China’s Economic Resurgence in 2025: Growth, Policy Strategy, and Trade Tensions Decoded
The Panda is watching the macro — so you don’t have to squint at GDP charts alone
Good Morning!
China’s economy is staging a robust comeback in 2025. With Q1 GDP growth hitting 5.4% — comfortably ahead of expectations — the world’s second-largest economy is once again surprising on the upside. Behind the headline numbers lies a more nuanced story: a shifting policy mix of targeted fiscal stimulus, monetary easing, and structural reforms that are powering an increasingly resilient, high-tech, and consumption-led growth model. Trade tensions and global uncertainty remain, but so too does Beijing’s determination to chart a new development path.
This piece kicks off Macro Week on Panda Perspectives — a special three-part series exploring the key dynamics driving China’s economy right now.
Today’s post offers a wide-angle macro view: growth, policy direction, trade, and where things might go next.
On Wednesday, we’ll dig into real estate — the long-awaited property review is here, and yes, it’s finally time to get serious about this sector again.
Then on Thursday, we’ll unpack the Chinese consumer — perhaps the most important and least understood pillar of China’s evolving economic story.
All three posts this week are free to read — but to get the most out of Panda Perspectives, including access to paywalled sections, data deep-dives, and full investor briefings, I encourage you to hit the subscribe button and join us for the full experience.
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Macroeconomic Momentum: China’s GDP Surges in Q1 2025
China's economy demonstrated remarkable resilience in Q1 2025, posting GDP growth of 5.4% year-over-year, exceeding market expectations of 5.1%. This stellar performance builds on the momentum established in late 2024 and signals that China's economy has successfully navigated the property market correction that weighed on growth in previous years.
The growth composition reveals an increasingly balanced economy. While investment continues to play a significant role, consumption is steadily gaining prominence as a growth driver, with retail sales growing at 4.6% year-over-year in Q1, an improvement from the 3.5% growth in the previous quarter. The services sector expanded by 5.8% in Q1, outpacing the overall economy, while high-tech manufacturing grew by an impressive 7.2%, highlighting China's successful economic upgrading and rebalancing efforts.
Looking ahead, we project full-year 2025 GDP growth of 5.0-5.2%, supported by the RMB2 trillion fiscal stimulus package announced in March, continued policy support, and improving global demand conditions. This forecast positions China as one of the fastest-growing major economies globally, with growth significantly outpacing developed markets and most emerging economies.
The sustainability of this growth trajectory is underpinned by China's strategic focus on quality over quantity, with emphasis on innovation, green development, and domestic consumption. While challenges remain, particularly in the property sector and from external trade tensions, the overall growth outlook remains decidedly positive.
Trade Tensions Rise: How Tariffs Are Reshaping China’s Export Strategy
US-China trade relations have entered a new phase of intensified competition, with recent developments indicating a significant escalation in trade tensions. The implementation of additional US tariffs on Chinese exports (up to 145%) in key sectors like electric vehicles, batteries, and semiconductors presents substantial challenges, with China responding with 125% retaliatory tariffs on US products and halting Boeing jet deliveries.
Quantitative assessments suggest the direct impact of these tariffs will be more significant than previously estimated, potentially reducing China's GDP growth by approximately 0.3-0.4 percentage points in 2025. However, this headline figure masks significant sectoral variations. While EV exports to the US may decline by 30-40%, the overall impact on China's EV industry will be cushioned by robust domestic demand and diversification to other export markets, particularly in Southeast Asia, the Middle East, and Europe. China's policy response has been measured but firm, combining diplomatic engagement, WTO challenges, and targeted support for affected industries. Recent data shows Chinese steel exports reaching their highest Q1 levels since 2016, signalling robust overseas demand and possible inventory shifts in anticipation of trade friction. This export front-loading effect may temporarily boost growth figures but raises sustainability questions as the full impact of tariffs unfolds in subsequent quarters.
The "China+1" strategy adopted by multinational corporations has paradoxically created new opportunities for Chinese companies. As labor-intensive manufacturing shifts to Vietnam, Bangladesh, and Mexico, Chinese firms are moving up the value chain, focusing on higher-value components, advanced manufacturing, and technology-intensive production. This evolution is evident in export data, with machinery and high-tech products now comprising over 60% of China's exports, up from 52% in 2020.
Inside the RMB2 Trillion Stimulus: Where the Money Is Going
The RMB2 trillion fiscal stimulus package announced in March 2025 represents a strategic shift in China's approach to economic management. Unlike previous stimulus efforts that heavily emphasised infrastructure and property, the current package is more balanced and forward-looking, with significant allocations to green energy (22%), digital infrastructure (18%), advanced manufacturing (15%), and social welfare (25%).
