China: State of Play, Policy, and Paths Ahead
Inside China’s Balancing Act: Growth, Debt, and Direction
Hey guys,
China’s story in 2025 is a mix of quiet stabilisation and deep structural tension.
Growth looks steady on paper, but under the surface, policy, capital flows, and confidence are all pulling in different directions.
Let’s get into the report.
Central bank tracker
US data tracker
(Government shutdown has kept the table below the same for a week)
China
China’s economy enters Q4 in a state of fragile equilibrium, stabilised. It’s not booming but is supported, not self-sustaining. The headline story is one of resilience amid structural constraint. Growth hovers near 4.8% according to most multilateral estimates, with the World Bank and IMF clustered around that figure. Yet the consensus warns of deceleration into 2026 as external demand softens and policy stimulus fades. Inflation remains barely positive. The PBoC and fiscal authorities have both stepped up support, but their efforts are running against the gravitational pull of property weakness, debt overhangs, and demographic decline. The simplest characterisation of China’s current state is one of macro stability purchased at a high cost in leverage and policy dependence (with a touch of stimulus overuse).
Growth: What’s Driving and What’s Dragging
The composition of China’s growth has changed markedly. Manufacturing and the new energy export complex (electric vehicles, batteries, and solar equipment) are the main engines keeping GDP growth around target. These sectors have become China’s bright spots, supported by industrial policy and a global shift toward cost-efficient green technology. Meanwhile, the domestic economy remains subdued. Private investment and household consumption have lagged amid low confidence, soft labor market sentiment, and the long shadow of the property correction. Services and small business activity are improving but still below pre-pandemic dynamism. PMI readings have oscillated around 50, reflecting a fragile balance between expansion and contraction, with official gauges showing renewed softness into late Q3. Some positive for the overal global tech backdrop (including China) is that the momentum behind semi’s is rallying hard.China catches some of the pleasent smell when tech booms.
As I mentioned at the start, the IMF and World Bank caution that the 2026 outlook could see slower growth as the tailwinds of stimulus fade and global headwinds strengthen. Structurally, potential growth continues to drift lower. Demographics are a major factor, despite a modest “dragon year” birth bump in 2024, the population fell for a third consecutive year, extending a multi-decade trend of labor force shrinkage. Total factor productivity growth has also downshifted, constrained by resource misallocation and slowing technological diffusion under tighter state oversight. Together, these forces imply that sustaining “around 5%” real growth now requires continuous policy support, strong performance in cleantech exports, and ongoing property inventory resolution.
Inflation and Prices: The Demand Shortfall
China’s inflation story is best described as disinflationary drift rather than outright deflation. Headline CPI continues to hover near zero YoY, weighed down by food-led dips and persistent retail discounting. Core inflation (anchored by services and healthcare) is more stable, preventing a Japan style deflation dynamic. PPI remain negative but the deflation gap narrowed into late summer, suggesting industrial pricing power has at least stopped deteriorating. Yet the macro signal is unmistakable: demand remains soft, and competitive “price wars” across consumer durables and autos highlight an economy still operating below its pre-pandemic trend.
This pattern reveals more than weak consumption, it points to a broader overcapacity challenge. In many manufacturing sectors, output continues to outpace final demand, forcing producers to cut prices to preserve market share. The PBOC and State Council have both flagged the need to “stimulate reasonable demand” to prevent disinflation from embedding expectations. For now, the risk is not runaway deflation, but a prolonged period of ultra-low inflation symptomatic of subdued domestic momentum.
Monetary Policy and Liquidity: Easier, But Less Effective
The PBOC remains firmly in easing mode. In mid-May, they cut the 1y LPR to 3.0% and the 5y to 3.5%, both record lows. Since then, they have kept rates steady while signaling openness to incremental reserve requirement ratio cuts or small policy rate trims. Yet the key constraint is not cost of credit, but appetite for it. Banks’ net interest margins have been compressed to cyclical lows, and the drag from property exposures continues to erode asset quality and lending enthusiasm. Yields are ultimately anchored by growth fears.
