In an increasingly uncertain global economic landscape, hopes that 2025 will be a more stable year for China’s economy may be unfounded. The World Bank recently delivered a sobering assessment of the nation’s prospects, predicting that growth in Asia’s largest economy will weaken even further next year. This expected slowdown, despite Beijing’s recent efforts to stimulate the economy and an initial positive reaction from global investors, could generate fresh headwinds for the wider region.
The World Bank, in a report released on October 8, acknowledged that fiscal support measures recently introduced by China may boost short-term growth. However, the multilateral lender emphasized that long-term economic stability will depend on more comprehensive structural reforms. “Recently signaled fiscal support may lift short-term growth, but longer-term growth will depend on deeper structural reforms,” the World Bank stated. For three decades, China’s rapid economic growth has benefitted its neighbors through trade and investment, but the size and impact of that economic impetus is now diminishing.
Despite the World Bank’s forecasts, there is some debate over whether China’s current measures to stabilize its economy are being underestimated. Beijing has taken steps such as cutting borrowing costs, reducing banks’ reserve requirement ratios, lowering mortgage rates, and unveiling market-support tools to stabilize share prices. Discussions are ongoing about bolder fiscal stimulus, which could further support the economy.
Yet, while these efforts have spurred optimism in some quarters, many economists remain concerned about a darker trajectory, particularly if China’s property crisis deepens. Property developers in China have been struggling under heavy debt burdens, and the ripple effects are evident across the financial system and local governments. Extreme volatility in the Chinese stock market over the last few weeks underscores the uncertainty surrounding these developments.
At the heart of the matter is China’s real estate sector, which has long been a key driver of economic growth. Plummeting home prices and sluggish property sales are raising fears that the sector may drag down the broader economy. The World Bank noted that addressing these real estate woes should be a top priority for Chinese policymakers, but there are doubts about whether enough is being done.
Chinese leader Xi Jinping seems to believe that time is on Beijing’s side when it comes to stabilizing the housing market. However, some economists draw parallels between China’s current situation and Japan’s property crash in the 1990s. While the two crises differ in certain respects, both illustrate how the collapse of a vital economic sector can have far-reaching and long-lasting effects.
The challenges in China’s real estate market are exacerbating broader economic issues, particularly at the provincial and municipal government levels. Local governments in China have traditionally relied heavily on land sales and taxes from massive construction projects as key revenue sources. As the property market declines, local government finances are taking a hit.
“China’s boom-and-bust housing market is partly driven by local governments’ heavy reliance on expanding the real estate market to provide a major source of income,” said Tianlei Huang, an analyst at the Peterson Institute for International Economics. “Since 2022, the downturn in the housing market has hurt local government finances and exposed a vulnerable system in need of reform.”
These local government fiscal woes represent a microcosm of the broader economic challenges facing China. The central government, under Xi’s leadership, has been focusing more on treating the symptoms of the economic slowdown than addressing the root causes, particularly the structural weaknesses in the real estate sector and local government debt.
According to the World Bank, China’s economy is expected to grow by 4.8% this year, but the forecast for 2025 is significantly lower, with growth predicted to slow to 4.3%. Both of these figures fall below Beijing’s 5% growth target, raising concerns that China’s economy could enter a prolonged period of stagnation.
For an economy at China’s stage of development, growth below 5% is effectively considered recession territory. Many economists warn that if Xi’s government does not take bold and decisive action to revive growth, even the World Bank’s relatively modest forecast of 4.3% could prove too optimistic.
Compounding the domestic economic challenges in China is the looming uncertainty surrounding the upcoming US election in November 2024. Should former President Donald Trump secure a return to the White House, the US-China trade relationship could face significant new hurdles.
During his previous presidency, Trump imposed a series of tariffs on Chinese goods, sparking a trade war that rattled global markets. If Trump were to win again, he has already signaled an intention to escalate those measures, including the possibility of imposing a 60% tax on all Chinese imports. Additionally, Trump has floated the idea of a global levy on imports entering the US, which would disproportionately impact export-reliant economies like China.
