Beyond the headline actuals

GDP growth composition reveals mounting concerns

• China’s headline growth remains apparently on track to meet the government’s annual target. However, the composition of such growth shows concerning vulnerabilities.
• Even though China’s H1:25 GDP growth of 5.3% keeps Beijing on track to meet its stated c.5% annual target, nominal GDP growth slowed to 3.9% y/y in Q2. This is the weakest since Q4:22—highlighting persistent deflationary pressures and weak pricing power. Worse, industrial activity keeps outpacing domestic demand, implying entrenched deflationary pressures.
• The headwinds from trade tensions and higher trade barriers have not yet played out. Rather, export growth has been beating expectations every month as companies use tariff truces to ship goods ahead of deadlines that keep being deferred. Chinese exporters have been rerouting goods to third countries and gaining market share in other countries, such as across Africa. As such, one-third of economic growth so far this year has come from net exports. However, this too is vulnerable to shifting global trade dynamics.
• Further, investment momentum plummeted to 1.4% y/y in Q2. Previously robust manufacturing investment and resilient infrastructure investment has offset the contraction in real estate investment. However, manufacturing investment growth slowed to 5.1% in June, the slowest since July 2023. Then, as we saw in August last year, maintaining infrastructure investment growth is becoming ever more challenging. Infrastructure investment hit a 12-month low despite a 129% surge in government bond issuance, as funds were diverted to refinance LGFV debt. All the while, real estate investment contracted by the most since November 2022, with housing demand and land sales deteriorating further.
• Still, consumption has been holding up reasonably well, accounting for half of China’s GDP growth in H1:25, driven by big-ticket items, supported by the consumer goods trade-in programme. However, stripping out the estimated CNY600bn boost from subsidies, retail sales growth wouldn’t be 4.0% but rather just 0.8-1.7% YTD. Already, a rising cacophony of voices are calling for stronger policy interventions, such as increased funding for the trade-in programme and widening the arc of goods and services the programme targets. One can safely assume that when high base effects come into play in the final months of this year, and as economic momentum loss continues during Q3:25, these calls will become more insistent.