The U.S. recently imposed an additional 34% "reciprocal tariffs" on China, which, combined with existing tariffs, has pushed comprehensive tariff rates to elevated levels. While these measures may exert short-term pressure on Chinese exports, China’s vast and diversified economic base, flexible and sufficient policy toolkit, and ongoing industrial upgrading underpin its long-term capacity for economic development. Furthermore, China’s latest debt resolution policies and fiscal taxation system reforms, supported by moderately loosen monetary policy, improve public debt structures and sustain fiscal sustainability. Given China’s robust economic resilience, low external debt risks, ample external liquidity, substantial policy space, and institutional advantages in mobilising resources to address risks, we believe that China’s sovereign credit fundamentals remain robust.
Impact of Export Disruption is Limited; Innovation-Driven Productivity Gains Support Economic Transition
China’s real GDP grew by 5% year-on-year in 2024, ranking among the fastest-growing major economies globally. This performance underscores the economy’s resilience amid structural transformation. From the perspective of economic structure, the digital economy and technological innovation have emerged as key growth drivers, with new quality productive forces becoming a pivotal engine. In recent years, high-tech sectors such as new energy, advanced equipment manufacturing, and the digital economy have sustained rapid investment growth. In addition, breakthroughs in AI and high-end manufacturing between 2024 and 2025 will further consolidate China’s high-quality growth foundation in the long term.
Although the U.S. tariff measures may temporarily dampen Chinese exports and amplify China’s near-term economic headwinds, China’s reduced direct export exposure to the U.S.—owing to Chinese enterprises’ prior overseas industrial footprint—has mitigated risks. Although transit trade may face impacts, other overseas economies retain some flexibility to adjust before the tariffs take full effect. Additionally, China’s diversified export destinations and its vast domestic market, with significant untapped demand potential, provide buffers against tariff-related headwinds. Moving forward, as China’s policy mix continues to prioritise boosting consumption and fostering new growth drivers—particularly through AI integration and industrial convergence—the medium-term economic outlook remains favourable. We expect China’s GDP growth to stabilise within a 4.5%-5% range from 2025 to 2027.
External Liquidity Remains Abundant; RMB Internationalisation Gains Momentum
By the end of 2024, China’s external debt stood at USD2.4 trillion (12.9% of GDP), remaining at a very low level globally, while its foreign exchange reserves totalled USD3.2 trillion, reinforcing its status as a major net creditor. Sustained current account surpluses, supported by China’s pivotal role in global trade and manufacturing, further bolster the nation’s external liquidity. Notably, growth in general trade (higher value-added) outpaced processing trade in 2024, underscoring China’s entrenched position in global manufacturing fields and supply chains.
Progress in RMB internationalisation has also strengthened China’s external financing capacity. According to the IMF’s latest data, the RMB ranks sixth in the currency composition of globally disclosed foreign exchange reserves, reflecting its growing recognition within the international monetary system. Correspondingly, the RMB’s role in cross-border payments has expanded. SWIFT statistics show that the RMB surpassed the Japanese yen to become the fourth-most-active global payment currency in November 2023, with its share in international payments reaching 4.33% in February 2025. In the context of tariff impact, U.S. trade protectionism may erode confidence in dollar hegemony and in the meantime raise global concerns about the U.S. economic recession, creating opportunities for China to enhance its trade influence and accelerate RMB internationalisation, leveraging its strong manufacturing position and consumer market potential.
Manageable Government Debt Risks; Debt Resolution and Fiscal Reforms Address Structural Imbalances
China’s 2025 fiscal policy, anchored in a "more proactive and impactful" stance, emphasises counter-cyclical adjustments, optimised expenditure structures, and strengthens support for social welfare and innovation. These measures play a significant positive role in stabilising growth, adjusting the growth structure and boosting consumption. The official deficit ratio was set at around 4% (RMB 5.66 trillion deficit), with RMB1.3 trillion in ultra-long-term special treasury bonds to be issued. While proactive fiscal measures may temporarily elevate deficit and debt levels, economic expansion will lay a good groundwork for future fiscal soundness and sustainability. As of the end of 2024, China’s general government net debt-to-GDP ratio stood at 56.4%, a moderate level globally, with risks remaining manageable. Furthermore, the central government’s low leverage ratio also provides headroom for targeted debt expansion. Coordinated with accommodative monetary policy, ongoing debt structure optimisation will help reduce borrowing costs and mitigate contingent liabilities at local government levels.
In November 2024, the Ministry of Finance of China unveiled a RMB12 trillion debt resolution package, emphasising cost reductions via debt swaps, stricter control over hidden debt, and reforms to local financing vehicles. In our view, these measures, alongside fiscal taxation reforms endorsed at the Third Plenum, will enhance fiscal efficiency, lower financing costs, and reinforce fiscal sustainability.
Ample Policy Space to Navigate External Shocks and Transition Challenges
Currently, China is traversing a crucial economic transition phase. The central government is adopting flexible macroeconomic policies to ensure a smooth shift towards a “new normal” of more balanced and sustainable growth. Despite uncertainties from the U.S. tariffs, China’s policy advantages—including substantial policy space, clear policy expectations, strong and flexible policy toolkit and institutional resilience —stand out amid global trade realignment. The government’s track record in strategic planning, centralised decision-making, and extensive control over critical resources have reflected its institutional resilience. In recent years, the coordination and synergy between fiscal and monetary policies have continued to strengthen, with the combined effects of these policies being progressively unleashed.
In 2025, China plans to maintain its "proactive fiscal policy and moderately loosen monetary policy" framework, strengthening counter-cyclical adjustments, cross-policy synergies, and targeted support for innovation and domestic demand. Concurrently, fiscal discipline and local debt risk mitigation remain priorities to avoid regional fiscal imbalances. We expect China’s adaptive policy framework to sustain stability and effectiveness through the transition, mitigating systemic risks in the medium term.
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