China’s growing momentum

Uncertainty on the geopolitical front is not holding China back. China’s positive momentum has continued so far in 2025, on the back of positive economic data from the first months of 2025.

In March, ANZ Research upgraded its forecast for gross domestic product (GDP) growth in China during 2025 to 4.8 per cent from 4.3 per cent, and to 4.5 per cent from 4.0 per cent for 2026.

Pending economic performance, ANZ Research expects China’s GDP growth will stay above 5 per cent in the first half, extending the solid momentum seen in the final quarter of calendar 2024.

However, the market will keep a close eye on the impact of United States tariffs and the US economic outlook. The latter will likely affect demand for China’s exports to not only the US but other key markets in Asia. ANZ Research has pencilled in a lower growth profile in the second half of 4.5 per cent.

Well exceed

Despite fewer workdays in January and February, industrial production (5.9 per cent year on year, to date) well exceeded ANZ Research’s forecast 5.2 per cent. Both retail sales (4 per cent) and fixed asset investment (4.1 per cent) are much higher than the 2024 average figures (3.5 per cent and 3.2 per cent, respectively).

Both figures are nominal growth. Since the Producer Price Index remains negative, ANZ Research estimates the real growth of both indicators is higher than the headline growth rates. There has been a slight improvement in sentiment for the property market. More cities have reported an increase in home prices since September 2024. New home sales during the Lunar New Year holiday increased 8 per cent, year on year. Property investment is down 9.8 per cent in the year to date.

The contraction was larger than expected at 8.5 per cent. Broadly, this figure is negative for the sector’s outlook. But with smaller supply in the pipeline, policymakers will aim for a quicker restoration of the supply-demand balance. ANZ Research still does not see a full-fledged recovery in property, but the performance for 2025 will likely be better than last year.

Consumption is expected to be the key economic driver in 2025. ANZ Research welcomes the plan of 30 consumption-boosting measures announced. Chinese authorities explicitly stated their support for the stock market. They appreciate the critical role of asset price reflation to combat the balance sheet recession.

This differs from the announcements in previous years, which were only a collection of sector subsidies and verbal guidance. ANZ Research estimate China’s 300 billion yuan trade-in program announced at the National People’s Congress will likely add another 1 trillion yuan to retail sales.

Rallied strongly

Despite the trade tension, China’s equity market has rallied strongly since the middle of January. This surprising performance can be attributed to China’s progress in utilising Large Language Models in artificial intelligence applications, which has triggered a global repricing of technology.

In addition, President Xi Jinping met business leaders, mainly from the tech sector. The meeting has improved the market sentiment substantially. Fixed-asset investment has contracted in the last two years, and the government wants to revive the confidence of the private sector.

Historically, China’s stock market is a good indicator of economic confidence, as measured by monthly purchasing managers’ indexes. The rapid adoption of AI, coupled with a growth-oriented policy stance, will likely increase the capex of both state-owned enterprises and the private sector. This will extend the positive momentum that began in the fourth quarter.

In theory, AI could be a solution to China’s demographic challenges. ANZ Research’s core view requires China to significantly improve its total factor productivity to break the middle-income trap. While the prospect of any TFP improvement is structurally compelling, one or two technological breakthroughs is not sufficient to revise up China’s long-term growth profile.

ANZ Research’s forecasts are based on economic variables, not industry excitement. In fact, despite being ultimately positive, the rapid adoption of AI is likely to initially drag down cyclical economic indicators because the labour market’s transition to structural changes tends to be slow. Cyclically, it is a negative shock.

Any displacement of workers initially means loss of household income, which translates into a potential decline in private consumption. Demand will catch up with potential growth only when the displaced capacity, including workers, is absorbed by the new economic structure and shares the income growth.

Optimism

The optimism in the equity market suggests investors are not very concerned about trade tension with the United States. For instance, the additional 10 per cent US tariff announced on February 1 lifted the effective tariff rate on imports from China to 23 per cent, based on our deep dive into the 10,300 products classified under eight-digit HS codes.

The US further increased the tariff by another 10 per cent in March, lifting the average rate to 33 per cent. In addition, the US also imposed tariffs on goods from Canada and Mexico. This may affect China’s re-routing trade via these countries.

The tariffs will affect China’s export both directly and indirectly. Experience in the first trade war indicates that tariffs were not as concerning as many people expected.

Shipments of tariff-impacted products increased by 15 per cent in 2017 followed by a 24 per cent decrease in 2019, while the export of goods not impacted by tariffs remained flat. Similar front-loading activities have been observed in the tariff-impacted group in 2024.

ANZ Research expects an immediate fall in China’s exports to the US in 2025 by 5 per cent, equivalent to 0.65 per cent of China’s total exports and 0.12 percentage points of total gross domestic product.

In ANZ Research's view, market concern about the impacts of tariffs on China is excessive. The US market is only 15 per cent of China’s total exports. Canada and Mexico combined are only 4 per cent of the total. If direct shipments to the US decline by say 20 per cent and exports to Canada and Mexico dropped by half, the total loss could be about $US173 billion. While large, this is equivalent to only nine days of China’s retail sales.

At the National People’s Congress, the government articulated a GDP growth target of about 5 per cent. The authorities seem optimistic about the outlook, especially after the recent breakthroughs in AI.

Given China’s goal of doubling its GDP per capita by 2035, it needs an annual average growth rate of 4.7 per cent. Fiscal policy will be proactive. The official deficit is set at 4 per cent of GDP. ANZ Research’s gauge of the ‘actual deficit’ to GDP ratio, covering both the general and government Funds Accounts, rises to a record high of 9.9 per cent. This reflects the need to not only stimulate growth but to also prevent risks.

In terms of monetary policy, the People’s Bank of China will likely delay the timing of easing. The current policy focus is to manage expectations of the RMB exchange rate when market volatility is high.

ANZ Research has pencilled-in an interest-rate cut in the third quarter when growth momentum is expected to falter again. Expect the authorities to allow banks to pay required reserves in short-dated treasury bonds instead of cash, which will help small banks manage their liquidity.

Raymond Yeung is Chief Economist, Greater China at ANZ

This is an edited excerpt from the ANZ Research report “ANZ Research Quarterly: A Trump pivot, not put”, published March 20, 2025