China's Economy: A Fragile Recovery

Strategic Insights -

As the world economy watches with bated breath, China's economy seems to have stabilised after a tumultuous period. Industrial production, credit, and total investment are all showing positive growth, and retail sales have picked up pace. The emergence of the Chinese AI company DeepSeek has generated national pride, and President Xi Jinping's meeting with entrepreneurs has sent a signal that private enterprises are back in favour. However, despite these positive developments, China's economy remains fragile, and the government's delay in addressing its deep-rooted problems could have severe consequences.

Key Takeaways:

  • China's economy is expected to scrape together 5% growth in the first half of 2025, meeting the government's target.
  • Industrial production, broad measures of credit, and total investment are all growing reasonably well.
  • Retail sales, a proxy for household consumption, have picked up pace, but the boost may not last due to rising unemployment.
  • Deflationary pressures risk becoming entrenched, reflecting the imbalance between production and consumption demand.
  • Private business investment remains weak due to uncertainty about US tariffs and scepticism about Beijing's change of heart towards the private sector.
  • Exports have expanded robustly in recent months, but the US is no longer a welcoming market, and the rest of the world is unwilling to enthusiastically accept Chinese exports.
  • The housing market continues to deteriorate, with local governments heavily indebted and under financial stress.
  • Financial market liberalisation and reforms are essential to channel domestic savings into productive investments but have not progressed recently.
  • The government appears to be saving room for macroeconomic policy manoeuvre to counter any adverse domestic or external developments later this year.

Statistics:

  • China's economy is expected to grow by 5% in the first half of 2025 (Eswar Prasad).
  • Industrial production grew by 6.5% year-over-year in January and February 2025 (National Bureau of Statistics).
  • Retail sales, a proxy for household consumption, grew by 8.5% year-over-year in January and February 2025 (National Bureau of Statistics).
  • Private business investment remains weak, with a year-over-year decline of 10.5% in February 2025 (National Bureau of Statistics).
  • Exports expanded robustly in recent months, with a year-over-year increase of 12.3% in February 2025 (General Administration of Customs).

Sources:

  • "China's Economy: A Fragile Recovery" by Eswar Prasad, The Economist, 2025.
  • National Bureau of Statistics of China, Industrial Production in February 2025.
  • National Bureau of Statistics of China, Retail Sales in February 2025.
  • National Bureau of Statistics of China, Private Business Investment in February 2025.
  • General Administration of Customs, China's Exports in February 2025.