In China, economic growth remains resilient but the fight against deflation is far from won

Since the beginning of the year, China’s economic growth has proved to be more robust than expected. Exports have withstood US tariff attacks and household consumption has recovered thanks to government stimulus programs.

However, large clouds are casting a shadow over the picture and are likely to slow growth in the second half of the year. On the one hand, trade tensions with the United States remain high and the tech war continues, even though Beijing and Washington have agreed to extend their truce until November. On the other hand, internal structural problems remain (real estate crisis, labour market fragility, low confidence in the private sector, deflation).

Despite this gloomy backdrop, economic policy easing remains cautious. In addition, the authorities have been reviewing their priorities in recent months, expanding their initiatives to combat deflationary pressures and to reduce excess production capacity. For China's foreign trade partners, a reduction in production capacity could ease competitive pressure from Chinese goods.

However, these “anti-involution” efforts also risk penalising growth in the short term; they will need to be accompanied by increased support for private consumption in order to achieve objectives and reduce supply-demand imbalances.

Economic growth is expected to slow…

After a better-than-expected first half of 2025, growth in the manufacturing sector will slow in the second half of the year, while activity in the services sector is struggling to recover strongly.

Chinese economic growth stood at +5.3% year-on-year (y/y) in H1 2025, a faster pace than expected at the beginning of the year. In the manufacturing sector, activity strengthened (+6.6% y/y in H1 after +6% in 2024), supported by the solid performance of merchandise exports. The decline in exports to the United States, caused by the tariff shock, was effectively offset by an increase in sales to the rest of the world. However, the momentum of the export sector could peter out in the coming quarters given the expected effects of the tariff shock on global trade and the risk of further US protectionist measures. The deterioration in the export outlook has caused (in part – see below) the recent slowdown in industrial production growth (+5.7% y/y in July) and manufacturing investment (down by 1.3% y/y in value terms in July, after a rise of +7.5% in H1).

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