China's GDP expands in Q4 but new growth drivers are needed in 2025

China’s economy ended the year stronger-than-expected, as GDP expanded by 5.4 percent in the final quarter of 2024, taking full year growth to five percent. Government stabilization efforts launched at the end of September appear to have paid off, so the official annual growth target was hit, spot on at five percent. The momentum gained positions the leadership to face the uncertainties of 2025, but significant challenges remain.

The improvement in Q4 was driven by a robust manufacturing sector and booming exports, which align closely with the leadership’s industrial policy objectives. Exports’ contribution to GDP growth hit its highest level since 1997, producing a record trade surplus of nearly USD 1 trillion. This peak highlights Beijing’s success in achieving its policy objectives, namely improving the industrial sector’s competitiveness. However, it risks triggering pushback from global partners, such as the United States and EU. Under the new Trump administration, frictions are likely to intensify.

By contrast, consumption remains a glaring weak spot, reflecting the downsides of China’s two-speed economy. The government has pledged additional support measures to bolster consumption, but there are no signs of structural reforms that could boost domestic demand in more secure, long-term ways. Household sentiment may take encouragement from signs the real estate sector’s struggles are bottoming out, but improvements remain tentative, and the sector’s recovery is still uncertain.

For China’s leadership, their prioritization of manufacturing and technology is about geopolitical resilience, even more than economic stability. Build-up capacity requires substantial financial resources, which comes at the expense of profitability. The leadership views the matter through the lens of geopolitical rivalry rather than economic development and is ready to bear the costs. 

However, the middle class that is bearing the brunt of this strategy, with weak consumption and real estate woes destroying their asset values and dampening their economic prospects. Deteriorating US-China ties under President Trump may paradoxically aid Beijing’s narrative. A harder external environment might enable the leadership to justify further sacrifices from the middle class and pressure companies to align with strategic goals focused on economic security and self-reliance.

China’s leaders are preparing for more challenges. So far, they are holding course and seem ready for more volatility in 2025. But navigating complexities requires a clear view of the economic challenges – which the leadership seems less keen to hearing. Instructions to “promote a positive narrative about the bright spots” may get economists to parrot the official line but risks ignorance of brewing challenges and can get in the way of making the best policy choices. Concerns about the reliability of Chinese data which overstate growth are already growing.

Macroeconomics: Stronger industrial sector helps lift Q4 growth to meet annual target

• China's GDP growth accelerated to 5.4 percent in Q4, which was the strongest quarterly expansion in 2024. It enabled the government to meet its annual growth target of “around 5 percent”; full year GDP came in at 5.0 percent. All the major components of GDP improved in Q4, with the aid of expanded stimulus measures (see exhibit 1). However, the divergence between a booming industrial sector and weak domestic consumption highlights China’s ongoing structural challenges. Trade tensions are expected to intensify in 2025 under Donald Trump’s presidency, which could add further complexity and require yet more support. 
• Stronger manufacturing activity was key to better GDP growth in Q4. Manufacturing growth rose by 6.2 percent in Q4, year-on-year, up from 5 percent in Q3. Full year manufacturing growth was up by 6 percent, compared to a paltry 3.9 percent in 2023. 
• Industrial output benefited from strong exports, contributing to China’s record trade surplus. Net exports contributed 30.3 percent to GDP growth in 2024, their highest share since 1997. Sustained foreign demand is underpinning China’s industrial activity, providing a buffer against weak domestic consumption.