As 2025 unfolds, concerns about China’s economy grow louder. The world’s second-largest economy is grappling with a convergence of crises—from deflationary spirals to high public debt—threatening not just its domestic stability but also global economic dynamics. Analysts point to a structural slowdown that could undermine Beijing’s ambitions while exacerbating international tensions.
A deflationary spiral with no clear end
For six consecutive quarters, consumer prices in China have declined, marking the longest deflationary streak since the Asian Financial Crisis of the late 1990s. According to Bloomberg staff, if this trend persists, China risks further economic stagnation. The consumer price index (CPI) in November 2024 registered an anemic 0.2% year-over-year increase, far below the 2% benchmark considered healthy by central banks globally.
Deflation erodes corporate profits, prompting firms to scale back investments and reduce hiring. This creates a vicious cycle of diminished consumer spending, exacerbating the economic slowdown. George Magnus, a Research Associate at the China Centre, Oxford University, emphasized that monetary policy tools—such as lowering interest rates and reducing bank reserve requirements—have proven ineffective. “Interest rates can’t fall far or fast enough to offset deflation,” Magnus stated on LinkedIn.
Debt-driven growth hitting a wall
China’s heavy reliance on debt to drive growth has reached a breaking point. Local governments are burdened with unsustainable debt levels, and even state employees face delayed payments, according to Wall Street Journal’s Lingling Wei. While policymakers have pursued fiscal stimulus measures, credit growth remains sluggish as businesses and consumers remain cautious.
Efforts to boost consumption and investment efficiency, outlined during the December 2024 Central Economic Work Conference, have yielded limited results. Magnus observed a shift from industrial development to stimulating domestic demand but noted, “How the government deploys additional leverage is uncertain given its mercantilist industrial and export policies.”
Mercantilism and export dependence
China’s export-heavy model faces headwinds as global demand wanes. According to the Rhodium Group’s Daniel Rosen, Reva Goujon, and Logan Wright, China’s domestic economy cannot absorb its industrial overcapacity, forcing Beijing to rely on exports. Yet, ongoing trade tensions with the United States and Europe’s recent sanctions on Chinese firms supplying Russia further complicate this strategy.
In December 2024, the European Union imposed its most comprehensive sanctions yet on Chinese companies, including those linked to supplying drone components to Russia. Beijing’s mercantilist policies, which prioritize industrial dominance, are increasingly under scrutiny. “China’s economic size and mercantilist policies have upended the global order,” observed Greg Jensen in The Wall Street Journal.
U.S. fiscal challenges adding pressure
China’s economic struggles are not occurring in isolation. They intersect with rising U.S. fiscal pressures, creating a complex web of global financial instability. With U.S. debt surpassing $35 trillion, America’s ability to manage its own economic challenges directly impacts China’s export-driven recovery. As the Federal Reserve maintains higher interest rates to combat inflation, global capital flows increasingly favor the U.S. dollar, exacerbating financial outflows from China.
Hannah Miao of the Wall Street Journal noted that a stronger dollar complicates China’s recovery by making its exports more expensive in key markets. This dynamic could lead to further trade imbalances and deepen existing tensions between the two superpowers.
Policy constraints and uncertain outcomes
China’s policymakers face limited options. While fiscal measures such as increased public spending are expected in 2025, their effectiveness is uncertain. Magnus highlighted the diminishing returns of monetary policy, arguing that deeper structural reforms—including addressing inefficiencies in state-owned enterprises—are essential but politically fraught.
Moreover, China’s shifting priorities from technology-driven growth to consumption-led strategies reflect growing anxiety among its leadership. Yet, as Magnus pointed out, such measures may be insufficient to reverse the current trajectory.
Global implications of China’s economic malaise
The stakes are high. Persistent economic weakness in China could destabilize global markets, particularly in commodity-exporting countries heavily reliant on Chinese demand. Furthermore, China’s reduced capacity to purchase U.S. Treasury bonds could complicate America’s fiscal management.
In Foreign Affairs, Rosen, Goujon, and Wright argued that the slowdown in China’s economy fundamentally alters the global economic order. “The trade war has evolved, giving the U.S. new leverage,” they noted, emphasizing the need for coordinated international strategies to address these challenges.
The road ahead
China’s economic struggles in 2025 underscore the limitations of its current growth model. Deflation, high debt, and external pressures require bold reforms that balance domestic stability with global responsibilities. Policymakers must navigate these challenges carefully to avert a deeper crisis that could reverberate far beyond China’s borders.
For the world’s second-largest economy, the question remains: Can China recalibrate in time, or will its economic troubles redefine the global landscape for years to come?