MNI: China's GDP Faces H2 Growth Challenges

China’s economy will face headwinds in the second half as export demand weakens and property remains subdued, policy advisors and economists told MNI, calling for stronger measures to stimulate domestic demand and stabilise prices.

Q2 GDP is expected to grow by 5.3% y/y, said Liang Jing, director at the Bank of China Research Institute, noting this would bring H1 growth to 5.4% – a solid foundation to meet Beijing’s around 5% full-year target. However, growth pressure is expected to rise in H2, with GDP projected at 5% in Q3 and 4.6% in Q4.

Liang expects exports to decline 2% y/y in Q3 – the first quarterly contraction since December 2023 – and real-estate development investment to fall 10.8% in 2025, a sharper drop than last year. Both represent key GDP challenges, she said.

Official Q2 GDP data will print on July 15, following Q1's 5.4% y/y increase. China’s GDP deflator remained negative y/y for the eighth straight quarter through Q1, while CPI edged up 0.1% y/y in June after four consecutive months of decline, and PPI fell 3.6%, the sharpest drop in two years.

Weak price pressure remains a major concern, Liang continued, noting subdued demand is driving the trend, limiting business expansion and weighing on household income and consumption. (See MNI: Tariffs, Weak Demand To Drive Moderate PBOC Easing In H2)

Teng Tai, director of WANB New Economy Research Institute, called for further monetary easing to combat deflation in the short term. Over the medium to long term, he argued, China may inevitably need to adopt zero or even negative interest rates – drawing on overseas experience – to emerge completely from deflation. Whether China’s monetary policy should swiftly shift toward zero or negative interest rates will be a key test of its ability to overcome deflation in a timely manner, he said, citing a sharp decline in average returns on investment across the economy.

EXPORT VOLATILITY

Falling global demand through the rest of the 2025 poses a greater risk to China’s exports than U.S. tariffs, which are expected to remain at the 30% level imposed earlier this year, most of the advisors told MNI.

Global trade and investment tensions are likely to persist, increasing downward pressure on the global economy, said Liang, adding U.S. tariff policies remain uncertain. A high comparison base in H2 and earlier front-loading of shipments could further disrupt exports, she noted.

According to Yuan Haixia, director of China Chengxin International Credit Rating’s Research Institute, net exports contributed 39.5% to GDP growth in Q1 – a near 25-year high. Chinese firms front-loaded USD24 billion in exports in H1, or about 4.5% of last year’s U.S. total, she estimated. But with front-loading waning and transshipments disrupted, pressure on exports is mounting. The machinery and electronics sector, including parts and components, may be particularly hard-hit, she added.

Future China-U.S. trade relations will hinge on the implementation of the Geneva agreements, she argued, noting Beijing’s leverage in key materials such as rare earths. While U.S. President Donald Trump faces domestic constraints that may limit further tariffs, the possibility of worsening trade tensions cannot be ruled out, she said.

POLICY SUPPORT

Authorities will continue to accelerate infrastructure rollout as a key growth driver, issuing about 60% of the CNY4.4 trillion in new special-purpose government bonds in H2 to ensure ample funding support, Liang predicted. (See MNI: PBOC Seen Resuming Bond Purchases As Gov't Issuance Rises)

Yuan sees room for at least one reserve requirement ratio (RRR) and interest-rate cut this year and more targeted support for trade, innovation, housing, and employment with authorities likely to introduce an additional CNY1 trillion in fiscal funding. The central government should accelerate its purchases of commercial housing, funded by government or special-purpose treasury bonds, she argued.

However, with the China-U.S. standoff likely to persist for 3-5 years or longer, policy should focus on building buffers over relying on aggressive short-term stimulus, she warned.

Teng called for increased consumer subsidies to lift household spending, warning that the marginal effect of key goods like automobiles and electronics is beginning to diminish and he stressed the importance of maintaining stable equity markets. Accommodative monetary policy must ensure ample liquidity to support confidence and private investment, he concluded.