China's 2025 Growth: A Target Met, But at What Structural Cost?

China's economy achieved its official growth target for 2025, expanding by 5.0% for the year. Yet the victory was narrow and came at a cost, as the final quarter revealed deepening cracks. Growth slowed to 4.5% in the fourth quarter, marking its weakest pace in three years and signaling a sharp deceleration from the 4.8% rate in the prior period. The headline figure was a technical win, but the composition tells a more troubling story of structural imbalance.

The growth was powered almost entirely by external demand. Full-year exports increased by 6.1%, a robust performance that directly offset a severe domestic contraction. Fixed-asset investment, a key engine of past expansion, fell 3.8% year-on-year. This decline was overwhelmingly driven by the property sector, where investment plunged 17.2% for the year. The slump in housing has now extended for three consecutive years, with home prices declining for a fourth straight year. In December, new home prices fell 0.4% month-on-month, while prices in 70 major cities dropped 3.05% annually.

Domestic consumption, the other pillar of the growth model, also showed weakness. Retail sales grew 3.7% for the year, a modest pace that failed to provide a broad-based lift. The fourth quarter saw retail sales growth slow to just 0.9% year-on-year, underscoring the fragility of consumer confidence.

The bottom line is that 2025's target was met not through a broad economic revival, but through a narrow, export-driven resilience. This setup masks a deepening domestic structural crisis, where the property sector's collapse and weak consumer demand are creating a dangerous dependency on foreign markets. The fourth-quarter slowdown is the first clear signal that this fragile balance is beginning to fray.

The Export Engine: Strength, Diversification, and Limits

China's narrow 2025 growth victory was powered by a resilient export sector, which grew 6.1% for the year. This performance was not a simple rebound but a strategic pivot, as the economy successfully diversified away from its most pressured market. While exports to the United States fell a steep 20.0% year-on-year, shipments to other regions more than compensated. Growth was led by strong demand in ASEAN (13.4%) and the EU (8.4%), with notable expansion also in India, Africa, and Latin America. This geographic shift demonstrates Beijing's ability to navigate trade barriers, a move that has been emboldened by the Trump administration's tariff policies.

More importantly, the export engine is changing its fuel. The composition of trade reveals a clear upgrade in China's competitive advantage. High-value manufactured goods, particularly in technology and mobility, drove the expansion. Exports of semiconductors (26.8%) and autos (21.4%) were top performers, with the auto industry cementing its global leadership by exporting over 5.79 million vehicles. This structural shift-from traditional labor-intensive goods to capital and technology-intensive products-signals progress in moving up the global value chain. It is a critical development for long-term growth, as it builds higher-margin, less trade-vulnerable industries.

Yet this export strength carries significant risks that threaten its sustainability. The most immediate concern is the record $1.189 trillion trade surplus for 2025. This figure, equivalent to the GDP of a major global economy, is a direct result of robust exports coupled with subdued imports. Such a massive imbalance is a global flashpoint. It risks escalating trade tensions, inviting retaliatory measures, and fueling accusations of overcapacity and unfair competition. The surplus also reflects a domestic economy that is not yet consuming enough of the world's goods, highlighting the persistent gap between external strength and internal weakness.

The bottom line is that export-led growth has become China's primary economic lifeline. While the diversification and value-upgrade are positive structural developments, they are being deployed to offset a deep domestic crisis. The record surplus is a double-edged sword: it provides a buffer against external shocks but simultaneously increases geopolitical friction and underscores the fragility of the current growth model. For 2026, the challenge is to manage this engine without stoking the very trade conflicts it seeks to avoid.

Domestic Vulnerabilities: The Deflationary Trap and Policy Response

The core of China's 2025 growth story is a stark contradiction: a headline target met by a resilient export sector, while domestic demand atrophies. The metrics for consumption are particularly telling. Full-year retail sales grew just 3.7%, a modest pace that failed to provide a broad-based lift. The fourth quarter revealed the true fragility, with sales growth slowing to a mere 0.9% in December, the weakest reading in over three years. This is not a temporary dip but a sign of a deep-seated loss of consumer confidence, where a 5% rise in real disposable income has not translated into spending.

This weakness is now embedded in the price environment, creating a dangerous deflationary trap. The consumer price index (CPI) was flat at 0.0% for the year, while the producer price index (PPI) fell 2.6%. The PPI decline is especially concerning, as it signals that cost pressures are not just absent but actively contracting across the industrial supply chain. This sets up a vicious cycle: weak demand leads to falling prices, which in turn discourages investment and spending, further depressing demand. The industrial sector's capacity utilization fell to 74.9%, a clear indicator of underutilized productive power that is a direct consequence of this demand shortfall.

In response, policymakers are preparing a targeted stimulus. Economists forecast that the People's Bank of China will act in the first quarter, with expectations for reserve requirement and policy rate cuts to inject liquidity and lower borrowing costs. The goal is to directly stimulate the domestic engine that has failed to ignite. However, this policy response underscores the severity of the underlying crisis. The need for aggressive monetary easing to support a 5% growth target highlights how weak the domestic foundation has become. It is a classic case of using the central bank's tools to compensate for a structural deficit in demand, a strategy that may provide a short-term boost but does little to address the root causes-namely, the property sector's collapse and the need to rebuild consumer confidence.

The bottom line is that China's economic model is caught in a bind. The export sector has absorbed the shock of a weak domestic market, but its record surplus is a symptom of the problem, not a solution. The deflationary pressures and policy response confirm that the 2025 target was met on borrowed time, relying on external strength to paper over a deep domestic vulnerability. For 2026, the challenge is to engineer a rebalancing that can break this cycle, but the policy tools available are limited in their ability to fix structural imbalances.

Forward Scenarios: Growth Pathways and Key Catalysts

The outlook for 2026 is one of cautious deceleration, with the economy facing a clear fork in the road. The World Bank projects growth to slow to 4.4% in 2026, while a Reuters poll of economists expects a similar pace of 4.5% in 2026 and 2027. This consensus points to a continuation of the current model, where external demand provides the floor, but domestic weakness drags the ceiling lower. The key question is not whether growth will slow, but by how much and what catalysts could alter the trajectory.

The primary catalyst for any meaningful rebound is a sustained improvement in domestic demand, specifically a stabilization of the property sector. The export engine, while diversified and upgraded, cannot be the sole driver of a sustainable recovery. A durable upturn requires a shift in the growth model, where consumer confidence and private investment regain their footing. This would break the current cycle of weak spending leading to falling prices, which further discourages investment. Without this internal reactivation, the economy remains hostage to external fortunes.

The risks to this outlook are significant and largely external. Persistent U.S. trade pressure, including the threat of new tariffs, represents a direct headwind to the export sector that has been the 2025 lifeline. A sharp slowdown in demand from key non-U.S. markets could force Beijing into a more aggressive stimulus response, as noted by analysts. More fundamentally, the unresolved overhang from the property sector-characterized by weak investment and declining prices-remains a structural vulnerability that saps household wealth and business sentiment. The inability to successfully pivot to a consumption-driven model would cement the economy's dependency on external demand, leaving it exposed to global protectionism.

The bottom line is that 2026 will test Beijing's ability to manage a delicate balance. The policy response will likely be reactive, with stimulus deployed to defend the growth target if exports falter. However, the real challenge is structural: to engineer a rebalancing that can reignite domestic demand and stabilize the property market. The current setup offers little room for error, as the margin for a soft landing has narrowed.