China's economic and industry outlook for 2025

Economy

Revitalizing Domestic Demand – China’s Top Priority

Will China face a significant risk of "Japanification" in 2025? How might policymakers respond to challenges from Trump 2.0, including higher tariffs? And what should be the optimal policy measures if global trade faces heightened protectionism?

Comparisons between China today and Japan in the past will likely intensify in 2025. Both have struggled with inadequate domestic demand following real estate market collapses. Weak domestic demand may exacerbate trade tensions since both economies are major exporters, though China’s trade prowess today carries far greater weight than Japan’s did three decades ago.

China, however, faces more severe challenges. Unlike Japan, China’s geopolitical tensions and the backlash against globalization limit its ability to replicate Japan’s policy choices, such as relocating production to the U.S. Additionally, an over-reliance on currency devaluation for economic relief, as Japan has done in recent years, is not a realistic option for China due to its unique economic and geopolitical circumstances.

Chart: Collapsing bond yields bring about reminiscence of Japanification but China has a massive untapped domestic demand
Source: Wind

How should China respond to rising tariffs? And most importantly, what concrete steps can be taken to reduce China's high savings rate?

Over the past three months, a widely accepted notion among investors is that policy support from Beijing will essentially set a floor for the highly volatile domestic stock market, but it will not be enough to rekindle animal spirits or fundamentally resolve the fiscal difficulties faced by most local governments. The perception is that the government's commitment to boosting domestic demand remains incremental and vague.

Against this backdrop, the Central Economic Work Conference, held on December 11 and 12 in Beijing and presided over by President Xi Jinping, provided additional clues about how policymakers plan to lend relief to the economy. According to President Xi, the economic growth target of around 5% for 2024 will be met. However, going forward, due to a challenging external environment and the economic transition in the post-real estate era, inadequate demand will remain a key feature of the economy. Therefore, appropriately loose monetary policy and fiscal expansion will be undertaken in 2025. Stabilizing the property and stock markets was also cited as a near-term objective.

Despite these measures, skepticism persists. Questions have been raised around the gap between the central government’s pledge to roll over local governments' debt and the fiscal shortfalls faced by many local administrations. The fiscal deficit-to-GDP ratio will undoubtably rise above the 3% ceiling in 2025 but is unlikely to increase significantly beyond 4%.

Why does the central government maintain such a seemingly conservative stance when most sovereign governments, especially in the developed world, have recently resorted to maximum stimulus measures? There are three primary reasons. First, China seeks to avoid the side effects and pitfalls associated with the "RMB 4 trillion" stimulus rolled out in late 2008. Second, the government aims to preserve fiscal ammunition in case tariffs rise substantially. Finally, policymakers are hesitant to provide a blank check to local governments, which have historically depended heavily on windfalls from the booming real estate sector.

The bigger question is whether these policy responses will allow the economy to avoid a potential deflationary spiral, assuming the property market will not fully completed its downcycle in 2025.

In our view, all these reasons are valid, but higher tariffs require immediate policy countermeasures, making concerns about moral hazard less pressing. Bolder monetary easing must be accompanied by a significant adjustment of the RMB exchange rate, otherwise real interest rates would remain elevated. Additionally, increased fiscal support—beyond savings on interest rate charges—is needed to stabilize local governments' finances, which is a direct way to support the real estate market.

In practical terms, relying on external demand to replace the real estate sector as a growth driver or exporting overcapacity will be extremely challenging for China. Unlike the trade war during the first Trump administration, it is reasonable to assume that the U.S. may target all surplus economies, including those benefiting from China’s relocated supply chains and investments, while applying tougher measures specifically against China.

For China, it is prudent to prepare for the worst: a substantial increase in tariffs and the distinct possibility of losing its Permanent Normal Trade Relations (PNTR) status with the U.S. Additionally, the U.S. may further stress "reciprocity," a principle emphasized during the 2018 trade war.

What would be China's policy response to such an external shock? There are numerous potential combinations of reflationary measures, possibly alongside some tit-for-tat moves. However, fiscal policy will remain a crucial instrument, complemented by adjustments to the RMB exchange rate. We anticipate that Beijing’s retaliatory actions will be largely symbolic, with the RMB depreciating by 5–7% in 2025. As a result, China’s growth rate for 2025 is expected to hover at around 4%.

In the long run, for consumers to take on a greater role in driving growth by reducing their savings rate, a more robust social safety net will be essential. Additionally, the services sector must be liberalized to create new job opportunities that cannot be met by manufacturing alone. However, given that approximately 70% of consumers' wealth is tied to the property sector, bolder monetary easing should be the starting point. If the RMB faces increasing downward pressure due to widening interest rate differentials between the U.S. and China, the government should avoid intervening in the foreign exchange market.

Asia has successfully weathered a slumping yen over the past two years, as most Asian currencies are undervalued, and many economies maintain a relatively strong balance of payments position. However, a significant depreciation of the RMB could further highlight China's extraordinary competitiveness. Even with a relatively stable RMB, numerous countries—including those on friendly terms with China (e.g., Thailand, Brazil, and Pakistan)—have imposed tariffs in 2024. If China redirects exports from the U.S. to other markets using a weaker RMB, backlash is likely. Thus, improving market access remains the best way to counter potential protectionism. What could China do to placate its trading partners?

Chart: Export front-loading ahead of higher tariffs

Source: Wind

From December 2024 onward, China will eliminate tariffs on goods from countries classified as the world’s least developed. This move aims to achieve two objectives: exploring new markets and bolstering the multilateral trade system. The scheme will encompass all United Nations-designated “least developed” countries that maintain diplomatic ties with China, according to Xinhua News Agency. Furthermore, China's recent decision to offer 10-day visa-free transit for all international travellers signals its commitment to keeping its doors open. However, for China's major trading partners—most of which are developed countries or newly industrialized economies—greater market access will be essential to address ongoing backlash against Chinese exports.

