An economic marvel at the turn of the twentieth century, China emerged as the largest commercial partner for most nations across the globe and began to exert exponential strategic influence beyond its borders. Yet, this ascent was abruptly disrupted by a virus that originated within its own territory, one that spiralled into a global catastrophe. The bloom turned to gloom, and for many, gloom to looming doom. Economic growth faltered, the housing market plummeted, local government debts soared, consumer confidence eroded, and deflationary pressures mounted.
Now, upon this once-dazzling dragon, the 47th President of the United States, Donald J. Trump, has imposed a renewed trade war. “If war is what the US wants, be it a tariff war, a trade war or any other type of war, we’re ready to fight till the end,” declared China’s Embassy in Washington on X.
Thus arises the question: Is China truly prepared for “any type of war”? And if so, can the United States withstand the blowback of Chinese retaliation? More broadly, will the rest of the world bear the storm that may follow?
Post-Covid Recovery: An incomplete phenomenon in China
In the wake of its abrupt exit from the zero-COVID regime in December 2022, China’s economic performance has undergone a volatile transformation. The strict lockdowns and mass testing campaigns that defined the pandemic era gave way to a fragile reopening, raising expectations of a strong rebound. By 2025, the Chinese economy finds itself at a critical juncture, projecting statistical recovery while grappling with entrenched structural weaknesses.
In the first quarter of 2025, China’s GDP grew by 5.4% year-on-year, matching the fourth quarter of 2024 and exceeding analysts’ expectations (Reuters, April 15, 2025). This growth was largely fuelled by industrial production, which rose 6.1%, and retail sales, which increased 4.7% year-on year. The services sector, particularly in consumer-facing areas such as tourism and entertainment, also showed signs of revival, bolstered by the Lunar New Year effect and pent-up domestic demand.
However, in a striking contrast to this growth, government revenues have sharply declined. According to China’s Ministry of Finance, national fiscal revenue fell by 3.2% year-on-year in Q1 2025. This paradox highlights the precarity of the recovery, even as GDP grows, key income sources, such as land sales, real estate taxes, and value-added tax from struggling private enterprises, have weakened.
Local governments, in particular, are reeling. Land sales, which constituted up to 40% of local government revenue in pre-COVID years, remain depressed due to the ongoing real estate crisis. With property developers unable or unwilling to invest in land acquisition, many regional governments have seen revenue streams evaporate, increasing reliance on central transfers and debt refinancing mechanisms.
Real estate, once a pillar of China’s growth model, remains in turmoil. Investment in property development contracted by 9.9% year-on-year in Q1 2025. Major developers like Evergrande and Country Garden remain trapped in restructurings, while new home prices continue to fall in tier-2 and tier-3 cities. The sector’s weight, nearly 25-30% of China’s GDP when accounting for related industries, means its weakness casts a long shadow across the economy.
This downturn not only affects growth, but also strikes at the core of household wealth. For most Chinese families, real estate is the largest asset. As property values decline, consumer sentiment suffers and spending contracts-further limiting value-added tax collection and local government budgets.
China’s ongoing deflationary cycle exacerbates this fragile fiscal environment. In Q1 2025, the Consumer Price Index (CPI) fell by 0.1%, and core inflation remained stuck around 0.5%. Meanwhile, youth unemployment hovers above 14%, and the Consumer Confidence Index sits at 88.4 (below the neutral 100 mark), indicating a broad reluctance to spend or invest in the future.
Simultaneously, the shadowy world of Local Government Financing Vehicles (LGFVs) has ballooned to nearly 65 trillion yuan ($9 trillion) or more than 45% of China’s GDP. Hence, Beijing announced a 6 trillion yuan ($839 billion) debt restructuring package in early 2025, aiming to stave off defaults and maintain basic public services. Yet this central support highlights a deeper fiscal brittleness: localities have exhausted their traditional growth model and remain trapped in high debt with low revenue.
The gap between national output and fiscal input suggests a recovery that is broad but not deep, propelled by state direction rather than private vitality. Whether this momentum can carry the economy into a new era of sustainable, consumption-led growth, or whether it is merely a mirage obscuring deeper vulnerabilities, is the central question of China’s economic story in 2025.
So, what were the major causes that impeded China’s recovery? Topping the charts is the real estate sector.
The property market’s instability continues to undermine broader economic recovery efforts in China. At the heart this crisis is the collapse of Evergrande, a once-dominant property developer, whose downfall has had far-reaching implications. Evergrande’s aggressive expansion and excessive borrowing led to a debt accumulation of over $300 billion by 2021. The company’s inability to meet its financial obligations culminated in a Hong Kong court ordering its liquidation in January 2024. This event not only shook investor confidence but also triggered a series of defaults among other major developers, including Country Garden and Vanke. The ripple effects have been profound, affecting supply chains, financial institutions, and the broader economy.
