US Federal Reserve Analysis Reveals the Depths of China’s Economic Problems

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Sep 20, 2025 - 09:55 Updated: Sep 20, 2025 - 09:45
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US Federal Reserve Analysis Reveals the Depths of China’s Economic Problems

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Commentary
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Economists and statisticians around the world have long harbored suspicions about the accuracy of figures coming out of Beijing’s National Bureau of Statistics. Concerns revolve around the extent of political pressure.
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So much concern has been voiced on the subject that the U.S. Federal Reserve (Fed) did a study to check the veracity of official Chinese statistics. In large part, the Fed’s analysts determined that the official data “appear to align closely with broader Chinese economic indicators and do not appear to be overstated.” Still, in their careful look at sectors of China’s economy, they ended up—perhaps inadvertently—highlighting China’s severely limited economic prospects.

For years, the chief source of suspicion about the validity of official Chinese statistics has been their smooth path over time. The Fed’s analysts noted this. For the first 20 years of this century, China’s official growth numbers showed almost no variation from one year to the next—less than one percentage point. Most countries show swings of up to 5 percentage points, some even more.

But the Fed’s team also noted that starting in the COVID-19 pandemic year 2020 and since, the variability of China’s official figures has increased to levels that are about the same as most other economies and more than many. The change has not erased suspicions of official Chinese figures, but it has reduced them considerably.

The Fed’s analysts then tested the 5 percent real growth reported for China’s real gross domestic product (GDP) in 2024 and the tracking to about 5 percent real growth targeted for this year. They did this by checking the official figures against an array of alternative measures—some from Chinese and some from other sources. From this rather elaborate procedure, they conclude that the 5 percent official figures are reasonably accurate. That is interesting.

What is more interesting and revealing is how the Fed’s analysis of various economic sectors shows a narrowing of the economy and poor growth prospects going forward.

It is hardly surprising that the Fed identifies China’s biggest economic problem as the ongoing property crisis that began to unfold in such a dramatic way in 2021 with the failure of the giant developer, Evergrande.

According to the Fed’s calculations, the crisis has already brought residential construction down 40 percent from pre-crisis highs and property sales down 70 percent. And though the pace of decline has slowed recently, the fallout from this crisis continues to hold back China’s overall pace of growth. Since at one time, residential construction constituted some 30 percent of the economy and alone contributed 1 percentage point a year to overall growth rates, the crisis, the Fed analysts noted, has created a huge hole in the economy that needs tremendous offsets to generate any growth at all, much less the 5 percent recorded in 2024 and targeted for 2025.

Fed analysts identify two areas that at least partially fill that gap: one is exports and the other is investment by the public sector. After the pandemic, Chinese exports surged. Part of the reason was that world trade had shifted decisively from services to goods, and that very much suited the Chinese economy.

The Fed calculates that Chinese exports between 2020 and 2024 rose at a more rapid rate than during any other five-year period for which these analysts had data. China’s huge balance of payments surplus during that time has the same effect from another angle.

While this export surge rescued some overall growth from the ill effects of the property crisis, Beijing generated another source of growth with heavy public investment in industry, especially productive capacity in high-technology, semiconductors, for one, quantum computing, electric vehicles, and batteries. Together, these alternative growth engines allowed China to record a 5 percent growth in 2024 and a similar pace earlier this year.

This analysis reveals much about the past, but what is even more important is its insights into China’s future challenges. Exports, for instance, can hardly remain the engine of growth they have been in the recently passed period. Sales in the United States had already begun to weaken in response to the Biden administration’s restrictions on China trade, and prospects are even poorer, given the tariffs and other restrictions imposed already and also threatened by the Trump administration.
The loss of the U.S. market alone would do much to weaken the export engine of China’s economy. Still, Europe, too, is placing tariffs and other restrictions on Chinese goods, especially electric vehicles and batteries. European businesses are pressuring national and EU leadership to become even more aggressive in this regard. Even less developed Asia has begun to show resistance to Chinese products.
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At the same time, the investment buildup that helped spur growth in the past two or three years has created so much additional productive capacity in these areas that China’s domestic economy cannot possibly absorb it. The result is a destructive deflation and an enhanced need to seek exports just at a time when the rest of the world is positioning itself against Chinese products.
The only avenue left for China, then, is the consumer. And there, reality has consistently disappointed. The real estate collapse has contributed mightily. Since some three-quarters of household wealth is tied up in real estate, declines in sales, construction, and home pricing have made Chinese households extremely cautious about spending on anything. Youth unemployment rates have further eroded confidence about the future, which impels spending cutbacks for all age groups. So far, Beijing’s efforts to stimulate consumer spending have failed.

While the Fed’s analysis indicates that recent official data have not exaggerated GDP growth, that same analysis has made clear China’s limited growth potential, if not forever, then for the foreseeable future. Beijing may deny this reality and even manipulate statistics to support that denial, but the reality is clear, nonetheless.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
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