In short, China, which has not yet moved into the camp of high-income countries as Japan did in the past, still has ample room for catching up. However, its policies will face more acute trade-offs in 2025.
 

Financial Services

Pursuing High-quality Development Under Monetary Easing

On November 5 2024, Pan Gongsheng, Governor of the People’s Bank of China (PBOC), addressed the Standing Committee of the National People's Congress to outline financial priorities for 2025. Looking ahead to 2025, a more relaxed monetary policy environment will enable the financial system to increase support for new quality productivity development. At the same time, comprehensive regulatory measures will be implemented, emphasizing high-quality growth across the sector. Banks, securities firms, and insurance companies are poised to experience significant positive changes and growth opportunities.

Monetary policy returns to "moderately loose" with extraordinary counter-cyclical adjustments

On December 9, 2024, the Political Bureau of the Central Committee announced a "moderately loose monetary policy" for 2025, marking its first reappearance since 2009. The policy will include "extraordinary counter-cyclical adjustments," signalling stronger intervention than in 2024. The PBOC is expected to further reduce the reserve requirement ratio (RRR) and interest rates, complemented by extraordinary easing measures, such as purchasing government bonds and conducting reverse repos.

While 1-2 RRR cuts are anticipated, interest rate reductions will depend on market conditions. The PBOC Monetary Policy Report Q3 2024 highlighted the challenges of further rate cuts, constrained by factors such as the net interest margins (NIM) and external exchange rates. As a result, domestic demand will remain a priority, with continued declines in loan prime rates (LPRs), albeit smaller than in 2024, to stabilize the banking sector.

Chart: PBOC's interest rate cut drives market interest rates lower (%)Data source: PBOC

Technology finance to drive growth as credit expansion slows

Technology finance is emerging as a top priority in 2025 to support new quality productivity development. Regulatory guidance is aimed at steering financial capital towards early-stage, small-scale, long-term, and hard-tech investments to meet the financing needs of technology companies at different stages of their lifecycle.

This implies: 1) Loosening risk tolerance for asset-light tech companies, coupled with improved risk management systems, including digital risk assessment tools. Lessons from the Silicon Valley Bank bankruptcy in March 2023 have informed these measures. 2) Increasing the allocation of financial resources to asset-light sectors, with direct financing levels stabilizing above 30%. Key growth areas include IPOs for science and technology innovation companies, corporate bonds, and notes.

The era of high-speed credit growth driven by traditional heavy-asset sectors, such as real estate, is fading. Credit growth slowed in 2024, and this trend is expected to continue in 2025, with domestic demand recovery remaining the key focus.

Figure 1: Proportion of direct financing growth (%)

Figure 2: Credit growth slowing amid financial data compression (%)

Data source: PBOC

Comprehensive regulatory approaches and prudential supervision of financial holding companies

The Third Plenary Session of the 20th Central Committee of the Communist Party approved a resolution emphasizing the need to incorporate all financial activities into legal regulatory frameworks. This marks the onset of comprehensive financial regulation, with the possibility of a financial law being introduced in 2025.

The resolution aims to construct a "firewall" between industrial and financial capital, reducing excessive leverage and speculative investments. Regulatory approval of financial holding licenses, initiated in March 2022, has been cautious, with only three firms—CITIC Financial Holdings, Beijing Financial Holdings Group, and China Merchants Group—receiving licenses to date. Stricter oversight is being implemented for industrial capital entering financial markets.

Banks: Slowing NIM decline and strengthened capital resilience

By the end of Q3 2024, the NIM for commercial banks stood at 1.53%, with a slowed pace of decline. Interest rate cuts in 2025 are expected to be more restrained, reducing the pressure on bank margins. The annual decline in NIMs is projected to remain within 10 basis points.

In 2025, the Chinese government will increase core tier 1 capital for the six big banks to consolidate their capital adequacy level, enhance their ability to withstand risks and ease the pressure on interest margins. Smaller banks, burdened by non-performing loans, may require local government support or other long-term mechanisms, such as introducing qualified shareholders or issuing convertible bonds to enhance capital adequacy.

Figure 3: Slowing decline of banks’ NIM (%)

Data Source: NFRA

Securities: improved performance through mergers and industry restructuring

Between 2022 and 2023, the securities industry experienced consistent year-on-year negative profit growth. However, new incremental policies, including the Securities, Funds, and Insurance Company Swap Facility (SFISF), as well as the entry of medium- and long-term funds into the market, are expected to stabilize capital markets and bolster industry profitability in 2025.

The reform strategy outlined in the "New Nine National Articles" and "Building First-Class Investment Banks" policy prioritizes supporting top institutions through mergers, organizational innovation, and structural reform. The goal is to create 2-3 internationally competitive investment banks by 2035. In October 2024, Guotai Junan's merger with Haitong Securities positioned it as the largest industry player by total assets. Both Guotai Junan and CITIC Securities are setting benchmarks against globally renowned investment banks, showcasing significant potential for growth.

In 2025, mergers and acquisitions (M&As) in the securities sector are expected to increase, fostering greater industry concentration. Leading firms are anticipated to scale up capital operations, expand their international networks, and enhance global competitiveness. Meanwhile, smaller firms will focus on specialized and differentiated services to carve out niches in the competitive market.

Insurance: accelerating growth in asset management and commercial annuities

In September 2024, the release of the "National Ten Articles" for the insurance sector set a clear trajectory for long-term and high-quality development. Key areas of growth include insurance asset management (AM) and commercial insurance annuities. Regulatory encouragement for foreign investments will further promote the reform and standardization of China's insurance industry.

With more than RMB 30 trillion in insurance assets under management, policies are steering investments towards the stock market and venture capital, fostering the development of "patient capital." The National Financial Regulatory Administration (NFRA) approved the establishment of an insurance asset management company by Prudential Insurance in October 2024. The entry of foreign firms is expected to inject fresh expertise and innovation into the domestic market, triggering a "catfish effect" that drives industry reform.

