China’s leader faces challenges ranging from ensuring his military’s loyalty and stable US ties to economic headwinds
President Xi Jinping is consolidating his position with a view to securing a fourth five-year term as Party chief and commander-in-chief in 2027. His authority will rest on the results of the CNY10tn (USD1.4tn) stimulus announced this month, his ability to promote loyalty among People’s Liberation Army (PLA) generals through a continuing purge, and his relations with the Donald Trump administration and US allies in Europe and Asia.
What next
Strategic summary
- China’s ‘anti-NATO’ cooperation with Russia, Iran, North Korea and other states will deepen, harming ties with US allies and multinationals.
- Public investment will surge while private consumption, though slowing, will retain some strength.
- The property market will continue to decline but is expected to stabilise by 2026, and local government debt sustainability will improve.
- Exports will likely surge in early 2025, as companies seek to get ahead of US tariffs, before losing strength after tariffs take effect.
- Global supply chains will shift as Chinese firms seek new production hubs to avoid US trans-shipment tariffs.
Analysis
Maintaining control over the PLA, including top generals, will be among Xi’s primary challenges to political stability over the coming year.
Unusual developments in China’s military have included the sudden prominence of Vice-Chairman of the Central Military Commission (CMC) General Zhang Youxia, who has chaired important national conclaves on ideology, strategic and operational issues in Xi’s absence.
PLA purges
Xi has in the past two years purged several dozen generals from two main defence sectors: the equipment procurement departments and the rocket forces (see CHINA: Military purge will impact efficiency – January 23, 2024). Those purged included two former defence ministers, Li Shangfu and Wei Fenghe, who were once identified as Xi proteges.
The president seems unable to oust the effective second-in-command in the PLA, Zhang, who had been in charge of armaments, rockets and missiles earlier in his career.
In China, the prestige and power of a top leader — such as founding Party Chairman Mao Zedong and Chief Architect of Reform Deng Xiaoping — has tended to rest on his control over the military.
In mid-2024, Xi was forced to put his wife Peng Liyuan — a popular singer within the PLA song and dance troupe who has the military title of lieutenant-general — in charge of disciplinary and promotion assessment within the CMC. This unusual step suggests that within the top brass, Xi seems unable to trust anybody but his wife.
Enhancing the quality and loyalty of senior PLA cadres will be difficult to achieve.
The retirement in 2027 of Zhang, a major antagonist of Xi, could pave the way for Xi and his wife to groom the next generation of loyalist generals.
Another key Xi protege — the second-ranked CMC Vice-Chairman General He Weidong, who established his reputation as senior cadre in the now-defunct 31st Group Army based in Fujian, a Xi power base — has not been seen in public since March. That does not seem to augur well for Xi’s efforts to remake the PLA in his image (see CHINA: Army will step up reform efforts – May 13, 2024).
Social unrest
Apart from ensuring loyalty within the security forces, the Xi leadership will grapple with rising social unrest. That includes a recent spate of ‘revenge against society’ attacks in which individuals likely suffering from poor mental health take out their personal financial or other grievances against society at large, including foreigners.
Even China’s more wealthy coastal regions have throughout 2024 witnessed a flare-up of such violent incidents, including a car attack in the city of Zhuhai and the indiscriminate stabbing of a Japanese school pupil in Shenzhen (see CHINA: People-to-people exchanges will diminish – September 23, 2024).
Increasing sporadic violence is indicative of ordinary people’s disaffection with declining living standards and employment possibilities.
Taiwan ties
Much of the well-being of the party and country depends on Xi’s intentions regarding Taiwan (see TAIWAN: Taipei will hasten divestment from China – November 20, 2024). Xi has repeatedly referenced the achievement of full ‘national reunification’ as justification for his staying power.
The PLA has been ordered to be ready to take Taiwan by force from 2027. Once it informs Xi that it is able to proceed with this action, his options regarding Taiwan will be reframed. However, circumstances might conceivably force his hand before 2027, or stay his hand after that date.
The apparent breakdown of discipline among the PLA leadership — particularly Zhang’s spectacular rise– indicates difficulties within the military. Speculation has swept the army and police that several senior generals are reluctant to risk their lives and their careers in a war where victory is by no means assured.
These misgivings come despite aggressive measures taken by the PLA in flying jet fighters across the ‘median line’ of the Taiwan Strait and staging mock naval blockades of Taiwan by stationing submarines and other naval vessels very close to the island’s coast.
Trump’s statement that he wants Taiwan to pay more for its own defence has prompted speculation in Taiwan that Washington could abandon Taipei, if Trump can strike an unspecified ‘grand bargain’ with Beijing (see US: National security team will advance Trump’s agenda – November 18, 2024).
However, the security of Taiwan has major implications for that of close US allies including Japan, South Korea and Australia. The so-called first island chain strategy to contain China could be jeopardised if the PLA took over Taiwan.
The Trump factor
Trump seems intent on securing at least an interim agreement between Russia and Ukraine to freeze their fighting, likely involving territorial and possibly other concessions to Moscow (see RUSSIA: Moscow will weigh up escalatory options – September 23, 2024).
Ending the war would remove a major irritant in Chinese-US ties: Washington accuses Beijing of assisting Russia’s war effort and also helping Iran, which has manufactured large quantities of drones, some of which have penetrated Ukraine’s and indeed Israel’s missile defence systems (see CHINA/US: Dialogue will face obstacles – October 9, 2024).
In his first four years in the White House, Trump gave up the time-tested pro-engagement China policy of his predecessors by naming China the most formidable ‘systemic competitor’ of the United States and launching a trade war with Beijing.
