Xi Jinping's New Year's speech will not tell a new story on the economy

Last year, President Xi Jinping addressed China's economic woes in his New Year's speech. He promised to “consolidate and strengthen the momentum of economic recovery.” As the year draws to a close, little seems to have changed except the date. While Chinese state media boasts about economic progress, global reports suggest a less optimistic reality for the world's second-largest economy.

The Central Economic Labor Conference

Every December, China's leaders gather at the Central Economic Work Conference to review the past year and plan for the next. This year's discussions reflected both the challenges of 2024 and the uncertainties ahead.

Consumer behavior reveals a worrying story. In November, retail sales rose just 3 percent from a year earlier, lower than expected even before adjusting for inflation. At the same time, consumer prices rose only 0.2 percent, showing that households are still wary of their spending. This cautious approach stems from the economic impact of Covid-19 lockdowns in 2022, which continues to weigh on confidence.

The challenges for 2025 are multiplying. According to The economistKey growth drivers like exports and manufacturing investment face threats, particularly from the United States. President-elect Donald Trump has proposed tariffs of more than 60 percent on Chinese goods, with an additional 10 percent penalty if China fails to crack down on fentanyl exports. Citigroup analysts warn that these tariffs could reduce China's growth rate by 2.4 percentage points unless the government takes strong action to counter the impact.

Even as the Chinese government projects resilience, the road ahead remains rocky, requiring bold steps to stabilize the economy.

Recovery power decreases

In the past, China's economic strength often came from aggressive government stimulus, especially during crises such as the 2008 global financial crisis. At the time, banks and state-owned enterprises drove demand, sustained by a booming real estate market. But today the situation is very different. The real estate market is struggling and cautious banks are reluctant to reduce the impact of new stimulus measures.

For example, in May, the government launched a 300 billion yuan ($41 billion) refinancing program to transform unsold properties into affordable housing. However, as of late November, less than 15 percent of this fund was used, according to Huatai Securities.

According to The economistthe root of the problem lies in past excessive expansion. After 2008, China faced growing debt and an oversupply of unsold apartments. To address this problem, President Xi's administration introduced policies such as “supply-side structural reform” and the three red lines to limit developer borrowing. While these measures were aimed at stabilizing the economy, they also caused the bankruptcy of large real estate developers after 2021, further slowing the recovery of real estate markets.

Recalibrate priorities

Faced with slow growth that challenges the economy, China's leaders are abandoning a supply-driven approach to boosting demand. This shift became clear at the Central Economic Work Conference, where vigorously stimulating consumption became the priority, setting aside the long-standing emphasis on industrial modernization.

The Finance Ministry announced that local governments could issue bonds to manage 10 trillion yuan of hidden debts, potentially freeing up 1.2 trillion yuan in 2025, according to Adam Wolfe of Absolute Strategy Research.

Early signs of recovery are also appearing in the real estate market. November saw a year-over-year rise in new residential property sales, the first such growth in more than three years, apart from a brief uptick following the easing of COVID restrictions at the start of 2023. These measures suggest progress, but sustained efforts will be essential.

Expanding the consumer toolbox

China is turning to creative strategies to encourage consumer spending. Cities like Shanghai are introducing electronic shopping coupons that offer discounts on restaurants, entertainment and hotels when spending thresholds are exceeded. This initiative is accompanied by a government exchange program that encourages households to upgrade their appliances and vehicles. As a result, household goods retail sales jumped more than 22 percent in November, although overall retail performance remained weak.

Other measures include increasing health insurance subsidies and increasing pensions to increase disposable income and reduce household savings. According to Goldman Sachs mentioned by The economistthese efforts could increase China's budget deficit by almost 2% of GDP in 2025.

Structural reforms and over-indebtedness

Domestically, China's debt situation appears manageable, with a debt-to-GDP ratio of around 68 percent, well below Japan's 250 percent or the United States' 120 percent. However, local governments face a much more difficult reality. Many are saddled with unsustainable debt due to falling tax revenues, a struggling housing market and pandemic-related spending. Some regional authorities are even struggling to pay salaries.

To address these challenges, the Politburo adopted a moderately accommodative monetary policy, moving away from the cautious stance it maintained for more than a decade. Although President Xi's vision of a high-quality, innovative economy remains the long-term goal, the government's immediate goal is to stimulate demand and stabilize the economy.

External pressures and global context

China's economic problems are compounded by global problems. President-elect Trump's strong trade policies highlight a growing divide between China and Western countries.

Despite these challenges, there is reason for hope. China's success in 2025 will depend on its balance between internal changes and external pressures. Recent efforts to encourage spending are a good start, but big problems such as local government debt and conservative lending by banks still stand in the way.

As President Xi prepares to deliver his New Year's speech, these words may sound familiar. However, behind them is a country at a crossroads, striving to solve immediate problems while aiming for a bright, high-tech future. The effectiveness of these efforts will determine not only China's future, but also its place in a divided world.