China's 2025 Growth: A Trade-Driven Target Met, But Structural Challenges Loom

China's economy achieved its official growth target for 2025, with gross domestic product expanding by 5 percent to reach 140.19 trillion yuan. Yet the final quarter told a different story, as growth slowed to 4.5% from a year earlier. This divergence frames the year's outcome: a trade-driven target met, but at the cost of deepening domestic weakness.

The engine for this external success was a record trade surplus. China's full-year surplus hit $1.19 trillion, a figure that broke the trillion-dollar threshold for the first time. This was powered by exports that grew 5.5 percent to $3.77 trillion, defying expectations and a turbulent year of global trade tensions. The surge was particularly strong in new markets, with shipments to ASEAN and Africa driving the expansion. In December alone, exports jumped 6.6 percent year-on-year.

This export strength starkly contrasts with the deterioration in domestic demand. While industrial output held up, retail sales and investment worsened throughout the year. The economy's core problem-a persistent imbalance between strong supply and weak demand-became more pronounced. This shortfall is the central vulnerability for 2026, as it undermines the sustainability of growth and fuels a record three-year streak of deflation.

The bottom line is that China's 2025 performance was a story of resilience, not recovery. By successfully pivoting exports to offset U.S. tariffs, the economy met its headline target. But the record surplus masks a domestic demand shortfall that remains the most pressing challenge, threatening to slow the economy's trajectory as external pressures persist.

The Export Engine: Diversification and Policy Support

China's resilient export performance was not a matter of luck, but a deliberate strategic pivot. Facing a sharp decline in shipments to the United States due to renewed tariff pressures, manufacturers successfully diversified into new markets, with shipments to ASEAN and Africa surging to drive the record surplus. This geographic shift is the core driver behind the 5.5 percent annual export growth that outpaced expectations. The momentum carried into the final month, as December exports jumped 6.6 percent year-on-year, accelerating from November's pace.

This diversification was supported by a deep industrial base and policy coordination. Vice-Minister Wang Jun attributed the robust performance to supportive policies and the country's industrial depth. The government's own actions, like the recent revisions to the Foreign Trade Law, signal a move toward freer trade, while the auto sector's 19.4 percent export growth and dominance in EVs highlight the competitive strength of specific industries.

Yet, this external success underscores a domestic imbalance. As Beijing looks to exports to counteract a prolonged property slump, the leadership has also begun to acknowledge the need to rebalance. In response, the cabinet has pledged to implement a coordinated fiscal–financial policy package to spur domestic demand. This includes concrete steps like a 62.5 billion yuan special treasury bond fund for a consumer trade-in scheme and expanded loan support for services and personal consumption. The goal is clear: to offset weak internal demand while the export engine continues to run.

The final month's data shows the export momentum is firm, with imports also rising 5.7 percent in December. However, analysts note this could be partly due to a low base effect from the previous year. The bigger picture remains one of structural tension: a powerful, diversified export sector is propping up the economy, while the government scrambles to build a stronger domestic engine. The record surplus is a testament to China's manufacturing adaptability, but it also highlights the vulnerability of relying on external demand to fill a gaping hole at home.

The Domestic Demand Deficit and Inflation Signals

The latest price data paints a clear picture of a demand-constrained economy, reinforcing the urgent need for targeted stimulus. On one side, consumer prices accelerated to 0.8% year-on-year in December, marking the fastest pace in nearly three years. This uptick, driven by a monthly gain of 0.2%, was largely attributed to base effects and seasonal factors rather than a surge in underlying spending power. On the other side, producer prices continued to fall, slipping 1.9% year-on-year for the 40th consecutive month. This deep and persistent deflation in the industrial sector signals weak business demand and excess manufacturing capacity.

The mixed signals are telling. The modest acceleration in headline consumer inflation does not mask the underlying weakness. More importantly, core inflation held steady at 1.2% annually, suggesting that underlying price pressures remain subdued. This divergence-consumer prices ticking up while industrial prices deflate-highlights a fundamental imbalance. It points to a domestic economy where final demand is not strong enough to pull forward business investment or inventory accumulation, leaving factories with little pricing power.

For policymakers, this data is a clear mandate. The record three-year streak of producer deflation is a red flag for the industrial base, while the modest core CPI reading indicates that broader consumer demand is not yet robust. Together, they confirm that the economy remains in a state of weak internal demand, precisely the vulnerability that Beijing acknowledged and pledged to address with its coordinated fiscal–financial policy package. The inflation report does not change the need for stimulus; it sharpens the focus on delivering it effectively to close the gap between supply and demand.

Catalysts and Risks for 2026: The High Base and Policy Execution

The setup for 2026 is defined by a high base and a critical test of policy execution. The first quarter faces a near-term headwind as it begins from the elevated growth levels achieved in the final months of 2025. With exports accelerating to a 6.6 percent year-on-year pace in December, the front-loading of shipments to offset U.S. tariffs has created a difficult comparison. This means the economy must generate new momentum from a stronger starting point, making the success of new fiscal packages all the more urgent.

The centerpiece of this effort is the coordinated fiscal–financial policy package, which includes an initial 62.5 billion yuan in special treasury bond funds for a consumer trade-in scheme. This targeted stimulus is designed to directly address the core vulnerability: weak domestic demand. Its effectiveness will be the primary catalyst for shifting the economy's balance away from export reliance. The cabinet's recent meeting reaffirmed the commitment to ensure a solid start, pledging to strengthen loan support for services and personal consumption. If implemented swiftly and at scale, this could begin to close the gap between supply and demand that has fueled three years of producer deflation.

Yet, structural challenges remain formidable. Persistent external trade tensions are a constant risk, with China's record surplus already drawing concern from trading partners about overcapacity and market distortions. The auto sector's 19.4 percent export growth and dominance in EVs exemplify this strength, but also highlight the vulnerability of key industries to protectionist pushback. Furthermore, the government's own acknowledgment of the imbalance between strong domestic supply and weak demand suggests that overcapacity in manufacturing is a systemic issue that any stimulus must navigate carefully.

The bottom line for 2026 is one of execution under pressure. The high base from 2025's export surge sets a tough benchmark. The new fiscal tools offer a clear path to stimulate consumption, but their impact will be limited if broader structural issues-like a weak jobs market and falling home prices-remain unresolved. Success hinges on policymakers delivering a stimulus that is both timely and effective enough to build a foundation for more balanced growth, before the external pressures and internal weaknesses can reassert themselves.