26 Nov 2025
China’s economic landscape is undergoing a transformation. China’s real GDP growth is in part driven by exports, with about a third of growth coming from this sector. This represents a shift from earlier trends, where domestic consumption was the overwhelming driver of growth. The transformation has been driven by slowing domestic demand growth, while export growth remains strong despite a US contraction.
The main issue holding back consumption is the weak labour market and the high savings rate. Urban wage growth has dropped to record lows and weak employment means household income growth is likely to stay slow. At the same time, savings rate continues to remain elevated. If people start saving less, it could give a boost to consumption, but consumer confidence post covid has remained low.
As a consequence of a weak labour market, China's economic narrative has evolved from the one focused on internal consumption to the one that increasingly relies on its capacity to export goods and services to global markets.
The property market is still in a slow decline as inventories are elevated and the housing prices have not fallen as much as in other corrections such as Hong Kong, Spain, USA, etc.
For an economy like China which is facing lower growth and deflation, interest rate cuts could help stimulate the economy, but the PBOC (People’s Bank Of China) has not made a lot of interest rate changes in the past as they aim to keep the yuan closely aligned to the US dollar. Lower rates could also negatively impact bank margins potentially leading to costly bail outs. Instead of monetary easing, China has launched the anti-involution campaign, a series of administrative measures aimed at curbing excessive competition and stabilizing prices in key industries. The anti-involution campaign could lead to some degree of downturn in certain industries, but the overall macroeconomic impact so far is fairly negligeable.
On the economic policy front, China sets a real GDP target and works backwards to determine the fiscal stimulus, monetary stimulus, etc. The fiscal stimulus is substantial, with a fiscal deficit of roughly 11% of GDP and the fiscal impulse being a significant ~2% of GDP.
Demographic trends pose a long-term challenge for China and a policy focus is on reviving consumption. While the government has introduced pronatalist policies and consumer benefits to encourage higher birth rates, the scale of these measures is modest, amounting to just 0.2–0.3% of GDP.
A significant policy shift has been the reallocation of credit from real estate to the industrial sector, especially after US sanctions on leading Chinese technology firms. This has bolstered China’s export competitiveness but has also led to excess capacity.
Political stability remains a key feature of the current environment. Leadership under President is firmly entrenched and the government has shown little tolerance for dissent or policy deviation at the local level. The ongoing anti-corruption campaign has further centralized authority and increased caution among local officials, who are now more likely to wait for clear directives from Beijing before taking action. This has contributed to a more top-down approach to economic management.
Looking ahead, the signals around China’s five-year plan indicate a marginal shift towards consumption, but overall policy remains centred on support for advanced manufacturing and technology. In recent years, officials have nearly achieved all five-year plan targets; however, the latest plans have included fewer quantitative economic targets than in the past with several indicators being descriptive. While China’s growth is slowing, it’s possible that officials will return to ambitious quantitative targets for growth, though that higher growth is now associated with falling marginal productivity of capital, suggesting that simply investing more may not yield the same returns as before.
As far as the equity markets are concerned, they are currently experiencing the sixth large market rally, but like most rallies in China, it’s possible that there is limited upside from here as the rally is starting to reach historical limits. There is concern that a drain of liquidity from the system to fund industrial policy could halt the rally. However, with households’ major holdings currently in time deposits, there is potential for a shift into equities if confidence improves, which could provide some support to the market.
In summary, China’s economy stands at crossroads. The resilience of its export sector has provided a buffer against domestic weaknesses, but structural challenges remain unresolved. The coming years will test the government’s ability to adapt its policy framework to boost domestic consumption with implications not only for China but for the broader world economy.
This Article is based on insights presented by Christopher Beddor, Deputy China Research Director, Gavekal Research.
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