Since the beginning of the year, China’s economic growth has proved to be more robust than expected. Exports have withstood US tariff attacks and household consumption has recovered thanks to government stimulus programs.
However, large clouds are casting a shadow over the picture and are likely to slow growth in the second half of the year. On the one hand, trade tensions with the United States remain high and the tech war continues, even though Beijing and Washington have agreed to extend their truce until November. On the other hand, internal structural problems remain (real estate crisis, labour market fragility, low confidence in the private sector, deflation).
Despite this gloomy backdrop, economic policy easing remains cautious. In addition, the authorities have been reviewing their priorities in recent months, expanding their initiatives to combat deflationary pressures and to reduce excess production capacity. For China's foreign trade partners, a reduction in production capacity could ease competitive pressure from Chinese goods.
However, these “anti-involution” efforts also risk penalising growth in the short term; they will need to be accompanied by increased support for private consumption in order to achieve objectives and reduce supply-demand imbalances.
Economic growth is expected to slow…
After a better-than-expected first half of 2025, growth in the manufacturing sector will slow in the second half of the year, while activity in the services sector is struggling to recover strongly.
Chinese economic growth stood at +5.3% year-on-year (y/y) in H1 2025, a faster pace than expected at the beginning of the year. In the manufacturing sector, activity strengthened (+6.6% y/y in H1 after +6% in 2024), supported by the solid performance of merchandise exports. The decline in exports to the United States, caused by the tariff shock[1], was effectively offset by an increase in sales to the rest of the world[2]. However, the momentum of the export sector could peter out in the coming quarters given the expected effects of the tariff shock on global trade and the risk of further US protectionist measures. The deterioration in the export outlook has caused (in part – see below) the recent slowdown in industrial production growth (+5.7% y/y in July) and manufacturing investment (down by 1.3% y/y in value terms in July, after a rise of +7.5% in H1).
In the services sector, growth also accelerated in H1 (+5.5% y/y after +5% in 2024). However, the recovery in domestic demand, which is supporting it, remains fragile and depends on policy stimulus measures. The recovery in household demand has been boosted by government subsidies from the consumer goods trade-in scheme but appears to have lost momentum in July (retail sales rose by 3.7% y/y in volume terms, vs. more than 5% in H1). In the real estate market, the few signs of stabilisation that appeared last winter were short-lived: home sales fell by 8.1% y/y in July (after 4.4% in H1), while property investment continues to contract and housing prices continue to decline. Household confidence is not improving, as it is still weakened by the real estate market crisis and by a job market and income trends that have deteriorated compared to the pre-COVID period. There are still major obstacles to a solid recovery in domestic demand.
… Is this worrying the authorities?
Fiscal and monetary policy support has remained moderate since the beginning of the year. This policy stance is likely to be maintained in the short term.
Monetary policy easing has remained gradual and moderate (such as interest rate cuts, liquidity injections, and easing of mortgage lending conditions). Moreover, it has faced reluctance from enterprises, households, and banks. Growth in outstanding bank loans has continued to slow, reaching a new historic low of +6.8% y/y in July (vs. +10.9% at the end of 2023). Yet, the easing of monetary conditions facilitated bond issues by local governments (whose average issuance rate has been below 2% since April, compared with 2.5% a year earlier) and supported fiscal stimulus. The fiscal strategy has mainly involved increasing investment in strategic sectors, infrastructure, and housing, providing support to exporters, and stimulating household demand.
Boosting private consumption is a priority in the economic strategy for 2025, and the authorities have introduced various support measures. The main announcements this summer include the continuation of the government subsidy programme for consumer goods and its extension to spending on services, new child allowances, and interest subsidies on consumer loans. The increase of initiatives is a positive development, but the measures taken remain modest in scope and more ambitious reforms of the social protection system are progressing slowly.
Despite persistently sluggish domestic demand and risks related to the international environment, the authorities do not currently seem to be considering any more significant easing of monetary and fiscal policy, or new measures to support the real estate sector. Meanwhile, since the beginning of the summer, they have been paying greater attention to the structural problem of deflation and “involution.”
