China Economic Update : Reviving Demand, Regaining Momentum

Overview & Synopsis

China’s gross domestic product (GDP) growth has moderated since the second quarter of 2024, owing to subdued domestic demand. The government has responded to the domestic demand slowdown with incremental policy stimulus, balancing short-term growth support with longer term de-risking objectives. While monetary policy has been eased, its impact has been constrained by subdued credit demand. Despite lower down payment ratios and mortgage rates, state-financed purchase of housing inventories, and liquidity support to developers, the property sector remains weak in the face of dampened housing demand. The outlook is subject to domestic and external risks. Domestically, a more persistent downturn in the property sector could further temper investment and local government revenues. Tighter local government financing, in turn, can lead to under-execution of fiscal policies, dampening growth. China’s growth slowdown is partly driven by structural factors, such as structurally low consumption, high property developer and local government debt, and an aging population. Addressing these challenges requires structural reforms to address vulnerabilities and sustain growth. Key priorities include (i) fostering domestic demand by strengthening social safety nets, redirecting fiscal resources to social spending, and promoting market-oriented reforms to encourage private sector investment; (ii) supporting a sustainable property sector recovery by addressing shortcomings in the property financing mechanism and resolving the sector’s debt overhang; and (iii) managing local government financial risks through reform in the fiscal framework and medium-term subnational fiscal consolidation.