China’s domestic economy has faced persistent struggles since the collapse of a property bubble in 2021, marked by the downfall of Evergrande—once the world’s most valuable property developer. The crisis, compounded with domestic crackdowns on key industries and persistently low consumer confidence, has exacerbated economic uncertainty. With a sluggish domestic market, Chinese companies have leaned heavily on exports, fueling a 5.9 percent surge in outbound trade—accounting for roughly 70 percent of China’s 4.9 percent GDP growth in 2024. However, this reliance on exports is now under threat, as the newly reinstated Trump administration targets Chinese goods with fresh tariffs and restrictions.
Despite these headwinds, China remains committed to its 5 percent growth target which it thinks it can achieve by shifting its economic strategy. By raising its fiscal deficit from 3 percent to 4 percent of GDP, Beijing is making a rare push toward stimulating domestic demand after years of prioritizing supply-side policies. While tariffs will certainly pose short-term challenges, they have also accelerated long overdue economic reforms. If China correctly navigates its policy decisions and bolsters consumer spending alongside its high-tech ambitions, it may not only weather the trade conflict but also emerge more resilient as the United States risks economic disruptions from strained supply chains and potential retaliatory measures.
Despite being able to see light at the end of the tunnel, China’s economy faces a tough road ahead. China suffers from major problems. Most notable among them is low consumer demand, which has led to a borderline deflationary economy that can cycle in on itself to become a significant contractionary force on growth. Chinese consumers are more likely to save than spend, and the ongoing demographic crisis has led to a smaller workforce, leaving individuals with less disposable income and spending power.
Over the past decades, the government has implemented a variety of policies that support the Chinese corporate sector over the people. For example, the government has kept the Chinese yuan weak, allowing Chinese companies to sell their goods at cheaper prices abroad at the expense of higher prices for domestic consumers. Other policies, including continuous subsidies on the supply-side rather than supporting the people, have led to a strong export sector at the cost of the domestic economy. Supporting the consumer would entail increasing wages which would weaken said export competitiveness and hurt headline growth prospects. Yet, this policy becomes unsustainable in the long term as Chinese youth unemployment persists and the overall economy sits on increasingly shaky ground. Chinese export competition remains strong on efficiency metrics, and it is time to support the domestic economy before the floor falls out beneath it.
In addition, Chinese corporations have recently experienced a flurry of regulatory crackdowns. In 2020, following statements by Alibaba founder Jack Ma that were seen as critical of the central government, Beijing cracked down hard on the tech sector—the crown jewel of the Chinese economy. Jack Ma’s Ant Group initial public offering (IPO), set to be the largest IPO ever, was struck down days before it was supposed to go live and fined $1 billion. Other tech giants such as Meituan, Tencent, and Alibaba were also crippled by hefty regulatory fines. The next year, Beijing wiped out an industry worth $100 Billion nearly overnight by banning private tutoring. Both of these regulatory overhauls spooked investors who became very aware of the CCP’s power and likely served as a considerable downward pressure on investment spending, contributing to greater economic weakness.
Typically, Chinese stimulus comes in two forms. The Chinese government’s classic move has been investing heavily in infrastructure: building new cities, bridges, and factories. These projects have fueled monstrous economic growth over the past decades. However, the central government tends to achieve this by having local governments borrow and build these projects. Currently, local governments, who earned a significant portion of their income from land sales, are deep in debt following the property crisis. A large portion of their debts are in esoteric forms such as “Local Government Financing Vehicles,” state-owned investment companies borrowing on behalf of the local governments who are unable to borrow directly. This results in many “hidden debts” that are off-balance-sheet, making them easy to hide from official filings and hard to keep track of. This practice has since caught up to local governments, and they are now in no position to be spending.
All these factors come together to form an increasingly dangerous problem for the Chinese economy. The deteriorating economic situation prompted a flurry of critiques from economists towards the latter half of 2024 calling for further action, to which the Chinese government did not oblige. Only a small debt swap and some minor consumer spending incentives through trade in programs, allowing consumers to trade in old appliances for credit towards purchasing a new one, were implemented. However the Chinese government only truly committed to expanding its domestic stimulus efforts in late February of 2025—once it was certain that they would be subjugated to tariffs. By raising the fiscal deficit from 3 percent to 4 percent of its GDP, the Chinese government is finally signalling concrete policy action to stimulate the economy. We have also seen an increasingly warm reception to the tech sector, which was shunned back in 2021, following the release of Deepseek R1. This shift is evidenced by the reemergence of Jack Ma and personal meetings between Xi and many of the top players in tech.
Trump’s tariffs may slow China’s export-driven momentum, but they are unlikely to deliver a significant blow to the Chinese economy. Instead, they have accelerated Beijing’s shift toward domestic stimulus and economic self-reliance. While the Chinese government has historically prioritized investment in strategic industries like advanced technology, the real test will be whether they can successfully stimulate consumer spending and restore confidence in the domestic market. If they fail to do so, China risks prolonged economic stagnation. However, if they strike the right balance, China could emerge from this trade conflict stronger, all the while the United States faces potential economic turbulence from disrupted supply chains and retaliatory measures.