By Jessica Huang
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| Cover Image Attribute: The file photo of workers at G.Tech Technology Factory, Zhuhai, China. Photo taken on 21 October 2015. Source: Wikimedia Commons. |
As autumn settles over Beijing, the air carries a familiar chill, not just from the weather but from the mounting strains on the world's second-largest economy. China's real gross domestic product growth, once a roaring engine of double-digit annual surges through the 2000s, has eased to 5.3 percent in the second quarter of this year, according to the National Bureau of Statistics' July assessments. This deceleration, while not catastrophic, lays bare a confluence of external trade disputes and domestic structural weaknesses that demand careful scrutiny. With the United States imposing escalating tariffs—starting at 10 percent, doubling to 20 percent, and peaking at 145 percent—the bilateral trade relationship, once a cornerstone of China's export-led expansion, now teeters under renewed pressure. A brief detente emerged on May 11, when both nations agreed to trim U.S. tariffs on Chinese goods to 30 percent for 90 days, an arrangement President Trump extended through November 10. China reciprocated by cutting its tariffs on U.S. imports to 10 percent from 125 percent. Yet last week, on October 9, China declared curbs on rare earth metal exports effective December 1 and restrictions on battery manufacturing equipment shipments from November 8, moves that could disrupt U.S. production in computer chips, defense gear, and battery technologies. The very next day, October 10, President Trump countered with threats of 100 percent tariffs on Chinese imports beginning November 1. Amid this escalation, Presidents Trump and Xi are slated to convene at the Asia-Pacific Economic Cooperation summit in Seoul on October 31 and November 1, a forum that may yet temper the rhetoric or harden the lines.
These frictions arrive at a moment when China's economy, modernized since the 1980s through a blend of skilled labor, infrastructure outlays, and cost-competitive manufacturing, confronts a pivotal test. Exports propelled the nation's ascent, fostering a burgeoning middle class and positioning the U.S. as China's top customer entering 2025. Freight activity to the U.S. has since tapered, yet total exports have held firm, buoyed by advances in Europe and Latin America that partially offset the American dip. "China hopes it can replace [U.S. demand] by stepping up exports to other countries," observes Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group. This pivot requires deeper penetration into Southeast Asia, Latin America, and Europe, territories where Chinese producers must contend with intensifying local rivalries. One sales manager at a car floor mats exporter, Wang Pengjie, reports his firm has forfeited 60 to 70 percent of U.S. orders but is redirecting efforts to Southeast Asia, Mexico, and the Middle East. Even so, he concedes these outlets "can't make up for it," particularly as fellow Chinese exporters flood the same channels, compelling sharper price concessions. His company now emphasizes premium products to endure what he terms a "very intense" price war.
As far as Beijing’s response is concerned, it reflects a quiet but firm commitment to fortifying its manufacturing backbone through incentives targeting consumer durables and industrial production. Technologically, China asserts itself in electric vehicles, where BYD has eclipsed Tesla in global sales volume. Such strides affirm the country's industrial depth, even as external shocks like U.S. levies expose vulnerabilities in its export dependence. A Reuters poll of 45 economists anticipates third-quarter GDP growth at 4.8 percent year-on-year, the feeblest since the third quarter of 2024 and a step down from 5.2 percent in the prior quarter. Quarterly expansion is projected at a mere 0.8 percent, decelerating from 1.1 percent in April through June. Full-year growth may settle at 4.8 percent, shy of the official around-5 percent aspiration, with a further easing to 4.3 percent in 2026. Larry Hu, chief China economist at Macquarie, who pegs the third quarter at 4.5 percent, foresees "mini-stimulus measures in Q4, especially for housing" to salvage the annual benchmark. In the longer view, he anticipates Beijing deploying domestic fiscal tools to buffer against overseas disruptions, aiming for "relatively steady growth."