This composition reflects China's commitment to sustainable, high-quality growth rather than merely boosting headline GDP figures. The stimulus is expected to generate multiplier effects of 1.3-1.5x, higher than the 1.1-1.2x multipliers observed in previous rounds, due to its focus on productivity-enhancing investments and consumption support.
Recent fiscal data shows total fiscal revenue declining by 1.1% year-over-year in Q1 2025 to 6 trillion yuan ($821.54 billion), while fiscal expenditure rose by 4.2%. This widening fiscal deficit, projected to reach 4% of GDP in 2025, up from 3% in 2024, reflects mounting fiscal pressures but remains manageable given China's relatively low government debt-to-GDP ratio of approximately 60% (significantly below most developed economies). The government is likely increasing expenditure to support economic growth amid external challenges, though debt sustainability concerns are rising in the context of ongoing trade tensions.
Special bond issuance is expected to reach RMB10 trillion, providing substantial funding for strategic initiatives without compromising fiscal sustainability. Compared to previous stimulus cycles, the current approach demonstrates greater precision in targeting structural bottlenecks and emerging growth drivers. The emphasis on green technology, digital transformation, and consumption support aligns with China's long-term development goals while addressing immediate growth challenges.
Monetary Easing Ahead: PBOC Signals Supportive Policy Shift
The People's Bank of China (PBOC) is expected to implement more accommodative monetary policy in the coming months, with DFRatings (a Chinese domestic credit rating agency) signaling that both policy rate cuts and reserve requirement ratio (RRR) reductions are likely in Q2 2025. This shift toward monetary easing responds to weak credit growth and external headwinds from trade tensions.
A PBOC-affiliated publication has outlined three scenarios that could trigger further easing:
(1) external shocks like new US tariffs
(2) fiscal+monetary coordination to reduce crowd-out risk
(3) systemic instability in asset markets.
This framework provides clear guidance for future PBOC actions, emphasising a domestic-led "dual circulation" model rather than RMB depreciation or export subsidies. The 1-year Loan Prime Rate (LPR) is expected to decline to 3.15-3.35% in 2025, down from 3.55% in 2024, reducing borrowing costs for households and businesses while supporting economic activity. Premier Li has recently called for more transparent and stable communication with markets, a predictable development environment for enterprises, and better policy delivery to guide expectations, signaling a response to investor frustration over inconsistent policy signals.
Reserve Requirement Ratio (RRR) cuts have injected RMB1-2 trillion in liquidity, ensuring adequate funding for the real economy without flooding the system with excess liquidity that could fuel asset bubbles. This calibrated approach reflects the PBOC's growing sophistication in monetary management.
Credit conditions have improved markedly, with total social financing expected to grow by 9-10% in 2025, supporting both traditional and emerging sectors. The banking sector remains well-capitalized, with the average capital adequacy ratio exceeding 14%, providing a solid foundation for sustainable credit expansion.
Shadow banking activities have been effectively contained through regulatory tightening, with the share of shadow banking in total financing declining to below 15%, down from over 25% in 2017. This reduction in financial system risks enhances China's economic resilience and creates space for targeted policy easing.
RMB Stability and Capital Flows: Reading the Signals
The Chinese yuan (RMB) has exhibited notable stability in April 2025, trading within a narrow range between 7.27 and 7.35 against the U.S. dollar. This steadiness reflects China’s robust external position, supported by foreign exchange reserves exceeding $3.2 trillion and a current account surplus of approximately 1.5% of GDP.
Capital flows have been mixed. Offshore Chinese equities experienced significant volatility earlier in the month, with the Hang Seng Index dropping over 13% on April 7, marking its steepest decline since the 1997 Asian Financial Crisis. However, markets have since rebounded, aided by Beijing’s stabilization efforts, including increased equity purchases by state-owned entities.
The People’s Bank of China (PBOC) continues to pursue a strategy of managed flexibility, allowing market forces greater influence over the exchange rate while employing macro-prudential tools to mitigate excessive volatility. This approach has contributed to the RMB’s resilience amid external pressures.
Furthermore, the internationalization of the RMB is progressing. Its share in global payments has risen to approximately 3.5%, up from 2.7% in 2023. This growth is bolstered by bilateral currency swap agreements, the expansion of the Cross-Border Interbank Payment System (CIPS), and increased use of the RMB in trade settlements with Belt and Road Initiative countries.
Export Engine Still Revving Up: China’s Diversification Playbook
China's export performance has exceeded expectations in early 2025, with exports growing by approximately 5% year-over-year in Q1, defying predictions of a slowdown due to trade tensions and global economic uncertainty. This resilience reflects China's success in diversifying export markets, moving up the value chain, and leveraging its comprehensive industrial ecosystem.
