China remains locomotive of global growth

This is an eventful week for the global economy. The US administration is unleashing commercial "fire and fury" by doubling down on tariffs, while China is holding its two sessions, announcing its core economic policy aims and governance priorities for the new year.

What stands out in the Government Work Report is the continued confidence in Chinese policy circles that the Chinese economy can achieve 5 percent GDP growth in 2025. In monetary terms, China is expected to add to its GDP an amount greater than the combined increase in the United States, the European Union and Japan.

Even more significant for the global economy, however, is the qualitative transformation of China's economic structure. Recent trends make it clear that China has moved up the value chain in production. It has shifted from labor-intensive industries driven by perspiration to high-tech manufacturing driven by innovation, as it seeks to cultivate new quality productive forces.

What is even more striking is that China's path toward new quality productive forces is being driven by its private companies, specifically the "Majestic Four" of BYD, DJI, DeepSeek, and ByteDance.

In terms of recent economic governance and reform, China has successfully redirected resources from an overheated real estate sector to industry. No other country could have achieved such a politically painful deleveraging of its real estate market (due to intensity of vested interests) while effectively channeling capital into new industries.

China also faces an external shock from rising US protectionism. While Chinese exports to the US as a share of China's GDP are not as significant as they were in 2018 when the US launched the tariff war, a negative shock could still impact the Chinese economy. Moreover, it remains uncertain whether the Global South (which now absorbs more Chinese exports than the US and EU combined) will be able to sustain China's industrial export growth.

Given the need to boost domestic demand amid external trade pressures, it is understandable that the Government Work Report has increased the budget deficit target from 3 percent in 2024 to 4 percent in 2025. The work report has made it clear that proactive fiscal expansion is on the horizon. While some economists anticipated even higher levels of deficit spending, caution is warranted. One needs to consider the potential for monetary expansion, which China has the capacity to pursue given its low annual inflation rate, expected at approximately 2 percent in 2025.

China's key targets for 2025, along with its recent economic performance, confirm that it remains the indispensable locomotive of the global economy. Predictions of economic collapse or claims of "Peak China", often circulated by pundits, are unfounded.

The critical question for China's economy in the years ahead will relate to the way the Chinese leadership continues to pursue reform and opening-up amid an increasingly antagonistic geopolitical environment.

Vasilis Trigkas, a visiting assistant professor of Global Affairs at the Schwarzman College, Tsinghua University.