In 2025, China will face three key challenges that will present President Xi Jinping with difficulties, contradictions and hard choices. First, and most obviously, is the state of the economy, which is beset by low consumer demand and deflation. Second is Xi’s desire to enact the structural reforms promised at last year’s Third Plenum, which will place China in a more advantageous position to move from a middle- to high-income country, but may conflict with the more immediate need to juice the economy. Third, the external environment continues to become more dangerous and complex. The imminent return of U.S. President-elect Donald Trump to the White House will upend the attempts to stabilize bilateral relations made by outgoing President Joe Biden, setting China up for a trade war with the U.S. in short order. Beyond that, the collapse of the Assad regime in Syria, the failed coup in South Korea and the ongoing war in Ukraine present China with more complications and few opportunities.
These challenges are all interrelated. The first two are most importantly about Xi’s power in relation to China’s state bureaucracy, business sector and society. Xi’s challenge, fundamentally, is to restore trust and confidence in his leadership, which have been gravely undermined by a series of policy decisions and campaigns that have centralized power in his hands while eliminating elite and societal challenges to his rule. In solidifying his position, however, Xi has sacrificed trust in his leadership and confidence in his policy decisions.
The immediate problem of the economy boils down to anemic growth. Necessary limits on investment-led expansion and the property sector have cut off traditional avenues of growth, while China’s household consumption did not make the comeback that many expected with the end of Beijing’s draconian “Zero COVID” policy. To the contrary, in the wake of the pandemic, China’s consumers felt less wealthy due to a decline in property values and less secure given the pandemic shock and China’s worsening relationship with its major trading partners. As a result, they are understandably holding back from purchases and instead preparing for a future that looks less rosy and full of risks. Complicating the picture even more is the fact that the brightest areas of the economy are in sectors, such as automotives, that are now targeted by foreign governments—from the U.S. and the European Union to Brazil—with tariffs and other restrictions to stop China from exporting its overcapacity.