News in Charts: Cracks forming in China’s growth strategy

Based on official data and Fathom’s China Momentum Indicator (4.0), China appears so far to be weathering the economic storms of 2025. However, as well as internal drags on growth, such as its ongoing housing crisis, China’s export-led growth model is under attack from the US. Peaking at 145% in April, US tariffs on Chinese goods and China’s retaliatory tariffs on US goods have since retreated, following the agreement of a 90-day pause from early May. Tariff rates currently stand at 30% for Chinese exports to the US and 10% for US exports to China respectively. However, the latest news indicates the possibility of a re-escalation, with both countries accusing each other of holding back key inputs for manufacturing. A return to April’s tariff rates would weigh on Chinese exports, around 13% of which have historically been destined for the US. So, given its internal headwinds and with external gales picking up, where else can the economy of the Peoples Republic of China’s (PRC) turn to maintain its 5% growth target for 2025?

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Investment made the largest contribution to the 5.8% of GDP growth over the past 12 months, having increased by 6.4%. China’s ‘Made in China Initiative’ 2025 (MIC) initially aimed to move the PRC up the value-add chain, alongside it building its self-sufficiency in advanced high-tech sectors. Three clear successes of the policy and broader Chinese investment all lie in transition technology: solar panels, lithium-ion batteries and electric vehicles. However, China has failed to gain complete self-sufficiency in IT products, notably semiconductors — the PRC has consistently run a trade deficit in IT since 2003. These sectors, and the capacity that China has built up in them, should secure China’s growth derived from net trade in the future, unless all western countries decouple completely from the PRC.

IN HOUSE

In times of low external demand, for example during the GFC, another form of investment has been the People’s Republic of China’s (PRC) favoured growth policy: heavy real estate construction. Up until 2020, the wider property market accounted for around 25% of GDP. However, following the housing market’s peak in March 2021, the sector now represents just 15% of China’s GDP, signifying how the bubble’s deflation has placed a drag on economic growth. The plateau has somewhat flattened out in recent months; house sales between Jan and April 2024 fell by 32% compared to the same period in 2023. This year, however, the fall has only been 2.4%. This small reprieve has primarily been driven by higher value property sales in China’s ‘tier 1’ cities. But adding ‘tier 2’ and ‘tier 3’ cities to the picture better represents a true shape of the still waning domestic demand for housing. When paired with the gargantuan stock of housing unsold, under construction or ‘paused’, China’s housing crisis is still far from over.

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With the property sector’s contribution to growth still meagre, a more sustainable strategy would be rebalancing the Chinese economy towards a consumption-led growth model. However, despite an interest rate cut in May, consumer confidence remains near ten-year lows and private consumption has not fared well since 2024 Q3,according to Fathom’s CMI (4.0). China’s government seeks to address this by increasing the minimum wage and developing a subsidy system for childcare. However, none of these transfers will make a significant difference to consumption unless China reforms its broken welfare system. Currently, much of the lower- and middle-income classes in China have extremely elevated levels of precautionary savings. These savings are all insurance related to protect oneself and/or one’s family from unemployment, illness or to prepare for retirement. With a weak welfare system, the reliance on this precautionary saving is far more pronounced.

IN HOUSE

Adding to the bleak picture, just two-thirds of China’s population live in urban areas — in OECD countries, the average is over 80% — and around only 48% have an official urban household registration. A 2025 study found that a migrants’ per capita consumption increased by 30% when moving from a rural to an urban area. Reforming China’s ‘Hukou’ registration system, which in its current form significantly hinders rural residents’ access to social benefits in urban areas, could encourage increased movement of Chinese people and migrants from rural areas to cities. Alas, unless these systemic issues are addressed by Chinese policymakers, rebalancing China’s economy to a consumption-led growth model remains off the cards.

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China has clearly excelled in certain industries, far outstripping expectations to become the market leader of key technologies and in turn successfully moving up the supply chain of some key high-tech sectors. However, disruptions to external demand unequivocally raises the importance of China’s internal market. This time round, full employment, supported by unproductive investment into infrastructure and housing construction financed through uncontrolled credit expansion and local debt accumulation, may not be enough to bolster China’s ambitious growth plans. However, evidence from China’s Third Plenum suggests that China is gearing up to address internal demand with two key policies. The promotion of sustainable ‘urban renewal’ and the ‘Private Sector Promotion Law’, which seeks to divert private capital into strategic industries to relieve pressure on public finances. Time will tell as to whether China will actually execute these blueprints successfully.

The views expressed in this article are the views of the author, not necessarily those of LSEG.

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