2025 Outlook Series | China Economic Outlook: Three Major Challenges & Three Policy Signals to Watch

Following a sharp rally last year, China’s stock market has returned to a period of volatility. As of the first week of 2025, the CSI 300 index has dropped about 11% from its peak on October 8, 2024. Meanwhile, in its final days, the Biden administration delivered two “farewell gifts” for China:

1. Further export controls on advanced semiconductors, announced on December 3 and marking the third round of semiconductor bans in three years, followed by
2. The launch of a Section 301 investigation into Chinese legacy chips announced on December 23. Earlier in 2024, the U.S. Trade Representative (USTR) has already raised tariffs on Chinese semiconductors from 25% to 50%.

Whether further tariff hikes will be imposed will be up to the incoming Trump administration to be inaugurated later this month. Looking toward 2025, what are the major challenges facing China’s economy, and what solutions could provide a way out of its economic struggles?

I. Three Major Challenges Weighing on China's Economic Growth

Challenge 1: Deflationary Pressure

In the third quarter of 2024, China's GDP deflator contracted by 0.56%, marking the sixth consecutive quarter of negative growth and the longest period of decline since the country joined the WTO in 2002. Looking at consumer prices, core CPI has been trending downward since 2022. A key reason for China’s deflationary woes continues to be the decline in housing prices. As real estate accounts for 60% of urban residents’ assets, slumping housing prices has a profound adverse impact on consumer sentiment and perceived wealth. In November 2024, nationwide housing prices fell by 5.7% year-on-year, continuing its trend of negative growth that began in May 2022. The cumulative annual growth in asset-derived household income during 2024 Q1~Q3 slowed to 1.2%, down from the pre-pandemic double-digit levels, significantly weakening consumers' capacity for high-ticket purchases.

Producer prices also reflect ongoing weakness. In November 2024, the Producer Price Index (PPI) in China fell by 2.5% year-on-year, extending its decline for the 26th consecutive month and indicating a bumpy path to the recovery of industrial goods demand, primarily due to the continued decline in capacity utilization since 2022. Meanwhile, businesses willingness to expand investments has remained sluggish, reflecting the lingering issue of overcapacity in the industrial sector, which is the second major challenge facing the Chinese economy.

Challenge 2: Overcapacity in the Industrial Sector

China has long suffered from the problem of overcapacity. Rising idle production capacity has led to low capacity utilization and weak industrial product prices. The primary cause lies in the government’s long-term strategy of subsidizing industries. Since the introduction of the "Made in China 2025" initiative in 2015, China has been seeking to overtake the U.S. in specific strategic industries, pouring substantial fiscal subsidies and low-interest loans into investment and production in manufacturing, particularly in electric vehicles (EVs), lithium batteries, and solar energy.

However, according to research from Goldman Sachs, **the heavily

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