Year of the Snake: China fights for stability in a complex world

China has entered the Year of the Wood Snake with fireworks that have shaken the global economy. The success of the small artificial intelligence startup DeepSeek—whose low-cost AI model has challenged Silicon Valley’s technological supremacy—serves as a promising harbinger after a year in which the Chinese economy was in the spotlight primarily for its struggles.

After consulting DeepSeek, we learn that those born under the sign of the Snake are characterized by a strong mindset, wisdom, and the ability to analyze situations and act effectively. It is no coincidence—or perhaps it would be more accurate to say that it is indeed a coincidence—that two of the most important leaders in the history of the People’s Republic of China, Mao Zedong and Xi Jinping, were born under this sign.

As we enter the new year, the current president will need intelligence and leadership to navigate obstacles and present to the world the image of a mature economy capable of contributing to global growth. Despite its ability to produce advanced technologies, the Chinese system is still grappling with structural problems and growing social tensions, as the moment of truth approaches in its trade confrontation with the United States.

Is China’s economic growth holding up?

As for growth, in his New Year’s speech, President Xi expressed optimism, stating that the worst is behind us and that the economy is in an expansionary phase. Supporting this narrative are positive GDP data, with a 5% expansion in 2024, in line with policy targets and above expectations.

However, behind this figure lies a more complex picture. The rebound in December, which allowed GDP to hit the target, was mainly driven by export growth, partly fueled by companies rushing to clear their inventories before the tariffs take effect. Exports accounted for 70% of 2024’s growth—not an ideal position for a country that may soon face reduced access to its main export market.

Regarding domestic demand, the best-performing sectors are those that have benefited from government subsidies. While these measures have helped sustain the economy in the short term, there is still no evidence that they have produced lasting benefits. On the contrary, some key indicators suggest that a recessionary trend remains in place. Despite billions of yuan being pumped into the system, consumer price growth continued to slow in November and December, signaling an environment of uncertainty and weak demand. Industrial production and corporate profits are also declining after the modest positive signs observed at the beginning of 2024.

In this context, the urgency with which economic policy announcements are being made reveals a certain level of concern within the government. This contrasts with the narrative of an economy on a growth trajectory, to the point that some— as often happens when discussing China—have even questioned the accuracy of the GDP data. In December, Xi himself acknowledged the challenges and urged authorities to prepare for a 2025 marked by extraordinary measures, continuing the expansionary policies of 2024.

Xi’s political agenda to support the economy

The guidelines of the plan were outlined by the Central Economic Work Conference. The committee acknowledged the weakness of domestic demand and external uncertainties, without explicitly mentioning the potential increase in U.S. tariffs. To stabilize growth, proactive policies will be needed to stimulate demand, revitalize household consumption, and encourage investment. The demand-boosting measures are focused on supporting specific supply chains in an effort to jumpstart the economy.

An increase in the issuance of special government bonds is planned to support companies in upgrading their machinery. Subsidies will be provided for the purchase of high-end, smart, and ‘green’ equipment. The renewal of fleets—including ships, trucks, and agricultural machinery—will also receive support, along with increased subsidies for replacing batteries in electric city buses.

In 2025, measures to support consumption will also be intensified through trade-in policies, which offer incentives for consumers to replace old goods with new products. In 2024, these policies were almost exclusively focused on home appliances and automobiles, yielding tangible benefits for those manufacturing sectors. The policy will be extended to other product categories, including electronic devices, as well as home renovation and furnishing products.

As expected, the Conference has committed to adopting a ‘moderately expansionary’ monetary policy, marking a shift from the ‘prudent’ approach it has maintained since 2011. This new stance mirrors that of 2008-2010, when China aggressively eased monetary policy to revive the economy following the global financial crisis.

To get a clear picture of the resources the government will deploy to finance spending and subsidies, one must wait for the National People’s Congress in March, where the fiscal targets for the new year will be unveiled. According to Reuters, it may be announced that the budget deficit will rise from 3% to 4% of GDP, providing approximately 1.3 trillion yuan in additional public spending capacity, which could reach 2 trillion if off-balance-sheet T-bill issuances are included (about 264 billion euros).

The risk of a trade dispute

This reserve would strengthen China’s position ahead of a trade dispute with the United States, a top concern for Xi. Trump has threatened a 60% tariff on imports from China, plus an additional 10% if China fails to curb fentanyl exports—a synthetic opioid responsible for tens of thousands of American deaths each year. More recently, he suggested that this second tariff could be implemented as early as February. The mere announcement has already triggered a sharp decline in the Shanghai Stock Exchange and weakened the yuan. However, the threat has been accompanied by more conciliatory messages, in which the new U.S. president has left the door open for dialogue and even expressed his desire to visit Xi during 2025.

The mixed signals from Washington have been met with optimism by Chinese government officials, but companies are preparing for the worst by shifting product inventories to their international subsidiaries to circumvent future tariffs.

Goldman Sachs economists estimate that an export tax to the United States could shave 0.7 percentage points off China’s GDP. A key side effect would be a weakening of the currency, further exacerbating the deflationary spiral.

The AI challenge

Further complicating relations is the release of DeepSeek. The development of this low-cost artificial intelligence model was indirectly aided by export restrictions on next-generation processors. Unable to rely on the expensive hardware used by Google, Meta, and OpenAI, DeepSeek’s researchers created a more efficient model, challenging the sustainability of the AI development approaches used by Silicon Valley’s giants.

This case highlights the challenges of controlling global trade and risks accelerating the deterioration of U.S.-China relations, pushing the two powers into a technological race. In recent days, leaks have emerged accusing DeepSeek of appropriating OpenAI’s models to develop its own technology. If this claim gains traction within the US administration, the trade confrontation between the superpowers could escalate.

Growing social tensions

In this complex scenario, beneath the surface of the dragon, social unrest is intensifying, manifesting in violent acts that serve as feverish indicators of a deeper malaise. In 2024, China recorded an unprecedented number of so-called ‘revenge against society’ incidents—indiscriminate attacks on innocent people that can sometimes escalate into mass killings. Perpetrators of these acts are driven by a desire for vengeance against society for perceived injustices: from a student who, after failing an exam, fatally stabs eight people at a school, to a man who runs over 35 pedestrians following a divorce.

These incidents are not unique to China, but the Party is clearly concerned about their spread, as evidenced by its efforts to censor information on what could indeed be classified as grim crime stories. Xi has directly intervened, urging local governments to implement extraordinary measures to prevent such events from proliferating further, including increased monitoring of social institutions and workplaces.

But the crackdown extends beyond curbing violent acts. Over the past year, a wave of dismissals has swept through high-ranking state and military officials, reaching even the highest echelons. Behind these purges—officially justified as anti-corruption efforts—may lie a broader attempt by the government to consolidate power within the armed forces.

Faced with these internal and external challenges, 2025 will be a pivotal year for China. The last time this lunar sign dominated the calendar was in 1965, the year when the foundations of the ‘Cultural Revolution’ began to take shape, ultimately reshaping the country’s political landscape and altering China’s history for decades to come. Though the context today is entirely different, China’s future still depends on its ability to innovate while maintaining continuity. Despite the challenges, we are confident that the country has all the necessary resources to shape its future once again, further strengthening its role as a global economic leader.