Mixed Q1 signals from China: Growth emerges but so do new headwind

April 02, 2025

Mixed Q1 signals from China. Trend growth persists but faces strong headwinds

Data for the first two months of 2025 suggest that the supply side of the economy remains solid and the demand side relatively weak, although there has been some improvement in retail sales. The recently concluded annual meeting of the Two Sessions set a real GDP growth target of “around 5%” for 2025, adopted an expansionary fiscal and monetary policy stance, and prioritized boosting domestic consumption. Following the Two Sessions, policymakers unveiled a Special Action Plan for Boosting Consumption. The plan largely follows the existing approach to support consumption, but it offers few new measures. Importantly, it doesn’t yet appear to be funded. 

Trusted Insights for What’s Ahead^®

• Status of China’s Economy: China's most recent economic data paints a mixed picture for the start of 2025
  Jan-Feb data show solid performance in fixed asset investment and industrial production thanks to the government's stimulus efforts that began last September. Despite a modest improvement in retail sales, consumer confidence remains very weak. The government has pledged to provide stronger fiscal and monetary policy support in 2025. However, it remains to be seen how effective this will be in expanding domestic demand given the underlying structural weaknesses that are dragging down confidence levels. A potential slowdown in export growth due to external factors also looms large as a challenge for policy makers.
• Investment Trends: Manufacturing remains robust, but property continues to contract
  Fixed asset investment (FAI) grew 4.1% y-o-y in Jan-Feb 2025, up from 3.2% in Jan-Dec 2024. Manufacturing investment remained robust (9.0% in Jan-Feb 2025 vs. 9.2% in Jan-Dec 2024) and infrastructure investment also increased (5.6% in Jan-Feb 2025 vs. 4.4% in Jan-Dec 2024). Property investment continued to contract (-9.8% in Jan-Feb 2025 vs. -10.6% in Jan-Dec 2024). Looking ahead, FAI should remain strong due to the even stronger policy support expected this year.
• Consumption Trends: Retail sales improved on holiday spending and stimulus, but confidence remains weak
  Retail sales growth picked up to 4.0% y-o-y in Jan-Feb 2025, from 3.7% in December 2024. The improvement was driven by strong spending during the Spring Festival holiday and the expansion of the consumer goods trade-in program. In the Two Sessions, the government announced that RMB 300 billion would be spent on expanding the consumer goods trade-in program for this year. 150 billion was allocated last year.
• Trade Trends: Export growth slows and potential tariff hikes cloud the 2025 outlook
  Export growth slowed to 2.3% y-o-y in Jan-Feb 2025, down from 10.7% in December 2024. This was due to the fading effects of last year’s front loading (to avoid expected US tariffs) and a high base effect compared to last year at this time. Since the new US administration assumed office on Jan 20, the US has raised tariffs to 20% on all imported Chinese goods. The potential looms large for further US tariffs on Chinese goods, including those processing in other countries enroute to final destination in the US.