China’s economy grew more than expected last year thanks to a late policy offensive and an export boom. The danger now is that President Xi Jinping will ease stimulus just as tariffs loom.
Gross domestic product rose 5.4% in the past three months from a year earlier, exceeding most analysts’ expectations and marking the fastest pace in six quarters. The jump raised growth annual to 5%, confirming an estimate that the Chinese leader telegraphed on New Year’s Eve.
But even with stimulus ramping up last quarter, annual consumption growth languished below pre-pandemic levels, real estate investment shrank by the most on record, and deflation persisted for a second straight year. Once adjusted for falling prices, nominal GDP expanded just 4.2% in 2024, the slowest since the economy opened in the late 1970s, barring the fall of the pandemic.
“The recovery tentatively remains in a still fragile mode,” Société Générale SA economists Wei Yao and Michelle Lam wrote in a note. “Authorities must apply a greater fiscal impulse in 2025 to ensure stable growth.”
The yuan strengthened as much as 0.1% against the dollar in both domestic and overseas markets after the data was released, before reducing the gain. The benchmark CSI 300 index of Chinese stocks closed up 0.3%.
Stimulus prospects
Fiscal policy expected to take center stage in China’s stimulus push this yearand it is expected for the government to announce its budget deficit and bond issuance plans in March.
The figures will give an indication of how much the government intends to spend to boost growth in the face of a possible second trade war with the United States. but upbeat official data released on Friday raised concerns about complacency.
“Better data has likely reduced Beijing’s sense of urgency and policy may continue to fall short on the housing and social welfare front,” Morgan Stanley economists including Robin Xing wrote in a note. They estimate that about 60% of the economy’s annual growth rebound was caused by China’s policy to boost consumption and manufacturing investment, while the rest came from advance shipments.
But they warned that this improvement may be “transitory” and they hope that the momentum will soften from in the second quarter of this year as exports slow and housing weakness continues.
Fiscal policy is especially important since the scope of monetary easing is limited by increasing pressure on the yuan to depreciate and concerns about capital outflows.
Chinese leaders planned to increase budget deficit to 4% of GDP and triple sales of special treasury bonds, Reuters reported last month.
Getting ready for Trump
China is set to announce its 2025 growth target at an annual parliamentary session in March, which will likely be similar, if not identical, to last year based on already announced provincial targets.
But achieving 5% growth may be more difficult this year for the second largest economy in the world. US President-elect Donald Trump, who returns to the White House next week, has threatened to impose tariffs of up to 60% on Chinese products. That could decimate trade with the Asian country and damage a growth engine that contributed about a quarter of growth in 2024.
“The biggest positive point for the economy last year was exports, which were very strongespecially if you exclude the price factor,” said Jacqueline Rong, chief China economist at BNP Paribas SA. “That means the biggest problem this year will be US tariffs.”
Trump’s tariff threats encouraged global companies to bring forward shipments and fueled the economy’s expansion last year. But that momentum may fade in the coming months as potential levies, including those from the EU and other trading partners, make Chinese exports less competitive.
