Rebalancing China’s Economy: Stimulus, Confidence, and Self-Sufficiency

2025 marks the conclusion of China’s 14th Five-Year Plan, a time for policymakers to present their scorecard and set goals for the next five years. To ensure a positive outcome, Chinese leaders will likely roll out active stimulus measures in the spring while continue pursuing self-sufficiency and technological advancement.

President Trump’s threat of steep tariffs is not the most significant challenge for Chinese economic policymakers. If Beijing can leverage rising tariffs to push domestic reform and increase household consumption, it can sustain balanced growth despite short-term pains. Even so, Beijing’s consumption-promotion measures will not sacrifice investment in strategic sectors. Chinese President Xi remains convinced that achieving self-reliance and technological advancement can heal economic woes, shake off the “Century of Humiliation,” and enshrine him as a paramount leader. 

The real challenge for Chinese policymakers lies at home. While they have experience designing and implementing industrial policies, they struggle to mobilize Chinese consumers to spend to drive growth. Without fixing public pessimism about the economy, direct household cash handouts are unlikely to spur household spending over saving. Beijing’s biggest challenge is restoring policy credibility and market confidence.

China’s leadership has acknowledged the confidence deficit plaguing the nation’s troubled economy. On New Year’s Day, President Xi urged the Chinese people to have confidence that they can overcome external uncertainties and internal challenges. Premier Li Qiang also warned local officials against practices that have stoked anxieties among entrepreneurs, such as unwarranted detention of executives.

Yet shifting policies without implying that President Xi’s existing policies have worsened economic woes and dented confidence is politically delicate. To sidestep this, Beijing may deflect blame onto local governments despite the fact that local behavior has been shaped by incentives from the top. But people are not easily fooled. Tactical policy modification without strategic reorientation towards balanced economic growth will do little to boost confidence.

The Central Economic Work Conference in December 2024 correctly called for expanding domestic demand by boosting domestic consumption, improving investment efficiency, and increasing pension and medical insurance subsidies. Yet this, at most, supplements the existing playbook of prioritizing investment in digital industrialization and strategic technologies. The party’s requrest for “early planning for major projects” for the 15^th FY Plan signals its unwavering prioritization of technology advancement, not household consumption.

President Xi has called for “strengthening top-down coordination” and “disciplining local governments and corporate behavior.” If this optimizes investment and reduces excess capacity, it could rebalance the economy towards consumption and ease trade tensions. However, if centralization stifles local initiatives and entrepreneurial spirit, it may lead to prolonged economic slowdown.

Beijing is unlikely to abandon its existing playbook unless President Trump and President Xi, on an off chance, strike a grand bargain to restore China’s access to advanced Western technology. Washington’s export controls raise the cost and delay Beijing’s technology progress, incentivizing Beijing to double down on its pursuit of self-sufficiency at the expense of supporting households. In a slower-growth environment, Chinese policymakers have fewer resources to spare when the party prioritizes technological advancement so as to not yield ground in the great power competition.