From Manufacturing Might to Fiscal Fears: China’s Economic Path
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| Image by Yanping Jiang from Pixabay |
China’s economy stands at a critical juncture, navigating a complex landscape of trade tensions with the United States and internal structural challenges that threaten its long-term stability. Despite recent data from the National Statistics Bureau painting a picture of relative calm, with stable GDP growth, mild softening in consumption, and steady employment, the underlying vulnerabilities—high debt, a persistent property market slump, and rising youth unemployment—cast a shadow over Beijing’s economic prospects. As U.S. President Donald Trump and his administration intensify efforts to address trade imbalances through tariffs, China’s ability to maintain its economic momentum is being tested. While Beijing’s pivot toward high-tech industries and its robust external finances provide a buffer, the combination of fiscal deficits, demographic decline, and subdued consumer sentiment could undermine its resilience if the tariff war drags on. This moment demands a clear-eyed assessment of China’s strengths and weaknesses, as the nation seeks to balance its global ambitions with domestic stability.
China’s economic performance in April 2025, as reported by the National Statistics Bureau, suggests a degree of resilience in the face of external pressures. Retail sales of consumer goods grew by 5.1 percent year-on-year, slightly below the 5.5 percent anticipated by analysts, while service industry production rose by 6 percent, and fixed asset investment increased by 4 percent. These figures, though modest, reflect a stabilizing economy, bolstered by government initiatives such as consumer trading programs that offer discounts on household goods, increased tourism and transportation inflows, and the Belt and Road Initiative. Officials remain optimistic, asserting that these factors will keep economic growth on track. China’s strengths are undeniable: its large and diversified economy, strong GDP growth prospects compared to its peers, and pivotal role in global trade provide a solid foundation. Moreover, its external finances remain robust, offering a cushion against shocks. Yet, analysts urge caution, noting that surface-level stability may mask deeper structural issues that could be exacerbated by prolonged trade tensions.
Central to China’s economic strategy is its ambitious “Made in China 2025” plan, which aims to transform the country into a global leader in high-tech, clean, and sustainable industries. This shift is already yielding results. Companies like GCL Technology, the world’s second-largest producer of polysilicon for solar panels, and electric vehicle manufacturers such as BYD, Leapmotor, and Nio are gaining prominence. In the battery sector, CATL and BYD are global heavyweights, while Huawei and Semiconductor Manufacturing International Corp. (SMIC) have made strides in developing advanced chips despite U.S. sanctions. These successes are not limited to terrestrial industries; China’s space program has also navigated around American restrictions, reflecting Beijing’s ability to innovate under pressure. This pivot toward high-tech sectors is reshaping China’s image from a manufacturer of mass-produced goods to a leader in cutting-edge technologies. By fostering world-beating companies in new energy, semiconductors, biopharmaceuticals, and artificial intelligence, China is building a new economic engine that promises resilience in the face of external challenges.
However, this transformation comes against the backdrop of significant domestic vulnerabilities. The prolonged slump in China’s property market, which has dragged down consumer confidence, remains a major concern. Nearly one in four Chinese citizens has some form of investment in real estate, and the sector’s woes—exacerbated by the collapse of property giant Evergrande in 2023—have had a ripple effect. Official data shows that investment in the property market fell by nearly 10 percent in the first four months of 2025 compared to the previous year, a decline that has further eroded consumer sentiment. The property crisis is emblematic of broader structural issues. China’s growth over the past few decades has been fueled by heavy capital investments, particularly in real estate, financed by an inefficient banking system. This has led to high and rising domestic debt levels, which now pose a significant risk. As Anne Stevenson-Yang of J Capital Research notes, “China has grown almost entirely through capital investment, and because there isn’t enough to invest in, a lot of good money chases bad, and they have reached a limit.” This inefficiency is compounded by the fact that much of this investment has failed to translate into sustainable growth, leaving the economy vulnerable to shocks.