This makes monetary transmission sluggish. Credit is cheaper but not necessarily flowing to where it’s most needed, particularly among private firms and households. The PBOC has therefore turned to more targeted levers like relending facilities for priority sectors, mortgage repricing to ease household debt burdens, and reserve requirement tweaks to guide liquidity where conventional easing cannot. The tone from policymakers is clear, no “big bang” stimulus, but a steady rhythm of fine tuning.
Fiscal Policy: The Real Driver of 2025
If monetary policy is the background rhythm, fiscal policy is the melody line of China’s 2025 macro score. The centrepiece of Beijing’s stimulus architecture is the deployment of ultra-long special treasury bonds to fund two flagship programmes being nationwide equipment upgrades across seven strategic sectors, and a sweeping consumer “trade-in” campaign targeting autos, appliances, and digital products.
The trade-in initiative alone is sizeable (roughly ¥300 billion for 2025), layered atop 2024’s ¥1 trillion special bond issuance. The incentives are powerful, there will be subsidies of up to 20% on qualifying purchases and as much as ¥15,000 for car scrappage, designed to directly boost household spending. Authorities claim the 2024 round added about one percentage point to consumption growth. For 2025, the program has been expanded and more explicitly tied to productivity upgrading.
Complementing this, policy banks are deploying around ¥500 billion in lending capacity to accelerate investment pipelines in infrastructure and high-tech manufacturing. The MoF has also raised special-bond quotas through 2026 to sustain local investment momentum. Still, the limits of fiscal firepower are clear. Fitch’s April downgrade to “A” reflected growing concern over China’s debt dynamics, while the mountain of local government financing vehicle liabilities constrains the room for an all out bazooka. The likely path ahead is a targeted surgical fiscal expansion.
Property: From Free-Fall to Managed Decline
The property sector remains the biggest structural drag on China’s growth model, though the worst of the collapse appears behind. Prices and transaction volumes are still falling, but the pace has slowed, and the policy toolkit is expanding. Minimum down payment ratios have been cut to 20% for first homes and 30% for second homes in many cities. Mortgage rates have declined following LPR cuts, and the PBOC has introduced relending facilities for state-led purchases of unsold inventory and completion of unfinished pre-sold units.
The most significant shift may yet come because Beijing is weighing a plan to mobilise central state owned enterprises to buy unsold housing stock and convert it into affordable rental units. If executed effectively, such a program could accelerate inventory absorption, stabilise prices, and strengthen banks’ collateral positions. Yet implementation speed and scale remain the critical variables. The faster the rollout, the quicker the path to a floor in property prices, and the cleaner the balance sheets that underpin the financial system. Iron is a perfect high frequency proxy to track for property and construction sentiment and could have quite a bit of upside if sentiment persists.
Financial System and Debt: Stable but Stressed
China’s financial system looks resilient on the surface but increasingly burdened beneath it. The official non-performing loan ratio sits near 1.5%, though property related NPLs are significantly higher. Banks’ profitability is thinning, and their ability to grow credit profitably is constrained by margin compression. Still, system wide capital adequacy remains solid, supported by government backing.
The local government debt problem looms large. A multi-year restructuring and swap program is underway to convert short-term local debt into longer maturities, but analysts widely argue that it only scratches the surface of hidden liabilities. The tail risk is a local funding accident, a cascade of local government defaults that undermines confidence in the broader financial system. So far, the central government’s quiet backstop and selective interventions have prevented such contagion. The question for 2025 is whether these measures will be enough if growth disappoints and local revenues weaken further.
External Sector: Trade, Balance of Payments, and the RMB
Externally, China’s trade is becoming more divided. Cleantech exports (particularly EVs, batteries, and solar components) remain robust, even as traditional exports to the US have slowed. ASEAN demand has helped offset Western weakness, keeping the overall export picture resilient but uneven.
