The Chinese economy is facing significant headwinds as renewed trade tensions with the United States threaten its industrial and technological advancements. The recent imposition of additional tariffs by President Donald Trump’s administration, coupled with China’s ongoing domestic economic struggles, has forced Beijing to recalibrate its policies to maintain a growth trajectory of around 5% in 2025. Premier Li Qiang has emphasised that China is facing “changes unseen in a century,” a reflection of the evolving geopolitical and economic landscape.
The Trump administration has introduced punitive tariffs on Chinese goods, imposing an extra 20% on existing duties. This latest escalation, which came into effect earlier this week, adds pressure to China’s manufacturing sector, which exports over $400 billion worth of goods annually to the US. The prospect of further tariff hikes has left many Chinese producers scrambling to find alternative markets, raising concerns about price wars, squeezed profit margins, and retaliatory trade barriers from other economies.
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The trade war is further complicating China’s internal economic difficulties. Weak household consumption, the ongoing property sector crisis, and deflationary pressures have compounded challenges to growth. The balance between exports and domestic demand has become increasingly fragile, and despite China’s long-held ambition to pivot towards a consumption-led economy, progress has remained sluggish.
Beijing looks to fuel domestic consumption
Faced with these challenges, Beijing has undertaken several strategic shifts to safeguard economic stability. One of the most significant moves is elevating domestic consumption as a top economic priority for the first time in recent years. The term consumption appeared 31 times in Premier Li’s report to the National People’s Congress (NPC), surpassing mentions of technology, indicating a clear shift in economic policy focus.
To bolster household demand, Beijing has expanded consumer subsidies by 300 billion yuan ($40 billion), targeting key sectors like electric vehicles, appliances, and household goods. These measures may be insufficient, given that China’s household spending accounts for less than 40% of its GDP — 20 percentage points below the global average. Without structural reforms in taxation, land use, and financial systems, household spending may remain weak despite increased subsidies.
Fiscal measures and debt strategy
To cushion the impact of tariffs and economic slowdown, China has unveiled a larger fiscal stimulus package for 2025. The budget deficit target has been raised to 4% of GDP — the highest in decades — signalling Beijing’s intent to adopt a more aggressive fiscal stance. Additional measures include the issuance of 1.3 trillion yuan ($179 billion) in ultra-long special treasury bonds and 4.4 trillion yuan in local government special debt issuance.
China has also taken steps to recapitalise major state banks, raising 500 billion yuan in an effort to provide liquidity and support domestic investment. Analysts predict that Beijing may adjust the budget mid-year if trade tensions escalate further, indicating a flexible approach to economic management.
Technology and industrial policy
While domestic consumption has taken precedence, Beijing is not abandoning its industrial ambitions. AI, robotics, and electric vehicles remain at the forefront of China’s economic strategy. The emergence of AI platform Deepseek has already boosted market sentiment, with AI advancement receiving heightened attention in Li’s speech.
Additionally, China is leveraging industrial policy to reinforce its economic self-reliance. The Central Economic Work Conference has emphasised the need for a more proactive fiscal policy to support high-tech industries and strategic emerging sectors. This includes increased capital investment, government bonds to fund R&D, and a moderately loose monetary policy designed to sustain industrial growth.
China’s long-term goal remains clear: to strengthen domestic technological capabilities while reducing reliance on Western markets. In this vein, Beijing has been expanding its engagement with Europe and Russia, forging new trade agreements and increasing diplomatic efforts to counterbalance US economic pressure.
Geopolitical strategy for the new global order
China’s response to the renewed trade war extends beyond economic policies. Beijing has engaged in tit-for-tat measures, imposing tariffs on US agricultural and energy exports while tightening restrictions on American companies operating in China. It has also taken diplomatic steps to deepen its alliances with alternative trading partners.
At the same time, China continues to increase its military spending, with a 7.2% rise in the 2025 defence budget. This sustained military buildup aligns with President Xi Jinping’s broader vision of asserting China’s dominance in the Asia-Pacific region while safeguarding economic and strategic interests.
China’s economic strategy in 2025 reflects a balancing act between countering external shocks and addressing domestic economic weaknesses. While Beijing is deploying a mix of fiscal expansion, industrial policy, and trade realignment to navigate the challenges posed by Trump’s tariffs, the success of these measures remains uncertain.
If China fails to stimulate household consumption effectively, the economy may continue to rely on investment-led growth, which carries long-term financial risks. Moreover, geopolitical uncertainty, combined with the potential for further escalation in trade hostilities, means that Beijing’s economic resilience will be tested in the coming months.
Nonetheless, Premier Li’s assertion that “the giant ship of China’s economy will continue to cleave the waves and sail steadily toward the future” suggests that Beijing is prepared for a prolonged economic contest. Whether its strategies will enable it to sustain growth amid mounting global headwinds remains to be seen.