Deborah Tan, an analyst at Moody’s Ratings, highlighted the risks such a scenario could pose not just to China, but to the entire Asia-Pacific region. “With higher US tariffs, a number of highly open economies in the Asia-Pacific are at risk of GDP falling below their baselines,” she noted. Countries like Malaysia, Singapore, South Korea, Taiwan, and Thailand, which are highly integrated into global supply chains, could also see significant economic disruptions.
Vietnam, for example, is deeply linked to China’s manufacturing supply chains and has a high export share of GDP. Moody’s simulations indicate that both China and Vietnam would see substantial hits to their high-tech and low-tech goods sectors if new tariffs were imposed by the US. These external risks only add to the growing list of challenges that Beijing must contend with.
Beyond the risks posed by trade tensions, Xi’s government is also grappling with a loss of confidence among global investors. Initial optimism over China’s stimulus measures has given way to growing skepticism as policymakers have been slow to tackle the more fundamental issues plaguing the economy, such as the property crisis, local government debt, and insufficient social safety nets.
The World Bank emphasized that while short-term stimulus measures are important, they cannot replace the deeper structural reforms that are necessary for sustainable long-term growth. According to World Bank economist Aaditya Mattoo, “most of the measures and bond proceeds will carry over into next year,” meaning that significant improvements in economic conditions may not be felt until much later. Even then, he cautioned, consumers may be hesitant to spend due to concerns about aging, illness, and unemployment.
Amid this uncertainty, some influential investors are urging China to take more aggressive steps. Billionaire investor Ray Dalio, founder of Bridgewater Associates, recently called for China’s leadership to adopt a “whatever it takes” mentality, similar to the approach taken by European Central Bank President Mario Draghi during the Eurozone crisis. Dalio warned that China could be sleepwalking into a prolonged economic funk similar to Japan’s “lost decades” following its 1990s financial crisis.
Avoiding such a scenario, Dalio argues, will require a delicate balancing act. China must restructure its bad debts while simultaneously ensuring that enough yuan is printed to support economic growth without triggering a surge in inflation. A successful strategy, he said, could help rekindle investor interest in Chinese stocks and revive economic confidence.
One of the greatest challenges for China’s policymakers is managing the country’s massive debt burden. As Dalio pointed out, any attempt to deleverage the economy will be disorienting and may result in significant wealth destruction. The political challenge for Xi and Premier Li Qiang will be to determine where the fallout from bad debts will be concentrated and who will bear the brunt of the costs.
Adding to these economic complexities are China’s demographic challenges. The country’s population is aging rapidly, and its working-age population is shrinking. These demographic shifts complicate efforts to stabilize the economy and maintain growth, as they affect productivity, consumption, and the ability of the government to finance social safety nets.
Despite the many challenges ahead, there are some positive developments that Xi and Li can point to. Analysts such as Sherry Zhao from Fitch Ratings have noted that refinancing risks for China’s local government financing vehicles (LGFVs) have been reduced in the short term thanks to government debt-relief measures. Additionally, the central government has increased transfers to support infrastructure spending, which should help prop up local economies.
However, these short-term measures do not address the longer-term risks associated with LGFVs’ debt burdens. Zhao emphasized that a sustainable resolution to these debt issues will depend on broader economic and fiscal reforms, which remain uncertain.
As 2025 approaches, China finds itself at a crossroads. The country’s economic growth is slowing, structural challenges are deepening, and global risks are mounting. The World Bank’s forecast of slower growth next year highlights the urgency for Beijing to take more decisive action to address its economic vulnerabilities.
Whether Xi’s government can rise to the occasion remains to be seen. Investors and economists alike are watching closely as China navigates one of the most critical periods in its recent economic history. The choices made in the coming months will not only determine the trajectory of China’s economy but also have far-reaching implications for the entire Asia-Pacific region and beyond.