The real estate sector’s dwindling has led to significant revenue shortfalls for local governments, which heavily relied on land sales for income. In 2022, land sale revenues dropped by 23% from the previous year, exacerbating fiscal pressures at the local level. Additionally, the decline in property values has eroded household wealth, dampening consumer spending and confidence.
Reacting to the crisis, Chinese authorities have implemented various measures, including easing mortgage rules, providing financial support to developers, and purchasing unsold housing to promote market stability. Nevertheless, uncertainty pervades for the foreseeable future.
Closely intertwined with the quandary of Chinese real estate is the escalating debt burden and the challenges of economic decoupling and de-risking.
China’s debt levels have surged, raising concerns about fiscal sustainability. By the end of 2024, the country’s general government debt was projected to reach 60.9% of GDP, with expectations of it climbing to 74.2% by 2026. This upward trajectory reflects the government’s efforts to stimulate the economy amid sluggish growth and external pressures. Notably, local government financing vehicles (LGFVs) have accumulated significant hidden debts, estimated at 14.3 trillion yuan ($2 trillion) by the end of 2023. In response, Beijing approved a 10 trillion yuan ($1.4 trillion) bond swap program to refinance these debts over five years, aiming to alleviate fiscal strains on local governments.
The economic decoupling between China and the United States has intensified, particularly with the reimposition of tariffs under President Trump’s administration. These tariffs, reaching up to 145% on Chinese goods, have significantly disrupted bilateral trade, which previously stood at $582 billion. The World Trade Organisation projects that U.S.-China trade will nearly cease in 2025, with global goods trade expected to shrink by 0.2%, reversing the prior year’s 3% growth. This decoupling extends beyond trade, affecting investment flows, corporate engagements, and educational exchanges, thereby reshaping global economic dynamics.
China has adopted a “dual circulation” strategy, underpinning domestic consumption (“internal circulation”) while maintaining engagement with global markets (“external circulation”). This approach aims to reduce reliance on foreign technologies and markets, fostering self-sufficiency in key sectors. However, implementing this strategy presents challenges, including stimulating domestic demand amid a property market downturn and addressing supply chain vulnerabilities.
China has also intensified its efforts to achieve technological self-reliance, with the semiconductor industry at the forefront of this endeavour. Recognising semiconductors as the backbone of modern technology-from smartphones to advanced military systems-China’s leadership has prioritised the development of a robust domestic semiconductor ecosystem.
Launched in 2015, the “Made in China 2025” initiative set an ambitious target: to achieve 70% self sufficiency in semiconductors by 2025. However, as of 2023, China’s self-sufficiency rate stood at approximately 23%, highlighting the challenges in bridging the technological gap with global leaders. This shortfall underscores the complexities of developing advanced semiconductor capabilities, which require not only significant capital investment but also decades of accumulated expertise and intellectual property.
To bolster its semiconductor industry, China has made substantial investments through the National Integrated Circuit Industry Investment Fund, commonly known as the “Big Fund.” The third phase of this fund, launched in 2024, raised over $47.5 billion, focusing on critical areas such as advanced chip manufacturing, equipment, and materials. These investments aim to reduce reliance on foreign technology and mitigate vulnerabilities exposed by international trade restrictions.
In terms of production capacity, China’s semiconductor industry is projected to grow by 40% over the next five years, driven by rapid equipment purchases and strategic investments in fabrication facilities. This expansion is crucial for meeting domestic demand and positioning China as a significant player in the global semiconductor landscape.
Despite facing export restrictions from countries like the United States, China has demonstrated resilience and innovation. Huawei’s development of the Ascend 910C Al chip exemplifies this spirit. This chip, designed to rival Nvidia’s H100, combines two 910B processors using advanced integration techniques, effectively doubling computing power and memory capacity. Such advancements indicate China’s capacity to overcome technological barriers and establish a self sufficient semiconductor supply chain. Needless to say, a lot remains to be seen.
While progress is evident, challenges persist. China’s semiconductor industry still relies heavily on mature-node technologies, and achieving breakthroughs in cutting-edge processes remains a formidable task. Moreover, the global semiconductor landscape is highly competitive, with established players holding significant advantages in terms of technology and market share.
Nevertheless, China’s unwavering commitment to technological self-sufficiency, backed by substantial investments and policy support, suggests a strategic long-term vision.
The ongoing weaponisation of trade, only servers exacerbates China’s economic capabilities.
