Natixis Asia Pacific Chief Economist Alicia Garcia Herrero recently highlighted challenges in China’s economic model:
“In the November data you had industrial production, value-added production, growing even higher than in October, with retail sales growing at only half that of production. So, what are you going to do with all of this production? Who are you going to export to? The problems are probably becoming more acute because protectionism is on the rise and China is not changing its model. I think 2025 is time for change, and China needs to change very soon, or the year might end up quite badly.”
China’s Transition to a Consumption Economy
Rising protectionism that analysts predict will intensify during Trump’s second term as US President may be contributing to Beijing’s economic rethink.
People’s Bank of China Governor Pan Gongsheng attended the Asian Financial Forum, sending a clear message. Beijing will target household income, social security, and subsidy support to boost consumption, saying,
“The priority of macroeconomic policy should shift from promoting more investment in the past, to promoting both consumption and investment, with more importance attached to consumption.”
In December, Beijing pledged stimulus measures to boost consumption and broader domestic demand. China’s President Xi Jinping also gave assurances that China will accomplish the 14th Five-Year Plan and implement more proactive and effective policies.
One key component of the 14th Five-Year Plan was the implementation of frameworks to expand domestic demand effectively and boost consumer spending. The Plan runs from 2021 to 2025. However, household spending still accounts for less than 50% of GDP, well below the Asia-Pacific average.
For context, household spending contributions to GDP in 2023 were:
Central and West Asia: Over 60%.
East Asia (including HK and China): Around 40%.
South Asia: Over 60%.
South East Asia: Over 50%.
However, Beijing faces several challenges in boosting household spending, including youth unemployment (16.1% in November) and low consumer sentiment. These complicate efforts to increase household spending.
Mainland China’s Market Outlook
Uncertainty about China’s economic outlook has weighed on Mainland China’s equity markets in early 2025.
The CSI 300 Index is down 3.31% year-to-date in 2025 after climbing 14.68% in 2024. Similarly, the SSE Composite Index has fallen 3.78% in January after gaining 12.67% in 2024. Both Indexes made their gains in the third quarter of 2024, ahead of the US Presidential Election.
Hong Kong-listed stocks have also struggled, with the Hang Seng Index down 4.59% year-to-date after jumping 18% in 2024.
Increasing US-China tensions and a lack of meaningful stimulus targeting consumption could materially impact demand for HK and Mainland China-listed stocks. However, robust stimulus measures and improving US-China relations could fuel a 2025 HK-China market rally.