China has pursued an overarching mission for the last two decades.
The country’s leadership has aimed to transition from an economy focused largely on exports to one that is fuelled more sustainably by domestic demand and a growing middle class.
But that drive has been difficult, and it has faltered as the country’s economic growth has slowed in the last few years, said Logan Wright, partner and director of China markets research for the research firm Rhodium Group.
“What we’re seeing in general is an economy that’s struggling with domestic demand, struggling with deflationary or disinflationary pressure, depending on how severely you view the threat,” Wright said.
He is one of four experts who shared their perspectives on the economy of China and South Asia for 2025 — a year, they agreed, that will be marked by yet more change for the world’s second-largest economy and a major driver of global growth.
FM also talked to Bing Mei, CPA, CGMA, the CFO of an investment company listed on the Stock Exchange of Hong Kong; Lay Huay Yeap, ACMA, CGMA, senior lecturer at the Singapore Institute of Technology and a former vice-president of finance at Barclays Wealth Management Asia, the Middle East, and Africa Offshore; and Eric Cheung, CPA, CGMA, the managing partner of the finance shared service centre in China for communications and advertising group WPP.
They identified bright spots and ongoing areas of concerns and raised questions about how and whether China will handle the continued hangover from its earlier years of rapid, debt-fuelled growth.
China’s big picture
China’s economy grew by 10% or more in the explosive years of the late 2000s. That figure slowed consistently through the 2010s — and then cratered as a result of the COVID-19 pandemic and a government crackdown on “shadow” lending.
The economy is still moving slowly back into growth. The government reported a 5.2% expansion in 2023, and Wright doesn’t expect considerable change to that in 2025.
“On balance, the data should look a little bit better than this year,” Wright said, however.
Among other factors, he listed:
- The real estate sector is settling out from a drastic four-year adjustment, which has reduced activity by about two-thirds. Wright expects a modest recovery in construction indicators.
- Consumer spending may benefit from slightly lower interest rates, subsidies, and other programmes.
- Exports will continue to grow but, perhaps, at a weaker rate than last year.
- Government spending may improve somewhat, but local governments could continue to struggle.
“These are very modest improvements relative to what has been a low baseline,” Wright said.
One further area of uncertainty in 2025 is the new US administration from 20 January — and what that will mean for US-China tariffs and trade.
And China’s rate of recovery, of course, is crucial to businesses’ plans for 2025.
“In the advertising industry, clients will spend more when their sales increase,” Cheung said. “We need help from the Chinese government to restore the confidence of consumers, so that they are willing to spend again, instead of saving money.”
At the same time, there are plenty of bright spots. The country’s exports remain competitive and resilient. And on “several advanced technologies”, Wright said, “Chinese companies remain at the forefront.” Electric vehicles remain a particular strength.
“We still have a huge market with lots of consumers,” Cheung said. “If they are confident in the future, they will start to spend again.”
Opportunities beyond China
While China negotiates some economic challenges, many other countries in Asia are looking forward to strong growth.
For example, South Asia continues to benefit from “a highly skilled labour force that comes at a relatively lower cost”, Yeap said, making it a prime opportunity for finance and accounting operations.
“In 2025, South Asia’s economy is expected to continue its robust growth, driven by strong domestic demand, particularly in India,” Yeap added.
She expects that manufacturing, service, and technology all could play a role in the region.
“Key trends to watch include the region’s increasing openness to global trade and investment via more free trade agreements, which could attract foreign capital and spur technological advancements and digital transformation,” she said.
Opportunity in South Asia, Southeast Asia, and other parts of the continent has drawn increasing interest from both Chinese and Western businesses.
Mei has seen the trend in person.
“I travel a lot in Asian countries. I just came back from Malaysia and saw many, many Chinese businesses over there,” said Mei, who is from China and works in Hong Kong.
“Many people consult with me. They want to expand in Indonesia, Malaysia,” he said. “This is a new trend for Chinese business leaders.”
Meanwhile, Western businesses continue to diversify their supply chains by investing in manufacturing in countries such as Vietnam. That was a result, in large part, of supply chain disruptions during the COVID-19 pandemic, but it also could be accelerated by the threat of US tariffs on China.
Wright has seen the trend for both Chinese and Western companies, with Rhodium’s cross-border investment monitor showing considerable investment in Vietnam and elsewhere.
“Many Chinese private firms are seeing there’s cost competitiveness outside of China,” he said. “For other firms, multinationals, there’s greater emphasis on reducing direct reliance upon China as a manufacturing base.”
Financial services have also shifted locations, Mei said.
Many have moved away from Hong Kong “because of the weak Chinese economy and the geopolitical tension between the US and China”, he said. “Now we feel the pressure, that Hong Kong’s got a lot of challenge to get the money back.”
Impact of China’s stimulus efforts
China’s government has stimulus plans that could boost the economy in 2025. Plans announced in November would take the pressure off debt-laden local governments by raising debt limits and issuing local government bonds to help debt refinancing, according to Reuters.
The scope of the initial package is 6 trillion yuan ($840 billion), but the initial reaction from some was disappointment.
“I think the stimulus package is still not enough,” Mei said — an opinion that was reflected in the initial market reaction.
With the November package’s focus on local government, Wright said the measure would do nothing for the consumer spending that China’s economy ultimately needs.
“The stimulus they’re talking about is local debt refinancing. It’s not consumer-focused,” Wright said. “They’re very opposed to these kinds of transfer payments.”
“Business leaders should well prepare for the effects of potential new stimulus spending,” Cheung advised, however. “A detailed plan should be in place, indicating actions that companies can take immediately in response to the stimulus.”
Preparing for China’s new normal
“I think for the short run it will be tough, very tough for the Chinese economy … especially for trade,” Mei said.
Mei, a former CFO of an electric vehicle manufacturer, plans to keep his investment strategy focused on new technology and opportunities abroad.
“We need to think out of the box to deal with the challenge. We need to find a way to solve those issues. If the US market now is more restricted to Chinese products, then we need to find the other markets. Think about entering ASEAN [Association of Southeast Asian Nations] countries, the Middle East countries,” Mei said.
And then there’s the question of the long run.
In Wright’s eyes, China faces the same challenge that it has for years: making the difficult and costly transition to a different and domestically centred economy.
“The path out is, basically, you have to restructure the growth model away from credit-intensive investment. And that requires fiscal allocations to improve household income over time and a more persistent programme to sort of rebalance the economy towards something more sustainable,” he said.
“That still probably involves slower paces of growth and adjustment costs in the short term. So that’s where the dilemma really is.”
— Andrew Kenney is a freelance writer based in the US. To comment on this article or to suggest an idea for another article, contact Oliver Rowe at Oliver.Rowe@aicpa-cima.com.
AICPA & CIMA RESOURCE
“Economic Growth Projections Reflect ‘Resilience’, IMF Says“, FM magazine, 22 October 2024