China’s ambitious “around 5%” growth target this year increasingly has a Donald Trump problem.
Every time the US president raises tariffs for mainland goods — 145%, at least for now — he makes it harder for Xi Jinping to avoid Beijing’s fate in 2022 and 1990. Those are the only two times in the last 35 years that China missed its gross domestic product target.
Yet there’s every reason to think Xi can pull off the seemingly impossible in 2025 so long as his Communist Party marshals a dual-focused response to Trump’s one-man tariff arms race.
The first is a burst of well-targeted stimulus to offset epically strong headwinds zooming China’s way. The second is incentivizing Xi’s 1.4 billion-plus people to save less and spend more.
Goal No 1 is not in question. The only uncertainty is the scale of the stimulus Team Xi is willing to unleash to boost consumption, stabilize the housing market and end deflation.
The urgency to stimulate is rising. Goldman Sachs, for example, thinks Xi’s economy will grow just 4% this year. Beijing’s actions to date, the Wall Street investment bank worries, aren’t enough to “fully offset the negative effect of the tariffs.”
At the low end, UBS economist Tao Wang thinks China will grow just 3.4% this year and 3% in 2026 as Trump’s tariffs choke exports.
“The tariff shock poses unprecedented challenges to China’s exports and will set forth major adjustments in the domestic economy as well,” Wang says.
China’s consumer spending, it’s generally believed, amounts to roughly US$7 trillion. The nation’s annual exports to the US are about $450 billion.
If Trump’s tariffs erase, say, half that amount, Xi would have to rely mostly on domestic consumption to pick up the slack. That’s doable, many economists agree, so long as Beijing acts urgently and boldly.
To turn the tide, analyst Zhang Di at China Galaxy Securities expects this month’s Politburo meeting to result in a stimulus jolt of between 1.5 trillion yuan ($205 billion) to 2 trillion yuan ($275 billion). Analysts at Citigroup skew more to the 1.5 trillion yuan figure.
“We see a greater chance that domestic stimulus would be brought forward,” Citi analysts write. “We reckon that fiscal policies should lead domestic demand expansion amid external shocks.”
Investors will get a fresh read of Chinese GDP on Wednesday, when most economists expect a 5.1% growth rate will be announced in the first quarter of this year.
Increased fiscal spending could be complemented by cuts in official interest rates and reserve requirement ratios. Last month, Xi’s team unveiled new fiscal measures, including a higher budget deficit target of around 4% of GDP, up from 3% in 2024.
“The wider deficit will support the economic outlook, but we think it is still uncertain as to how large the fiscal impulse will be, or whether it will sustainably lift underlying domestic demand,” cautions Jeremy Zook, an analyst at Fitch Ratings.
Fitch, Zook says, still views Beijing’s 2025 GDP target as “ambitious” and predicts the economy will end up growing 4.3% this year “due to headwinds from subdued domestic demand, lingering property-sector stress and rising external challenges.”
That leaves pumping up consumption as Xi’s top priority. “Public expenditure is set to rise by 1.4 percentage points to 30% of GDP, but consumption-focused measures remain relatively modest, in our view,” Zook notes.
Roughly 300 billion yuan is allocated to a consumer goods trade-in program, up from 150 billion yuan last year.
But “we believe most policies remain focused on supply-side measures, such as investment in industrial advancement,” Zook says. “Local governments will be permitted to use bond proceeds to purchase idle land or vacant housing units, but it is unclear if the amounts involved will be substantial.”
At the same time, many economists expect monetary policy to be eased via official rate cuts and RRR reductions.
“Deflationary pressure is persistent,” says economist Zhiwei Zhang, president of Pinpoint Asset Management. Making matters worse, he says, “policy uncertainty in the US is still elevated.”
Julian Evans-Pritchard, head of China economics at Capital Economics, says that “while policymakers have signaled a willingness to do more to support domestic demand, a lot of fiscal spending is still being devoted to expanding the supply side of the economy.”
Evans-Pritchard adds that “it seems unlikely that consumption support will be sufficient to fully offset weaker exports. As such, overcapacity looks set to worsen, exacerbating downward pressure on prices.”
Adding to Xi’s balancing act is a desire to keep the yuan exchange rate stable. This will be particularly challenging as the PBOC eases and Trump’s chaotic White House trashes confidence in the US dollar.
This year alone, the dollar is down 9.6% versus the euro and nearly 9% versus the yen.
This trajectory may give Beijing scope to tolerate a weaker yuan without being labeled a currency manipulator by Trump’s Treasury Department. Generally, though, few see Xi resorting to a weaker exchange rate to boost exports.
For one thing, notes HSBC strategist Joey Chew, a yuan devaluation could “weaken” consumer confidence and “risk capital flight” at the worst possible moment for Beijing.
Christopher Wong, strategist at Oversea-Chinese Banking Corp, notes that “policymakers may prefer to maintain some degree of measured yuan stability. A softer magnitude of increase in the dollar-yuan fix should calm sentiments for yuan, as well as provide a breather for Asian currencies.”
