China’s Q2 Economy: Growth Amid US Trade Tensions and Domestic Headwinds

China’s economy navigated a complex second quarter, officially expanding by 5.2% amidst escalating trade tensions with the United States. While Beijing’s published figures suggest a degree of resilience, a deeper analytical view reveals underlying structural challenges and prompts questions about the true pace of growth, painting a nuanced economic landscape for the world’s second-largest economy.

• China’s official Q2 2025 GDP growth was reported at 5.2%, following 5.4% in Q1, bringing first-half growth to 5.3%.
• External analysts, such as Capital Economics, expressed skepticism, citing a significant slowdown in fixed asset investments (2.8% growth in H1).
• Analysts estimate actual GDP growth was likely below 4% for April-May, with a full-year 2025 forecast around 3.5%.
• Exports surged in June by 5.8% year-over-year, significantly bolstering reported growth due to a temporary reprieve on U.S. tariffs.
• Persistent weakness in domestic demand is a critical concern, marked by a 0.1% decline in consumer prices in H1 2025.
• A crucial August 12 deadline looms for a new U.S. trade agreement, with potential tariffs up to 245% if talks fail.

Official Figures Versus Expert Scrutiny

Official data from Beijing indicated an annual growth rate of 5.2% for the second quarter, a slight moderation from the 5.4% recorded in the first quarter. This brought the overall growth for the first half of 2025 to 5.3%, seemingly keeping the economy on track with national targets. However, this optimistic outlook has been met with considerable skepticism from external analysts.

Prominent among these critical voices is Zichun Huang of Capital Economics, who highlighted inconsistencies between reported GDP and other key economic indicators. Huang pointed to sluggish fixed asset investments, which grew by only 2.8% in the first half of the year, with a particularly sharp slowdown observed by June. This disparity suggests that China’s actual GDP growth for April and May was likely below 4%, leading Capital Economics to forecast a more modest 3.5% growth for the full year 2025. Such discrepancies raise questions about the influence of political imperatives to meet annual targets on published economic figures.

Export-Driven Growth Amid Trade Tensions

Despite the broader economic complexities, robust export performance significantly bolstered China’s reported growth figures. June exports surged by 5.8% year-over-year, accelerating from a 4.8% increase in May. This notable uptick was primarily attributed to a temporary reprieve on tariffs previously imposed by the administration of President Donald Trump, which stimulated orders as trade talks resumed between the two economic giants.

Beyond the immediate relief from tariff pauses, Chinese firms have also strategically diversified their export markets and expanded offshore manufacturing operations. These proactive measures have been crucial in mitigating the ongoing impact of U.S. duties and navigating the volatile global trade landscape, underscoring a strategic shift in China’s export-oriented industries.

Persistent Domestic Headwinds

While exports provided a temporary cushion, persistent weakness in domestic demand remains a critical long-term concern for China’s economic stability. The first half of 2025 saw a 0.1% decline in consumer prices, a clear signal of internal softness and deflationary pressures. This indicates a cautious consumer sentiment and subdued internal consumption, which are vital for sustained economic expansion.

These domestic issues are further exacerbated by a confluence of structural challenges. Significant demographic shifts, including an aging population and declining birth rates, pose long-term constraints on the labor force and consumer base. Furthermore, the lingering economic aftermath of the COVID-19 pandemic continues to weigh on various sectors, compounded by a prolonged and deeply entrenched real estate crisis that affects both consumer confidence and financial stability.

Navigating Future Risks and Policy Imperatives

With Chinese leaders targeting a 5% growth rate for the year, aiming to align with the previous year’s performance, the economic outlook faces significant external risks. The recovery of exports, which has been a key driver of recent growth, remains highly vulnerable to renewed U.S. tariffs. This fragility underscores the precarious nature of China’s current economic trajectory, heavily reliant on external trade dynamics.

A crucial deadline looms on August 12 for the finalization of a new trade agreement between China and the United States. Failure to secure this accord could trigger a substantial escalation, with duties potentially soaring up to 245% on Chinese goods. Such an outcome would severely impact China’s export capabilities, disrupt global supply chains, and significantly derail the nation’s economic growth trajectory, presenting a critical challenge for Beijing’s policymakers.