Deja vu: Xi Jinping's New Year speech won't tell a new story on economy

Last year, President Xi Jinping addressed China’s economic struggles during his New Year’s Eve speech. He promised to “consolidate and strengthen the momentum of economic recovery.” As the year comes to a close, little seems to have changed apart from 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 Work Conference

Every December, Chinese leaders meet 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 behaviour tells a concerning story. In November, retail sales grew by only three per cent compared to the previous year—lower than expected, even before adjusting for inflation. Meanwhile, consumer prices rose by just 0.2 per cent, showing households are still wary of spending. This cautious approach stems from the economic impact of Covid-19 lockdowns in 2022, which continues to weigh on confidence.

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The challenges for 2025 are mounting. According to The Economist, key growth drivers like exports and manufacturing investment face threats, particularly from the United States. President-elect Donald Trump has proposed tariffs of over 60 per cent on Chinese goods, with an additional 10 per cent penalty if China fails to tackle fentanyl exports. Analysts at Citigroup warn these tariffs could reduce China’s growth rate by 2.4 percentage points unless the government takes strong measures to counteract the impact.

While the Chinese government projects resilience, the road ahead remains filled with hurdles, requiring bold action to stabilise the economy.

Waning power of stimulus

China’s economic strength in the past often came from aggressive government stimulus, especially during crises like the 2008 global financial meltdown. Back then, state-owned banks and enterprises drove demand, supported by a booming property market. But today, the situation is very different. The property market is struggling and cautious banks are holding back reducing the impact of new stimulus measures.

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For example, in May, the government launched a 300-billion-yuan ($41 billion) refinancing programme to turn unsold properties into affordable housing. However, by late November, less than 15 per cent of this fund was used, according to Huatai Securities.

According to The Economist, the root of the problem lies in past over-expansion. After 2008, China faced soaring debts and an oversupply of unsold flats. To address this, President Xi’s administration introduced policies like “supply-side structural reform” and the “three red lines” to limit developer borrowing. While these measures aimed to stabilize the economy, they also caused major developers to go bankrupt after 2021, further slowing the property market’s recovery.

Recalibrating priorities

With slow growth challenging the economy, China’s leaders are shifting from a supply-driven approach to stimulating demand. This change was clear at the Central Economic Work Conference, where “vigorously boosting consumption” became the priority, sidelining long-standing focus on industrial upgrades.

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

There are also early signs of recovery in the housing market. November saw a year-on-year rise in new residential property sales—the first such growth in over three years, apart from a brief uptick after COVID restrictions eased in early 2023. These steps hint at progress, but sustained effort will be key.

Expanding the consumer toolkit

China is turning to creative strategies to encourage consumer spending. Cities like Shanghai are introducing electronic shopping coupons that offer discounts on dining, entertainment and hospitality when spending thresholds are exceeded. This initiative works alongside a government trade-in programme that incentivises households to upgrade appliances and vehicles. Consequently, retail sales of household goods jumped over 22 per cent in November, even as overall retail performance stayed weak.

Other steps include expanding health insurance subsidies and raising pensions to increase disposable incomes and lower household savings. According to Goldman Sachs as mentioned by The Economist, these efforts could push China’s fiscal deficit up by nearly 2 per cent of GDP in 2025.

Structural reforms and debt overhang

At the national level, China’s debt situation appears manageable, with a debt-to-GDP ratio of about 68 per cent—far below Japan’s 250 per cent or the United States’ 120 per cent. However, local governments face a much tougher reality. Many are burdened with unsustainable debt due to falling tax revenues, a struggling property market and pandemic-related spending. Some regional authorities are even struggling to pay salaries.

To address these challenges, the Politburo has adopted a “moderately loose” monetary policy, moving away from the “prudent” stance it maintained for over a decade. While President Xi’s vision of an innovative, high-quality economy remains the long-term goal, the government’s immediate focus is on boosting demand and stabilising the economy.

External pressures and the global context

China’s economic problems are being made worse by global issues. President-elect Trump’s strong trade policies highlight a growing split between China and Western nations.

Even with these challenges, there are reasons for hope. China’s success in 2025 will depend on balancing internal changes with outside pressures. Recent efforts to encourage spending are a good start, but big problems like local government debt and careful lending by banks still stand in the way.

As President Xi gets ready for his New Year’s Eve speech, the words might sound familiar. However, behind them is a country at a crossroads—working to solve immediate problems while aiming for a bright, high-tech future. How well these efforts work will not only decide China’s future but also its place in a divided world.