This forecast aligns with an AFP survey of analysts, which also projects 4.8 percent growth for July through September, underscoring the drag from tepid demand and the property sector's woes, exacerbated by the U.S. trade skirmish. Alicia Garcia-Herrero, Asia-Pacific chief economist at Natixis, describes the trajectory as "clearly decelerating, not drastically… but noticeably," attributing the core drag to a consumption slump that evinces "really bad deflationary pressure." Fiscal fragilities compound the issue, with local governments saddled by debt that hampers loan servicing in several provinces. Exports, though robust at 8.3 percent year-on-year growth in September—the briskest since March—along with infrastructure spending, mask these fissures in aggregate GDP tallies. Consumer prices dipped again last month, following a six-month nadir in August. Heron Lim, a lecturer in economics at ESSEC Business School, notes that while U.S. business has waned, "China’s involvement in other markets has improved," enabling a supply-chain reconfiguration that sustains factory operations. Guo Shan of Hutong Research acknowledges the export vigor but insists "hitting the (annual five percent) target does require more policy support," with the upcoming Communist Party plenum likely to prioritize "policies to promote consumption, services and innovation."
The property overhang, germinating in 2021, looms as a persistent liability. Lax credit from local authorities and unchecked builder expansion engendered an oversupply, precipitating price declines that curbed construction momentum. Once a dynamo contributing nearly one-third of GDP, real estate's contraction now imperils financial stability. Efforts to revive it—such as easing purchase curbs—have yielded uneven outcomes, leaving major projects stalled and top developers in default. Homebuyers, wary after years of urban boom, withhold commitments, further damping investment. Retail sales edged higher in 2025 versus 2024, yet sustainability remains elusive. "Stimulus measures are boosting consumer spending, but savings are also rising," Haworth remarks. "Even though the economy isn’t booming, it is still growing." Broader gauges corroborate the torpor: year-on-year consumer inflation oscillated between minus 1 percent and plus 1 percent over the past two years, while 10-year government bond yields descended from 2.6 percent at 2024's outset to 1.6 percent early this year, rebounding modestly to 1.85 percent by October 10. These patterns evince muted activity and tempered growth prospects. China often withholds adverse metrics, like youth unemployment, hinting at concealed distress.
Deeper imbalances afflict the economy's composition. China's ascent has hinged on investment and manufacturing, yet household consumption lags, a disparity with worldwide repercussions. As a key player in global investment and production, China underperforms in demand generation. Gross fixed capital formation sees China commanding a substantial share, dwarfing peers like the United States, European Union, India, and others in 2021 relative to 2005 benchmarks. In manufacturing value added, China's portion has swelled, outstripping the U.S., EU, and India. Conversely, household consumption—encompassing non-profit institutions serving households—reveals China trailing, with the U.S., EU, and world aggregates holding steadier proportions. Over decades, China's household expenditure as a GDP fraction has hovered below 40 percent, contrasting the U.S. and Japan's steadier bands around 60 to 70 percent, and Germany's around 50 percent. Investment, meanwhile, has surged to 42 percent of GDP, far exceeding global norms and fueling overcapacity. Factory utilization across sectors dips below 80 percent—the threshold economists deem salubrious—with oil and natural gas extraction, automobiles, manufacturing writ large, and non-metallic minerals all registering subpar rates through the first quarter of 2025.
These distortions trace to a model prioritizing production, a playbook Beijing clings to amid U.S. rivalry. The Communist Party's October 20-23 plenum will delineate a five-year vision accentuating high-tech manufacturing to modernize industries and assert global sway. This gathering, culminating in a blueprint for parliamentary ratification in March, confronts antithetical imperatives: bolstering tech prowess while alleviating supply-demand mismatches that imperil sustained expansion. The former sustains resource flows to producers; the latter demands reallocating funds to households, curtailing business and public outlays. Over the prior decade, growth favored the former, igniting deflation and debt accumulation. U.S. President Trump's triple-digit tariff threats last week sharpen the dilemma, compelling Beijing to weigh great-power contestation against redressing internal disequilibria.
