China’s 1Q25 economy grew better than expected at 5.4%. The increase in US import tariffs may pressure China’s economy for the rest of the year

China’s 1Q25 economy grew 5.4% YoY (Figure 1), exceeding the forecaset of 5.2% YoY, supported by the following factors:

1.    Exports showed strong growth, accounting for approximately 20% of GDP, with shipments to key trading partners such as the US and ASEAN accelerating sharply in March 2025 amid concerns over a new round of trade wars (Figure 2).

2.    Domestic spending (accounting for approximately 50% of GDP) expanded strongly, driven by the trade-in program (old for new), which saw an increase in credit limits as compared to the previous year.

3.    Industrial output accelerated in line with export trends, with output from new manufacturing industries such as electric vehicles and industrial robots showing strong growth (Figure 3).

•    Meanwhile, the continued contraction in real estate investment still pressured China’s economy (Figure 4).
•    Although China’s 1Q25 economic performance surpassed expectations, it may still face significant uncertainty for the rest of 2025 due to four key factors:

1.    China’s exports may slow following the latest US 145-percent import tariffs, which are projected to cut Chinese exports to the US by more than half. However, the reciprocal tariff exemption on electronics, including smartphones and computers, which account for 22 percent of US imports from China, may partially offset the impact, though these products still face an additional 20% import tariff due to US allegations of Chinese fentanyl trafficking. Meanwhile, the 90-day reciprocal tariff exemption for non-China countries may boost China’s exports to ASEAN. Nonetheless, this increase is unlikely to fully compensate for the US export decline, which accounts for 2.8% of China’s economy.

2.    Uncertainty surrounding trade negotiations between the US and other nations may trigger additional countries to impose tariff hikes on China in addition to the US, potentially hindering China’s efforts to find new export markets.

3.    China may face a heightened deflation risk as domestic demand may continue to weaken amid persistently low consumer confidence. Meanwhile, price levels may remain under pressure from mounting industrial overcapacity, driven by the risk of a new round of trade war. Furthermore, slowing industrial output due to declining exports may dampen employment and domestic income growth, further aggravating China’s deflationary pressures.

4.    China’s real estate sector may continue to pressure domestic confidence.

•    The Chinese government may gradually roll out additional economic stimulus measures, including fiscal support for domestic spending, investment in infrastructure and new quality productive forces, as well as export subsidies. Moreover, there is financial easing, such as policy rate cuts. However, these efforts are unlikely to offset the impact of the renewed trade war. KResearch expects China’s 2025 economic growth to slow to 3.6 percent YoY.

Scan QR Code