How Healthy is the Chinese Economy?
How Healthy is the Chinese Economy?
With China’s economy growing by 5.4% on a year-on-year basis in the first quarter of 2025, it is easy to assume that the Chinese economy is in better health than many have estimated. However, there are concerns that this rate of growth is unsustainable given the mounting threats facing the Chinese economy, most notably its worsening trade war with the United States. As a result, the Chinese economy is likely to face a great deal of turbulence in the months ahead, with the country finding that it is increasingly difficult to generate such high rates of economic growth in the future.
What is Happening
- By expanding by a better-than-expected 5.4% in the first quarter of this year, China’s economy allayed some fears that it could face a slowdown in the early part of 2025. However, much of this growth can be attributed to two unique factors that are unsustainable. First, the Chinese government has enacted major stimulus programs in recent months to revive the country’s moribund domestic market. Second, there was a surge in manufacturing and export activity in China in the early part of this year as manufacturers and exporters attempted to do as much business as possible prior to the implementation of massive new US tariffs on Chinese imports.
- Over the near-term, it will be the response by China, and by those businesses that have invested heavily in China, to the trade war launched by the United States that will determine the direction and health of the Chinese economy. Should a sizeable share of businesses that have invested in China choose to decouple their operations from that country, or should more governments place barriers on Chinese imports, there could be a major economic slowdown in China. Likewise, if the recent recovery in domestic consumption in China proves short-lived, China’s economy will also face a slowdown in the coming months.
- The days of the Chinese economy growing by 10% per year for a 30-year period are long over. In fact, the Chinese economy was growing by around 7% in the years before Covid, but now can only make it to 5% growth with major stimulus measures being enacted. Worse, China’s demographic timebomb and growing resistance around the world to China’s control of many key manufacturing industries indicates that a continued slowdown of the Chinese economy will continue in the years and decades ahead.
Implications
- Should China respond to a sharp decline in exports to the United States by attempting to boost exports to other major economies such as Southeast Asia, India or Europe, governments in these regions will be under pressure to do more to protect local industries from Chinese competition. Such a development would turn what is now a trade dispute between the US and China into a full-blown global trade war, something that would be devastating for the health of the global economy.
- Businesses that have invested heavily in China will be pulled in two directions in the coming months. On one hand, many businesses are seeking to decouple their supply chains from China amid growing economic and geopolitical tensions. On the other hand, many of these businesses will find it very difficult to decouple from China given the extent of their supply chains in that country and the lack of alternative production locations over the near-term.
- It is not hard to see how the current trade tensions between the United States and China could quickly turn into severe geopolitical tensions that could bring the world’s two most powerful countries into a conflict with one another. One only needs to look at the economic factors that resulted in previous global conflicts (most notably the Second World War) to understand how a trade dispute or an economic concern can trigger a full-scale war.
Summary
Concerns over the near-term health of the Chinese economy have been allayed a little thanks to the better-than-expected GDP growth results from the first quarter of this year. However, the Chinese economy is facing a series of monumental near-term and long-term challenges that will make it much harder for the world’s second-largest economy to generate growth in the years ahead. This poses challenges not only for China, but for the wider global economy, as well as for global security.