Commercial insurance annuities—third-pillar products designed to address China's aging population—represent a significant growth area. With the nationwide rollout of the personal pension system, the market is poised for rapid expansion. Chinese insurers are adopting international best practices, such as Guomin Pension's partnership with Allianz, to develop diversified pension security and wealth management products, driving innovation in this sector.
 

Energy

New Energy: Resilience Amid Disruption

The global energy transition marches on, but for China’s new energy sector, 2025 will be a year of steady growth coupled wih strategic adjustment. While policy support remains the backbone of the industry’s progress, the road ahead is marked by both opportunities and challenges. Proactive fiscal policies and a more accommodating credit environment are set to provide tailwinds for China’s economy, with energy policies shifting focus from ramping up clean energy production to stimulating demand. Falling raw material costs and technological breakthroughs are also set to sharpen the competitive edge of clean energy solutions.

Yet challenges remain. The ongoing issue of wind and solar curtailment threatens to erode investor confidence, while global green trade barriers are complicating international competitiveness. With tariffs rising and carbon footprint scrutiny tightening across supply chains, the stakes have never been higher for Chinese energy firms vying for global leadership.

Three Shifts to Watch

Solar: Stability and a Global Pivot

China’s solar industry enters 2025 with a more stable outlook. Stricter manufacturing standards and reduced export tax rebates are expected to moderate the rapid pace of capacity expansion, stabilizing product prices.

Geopolitical shifts are also reshaping market dynamics. Brazil’s recent hike in import tariffs on photovoltaic (PV) modules, from 9.6% to 25%, reflects tightening trade barriers. Meanwhile, Europe, a key market, is imposing stricter environmental and carbon disclosure regulations that could dampen growth prospects for Chinese exporters.

In response, Chinese solar firms are pivoting toward emerging markets such as the Middle East and Latin America. The Middle East is projected to add 90 GW of PV capacity by 2027, while Latin America is set to install over 165 GW by 2030. These emerging markets offer a lifeline to Chinese manufacturers grappling with tougher conditions in the U.S. and Europe.

Figure 1: China solar PV exports hit by tariffs and trade barriers

Data source: UN Comtrade, ITC Trade Map, EIU, Deloitte Research

Energy Storage: Domestic maturity, global ambition

Energy storage is becoming a cornerstone of renewable energy integration. Global storage installations are projected to reach 261 GWh in 2025, marking a 40% year-on-year increase. China, already a leader in this sector, saw its operational energy storage capacity surge to 58.5 GW/128 GWh by September 2024, an 86% increase in less than a year.

Policy priorities are evolving, shifting from mandating storage for new energy projects to enhancing storage efficiency and market competitiveness. Measures to improve grid dispatch mechanisms, promote shared storage facilities, and refine trading rules are unlocking new revenue streams. By 2025, independent storage projects in select provinces are expected to achieve commercial viability.

China’s dominance extends beyond its borders. Three of the world’s top five energy storage system integrators are Chinese, and they are making significant inroads in European markets. However, compliance with new EU carbon footprint regulations, requiring disclosures from 2025 and stricter limits by 2028, will be a critical challenge.

Green Hydrogen: The next frontier

Few segments are as poised for explosive growth as green hydrogen. Global production capacity—both operational and under construction—has surged past 6 million tons annually, with the International Energy Agency projecting a staggering rise to 49 million tons by 2030. China, with its cheap green electricity, robust policy support, and industrial ecosystem, is at the forefront. Current operational capacity stands at 120,000 tons, with 1.76 million tons in the pipeline. As the world’s largest producer of electrolyzers, China controls 60% of global capacity, cementing its position as a leader in the hydrogen economy.

Figure 2: Top 10 countries in green hydrogen production capacity (Oct 2024, 000 tons per year)

Source: IEA, Deloitte Research

Transportation is set to be a critical driver of demand. The International Maritime Organization’s net-zero target for 2050 is driving interest in green shipping corridors and alternative fuels like green methanol and ammonia. Domestically, China’s plans to expand its hydrogen fuel cell vehicle fleet from 14,000 today to 50,000 by 2025 highlight the sector’s growth potential.

In heavy industries, hydrogen applications are advancing, though economic viability remains a barrier. Companies like Baowu Steel are piloting hydrogen-based reduction technologies, while Europe and Japan prepare for large-scale hydrogen imports. While transportation costs are high, China’s advantages in green electricity and scale could secure it a substantial share of this emerging market, provided it meets stringent carbon footprint standards.

Outlook

China's new energy sector, though accustomed to disruption, continues to be a pillar of global competitiveness. With an unmatched industrial ecosystem, relentless innovation, and firm policy backing, the industry is well-positioned to weather external challenges. The energy transition is accelerating, and while 2025 will bring fierce competition and regulatory hurdles, the industry’s adaptability and resilience should ensure it remains on an upward trajectory.

Technology, Media & Telecommunications

External Pressures Catalyze Technological Self-reliance

The most significant impact on the technology sector in 2025 will be the U.S. intensifying sanctions against China. However, this move is likely to trigger an acceleration of China's self-innovation and domestic substitution efforts, strengthening fundamental research and the development of core technologies, and driving upgrades in domestic industries. Consequently, we expect the technology sector in 2025 to experience short-term disruptions but a cautiously optimistic long-term outlook. Semiconductors, artificial intelligence, and emerging technology sectors are set to become core focus areas, which are critical to strengthening China’s industrial supply chains.

Semiconductors: Domestic supply chain substitution to accelerate

The U.S. is expected to implement more aggressive technology policies towards China, focusing on the following key measures:

1. Diversified sanction measures: The U.S. may expand export controls to cover a broader range of products, not only targeting high-performance AI GPUs and quantum technologies but also extending to mid-range chips. Multilateral cooperation, in which the U.S. and key supply nations restrict China’s access to semiconductor manufacturing technologies, and limiting U.S. investments in key Chinese sectors, are also anticipated.

