Growth headwinds and complex geopolitics

China has been a regular global outperformer in history, with real GDP growth averaging +10.3% during the 2000-2009 decade and +7.7% over 2010-2019. It was one of very few economies that was spared by a recession at the height of the global pandemic in 2020 (growing by +2.2%), followed by a massive rebound in 2021 (growing by +8.5%). Continued stringent sanitary policies and a real estate crisis led to a significant slowdown in 2022, with growth declining to +3.0%. The subsequent economic rebound disappointed (growth at +5.2% in 2023), in the context of still low consumer confidence, the property sector downturn and limited fiscal and monetary policy support. Domestic headwinds subsisted in 2024, partly mitigated by stronger policy support and resilient exports. We expect growth of +4.6% in 2025 and +4.2% in 2026, indicating a path of lower trend growth compared to the previous decades, given continued domestic and external headwinds. In terms of prices, as a result of industrial overcapacity and soft demand, price pressures have been muted since the beginning of 2023. We expect inflation to reach 1.0% in 2025 and 1.5% in 2026.

Policy support clearly stepped up from the end of September 2024. The PBOC delivered a super package of monetary easing, followed by fiscal measures that both provide short-term support and attempt to tackle the long-term sustainability of public finances. Further policy support will also likely be delivered in 2025, with a special focus on domestic demand. Larger room for maneuver for fiscal spending by the central and local governments may translate into favorable measures for households – although the scale may ultimately depend on how large the shock from higher US tariffs is. On the monetary side, we expect at least two policy rate cuts of -10bps each in 2025, and two cuts of -25bps each in the reserve requirement ratio.

Our proprietary model that tracks the structural business environment across nearly 200 countries suggests that the business environment in China has deteriorated over the past years amid the broad-based economic slowdown, weaker business sentiment and rising geopolitical tensions. The World Bank Institute’s annual Worldwide Governance Indicators suggest that there has been a decline in regulatory quality, although there have been improvements in the rule of law and control of corruption. In addition, the Index of Economic Freedom from the Heritage Foundation assigns a rank of 154 out of 184 countries in 2023, compared with 107 in 2021, reflecting a deterioration in scores that reflect freedom in terms of trade, business, investment and property rights. Lastly, China ranks relatively low based on our proprietary “Environmental Sustainability Index”, at 159 out of 210 economies, suggesting that while it exhibits strengths in water stress and climate adaptation, there is potential for improvement in terms of the recycling rate, renewable electricity output and CO2 emissions per GDP.