China can reach its growth target 2025 but with even more stimulus and the second half will be tougher

The Chinese economy has shown remarkable resilience in the first half of 2025, recording a GDP growth of 5.3%. Aside of the favorable base effect of a very weak first half last year, the robust performance was largely fueled by continued strength in exports, growing 6.1% YoY in the first seven months and defying the tariff’s gravity. Despite a marginal slowdown in Q2 driven by recouping imports, net exports still contributed around 30% of the overall growth in the first half of 2025, roughly the same as in 2024.Domestic consumption has also proven resilient, although not as much as exports, with its contribution to GDP growing to 2.8 percentage points in the first half of 2025 from 2.3 percentage points in the second half of 2024. The components of domestic demand, investment and consumption, have been quite divergent, though, with investment doing much more poorly. In fact, its contribution to GDP growth fell to an average of 0.7 percentage points in the first half of 2025, down from 1.2 percentage points in the second half of 2024 while consumption remained resilient.The economy’s outperformance in the first half makes the Chinese government’s 5% GDP growth target, which was set during the Two Sessions back in March, more realistic. More specifically, the third and fourth quarter will need an average GDP growth rate of 4.7%, which we believe is feasible under the current fiscal (and to a lesser extent monetary) stimuli.And yet, the data for July clearly shows more headwinds going forward into the second half. Retail sales year-to-date further decelerated to 4.8% YoY from 5.0% in June, showing the fading effect of consumer goods trade-in subsidies. Investment fell massively to 1.6% from 2.8% YoY YTD, dragged by the continued deterioration in the real estate sector with a deeper contraction. Home prices and property sales are still under pressure and improvement is limited to tier-1 cities.As such, without stronger and more lasting stimulus measures, particularly the ones targeting service consumption, sustaining the momentum from first half will be challenging. Investment too, remains a significant concern. With the persisting deflationary pressure where PPI wanders below -3% and CPI sticks around zero, companies are forced to curb investment in fear of bigger losses due to overcapacity but also the ongoing anti-involution campaign. This situation is particularly alarming considering the deep negative growth in real estate investment and stubbornly declining property prices.Against such backdrop, the government is trying to stimulate the economy with infrastructure investment financed by additional bond issuance. Recent announcements about infrastructure projects, such as the hydropower projects at the downstream of Yarlung Tsangpo River, also highlight the government’s commitment to increasing public investment. That said, we don’t expect the government to double down on a single sector for the sake of avoiding the old growth model that heavily relied on real estate.All in all, while the Chinese economy has a greater likelihood of meeting the government’s growth target, there are significant uncertainties down the road. Despite foreseeable headwinds from trade friction and persisting deflation, the government does have more bullets for further stimulus if needed. Therefore, we have revised our forecast of China’s GDP growth to 5% for 2025 and 4.5% for 2026.