China finds its feet: economic stability and gradual recovery in 2025

Positive policy and a more efficient allocation of resources have put China in a less vulnerable position.

After several tough years, the narrative on Chinese economy has turned to stabilising and both consumers and investors are starting to regain a measure of confidence. Challenges remain but Societe Generale sees a gradual recovery now that government policy has turned more supportive, and we expect further stimulus measures during 2025 to consolidate growth and squeeze deflation out of the system. 

The challenge on everyone’s lips at present is tariffs as the new US administration rolls out an aggressive and seemingly more transactional trade policy. However, China may not be as vulnerable to the tariffs and trade sanctions being launched by the new government.

We believe the broad 10% tariff imposed in February and the additional 10% imposed in early March are manageable as long as Beijing is committed to reviving domestic demand. 

However, it is still hard for us to see additional 40-60% across the board implemented within this year, because more than half of China’s exports to the US are consumer goods. Beyond the first 10-20% broad-based hike, more likely is a batch-by-batch approach afterwards, focusing on intermediary goods that China has already reduced exposure significantly. 

Taking a long-term view, tariffs could be a silver lining for China, prompting policymakers in Beijing to gradually rebalance the economy towards consumption. One uncertainty though is what the Trump administration would do about the imports from China+1¹ countries that are backed by Chinese companies and inputs.  

Domestic policy turns positive 

Currently, we expect tariffs to shave around one percentage point off GDP growth this year, which can be absorbed by an economy that feels more stable and settled than for several years. Nominal growth – which is the number to focus on – was around 4% last year, after deducting 1 percentage point of deflation and should improve to almost 5% in 2025. Aggregate demand is expected to improve again, and this should boost corporate earnings growth and be reflected in higher stock prices. 

A bigger positive to households’ confidence and wealth will be stabilisation in house prices after three difficult years. Not only is demand improving, supply has also been cut back sharply. While there is still an inventory overhang nationally, supply and demand in first-tier cities is starting to come into balance. It is too early to declare a recovery in this key sector, which accounts for a third of GDP, but housing is no longer the drag on sentiment and economic performance that it has been. 

What has changed? In a word, policy. The government has realised that its relentless focus on manufacturing and investment, much of it in the cause of making China self-sufficient in critical industries, had gone too far. 

Its course corrected last September and started to roll out support measures for housing, for consumers and for local governments. November’s RMB12 trillion, a 6-year package to support local government finances, is allowing city and state administrations to switch from merely repaying debt to helping local businesses and consumers, thus achieving at least fiscal neutrality or even fiscal expansion.

Efficiency is the watchword

Just as importantly, Beijing has stopped targeting service sectors, including online education platforms, fintech businesses and is even signalling a return to the fold for the big tech businesses, with President Xi meeting several of their leaders in February. This focus on the service sector is important since China still needs to find jobs for 10 million new graduates each year. 

Policymakers have been able to switch focus too, where the emphasis is now on the efficiency of investment and not just the quantity. As a result, we expect to see some consolidation in industries that have too much overcapacity in China. Spending on clean energy like renewables, for example, will also be maintained but the goal here is domestic energy security as much as reducing emissions. 

Overall, we predict stabilisation followed by recovery based on a better balance between supply and demand. That should produce more sustainable growth which, in turn, should allow the country to achieve its policy goals with (much) lower levels of GDP expansion than in the past.

_{1. “China+1” refers to the business strategy of redirecting investments from China to other economies, such as Southeast Asia. This helps to manage downsides of dependency and risks against geo-politics and tariffs. (McKinsey & Company)}