China’s economy expanded by 5.2 percent in the second quarter of 2025, down from 5.4 percent in Q1 and only slightly above analysts’ projections. Although this pace still meets Beijing’s official annual target of “around 5 percent,” a confluence of challenges—including a deepening property slump, rising deflationary pressures and cautious consumer sentiment—points to a clear deceleration ahead.
Property Market Hits the Brakes
Investment in real estate, long a cornerstone of Chinese expansion, has plunged sharply. In the first half of 2025, property investment contracted by double digits year‑on‑year, while new home prices recorded their steepest monthly decline in eight months. A surge of developer defaults and a backlog of unfinished housing projects have eroded household wealth and undermined confidence in the sector. Local governments, heavily reliant on land‑sale revenues to finance infrastructure, are scrambling to plug budget gaps as land auctions yield lower bids and fewer buyers.
To counteract this downturn, Beijing has ramped up infrastructure spending, with reports of a supplementary budget of up to one trillion yuan earmarked for roads, railways and urban renewal. Yet even as bridges and highways rise, analysts warn that such stimulus risks merely papering over structural weaknesses: excess capacity in heavy industry, soaring municipal debt and the legacy of overinvestment that fueled the property boom in the first place.
Consumers Caution as Deflation Looms
On the consumption front, retail sales growth slowed to its weakest pace since early 2025, dipping below 5 percent for the first time this year. At the same time, producer prices have slipped into outright deflation, signaling that businesses are under intense pricing pressure. With firms reluctant to raise selling prices, profit margins are being squeezed, prompting many to pare production plans and postpone new investments.
Households are feeling the pinch. Urban wage growth has weakened, while the cost of living in major cities remains elevated. Faced with uncertain job prospects, many consumers are deferring big‑ticket purchases such as cars, appliances and overseas travel. In response, authorities have rolled out targeted subsidies—covering everything from home appliance rebates to auto trade‑in programs—backed by a 300 billion yuan consumer‑stimulus fund. But with consumer confidence at multi‑year lows and real incomes largely flat, these measures have yet to spur a sustained rebound in spending.
Demographic Shifts and Debt Risks
Beyond the immediate cyclical challenges, China confronts longer‑term headwinds that threaten its growth trajectory. The working‑age population is contracting as birth rates fall and the population ages, tightening labor markets and putting upward pressure on wages. Youth unemployment, once a closely held statistic, has hovered near 15 percent, despite a slight easing earlier this spring. This figure could rise again when more than 12 million university graduates enter an already crowded job market this summer.
Corporate and local government debt levels have also surged to record highs. After a post‑pandemic credit expansion, many firms and municipal financing vehicles now struggle under heavy debt servicing burdens. Although the People’s Bank of China has trimmed benchmark lending rates and injected liquidity through targeted facilities, banks remain wary of extending large new loans to sectors deemed risky—most notably real estate and local infrastructure. As debt servicing costs climb, the risk grows that businesses and localities will curtail investment, potentially triggering layoffs and further weakening consumer spending.
External Pressures Compound the Slowdown
On the trade front, a fragile U.S. tariff truce provided a brief reprieve, prompting exporters to accelerate shipments ahead of looming tariff deadlines. But export volumes have since eased, and any reimposition of higher U.S. duties could deal a fresh blow to manufacturing—an industry that still accounts for nearly one‑third of GDP. At the same time, global demand remains uneven, with Europe and parts of Asia grappling with their own economic headwinds.
As policymakers prepare to convene for the late‑July Politburo meeting, they face a delicate balancing act: deploying enough stimulus to prevent a sharper slowdown, while avoiding measures that might exacerbate financial risks or reignite asset bubbles. Early indications suggest a calibrated approach: incremental boosts to infrastructure budgets, expanded unemployment and social insurance subsidies—particularly for young job‑seekers—and the option to cut interest rates further if conditions deteriorate.
Despite these efforts, many economists argue that without deeper structural reforms—such as liberalizing key service sectors, addressing excess capacity, strengthening social safety nets and easing restrictions on private enterprise—China’s growth is likely to decelerate toward the mid‑4 percent range in the coming years. What happens next will not only shape China’s domestic outlook but also carry significant implications for the global economy.
