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Chinese people around the world have just celebrated lunar new year, which this year has run from January 28 to February 4. It is the biggest festival of the year in China, signalling the start of spring, and this is the year of the wood snake. According to Chinese astrology, the characteristics of the snake – renewal, potential, opportunity and wisdom – will affect the year ahead.
As we start the new lunar year, it feels like a good time to look ahead to look at the prospects for the Chinese economy through the prism of these characteristics.
Renewal of traditional economic drivers
China dominates global manufacturing – its manufacturing production is as large as the next seven largest competitors combined. This has earned China the title of the world’s manufacturing superpower – but it has come at a cost. The latest data shows that China is among the top 20 most polluted countries across the world.
Therefore, it’s likely that over the next 12 months, there will be a continued drive towards the renewal, or upgrading, of traditional industrial sectors that have historically driven growth in China but are also heavy polluters.
This is part of a broader push by China to improve its climate footprint and reduce emissions. These are goals outlined in the national climate action plan, referred to by the Paris climate agreement as the nationally determined contributions.
Potential for a surge into AI
China has identified the potential for adopting AI, robotics and 3D printing in transforming its manufacturing base. Meanwhile, the country’s next generation AI development plan sets out clear objectives to make AI the main driver of Chinese economic change and industrial development. Expect to see more progress towards this goal in 2025.
China’s machine-learning sector has experienced considerable growth, and is predicted to grow by an average of 34.8% a year over the next five years. While the US is the major competitor and commands the largest market size, the recent release of the R1 chatbot by DeepSeek has created a stir.
DeepSeek claims to have developed its latest R1 model at a cost of around US$6 million (£4.8 million), which is considerably less than its US competitors such as Open AI’s ChatGPT-4, which is reported to have cost more than US$100 million. It’s an indication of the strength of innovation which underlines the potential growth of China’s AI sector, and is likely to help narrow the gap with the US.
Opportunities for foreign investment
In addition to upgrading traditional industries, we can expect to see opportunities around new areas of growth in advanced technology sectors such as fintech and green tech. China will continue shifting its focus to industries in which its firms can add lots of value, such as in technology-related manufacturing.
Major investment is needed to fund these industries and two major changes have occurred in recent months, recognising that this cannot come only from domestic sources.
First, the changes to China’s A-share market, which went into effect in December 2024, will make it easier for a wider range of overseas investors to enter. For example, smaller amounts of capital are required, and foreign capital can now come from unlisted companies.
Second, in November 2024, China opened up its manufacturing sector to foreign capital by removing all access restrictions.
Over the next year, we can expect to see these changes increase the amount of foreign capital in China, and help realise these new areas of growth.
The wisdom of opening up
China continues to see the wisdom of opening its economy in terms of investment – and therefore that it is critically important to remain well-connected to the rest of the world.
The geopolitical tensions with the US are a challenge: the US president, Donald Trump, has said he will impose tariffs of 10% on imports from China. But on a more positive note, breaking protocol last month, Chinese vice-president Han Zheng was invited to, and attended, Trump’s inauguration ceremony.
It’s an indication of the current US administration’s view of the importance of America’s relationship with China.
The year ahead is also likely to bring opportunities for the UK to continue its efforts to reset its relationship with China. During the recent visit to Beijing by the chancellor of the exchequer, Rachel Reeves, there was a discussion of a “stable and balanced UK-China relationship”.
Few expect, or desire, a return to the “golden era” rhetoric of the likes of former UK chancellor George Osborne, who in a speech at the Shanghai Stock Exchange in September 2015 called for Britain and China to work together to ensure mutual prosperity: “Let’s stick together to make Britain China’s best partner in the west. Let’s stick together and create a golden decade for both of our countries.”
However, greater dialogue with China may be possible, while at the same time carefully managing the UK’s relationship with the new US administration.
China watchers will be keeping their eyes peeled for other economic developments over the year ahead – for example, the progress of Chinese fiscal reforms and their impact on local and regional finances and income distribution. Also, there is the matter of the real estate market. After significant falls in housing sales and investment during 2024, house prices are showing signs of stabilising.
China’s economy will face challenges in the year ahead. But there are also some clear opportunities for this manufacturing giant, particularly in the tech sector as it starts to narrow the gap with the US.
Karen Jackson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
