China’s economy grew by 5.4% in 1Q 2025, with a sequential gain of 1.2% QoQ. The recovery showed signs of improvement across multiple fronts. External demand was helped by frontloaded shipments. Industrial output and retail sales picked up on the back of ongoing stimulus. Credit demand firmed, with fixed asset investment gaining some traction. Still, mounting trade tensions pose downside risks, underscoring the need for timely policy support.

Trade

Export growth accelerated from 2.3% YoY in Jan-Feb to 5.8% in 1Q, with exporters frontloading the shipments before the heightened tariff kick-in on 2^nd April. Mechanical and electrical products picked up from the moderate growth in the first two months. Of which, general machinery and equipment and mobile phone exports turned positive during the period. Agricultural products also picked up from 3.0% YoY YTD in February to 5.7% in March.

Such development cohered with official PMI’s further improvement to 50.4 in March. Caixin SME exporter-focused index also stayed above the expansionary threshold at 50.8. Looking ahead, frontloading of electronics products will likely sustain. Exporters will speed up the shipment in view of the temporary tariff exemption. 

Industrial production

Industrial production growth improved from 5.9% YoY to 6.5% in 1Q, backed by both external and domestic demand. Amongst all, EV ,3D printing equipment and industrial robotics surged 45.4%, 44.9% and 26.0% YoY, respectively, supported by equipment upgrade initiatives.

Fixed asset investment

Headline fixed asset investment (FAI) improved to 4.2% YoY in first three months. State-sector investment remained as a primary driver of FAI growth, increased by 6.5% YoY YTD. Automobile and equipment and tools purchases, ticked up by 24.5% and 19.0% YoY, thanks to the government initiatives. Railway, shipbuilding, aerospace and other transportation equipment manufacturing grew by 37.9% in March. Private investment improved from flat to 0.4%, backed by narrowed decline in foreign direct investment.

Property

Initial improvement was seen in real estate investment, with contraction narrowed from 10.6% in 2024 to 9.9% as of March. Residential floor space started dropped 23.9% YoY so far this year. Property developers continue to prioritise the completion of unfinished homes. Residential inventory remained at 25.4 months on a 12months moving average basis in February, with a 1.2% decline in primary market sales transaction in 1Q.

Retail sales

Retail sales growth increased from 4.0% YoY in Jan-Feb to 4.6% in 1Q, thanks to the improving consumer sentiment. Communication equipment, cultural and office supplies, household appliances, and furniture increased by 26.9%, 21.7%, 19.3%, and 18.1%, respectively. The decline in automobile also narrowed from -4.4% YoY YTD in February to -0.8% in March.

Money supply

Liquidity conditions improved in Q1. M1 growth rose from 0.1% YoY in February to 1.6% in March. The narrowing gap between short-term M1 and time deposit M2 growth indicates that households are more willing to hold liquid cash for consumption, while corporates are showing greater willingness to undertake capex expansion.

Loans

Credit demand also showed signs of stabilisation. Loan growth rebounded for the first time after 23 consecutive months of slowdown, driven by strong demand for corporate loans. The decline in new medium- to long-term corporate loans narrowed to -10% YoY in Q1, from -13.0% in the first two months. Household medium- to long-term loan contraction also moderated, improving from -27.7% YoY to -9.4%.

Inflation

Consumer prices remained flat at -0.1% YoY in March, consistent with levels seen in January and February. Core CPI followed a similar trend, holding steady at 0.5% YoY. Meanwhile, producer prices extended their contraction, falling by -2.5% YoY in March—marking the 30th consecutive monthly decline amid persistent overcapacity pressures.

Looking ahead

China began 2025 on a strong footing, though this momentum now faces pressure from escalating trade tensions. The imposition of steep tariffs—145% on all Chinese imports, with select products facing rates as high as 245%—will weigh on growth. We estimate these US tariffs alone could reduce China’s GDP by 2.28%. Amid heightened uncertainty, businesses may delay hiring and capital expenditures, further dampening economic activity. The sagging external sector will fuel overcapacity and, in turn, exert deflationary pressure (our estimates show that the correlation between PPI and export growth reached 0.71 during 2007–2015).

In our view, the government is likely to fast-track fiscal stimulus, including the issuance of RMB 4.4 trn in local government special bonds and RMB 1.8 trn in special sovereign bonds. On the monetary front, we anticipate further easing, with a 100bps cut to the reserve requirement ratio and a 30bps reduction in the 1-year loan prime rate this year.

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