Our 2025 Outlook for China’s Economy

Under the baseline, we expect China's GDP growth to slow to 4.0% in 2025 and 3.0% in 2026, with the assumption that the US hikes tariffs on China’s exports starting in September 2025 and China would increase policy support in response. Net exports will likely still contribute positively to GDP growth in 2025, but we expect exports to fall sharply in 2026, bearing down on manufacturing capex and prices. We expect additional fiscal expansion in 2025-26 to help alleviate local government financial challenges, support infrastructure investment, and help to stabilize the property market. Nevertheless, we expect CPI inflation to weaken to 0.1% in 2025 and -0.2% in 2026 along with a weaker growth. 

Our base case assumes a 60% tariff hike on about three quarters of US imports from China, announced in Q1 2025 but implemented in stages between Q3 2025 and Q2 2026, although there is considerable uncertainty on the time, scale and magnitude of actual tariff increases. We assume only limited retaliation from China on targeted US products, and no blanket US tariff hikes on imports from the world. While China’s exports decline should be most acute in 2026, we think corporate capex will likely weaken notably already in 2025. Even after considering potential trade triangulation and supply chain shifts, we estimate the negative drag on GDP growth to be over 150 bps.

We expect China will intensify policy support in 2025-26 to boost domestic demand. Specifically, we foresee the broad augmented fiscal deficit to expand by 2ppts of GDP in 2025, including the budget deficit expanding to 3.5-4% of GDP, special treasury issuance raised to RMB 2 trillion, and special LGB raised to RMB 4.5 trillion. We also expect interest rates to be cut by 30-40bps in 2025 and 20-30bps in 2026, and faster implementation of property support measures. We think a tariff shock may trigger bigger support to household consumption, as well as more structural reforms. We expect the RMB to depreciate further (USDCNY at 7.6 at end 2025) but do not envisage the active use of currency depreciation as a macro policy tool.

The supportive property measures since end September will likely help facilitate the stabilization of property sales and prices. However, that will take time and the expected US tariff hike would bring fresh downward pressure. We now expect property sales to stabilize in H1 2026 and starts in mid- 2026, with declines narrowing to 5-10% and 10- 15%, respectively in 2025, and markets in tier 1 cities to stabilize earlier. The speed of the government’s property inventory destocking program and any additional policy measures may affect our baseline forecasts, as will changes in market sentiment. We still do not expect a serious credit crunch or typical financial crisis. 

The timing and magnitude of US tariff hikes may be different from our assumption, as well as the timing and size of China’s policy support. Tighter US tech restrictions and more aggressive decoupling measures could lead to further downside risk. Faster implementation of structural measures and reforms in China would boost domestic confidence and the economy. In addition, property market sentiment is also hard to predict in such an unprecedented downturn.