China's Resilient Q2 Growth: Navigating Trade Headwinds and Unlocking Sector-Specific Opportunities

China's economy defied expectations in Q2 2025, growing 5.2% year-on-year, but the numbers mask deeper divides. While manufacturing and export resilience shone, domestic demand stagnation and the unresolved U.S.-China trade conflict loom as critical risks. For investors, the path forward lies in selectively targeting sectors benefiting from policy stimulus and export diversification, while avoiding overexposure to vulnerable industries like property.

Manufacturing: Export Diversification Fuels Resilience

The star performer remains industrial output, which surged 6.8% in June—far exceeding forecasts. This strength stems from Beijing's pivot to non-U.S. markets: exports to the EU and Southeast Asia rose 6.6% and 13%, respectively, offsetting a 10.9% drop in U.S.-bound shipments. .

This shift underscores the viability of China's “trade rebalancing” strategy. Sectors like machinery, electronics, and automotive—already dominant in global supply chains—are likely to benefit further as firms relocate production closer to European and Asian markets. Investors should prioritize state-backed manufacturers with strong export exposure, such as those listed on the Shanghai Composite Index, which has gained 4% year-to-date despite macro headwinds.

Renewables and Tech: Fiscal Stimulus Meets Long-Term Growth

The government's stimulus measures—interest rate cuts, liquidity injections, and subsidies—are disproportionately favoring infrastructure and green tech. Fixed asset investment in renewable energy and advanced manufacturing grew at double the pace of overall investment, while property investment sank 11.2%.

Solar and wind energy projects, in particular, are being fast-tracked to meet China's 2030 carbon targets. State-owned enterprises (SOEs) like China National Offshore Oil Corporation (CNOOC) and Tongwei Group (a solar cell manufacturer) are key beneficiaries of subsidies and land-use policies. Meanwhile, tech-driven industries such as semiconductors and AI infrastructure—critical to reducing reliance on U.S. components—are gaining momentum.

Consumer Sector: Caution Amid Deflationary Pressures

Retail sales growth slowed to 4.8% in June, underscoring the fragility of domestic demand. Deflation risks persist, with food prices falling for seven consecutive months, and youth unemployment stuck near record highs. While subsidies for consumer electronics and automobiles have provided short-term boosts, structural issues like weak household savings and wealth inequality remain unresolved.

Investors should avoid overexposure to consumer discretionary stocks unless they show clear pricing power or exposure to export markets.

Property: A Sector in Structural Decline

The property market's collapse continues unabated, with investment down 11.2% in H1. Beijing's reluctance to unleash a full-scale bailout—fearing moral hazard—means the sector will remain a drag on growth until reforms address overleveraged developers and excess inventory. Avoid residential developers and construction firms; instead, focus on logistics real estate tied to e-commerce and cross-border trade hubs.

Policy Outlook: More Stimulus Needed, but Timing is Critical

Analysts estimate that 1.5 trillion yuan in additional fiscal spending is required to hit the annual 5% growth target. With U.S. tariffs still at 145% and a trade deal deadline looming on August 12, policymakers face a tight window to act. A rate cut or targeted tax relief for exporters could provide a near-term boost, but structural reforms to pensions and local government financing are needed for sustained growth.

Investment Strategy: Selective Exposure Before Q4

• Buy:
• Manufacturing exporters with EU/Asia exposure (e.g., Zhejiang Geely Holding Group, a automotive exporter to Scandinavia).
• Renewables and tech SOEs (e.g., Tongwei Group, CNOOC's offshore wind projects).

• Infrastructure funds linked to Belt and Road projects.

• Avoid:

• Property developers (e.g., Evergrande, China Vanke) until policy clarity emerges.

• Consumer discretionary stocks without export linkages.

• Watch:

• The U.S.-China trade deal outcome (August 12).
• Q3 inflation data to gauge deflationary pressures.

Conclusion: Time is Running Out

China's Q2 results reflect a “growth-at-any-cost” strategy, but the economy remains fragile. Investors must balance short-term opportunities in manufacturing and renewables with long-term risks from policy inertia and trade friction. With Q4 likely to see renewed slowdown pressures, now is the time to take selective positions—before the window closes.