China’s Slowing Growth Isn’t a Problem

Bullseye? Chinese GDP grew 5% in 2024, hitting the government’s target.^[i] Many credit Beijing’s stimulus efforts for the growth but warn looming US tariffs pose a new challenge in 2025. Skeptics further note deflation suggests something is off in China’s economy. In our view, the doubts overlook the simple fact China’s growth is broad-based and healthy—a fine contributor to the global economy.

Q4 GDP rose 5.4%, beating consensus estimates of 4.9% and speeding from Q3’s 4.6%.^[ii] That reacceleration lifted annual growth to 5.0%, meeting the government’s 2024 growth target of around 5%.^[iii] Alongside GDP, December retail sales (3.7% y/y) and industrial production (6.2% y/y) also beat expectations (3.5% and 5.4%, respectively).^[iv] However, most credited China’s late-year growth spurt to strong exports as companies front-ran potential US tariffs and Beijing’s stimulus efforts—neither indicating an economy running on its own, sustainable power. Looking ahead, many presume China’s economy needs help navigating several headwinds, including tariffs, deflationary pressures and an aging population.

We don’t dismiss China’s economic challenges, but they needn’t derail GDP growth. Consider some not-too-distant history. Ever since Chinese GDP growth started slowing in the early 2010s, the economy has hit some big speedbumps—some of which weighed on its expansion and contributed to local (and sometimes global) market volatility. But COVID-driven lockdowns notwithstanding, China’s economy has grown fairly consistently.

Go back to 2014 – 2015, when a global manufacturing soft patch had an outsized effect on Chinese output. The government was implementing efforts to transition the economy from manufacturing and export-driven growth to a consumption and services-led economic model. That meant curbing excesses in steel and other industrial sectors—which contributed to an economic slowdown. Efforts to move to a more market-driven exchange rate added another wrinkle, sparking fears of a currency meltdown—or intentional devaluation. “Hard landing” fears picked up then, yet Chinese growth didn’t cease. It just continued its longer trend of moderation.

Or what about 2018 – 2019? US “trade war” worries grabbed headlines, but in our view, the main contributor to slowing growth then was the government’s crackdown on shadow banking and local government debt issuance. That initiative disproportionately knocked small and medium-sized businesses—which comprise the bulk of China’s private sector—and coincided with (and perhaps contributed a bit to) a broader global manufacturing weak stretch. Here, too, no economic “hard landing” ensued.

Four years ago, several developments seemed to threaten Chinese growth, from the Delta COVID variant and flooding in central China to electricity shortages and a re-regulation push in different domestic industries (notably Tech). However, the collapse of giant real estate developer Evergrande appeared to pose the biggest problem of all, as many thought China’s long-running property market struggles would now derail the economy. However, Evergrande’s default didn’t lead to contagion or a property market collapse that upended China’s economy. Yes, problems rippled through the sector and had genuine economic implications. But the government managed the fallout, focusing on supporting the beleaguered real estate sector and targeting stimulus where most needed.

These issues over the past 10 years weighed on growth and had real-world consequences—think the factories struggling to sell product in an oversupplied market or homebuyers who couldn’t live in sold-but-unfinished apartments. But these challenges didn’t crash the economy, in part due to the government’s desire to maintain economic (and therefore social) stability. Policymakers have employed several tools to support the economy, from easing reserve requirements to free up capital for bank lending to cutting taxes, investing in local infrastructure investment and making investors and workers whole after company collapses. Yes, policymakers backstopped the property sector last year, and that benefited the economy. But there is a world of difference between backstops and pumping massive stimulus. Simply, China has long defied hard landing projections—a tale that continued in 2024.

Entering 2025, many presume China’s economy needs additional help to skirt trouble. But we don’t think today’s crop of fears necessarily imperils growth. Take deflation. Many see falling prices as a sign of weakening demand, so when China CPI fell year-over-year in six of seven months from July 2023 – January 2024, headlines warned trouble loomed.^[v] But actual, deep deflation is a symptom of economic problems, not a cause. It also isn’t actually present in China. Deflation (like inflation) is a monetary, not a psychological, phenomenon—the case of too little money chasing too many goods and services. In China, M2 money supply and credit (as measured by total social financing) rose on a year-over-year basis throughout 2024—at a slower rate, yes, but still expansionary.^[vi] It is tough to get prolonged deflation when money supply and credit are expansionary. Consider, too, that stretch of falling prices in late 2023 – early 2024 didn’t span the broad economy. Rather, two categories (pork, a staple of Chinese diets, and energy) drove the decline. Core CPI (which excludes food and energy prices) didn’t contract over that timeframe.^[vii]

As for tariffs, we are monitoring trade policy and don’t dismiss the possibility of a trade war. But we have seen this movie back in 2018 – 2019 with the same leading actor—and President Donald Trump’s sharp rhetoric and threats didn’t bring disaster for China. On the demographics front, China does face a unique headwind as the disastrous One-Child Rule robbed the country of millions of people. But we think it is premature to declare that fewer young people mean future economic growth will be permanently slower. We can’t know what will happen decades from now, but societies can adapt—whether through policy, technology, medicine or otherwise. Then, too, officials have relaxed that policy significantly. In our view, the low expectations toward the world’s second-largest economy—which continues to expand at a healthy clip, adding to global growth—set the stage for some positive surprise.