China: Growth drift and export reliance – Rabobank

Rabobank strategists highlight renewed weakness in China, with official PMI data showing both manufacturing and non-manufacturing back in contraction and domestic demand still soft. Policymakers are prioritizing faster implementation of existing measures over new stimulus. They expect China’s growth trend to drift below the authorities’ 4.5%-5.0% target range over coming years, with growth around 4.5% in 2026 and 4.2% by 2027.

Trend growth seen moving lower

"China was the weak spot. The official PMI data disappointed, with both manufacturing and non-manufacturing activity slipping back into contraction territory. Domestic demand remains soft, and the Politburo meeting offered little comfort for those hoping for a fresh round of stimulus. Instead, policymakers focused on speeding up the implementation of measures already in place."

"The broader challenge is that China still relies heavily on exports to support growth, as the cracks in the domestic economy are wide. Weak consumer demand, falling foreign direct investment, subdued business investment and persistent overcapacity in parts of the industrial sector continue to weigh on activity. Record trade surpluses may flatter headline growth, but they do not provide a sustainable foundation for the economy, let alone its relationship with other countries."

"In this report, we argue that China is likely to be pushed, at least gradually, towards a more consumption-driven growth model. That transition will not be painless. The adjustment could prove costly and disruptive, particularly if trade tensions with the rest of the world continue to intensify in the meantime. Our base case is that China's growth trend will continue to drift lower over the coming years and settle below the authorities' preferred 4.5%-5.0% range. We still expect growth of around 4.5% this year, but see it slowing to roughly 4.2% in 2027."

"As Chinese firms currently look abroad to absorb their excess production, Europe finds itself at the sharp end of the adjustment. Partly in response, the EU has rolled out a broad set of policies aimed at strengthening domestic production, reducing vulnerabilities in key supply chains and limiting exposure to external economic pressure. This report provides a non-exhaustive overview of those initiatives. Whilst there is clearly a more coherent framework emerging from Brussels, it is also fair to say that progress in implementation remains slow and uneven."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)