Despite China’s reported 5.2% year-on-year GDP growth in the second quarter of 2025, which slightly surpassed forecasts, the underlying economic landscape reveals significant internal vulnerabilities and mounting external pressures. This moderate expansion, a deceleration from the prior quarter, masks deep structural imbalances and an increasing reliance on targeted policy interventions rather than robust domestic demand. Beijing’s economic strategy appears increasingly complex as it navigates a prolonged deflationary cycle, a distressed real estate market, and escalating international trade tensions.
The impetus for China’s second-quarter economic performance largely stemmed from substantial government subsidies channeled into its manufacturing sector and a surge in preemptive exports. This strategic push aimed to mitigate the impact of anticipated higher tariffs from major trade partners. Exports, in particular, saw a notable 5.8% increase, partly facilitated by a reorientation of trade flows towards Southeast Asia and Europe. This re-routing became crucial after the administration of President Donald Trump initially escalated tariffs on certain Chinese goods to as high as 145% in April, before reducing them to 55% following a trade truce in May.
Domestically, China continues to grapple with its most extended period of deflation in decades, a phenomenon that erodes consumer confidence, depresses wages, and constrains corporate profit margins. While industrial production demonstrated resilience with a 6.8% rebound in June, retail sales growth slowed to 4.8%, highlighting persistent weaknesses in internal consumption. This divergence underscores the challenge of rebalancing the economy towards demand-led growth.
The urban unemployment rate remained at 5% in June, a figure expected to rise with 12.2 million new graduates entering a challenging job market. Despite consumption being a stated priority, Beijing has largely avoided direct household transfers. Instead, the government allocated approximately 300 billion yuan (about $41.8 billion USD) to consumer goods subsidies, particularly for electronics. However, the program faced implementation hurdles, with several cities suspending participation due to funding shortages, although a new round of allocations has been announced.
Real Estate and Market Dynamics
The real estate sector remains a significant drag on economic vitality. New home prices in 70 key cities experienced their worst decline in eight months, falling 0.3% in June. This trend is particularly concerning given that real estate constitutes around 70% of household wealth in China, directly impacting consumer spending and broader economic confidence. Authorities have acknowledged that current policies are proving insufficient to reverse the sector’s downturn. Concurrently, intensifying price wars across key sectors, including electric vehicles and food, are compressing corporate margins and leading to mounting losses for many businesses. The producer price index also registered its lowest level in nearly two years, further reflecting the pervasive deflationary pressures.
Externally, China faces a delicate balancing act amid ongoing trade tensions. The crucial renegotiation of the trade truce between China and the United States is scheduled before August 12. Simultaneously, relations with the European Union are strained, with the bloc criticizing China’s new export controls on critical rare earth minerals. A high-level meeting between EU and Beijing officials is slated for the current month, indicating the importance of these diplomatic and economic dialogues.
Amid these challenges, some advisors to the People’s Bank of China have proposed a substantial fiscal stimulus package of up to 1.5 trillion yuan to counter the compounding effects of tariffs and internal slowdowns. However, Beijing appears hesitant to implement drastic measures as long as official economic data maintains an appearance of stability, opting instead for more targeted and incremental interventions to steer the complex economy.
Lucas turns raw market data into actionable strategies, spotting trends in a heartbeat. With 9 years managing portfolios, he treats market volatility like a surfer riding big waves—balance and timing are everything. On weekends, Lucas hosts “Bull & Bear Banter” podcasts, showing that finance discussions can be as entertaining as they are informative.