The balance of payments continues to mirror 2024 patterns. The current account surplus widened in 1H25, supported by strong export margins and weak imports. Yet persistent capital and financial outflows through portfolio and FDI channels have offset that strength. SAFE data confirm the divergence where the surplus persists but the capital account bleeds. As a result, the RMB has remained stable rather than strong, hovering within a managed range. Policymakers appear content with this balance, a slightly weaker but stable currency that supports exports without risking capital flight. You can see this balance play out in real time through USDCNH, the offshore yuan. It’s effectively the market’s daily verdict on China’s trade surplus, capital outflows, and policy management.
Geopolitics and Tech Controls: The New Risk Premium
The external environment remains a major swing factor for China’s medium term outlook. US-China relations have settled into a managed but uneasy equilibrium. A “reciprocal tariff framework” has replaced the previous truce, and Washington has expanded export controls under the BIS on advanced chips and manufacturing tools. In response, Beijing has tightened import scrutiny on high-end semiconductors including Nvidia class AI chips and restricted exports of key inputs such as rare earths, graphite, and artificial diamonds.
Europe is moving in the same direction. The EU’s definitive tariffs on Chinese EVs are now in place, and Brussels is building an industrial policy framework aimed at countering perceived subsidies. Meanwhile, regional flashpoints have intensified with incidents in the South China Sea involving the Philippines, including collisions and water cannon confrontations. These situations have heightened geopolitical risk perception and could add friction to trade and investment flows. Besides the tail-risks China is facing, they’re set to outperform the US:
This makes China’s story even more interesting, there is positive performance in a neutral environment, if that neutral environment shifts quickly to posiitve then we will likely see China outperform most of its global peers. From a macro POV these tensions channel through multiple avenues, being capital expenditure (especially in chip and tech manufacturing), export composition (tilting further toward cleantech), and terms of trade dynamics in critical materials. The risk premium on Chinese assets increasingly reflects these geopolitical overlays.
Labour Market and Demographics: Structural Headwinds
The labour market’s headline figures mask underlying fragility. After the government revised its methodology to exclude students, youth unemployment among those aged 16–24 still hovers in the mid-teens and reached a new high under the revised series in August. Household confidence remains subdued, limiting consumption recovery despite stimulus.
On the demographic front, the picture is even starker. China’s population declined for a third straight year in 2024, cementing its transition into an ageing society. The shrinking workforce and rising old age dependency ratio are now structural constraints on growth, productivity, and fiscal space. Policymakers have acknowledged this by emphasising productivity upgrades, automation, and the so called “silver economy” policies aimed at leveraging the consumption potential of older demographics while mitigating labour shortages through technology.
Forward Look: Scenarios and Markers
A contrarian case is quietly building for Hong Kong’s equity market, specifically the HK50 as China’s macro narrative moves from crisis to containment and macro stability takes hold. Growth is holding near 4.8%, inflation is flat, and policymakers are firmly supportive (using ultra-long bonds, trade-in subsidies, and policy-bank credit to engineer a cyclical rebound). With the PBOC keeping rates at record lows, discount rates are anchored and policy support remains active. Property is no longer collapsing but moving into a managed decline, with SOEs preparing to buy unsold housing, containing financial contagion risk. Cleantech exports, resilient ASEAN demand, and a stable RMB are offsetting US and EU friction, while valuations on Hong Kong equities already price in a worst case China slowdown that hasn’t materialised.
Banks, insurers, developers, and exporters (core Hang Seng components) now sit at multi-decade valuation discounts despite improving liquidity and a credible policy floor. In essence, Hong Kong’s market has transformed from a fragile growth proxy into a policy proxy, where steady macro data, stabilised credit, and an asymmetric easing bias make the HK50 a deeply discounted but increasingly compelling long for investors betting on China’s managed stabilisation rather than its collapse. Momentum has picked up this year, but if the backdrop in China unfolds in a positive manner then this chart has space to go MUCH higher.
In short: China doesn’t need to boom for Hong Kong to rally, it just needs to stop deteriorating. And that’s exactly what the data now show. I sent out two positions on the HK50, using profits and risk from the 2s10s steepener meaning the total loss was -0.5%. I will be looking to position long again when the oppurtunity arises and will be sure to send it to the Substack chat.
I do want to refererence a chart that is a tail-risk to immediate positioning, chip valuations near extremes:
Have an amazing week!