The Chinese economy shows signs of recovery, yet effective demand remains insufficient.

In 2023, the overall growth rate reached 4.8% in the first three quarters, with projections suggesting an annual growth of about 5%. However, there remains a stark imbalance between supply and demand, with supply significantly outpacing demand.

Key indicators reveal that the industrial sector and exports are major growth driversWhile GDP grew by 4.8%, industrial value-added surged by 5.8%, primarily due to strong export performanceExports measured in RMB increased by 6.2%, far exceeding the GDP growth rate.

This reliance on industrial and export strength, however, poses risks

On the demand side, both fixed asset investment and retail sales have lagged, growing at rates of 3.4% and 3.3%, respectivelyChanges in global trade dynamics, particularly the imposition of tariffs by the US government, threaten to dampen external demand and economic growth further, increasing the risk of economic downturn.

Currently, the inadequacy of effective demand manifests in three major areas:

Firstly, consumer demand is strikingly weakThe COVID-19 pandemic profoundly affected consumer behavior, leading to a retail sales growth of only 3.5% in the first ten months of this year, lower than the pre-pandemic figure of about 8%. Particularly alarming were the growth figures for June, July, and August, which stood at just 2%, 2.7%, and 2.1%, respectivelyDespite initial recovery, the growth rate of services retail has also slowed significantly.

Secondly, demand shortages have resulted in persistently low prices

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The GDP deflator index fell by 0.7% over three consecutive quarters, bringing nominal GDP growth down and directly impacting household income and corporate profitsThis disconnection between macroeconomic data and individual experiences creates a disparity that further aggravates consumer sentiment.

Thirdly, decreasing demand may transmit negative effects back into supplyAs demand weakens, product sales prices decline, which presses corporate profit margins furtherDespite expectations for improved profitability in the first half of 2024, industrial profits fell by 3.5% year-on-year during the first three quarters of this year—a sign that these weak demand pressures are likely to ripple through to the supply side.

Historically, since 2012, the Chinese economy has transitioned into a phase characterized by a "new normal," marked by shifts from supply-side constraints to rising demand insufficiencies

The pandemic's impact has heavily strained consumer demand, fostering an environment where insufficient demand now emerges as a significant constraint on economic growth.

In recent years, particularly post-pandemic, three key changes have occurred in the demand landscape:

First, adjustments within the real estate market have constricted overall demandSales in the real estate market peaked in 2021, with total sales around 18.2 trillion yuanIn 2023, that number has plummeted to 11.6 trillion, with a 20.9% drop in sales just in the first ten months of this year—indicating a potential full-year decline in total sales down to approximately 9.2 trillion, which highlights a considerable withdrawal of demand from the market.

Second, the deterioration of balance sheets impacts demand

Falling real estate prices have eroded household assets while sluggish equity markets have reduced household investment incomesTogether, these factors foster a climate of increased caution in consumer spendingCorporate debt levels have risen, limiting investment capabilities and willingnessMoving forward, effective demand restoration will require not only economic recovery but also a rehabilitation of asset valuations.

Thirdly, the burden of local government debt limits demand expansionBy the end of 2023, local government debt stood at 40.74 trillion yuan, a staggering increase since 2010. As debt burdens grow, with some provinces seeing interest payments exceeding 20% of fiscal revenues, these financial constraints severely affect local governments’ spending on projects capable of stimulating demand.

The imbalance between supply and demand emerges from an historically investment and export-driven model of growth

As external pressures mount, predominantly from trade tensions, the effectiveness of this model in promoting growth will diminishThe marginal efficiency from investment will decline with rising local debt and constricting financial resources, necessitating a fundamental shift in China's developmental strategies.

New challenges posed by external environments

The year 2025 marks the end of the "14th Five-Year Plan," making it pivotal to maintain steady economic operationsRecent policies aimed at stimulating demand have begun to stabilize the economy, while market sentiments benefit from a recovering asset market and the implementation of significant economic reforms.

However, the path ahead won't be without its challenges

Anticipating a slowdown in export growth alongside ongoing domestic demand deficiencies could compound economic pressureIn light of potential tariff escalations, particularly regarding exports to the U.S., the reliance on trade as a growth container becomes increasingly precarious.

Furthermore, the spillover effects from the deep adjustments in the real estate sector, which continue to affect investment, consumption, and local fiscal balances, necessitate vigilant monitoringThe shifting dynamics in the real estate market could prolong the period of low growth if not addressed adequately.

Strategic focus on expanding domestic demand, stabilizing growth, and promoting transformation

The macro-control tasks for 2025 remain daunting, requiring a balanced approach that emphasizes steady progress while fostering economic transformation

Comprehensive macroeconomic policies aimed at nurturing domestic demand will be crucial, coupled with deepening reform initiatives that enhance economic resilience against external uncertainties.

Moreover, expanding domestic demand alongside strategies for managing economic instability will be necessary for sustainable growth moving forwardAs highlighted in recent economic forecasts, a target growth rate of around 5% for 2024 can facilitate elasticity and meet broader modernization goals by 2035.

Implementing robust macroeconomic policies aimed directly at stimulating domestic demand will be prioritizedActive fiscal policies combined with supportive monetary measures can help bolster economic momentum and pave the way for recovery.

Additionally, addressing external uncertainties requires not only maintaining trade relations with key partners but also aligning institutional frameworks with global standards