Backgrounder: China’s Economic Stimulus Program

October 2025

After a long period of annual double-digit economic growth, China has experienced a slow but steady decline in its growth rate since the 2008 international financial crisis. Its growth rate reached a peak of 14 percent in 2007 and declined in subsequent years. China’s growth rate is now around 5 percent according to official government statistics, although many independent estimates of China’s growth are even lower. But all agree growth is slowing.

There are several reasons for this decline. Most importantly, the benefits of China’s economic model—relying on exports and infrastructure investment as engines of growth—have been exhausted. As a percentage of China’s GDP, exports have declined from 35 percent in 2007 to just 20 percent in 2024. International demand for China’s exported goods shifted dramatically down during the great recession triggered by the 2008 international financial crisis. In later years, tariffs on exports from China and restrictions on the sale of advanced technology to China have posed additional challenges to its economic growth. In particular, there has been a sharp decline in US-China trade in 2025 as the two countries imposed higher tariffs on each other. That decline was in large part offset by increases in trade with other countries. Exports to Southeast Asian countries are mostly re-exported to the US. This subterfuge did not last long, as the Trump administration is now clamping down on this tactic.

After years of massive spending on domestic infrastructure, China now has an abundance of roads, railroads, manufacturing capacity, and energy supply. This spending provided a significant boost to local economies, but also saddled local governments with massive amounts of debt.

China’s leaders have been trying to shift their economic model to be closer to that of the advanced industrial countries, which rely on innovation and consumer spending to grow their economies. While China is now at the cutting edge of some technologies—especially renewable energy, such as EVs, batteries, and solar panels—it lags in many others, perhaps most notably semiconductors. Consumer spending remains far below that of major economies, and conversely household savings is much higher. For example, consumer spending makes up almost 70 percent of GDP in the US, whereas in China it is less than 40 percent; household savings are less than ten percent of income in the US, but over 33 percent in China.

The real estate crisis is another factor in China’s slowing growth rate. Real estate construction and sales were a major portion of local government revenue and GDP growth, but resulted in a real estate bubble with rising real estate values but many vacant units. The government was worried that housing sales were primarily an investment strategy and not utilized residences. It imposed limits on how many homes a person could own in order to reduce the building of excess housing units that remained vacant and even the building of entire “ghost cities” with new roads, housing, and commercial space but no residents. Housing construction was akin to a Ponzi scheme: future sales were used to pay for the construction of homes already under contract. The collapse of the housing sector began in 2021 during the pandemic. Some major real estate builders, like Evergrande, were allowed to go bankrupt and eventually shut down. The construction and sales of new housing are now at their lowest levels since 2010. Housing prices began to decline. This may have been good for new home buyers, but bad for people who had bought homes in the past and were now underwater, and even worse for those who bought real estate as an investment that previously promised high annual growth rates. Many middle class families have watched their wealth collapse along with the housing market. Falling real estate prices have led to falling household incomes which in turn led to falling levels of household consumption. Instead of investing in real estate or spending on consumer goods, most Chinese are now simply saving more.

Whereas many Western countries have been dealing with higher inflation, in large part as a result of the Covid pandemic, China has been faced with deflation. The main reason for this is excessive domestic competition that led to price cuts to reduce inventory. Although the Chinese government denies foreign complaints that the country intentionally has excess capacity in order to export its surplus goods, it recognizes the problem with excess capacity in its domestic economy. It refers to this problem as “involution”: excessive competition leads to price cutting, lower profits, and delayed payments to suppliers and to delivery people. Ironically, the industries prioritized in China’s “new economy”—EVs, batteries, and solar panels—are all experiencing involution. The central government is trying to limit excessive competition, price cutting, and local protectionism in order to create national champions and to find a cure for deflation.

A final drag on economic growth in China is consumer sentiment. During its boom years, rising levels of income were a major source of popular support for the ruling Chinese Communist Party. With slower growth, however, most Chinese are less optimistic about their future economic prospects. They are worried about the high cost of urban living; rising rates of unemployment, especially among young people; fewer opportunities for upward mobility; and declining levels of household wealth due to the downturn in the real estate market.

These factors—the exhaustion of China’s development model, the housing crisis, deflation, and declining consumer sentiment—have led to persistent obstacles to sustaining economic growth.

China’s Stimulus Policies

What has the Chinese government done to boost its overall economic growth rate? During 2024, it introduced a variety of measures to stimulate the economy.

• Local government investments in infrastructure
• Trade-in program for major consumer goods: consumers got subsidies on new purchases of big ticket items by trading in their old appliances and autos
• Prime interest rate lowered
• Relaxation of rules on home buying: Banks reduced mortgage rates for new and existing mortgages; banks also reduced the required down payment to 15 percent; some cities also lifted restrictions on how many homes individuals could own
• Re-capitalization of big banks and a reduction in the amount of reserves banks must hold: both measures were designed to encourage more lending, especially to private enterprises
• Childcare subsidies: local governments paid RMB3600 (roughly $500) subsidies to families for each child under 3 years of age

These policies had an immediate but limited impact. For example, there was a one-time boost in retails sales but not a sustained increase in household consumption. The subsidies for retail sales were not large enough or broad enough to change spending habits. People do not buy EVs and household appliances every month. Lowering the interest rate did not spur more consumer spending because most households and individuals do not rely on consumer credit for their purchases. The new infrastructure investments and childcare subsidies added to the growing problem of mounting local debt. The government achieved its official growth target for 2024, but many observers were skeptical of the official reports.

New data released in September 2025 by China’s National Bureau of Statistics revealed the lingering economic problems facing China’s leaders. These data revealed slowdowns in retail sales, industrial output, fixed asset investments, and property investments, as well as declines in the average sales price of housing. Moreover, the urban unemployment rate was 5.3 percent, up from 5.2 percent the previous month. For youth aged 16-24, the unemployment rate rose to 18.9 percent, the highest level since it reached 21.3 percent in 2023 (at which point, the government stopped reporting and revised how it measured youth unemployment). The newly released data also revealed persisting deflation, which is a further drag on the economy.

Prospects

The Chinese government’s short run goal of avoiding an economic crisis will in all likelihood be accomplished. The Chinese economy will almost certainly hit its 5 percent growth target for this year, even if it has to fudge the numbers. In the long run, however, it has become apparent that the limited stimulus measures adopted so far are not enough to correct the endemic problems in the Chinese economy. That may well require structural changes, such as a dramatic increase in social welfare spending, such as unemployment insurance, health care, pensions, etc. Because the Chinese government spends so little on social welfare, people are compelled to save a comparatively high percentage of their incomes to guard against medical emergencies and plan for retirements. At present, however, Beijing has not given any indication it is prepared to take this step.

In fall 2025, the CCP is scheduled to hold its annual meeting of its central committee members, the top 200 or so leaders from across the country. That meeting will approve an outline of the new five-year plan. That plan will set priorities on the kinds of investments in the coming years, which in turn will signal which industries will receive preferential treatment. That meeting may not announce new stimulus policies, which are designed for short-run growth, but will indicate the kinds of long-term policies China’s leaders plan to make to develop their economy in the years to come.