2. Tightened controls on Chinese capital: There will likely be intensified scrutiny of Chinese acquisitions of U.S. high-tech companies, particularly in advanced and strategic sectors, aimed at curbing the expansion of Chinese capital.

3. Higher tariffs: Tariffs on semiconductors and related tech sectors could be further raised. Recently, Trump indicated that the U.S. may impose an additional 10% tariff on nearly all Chinese imports, which would further strain Chinese exports.

Figure 1: Mature process chips drive China's chip exports to grow against the trend

Source: The General Administration of Customs

Despite the pressure of these regulatory measures, Chinese semiconductor exports have shown resilient growth, particularly in the mid-to-low end of the market, where China holds a competitive advantage. With rapid technological upgrades, the semiconductor sector in China presents substantial growth opportunities:

1. Accelerating Localization of Semiconductor Supply Chains: Following multiple rounds of export controls, China’s semiconductor equipment companies have significantly ramped up R&D spending. For instance, by the third quarter of 2024, R&D expenditure for 11 semiconductor equipment companies listed on China’s A-share market, each valued over 10 billion yuan, rose by 50%, representing 14% of their total revenue. By 2025, the domestic self-sufficiency rate in semiconductor equipment is expected to reach 35%. Similarly, the localization of China’s EDA (Electronic Design Automation) industry is accelerating, with the localization rate projected to rise from 6.2% in 2018 to 22% by 2025.

Figure 2: The semiconductor localization process is accelerating

Sources: Sci-Tech Daily, CSIA, Head Panther Research Institute, Goldman Sachs, ICP Capital

2. Policy Restrictions May Fall Short of Intended Effects: Despite multiple rounds of export controls, the revenue growth of U.S., Japanese, and Dutch semiconductor equipment companies in China has not decreased but instead has increased. In Q1 2024, more than 40% of U.S. semiconductor equipment exports went to China, and China accounted for 50% of Japan’s semiconductor equipment exports. This trend highlights the growing dependence of U.S. semiconductor companies on non-U.S. exports to circumvent domestic export controls, underscoring China’s continued role as a key business partner for the world’s leading semiconductor companies.

Artificial Intelligence: Continuous iteration and upgrades

AI continues to revolutionize industries, with 2025 poised to mark significant progress in its adoption and development:

1. AI agent applications to experience rapid growth: By 2025, we project that 25% of global companies using generative AI will pilot AI agents, with this figure expected to reach 50% by 2027. Major Chinese internet companies have launched AI agent strategies, positioning 2025 as China's "AI Agent Year." AI agents are expected to be applied in customer service (handling more complex queries than current chatbots and solving problems autonomously), cybersecurity (self-detecting attacks, generating reports, and identifying new vulnerabilities), compliance (analyzing regulations and company documents for compliance), and R&D (assisting with data analysis to enhance efficiency), accelerating China’s digital transformation and business model innovation.

2. AI to combat deepfakes: Currently, tech companies use machine learning models to detect patterns and anomalies in deepfake content. In September, China introduced its first technical standard for deepfake detection in the financial sector, which enhances security for identity verification and transaction validation in banking. By 2025, deepfake detection technology is expected to be widely adopted across industries, driving the cross-sector standardization and collaboration needed to build a comprehensive digital security ecosystem.

3. Generative AI as a differentiator for smartphones: In recent years, incremental innovations in smartphones have failed to capture the market’s attention. In response, leading manufacturers have incorporated generative AI into smartphones. By 2024, next-generation AI smartphones are expected to account for 15% of global smartphone shipments, with this figure forecast to exceed 30% by 2025. Currently, generative AI in smartphones is used primarily for real-time voice-to-text translation, document processing, global search, and image editing. In the future, new functions such as personalized assistants and more efficient multitasking capabilities will further drive market growth.

"Hard Tech": Domestic innovation opens new frontiers

In response to external pressures, we expect several new technological sectors to develop rapidly, forming strategic pillars for China’s technological self-reliance:

1. Chiplet technology: Chiplet technology, which integrates smaller, higher-yield chips to improve performance and yield, is set to scale up. China has introduced its first native small chip standard, positioning Chiplet technology as a “shortcut” for overcoming technological gaps. By 2025, small chips are expected to see widespread applications in automotive, data centers, AI, and mobile communications.

2. Optical chips: With the rapid development of 5G, cloud computing, and AI technologies, the demand for high-speed, high-bandwidth communications is surging. As a core component of optical communication, the market for optical chips continues to grow, with China’s optical chip market expected to reach 17 billion yuan by 2025. China’s current capabilities in optical chips are on par with global standards, unaffected by the constraints of advanced integrated circuit processes, making it feasible for China to lead and innovate in this sector.

3. Quantum computing: The Chinese government has significantly increased support for quantum computing research, with R&D funding surpassing 10 billion yuan in 2024 and the successful development of the world’s largest third-generation superconducting quantum computer. By 2025, domestic quantum companies are expected to enter a more active development phase, rolling out hardware, software products, and quantum computing cloud platforms, with clearer commercialization models emerging.

Figure 3: Top five countries in global quantum information investment.

Source: Qianzhan Industry Research Institute

4. Low-altitude economy: As a strategic emerging industry, the low-altitude economy is rapidly growing, fuelled by policy support and investment. By 2025, the market size for China’s low-altitude economy is expected to reach 1.5 trillion yuan. Drones, low-altitude intelligent networks, and electric vertical take-off and landing (eVTOL) vehicles are becoming key growth drivers, accelerating industrialization. 2025 will be a pivotal year for infrastructure development, including low-altitude take-off and landing facilities, communication networks, and intelligent low-altitude systems, solidifying the foundation for the sector’s future growth.

