The Steady Dragon Can Breath Fire and Byte
China's economy delivered robust 5.2%yoy growth in Q2 2025, exceeding market forecasts and maintaining momentum towards its annual target of "around 5%." This performance highlights the resilience of the Chinese economy, despite trade tensions with the US.
Exports rose by 5.8% in June, driven in part by a rush of orders ahead of possible new US tariffs. China's diversification efforts are also becoming increasingly evident, with notable export gains to Southeast Asia and the EU helping to offset some of the decline in trade with the US. Meanwhile, industrial output also impressed, growing 6.8%yoy, with high-tech manufacturing remaining a key growth engine.
However, concerns persist on the domestic front. Consumer prices edged lower in the first half of the year, indicating ongoing deflationary pressures. Retail sales growth has also slowed, and the property market remains under strain, with new home prices falling at their fastest rate in months. Fixed-asset investment has also underperformed, adding to signs of weakness in domestic demand.
Beijing’s broader strategy to weather economic headwinds and rising tariffs involves a multi-pronged approach. The focus is shifting towards strengthening domestic consumption to counterbalance external uncertainties. China is intensifying its diversification of trade partnerships and doubling down on industrial upgrading and technological self-sufficiency, particularly in strategic areas such as semiconductors.
China maintains significant financial resources to navigate potential economic turbulence. Foreign exchange reserves of nearly $3.32 trillion as of June provide a robust buffer against external shocks whilst supporting renminbi stability. The China Investment Corporation (CIC), the country’s sovereign wealth fund, manages assets estimated at around $1.33 trillion, providing further financial stability and firepower.
Furthermore, the People’s Bank of China (PBOC) possesses extensive monetary policy tools including interest rate cuts and adjustments to bank reserve requirements, which it has already signalled will be deployed in a “moderately loose” manner to support growth. Fiscal policy remains equally flexible, with Beijing demonstrating willingness to expand deficit spending, including the CNY300 billion ultra-long special sovereign bonds allocated for consumer subsidies in 2025. Collectively, these resources give policymakers considerable flexibility to inject liquidity, support key industries, and cushion the economy from further shocks.
Separately, in a surprising development amid ongoing US-China tech tensions, NVIDIA, the leading chipmaker, announced its expectation to resume sales of its H20 AI chips to China. This marked a significant departure from Washington's previous stance following April's effective ban which we discussed in our daily “Gobi Bytes”. This reversal suggests the US government will now grant required export licences, potentially boosting NVIDIA's revenue whilst signalling a more pragmatic approach to tech sector relations.
The policy shift introduces new dynamics to evolving US-China tech policy, suggesting a potentially more conciliatory stance from Washington that could provide relief to technology sectors on both sides of the Pacific. However, given the volatility of recent policy reversals, markets would be wise to wait for the signatures to dry before celebrating.
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