China’s economic policy holds line as growth weakens

China’s economy faced growing challenges in Q3 as GDP growth slowed to 4.8 percent. Regardless of mounting external pressures and persistent domestic weaknesses, growth is unlikely to miss the government’s annual target of “around 5 percent”. GDP expanded 5.2 percent in the first nine months, though key macro indicators showed a clear slowdown over the third quarter. After doling out extensive monetary and fiscal support in Q2, policymakers largely took a ‘wait and see’ stance in Q3, though pressure is building for further adjustments.

The increasingly turbulent global environment, marked by the Trump administration’s frequent tariff announcements, export controls, or hikes of port fees, has heightened the uncertainties surrounding  global trade. However, China’s leadership has remained unfazed and seems well-prepared to face US pressure, responding swiftly with targeted retaliatory measures. Beijing is leveraging its dominance in critical supply chains, such as rare earths, and its purchasing power in key commodities like soybeans. The anticipated meeting between presidents Xi Jinping and Donald Trump at the upcoming APEC Summit in South Korea will be a key test of whether further escalation in bilateral tensions can be avoided.

Despite the heightened political rhetoric, exports continue to provide a strong boost to China’s economy. So far this year, exports have risen by 6.1 percent, compared to the first nine months of 2024. China’s trade surplus in the first nine months reached 88 percent of last year’s record and is expected to surpass the 1 trillion USD mark by the end of 2025. The export surge begun in 2021, driven initially by the Covid pandemic and China’s global tech expansion, has yet to subside. However, growing discussion of voluntary export controls and international concern at widening trade imbalances suggest this momentum may soon approach its limits.

Although Chinese policymakers tend to attribute the current slowdown to the challenging external environment, it is largely driven by entrenched domestic factors. The real estate downturn and weak household consumption are the outcomes of China’s policy choices, and thus self-inflicted. The government acknowledges these challenges and has tried to counter them with new programs to support consumption, with limited impact so far. The 19-point plan to boost services consumption launched in September is the latest in a series of similar initiatives. Recent efforts focus on raising incomes through higher minimum wages and lowering social security costs, including childcare. The aim is to alleviate immediate pressure points, but a consumption-led recovery backed by large-scale government stimulus remains unlikely.

The Fourth Plenum, held October 20–23, set China’s future economic and social policy priorities, finalizing them for inclusion in next year’s 15th Five Year Plan. The renewed emphasis on strengthening consumption seeks to provide additional economic support ahead of an expected export slowdown next year. However, the focus remains on optimizing China’s technology and innovation sectors, which are seen as central to China’s long-term strategy. Rather than signaling a major policy shift, the Plenum reaffirms the leadership’s confidence in its current course, which it views as the right medium to long-term approach to navigating a period of global uncertainty.

Macroeconomics: GDP growth stays stable in volatile global environment

• China’ GDP expanded at a steady pace in Q3, in a volatile external policy environment shaped by uncertainty in relations with the US. Meanwhile, domestic challenges include overproduction and weak consumption. Even so, GDP grew by 4.8 percent in Q3, slightly lower than 5.2 percent in the June to August period, but broadly in line with expectations. Growth for the first three quarters averaged 5.2 percent, indicating the government’s 2025 growth target of around 5 percent is likely to be met.
• No sector was spared the broader slowdown in Q3, as economic headwinds intensified. Manufacturing growth continued to outperform other parts of the economy; it eased gradually to 6.3 percent year-on-year over the quarter but still outpaced the services sector (see exhibit 1).
• As in the previous quarter, the construction sector was the biggest drag on the economy, contracting yet further from 0.6 percent in Q2 to 2.3 percent in Q3. Real estate activity is persistently weak, and the government is also holding back on new infrastructure projects.