Government & Public Services

New Quality Productive Forces in Alignment With Reality

The Central Economic Work Conference, held in December, emphasized the need to balance nurturing new drivers of growth with transforming traditional ones. The 20th CPC Central Committee further reinforced this directive, underscoring the importance of tailoring the development of new productive forces to local conditions. With 80% of China’s manufacturing rooted in traditional industries, these sectors remain vital for employment and the stability of industrial and supply chains. Local governments face the dual challenge of stabilizing domestic demand, employment, and livelihoods while fostering innovation and integrating new and old economic drivers.

Modernizing equipment in traditional manufacturing

Traditional manufacturing enterprises will undergo upgrades in four directions: high-end capabilities, intelligent operations, green development, and enhanced safety. In 2024, government subsidies for modernizing manufacturing equipment became a primary means of "expanding domestic demand." To date, more than 6,400 facilities—including water supply plants, heat exchange stations, and liquefied gas filling stations—have completed modernization and smart upgrades.

Soochow Securities estimates that equipment renewal-driven fixed asset investments contributed one-fifth of economic growth in 2024. In 2025, government support for equipment renewal is expected to increase significantly, with an expanded range of supported products. Key industries, including petrochemicals, steel, non-ferrous metals, and building materials—which account for nearly 30% of the national industrial output—will become focal points for modernization efforts. These industries will benefit from government subsidies aimed at promoting digital and green development.

Investments in high-tech manufacturing

Investments in high-tech manufacturing will remain strong, spearheading the structural upgrading of the economy. In 2024, high-tech industries outperformed the manufacturing average, buoyed by policy support. This trend is expected to continue, with state-owned "patient capital" playing a more prominent role. To facilitate this, mechanisms are being implemented to encourage risk-taking and innovation by state-owned capital.

Shenzhen has pioneered a "bold capital" initiative, setting an example for creating an inclusive entrepreneurial environment. In 2025, more local governments are expected to follow suit, introducing detailed plans to eliminate institutional barriers and establish frameworks for promoting long-term, high-risk investments.

Figure 1: Year-on-year growth rate of value added above designated size in high-tech industries and manufacturing industries, 2018-2024 (%)

Source: Wind

Strengthening state-owned enterprises (SOEs) and financing key projects

Central and local SOEs will continue to support investment in key industrial projects through incremental funding. The Ministry of Finance has enhanced the management of state-owned capital gains, addressing gaps in contributions and budgetary oversight.

In November, two central SOEs issued special-purpose bonds totaling 500 billion yuan to stabilize growth and boost investment. These bonds are directed towards supporting major national strategies, enhancing security in critical areas, upgrading large-scale equipment, and replacing aging consumer goods. This indicates the launch of a new round of investment initiatives by central SOEs, with more funds likely to be allocated to stabilize investment in 2025.

Building resilient cities

Urban infrastructure development will embrace next-generation information technologies to improve urban safety and efficiency. The State Council issued guidelines in December emphasizing the integration of high-quality development and high-level security in urban planning. "Resilient cities" are now a key paradigm for enhancing urban infrastructure. Investments in new infrastructure construction—ranging from communication networks to smart systems—will enhance the resilience and adaptability of cities, making them more equipped to handle future challenges.

Accelerating urbanization

A new phase of urbanization aims to unlock domestic demand by encouraging rural migrant workers to settle in cities. The State Council’s five-year plan targets lifting the urbanization rate of permanent residents to nearly 70% by 2029. Each percentage point increase in the urbanization rate is projected to stimulate approximately one trillion yuan in new investment demand and over 200 billion yuan in consumer demand.

Currently, 170 million rural migrant workers and their families have yet to settle in urban areas. Estimates suggest that accommodating this population will require an annual urban public budget expenditure of approximately 500 billion yuan. Ensuring stable employment, housing, and access to public services for these new urban residents is critical to fostering domestic consumption and expanding demand.

Life Sciences & Health Care

Upgrading Towards Original Innovation Development

In 2024, the life sciences and healthcare (LSHC) industry benefited from a series of favorable policies, laying the foundation for brighter prospects in 2025. Starting with the Two Sessions of 2024, requirements for original innovation in the sci-tech sector were elevated, with innovative drugs included in the new productivity forces list for the first time. In July, the State Council approved the “Comprehensive Chain Support Plan for Innovative Drug Development,” launching an industry-wide movement to upgrade innovation at the highest national level. Provinces and cities such as Beijing, Shanghai, Guangzhou, Zhuhai, Jiangsu, and Shandong introduced supportive policies that collectively accelerated the pace of original innovation upgrades. Guided by national directives, technological innovation and integration, market access, and capital sectors have all responded, driving the transformation and implementation of innovation.

• AI empowering innovation and accelerating scientific research translation. In November, the state released the “Reference Guidelines for AI Application Scenarios in the Health Sector,” promoting “AI+” innovations in healthcare. The guidelines identify 13 specific scenarios for applying AI in healthcare, providing clear direction for intelligent development. AI-driven drug discovery (AIDD) continues to gain traction, with multiple companies entering the field and driving transformative changes in the innovative drug industry. The government also encourages replacing outdated medical equipment with advanced devices equipped with intelligent functions, accelerating the digital transformation of medical institutions.
  
  
• Reforming medical payments to safeguard the commercialization of innovations. In July, the release of the DRG/DIP Payment 2.0 version enhanced support for innovative drug and medical device development. Exemptions for certain payments and measures encouraging the rational use of cutting-edge assets by medical institutions have created an environment conducive to innovation. The government is also fostering closer collaboration between public and private health insurers, diversifying payment sources and structures for high-cost, innovative drugs and devices to facilitate their commercialization.
  
