China’s export boom can’t stop economy’s worst quarter in 2025
CHINA’S economy likely expanded the slowest in a year last quarter despite a boom in exports. This is a disconnect the Communist Party may move to rectify, by championing higher consumption, when it convenes for a key meeting next week.
As trade tensions escalate with the US, a weakness in investment, industrial output, and retail sales is undermining the momentum from record sales abroad.
Data due Monday (Oct 20) from the National Bureau of Statistics will show that the gross domestic product grew 4.7 per cent in the third quarter from the year before. This is based on the median estimate in a Bloomberg survey, and down from 5.2 per cent in the prior three months.
Retail sales are forecast to have expanded 3 per cent in September, and industrial output climbed 5 per cent, a pace that would be the weakest this year for both. Analysts also expect a further deterioration in property and fixed-asset investment.
The economic fragility, on display in China last quarter, will set the tone for the gathering of party officials at the so-called fourth plenum in Beijing.
The huddle will provide clues to their priorities for the roadmap for China’s development in 2026 to 2030, with governments and investors around the world calling for rebalancing the economy toward domestic consumption.
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“There is increasing consensus among the policymakers that boosting consumption is important, given tariff risks and falling investment returns in traditional sectors,” Societe Generale analysts Michelle Lam and Wei Yao said in a report.
“Introducing a consumption target will send an even stronger signal of policy determination,” they added.
Top officials already signalled a greater focus on consumption after Donald Trump’s re-election as president, ramping up spending in areas like education and employment.
Until now, they have taken relatively measured steps and stopped short of setting a specific goal.
According to World Bank data, at its current level of about 40 per cent, household consumption as a proportion of China’s GDP is lower than the global average of 56 per cent. The country is lagging even further behind a share of high-income countries, who are at almost 60 per cent.
The International Monetary Fund (IMF), which this week kept its prediction for China’s growth this year at 4.8 per cent, expects a slowdown to 4.2 per cent in 2026. This outlook is in line with the median forecasts of economists surveyed by Bloomberg.
But the IMF also warned that “China’s prospects remain weak”.
“Real estate investment continues to shrink while the economy teeters on the verge of a debt-deflation cycle,” it said.
“For China, rebalancing toward household consumption, including through fiscal measures with a greater focus on social spending and the property sector, and scaling back industrial policies, would reduce external surpluses and alleviate domestic deflationary pressures,” it said in its global economic outlook.
Investment and consumer weakness drags growth
On the surface, China’s economy has been a picture of health this year, with headline growth near the government’s target of around 5 per cent. High-tech sectors such as automaking are faring well and exports are hitting new records.
But under the hood, economic vulnerabilities are building up.
Price declines and excessive competition are eating away at company profits, at a time when consumption demand is weak, with the housing sector still slumping and investment in steep decline.
New figures scheduled for release next week will probably confirm that China has now had nine straight quarters of deflation – the longest streak of economy-wide price declines since market reforms in the late 1970s.
Behind the pressure on prices is weak consumer demand, compounded by the fallout from the housing market crash. Overcapacity in some industries has also led to a glut of production, forcing firms to cut prices to survive.
Home sales by the top 100 developers stopped falling in September, though the size of the market is tiny, compared to what it was before the government tightened credit for builders about four years ago.
New homes worth 253 billion yuan (S$50 billion) were sold in September by the largest developers, which is less than a quarter of the amount sold in September 2020, before the collapse began.
In the first nine months, fixed-asset investment is forecast to have slowed again to be unchanged from a year earlier. It has been plunging since May, despite a massive expansion in government borrowing, meant to support the spending power of local authorities.
Much of that money, however, has apparently gone toward repaying older debts, limiting the stimulatory effect on growth.
The government at all levels sold 11.5 trillion yuan worth of bonds in the first three quarters, a 60 per cent increase from last year. The broad budget deficit had blown out 42 per cent in the first eight months of the year.
Chang Shu and David Qu, Bloomberg Economists, said: “Leading indicators show softness in China’s economy extending in September. Manufacturing remained weak even as exports picked up. “Consumer spending lost vigour, evident in the first half, as subsidy support waned and the property market took another turn down. Investment appears to have stagnated.”
Government spending on infrastructure has not been enough to make up for the slump in investment in housing, and the slowdown in money going to manufacturing.
Foreign firms have also been pulling back on their spending, with inbound new foreign direct investment down almost 13 per cent in the first eight months of the year, putting the country on track for three straight years of declines.
Focus shifts to boosting consumption
One bright spot for China is foreign demand, with the goods trade balance so far this year hitting a record US$875 billion, according to data out earlier this week.
Apart from supporting the economy, the export bonanza is also giving Beijing a stronger hand in trade talks with the Trump administration, as Chinese firms have shown that they can find new markets to replace the US.
Net exports were worth 6.4 per cent of the GDP in the first half of the year, accounting for almost a third of economic growth. This is the highest level in more than a decade.
But their contribution has been receding since the fourth quarter of last year, and the IMF is warning of further risks ahead.
“It is difficult to see how the strong contribution of manufacturing exports to the country’s growth can be sustained,” the fund said in its report.
The lack of any substantial pickup in domestic demand means that consumer prices will likely continue declining this quarter, putting the government’s inflation target of 2 per cent for this year out of reach.
For all the turbulence of recent months, the economy’s strong showing in the first two quarters of this year likely means that fresh stimulus will not be high on the agenda for the party meeting next week.
The government already announced late last month a plan to offer 500 billion yuan worth of capital under the so-called quasi-fiscal “new financing policy tool”, to spur investment.
“We don’t expect fixed-asset investment growth to drop further, with infrastructure catch-up likely ongoing,” Citigroup economists including Yu Xiangrong wrote in a note earlier this month.
The latest capital injection via the financing tool “could support the numbers further towards year-end”, they said. BLOOMBERG
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