China growth slows to 4.9 percent

China’s National Bureau of Statistics reported that the world’s second-largest economy expanded by 4.5% year-on-year in the fourth quarter of 2025. This figure represents a slight deceleration from the 4.8% growth recorded in the third quarter, marking the slowest quarterly pace in three years. Despite the cooling year-end performance, the Chinese economy grew by 5.0% for the full year of 2025, successfully hitting Beijing’s official target of “around 5%.”

The achievement was largely driven by a record-breaking export engine that offset a persistent slump in the domestic property market and tepid consumer spending. However, some analysts believe the official narrative paints a picture that is too bright. “We think growth is weaker than official figures suggest,” said Zichun Huang, China economist at Capital Economics. According to Huang, the official numbers “overstate the pace of economic expansion” by at least 1.5 percentage points.

Divergence Between Factories and Homebuyers

The 2025 data highlights a growing split within the Chinese economy. On one side, high-tech manufacturing and exports reached historic highs; on the other, domestic demand and real estate continued to drag on the national average. Chinese manufacturers defied significant global trade tensions, including renewed US tariffs under the Trump administration, by aggressively diversifying into emerging markets in Asia, Africa, and Latin America.

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China reported a record trade surplus of $1.2 trillion in 2025, a 20% increase from the previous year. Industrial output rose 5.2% in December, led by sectors like electric vehicles, shipbuilding, and green energy technology. While factories hummed, Chinese households remained cautious. The property sector, once the primary driver of Chinese growth, showed little sign of a robust recovery. Property investment plunged 17.2% over the year, as falling home prices continued to erode household wealth. Retail sales growth slowed to just 0.9% in December, despite government subsidies designed to spur spending.

This heavy reliance on exports to drive economic expansion creates a precarious balancing act for Beijing. While record shipping volumes provide a short-term buffer against domestic weakness, they expose the country to shifting geopolitical winds and the risk of retaliatory barriers abroad. The strategy works until it doesn’t, especially if global demand softens or trade barriers rise further.

Trade Barriers Adjusted

China has been trying to mend relations with some of its trading partners to sustain this flow. Last week, Canada announced it is replacing its blanket 100% tariffs on electric vehicle imports with a more standard trade framework, lowering the tariff to 6.1%. An import quota of 49,000 would be in place, which would increase to 70,000 over a five-year period.

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Previously, the European Union and China reached a consensus to replace punitive tariffs on Chinese electric vehicles with a “price undertaking” mechanism, commonly known as a minimum price floor. This agreement aims to de-escalate a trade war that has simmered since 2024, providing a “soft landing” of sorts for both the European automotive industry and Chinese exporters. Notably, China has a massive production overcapacity that has been driving its exports.

“China is effectively pushing growth through exports at a loss, and that is not sustainable. Cutting prices may keep volumes up, but it undermines profits and, ultimately, growth,” said Alicia Garcia-Herrero, chief economist for Asia Pacific at French bank Natixis. “The fourth-quarter slowdown is the ‘tell’—suggesting China enters 2026 with fading momentum rather than a fresh upswing,” noted Charu Chanana, chief investment strategist at Saxo.

A Shift in Stimulus Strategy

To maintain growth in 2026, Beijing is expected to pivot toward more aggressive fiscal stimulus. The central government has already signaled a “proactive” stance, likely focusing on strengthening the social safety net to encourage households to trade their “precautionary savings” for active consumption. The People’s Bank of China has cut interest rates on all structural monetary policy tools by 0.25%. It has lowered the one-year relending rate from 1.5% to 1.25%, effective today.

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An additional 500 billion yuan has been allocated to relending facilities, with a dedicated 1 trillion yuan quota specifically for private small-to-medium enterprises. PBOC Deputy Governor Zou Lan signaled that there is still “ample room” for further cuts to benchmark interest rates and the Reserve Requirement Ratio later in the year. To address the persistent “real estate drag,” authorities have slashed the minimum down payment for commercial property mortgages to 30%.

Unlike the massive infrastructure packages of 2008 or 2015, the 2026 strategy is surgical. A massive 1.2 trillion yuan has been earmarked for technological innovation and industrial upgrades. Beijing is prioritizing “new productive forces” like artificial intelligence, robotics, and green energy. China’s Five-Year Plan for 2026–2030 signals a strategic pivot from initial innovation to widespread application. The Ministry of Industry and Information Technology recently released a full action plan which is designed to bridge the gap between China’s massive industrial data and the burgeoning power of AI.