  
• Easing foreign investment restrictions to promote global innovation collaboration. In September, the state introduced new regulations easing foreign investment restrictions, yielding multiple breakthroughs in the LSHC sector. Foreign enterprises can now conduct R&D on human stem cells, gene diagnostics, and therapeutic technologies in free trade zones in cities like Beijing, Shanghai, Guangzhou, and Hainan. Additionally, foreign-owned hospitals can now be established in nine cities and regions nationwide. In late November, the National Health Commission and three other departments issued the “Pilot Program for Expanding the Opening-Up of Foreign-Owned Hospitals,” further detailing entry rules for foreign investments in healthcare. These measures positively contribute to high-quality development and accelerate integration with the global market.
  
  
• Capital markets rebounded in late 2024, driven by the policy environment and overseas expansion. Stimulated by national policies and the successful overseas expansion of Chinese pharmaceutical and medical device companies, China’s LSHC capital markets began to recover in the second half of 2024. The total value of fundraising deals in the first three quarters of 2024 nearly equaled the total for all of 2023. While biopharmaceuticals and medical devices remained key investment areas, the number of deals and the fundraising scale declined year-over-year, with a shift toward smaller, early-stage rounds. Overall, the market is trending toward “investing in hard technologies and smaller deals.”

Looking ahead to 2025, as Chinese innovative drug and medical device companies grow stronger, they are becoming vital pillars of global life sciences development. We anticipate the following trends in the LSHC industry:

• ‘Going-out’ becomes essential, with more diversified approaches. In 2024, Chinese innovative drug and medical device companies actively pursued overseas expansion, resulting in a variety of “go-global” initiatives. These included independent ventures, strategic partnerships, licensing deals, and M&A-driven growth. Multinational pharmaceutical companies formed strategic collaborations with Chinese biotech firms to jointly develop innovative assets. Over 60 locally developed innovative assets were successfully licensed abroad in 2024, and four domestic biotech firms were acquired by global pharmaceutical giants. As international markets increasingly recognize Chinese innovations, more companies are expected to expand overseas to access broader opportunities.
  
  
• Increased localization of foreign investment. Encouraged by regulatory relaxation and policy incentives, foreign LSHC companies have significantly boosted their localization investments in recent years. Policy changes suggest that this trend will accelerate further. While restrictions on foreign investments have eased, government procurement now favors locally produced products, offering a 20% price evaluation advantage over imports. This promotes the localization of foreign enterprises’ production and supply chains.

Key foreign localization events in 2024:

• Refining the local investment and financing environment, with a focus on niche sectors. Influenced by external market conditions and ongoing industry valuation adjustments, investors remain cautious about large-scale investments. The trend of “early and small investments” is expected to continue, with growing emphasis on project innovation and company strength. Investors are increasingly willing to fund original projects, reinforcing the focus on “hard technologies.” Startups and growth-stage companies must plan for independent growth following angel and Series A financing.

In 2025, Chinese innovative drug and medical device companies may face greater geopolitical challenges, particularly with the onset of a Trump 2.0 era. The “America First” strategy and high tariffs could directly impact pharmaceutical exports to the U.S., significantly affecting Chinese raw material pharmaceutical (API) companies. The loss of cost advantages due to high tariffs could hinder export growth.

Additionally, the proposed “Biosafety Act” and the potential delay in U.S. interest rate cuts pose further risks for China’s CXO (Contract Research and Manufacturing) sector. The passage of the Biosafety Act draft by the U.S. House of Representatives in September 2024 signals stricter global market regulations for Chinese CXO companies, potentially leading to a contraction in their overseas operations.

Chinese life sciences companies must closely monitor market dynamics and adjust their overseas expansion strategies accordingly.

Retail

Will Consumer Confidence Rebound?

A review of the first 11 months of 2024 reveals a declining contribution of consumption to economic growth. The total retail sales of consumer goods recorded low single-digit growth since March, reflecting subdued consumer activity. However, incremental policies introduced at the end of September provided some relief. According to data from the National Bureau of Statistics, the "old-for-new" policy boosted year-on-year retail sales growth in October and November by 1.48 and 1.76 percentage points, respectively. Moreover, the Consumer Confidence Index rose for the first time in October after six consecutive months of decline, though it remains below baseline levels.

The Central Economic Work Conference in December emphasized stimulating consumption as a priority over technological innovation. Key measures include promoting income growth and reducing burdens for middle- and low-income groups, raising retirees' basic pensions, and increasing fiscal subsidies for urban and rural medical insurance. These policies have sent positive signals to the market, but whether consumer confidence will continue to recover remains a critical factor in the domestic economy’s performance in 2025.

Figure 1: The driving effect of consumption on the economy continues to decline

Source: National Bureau of Statistics

Figure 2: Total retail sales of social consumer goods, y-o-y growth

Source: National Bureau of Statistics

Consumption trends and preferences

As the proportion of per capita service expenditures rises yearly, consumption is transitioning from a focus on functionality and conspicuous purchases to an emphasis on self-fulfillment and emotional value. Over the past three years, consumer behavior has shifted from an extreme cost-performance mindset to a "quality-price ratio" approach, where consumers seek a balance between quality and affordability.

Looking toward 2025, emotional value consumption is emerging as a dominant trend, particularly among younger generations. For example, during last year’s Double Eleven shopping festival, the turnover for IP-themed entertainment products exceeded 10 billion yuan—a year-on-year increase of over 100%. Experiences that cater to self-pleasure, healing, and immersion are increasingly influencing consumer decisions across all demographics.

Figure 3: Comparison of service consumption proportion between China and the U.S.

Source: wind

Figure 4: The consumption concept of domestic residents is gradually changing

Source: Deloitte Research

Emerging opportunities

1. Essential consumer goods: The growth rate for essential goods has narrowed but remains resilient. High-end baijiu continues to dominate liquor sales, driven by gifting and rational consumption preferences favoring well-known brands. The beer industry, impacted by weak catering demand in 2024, is exploring "self-pampering" products, such as low-alcohol options, to regain momentum. As offline dining recovers and demand for non-ready-to-drink products grows, beer profitability is expected to improve. Social e-commerce and retail channels are also propelling the rapid growth of leisure foods, which are anticipated to sustain high demand in 2025.