Buoyed by US bipartisan support for further containing China, Trump is likely to maintain this combative posture. However, compared with predecessors including President Joe Biden, Trump is also a less committed defender of international norms and he remains open to making deals with both Moscow and Beijing if he calculates they would benefit the United States.
Fourth Plenum
Much of the agenda of Xi and the Party will be elucidated during the Fourth Plenary Session of the 20th Central Committee, due to be called in the second half of 2025.
Xi was reportedly subjected to criticism by Central Committee members and retired Politburo Standing Committee members at the Third Plenum in July 2024, for allegedly mismanaging the economy and relations with the West (see CHINA: Beijing reaffirms protectionism at third plenum – July 25, 2024).
This puts the onus on Xi to prove to the Central Committee that he is raising living standards, improving the security forces and keeping external relations on an even keel.
China’s economy
Trump’s re-election as US president poses a major threat to China’s 2025 economic prospects, with new tariffs on the horizon (see INTERNATIONAL: Markets enter a dangerous new phase – November 14, 2024).
Trump’s return comes at a time when China’s trade tensions with the EU are escalating, and China is at risk of facing trade conflicts on multiple fronts.
Faced with external volatility, China is pivoting its focus towards domestic demand, pledging new stimulus to bolster investment and consumption in 2025.
Trade disputes
China can no longer rely on exports to shore up growth, given trade tensions with the United States and other major trading partners.
Trump has pledged to end China’s most-favoured-nation trading status and impose blanket tariffs of 60% or more on Chinese goods, although if enacted they could be reversed in exchange for commercial deals.
The Chinese leadership has likely planned for the scenario of a Trump presidency with retaliatory measures and stimulus packages, but its toolkit will not fully offset the damage, especially with Republicans having majorities in the House of Representatives and the Senate, which will enable Trump to take stronger actions on trade.
Companies will stockpile Chinese goods ahead of potential tariffs, leading to a surge in trade volumes in the first quarter of 2025. After tariffs are imposed and inventories become saturated, there will be a major slowdown in export growth.
Chinese firms’ exports from bases in South-east Asia and other third-party markets will be subject to tariffs. China-ASEAN tensions could rise if ASEAN tightens scrutiny of Chinese trade and investment to avoid US tariffs, and Chinese companies could look to alternative markets for overseas production.
Trump’s ‘America First’ foreign policy will see the United States step back from engagement with international forums and allies, leaving the EU, Canada and Australia more isolated in their engagement with China.
The EU is currently teetering on the edge of its own trade war with China after imposing tariffs on Chinese electric vehicle imports in October. Concerns about a widening trade deficit and dumping will continue to inflame the situation.
However, US-EU trade tensions, which escalated during Trump’s first term, could divert EU attention away from China’s trade practices (see EU/US: Trade relations face challenges – November 19, 2024).
More stimulus
In the face of Trump’s re-election, further stimulus will be essential to shore up economic growth and market confidence (see CHINA: Slower growth builds case for fiscal stimulus – October 25, 2024).
China this month announced CNY10tn in stimulus for local governments to repay hidden debts over 2024-28, which will improve the sustainability of regional debt levels (see CHINA: Regional debt crisis will affect services – October 24, 2024). The finance minister said additional stimulus is in the pipeline for 2025.
The government will announce additional stimulus for investment and consumption as domestic demand takes greater precedence, with the external sector heading into a volatile period.
Consumption stimulus, which could include consumer vouchers and cash handouts, marks a departure from traditional policymaking, which has focused on infrastructure.
Investment stimulus will be crucial to create demand to absorb excess capacity and will be combined with industrial consolidation in certain sectors, likely including steel and cement.
Substantial risks
GDP is likely to grow by around 4.8% in 2025, on par with growth in 2024, despite trade tensions and the continued contraction of the property sector. Growth will be bolstered by fiscal and monetary stimulus, which will benefit both investment and household spending.
Net exports, which were a net positive contributor to China’s economy in 2024, are projected to be flat in 2025. Investment will likely grow by over 4.5% on the back of stimulus support, which will mainly benefit public investment.
The property market will remain the main drag, especially on private investment, but the scale of decline will narrow, as 2025 should be the last year of the housing market’s decline before stabilising in 2026.
Private consumption will decelerate but remain the fastest-growing area of the economy.
Government spending will accelerate thanks to a wider fiscal deficit.
Overcapacity will remain an issue, keeping inflation tepid. However, the government’s creation of additional domestic demand will deliver slightly higher price growth (above 1%) than in 2024.
Draft Five-Year Plan
In 2025, top Chinese officials will work on the draft of the 15th Five-Year Plan (FYP), which will outline social and economic goals for 2026-2030. The draft will be released in autumn 2025 and approved in March 2026.
The plan will probably focus on securing China’s advantage in important and emerging technologies — including artificial intelligence, semiconductors and quantum technologies — as global competition heats up.
Protectionism will remain a consistent theme, with the Party leadership intent on building the economy’s defences against geopolitical rivalry. However, there may be a renewed emphasis on building alliances with like-minded countries to gain leverage against the United States.
With 2030 being the year China aims to start decreasing its national carbon emissions, the 15th FYP will focus on laying the groundwork for decarbonisation, including finalising national carbon emissions accounting standards and the emission trading scheme (see CHINA: The low-carbon energy transition will be slow – October 29, 2024).
Faced with the long-term threat of population decline, the Party may announce new plans to increase the birth rate with incentives for families and better childcare provisions (see CHINA: Pension-age reform misses long-term challenges – November 4, 2024).
Chinese President Xi Jinping (right) shakes hands with his US counterpart Joe Biden (left) on the sidelines of the APEC summit in Peru (Leah Millis/POOL/AFP/Getty Images)
Authored by:
Thomas Shipley
East Asia
