China’s Big Stimulus Bet: Xi’s Economy vs. Trump’s Trade War

China has decided that 2025 will be the year of bold moves and even bolder spending. If Beijing’s latest economic pronouncements were a movie trailer, the tagline would read: “When the going gets tough, the tough get spending.” Amid slowing growth, deflation woes, and the looming specter of a Trump-led trade war, President Xi Jinping’s Politburo has unveiled an ambitious blueprint for economic stimulus, signaling it’s ready to pull out all the stops.

For the first time in 14 years, the words “prudent monetary policy” are being retired in favor of something more flexible, more daring—“moderately loose.” It’s a shift reminiscent of the global financial crisis era, but this time, the stakes are higher, and the challenges more complex.

What’s on Beijing’s Menu?

Think of China’s stimulus plan as a multi-course banquet, except every dish is expensive, controversial, and designed to solve a problem that’s been simmering for years:

Monetary Policy:Beijing is rolling out the red carpet for rate cuts. The reserve requirement ratio (RRR) is expected to be slashed further, freeing up hundreds of billions of yuan for banks to lend. The last round of RRR cuts injected approximately 1.2 trillion yuan ($164 billion) into the economy. Economists project that another 1-2 percentage points of cuts could add a similar amount in liquidity next year.
Fiscal Policy:The “more proactive” fiscal stance means China could expand its budget deficit beyond the usual 3% of GDP. Let’s not forget that earlier this year, the Finance Ministry launched a $1.4 trillion program to restructure local government debt. With central government debt-to-GDP at around 21%, officials have room to maneuver. But will they?
Boosting Consumption:China’s consumers haven’t been this cautious since the Great Recession. Retail sales growth has slowed to around 3.8%, far below the pre-pandemic average of 8%. To combat this, Beijing is doubling down on cash-for-clunkers-style programs that encourage people to trade in old electronics and appliances for newer models. Experts estimate that such initiatives could boost retail sales by as much as 1.2 percentage points annually.
Stabilizing the Property Market:Once the darling of China’s economy, the real estate sector is now its Achilles’ heel. Property sales have fallen for 27 consecutive months, while property investment is down 8.8% year-over-year. The government is likely to roll out new tax incentives and subsidies to encourage home buying, but reversing the sector’s decline will be a Herculean task.

The Big Picture: Why Now?

The urgency behind these measures isn’t hard to understand. China’s economic growth has slowed to 4.8% this year, well below the double-digit figures of the 2000s. Meanwhile, deflation is casting a long shadow:

Producer Prices: Have fallen for 26 straight months.
Consumer Prices: Barely moved, with November’s inflation hovering around 0%.
Corporate Profits: Down 9% year-to-date, with manufacturing firms hit the hardest.

While the People’s Bank of China has already cut interest rates four times this year, the impact has been muted. That’s partly because banks are wary of lending in an environment where businesses are reluctant to borrow.

Trump: The Elephant in the Room

China’s stimulus plan isn’t unfolding in a vacuum. Across the Pacific, President-elect Donald Trump is preparing to take office with a promise to impose a 60% tariff on Chinese goods. This isn’t just a policy; it’s a wrecking ball aimed squarely at bilateral trade, which totaled $690 billion in 2023.

Trump’s rhetoric has already rattled markets. The offshore yuan has fallen 2.3% since his election, while the Shanghai Composite Index is up a modest 1.5% on hopes of domestic stimulus. Economists at Morgan Stanley warn that Trump’s tariffs could shave 0.6 percentage points off China’s GDP growth in 2025, making Beijing’s stimulus efforts even more critical.

China’s Stimulus Playbook: A History Lesson

The last time China adopted a “moderately loose” monetary policy was in 2008, during the global financial crisis. Back then, the government unleashed a $586 billion stimulus package—equivalent to 12% of GDP. The results were mixed: while the economy rebounded quickly, the stimulus also fueled a debt bubble and overcapacity in industries like steel and cement.

This time around, Beijing insists it will avoid the pitfalls of the past. Instead of throwing money at infrastructure megaprojects, the focus will be on sustainable growth drivers like technology, green energy, and domestic consumption.

The Geopolitical Wildcards

If China’s economic challenges weren’t enough, the global landscape adds another layer of complexity.

The Middle East:Rising tensions following the collapse of the Assad regime in Syria could disrupt oil supplies, pushing up energy costs for China, which imports 72% of its crude.
Europe’s Economic Woes:Sluggish growth in the EU, China’s second-largest trading partner, could dampen demand for Chinese exports.
South Korea and Japan:Political instability in South Korea and Japan’s uncertain monetary policy are complicating Beijing’s regional strategy.

Investor Takeaways: Brace for Volatility

What does all this mean for global investors? In short, expect a bumpy ride.

Currency Markets: The yuan could face further depreciation if China’s stimulus measures fail to deliver. Analysts predict a potential drop to 7.5 against the dollar by mid-2025.
Equities: While Chinese stocks may benefit from short-term stimulus, the long-term outlook is clouded by structural issues like debt and demographic decline.
Commodities: Beijing’s renewed focus on infrastructure and manufacturing could boost demand for commodities like copper and steel.

Conclusion: A High-Stakes Gamble

China’s 2025 economic strategy is ambitious, necessary, and fraught with risk. If the measures succeed, they could stabilize the world’s second-largest economy and counterbalance the impact of Trump’s trade policies. But if they fail, Beijing could find itself grappling with an even deeper economic malaise.

For now, the world watches as China embarks on its boldest economic experiment in over a decade. Whether it’s a masterstroke or a misstep, one thing is certain: the stakes have never been higher.