Dan Wang, China director at Eurasia Group, warns that Xi using the yuan as a trade war weapon might be “inviting financial crisis on its own.”
That’s why Team Xi is veering the other way by reassuring global investors it will defend, not deflate, the yuan. In other words, speculators who short the yuan do so at their own peril.
Yet Xi’s government has a bigger challenge on its hands: Goal No 2, which is shifting China once and for all away from exports and debt-financed investment toward a domestic demand-led growth model.
The Politburo meeting later this month could be a make-or-break moment for Xi’s desire to move China decisively upmarket into higher value-added industries. A key element of that transition is building bigger social safety nets to encourage households to spend more and save less.
Xi’s inner circle has been telegraphing moves to do everything from reducing regulations, boosting the birthrate, upping subsidies for some exports and devising a stabilization fund to shore up its stock market.
But the real focus must be on creating the social safety nets that the central government and municipalities have been promising for years.
Doing so is easier said than done, though. In the medium term, for example, Xi’s land reforms that benefit China’s 477 million rural residents could just lead to higher rural savings unless they’re paired with substantial improvements in rural social welfare, says economist Camille Boullenois at Rhodium Group.
In 2023, Boullenois notes, rural residents had an implied savings rate of just 13.7%, compared to 33.8% for urban residents – probably because they have far less income to save.
“Given the severe shortfalls in public services and social safety nets in rural areas,” she says, “any increase in rural income would likely be set aside as precautionary savings to guard against future uncertainties, rather than spent on consumption.”
Generally speaking, Boullenois adds, Chinese households already bear a disproportionate share of basic service costs. In 2021, out-of-pocket healthcare spending accounted for 35% of total health expenditures in China, compared to just 13% in Organization for Economic Cooperation and Development countries.
Similarly, households spent an average of 7.9% of their annual expenditures on education, far exceeding the 1% to 2% seen in Japan, Mexico, and the US.
“Meaningfully boosting consumption requires structural reforms to address the rural-urban divide, the precarious position of migrant workers, and the misallocation of capital by state-owned enterprises and banks,” Boullenois says.
“Many of these issues were recognized in China’s 2013 reform agenda but have remained largely unaddressed due to political and financial constraints.”
The bottom line, Boullenois says, is that “substantial fiscal resources will be required. Tens of trillions of RMB – likely around 30% of China’s GDP – would be needed to fund both one-time investments, such as social infrastructure and financial stabilization measures, and ongoing expenditures to support social transfers and public services.”
That means sweeping changes to China’s tax system, a reallocation of government spending and increases in central government borrowing.
It also means increased local government incentives to ensure that new fiscal resources are directed toward social spending rather than investment-driven growth.
Along with the necessary resources and financial commitments, moving toward a fundamentally new model requires big changes in the Communist Party’s mindset.
Despite its name, China’s ruling party bigwigs tend to “have an aversion to being ‘welfarist,’ which historically aligns with China’s tendency to view its citizens as a source for labor and tax revenue rather than as human resources to be cultivated and assisted when in need,” says economist Thomas Duesterberg at the Hudson Institute.
This, Duesterberg adds, “has resulted in a social safety net that considerably lags international standards, especially those of developed and even middle-income countries.”
High debt levels burden Chinese local governments, and shrinking revenues, declining birthrates, falling marriage rates and aging populations further fuel the deterioration of government finances, Duesterberg notes.
“These problems contribute to the growing financial vulnerability of Chinese households and create significant concerns for future generations,” he says. “Families often shoulder the costs of caring for their elderly, educating their children and paying for healthcare.”
China’s public healthcare spending is limited, with around 7% of GDP devoted to the national system, Duesterberg notes.
Families, on average, spend at least 27% out-of-pocket of their total health costs to make up for shortfalls in their health insurance, compared to just 11% in the US.
Part of the challenge, notes Erik Green, research associate at the International Institute for Strategic Studies, is Beijing overcoming “officials’ deep-seated risk aversion and consequent unwillingness to implement reforms and innovate policy solutions. Despite the development of plans to address them, these challenges are likely to continue to undermine the progress of China’s economic, social, political and military reforms.”
Switching economic engines at the quietest of times is hard enough, never mind amidst a global trade war that’s intensifying by the day.
The best-case scenario is for Trump to be chastened by recent chaos in global markets – and trillions of dollars of losses – and go easier on the tariffs. After all, “any escalatory moves beyond the already prohibitive tariffs perhaps carry more symbolic meanings than real impact,” says Citigroup economist Xiangrong Yu.
By now, Trump realizes that Xi isn’t about to cave to his tariffs arms race. The official Xinhua News Agency reports that Beijing will continue to take “resolute measures” to safeguard its economic interests. That includes its retaliatory move to hike tariffs on US goods to 125%.
But for Xi’s China, there’s no defense like going on the economic offense to revitalize domestic demand, regardless of what Trump does. This month’s Politburo meeting is an ideal opportunity to pivot at long last toward consumer-demand-led growth.
Follow William Pesek on X at @WilliamPesek
