China

Heightened tariff risk, partially offset by increased domestic stimulus

Despite achieving its official annual growth target of "around 5%" in 2024, China's economic performance was characterised by significant imbalances and volatility. On the positive side, exports transitioned from a drag to a key driver of growth, fueled by recovering global demand for electronics and resilient US consumption. Additionally, manufacturing investment continued to be robust, supported by ongoing policy initiatives aimed at industrial upgrading and the green transition. However, the downturn in real estate continued to weigh heavily on property investment and dampened household consumption, doubly driven by a negative wealth effect and reduced demand for housing-related goods and services. Moreover, economic activity has also shown significant volatility, starting the year on a strong note, partly due to the delayed impact of supplementary fiscal measures announced in Q4 2023. However, momentum weakened notably in the second and third quarters as the effects of these policies faded. The combination of slowing growth and renewed concerns over US-China trade tensions prompted policymakers to roll out a more comprehensive package of support measures starting in late September. These measures spanned fiscal, monetary, housing and equity market policies, the aim being to stabilise the economy. The policy-driven initiatives, coupled with a surge in front-loaded exports to preempt potential tariff hikes, helped revive growth momentum toward the end of the year. This rebound ultimately enabled China to meet its 2024 growth target, albeit amid persistent structural challenges.

Looking at 2025, the biggest uncertainty involves the tariff war, which has been compounded by the re-election of Donald Trump and the expected escalation of global protectionist measures. At the time of writing, the Trump administration already implemented two additional 10% tariffs on Chinese goods in early February and March. These measures are particularly damaging for industries heavily reliant on US demand, such as ICT (laptops, mobile phones) and labour-intensive manufactured goods (textiles, clothing, toys, baby carriages). While the immediate impact on exports has been softened by front-loaded demand driven by expectations of even higher tariffs – Trump threatened a 60% tariff hike on Chinese goods during the election campaign – the full effects are likely to emerge in the second half of 2025. This could include a payback effect, as demand for durable goods is pulled forward, potentially leading to a slowdown later in the year. In response, China has imposed retaliatory tariffs of 10-15% on selected goods imported from the US, primarily targeting energy and agrifood products, which account for only a quarter of Chinese imports from America. China’s measured retaliation suggests it is potentially open to further negotiations, although the limited progress in fulfilling the Phase One trade deal signed in early 2020 could complicate discussions moving forward.

In this regard, policy stimulus will be crucial, particularly in offsetting the anticipated slowdown in external demand. Correspondingly, growth drivers are likely to shift in 2025, moving away from exports and toward domestic stimulus. The 2025 fiscal budget is modestly stronger compared to previous years. The official fiscal deficit has been lifted to 4% of GDP, up from the typical 3%, while the issuance of special government bonds – RMB 1.8 trillion for the central government and RMB 4.4 trillion for local governments – has reached a record high. The proceeds are expected to be channeled into investment and consumption. With stimulus focused on consumer goods trade-in programmes and large-scale strategic construction projects, durable goods consumption and manufacturing investments are likely to emerge as the key beneficiaries. In particular, the size of fiscal support for consumer goods trade-ins has doubled to RMB 300 billion, up from RMB 150 billion last year, and now extends beyond automobiles and household appliances to include personal electronics.

Renewed focus on resolving local government debt burden

Significant pressure continues to bear on the fiscal situation of local governments in China, primarily due to the sharp decline in non-budgetary financing sources, particularly land sales and borrowing through local government financing vehicles (LGFVs). Meanwhile, the issuance of "hidden debt" – off-budget borrowing by local governments – has been a recurring concern for Chinese policymakers, as this hidden debt could exceed half of China’s annual GDP, according to IMF estimates.

To address the growing local government debt burden, China introduced a multi-year debt swap programme in November 2024. The programme, totaling RMB 10 trillion (approximately 7.5% of 2024 GDP), will be implemented over five years. It includes two key components: an increase of RMB 6 trillion in the local government debt ceiling, allocated over three years, to facilitate the swap of hidden debt, and an annual allocation of RMB 800 billion from the special local government bond quota for five years, totalling RMB 4 trillion, also dedicated to hidden debt swaps. While the programme does not involve additional government borrowing, it is expected to save local governments approximately RMB 600 billion in interest payments over the next five years. Moreover, the debt swap will mitigate repayment risks by converting high-risk off-balance-sheet debt into less risky on-balance-sheet government debt, which can theoretically be rolled over indefinitely. In the short term, the easing of cash flow pressures will provide local governments with greater fiscal flexibility. This will enable them to address overdue payments to suppliers and civil servants, as well as fulfill their spending obligations to support economic growth.