2. Optional consumer goods: While demand for clothing, footwear, and accessories remained weak in 2024, niche markets like emerging sportswear categories have shown strong growth. In 2025, the gradual recovery of consumer confidence and product innovation is expected to sustain resilience in specialized functional and niche sportswear markets.

The cosmetics sector faces intensifying competition and waning online growth. However, structural opportunities exist for domestic brands, functional ingredients, and upgraded service experiences. Additionally, government subsidies for replacing old appliances have revitalized demand, with the home appliance industry witnessing significant sales growth since September. Durable goods such as furniture and building materials are expected to maintain their momentum, driven by sustained policy support.

3. E-commerce and offline retail: As the e-commerce traffic dividend fades, enterprises must focus on refined operations and innovate retail models. While online platforms thrive on cost-performance and category diversity, offline stores need to emphasize service and immersive experiences. By 2025, offline retail formats will likely accelerate transformations to meet consumers' emotional needs. For instance, shopping centers in Beijing and Shanghai are increasingly incorporating ACG (anime, comic, and games) culture and other social scenarios to attract foot traffic and drive sales.

Figure: Scale and Penetration Rate of Online Shopping Users

Source: CNNIC

4. Lower-tier markets: Lower-tier cities, which account for nearly half of China’s consumption, present vast untapped potential. These markets are seeing rapid growth in service consumption and increasing willingness to upgrade purchases. E-commerce and lightweight store formats can help new brands penetrate these areas.

5. Leisure and entertainment: Rising work pressures have heightened consumer interest in leisure and emotionally fulfilling activities. Extended public holidays in 2025, such as New Year's Eve and Labor Day, are expected to boost demand for short trips and staycations, creating opportunities in the leisure economy. Enterprises can capitalize on this trend by offering tailored food, beverage, and hotel products.

6. Global expansion: As domestic consumer segments like tea drinks, cosmetics, and trendy toys reach saturation, expanding overseas offers a second growth curve. Emerging markets in Southeast Asia, where consumption power is rising, present lucrative opportunities. Businesses should focus on localization strategies and building localized supply chains to succeed internationally.

Challenges and risks

1. Supply chain complexity: Dependence on imported raw materials leaves consumer goods companies vulnerable to geopolitical disruptions and tariffs. Flexible and reliable supply chain solutions will be essential.

2. Regulatory compliance for overseas ventures: As legal frameworks tighten globally in areas such as data protection and environmental standards, businesses must adapt quickly to maintain compliance in international markets.

Auto

Automotive Industry: Building on the Past, Bridging the Future

The year 2025 is set to be a transformative one for China’s automotive industry, marking a shift from achieving foundational milestones to pursuing new growth opportunities. On one hand, the industry will "build on the past" by exceeding the 20% sales penetration target for new energy vehicles (NEVs) outlined in the New Energy Vehicle Industry Development Plan (2021–2035). On the other, it will pivot "from domestic to global," transitioning from domestic demand-driven growth to a balanced strategy encompassing international markets.

In 2024, the industry faced challenges such as weakening domestic demand and intense competition, leading to prolonged price wars during the first half of 2024. However, government initiatives—such as doubling subsidies for vehicle trade-ins in July—helped boost sales in the latter half. Passenger vehicle sales rebounded and are expected to achieve 4-5% annual growth year-on-year.

Key Trends to Watch in 2025

1. Extension of vehicle trade-in policies with diminished returns

The trade-in policy significantly contributed to vehicle sales in 2024, driving at least one million additional unit sales. While the policy is likely to continue in 2025, its impact on growth may diminish. With household income levels, employment prospects, and consumer confidence remaining critical factors, stimulus measures will continue to play an essential role in short- to medium-term sales performance.

2. NEVs become the dominant powertrain

NEVs are poised to achieve over 50% market penetration in 2025, solidifying their position as the mainstream vehicle type. By the end of Q3 2024, NEV sales reached 7.8 million units, representing a 47% penetration rate. The market also reflects structural changes, with plug-in hybrid electric vehicles (PHEVs) growing from 18% of NEV sales in 2021 to 45% in 2024.
While Tier-1 cities have already surpassed 50% NEV penetration, Tier-2 cities are catching up, and Tier-3 and lower-tier cities are accelerating their adoption rates. Government subsidies for charging and battery-swapping infrastructure in county-level cities, coupled with expanded NEV product offerings, are expected to drive growth in these regions over the next decade.

Figure 1: Development of PV registration in China by powertrain type

Data source: GlobalData

Figure 2: China NEV penetration by city tier

Data source: insurance registration data

3. Intelligent vehicles as the next competitive frontier

While NEVs have entered the "majority mass" adoption stage, smart vehicle technologies are transitioning from "early adopter" to "early mass" phases.

• Consumer preferences: Buyers increasingly prioritize smart features, valuing convenience and advanced functionality. Many are willing to pay premiums for these technologies.
  
  
• Cost reductions: conomies of scale and technological advancements have significantly lowered the costs of key components like lidar, enabling more affordable integration of advanced driver-assistance systems (ADAS).
  
  
• AI empowerment: Large AI models are driving advancements in autonomous driving systems, enhancing user experience and system competitiveness.

Figure: Development of Autonomous driving penetration in China

Data source: Frost & Suvillian, CIC

4. Challenges in export growth amid geopolitical tensions

Although China's automotive exports slowed in the first three quarters of 2024 due to rising EU tariffs and declining battery electric vehicle (BEV) exports, strong growth in plug-in hybrid electric vehicle (PHEV) exports offset this decline. 

