The beginning of the year was relatively good for the Chinese economy – in the first quarter of 2025, GDP growth remained at the level of the fourth quarter of 2024 and amounted to 5.4% (YoY), exceeding market expectations (5.1%).
The analysis of the current situation in China is presented by Finam analysts.
Retail sales growth accelerated in March to 5.9% (YoY) (the highest since December last year) after rising 4.0% in January-February, while industrial production growth accelerated to 7.7% (the highest since June 2021) from 5.9% in the first two months. In March, China sharply accelerated export growth (12.4% YoY), apparently reacting to the outbreak of the tariff war launched by the United States. However, the housing market remains vulnerable - real estate investment fell by 9.9% (YoY) in the first three months. Deflation is also considered an indicator of weakened consumer demand.
However, several rounds of tariff increases by the United States, as a result of which duties for China were increased to 145% (exceptions were established for a number of electronics products and the tariff rate is still 20%), threatens to reduce exports from China to the United States by tens of percent. On the other hand, China has also imposed a three-digit 125% tariff on American imports, and in April, according to media reports, it has "quietly" withdrawn some of its products.
Due to the complex production chains, the high duties of the United States and China deal a "double shot" to international business. As reported in the Financial Times, foreign companies operating in China were at risk of being hit by trade duties twice — once when importing materials from the United States, and the second time when exporting finished products to the United States.
Against this background, the growth forecasts of the Chinese economy are being revised downwards. The IMF lowered the forecast of China's economic growth for 2025 to 4.0% (-0.6 percentage points compared to the January forecast) and for 2026 also to 4% (-0.5 percentage points compared to the January forecast). Meanwhile, the Chinese authorities have set the GDP growth target for this year at 5%, the same as last year.
Statements by the top authorities of the United States give some hope. So, US President Trump admitted that the 145% duty imposed by him was too high, promising to reduce them and achieve a trade agreement with Beijing. U.S. Treasury Secretary S. Bessant said that the United States has the opportunity to conclude a large-scale trade agreement with China. However, China has so far, at least officially, shown no signs of taking the first step towards starting negotiations. According to the Chinese side, the United States should show "respect" towards China.
The Chinese authorities are actively looking for ways to offset external pressure by stimulating domestic demand and diversifying international trade. Back in March, at the session of the National People's Congress, the following guidelines were adopted: The budget deficit is planned to be about 4% of GDP, which is the highest value in 3 decades. Previously, the planned budget deficit was 3% of GDP. Now the country's authorities intends to "adhere to a more proactive fiscal policy" to stimulate economic growth. It is also planned to place special bonds of local authorities in the amount of 4.4 trillion RMB (3.9 trillion RMB in 2024) for investments in infrastructure and other industries. It is also planned to place special government super-long bonds worth 1.3 trillion RMB (2024: 1 trillion RMB), with 300 billion RMB (2024: 150 billion RMB) of the total amount going to subsidize consumer spending through the newly expanded trade-in scheme (for electric vehicles, household appliances and other goods). The trade-in range has been expanded to increase spending on expensive consumer goods. Separately, Beijing plans to raise 500 billion RMB to recapitalize large state-owned banks.
The Chinese authorities promise to prepare an emergency plan to protect the economy from increasing external shocks amid the escalation of the trade dispute with the United States. At a recent government meeting, it was said that the authorities intend to develop new monetary policy instruments and financial mechanisms to support the technology sector, consumer spending and trade. There is a need for greater liquidity release in the banking sector "if necessary" and "careful timing" to reduce interest rates. The head of the People's Bank of China, Pan Gongsheng, recently said that China would adhere to a moderately soft monetary policy to support the country's economy.
We expect China's economy to grow by 4-4.5% this year. We hope for some resolution of the tariff disputes between the United States and China. Sectors of the Chinese economy such as agriculture, defense (another 7.2% increase in spending is planned), AI (Chinese developer AI DeepSeek has introduced a product with capabilities comparable to leading American technology leaders, but on less powerful chips and with a cost multiple lower), domestic consumption may be more resistant to tariffs.
