OECD Economic Outlook, Volume 2025 Issue 1

China

Economic growth will slow to 4.7% in 2025 and weaken further in 2026 to 4.3%. Consumption is being dampened by still high precautionary savings as a scarring effect of the pandemic, and the real estate correction but will be supported by the continuing trade-in programme in 2025. Investment in the real estate sector will continue to contract, but business investment will be buttressed in 2025 by the trade-in programme for enterprises. Infrastructure investment will be stable. Exports will be curbed by the newly imposed tariffs on trade with the United States, while imports will fall due to continued localisation of production. Consumer price inflation will remain low, and producer prices will continue to fall.

Fiscal policy will become more supportive with a sizeable stimulus approved to finance the trade-in programme and social transfers, unprecedented in recent decades. Some major state-owned banks will be recapitalised to enable them to expand lending. Monetary policy will provide liquidity as needed. Easing prudential measures surrounding mortgage lending will support housing demand. Liberalisation in several services, including healthcare and childcare, and reforms to wage setting mechanisms to support higher wages will boost efficiency and potentially consumption. The social security system should be revamped to reduce precautionary savings and support consumption in a sustainable manner. Administrative monopolies as well as illegal fees should be abolished to unleash private sector potential.

Growth has been stable despite the trade conflict

Annual growth was broadly stable at 5.4% in the first quarter of 2025. Consumption has been supported by the expansion of the trade-in programme, now including smartphones in addition to home electronics. Manufacturing investment has remained stable, supported by strong industrial production, and infrastructure growth has been strong. Investment in real estate, however, continues to fall, as excess supply needs to be worked off. Declining food prices have kept inflation below zero. The producer price index has continued to fall.

China 1

1. In nominal terms (CNY).

Source: CEIC.

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China: Demand, output and prices

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Exports have grown at a solid pace but now face higher tariffs on shipments to the United States, which accounted for 13.5% of direct Chinese merchandise exports in 2024. The tariffs will disproportionately affect private companies, including foreign ones, as they are the major exporters. While exports have been boosted by front-loading since late 2024, imports have fallen. China’s retaliatory tariffs will affect imports from the United States. New and existing external restrictions on trade in specific products and investment will further impede Chinese trade with the United States and contribute to risks of supply-chain disruption in the longer term.

China 2

Source: CEIC.

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Fiscal stimulus is being stepped up and monetary policy remains supportive

Fiscal policy has become more supportive in 2025 with the official budget deficit (which is the deficit on the major budget account out of the four accounts) planned to increase by one percentage point of GDP this year, a move unseen in the recent decade. Spending on social policies and transfers will increase, including on public health services, subsidies for citizen health insurance, raising the minimum citizen pension, child subsidies and making childcare services available countrywide. These policies, alongside the extension and expansion of the trade-in programme to include smartphones in addition to home appliances, will mostly benefit low-income groups, who have a higher propensity to consume. In addition, liberalisation of health, elderly care, childcare and household services will support consumption. A new wage-setting mechanism will help raise annual wage growth. Use by local governments of special bonds will be more flexible, boosting infrastructure spending. The debt burden of heavily indebted local governments is being alleviated and some consumption taxes are being assigned to the local level, although the core imbalance between revenue assignments and spending responsibilities at sub-national government levels has yet to be addressed, and local governments continue to face financial pressure from lower real estate prices. Fiscal policy is assumed to be broadly neutral in 2026.

Monetary policy rates will remain low, and the authorities are ready to lower them or the reserve requirement ratio further if needed. There was a 10 basis point cut in the loan prime rates, the seven-day reverse repo rate and the interest rates for the standing lending facility as well as a 50 basis point cut in the reserve requirement ratio in May. Banks have started a new round of deposit rate cuts. Special treasury bonds are being issued to recapitalise some of the major state-controlled banks so that they can step up their lending to support the private sector. Prudential easing measures adopted in late 2024 will continue to support housing demand, including for second‑hand housing.

Growth will be held back by higher trade barriers

Growth is expected to slow in 2025 and weaken further in 2026 due to higher trade barriers and the continuing adjustment in the real estate sector. The higher level of tariffs on trade with the United States will contribute to lower exports and imports, with the impact in 2025 mitigated by the front-loading of trade. The impact on trade will further be mitigated by lower administrative burdens on firms, the full VAT refund on exports, the critical nature of some trade and through increased trade to other markets. However, it will be dampened by weaker demand in China’s export markets due to higher uncertainty. Consumption will be supported by higher incomes and increased social spending. Inflation will remain low, despite a small boost form higher import prices.

Risks to growth are tilted to the downside. While an easing of trade restrictions between China and the United States would improve the outlook, any further increase of trade restrictions internationally or a slowdown in other economies would slow export growth and industrial activity. The small boost to social transfers cannot replace social security reforms and may keep uncertainty and precautionary savings high. Potential further credit events may disrupt the orderly adjustment process in the real estate sector. Excessive relaxation of demand-side restrictions in the property sector could result in stronger growth, but also in a further build-up of imbalances and sharper adjustment in the future. Delaying addressing the funding gap at sub-national government levels may lead to further accumulation of implicit debt and costly resolution later. Fiscal expansion coupled with more stringent measures to raise spending efficiency may lift the impact of the spending and result in higher growth. Excessive subsidies to import‑dependent high-technology sectors that face high tariffs and other restrictions could temporarily boost those industries but would waste scarce fiscal resources and potentially lead to excess capacity. Reducing the mortgage burden and targeting low-income groups with transfers may result in somewhat higher consumption.

Structural reforms could hold up growth in the medium term

While China’s potential growth is slowing due to population ageing, there is ample room for structural reforms to keep growth at a reasonably strong level in the medium term. At the current juncture, a range of measures are being explored to mitigate the impact of US tariffs: VAT refund on exports, tariff cuts on other countries and lowering the administrative burden on enterprises and abolishing illegal fees, as there is little room to cut profit margins due to cut-throat competition in many manufacturing industries. In services, where markups are much higher, strengthening the Fair Competition Review Mechanism and abolishing local protectionism should be pursued. New social transfers will boost consumption, but bolder social security reforms are needed. Unemployment insurance coverage needs to be extended to all, and pensions should provide at least a minimum standard of living to all eligible people. Furthermore, the list of treatments and medicines covered by health insurance needs to be widened so that health costs do not push people into poverty.