Several factors have contributed to this export strength:
Supply chain diversification within Asia has often resulted in final assembly and export from China, maintaining China's central position in regional production networks.
Chinese exporters have demonstrated remarkable agility in adapting to changing market conditions, rapidly shifting focus to non-US markets, particularly in Southeast Asia, the Middle East, and Europe.
The composition of exports has continued to evolve toward higher-value products, with machinery, electronics, and high-tech goods now accounting for over 60% of total exports.
Export front-loading has been observed, with businesses accelerating shipments before the implementation of higher tariffs, as evidenced by China's Q1 steel exports reaching their highest level since 2016.
Import growth has also accelerated to approximately 5% year-over-year, driven by robust domestic demand for raw materials, components, and consumer goods. This balanced growth in both exports and imports has maintained China's trade surplus at around $650 billion, slightly below the $700 billion recorded in 2024 but still substantial.
Regional trade patterns show increasing integration with ASEAN, which has surpassed the EU as China's largest trading partner. Trade with Belt and Road countries has grown at double-digit rates, creating new markets for Chinese exports while securing critical resource imports. Recent diplomatic efforts have reinforced these relationships, with
President Xi signing 36 cooperation agreements with Vietnam and 23 bilateral agreements with Malaysia, focusing on Belt and Road initiatives and regional economic cooperation.
Manufacturing’s Comeback: High-Tech and Clean Energy Lead
Manufacturing has emerged as a bright spot in China's economy, with the manufacturing PMI consistently above 50 since February 2025, indicating expansion. Industrial production grew by approximately 7% year-over-year in Q1 2025, significantly outpacing the overall economy and highlighting the sector's role as a growth engine.
This manufacturing strength is particularly evident in high-tech and emerging sectors. Electric vehicle production increased by 25% year-over-year, solar panel output rose by 30%, and semiconductor production expanded by 15%. These growth rates underscore China's success in moving up the value chain and establishing leadership in industries of the future. A significant milestone was recently achieved with Chinese scientists at Fudan University developing an ultrafast memory chip with virtually zero standby power using antiferroelectric materials, reinforcing China's push to lead in frontier technologies.
Capacity utilization rates have improved to approximately 78%, up from 75% in 2024, indicating healthier supply-demand dynamics and creating conditions for increased private investment. Manufacturing investment grew by 8% year-over-year in Q1 2025, with private enterprises accounting for over 60% of this growth.
Fixed Asset Investment (FAI) grew by 4.5% year-over-year in Q1 2025, showing a slight deceleration from the 4.8% growth in the first two months of the year. The investment climate remains mixed, with infrastructure and manufacturing investments robust while the property sector continues to lag. Private investment growth remains subdued, reflecting cautious business sentiment amid economic uncertainties, suggesting authorities may need to implement measures to boost private investment and address sectoral imbalances.
Technology advancement and industrial upgrading continue at a rapid pace, with R&D spending by manufacturing enterprises increasing by 12% year-over-year. The integration of artificial intelligence, robotics, and advanced materials is transforming traditional manufacturing processes, enhancing productivity and competitiveness.
Inflation Outlook 2025: From Deflation Risk to Price Stability
China's inflation landscape has shifted from deflationary concerns in 2024 to a more balanced outlook in 2025. Consumer Price Index (CPI) growth is expected to range between 0.3% and 0.8% for the year, a modest but positive figure that indicates stabilizing domestic demand without creating inflationary pressures.
Food prices, which experienced significant volatility in previous years, have stabilized, contributing to overall price stability. Non-food inflation remains subdued at approximately 0.5%, reflecting the gradual nature of the consumption recovery and continued productivity improvements that help contain cost pressures.
Producer Price Index (PPI) deflation has moderated significantly, with PPI expected to range between -1.3% and 0% in 2025, compared to approximately -2% in 2024. This improvement reflects recovering industrial demand, stabilising commodity prices, and reduced overcapacity in key sectors.
The inflation outlook remains benign, creating space for continued accommodative monetary policy without risking price stability. This favourable inflation environment positions China well for sustainable growth, allowing policymakers to focus on structural reforms and quality improvements rather than managing inflation concerns.
*We will look at inflation in more detail in the consumer note later in the week.
Policy Priorities: Green Growth, Innovation, and Dual Circulation
China's economic policy framework for 2025-2026 reflects a sophisticated balance between short-term growth support and long-term structural transformation. Its always good to know the key terms and the priorities they relate to:
Innovation-driven development, with increased funding for R&D, strengthened intellectual property protection, and support for strategic emerging industries.
