As part of UBP’s 2025 Investment Outlook, senior economist Carlos Casanova examines China’s recent efforts to address its structural challenges. Despite the country’s initiatives, UBP remains cautious about the prospects of the world’s second-largest economy, as they are likely to fall short of expectations.
In September 2024, the Chinese government unveiled a series of measures aimed at addressing its structural challenges, notably the struggling property market and local government debt. These initiatives buoyed Chinese indices in the final quarter of the year. Yet a crucial question lingers: are they enough to stabilise the world’s second-largest economy?
Policy pivot
Echoing historical parallels to Mario Draghi’s 2012 ‘whatever it takes’ commitment during the European debt crisis, Beijing announced a policy pivot while deploying a combined monetary and fiscal stimulus, as well as debt restructuring.
Despite this shift of narrative, the scale of the challenge remains immense. Local government debt – including off-balance-sheet obligations – is estimated to exceed CNY 18 trillion, with a significant portion maturing in 2025 and 2026. Similarly, the value of unsold homes in China has surpassed CNY 6 trillion, underscoring the systemic risks posed by the property sector.
In response, the Chinese government has approved a modest increase in local government debt ceilings, allowing for CNY 6 trillion in new issuance over three years. While it is a step in the right direction, this represents only 1.5% of GDP annually – well short of the estimated 15% of GDP needed to comprehensively address underlying risks. This cautious approach reflects a preference for incremental measures over aggressive stimulus, as China seeks to avoid the pitfalls of Japan’s ‘lost decades’.
Renewed trade tensions with the US
Donald Trump's return to the US presidency introduces a new layer of uncertainty. His administration's proposed tariffs of up to 60% on Chinese exports could jeopardise a vital component of China's economy, as US exports account for around 3% of the nation's GDP, which has become increasingly reliant on exports since the pandemic. While the short-term economic impact is expected to be relatively modest – ranging from 0.2% to 0.4% of GDP – Trump's tariffs may result in significant long-term effects. This is due to the phased implementation of the tariffs and the potential deflationary consequences that mitigating measures like tax cuts for exporters might have, alongside increased geopolitical tensions. Beijing's ability to address these challenges through enhanced domestic consumption and targeted stimulus measures will be crucial in shaping investor sentiment.
Cautious outlook for 2025
Despite facing obstacles, China remains a major contributor to global economic growth. In value terms, a ‘slowing’ China adds approximately USD 850 billion annually to the global economy, roughly equivalent to the size of Switzerland’s GDP.
However, China’s path to stability will probably be incremental, marked by cautious policy deployment and measured responses to external pressures. While this approach reduces the risk of abrupt economic dislocations, it also limits the scope for rapid recovery, as reckoning with structural headwinds requires time. For this reason, and given the prevailing uncertainties, UBP maintains its outlook rating of 2/5.