Chen Bo, senior research fellow at the National University of Singapore's East Asian Institute, anticipates the plan will "definitely emphasize, and re-emphasize, support for high-tech research and industrial development." He adds, "In terms of a country's hard power, manufacturing is still a top priority. When conflict arises, what ultimately matters is manufacturing, not services." President Xi Jinping, in a July address reprinted in Communist Party outlet Qiushi, framed the era as one of "changes not seen in a century," where "technological revolution and major-country competition increasingly intertwined," urging seizure of the "strategic high ground" in the tech contest. China dominates in electric vehicles, solar and wind power, and rare earths, wielding the latter via export restraints ahead of prospective Trump-Xi parleys later this month. Beyond select pinnacles like aircraft and advanced semiconductors, supply chains remain insular. With the West pursuing re-industrialization and rearmament post-Russia's Ukraine incursion and amid Taiwan and South China Sea frictions, Beijing deems any industrial slack untenable. "If you do not develop high-end industries, you will be subject to others in the future," cautions Guo Tianyong, professor at the Central University of Finance and Economics in Beijing, though he urges "a better policy balance."
Fissures mount beneath the surface. Morgan Stanley analysts project post-plenum rhetoric to yield a "tech- and supply-driven framework, with incremental focus on social welfare," rendering "decisive reflation... elusive in 2026." The outgoing five-year span weathered factory-gate deflation, property turmoil, municipal debt alarms, pervasive overcapacity, and peak youth joblessness. A cohort primed for lucrative service roles—suited to a consumption-centric paradigm—confronts scant prospects. "If you only rely on external demand and domestic demand is not working, then you will have unemployment problems and also deflation," Hu warns. "If it continues like this for one or two years, it's still okay. But in the long run, it will definitely be a problem." He posits Beijing may prioritize consumption stimulus should export erosion imperil targets.
The 2026-2030 blueprint, the 15th in a Soviet-inspired lineage dating to the 1950s, inherits unfulfilled vows. Its predecessor vowed to "fully leverage the fundamental role of consumption in stimulating economic development," while the one prior pledged that "the contribution of consumption to economic growth will continue to grow." Households, battered by property losses and pandemic scars, favor hoarding over outlays, spurring advocacy for labor, tax, state enterprise, land, and welfare overhauls. Analysts envision incremental navigation via tech-oriented industrial aid over capacity buildup, coupled with nascent welfare enhancements. Recent initiatives encompass consumer subsidies, childcare aid, minor pension hikes, and a Supreme Court edict mandating employer-worker social insurance contributions, paving the way for amplified safeguards.
An anonymous policy adviser, speaking on condition of discretion, foresees escalating benefits in the coming quinquennium, with modest pensions advancing swifter than affluent ones. Yet these "won't be particularly substantial," constrained by a slender social security purse and straitened local coffers. Post-property slump, "we are unable to find new demand drivers." Dan Wang, China director at Eurasia Group, anticipates the plan to dwell on "people's livelihood, including social security, healthcare systems, and possibly more support and protection for low-income groups." She cautions, however, that such phrasing "absolutely not" heralds a foundational pivot. "In a now very typical Marxist country," Wang concludes, "it's all about production."
Equity markets mirror these tensions. China's bourses endured a trio of down years from 2021 to 2023 per the MSCI China Index, rebounding with a 2024 rally that a softening dollar augmented for U.S. investors in 2025. As of October 10, the index lingers 30 percent beneath its February 2021 zenith. Despite its heft, China resides in emerging-market taxonomy, comprising over 30 percent of the MSCI Emerging Markets Index—the heftiest national slice. "Any investor who puts money to work in a broad, emerging market index owns a significant position in Chinese stocks," Haworth reiterates. Last year, the emerging index delivered 7.5 percent total returns, edging the MSCI EAFE developed markets but trailing the S&P 500's 25.0 percent. Through October 10 this year, it has climbed 30.1 percent, surpassing the S&P 500's 12.5 percent.
