China: Donald Trump's tariffs are not China's only problem

The Chinese government announced on Friday that the Chinese economy rebounded in the last three months of last year, enabling it to achieve its full-year economic growth target of 5% for 2024. Nevertheless, this is still one of the slowest growth rates in decades, as China, the world's second-largest economy, continues to struggle with a protracted real estate crisis, high local government debt, and youth unemployment.

The head of China's National Bureau of Statistics said that China's economic achievements in 2024 were "hard-won" after the government launched a series of stimulus measures at the end of last year. In the past, Beijing rarely failed to meet its growth targets. Experts generally predicted this growth rate, with the World Bank stating that lower borrowing costs and growing exports would mean that China could achieve an annual growth rate of 4.9%.

However, investors are preparing for potential challenges: the looming threat of President-elect Donald Trump imposing tariffs on $500 billion worth of Chinese goods. In addition, weak business and consumer confidence, as well as Beijing's interest rate cuts to stimulate growth, which will lead to a continued weakening of the yuan, are hindering China from achieving its growth targets for next year.

Here are three reasons why the challenges facing Xi Jinping are greater than Trump's tariffs: Firstly, tariffs have already begun to hurt China's exports. There are increasing warnings that the Chinese economy will slow down in 2025. One of the main drivers of growth last year, exports, is now at risk. China has been relying on manufacturing to overcome the economic slowdown, exporting record numbers of electric vehicles, 3D printers, and industrial robots. The United States, Canada, and the European Union have accused China of producing too many goods and imposed tariffs on Chinese imports to protect domestic jobs and businesses.

Experts say that Chinese exporters may now turn their attention to other parts of the world. But these countries are likely to be in emerging markets, which have lower levels of demand than North America and Europe. This could affect Chinese companies hoping to expand, which in turn could affect energy and raw material suppliers. Xi Jinping hopes to transform China from the world's factory for cheap goods into a high-tech power by 2035, but it is unclear how manufacturing can continue to be such an important driver of growth amid rising tariffs.

Secondly, people's willingness to consume is insufficient. In China, household wealth is mainly invested in the real estate market. Before the real estate crisis, the real estate market accounted for almost a third of the Chinese economy, employing millions of workers, from builders and developers to cement producers and interior designers. Beijing has implemented a series of policies to stabilize the real estate market, and the China Securities Regulatory Commission (CSRC) has also stated that it will strongly support reforms. But there are still too many vacant homes and commercial properties, and this oversupply continues to depress prices.

The slump in the real estate market is expected to bottom out this year, but Wall Street banking giant Goldman Sachs said that the slump will be a "multi-year drag" on China's economic growth. It has already severely hit consumption—in the last three months of 2024, household consumption accounted for only 29% of China's economic activity, down from 59% before the pandemic. This is also one of the reasons why Beijing is increasing exports. It hopes to help offset the domestic slump in consumption of new cars, luxury goods, and almost all other goods. The government has even launched programs such as trade-ins for consumer goods, where people can exchange their washing machines, microwave ovens, and rice cookers. But experts doubt whether these measures alone will be enough without addressing the deeper problems in the economy.

They say that people need more money to return to pre-pandemic levels of consumption. "China needs to restore the vitality of the people, and we are still far from that step," said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Bank. "If the private sector starts to invest and innovate, this could increase income and job prospects, and people will be more confident to consume." In addition, high public debt and unemployment have also affected savings and spending. Official data show that youth unemployment remains high and wage growth has stagnated compared to pre-pandemic levels.

Thirdly, businesses are not flocking to China as they once did. President Xi Jinping has pledged to invest in cutting-edge industries that the government calls "new productive forces." So far, this has helped China become a leader in renewable energy products such as solar panels and electric vehicle batteries. Last year, China also surpassed Japan to become the world's largest auto exporter. But the bleak economic outlook, uncertainty about tariffs, and other geopolitical uncertainties mean that foreign companies' interest in investing in China has waned.

Stephanie Leung of wealth management platform StashAway said that it is not just about foreign or domestic investment, but that businesses do not see a bright future. "They want to see a more diverse group of investors coming in." Given all these reasons, experts believe that measures to support the economy can only partially alleviate the impact of potential new US tariffs. Goldman Sachs' chief China economist, Hui Shan, wrote in a recent report that Beijing will either take bold measures or accept that economic growth will not be as fast, adding: "We expect them to choose the former."

"China needs to stabilize the real estate market and create enough jobs to ensure social stability," said Ding Shuang of Standard Chartered Bank. According to the research institute China Dissent Monitor, more than 900 protests led by workers and homeowners took place in China between June and September 2024, an increase of 27% compared to the same period last year. These social tensions caused by economic discontent and wealth erosion will be a concern for the Chinese Communist Party. After all, explosive growth has made China a global power, and the promise of increasing prosperity has largely helped its leaders maintain strict control over dissent.