China’s November economic data reveals a mixed bag of industrial growth and faltering retail sales, painting a complex picture of its ongoing struggle to shift from an export- and investment-driven growth model to one centered on domestic consumption. As Beijing faces the dual challenge of sluggish consumer demand and the specter of higher U.S. tariffs under a potential second Trump administration, the stakes for policy recalibration are higher than ever. This analysis explores the underlying issues, the impact of global dynamics, and the lessons from similar past scenarios.

Industrial Growth Outpaces Expectations, but Retail Sales Falter

November 2024 saw China’s industrial output grow 5.4% year-on-year, slightly exceeding forecasts and October’s growth rate of 5.3%. However, this was overshadowed by retail sales, which grew by a mere 3.0%, marking the weakest pace in three months and a significant drop from October’s 4.8% rise.

The disparity between production and consumption underscores a longstanding imbalance in China’s economy. While the government has championed policies that prioritize manufacturing, the benefits have not translated effectively into robust consumer spending. Analysts like Dan Wang argue that this focus on production capacity exacerbates overcapacity issues and forces companies to seek overseas markets to absorb excess supply.

Domestic Consumption: A Persistent Weak Link

China’s retail performance has been bolstered, in part, by government subsidies, contributing an estimated 1.5–2 percentage points to monthly sales growth. However, these subsidies reveal the fragility of underlying consumer demand. For example, events like the “Double 11” shopping festival, which frontloads spending, distort retail figures and fail to reflect sustainable consumption patterns.

The ongoing property crisis further weakens consumer confidence. With over 70% of household savings tied up in real estate, the sector’s instability continues to drag on broader economic sentiment. Although November saw new home prices fall at the slowest pace in 17 months, the housing market’s fragility remains a critical concern.

External Pressures: The Looming Tariff Threat

A significant external challenge for China lies in its trade relations with the United States. President-elect Donald Trump’s promise of imposing tariffs exceeding 60% on Chinese goods could deal a severe blow to China’s export-driven industries. Such tariffs would compel Beijing to accelerate its long-delayed transition to a consumption-driven economy. However, this pivot is easier said than done, given the structural issues plaguing domestic consumption.

Historical precedent illustrates the impact of trade tensions on China’s economy. During the 2018–2019 U.S.-China trade war, tariffs on Chinese goods strained supply chains, increased costs for businesses, and contributed to slower GDP growth. Despite retaliatory measures, China struggled to counteract the effects fully. The current situation threatens to rekindle similar economic disruptions.

Policy Responses: Stimulus and Structural Reforms

At the recent Central Economic Work Conference (CEWC), China’s leaders outlined ambitious plans to address the economic slowdown. These include raising the budget deficit, issuing more debt, and adopting a more accommodative monetary policy for the first time in 14 years. Policymakers have pledged to prioritize consumption and stabilize the property sector, which once contributed 25% of GDP.

However, experts caution against over-reliance on short-term stimulus measures. Julian Evans-Pritchard of Capital Economics notes that while policy support might yield temporary growth spurts, it cannot counteract deeper structural weaknesses or shield China from external shocks like U.S. tariffs.

Lessons from Similar Incidents: Japan and South Korea

China’s current predicament bears similarities to economic challenges faced by Japan in the 1990s and South Korea during the 1997 Asian Financial Crisis. Both countries grappled with weak domestic consumption, overreliance on exports, and systemic financial vulnerabilities.

• Japan’s Lost Decade: After its asset bubble burst, Japan struggled with deflation, stagnant wages, and declining consumer spending. Efforts to stimulate the economy through public works projects and monetary easing yielded limited success, as structural reforms were slow to take hold.
• South Korea’s Crisis Recovery: In contrast, South Korea leveraged the Asian Financial Crisis to implement sweeping reforms. By opening its markets, improving corporate governance, and fostering domestic innovation, South Korea built a more resilient economic model.

China can draw lessons from these cases, particularly the need for swift, comprehensive reforms to address structural issues while avoiding over-reliance on stimulus measures.

Economic Outlook: Risks and Opportunities

While China has set a GDP growth target of around 5% for 2025, a Reuters poll suggests that growth could reach 4.5%, with U.S. tariffs potentially shaving up to 1 percentage point off this figure. Moody’s recently revised its forecast for China’s 2025 GDP growth from 4.0% to 4.2%, citing potential policy interventions.

Stabilizing the property sector remains critical. A well-functioning housing market would not only restore consumer confidence but also free up household savings for other forms of spending. Additionally, reducing reliance on subsidies and fostering genuine income growth are essential for boosting consumption sustainably.

Balancing Domestic and International Strategies

As Beijing grapples with domestic challenges, it must also navigate complex international dynamics. Strengthening trade relations with emerging markets and diversifying export destinations could help mitigate the impact of U.S. tariffs. Additionally, enhancing collaboration within regional frameworks like the Regional Comprehensive Economic Partnership (RCEP) could bolster China’s economic resilience.

A Roadmap for Economic Resilience

To weather the current challenges, China must undertake a multipronged approach:

1. Structural Reforms: Accelerate reforms to shift from an export-driven economy to one rooted in domestic consumption. This includes improving social safety nets, reducing income inequality, and fostering innovation-led growth.
2. Property Sector Stabilization: Address the housing crisis by implementing policies that ensure affordable housing while discouraging speculative investment.
3. Trade Diversification: Expand trade partnerships and reduce dependence on traditional markets like the U.S., leveraging agreements like RCEP to access new opportunities.
4. Consumption-Led Growth: Enhance household purchasing power through wage growth, reduced income taxes, and broader access to credit.

A Critical Juncture for China’s Economy

China’s November economic data underscores the delicate balancing act Beijing must perform to sustain growth amid mounting internal and external pressures. While industrial output shows promise, weak retail sales highlight the challenges of fostering a consumption-driven economy. As U.S. trade policies threaten to upend export markets, China must act decisively to recalibrate its economic strategies.

Lessons from past global incidents highlight the importance of structural reforms, international diversification, and targeted policy interventions. Whether Beijing can rise to the occasion will determine its economic trajectory in the coming years—and its ability to withstand future shocks.

(Adapted from ChannelNewsAsia.com)

Categories: Economy & Finance, Geopolitics, Regulations & Legal, Strategy