China’s growth likely to beat target, cutting need for more stimulus

China's economy expanded 5.1% year-on-year in the second quarter of 2025, according to economists surveyed by Bloomberg—a performance that places first-half growth at 5.3%, above Beijing’s official annual target of “around 5%.” On paper, this is good news. It suggests that earlier fiscal support and a short-lived export boom were enough to keep the recovery narrative intact—at least for now.

But this headline hides more than it reveals. A closer look at the underlying drivers shows an economy still struggling with uneven demand, persistent industrial deflation, and deep stress in the property sector. What appears as momentum may actually be fragility in disguise.

The single biggest tailwind came from exports, which rebounded sharply following a temporary trade truce with the United States in mid-May. The deal cut tariffs on Chinese goods to 55% from a previous high of 145%, triggering a surge in shipments to American buyers looking to front-load purchases ahead of the truce’s expiration in August.

That gave industrial output a lift. But the nature of this surge is transactional, not transformative. The export gains are time-bound and unlikely to sustain into Q3 unless the trade truce is extended. Citigroup analysts correctly describe the policy climate as “wait-and-see,” with limited urgency to inject new stimulus just yet. The risk, however, is that this window may close faster than expected.

This moderate growth beat gives the People’s Bank of China (PBOC) room to hold off on large-scale monetary easing. Its June policy committee statement dropped earlier pledges to inject liquidity, replacing them with language emphasizing “flexible calibration.”

This doesn’t mean stimulus is off the table—only that the central bank is pacing itself. Economists from Nomura and Citi still forecast modest easing by year-end, including a 10-basis-point cut in policy rates and a 50-basis-point reduction in banks’ reserve requirement ratios. But any action is likely to be incremental, not sweeping.

The current posture prioritizes policy space over stimulus velocity—a sign that Beijing is aware of global volatility, and perhaps reserving firepower in case US-China trade tensions resurface.

Consumer spending, which Beijing has long sought to turn into a key growth engine, showed signs of fatigue. Retail sales growth in June likely fell to 5.2%, down from 6.4% in May. While this brings first-half consumption in line with GDP, the pullback is worrying given the scale of existing fiscal support. Part of the slowdown may be explained by the early start of JD.com’s mid-year shopping festival, which brought forward purchases into May. Some provinces also paused subsidy schemes in June, temporarily reducing demand for big-ticket items like electronics and autos.

But beyond these technicalities lies a bigger issue: household confidence remains low. Job insecurity, high youth unemployment, and weak property prices continue to depress consumer sentiment. Households appear more inclined to save than to spend, which constrains the kind of rebalancing Beijing hopes to achieve.

Industrial production is expected to have risen 5.6% in June, extending the manufacturing recovery sparked by stronger foreign demand. Yet profits tell a different story. Output is up—but earnings aren’t. Profits at industrial firms fell 1.1% in the first five months of 2025, a clear sign that overcapacity and price pressures are eating into margins. This is consistent with the return of deflationary trends in producer prices and underscores the structural challenges facing Chinese manufacturers.

The government's renewed emphasis on curbing “involution”—a term referring to the kind of zero-sum price competition that erodes value—signals recognition that productivity, not volume, needs to drive the next phase of industrial development. Still, the path to healthier margins will likely involve painful consolidation.

Fixed-asset investment grew at an estimated 3.6% in the first half of the year. But within that figure lies a sharp 10.9% drop in real estate investment—the steepest decline since the pandemic began. Developers remain under financial strain, and homebuyer confidence has yet to recover.

Rumors of a top-level government meeting aimed at stabilizing the housing market have sparked rallies in developer stocks. But hopes for a policy rescue may be misplaced. Beijing remains cautious about reversing the deleveraging efforts that began in 2020 under the “three red lines” policy. The dilemma is clear: restore confidence without reinflating the bubble.

Unless authorities introduce targeted support that encourages real demand—such as lowering down payment requirements or offering mortgage rate subsidies—recovery in this sector is likely to remain elusive.

China’s Q2 2025 GDP growth beat buys Beijing time, but doesn’t resolve its biggest challenges. The economy remains heavily reliant on policy interventions and external demand. Domestic consumption and property—historical pillars of growth—are not yet on stable footing.

The government’s cautious tone on monetary easing reflects a deeper strategy shift: moving from reactive stimulus to structural patience. But patience has limits. Without more decisive action on household income, social safety nets, and property reform, second-half growth risks fading. The headline growth number may satisfy annual targets. But it doesn’t signal escape velocity. It signals managed fragility.