China’s current account surplus rebounded in 2024, primarily supported by an improving goods trade balance. This improvement was driven by recovering global demand for electronics, front-loaded demand to preempt potential tariff hikes and weak import demand. However, the services trade deficit widened, largely due to a faster recovery in tourism outflows compared to inflows. This trend was fuelled by China’s expanded visa-free “circle of friends,” which includes popular nearby destinations such as Singapore, Malaysia and Thailand, all of which exempted visa requirements for Chinese tourists and came into effect in late 2023 or early 2024. Despite the rebound, the improvement in current account surplus may not be sustainable in 2025 as export growth is expected to slow. On the capital account side, China faced ongoing challenges in 2024. Balance of payments data revealed net foreign direct investment (FDI) outflows throughout the year. These outflows were driven by two key factors: first, foreign firms chose to repatriate their profits amid “de-risking” efforts and seek more attractive interest rates abroad, and second, rising outgoing FDI as Chinese corporates increasingly “go global” to tap new markets and relocate excess production capacity abroad. These dynamics have exerted deprecation pressure on the yuan and have limited the central bank’s ability to implement large scale policy rates cuts, leaving fiscal measures as the primary tool for economic stimulus.

Geopolitical tensions and economic decoupling

While the outcome of the US presidential election may not fundamentally alter the trajectory of US-China strategic competition, the return of Donald Trump to the White House could reshape the dynamics of this rivalry in more unpredictable and potentially disruptive ways. For instance, Trump may revive or escalate trade tariffs, technology sanctions and other economic measures to target China. During his election campaign, he threatened to revoke China’s most-favoured-nation status and impose tariffs of up to 60% on all Chinese imports, and also phase out imports of "essential goods" such as electronics, steel, and pharmaceuticals. In April 2025, the escalation of tariffs between the two powers seemed irresistible.

In this context, the relocation of supply chains away from China could accelerate, as businesses seek to mitigate risks from heightened trade barriers and geopolitical uncertainty. However, the "China+1" strategy may be the object of tighter scrutiny under the second Trump administration, as evidenced by the punitive tariffs already imposed on Chinese solar exports manufactured in Southeast Asia. Meanwhile, Beijing is likely to double down on its efforts to enhance technological self-reliance via initiatives like "Made in China 2025" and the "dual circulation" strategy aiming to reduce China’s dependence on foreign technology and markets. While these efforts could strengthen China’s resilience to external pressures, they may also lead to greater market restrictions as import substitution policies and localisation requirements could limit foreign firms’ access to key industries. Moreover, recent legislative measures – such as the Anti-Espionage Law, Personal Information Protection Law, and National Security Law – could create an opaquer regulatory environment and complicate foreign firms’ ability to conduct due diligence.

Payment

Cash payment is usually used for face-to-face domestic retail transactions. Due to tight capital controls imposed by the authority, an individual can only purchase up to USD 50,000 each year. Furthermore, when a Chinese company makes an international payment in a foreign currency, the company must submit a foreign currency payment application with the local bank, along with supporting documents like sales contracts and invoices. The whole process can be quite lengthy and it is possible that the bank will reject the transaction.

Commercial Acceptance Drafts (CAD) and Bank Acceptance Drafts (BAD) are both common methods of payment for Chinese companies. These are two negotiable instruments: whereas CAD is issued by companies to entrust the payer to unconditionally pay the specified amount to the beneficiary on the date, BAD is issued by the acceptance applicant, entrusting the acceptance bank to make unconditional payment of a certain amount of money to the payee or bearer on the designated date. In practice, BAD is regarded as safer and therefore more accepted than CAD.

Letter of credit and cheques are also used, but are less popular in China. The use of letters of credit is typically confined to big companies; and cheques are used infrequently by both individuals and companies.

SWIFT bank transfers are also among the most popular means of payment as they are rapid, secure, and supported by a developed banking network, both internationally and domestically.

Debt Collection

Amicable phase

The creditor makes phone calls and sends letters of collection to chase the debtor for payment. If debtor is responsive and acknowledges the debt, the two parties will negotiate payment plans to try to have payment settled. In the existence of a dispute, both parties need to come to an agreement or offer discount on debt amount.

Legal proceedings

The Chinese court system is complex. It is divided into multiple tribunals at different levels. The basic People’s Courts are at the lowest level with the County People’s Courts or Municipal People’s Courts. The basic People’s Courts have jurisdictions over most cases of first instance. Intermediate People’s Courts handle certain cases in first instance, such as major foreign-related cases, as well as appeal proceedings brought against decisions rendered by the basic People’s Courts. At the Higher level, the High People’s Courts decide on major cases in first instance. The Supreme People’s Court is at the highest level, which handles interpretation issues, and has jurisdiction over cases that have a major impact nationwide.

