In the latest indicators of China’s economic health, a confluence of falling bond yields, declining GDP growth and persistent consumer price deflation paints a concerning picture for the world’s second-largest economy. Throughout 2024, China’s GDP growth has been a subject of intense scrutiny, with estimates from China-skeptical Rhodium Group ranging between 2.4% and 2.8%. These figures starkly contrast with the official statistics reported by the National Bureau of Statistics (NBS), which indicated an annualized growth rate of 4.8% year to date through the third quarter. The divergence is most pronounced in the realm of gross fixed capital formation, where investment figures differ significantly, compounded by discrepancies in household consumption data.
This underperformance marks a pivotal shift in the narrative surrounding China’s economic trajectory. 2024 has been a turning point, where Beijing’s previously optimistic outlook has been tempered by a persistent post-COVID malaise. The government’s late acknowledgment of the need to bolster domestic consumption resulted in inadequate measures to salvage the year’s economic performance — even now, the government is trying to encourage people to buy more clothing and home appliances with a trade-in program. While Beijing continues to assert that it met its growth targets, skepticism persists both domestically and internationally, with organizations like the International Monetary Fund (IMF) hesitating to fully endorse the official figures.
Amid these challenges, China’s policy stance has begun to evolve. The government’s response has mainly involved short-term countercyclical support measures, which are expected to slightly boost growth in 2025. Projections suggest that GDP growth could edge from the 2%-3% range observed in 2024 to between 3% and 4%, with a possibility of reaching 4.5% should policy measures align favorably. But this anticipated improvement is viewed by many analysts as cyclical rather than indicative of a sustained recovery. Unresolved structural issues, such as overinvestment in manufacturing and the need for a deeper economic liberalization to shift toward a consumption-led economy, pose significant hurdles for long-term growth.
One of the central issues undermining the credibility of China’s economic data is the so-called “authority bias.” This bias arises from the selective presentation of economic indicators by Chinese authorities, emphasizing positive metrics like steady real GDP growth and stable employment while omitting critical data points such as falling prices, slowing nominal GDP growth and declining fiscal expenditures relative to budget targets. This selective reporting complicates the assessment of China’s true economic condition and has become a focal point in global discussions about the country’s slowdown.
The discrepancy between China’s reported macroeconomic data and the actual policy actions taken by the government calls the credibility of government-reported data into question. For instance, while official reports suggest only a marginal slowdown in GDP growth, the government’s aggressive fiscal maneuvers — such as cutting interest rates, adjusting budgets, refinancing local government debt and introducing liquidity facilities — indicate a more severe economic downturn. These policy shifts are unprecedented in their scope and urgency for a minor economic slowdown, suggesting that the underlying economic conditions are more dire than officially acknowledged.
Consumer price deflation adds another layer of complexity to China’s economic challenges. In 2024, Consumer Price Index (CPI) growth was recorded at a mere 0.2% year on year in November, with core price growth around 0.3%. These figures are starkly lower than official projections and are indicative of broader deflationary pressures. Additionally, data from economists associated with the China Finance 40 Forum suggests that CPI growth over the past three years has hovered around negative 2%, underscoring the depth of deflationary trends that are not fully captured in official statistics.
Falling bond yields in China are symptomatic of broader investor sentiment shifts away from equities toward safer assets. The People’s Bank of China (PBOC) has recently halted the purchase of government bonds, a move aimed at preventing a potential bond bubble. This decision is particularly unusual in a global context where central banks are typically increasing bond purchases to stimulate economies facing deflation. The cessation of bond buying is intended to stabilize bond prices and prevent a further decline in yields, which have already been on a downward trajectory due to aggressive borrowing by commercial banks and risk-averse investor behavior.
The weakening of the yuan against the dollar is another critical factor impacting the economy. The significant depreciation of the currency exacerbates trade imbalances by making exports cheaper and imports more expensive, thereby contributing to a substantial trade surplus. While this might seem beneficial on the surface, it masks underlying issues such as overcapacity in manufacturing and the structural weaknesses in the domestic demand that are critical for sustainable growth.
Government consumption, although a part of the official GDP figures, reveals limited growth potential. Fiscal expenditure statistics indicate that government spending has only grown by low single digits, with modest contributions to GDP growth. The introduction of stimulus packages focused on refinancing local government debt has provided some relief, but the late timing of these measures means their impact will be more pronounced in the subsequent year rather than in 2024.
Household consumption remains a precarious pillar of the economy. Despite efforts to boost consumer spending through trade-in subsidies for automobiles and household appliances, fundamental issues such as slow growth in disposable income and wages continue to hinder significant gains. The ongoing deleveraging process, where households prioritize paying down debt over spending, further limits the potential for increased consumption. Real household consumption growth is estimated to range between 3.5% and 4% in 2025, contributing approximately 1.3 to 1.6 percentage points to GDP growth.
(The Outbound Ocean TEU Index is an index measuring container volumes outbound from a country; China’s outbound volumes are displayed above. Chart: SONAR. To learn more about SONAR, click here)
Net exports have been a bright spot, driving a positive contribution to GDP growth in 2024 through robust export performance despite global trade tensions. Exports increased by 6.7% in value terms year to date through November, with export volumes growing even faster at 11.6% year on year. The fact that the value of exports increased by 6.7% while volumes grew by 11.6% seems to confirm reports that China is dumping onto the global market discounted goods that its own consumers are unwilling to buy.
However, this growth is heavily reliant on the weakness of domestic demand and could be vulnerable to shifting global economic conditions and trade policies.
In 2025, investment is expected to stabilize, driven by supportive fiscal policies aimed at revitalizing infrastructure and construction sectors. However, private investment remains subdued due to constraints on credit growth and deflationary pressures. Government spending is projected to contribute between 0.5 and 1 percentage point to GDP growth, supported by increased fiscal deficits and special treasury bonds issuance, though this will be tempered by declining tax revenues.
China’s economic landscape in 2024 and 2025 is characterized by a delicate interplay of slowing growth, deflationary pressures and shifting investor sentiments. While short-term policy measures may provide modest economic support, the underlying structural challenges — from overinvestment in manufacturing to the need for a consumption-led growth model — pose significant obstacles to sustained recovery. The ongoing “authority bias” in official data further complicates the global community’s understanding of China’s true economic state, making it imperative for more transparent and comprehensive reporting to accurately gauge the nation’s economic trajectory.