China Q2 GDP grows more than expected amid tariff deescalation, consumer subsidies

China's economy expanded 5.2% year-on-year in Q2 2025, slightly exceeding expectations and contributing to a 5.3% H1 growth that surpassed the government's annual target. This resilience was primarily driven by robust export demand and initial domestic spending stimulus, with limited impact from the US trade war. However, June data revealed a mixed picture, as industrial production accelerated to 6.8% year-on-year, while retail sales growth slowed to 4.8% and fixed asset investment remained sluggish at 2.8% year-on-year, indicating an uneven recovery in domestic consumption and capital spending.

Analysis

China's economy posted a resilient headline growth figure for Q2 2025, with GDP expanding 5.2% year-over-year, narrowly surpassing expectations of 5.1%. This brought first-half growth to 5.3%, comfortably above the government's 5% annual target. The outperformance was primarily driven by the external sector, as a de-escalation in the U.S. trade conflict supported robust export growth, particularly with strong demand from Europe and India. However, a deeper look at the June data reveals a significant divergence and an imbalanced recovery. Industrial production surged 6.8% YoY, far exceeding the 5.6% forecast, confirming the strength in export-oriented manufacturing. Conversely, domestic demand appears to be faltering, with retail sales growth slowing to 4.8% (missing expectations of 5.2%) and fixed asset investment remaining sluggish at 2.8% (missing the 3.6% forecast). This indicates that initial government stimulus is losing traction and that the recovery is increasingly dependent on external factors, while internal consumption and business investment are showing clear signs of weakness.

Key Decisions for Investors

• Investors should assess their China exposure, potentially overweighting export-oriented industrial companies that benefit from strong external demand while remaining cautious on consumer-facing sectors given the clear deceleration in retail sales.
• Given the economy's heavy reliance on exports, closely monitor global trade data and geopolitical developments, as any negative shift in external demand could significantly impact China's growth trajectory.
• Anticipate further policy stimulus from Beijing aimed at reviving domestic consumption and investment, as the underperformance in retail sales and fixed asset investment highlights a growing need for intervention to rebalance the economy.