China’s real GDP grew by 5.4% year-on-year (YoY) in Q1 2025, matching the growth rate in Q4 2024 and exceeding market expectations. The robust start of China’s economy was fueled by proactive policies implemented since last September, as well as front-loading exports ahead of US reciprocal tariffs. But the growth of major economic indicators including industrial production, retail sales and fixed asset investment marginally slowed in April due to the escalation in China-US tariff tensions.

Thanks to policies to boost consumption, the YoY growth rate of total retail sales increased from 4.0% in Q4 2024 to 4.6% in Q1 2025. Meanwhile, as local government debt burdens ease, urban renewal and consumption-related infrastructure projects expand, infrastructure investment maintains strong. The growth rate of manufacturing investment remained relatively stable, decreasing slightly by 0.1 percentage points from the previous quarter to 9.1%.

Supported by strong infrastructure investment, export front-loading, equipment upgrades and consumer goods trade-in programmes, industrial production grew by 6.5% year-on-year in Q1, further increasing from 5.8% of 2024 full year growth. Notably, manufacturing production grew from 6.1% of last year to 7.1% in Q1.

Although the decline in real estate investment narrowed by 2.5 percentage points to -9.9% compared to Q4 2024, it still remains the largest drag on fixed asset investment, pulling down overall investment by 1.7 percentage points. Stabilising the real estate market is still a priority of government economic work this year.

Underlying concerns about economic performance persist as export front-loading ends in the second half of this year. Overcapacity and fierce price competitions are eroding industrial profits. The GDP deflator for Q1 2025 was -0.8%, marking the eighth consecutive quarter of negative readings. In response to these challenges, the government has committed to a comprehensive policy package to steer the economy, as indicated in the Politburo meeting on April 25, including accelerating actions on existing policies and introducing targeted incremental policies: such as cuts in lending costs, additional quotas for relending facilities, to strengthen private enterprises, technological innovation, consumption, foreign trade, and the real estate and capital markets. Additional policy-based financial instruments are expected to be introduced to reinforce infrastructure investment.

The substantial progress in China-US trade negotiations in May is expected to alleviate the downward pressure on China’s economy for the rest of Q2 2025. Given the lingering uncertainties in global trade following the 90-day pause, Chinese enterprises are likely to accelerate their exports, thereby driving strong performance in China’s industrial production and manufacturing investment in Q2.