China’s slowdown set to deepen as pivot to consumption stalls

BEIJING – China’s economy likely capped 2025 with its weakest quarterly growth in three years, exposing a lopsided reliance on exports over consumption that is set to extend into coming months.

After weathering US President Donald Trump’s trade war thanks to record sales outside the United States, China is set to release data on Jan 19 showing that a historic contraction in investment and faltering consumption are offsetting the momentum given by the export boom.

Gross domestic product likely gained 4.5 per cent in the fourth quarter from the same period a year prior, according to the median prediction of economists in a Bloomberg survey. That would be the lowest since the reopening from Covid-19 lockdowns.

Full-year growth is projected at 5 per cent, matching Beijing’s target. However, the nominal expansion rate could be significantly lower given entrenched deflation, which is weighing on corporate earnings and household wealth.

Consumption and investment probably remained the economy’s weak links. Retail sales growth is seen moderating to a fresh three-year low in December and fixed-asset investment is set to post its first annual contraction since official data started three decades ago. 

The expansion in industrial output, however, possibly picked up in December to the fastest since September on strong exports.

This uneven growth pattern will likely persist in 2026, buoyed by a positive outlook for exports. While Beijing has prioritised domestic spending, it is unlikely to unleash major stimulus as it continues to battle risks tied to local government debt. President Xi Jinping has also hinted at greater tolerance for slower expansion.

“We expect China’s exports to remain resilient thanks to an accelerated global economy,” Macquarie Group economists including Mr Larry Hu wrote in a note last week. “If so, the stimulus on domestic demand will remain modest and the two-speed growth pattern will persist.”

Beijing has stuck to a growth target of “around 5 per cent” for the past three years. But foreign banks, including Goldman Sachs and Standard Chartered, increasingly see the government lowering that goal to between 4.5 per cent and 5 per cent for 2026.

Standard Chartered analysts led by Ding Shuang said such a goal is consistent with China’s ambition to become a moderately developed economy by 2035 and the bank’s estimate of the nation’s sliding growth.

“Macro policies will likely remain supportive to avoid a cliff, but are unlikely to become more expansionary,” the economists wrote in a report on Jan 13. They expect the headline official budget deficit to narrow to 3.8 per cent from 4 per cent in 2025 as China moves “away from a tariff-related emergency response mode”.  

China’s central bank has signalled its intent to use mostly targeted adjustments to bolster the economy. On Jan 15, deputy governor Zou Lan of the People’s Bank of China announced a cut to the cost of its structural lending tools, while only suggesting the government has room to reduce the broader policy interest rate.

That restraint reflects a recognition that monetary easing has become less effective in supporting an economy weighed down by weak demand and structural imbalances. A years-long property slump, saturated infrastructure investment and a huge local debt overhang have forced the government to look for new growth engines. 

Beijing is betting big on tech innovation and has promised to make consumption a larger part of the economy. It also wants to expand the services sector to help rebalance growth.

However, a weak job market and falling home prices will continue to weigh on shoppers in 2026, Goldman economists wrote in a note last week. They cautioned that restructuring the economy is a long game.

“Even with strong determination and sufficient resources, transforming China’s economy into one driven by consumption and services will take years,” they said. “With a more reluctant, measured approach, it could take decades.”

Retail sales growth has slowed every month since June as funding ran dry for the government’s flagship programme to help consumers trade in old goods for new ones.

The authorities said at the end of December they were providing 62.5 billion yuan (S$11.6 billion) in initial funding for the drive in 2026, releasing the subsidies before the annual budget is reviewed by national legislators in March.

That cash will likely only cover about three months. If that pace continues, the total amount for the year may fall short of the 300 billion yuan granted in 2025, raising questions about how long the support for consumers will last.

Beijing has also vowed to stop the historic drop in investment in 2026, although it remains to be seen whether local officials will actually ramp up capital expenditure on the ground.

Mr Xi has emphasised efficiency, and the government is moving to stop cut-throat competition among companies – a campaign dubbed “anti-involution” – to curb price wars that destroy profits.

Citigroup economists expect only a “measured” policy expansion, given the strength of external demand and emerging industries. 

Writing in a note last week, they described China’s economy in 2025 as split along clear lines: Strong supply and growing new sectors contrasted with weak domestic demand and struggling legacy industries like property and coal.

“The K-shaped economy can be self-reinforcing, and it would take major catalysts to break it,” they said. “Are big catalysts approaching to break the K-shape? Not likely in our view, at least in 2026.” BLOOMBERG