The weaponisation of trade has far-reaching implications beyond the U.S. and China. The International Monetary Fund (IMF) has downgraded global growth forecasts, citing the negative impact of steep U.S. tariffs. Global growth is now projected at 2.8% for 2025, down from earlier estimates of 3.3%.
China has retaliated to trade pressures by leveraging its dominance in critical sectors. It has imposed export restrictions on rare earth minerals, essential for various high-tech industries, affecting more than a dozen U.S. defence and aerospace firms. China has warned countries against aligning with U.S. trade policies at its expense, threatening countermeasures against those that do.
The intensification of trade tensions has compelled China to reassess its economic strategy. Efforts are underway to bolster domestic consumption and reduce reliance on external markets, aligning with the “dual circulation” strategy. However, the challenges posed by a troubled property sector and deflationary pressures complicate these efforts.
Amidst escalating geopolitical tensions and a shifting global economic landscape, China is intensifying efforts to internationalise its currency, the renminbi (RMB). This strategic move aims to reduce reliance on the U.S. dollar and establish greater financial autonomy.
The People’s Bank of China (PBOC) has implemented several initiatives to promote the RMB’s global use. These include urging state-owned enterprises to prioritise RMB in overseas transactions and enhancing the Cross-Border Interbank Payment System (CIPS) to facilitate efficient RMB settlements . Additionally, Hong Kong is developing an Asian securities depository to rival Euroclear, aiming to bolster RMB-denominated financial infrastructure.
Despite these efforts, the RMB’s share in global reserves remains modest. Factors such as China’s capital controls and limited financial market openness hinder broader adoption . Furthermore, while the RMB’s use has increased in certain bilateral trade agreements, it still lags behind major currencies like the U.S. dollar and the euro in international transactions.
Meanwhile, China is confronting significant demographic challenges that threaten its long-term economic vitality. The nation’s population has been declining for three consecutive years, with the total standing at 1.408 billion at the end of 2024, a decrease of 1.39 million from the previous year.
Over 22% of China’s population is now aged 60 or above, leading to a shrinking workforce and increased pressure on the pension system. The government has initiated reforms, such as gradually raising the retirement age to 63 for men and up to 58 for women over the next 15 years.
The aging population poses risks to economic growth, with a higher dependency ratio and potential labor shortages. Additionally, the government’s “silver economy” initiative aims to tap into the consumption potential of the elderly, projecting growth from 7 trillion yuan ($982 billion) to 30 trillion yuan ($4.2 trillion) by 2035 . However, without adequate social security and healthcare infrastructure, these measures may fall short in addressing the broader challenges posed by demographic shifts.
In 2025, China stands at a critical economic crossroads, its old growth engines sputtering, new strategies emerging, and external headwinds mounting. While the country continues to project strength through headline GDP figures and strategic policy responses, deeper structural challenges persist: a beleaguered property sector, spiralling local debt, intensifying geopolitical rivalries, deflationary pressures, and a rapidly aging population. Simultaneously, China’s bid for technological self-reliance, renminbi internationalisation, and domestic consumption-led growth represents both ambition and necessity in a fragmenting global order. Whether this moment marks the beginning of a high-quality, resilient transformation, or a prolonged period of stagnation masked by state-led stability, remains uncertain. But one thing is clear: the choices Beijing makes now will reverberate across the global economy for years to come.
As 2025 unfolds further, China’s economy is no longer the unrivalled marvel of the early 21st century. It’s momentum hurt by the pandemic and the ensuing recovery in a disarray are encumbering the behemoth Chinese manufacturing capacity. Therefore, the second populous nation on earth is simultaneously exhibiting signs of revival and regression. Behind the statistical sheen of GDP growth lies a system strained by internal contradictions: a shattered real estate market, dangerously leveraged local governments, deteriorating demographics, and a consumer base hesitant to spend. Now, in midst of trade war, external forces are constricting China’s room to maneuver, whether through a re-escalated trade war with the United States, restrictions on key technologies, or the broader unwinding of a global order once conducive to its rise.
Yet China is not without agency. Its push for semiconductor self-sufficiency, the attempts to globalise the renminbi, the pivot to domestic consumption, and massive state-led investments in emerging industries demonstrate a Chinese leadership’s concrete efforts to reassert the country’s economic fecundity.
Whether China will succeed in transforming this moment of pressure into a springboard for long term renewal depends not only on its ability to manage crisis but on its willingness to reform deeply, rebuilding trust in markets, fostering private sector vitality, and ensuring that growth is no longer driven by brute investment, but by productivity, innovation, and inclusiveness.
So, the story of China’s economy in 2025 is not one of collapse, nor of triumph. It is one of recalibration, a great power grappling with the costs of its past choices while cautiously mapping the future. The dragon still breathes, but it now treads a far narrower path through an increasingly contested world.