China's economy in recent years has shown a recurring “U-shaped” pattern: strong momentum in Q1, softening in Q2, deeper pressure in Q3, and recovery in Q4. The cycle reflects the interplay between early policy stimuli, domestic fragility, and mounting global headwinds.

In H1 2025, China posted stable growth, with Q1 GDP up 5.4% and Q2 likely above 5%, despite rising tariffs from the US and lingering property weakness. But pressures are intensifying in H2, with key risks emerging across five fronts: waning stimulus effects, housing drag, tight fiscal space, weak pricing power, and geopolitical headwinds.

H1 growth was fueled by policy front-loading, trade-in incentives, infrastructure spending, and strong manufacturing investment tied to industrial upgrades. Fiscal support remained proactive, with faster bond issuance and expanded expenditure outpacing revenue. Consumer activity also rebounded, driven by appliance and electronics subsidies.

Externally, exports held up due to front-loading ahead of tariffs and transshipment flows. Yet, this resilience masks rising frictions: the US has tightened scrutiny on Chinese goods routed through Southeast Asia and Mexico, signaling broader decoupling efforts.

Despite early gains, the recovery’s base is fragile:

1. Stimulus Fatigue: Trade-in campaigns drove durable goods consumption but risk front-loading demand. Household sentiment remains cautious amid job insecurity, pay cuts, and falling property values.

2. Real Estate Drag: The sector remains a key overhang. Home prices continue to decline in major cities; developers are under pressure, and secondary listings have surged. The adjustment affects household wealth, local revenue, and broader investment sentiment.

3. Local Fiscal Stress: Front-loaded spending in H1 has narrowed maneuvering room. With local governments responsible for 86% of public spending, their capacity to act will shape the breadth of recovery.

4. Persistent Disinflation: In June, CPI rose just 0.1%, while PPI fell 3.6%, marking a 33-month slide. Price weakness erodes corporate margins, suppresses household income, and weighs on tax revenues—widening the gap between macro stability and micro strain.

5. External Uncertainty: The tariff war continues to evolve, and global demand remains fragile. US-led reshoring and trade realignment could dent China's export recovery. Other nations may follow Washington's lead in erecting barriers.

China faces a narrowing window to deliver both near-term stabilization and long-term transformation. Policymakers are likely to avoid excessive monetary expansion, instead pursuing a targeted, multi-pronged strategy:

1. Fiscal Policy: Targeted Expansion

• More special local government bonds and improved fiscal efficiency;

• Temporary tax and fee relief for businesses;

• Prioritized spending on livelihoods, infrastructure, and major national projects.

2. Monetary Policy: Precision over Volume

• RRR cuts and structural tools like re-lending and rediscounting;

• Credit guidance toward SMEs, green projects, and tech innovation;

• Improved transmission mechanisms to reduce financing bottlenecks.

3. Industrial Policy: Strengthening the Supply Side

• Continued investment in logistics, manufacturing, and energy security;

• Upgrading traditional industries and developing new productive forces;

• Boosting industrial chain resilience and accelerating the digital economy.

4. Domestic Demand: Supporting Incomes and Consumption

• Policies to raise household income, especially in rural areas;

• Support for key sectors such as autos, electronics, and housing;

• Better mobilization of private investment, alongside disciplined public capital use.

5. External Sector: Guarded Openness

• Continued push for high-standard FTAs and market access reform;

• Services for foreign businesses and improved business environment;

• Risk mitigation in transshipment, trade diversion, and tech export controls.

6. Labor Market: Income and Employment as Anchors

• Expansion of vocational training and support for flexible employment;

• Inclusive financial services to support entrepreneurship and rural revitalization;

• Support for youth and migrant employment through job placement and subsidies.