China: After resilience comes the slowdown and more support – ABN AMRO

Q2 GDP data showed a remarkable resilience, with exports holding up despite tariff war … but recent activity data confirm domestic imbalances, and weakening growth momentum. Beijing focuses on ‘excessive competition’; additional demand support still likely, ABN AMRO's economist Arjen van Dijkhuizen reports.

More fiscal support and piecemeal monetary easing

"Considering how the second quarter started, with US-China tariffs initially skyrocketing in the post-US ‘Liberation Day’ escalation, the Chinese economy has been remarkably resilient. Quarterly growth slowed marginally to 1.1% q/q (Q1: 1.2%) and annual growth to 5.2% y/y (Q1: 5.4%). Exports held up well despite tariffs. Although US-China tensions flared up from time to time since, with the focus shifting from tariffs to chokepoints, talks in London (June) and Stockholm (July) confirmed the status quo, in line with our expectations. The tariff pause has now been extended until mid-November, and there are talks of a potential meeting between presidents Trump and Xi in late October."

"Despite this external resilience, domestic imbalances remain. Except for foreign trade, July data surprised to the downside, and pointed to weaker momentum. Retail sales slowed more than expected, with the effects of consumer subsidies fading. Particularly striking was the turnaround in fixed investment, with manufacturing investment cooling sharply and infrastructure investment showing a rare monthly contraction. Next to some specific, technical issues, the crackdown on so-called disorderly (‘involutionary’) competition seems to be a key driver."

"Beijing’s recent crackdown on excessive competition aims to fight deflation and restore corporate profitability by trying to prevent aggressive price wars in some sectors (like EVs) and to keep supply abundance in check. It remains questionable to what extent this crackdown will be effective, as the deflationary environment is in the first place a function of broad supply-demand imbalances, and previous crackdown policies haven often caused counterproductive side effects on confidence and demand. Although we have marginally raised our 2025 growth forecast (to 4.9%, from 4.7%) on resilient Q2 GDP data, we still expect (annual) growth to slow materially in 2H-2025, partly reflecting base effects from last year. All in all, we still expect c aimed at stabilising domestic demand, the key policy goal for 2025, with the July data likely adding some sense of urgency."