In 2025, passenger car exports are expected to grow at a more moderate rate of 10-15%. Key drivers include:

• Geographic expansion: Chinese automakers are penetrating emerging markets in Southeast Asia, the Middle East, and Latin America.
  
  
• Product diversification: The shift from predominantly internal combustion engine (ICE) vehicles to a balanced mix including BEVs and PHEVs.
  
  
• Overseas production: International factories, planned in earlier years, are expected to begin operations, creating infrastructure for greater scale.

However, risks such as geopolitical conflicts and stricter regulations may pose uncertainties for Chinese automotive exports.

Challenges in a fragmented and profit-strained industry

The industry is grappling with market fragmentation and declining profitability. The concentration ratio of the top 10 companies (CR10) fell from 57% in 2020 to 55% in 2024, reflecting a more competitive landscape. Additionally, prolonged price wars and weak domestic demand have driven the automotive sector’s profit margin to a decade-low of 4.6% in 2024.

Strategies for automakers in the “involution” era

To address the dual pressures of intensified competition and long-term industrial transformation, automakers can adopt the following three core strategies:

1. Cost reduction and efficiency enhancement: Automakers must enhance cost competitiveness through strategies like vertical integration, technology-driven cost optimization, and strategic partnerships. Companies such as BYD have leveraged vertical supply chains, while Tesla continues to innovate in materials and manufacturing processes to balance cost and performance.

2. Diversified product development models: As the industry enters the "smart technology" era, mixed R&D models combining in-house development and outsourcing will become more prevalent. These approaches reduce development cycles and accelerate the launch of new models.

3. Global expansion for scale and profitability: Drawing from the experience of Korean automakers, Chinese firms can achieve sustainable growth in international markets by:

• Targeted regional expansion: Tailoring products to meet local market needs.
  
  
• Brand enhancement: Improving perceptions through high-quality design, marketing, and after-sales services.
  
  
• Supply chain localization: Establishing local production and supply chains to reduce costs and enhance competitiveness.

Logistics

Cost Reduction and Overseas Expansion Collectively Drive Industry Growth

China’s logistics industry is poised for steady growth in 2025, supporting economic transformation, consumption, and modernization.

China’s logistics industry is poised for steady growth in 2025, supporting economic transformation, consumption, and modernization. According to the China Federation of Logistics and Purchasing, total social logistics volume reached RMB 258.2 trillion in the first three quarters of 2024, a year-on-year increase of 5.6%, with projections of RMB 360 trillion for the full year. Social logistics costs grew by 2.3% to RMB 13.4 trillion, accounting for 14.1% of GDP. Bolstered by the growth of consumer e-commerce, average monthly express delivery volumes reached 14 billion items, with total business volumes surpassing 150 billion items by mid-November.

In line with the Central Economic Work Conference’s emphasis on stimulating consumption and expanding domestic demand, the logistics supply chain will continue to evolve, ensuring quality and efficiency in meeting these objectives.

Figure 1: Total social logistics volume and growth rate (2014-2024)

Source: National Bureau of Statistics, Deloitte Research

Key development priorities for 2025

1. Reducing costs through efficiency and innovation: Lowering logistics costs will remain a central focus for the industry over the next few years. The "Action Plan for Effectively Reducing Logistics Costs Across Society," issued in late 2024, sets a target of reducing the ratio of social logistics costs to GDP to approximately 13.5% by 2027. This could save over RMB 1 trillion in total logistics costs.

• Efficiency improvements: Enhancing rail and port-waterway multimodal transportation will play a significant role in achieving this target.
  
  
• Green logistics: Accelerating the phasing out of high-energy-consuming equipment and promoting intelligent, unmanned technology will reduce emissions and speed up logistics operations.

2. Expanding cross-border logistics capabilities: China’s logistics industry is capitalizing on policies encouraging high-level opening-up and digital trade. In 2024, imports and exports of digitally deliverable services reached RMB 2.13 trillion (a 5.3% increase), while cross-border e-commerce imports and exports grew by 11.5% to RMB 1.88 trillion.

Although U.S. tariff policies pose challenges, diversification strategies—such as expanding trade with ASEAN, the Middle East, and Latin America—are mitigating risks. From 2018 to 2023, export markets in these regions achieved compound annual growth rates exceeding 10%. This momentum will continue to drive rapid growth in cross-border logistics targeting emerging markets.

Figure 2: Compound annual growth rate (CAGR) of China's total export sales to major markets (2018-2023)

Source: Statistics from the General Administration of Customs

Opportunities for enterprise development

1. Integrating supply chains and innovating logistics modes: Logistics enterprises must focus on optimizing the transition between various transportation methods and deepening collaborations with core industries like manufacturing and commerce. By enhancing supply chain integration, companies can achieve both cost reductions and efficiency gains.

2. Digitalization and AI-driven innovation: The adoption of digital and intelligent technologies is essential for creating agile supply chains. AI-powered tools can improve operational efficiency, reduce resource waste, and enable intelligent decision-making. For instance, AI scheduling solutions can optimize transportation routes in real time, cutting carbon emissions and minimizing costs.

3. Optimizing overseas warehousing: Enhancing cross-border service capabilities requires investments in overseas warehouses and logistics hubs. Currently, there are more than 2,500 overseas warehouses covering over 30 million square meters. Logistics firms must establish efficient transit centers, robust distribution routes, and adaptable transportation resources to meet growing demands in international markets.

4. Global competitiveness and differentiation: Large logistics enterprises can expand their international competitiveness by increasing transportation capacities—such as expanding full-cargo aircraft fleets—and deepening supply chain integration. Meanwhile, small and medium-sized firms should focus on niche areas like multimodal transportation, smart logistics, and cold chain logistics to offer specialized services and improve customer satisfaction.

The logistics sector is well-positioned to meet China’s economic goals in 2025. By embracing innovation, improving efficiency, and expanding its global reach, the industry will continue to play a pivotal role in enabling growth and supporting new consumption patterns.