(Source:www.businesstimes.sg)
Property Market Hits the Brakes
Investment in real estate, long a cornerstone of Chinese expansion, has plunged sharply. In the first half of 2025, property investment contracted by double digits year‑on‑year, while new home prices recorded their steepest monthly decline in eight months. A surge of developer defaults and a backlog of unfinished housing projects have eroded household wealth and undermined confidence in the sector. Local governments, heavily reliant on land‑sale revenues to finance infrastructure, are scrambling to plug budget gaps as land auctions yield lower bids and fewer buyers.
To counteract this downturn, Beijing has ramped up infrastructure spending, with reports of a supplementary budget of up to one trillion yuan earmarked for roads, railways and urban renewal. Yet even as bridges and highways rise, analysts warn that such stimulus risks merely papering over structural weaknesses: excess capacity in heavy industry, soaring municipal debt and the legacy of overinvestment that fueled the property boom in the first place.
Consumers Caution as Deflation Looms
On the consumption front, retail sales growth slowed to its weakest pace since early 2025, dipping below 5 percent for the first time this year. At the same time, producer prices have slipped into outright deflation, signaling that businesses are under intense pricing pressure. With firms reluctant to raise selling prices, profit margins are being squeezed, prompting many to pare production plans and postpone new investments.
Households are feeling the pinch. Urban wage growth has weakened, while the cost of living in major cities remains elevated. Faced with uncertain job prospects, many consumers are deferring big‑ticket purchases such as cars, appliances and overseas travel. In response, authorities have rolled out targeted subsidies—covering everything from home appliance rebates to auto trade‑in programs—backed by a 300 billion yuan consumer‑stimulus fund. But with consumer confidence at multi‑year lows and real incomes largely flat, these measures have yet to spur a sustained rebound in spending.
Demographic Shifts and Debt Risks
Beyond the immediate cyclical challenges, China confronts longer‑term headwinds that threaten its growth trajectory. The working‑age population is contracting as birth rates fall and the population ages, tightening labor markets and putting upward pressure on wages. Youth unemployment, once a closely held statistic, has hovered near 15 percent, despite a slight easing earlier this spring. This figure could rise again when more than 12 million university graduates enter an already crowded job market this summer.
Corporate and local government debt levels have also surged to record highs. After a post‑pandemic credit expansion, many firms and municipal financing vehicles now struggle under heavy debt servicing burdens. Although the People’s Bank of China has trimmed benchmark lending rates and injected liquidity through targeted facilities, banks remain wary of extending large new loans to sectors deemed risky—most notably real estate and local infrastructure. As debt servicing costs climb, the risk grows that businesses and localities will curtail investment, potentially triggering layoffs and further weakening consumer spending.
External Pressures Compound the Slowdown
On the trade front, a fragile U.S. tariff truce provided a brief reprieve, prompting exporters to accelerate shipments ahead of looming tariff deadlines. But export volumes have since eased, and any reimposition of higher U.S. duties could deal a fresh blow to manufacturing—an industry that still accounts for nearly one‑third of GDP. At the same time, global demand remains uneven, with Europe and parts of Asia grappling with their own economic headwinds.
As policymakers prepare to convene for the late‑July Politburo meeting, they face a delicate balancing act: deploying enough stimulus to prevent a sharper slowdown, while avoiding measures that might exacerbate financial risks or reignite asset bubbles. Early indications suggest a calibrated approach: incremental boosts to infrastructure budgets, expanded unemployment and social insurance subsidies—particularly for young job‑seekers—and the option to cut interest rates further if conditions deteriorate.
Despite these efforts, many economists argue that without deeper structural reforms—such as liberalizing key service sectors, addressing excess capacity, strengthening social safety nets and easing restrictions on private enterprise—China’s growth is likely to decelerate toward the mid‑4 percent range in the coming years. What happens next will not only shape China’s domestic outlook but also carry significant implications for the global economy.
(Source:www.businesstimes.sg)