China's 2025 Growth: A Trade-Driven Flow Story with a 2026 Slowdown

The headline is a win: China's economy grew 5.0% for the full year, meeting its official target. But the flow tells a more nuanced story of a two-speed engine. Growth slowed sequentially, with the fourth quarter expanding at 4.5% year-on-year, down from 4.8% in the third quarter. This deceleration was driven by a sharp weakening in domestic demand, most starkly seen in retail sales, which grew just 0.9% in December-the weakest pace since late 2022.

Meanwhile, exports provided the critical offset, allowing the full-year target to be hit. This support came from a strategic diversification away from the U.S., which helped exporters navigate trade tensions and contributed to a record trade surplus of nearly $1.2 trillion in 2025. The reliance on external demand, however, underscores the vulnerability of an economy where domestic consumption and investment are faltering.

The divergence is clear. While manufacturing output and exports powered the headline number, fixed-asset investment contracted 3.8% for the year, and property investment plunged 17.2%. This creates a setup where growth is externally propped but internally fragile, with the domestic engine running on fumes.

The 2026 Outlook: A Structural Slowdown is Inevitable

The forward view confirms the two-speed engine is set to continue, but at a slower pace. The IMF projects 4.5 percent growth this year, up from its prior forecast but still a deceleration from 2025's 5.0%. Goldman Sachs Research sees a slightly faster 4.8% for 2026, which is still down from last year's pace and above the broader consensus. This consensus, however, is not a sign of strength but of a shared expectation for a structural slowdown.

The driver is clear: domestic demand remains the weak link. The IMF explicitly notes that domestic demand has been subdued due to the property slump and weak social safety nets, forcing growth to remain dependent on external trade. This dynamic is expected to persist, with Vanguard forecasting full-year GDP growth to slow to 4.5% in 2026 as the two-speed economy endures. The core challenge is that China cannot rely on ever-higher exports to drive durable growth, making a pivot to consumption-led expansion the critical but long-term policy priority.

The setup for 2026 is one of gradual policy support meeting persistent headwinds. Authorities have begun a new round of stimulus, including frontloaded spending and targeted rate cuts, but analysts see this as gradual and targeted. The property sector's drag is expected to lessen, but the economic and psychological impact of its prolonged downturn will continue to dampen household confidence and consumption. Without a more forceful policy shift to boost domestic demand, the economy's reliance on external trade will remain a vulnerability, capping growth at a sub-5% level.

Catalysts and Risks: Policy Levers and Structural Headwinds

The 2026 trajectory hinges on whether policymakers can successfully pivot the flow from external to domestic demand. The need for more forceful fiscal and monetary stimulus, particularly targeted support for the property sector, is clear. As the IMF notes, stronger social protection and fiscal support for the property sector can help boost domestic demand. Yet implementation faces hurdles, with analysts expecting additional property-support measures but a broad rescue package still distant. This gradual, targeted approach may not be enough to counteract the deep-seated drag from a sector that remains a key wealth anchor for households.

The property market's decline is expected to lessen its economic drag, but the sector itself has not yet reached its bottom. Goldman Sachs Research observes that the economic drag from a declining property market is expected to lessen, which is a positive catalyst for growth. However, the underlying weakness persists, with new property starts hitting levels last seen in the early 2000s. This prolonged downturn continues to fuel a negative wealth effect, dampening household confidence and consumption. The risk is that without a more decisive policy intervention, this structural headwind will linger, capping the recovery in domestic demand.

A key external risk is that elevated global trade uncertainty will curtail the export growth that supported 2025's resilience. While Chinese exporters have successfully diversified into non-US markets, building a consumption- and services-driven economy will take years. The record trade surplus of 2025 was achieved despite higher tariff costs and uncertainty. If geopolitical tensions escalate further, they could directly disrupt the export engine that has been propping up the two-speed economy. This would leave the economy even more exposed, as the domestic engine remains fragile and unable to fully compensate.