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#china2025 Rocks, and Hard Places
China
Dear Readers,
Over the holidays, GlobalPost is collaborating with our sister publication, World Politics Review, to bring you special coverage of the key geopolitical issues facing some of the major countries and regions of the world in 2025.
Today, Mary Gallagher takes a look at China.
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We wish you happy holidays and best wishes for the New Year.
Your GlobalPost Team

In 2025, China will face three key challenges that will present President Xi Jinping with difficulties, contradictions, and hard choices.

First, and most obviously, is the state of the economy, which is beset by low consumer-demand and deflation. Second is Xi’s desire to enact the structural reforms promised at last year’s Third Plenum, which will place China in a more advantageous position to move from a middle- to a high-income country, but may conflict with the more immediate need to juice the economy.

Third, China is facing an external environment that is becoming more dangerous and complex. The imminent return of US President-elect Donald Trump to the White House will upend the attempts to stabilize bilateral relations made by outgoing President Joe Biden, setting China up for a trade war with the US in short order. Beyond that, the collapse of the Assad regime in Syria, the failed coup in South Korea, and the ongoing war in Ukraine present China with more complications and few opportunities.

These challenges are all interrelated. The first two are most importantly about Xi’s power in relation to China’s state bureaucracy, business sector, and society. Xi’s challenge, fundamentally, is to restore trust and confidence in his leadership: These have been gravely undermined by a series of policy decisions and campaigns that have centralized power in his hands while eliminating elite and societal challenges to his rule. In solidifying his position, however, Xi has sacrificed trust in his leadership and confidence in his policy decisions.

The immediate problem of the economy boils down to anemic growth. Necessary limits on investment-led expansion and the property sector have cut off traditional avenues of growth, while China’s household consumption did not make the comeback that many expected with the end of Beijing’s draconian “Zero COVID” policy. On the contrary, in the wake of the pandemic, China’s consumers felt less wealthy due to a decline in property values and felt less secure given the pandemic shock and China’s worsening relationship with its major trading partners. As a result, they are understandably holding back from purchases and, instead, they are preparing for a future that looks less rosy and full of risks. Complicating the picture even more is that the brightest areas of the economy are in sectors, such as the automotive industry, which are now targeted by foreign governments – from the US and the European Union to Brazil – with tariffs and other restrictions to stop China from exporting its overcapacity.

In the latter half of 2024, the Chinese government announced a swath of measures designed to prop up the stock market, stabilize the property market, recapitalize banks, and shore up local government finances. And recently, the government signaled being more open to more expansive fiscal and monetary policies. At the Central Economic Work Conference, consumption and domestic demand were listed first and foremost among the government’s key priorities. All of this demonstrates that the government knows the economy is doing far worse than it is publicly acknowledging.

Stabilizing the economy around the government’s 5 percent growth target is probably achievable with these measures, especially if the government follows through on its recently stated intention of taking steps to increase the incomes of middle- to low-income groups. It would be particularly beneficial if efforts to boost consumption and domestic demand were accomplished by structural reforms to redistribute incomes and increase the fiscal revenue streams of local governments, which are ultimately responsible for social welfare in China’s governance system.

Ambitious structural reforms along these lines were proposed at the much-anticipated Third Plenum of the 20th Party Congress, which was originally slated to be held in 2023 but ultimately took place in July 2024. But scant details have emerged about implementation since then. More distressingly, many of the 2024 reforms were variants of the reforms promised at the Third Plenum in 2013, which was the first such gathering held under Xi’s rule.

Needed structural reforms include more adequate measures to redistribute income from high-income earners to low-income earners, and from the protected state sector to the private and informal sectors. Fiscal reform is necessary to increase the amount of revenue that flows to local governments, which are burdened with providing most of the services available in China’s fragmented and incomplete welfare state. Finally, the liberalization of China’s household registration system would grant rural Chinese greater rights to settle permanently in the cities where they are employed.

But measures taken so far to boost the economy have mainly been designed to build confidence in the stock market, the state banks, and local governments, without addressing the distributive issues that structural reform requires. In fact, deep structural reforms would place greater burdens on powerful entities, such as state-owned enterprises, banks, and local governments. It will be dangerous for China if the most difficult reforms are further delayed in 2025 because they threaten the status quo at a time when no interest group is satisfied or confident about its future.

This gets to the heart of Xi’s challenge in 2025 – how to restore confidence and trust in his leadership. The bureaucracy has been cowed into submission by a decade-long, anti-corruption campaign that removed the traditional incentives for entrepreneurial government action. Civil society has been thwarted by waves of crackdowns on anything that smacks of social or political activism – including efforts to promote labor rights, legal protections, and environmental protection. Space to advocate for social and legal change has disappeared.

In addition, urban citizens who once thought that their personal freedoms were safe as long as they weren’t political have been traumatized by the COVID-19 lockdowns. Finally, China’s business elite were disciplined through the “regulatory storm” of 2021, which launched investigations into – and crackdowns on – China’s most successful technology companies, such as Alibaba, Didi, and JD.com.

These crackdowns have resulted in greater political and social stability. With the one exception of the White Paper protest movement, which was fueled by mass anger at pandemic lockdowns but lacked organization, social unrest under Xi has been far less concerning than it was under his two direct predecessors.

Instead, Xi is confronted with the opposite of social unrest – namely, social stasis. In the government, this is known as formalism and bureaucratism. Cadres are afraid to take risks when anti-corruption charges can end careers, and instead consider it better to do nothing. In society, this is known as “lying flat” or “going to rot,” as unemployed youth opt out of dead-end jobs and social activists withdraw from dangerous advocacy work. For business elites, capital flight and immigration abroad are the answer to their lack of confidence at home.

So far, the government has not made any announcements of radical shifts to rebuild confidence. If the economy continues to suffer, there are a number of consequential decisions Xi could take to demonstrate resolve. One possibility would be a major fiscal stimulus package. A second is a significant expansion of central government support for pensions and medical insurance. The government signaled plans for both of these measures in December, but details are still lacking.

Less likely would be the announcement of “victory” in the anti-corruption campaign and a clear signal to local governments that the central government is once again squarely focused on growth. This might align incentives, encouraging local governments and the private sector to pursue mutually beneficial policies. However, ending the anti-corruption campaign is unlikely, because it has been so important in shoring up Xi’s personal power base and limiting challenges to his rule.

Also less likely, but certainly possible given Trump’s dealmaking proclivities and his admiration of Xi, would be a major trade agreement that voluntarily restricts Chinese exports to the US while boosting Chinese imports from the US and opening its domestic market more widely to US high-end services in health care, finance, and education. However, such a deal appears unlikely given the China team that Trump has lined up so far, which includes many who see China as an existential threat to the United States.

In short, in the coming year, China will be beset by very knotty internal and external challenges. The need to achieve greater economic growth is chief among them, with both internal and external dimensions. It’s unclear what particular solutions to China’s challenges Xi will pursue, in part because he has no easy options. What is clear is that 2025 will be a pivotal year for both China and its most powerful leader since Mao.

Mary E. Gallagher is the Marilyn Keough Dean of the Keough School of Global Affairs at the University of Notre Dame and a columnist for World Politics Review.

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