(Bloomberg) -- China’s economy showed surprising strength in early 2025 thanks to consumer subsidies and a rush of export shipments to beat tariffs, although an impasse with Donald Trump over the trade war is darkening its outlook and fueling calls for stimulus.
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China’s gross domestic product grew 5.4% in the first quarter from a year ago, the government said Wednesday, more than a forecast of 5.2%. Both production and consumption indicated unexpected momentum in March, before massive US levies on Chinese goods kicked in this month.
The rosy picture will give little comfort to policymakers as economic activities are expected to deteriorate starting from April. Cargo data last week already showed a slowdown in the volume of goods processed by Chinese ports, foreshadowing a decline in commerce as global companies pause orders and reduce output.
The improvement is “all in the past now,” said Michelle Lam, Greater China economist at Societe Generale SA. “Stimulus delivery is still pretty urgent. Things can deteriorate fairly quickly with some high-frequency data showing tariff impact on US-bound shipments.”
In a sign that tariff fears prevailed, Chinese stocks in Hong Kong extended their losses to as much as 3.3%. The yuan was steady at 7.3297 in the offshore market, while the 10-year government bond yield fell 2 basis points to 1.63%.
The data released by the National Bureau of Statistics suggests the economy was supported in part by front-loaded shipments before tariffs jumped to prohibitive levels this month.
Without more stimulus, China could struggle to meet its official growth target of around 5% this year. Exports are expected to contract after contributing to a third of growth in 2024, while business and consumer sentiment will likely suffer a blow from the trade war.
Economists at international banks including UBS Group AG, Goldman Sachs Group Inc., Citigroup Inc. and Societe Generale have lowered their forecasts for China’s 2025 growth in recent weeks to around 4% or lower. Australia & New Zealand Banking Group announced a similar downgrade following the data release.
The Chinese economy’s performance this year will largely depend on how much stimulus Beijing rolls out and how quickly it deploys support measures. A key factor will be the sustainability of the recovery in consumer demand, which has been buoyed by subsidies for buying cars, appliances and smartphones.
Some economists expect the People’s Bank of China to cut interest rates or the amount of cash banks must keep in reserve as soon as this month, while others predicted several trillions of yuan in additional fiscal borrowing and spending to fill the gap left by declined exports.
The government could also provide targeted help to exporters by expediting tax rebate payouts or offering them cheaper loans, according to Lu Ting, chief China economist at Nomura Holdings Inc.
A meeting by the Communist Party’s decision-making Politburo at the end of April will likely provide further clues to policymakers’ thinking when it comes to the timing and size of stimulus. With the positive data, the risk is that officials could decide to act only when growth hits a wall.
“The government may wait to observe the magnitude of the slowdown in exports and react accordingly,” Zhang Zhiwei, chief economist at Pinpoint Asset Management.
Off to a Good Start
Data released Wednesday showed industrial output expanding 7.7% in March from a year ago, the fastest growth since June 2021. Retail sales increased 5.9%, the best pace since December 2023 and much stronger than the 4.3% gain expected by economists.
The NBS struck a note of caution even as it released the positive indicators, emphasizing the need for greater support for the economy.
“The external environment is becoming more complex and severe, and the drive for growth of effective domestic demand is insufficient,” the bureau said in a statement. “We must implement more proactive and effective macro policies.”
Highlights of other key economic indicators:
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Fixed-asset investment rose 4.2% in the first three months of 2025, and property investment contracted 9.9%. Both are largely in line with expectations
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The urban jobless rate was 5.2% in March, dropping from 5.4% in the previous month
The surprise improvement in the industrial sector is in line with a surge in exports in March. The production of computers and other electronics picked up, soaring 13% last month from a year ago. Steel, cement and electricity output all accelerated, also supported by the government’s push to build infrastructure projects early this year.
For consumption, home appliances and furniture led the expansion with sales growing about 30% in March from a year ago, thanks to government subsidies. However, some unsubsidized goods such as cosmetics and clothing expanded only modestly, suggesting potential weakness in underlying sentiment.
Catering spending accelerated to the fastest in a year, as a number of local governments rolled out discount vouchers to encourage dining out and tourism spending.
The government is increasingly looking at services as a potential source for growth after previously focusing measures on boosting spending on goods. In a work plan released Wednesday, authorities including the Ministry of Commerce listed 48 measures to expand household spending in catering, health care, entertainment and tourism and sports.
What Bloomberg Economics Says...
“Looking ahead, the picture looks a lot more challenging, with high US tariffs likely to slam external demand. We expect policymakers to step up stimulus urgently, front-loading this year’s big budget and cutting rates and reserve requirements.”
— Chang Shu and David Qu
Read the full note here.
In a sign of an imbalance between supply and demand, the economy continued to suffer from persisting deflation. The GDP deflator — a broad measure of prices across the economy — declined for the eighth consecutive quarter. That’s the longest streak since the quarterly data began in 1993.
Highlighting the urgency to shore up domestic demand, Premier Li Qiang visited a consumer goods exhibition in Beijing on Tuesday.
He called on business representatives to be “united” to overcome difficulties and actively diversify markets, including compensating export losses with domestic sales. Officials should make greater efforts to stabilize employment, boost people’s income and strength social security to encourage consumer spending, and guide companies to compete in a healthy way, he said.
Li was also debriefed by the city government regarding progress in the purchases of unsold homes, pledging to “study and launch new supportive policies in a timely manner.” The property market is still far from reaching a turning point, Wednesday’s data showed.
“China can only count on domestic consumption,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group. “The retail sales figure is encouraging. Whether it can be sustainable depends on how fast and large the stimulus package will be.”
--With assistance from Zhu Lin and Iris Ouyang.
(Updates with more details, comments throughout.)
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