^{Photo: China Daily}

China’s economy lost momentum at the end of the year, with fourth-quarter growth slowing to its weakest pace in nearly three years as household spending underperformed expectations and the property downturn continued to weigh on investment. While full-year output still met Beijing’s official target, the underlying data highlights growing imbalances between exports, consumption, and domestic investment.

Growth slows despite meeting annual target

Data released by the National Bureau of Statistics showed that gross domestic product expanded by 4.5% year on year in the October to December period, down from 4.8% in the third quarter. This marked the slowest quarterly growth rate since early 2023, underscoring the fragile recovery in domestic demand.

On an annual basis, China’s economy grew 5% in 2025, aligning with the government’s target of around 5%. Policymakers have pointed to this outcome as evidence of resilience, particularly given persistent global uncertainty, trade tensions with the United States, and a prolonged real estate correction at home.

Consumption disappoints while factories hold up

December data painted a mixed picture of economic activity. Retail sales, a key gauge of household consumption, rose just 0.9% from a year earlier. This was below economists’ expectations of 1.2% growth and slower than November’s 1.3% increase, making it the weakest reading since late 2022. Analysts note that cautious consumer sentiment, weak income growth, and falling property prices continue to restrain spending.

In contrast, industrial output showed relative strength. Factory production climbed 5.2% year on year in December, beating forecasts for 5% growth and accelerating from 4.8% in the previous month. Manufacturing has been supported by steady external demand and government backing for high-tech and advanced industrial sectors.

Investment dragged down by property slump

Fixed-asset investment remained a major drag on growth. Investment, including infrastructure and real estate, fell 3.8% in 2025, a sharper decline than the 3% drop expected by economists. The property sector remained the weakest link, with investment in real estate development plunging 17.2% during the year, worsening from a 10.6% contraction in 2024.

The ongoing property crisis has strained developer balance sheets, reduced local government revenues, and dampened household confidence. Despite targeted support measures, analysts say a sustained recovery in the sector remains elusive.

The urban unemployment rate stood at 5.1% in December, unchanged from the previous month, suggesting limited improvement in labor market conditions.

Markets react cautiously

Financial markets responded cautiously to the data. Mainland China’s CSI 300 index initially rose about 0.6% before giving up some gains, while Hong Kong’s Hang Seng Index fell roughly 0.8%. The offshore yuan strengthened modestly to around 6.96 per dollar, its firmest level since May 2023, reflecting a combination of stable capital flows and expectations of policy support.

In an official statement, the statistics bureau said China must adopt “more proactive and effective macro policies” and continue efforts to expand domestic demand, signaling a policy focus on shoring up consumption.

Exports carry the load as imbalances grow

Exports continued to play an outsized role in supporting growth. China recorded a record trade surplus of nearly $1.2 trillion in 2025, driven by strong shipments to non-U.S. markets as exporters diversified destinations to mitigate tariff risks.

Net exports accounted for close to one-third of GDP last year, while consumption contributed about 52% of total output, according to officials. Economists warn that this reliance on external demand is not sustainable over the long term.

Analysts at several global banks note that front-loaded shipments, tighter transshipment controls, and a firmer currency have so far had a limited impact on exports. Looking ahead, some expect export growth of around 3% in 2026, though risks are skewed to the downside.

Trade headwinds remain significant. The potential expiration of the trade truce with Washington later this year, alongside renewed tariff threats under U.S. President Donald Trump, could further complicate China’s external outlook. China’s large trade surplus has also drawn criticism from major trading partners concerned about an influx of low-priced Chinese goods.

Inflation, credit, and policy response

Price pressures remain subdued despite a modest pickup in consumer inflation. Consumer prices rose 0.8% in December, the fastest pace in nearly three years, while producer prices fell 1.9%, extending a long streak of factory-gate deflation. The GDP deflator, a broad measure of economy-wide prices, has remained negative since 2023 and is expected by some economists to stay in deflationary territory through 2026.

Credit demand also weakened. New bank lending fell to 16.27 trillion yuan in 2025, the lowest level in seven years, highlighting subdued borrowing appetite among households and businesses.

In response, the People’s Bank of China has stepped up easing efforts. Recent measures include a 25-basis-point cut across several lending facilities and expanded credit quotas for priority sectors such as agriculture, technology, and private enterprises. Major investment banks now expect further policy support, including potential cuts to reserve requirements and benchmark policy rates in the coming months.

Outlook: growth intact but challenges persist

China’s economy continues to show headline stability, but the composition of growth reveals persistent structural challenges. Weak consumption, falling property investment, and deflationary pressures are forcing policymakers to rely heavily on exports and industrial production to meet growth targets.

Economists broadly agree that deeper reforms aimed at boosting household incomes, stabilizing the property market, and rebalancing growth toward domestic demand will be critical to sustaining long-term expansion and reducing vulnerability to external shocks.

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