China Hits 5% GDP Target But Trump Tariffs Threaten Further Growth
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China Hits 5% GDP Target But Trump Tariffs Threaten Further Growth
Bloomberg News
5 min read
(Bloomberg) -- China’s economy grew more than expected last year on a late policy blitz and export boom. The danger now is President Xi Jinping eases up on stimulus just as tariffs loom.
Gross domestic product rose 5.4% in the last three months from a year earlier, exceeding most analysts’ expectations and marking the fastest pace in six quarters. The jump brought full-year growth to 5%, confirming an estimate the Chinese leader telegraphed on New Year’s Eve.
But even with the stimulus bump in the last quarter, annual consumption growth languished below pre-pandemic levels, property investment contracted by the most on record and deflation persisted for a second straight year. Once adjusted for falling prices, nominal GDP expanded only 4.2% in 2024, the slowest since the economy opened up in the late 1970s barring the pandemic slump.
“The recovery is tentatively sustained in a still fragile mode,” Societe Generale SA economists Wei Yao and Michelle Lam wrote in a note. “Policymakers need to make a stronger fiscal boost in 2025 to ensure growth stability.”
The yuan strengthened as much as 0.1% against the dollar in both the onshore and offshore markets after the data release before paring the gain. The benchmark CSI 300 index of Chinese stocks closed 0.3% higher.
Stimulus Outlook
Fiscal policy is expected to take center stage of China’s stimulus push this year, with the government expected to announce its budget deficit and bond issuance plans in March.
The numbers will give an indication of how much the government is looking to spend to bolster growth in the face of a possible second trade war with the US, but the upbeat official data released Friday raised concern of complacency.
“Better data has likely reduced Beijing’s sense of urgency and policy may continue to undershoot on the housing and social welfare front,” Morgan Stanley economists including Robin Xing wrote in a note.
They estimate that about 60% of the rebound in the economy’s annual growth was caused by China’s policy to boost consumption and manufacturing investment, while the rest came from advanced shipments.
But they warned that such improvement may be “transitory” and expect the momentum to soften from the second quarter this year as exports slow and housing weakness drags on.
Fiscal policy is especially important as the scope of monetary loosening is constrained by mounting pressure on the yuan to depreciate and capital outflow concerns.
Chinese leaders planned to raise the budget deficit to 4% of GDP and triple sales of special treasury bonds, Reuters reported last month.
Bracing for Trump
China is set to announce its growth goal for 2025 at an annual parliamentary session in March, which is likely to be similar if not identical to last year’s based on provincial goals already announced.
But to achieve 5% growth may be tougher this year for the world’s second-largest economy. US president-elect Donald Trump, who returns to the White House next week, has threatened tariffs of as high as 60% on Chinese goods. That could decimate trade with the Asian country and damage a growth driver that contributed about a quarter of growth in 2024.
“The biggest bright spot in the economy last year was exports, which was very strong especially if price factor was excluded,” 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 businesses to frontload shipments and bolstered the economy’s expansion last year. But that boost may fade in the coming months as potential levies, including from the EU and other trade partners, make Chinese exports less competitive.
What Bloomberg Economics Says...
“The government has repeatedly alluded to significant support. We see this forthcoming, as Friday’s data hammer home the pressing need. The imperative could become even greater in the case of higher tariffs hitting exports significantly.”
— Chang Shu and David Qu
Read the full analysis here.
While the government has signaled it has ample policy space to stimulate the economy, the effectiveness of public spending has waned in recent years.
Officials have struggled to find enough appropriate infrastructure projects to build while private investment has been contracting. A further manufacturing push would risk worsening factories’ overcapacity and complaints from trade partners that the country is flooding global markets with cheap goods.
New Priority
Pressed by both a darkening export outlook and declining benefits of the investment playbook, Chinese authorities have repeatedly promised to make boosting consumption a top priority in 2025.
They plan to expand a program to subsidize companies and consumers to upgrade appliances and equipment, after the initiative helped accelerate the increase in retail sales in the last few months of 2024. Pension and subsidies for medical insurance of some groups will go up and may encourage households to spend rather than save.
The government earmarked 300 billion yuan ($40.9 billion) — raised from its special sovereign bond sales last year — to fund the equipment upgrading and consumer goods trade-in program. That effort could double to 600 billion yuan this year, Helen Qiao, chief economist for Greater China at Bank of America, said in an interview with Bloomberg TV.
Officials are also allowing special local bonds to be used by city governments to acquire unsold homes and buy back unused land, in moves aimed at easing the cash crunch faced by developers and boosting land prices by reducing supply.
However, progress has been slow in the initiative to reduce housing inventory, as well as in a government-led drive to renovate urban villages. That has contributed to extremely weak sentiment among Chinese developers, with real estate investment plunging 10.6% last year, the worst year since records began in 1987.
“We are concerned that Beijing may not ramp up its efforts enough in carrying out the hard work after seeing some short-term green shoots,” said Lu Ting, chief China economist of Nomura Holdings Inc. “Simply put, despite today’s sanguine data, now is not the time for Beijing to rest on its laurels.”
--With assistance from Iris Ouyang and James Mayger.
