China Hits 5% Target, But the Expectation Gap Reveals a Crumbling Engine

China hit its 5% annual growth target for 2025, a headline that met the government's goal. But the market was looking past the headline to the trend, and the quarterly print revealed a steeper deceleration than expected. The economy grew at a slower pace of 4.5% in Q4 from 4.8% in the previous quarter. While this beat the Reuters consensus forecast of a 4.4% expansion, the real story is the momentum loss. The slowdown to a three-year low in the final quarter signals fading engine power, not a fresh upswing.

The most glaring miss, however, was in the investment engine. Full-year fixed asset investment contracted by 3.8%, a far worse result than the 3.0% drop expected by analysts. This wasn't a one-quarter stumble; the data shows a relentless decline, with the annual figure worsening from a 2.6% drop in the first eleven months. The property sector, a traditional growth pillar, saw investment fall 17.2% for the year, underscoring the depth of the slump.

This expectation gap reveals a fragile growth model. The headline 5% target was achieved, but it was powered by exports and manufacturing, which did the heavy lifting. Domestic demand, particularly through investment, remained under severe pressure. In other words, the economy is showing resilience, but it's a resilience built on external demand, not a broad-based domestic recovery. That creates a foundation that is both narrow and vulnerable to global trade headwinds.

The Engine of Growth: Exports vs. Domestic Demand

The growth story for 2025 is a tale of two engines. On one side, exports provided the crucial lift, helping to offset a deep domestic slump. On the other, the domestic demand engine sputtered, revealing a fragile foundation. The numbers tell the split: full-year fixed asset investment contracted by 3.8%, a sharper drop than expected. In response, full-year exports increased by 6.1% in yuan terms, a powerful counterweight that kept the headline growth on track.

Yet this export-driven growth masks a persistent weakness at home. Retail sales, the pulse of consumer demand, slowed to a crawl, growing just 0.9% in December. That was the weakest pace since late 2022 and missed forecasts. This domestic demand slump is structural, not a temporary dip. It's the result of a prolonged property crisis and weak household confidence, which policymakers have struggled to reverse despite stimulus programs.

The durability of this export engine is now in question. Beijing has managed to reroute shipments away from the U.S., but it faces mounting trade barriers globally. As economist Lynn Song notes, the key question is how long this can remain the primary driver. With the U.S. and other economies like the EU and Mexico raising or threatening new tariffs, the external environment is tightening. This creates a direct risk to the growth model that just barely met the 5% target.

The record trade surplus of $1.2 trillion is a double-edged sword. It's a clear sign of export strength, but it also highlights the internal imbalance. A surplus of this scale means China is exporting far more than it is importing, which is a symptom of weak domestic demand. In other words, the economy is growing, but it's doing so by selling more abroad while its own consumers and businesses pull back. That setup is inherently vulnerable to any global trade slowdown and leaves the economy exposed if external demand falters.

The Investment Crater: A Sandbagged Reality

The headline growth target was met, but the investment data reveals a crater where confidence used to be. The official print for 2025 shows fixed asset investment contracting by 3.8%, a sharper drop than the 3.1% decline expected by analysts. This wasn't a minor miss; it was a significant deterioration that reset the market's view of domestic momentum. The real shock came from the private sector, where investment fell 6.4% year-on-year. That's a deepening of the slump, signaling a fundamental loss of appetite for capital expenditure.

The property sector is the epicenter of this crater. Investment there plunged 17.2% for the full year, a deepening from the 10.6% drop in 2024. This isn't a cyclical dip; it's a structural collapse that has been accelerating. The data shows the annual figure worsening from a 2.6% drop in the first eleven months, with the decline in December alone being the steepest monthly drop in over a year. This relentless property slump is the primary reason for the Q4 slowdown, directly dragging on the investment engine that was supposed to be a growth pillar.

In this context, the recent announcement of "proactive" fiscal policies looks less like a bold new plan and more like a response to a reset expectation. The market had been hoping for a stabilization, but the sandbagged reality of a 6.4% private investment drop and a 17.2% property plunge forces a guidance reset. Policymakers are now playing catch-up, trying to inject confidence into an economy where the private sector has already pulled back.

The bottom line is that the investment crater reveals a fundamental loss of confidence in the domestic economy. When private businesses and developers stop investing, it's a clear signal that the future looks uncertain. For now, growth is being propped up by exports, but that external engine is facing rising trade barriers. The domestic foundation, as shown by this crater, is crumbling.

Catalysts and Risks: The 2026 Expectation Reset

The fragile growth model that just met its target now faces a critical test. The forward view is one of a reset expectation. The World Bank has already signaled a slowdown, forecasting China's economic growth to slow to 4.4% in 2026 from an estimated 4.9% in 2025. This downward revision in consensus sets the stage for a year where the market will scrutinize every data point for signs of whether the export engine can continue to compensate for a domestic economy still struggling with weak investment and consumption.

The key risk is clear: export strength may not be sustainable. While Beijing successfully rerouted shipments away from the U.S., other governments are taking action to protect local industries, with the EU threatening new tariffs and Mexico already raising duties. Should more economies follow suit, the external environment will tighten, directly squeezing the primary growth pillar. This creates a direct vulnerability for the 2026 outlook, where the model's reliance on exports is exposed.

Watchpoints for the coming year will center on policy effectiveness. The market will need to see if new credit-easing measures and the continuation of consumer stimulus programs, like trade-in subsidies, can finally stabilize the domestic demand engine. As economist Chi Lo notes, stabilization of the property market is key to reviving public confidence. Any shift in fiscal policy to directly stimulate consumption or investment will be a major catalyst. For now, the setup is one of a sandbagged reality: the economy grew, but it did so by leaning heavily on external demand while its internal foundations remain weak. The 2026 expectation gap will be defined by whether that external support holds or cracks.