Fiscal challenges further complicate the picture. China’s fiscal deficit is projected to rise to 8.8 percent of GDP in 2025, up from 6.5 percent in 2024, according to Fitch Ratings, with some experts suggesting the true figure could approach 10 percent when combining federal and provincial deficits. This is significantly higher than the median deficit for “A” category sovereigns, which stands at 2.7 percent of GDP. The government’s official deficit target was raised to 4 percent of GDP in 2025, up from 3 percent the previous year, reflecting the strain on public finances. Revenue is also declining, expected to fall to 21.1 percent of GDP in 2025 from 28.4 percent in 2019, driven by a structural drop in property-related revenues and tax cuts. Fitch Ratings has warned that deteriorating public finances were a key factor in revising the outlook on China’s “A+” sovereign rating to negative in April 2024. The agency estimates that general government debt, including central and local government obligations, rose above 60 percent of GDP in 2024 and could reach the high-60s by 2025, exceeding the median for similarly rated sovereigns. A “debt swap” program, which will bring around a trillion yuan of off-balance-sheet local government debt onto official books, is likely to further elevate this ratio.
The property sector’s downturn and the overhang of local government financing vehicle debt are also raising financial stability risks. The International Monetary Fund’s 2024 Financial System Stability Assessment noted that while China’s largest banks are well-capitalized and liquid, mid-sized and smaller banks are more vulnerable, particularly as asset quality deteriorates and profitability declines. Loss deferral practices, which obscure the true extent of financial losses, further reduce transparency. Jeremy Zook, Director at Fitch-Hong Kong, highlights the precarious balancing act Beijing faces: “External pressures will be particularly acute for Mainland China, at a time when the domestic economy is still finding its footing amid ongoing property sector challenges, subdued household confidence and consumption, and deflationary pressures.” Fiscal policy will likely play a critical role in stabilizing the property market and offsetting these headwinds, but the cost will be wider deficits and higher debt.
Compounding these challenges is the issue of youth unemployment, which is more severe than official figures suggest. Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis, points out that in China’s manufacturing sector, workers are often asked to take unpaid leave, resulting in reduced hours and lower earnings while remaining technically employed. This practice, driven by increasing automation, has led to stagnant disposable income. As Herrero observes, “China’s economic power is increasing, but household power, or purchasing power, is not.” This disconnect between macroeconomic growth and household well-being is a critical weakness, as expanding consumption remains Beijing’s top priority for 2025. The government has set an ambitious growth target of around 5 percent, but achieving this will require boosting domestic demand, a task made difficult by subdued consumer confidence and ongoing property sector stress.
The U.S.-China trade war adds another layer of complexity. The Trump administration’s focus on addressing trade imbalances through higher tariffs reflects a broader sentiment in Washington that China’s dominance in low-cost manufacturing has gone unchecked for too long. China’s grip on global manufacturing is unprecedented, with the global trade-to-GDP ratio rising from 25 percent in 1970 to over 60 percent by 2022. This dominance has allowed China to drive down global prices, benefiting consumers but squeezing out competitors. However, it has also contributed to trade imbalances, as China’s weak domestic demand limits its imports. The Rhodium Group and other analysts argue that China’s reluctance to shift away from low value-added manufacturing, even as it moves up the global value chain, has perpetuated these imbalances. A prolonged tariff war could exacerbate China’s vulnerabilities, particularly given its high debt levels, demographic decline, and structural weaknesses. While some argue that higher tariffs would hurt the U.S. more, the consensus is that a drawn-out conflict could be equally damaging for Beijing.
China’s economy is at a crossroads. On one hand, its pivot toward high-tech industries, robust external finances, and strategic initiatives like “Made in China 2025” position it to weather external pressures. On the other hand, the property market slump, rising debt, fiscal deficits, and youth unemployment highlight deep-seated vulnerabilities. Beijing’s ability to stimulate domestic demand while managing its fiscal challenges will be critical. The government is exploring new revenue-enhancing measures, but fiscal consolidation will be difficult without addressing structural issues like the property sector and local government debt. As trade tensions with the U.S. show no signs of abating, China must navigate these challenges with precision. The nation’s economic power is undeniable, but its future hinges on its ability to address the cracks in its foundation. A stumble, if not inevitable, remains a real possibility if these pressures converge unchecked.