China’s economy slows despite 5% growth aim
China’s economy experienced a decline in momentum last quarter, despite achieving the government’s target for 2025. This marks yet another year of uneven growth that may prove difficult to maintain in a global environment characterized by protectionism. Despite industrial production performing strongly in December, retail sales and investment declined more than anticipated. The world’s second-largest economy expanded 4.5 per cent last quarter from a year earlier, marking the slowest pace since the reopening from Covid lockdowns in late 2022. For the full year, gross domestic product rose 5 per cent, according to data. This figure confirms an estimate provided by President Xi Jinping in a speech on New Year’s Eve and aligns with the anticipated expansion in 2024. Chinese onshore stocks experienced a modest increase after the data release, whereas government bonds and the yuan remained relatively stable. “Despite achieving the 5 per cent growth target, China’s economy actually posted weaker on-year growth one quarter after another in 2025, which shows domestic demand is still weak,” said Larry Hu. “The most important thing is not the headline growth, but whether China can break away from the current two-speed growth.”
Consumer spending and business investment continue to lag, as a lackluster jobs market and declining home prices exert pressure on domestic demand. As China faced increasing trade barriers globally, its manufacturing advantage and the strength of exporters have supported factories, maintaining industrial output growth at over 5 percent for the majority of the previous year. “Net exports contributed a third of economic growth in 2025,” Kang Yi said at a briefing. According to official data, that marks the highest level since 1997, when their share was 42 percent. The uneven growth pattern is expected to continue into 2026. Although Beijing demonstrates an increased readiness to assist consumers, it is improbable that it will implement extensive stimulus measures as it continues to confront the challenges associated with local government debt. “China’s latest data point to a rapid deceleration in domestic demand at year-end — a development that deserves more attention than the economy meeting its annual growth target.” Production has been maintained, likely indicating robust exports. In contrast, the weakness in domestic demand is evident, as consumption continues to slow and investment experiences a more significant contraction. Policymakers now face the significant challenge of achieving the objective of transforming China into a moderately developed economy by 2035, necessitating an average growth rate of 4.17 percent over the forthcoming decade. The first quarter of 2026 may present significant challenges, considering the elevated baseline established by the economy’s swift growth a year prior, driven by export front-loading and consumer subsidies. “The Chinese economy withstood multiple pressures and maintained steady progress in 2025,” stated. However, “the impact of the external environment is deepening, and the imbalance between strong domestic supply and weak demand is prominent.” The economy continues to grapple with numerous longstanding issues and emerging obstacles.”
Following months of tariff turmoil, China has come out justified regarding the resilience of its export-driven economy, which navigated Donald Trump’s trade war by increasing shipments beyond the US borders. A record $1.2 trillion goods trade surplus has granted top officials the opportunity to address vulnerabilities that encompass deflationary pressures, a persistent housing crisis, and demographic setbacks. In 2025, nominal economic growth, unadjusted for price changes, reached 4 per cent, marking the slowest rate since 1976, excluding the pandemic year of 2020. The nation’s population has declined for the fourth consecutive year, as the number of babies born in 2025 fell to a historic low of under 8 million, marking the lowest birth rate since 1949.
During periods of sluggish price increases, nominal expansion serves as a more valuable indicator as it more accurately captures shifts in wages, profits, and government revenue. Wage growth, a key element of household disposable income, decelerated to 5.3 percent in the fourth quarter compared to the same period last year, marking the slowest rate since the beginning of 2023. Deflation has persisted for three consecutive years — a record duration since China initiated its transition to a market economy in the late 1970s. With the exception of Japan, no other significant economy has faced such extended price drops since the conclusion of World War II. China’s leadership has committed to “significantly” increasing the share of consumption in its economy in the upcoming five-year plan, set to take effect in 2026, while maintaining a focus on technology and manufacturing as the primary priorities. Beijing has pledged to halt the significant decline in investment this year, yet it remains uncertain if local officials will genuinely increase capital expenditure in practice. Xi has underscored the importance of efficiency, and the government is taking steps to eliminate cutthroat competition among companies — a campaign referred to as “anti-involution” — aimed at curbing price wars that diminish profits.
Beijing has maintained a growth target of “around 5 per cent” for the past three years. However, global banks such as Goldman Sachs Group Inc. and Standard Chartered Plc are increasingly anticipating that the government will reduce that target to a range of 4.5 percent to 5 percent for 2026. “Consumption will likely remain the laggard, with the magnitude of property easing still hanging in the air,” stated Michelle Lam. Last year, domestic demand remained subdued, particularly when excluding the impact of the government’s 300 billion-yuan ($43 billion) subsidies aimed at household purchases of consumer goods. Investment contracted in December at the fastest rate observed last year, despite some modest stimulus introduced late in 2025, according to Jacqueline Rong. “While the room for fiscal stimulus this year is more limited than in 2025, monetary easing could play a more active role than last year given the downward pressure on the economy and the property downturn,” she said, forecasting cuts in interest rates and banks’ reserve requirement as early as in March. “It’s clear that domestic demand has remained extremely weak, while exports are unusually strong,” Rong stated.