Fast-Track Procedure

If the debt is purely monetary, there are no other debt disputes between the creditor and the debtor, and the repayment order can be served on the?debtor, the creditor can apply for a repayment order against debtor with the court. The debtor has 15 days to repay the debt after the order is issued; otherwise, he must submit a defence before the payment deadline. If debtor fails to do either, the creditor can apply for enforcement. However, if debtor’s written defence or objection is approved by the court and the ruling for terminating the debt payment order is issued, the debt payment order will be invalidated and the creditor can choose to pursue legal action. In practice, creditors do not usually use the fast-track procedure and will immediately initiate legal proceedings when the amicable phase fails.

Ordinary Procedure

Legal proceedings commence with the creditor lodging the case and submitting statement of claims with the court with corresponding jurisdiction. Once the case is accepted, court summons will be delivered to parties involved. Usually within one month, the first hearing will be arranged and the court will make a final attempt to reach a payment agreement between creditor and debtor via mediation. If no agreement can be reached, the litigation continues with several rounds of hearings, before a judgement is rendered by the court.

In theory, a first instance ruling could be rendered within six months after the case’s acceptance, but in practice, proceedings can last longer as the complexity of the case increases (for example, when there is more than one creditor, or when a foreign party is involved). In some cases, the whole process can last to one to two years. Furthermore, appeal proceedings must be terminated within three months after appeal acceptance.

Enforcement of a Legal Decision

Domestic judgments, once obtained, can be executed by, for example, seizing the debtor’s bank accounts, property, or by a transfer of rights. The creditor can apply for enforcement with the People’s Court or with an enforcement officer.

For foreign judgments, the recognition and enforcement is based on the provisions of an international treaty concluded or acceded to by both China and the foreign country or under the principle of reciprocity. In practice, enforcing foreign arbitral awards is easier than enforcing foreign court decisions in China, because over 150 countries including China have signed and ratified the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, June 10, 1958).

Another method of enforcement is the “Arrange­ment on Reciprocal Recognition and Enforcement of judgments in Civil and Commercial Matters” (REJA) between China and Hong Kong. There are similar arrangements between mainland China and Macao, as well as between mainland China and Taiwan. It provides a legal basis for Chinese courts to enforcement judgments from Hong Kong, Macao, and Taiwan. It allows creditors to use courts from Hong Kong, Macao, and Taiwan for cases in mainland China.

Insolvency Proceedings

Parties may agree debt restructuring arrangements without going to court. However, such arrangements must not jeopardize the interests of any other creditors – otherwise, they may subsequently be declared invalid in any court bankruptcy proceedings.

The 2007 Chinese enterprise bankruptcy law sets out three types of formal bankruptcy proceedings: bankruptcy, reorganization and reconciliation.

RESTRUCTURING PROCEEDINGS

This can prevent a company with plentiful assets while experiencing cash flow difficulties from entering bankruptcy. Either debtor or creditor can apply with the court for Restructuring, which allows debtor to manage its properties under an administrator’s supervision. A restructuring plan should be approved by a majority of creditors in each voting class (secured, creditors, employees…) at creditor’s meetings, then sent to the court for approval within ten days from the date of?adoption.

After the implementation of the restructuring plan, the administrator will supervise and submit report on debtor’s performance with the court. The administrator or debtor must file an application to the court for approval within ten days from the date of?adoption.

RECONCILIATION

This procedure allows the company to settle its liabilities with its creditor prior to the court declaration of debtor’s bankruptcy. The debtor directly submits a payment proposal to the court and upon receiving court’s approval on compromise payment proposal, the debtor will recover its properties and business from the administrators. The administrator will supervise debtor’s performance and report to the court. If the debtor fails to implement the compromise proposal, the court will terminate this procedure and declare debtor bankrupt as requested by the creditors.

BANKRUPTCY

The procedure has the purpose to liquidate an insolvent company and distribute its assets to its creditors. The bankruptcy request should be applied with the court and the request can be sent both in the name of debtor and a creditor. Once accepting the bankruptcy petition, the court will appoint an administrator from the liquidation committee and debtor will be notified within five days and is required to submit financial statement to court within 15 days. The administrator will verify the claims and distribute the assets to creditors. After the final distribution is completed, the court will receive administrator’s report and decide whether to conclude the proceedings within 15 days.

SPECIAL PROVISIONS REGARDING ENTERPRISE BANKRUPTCY PROCEEDINGS DURING THE 2020 COVID-19 PANDEMIC:

In the event of creditors applying for a company’s bankruptcy proceedings due to debtor’s debt payment default as a result of the pandemic or pandemic prevention measures, the people’s court should endeavour to prevent debtor’s bankruptcy by actively facilitating debt negotiation between debtor and creditor with measures such as payment instalments, extension of credit terms, revising the contract prices.

The court should distinguish the companies under financial distress mainly due to COVID-19 from the ones already suffering from financial difficulties prior to the pandemic. For the former, the bankruptcy proceeding shall be prevented, while for the latter, the court shall let them go bankrupt.

Last updated:March 2025