China Booms as Tariffs Loom
China's economy demonstrated unexpected resilience in early 2025, growing 5.4% in the first quarter—surpassing the estimates of 5.1%. This temporary boost stemmed from consumer subsidies and accelerated export shipments as businesses rushed to beat impending tariffs. However, as trade tensions with the Trump administration intensify, China’s growth is expected to temper.
March indicators revealed strong performance across sectors just before major US tariffs took effect. Industrial output jumped 7.7%yoy—the strongest level since mid-2021—while retail sales grew 5.9%, significantly exceeding economist projections of 4.2%. Fixed asset investment grew 4.2% (exp. 4.1%), though property investment contracted by 9.9%. The urban unemployment rate improved to 5.2% in March, down from February's two-year high of 5.4%.
China typically posts strong economic data at the beginning of the year, and with the recent additional stimulus measures announced, consumption and investment have been a beneficiary. Despite these encouraging figures, financial markets are still concerned. Recent cargo statistics already show declining processing volumes at Chinese ports as global companies pause orders and reduce production. The tit-for-tat tariff war has escalated dramatically, with total levies imposed by Trump on Chinese goods reaching 145%, while Beijing has retaliated with 125% duties on American products.
Several investment banks have slashed their growth forecasts for China, with UBS projecting just 3.4% expansion this year—the most pessimistic outlook among major financial institutions. UBS expects China's exports to the US to fall by two-thirds in coming quarters.
Economic performance moving forward will depend heavily on Beijing's stimulus response. Policymakers may look at cutting reserve requirement ratio by 50bps, coupled with interest rate reductions of 15bps, and further fiscal stimulus of CNY1-1.5 trillion ($137-$205 billion). The upcoming Communist Party Politburo meeting later this month may provide insights into the timing and scale of these measures.
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