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Stephen Roach

While China has left its official growth target unchanged at around 5 per cent, the tone of the work report from this year’s “two sessions” was different. The balance has shifted from a standard recapitulation of notable accomplishments to an unusually candid assessment of the multiplicity of problems that China now faces.
This was buried in the middle of a long report prepared by China’s National Development and Reform Commission, which emphasised “the negative impact of the external environment” while recognising domestic foundations are not strong enough for sustained growth in the Chinese economy. That message needs to be taken seriously.
Conflict escalation with the United States is obviously at the top of China’s external concerns. The good news for China is that it has travelled this road before. The bad news is that it is facing a new round of US tariff hikes and sanctions when its economy is weaker than it was during the first phase of the trade war in the late 2010s.
China has been hit hard by the bilateral trade conflict with the US. While the US is still China’s largest nation-state export market, its share of total Chinese exports fell to 12.8 per cent by 2023, well below the 19.8 per cent average for the five years to 2018, when the first phase of the trade war started.
Meanwhile, the multilateral impacts have been minimal. China executed an impressive export diversification strategy – drawing on significantly increased export exposure to Vietnam, Russia and India, as well as Germany, the United Kingdom, South Korea, Thailand, Indonesia and Mexico.
With US export demand likely set to decrease due to the Trump tariffs, China must intensify export diversification to cushion the external shock. That may be very difficult to achieve considering prospects for a renewed contraction in the global trade cycle over the next several years. Moreover, as Trump escalates his tariff campaign to multilateral “reciprocal” measures, likely retaliation poses added risks to baseline trade projections.


In the context of China’s 5 per cent gross domestic product (GDP) growth target, a new external shock puts increased pressure on internal demand to provide an offset. Unsurprisingly, with lingering weakness in the property sector, “boosting consumption and investment returns” is listed as the No 1 economic priority by the government in the year ahead. This ranking, however, is no guarantee of success.
Consumer-led rebalancing has been long been discussed in Chinese policy circles, but with little to show for the effort. Chinese authorities continue to emphasise trade-in campaigns to bring forward demand for ageing big-ticket durable products such as cars, appliances and consumer electronics.
However, a one-off boost to replacement demand alone does not address the lingering excesses of precautionary household saving, underscoring a still problematic outlook for sustained growth in discretionary consumption.
The optimistic view is that recent Chinese stimulus actions will re-energise consumer confidence and encourage households to draw down excess saving. While the International Monetary Fund’s latest assessment of China finds some reduction in household saving following the end of the Covid lockdown, the saving rate remains above pre-pandemic levels.

In 2023, burgeoning household bank deposits were nearly 13 per cent larger than China’s nominal GDP, so one might hope that the recent stimulus will unlock that saving and spur pent-up personal spending. I have my doubts though.
Survey data from the People’s Bank of China indicate that over 60 per cent of China’s urban residents still want to increase personal saving – dramatically higher than the roughly 40 per cent share prevailing in early 2018, before Trump’s trade war.
I have long stressed the need to focus on a more robust social safety net – namely healthcare, pensions and hukou reforms – as the necessary antidote to China’s excessive savings problem. The just-announced 30-point consumption action plan offers disappointingly modest support for this approach.
Instead, Beijing has opted to focus more on the supply side of its economy. Consistent with the equally high priority placed on investment returns, there is a considerable emphasis on “new quality productive forces” and related emerging industry clusters – especially innovation in artificial intelligence, advanced computing and alternative energy generation and storage. This is aimed at boosting total factory productivity, justifiably an important counterweight to a declining working-age population that has arisen from China’s draconian one-child family planning policy.


Alas, there is an important catch to this strategy. Without a commensurate increase on the demand side of the equation – especially household consumption – the heightened focus on total factor productivity on the supply side could be self-limiting. As a demand-short economy, China would then export excess production of its new quality products to the rest of the world – exacerbating the serious protectionist pressures it is already facing.
For over a quarter of a century, China has faced several key external challenges – the 1997 Asian financial crisis, the mild global recession of 2001, the 2008 global financial crisis and the first phase of the trade war.
In those instances, China responded forcefully and did not succumb to crises, or weiji. In keeping with the dual Chinese meaning of this word – danger and opportunity – China avoided danger by seizing on the opportunity. This strategy was effective in large part because China had the backstop of strong underlying momentum of its real economy. Today, China lacks that luxury.
Last year, it was quite difficult for China to hit its 5 per cent growth target. In a more treacherous external climate, I suspect that China will be under considerably greater pressure to pull it off in 2025.


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Beijing has withstood external pressures for decades but without strong domestic demand, those pressures are increasingly harder to surmount


Beijing has withstood external pressures for decades but without strong domestic demand, those pressures are increasingly harder to surmount.


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Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


China knows economic challenges lie ahead. Is it ready for them?

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Beijing has withstood external pressures for decades but without strong domestic demand, those pressures are increasingly harder to surmount

Beijing has withstood external pressures for decades but without strong domestic demand, those pressures are increasingly harder to surmount