Green development, accelerating the transition to renewable energy, promoting energy efficiency, and developing circular economy models.
Dual circulation strategy, enhancing domestic demand while maintaining openness to international markets and investment.
Common prosperity, with expanded social safety nets, improved access to education and healthcare, and reduced regional and urban-rural disparities.
Digital transformation, building next-generation digital infrastructure and promoting the integration of digital technologies across economic sectors.
Expected policy adjustments include further targeted RRR cuts and policy rate reductions in Q2 2025, as signaled by DFRatings and PBOC-affiliated publications.
Premier Li's recent call for clearer market communication and more predictable policy delivery suggests a push toward improving credibility and forward guidance. The reform agenda continues to advance, with market-oriented reforms in factor markets (land, labor, capital) and state-owned enterprise governance.
China has also indicated conditional openness to resuming trade talks with the US, demanding a designated negotiator backed by Trump, curbs on anti-China rhetoric, and willingness to address issues like sanctions and Taiwan. This represents a conditional opening for diplomacy, though Beijing is clearly asserting the need for a more respectful and predictable US stance before meaningful negotiations can proceed.
Investment Opportunities: Where to Focus Amid Volatility
The evolving economic landscape creates distinct investment opportunities across sectors:
Green technology and renewable energy companies are positioned for strong growth, supported by policy incentives, technological advancement, and growing domestic and international demand.
Advanced manufacturing, particularly in automation, new materials, and high-end equipment, offers attractive prospects as China accelerates industrial upgrading.
Consumer discretionary sectors catering to the growing middle class, especially in healthcare, education, culture, and tourism, present long-term growth potential.
Digital economy leaders in areas such as artificial intelligence, cloud computing, and industrial internet stand to benefit from China's digital transformation push.
Financial services firms, particularly those focused on wealth management, green finance, and fintech, are well-positioned to capitalise on financial system reforms and expanding middle-class wealth.
Recent market performance has been mixed, with significant volatility observed across Chinese equity markets. Offshore Chinese equities have underperformed, with the
Market Volatility and Investment Strategy: Reading Between the Lines
Chinese equity markets remain under pressure in April 2025, with investor sentiment caught between improving macro data and lingering concerns about policy clarity and global tensions. Offshore markets have been hit hardest: the Hang Seng Index and HSCEI ETF have extended their recent downtrends, reflecting persistent foreign selling, geopolitical jitters, and a rotation out of high-beta Chinese names.
Onshore markets have proven more resilient but not immune. The Shanghai Composite and CSI 300 have posted modest declines since the start of the month, weighed down by weak private investment and a cautious outlook in the property sector. Growth-heavy indices like ChiNext have also come under renewed pressure, signaling waning enthusiasm for speculative names amid tighter liquidity and shifting investor preferences.
This divergence between offshore and onshore performance reflects more than just technicals — it underscores deeper tensions around capital flows, confidence, and the recalibration of risk. At the same time, it highlights an important dynamic for investors: while headline indices may struggle, opportunities remain within favored policy-aligned sectors such as green technology, advanced manufacturing, and consumer services — areas where government support, demand tailwinds, and structural reform are converging.
Panda Perspective: Navigating Opportunity in a Rebalancing China
China’s economy has shown impressive resilience and adaptability in early 2025. The Q1 GDP print of 5.4% exceeded expectations, and retail sales grew at 4.6% — a clear sign of momentum powered by industrial strength, policy support, and preemptive export activity ahead of tariff hikes.
But this momentum is not without its challenges. Trade tensions with the U.S. have escalated meaningfully, with tariffs reaching 145% on some Chinese goods. China has responded with its own countermeasures, including 125% retaliatory tariffs and the suspension of Boeing jet deliveries. These moves are reshaping the external landscape and could weigh on growth in the second half.
Despite this, the domestic policy environment remains constructive. Fiscal stimulus is flowing, and monetary easing is widely expected in Q2, including policy rate and reserve requirement ratio cuts. However, market volatility has increased, and the divergence between onshore and offshore equity markets is a reminder that confidence is fragile and capital selective.
Looking forward, China’s economic trajectory will hinge on its ability to navigate external shocks while staying committed to internal rebalancing. The pivot toward innovation, green development, and domestic consumption offers a durable framework for sustainable growth — but execution matters, and volatility is likely to remain a feature, not a bug.
For investors, the message is clear: selectivity is essential. Those who align with policy-supported sectors and take a long-term view stand the best chance of capturing attractive risk-adjusted returns in what remains one of the most dynamic and consequential markets in the world.