Global factory surveys from September paint a bleaker canvas. Activity contracted across swaths of the world, per private gauges, as U.S. softening and Trump's tariff specter compounded China's demand enervation. The Eurozone's HCOB Manufacturing PMI slid to 49.8 from August's 50.7, the inaugural expansion since mid-2022 now faltering, with new orders plummeting at the quickest clip in six months and exports a prime culprit. "The drop in the PMI is showing up across the board, with respective figures for consumer goods, capital goods and intermediate goods all down on the month," notes Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. Divergences persist: the Netherlands hit a 38-month pinnacle, while Greece, Ireland, and Spain grew; Germany, France, and Italy shrank. Britain's output contracted at its swiftest in five months, belying official tallies amid domestic and export lethargy.
On the other hand, Asia fares no better. Japan and Taiwan, bastions of export might and tech, posted contractions, the former's S&P Global PMI at 48.5—the deepest in six months, driven by output and order plunges. China's official gauge confirmed a sixth straight manufacturing contraction, beset by frail consumption and tariff pinches. The protracted malaise spotlights dual burdens: post-pandemic domestic rebound's fragility and tariff-induced factory strains, rippling to component buyers abroad. "The September PMI readings for most countries in Asia remained weak and we continue to expect manufacturing activity in the region to struggle in the near term," posits Shivaan Tandon, emerging markets economist at Capital Economics. With growth softening and inflation subdued, Asian central banks may ease further.
These threads converge on Beijing's policy crossroads. Modest supports this year—preserving latitude for shocks—leveraged sturdy exports and buoyant equities, but trade flares erode that margin. Teeuwe Mevissen, senior China economist at Rabobank, anticipates the plenum to deliberate a consumption-led transition from infrastructure and property reliance, a shift long advocated yet elusive. Such a reorientation, while imperative, clashes with production imperatives amid U.S. contest. Hu's expectation of consumption gravity upon export shortfalls echoes Garcia-Herrero's deflationary alerts and Wang's livelihood emphases. Yet the adviser's fiscal strictures and Chen's manufacturing primacy intimate a gradualist path, tilting toward tech sans capacity surfeit.
For investors, the tableau warrants measured exposure. "Global stocks offer an attractive investment opportunity to manage risk from elevated U.S. equity values and trade uncertainty," Haworth advises. A broad emerging allocation, encompassing Chinese holdings, affords diversification, with sectors like manufacturing and exporters proliferating beyond China—poised to gain from bilateral fallout. "Today, compared to the past, we find more manufacturing and [other] exporters across emerging market economies," he explains. "Many of these manufacturers outside of China may benefit from U.S.-China trade fallout." Adjustments ought to harmonize with personal objectives, timelines, and tolerances; consultation with advisors can assay integrating emerging equities, including China, into diversified frameworks. The MSCI China Index, spanning large- and mid-cap A, H, B shares, Red Chips, P Chips, and foreign listings like ADRs across 568 constituents, encapsulates 85 percent of the equity universe, with A shares at 20 percent free-float weight. The emerging index, covering 24 nations' large- and mid-caps, carries amplified risks—volatility from regional concentration, foreign levies, currency flux, and divergent standards or geopolitical shifts—versus developed peers.
In this intricate weave, China's economy endures not as an unassailable colossus but as a system recalibrating amid headwinds. Third-quarter data, slated for Monday alongside retail, industrial, and investment metrics, will furnish granular insights. The plenum's deliberations may affirm production's primacy while nodding to consumption's claims, a duality that has defined—and strained—the model for decades. With tariffs casting long shadows and supply chains quietly rerouting to distant shores, Beijing stands at a fork where every decision ripples far beyond the Great Wall—recasting not just China's own arc, but the very architecture of the world economy it once built brick by export-packed brick. The road ahead calls for a tightrope walk: guarding that razor-sharp manufacturing prowess without letting household hearths grow cold, weathering the trade storm's fury through the quiet strength of homegrown resilience. In this tangled age of silicon showdowns and superpower jousts, as President Xi has laid bare, the wager isn't confined to one nation's ledger—it's a global ledger, urging everyone from factory floors in Detroit to boardrooms in Brussels to pause and parse the low rumble of this behemoth's workings.
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