China’s economic growth rate peaked in 2007 when it hit a jaw-dropped 14.1 percent; it has been declining since then. The decline was accelerated by Xi Jinping’s crackdown on the real estate sector through his “three red lines” policies, then by the COVID-19 pandemic. Now China’s annual economic growth has stagnated at around 5 percent, according to official data, and many outside experts think the real total is even lower.
China just published its economic data for the first half of 2025, indicating a better-than-expected growth rate. According to the latest data, China’s GDP growth rate through the first six months of 2025 was 5.3 percent, better than the annual target of 5 percent. Despite this, the structural challenges remain solid. Internal factors – like the growing disparity between rural and urban areas and rising youth unemployment – are combining with the ongoing trade war with the United States and geopolitical crises in Ukraine and the Middle East to pose a serious geoeconomic challenge for the party-state.
First, the good news for China: the trade war with the United States has not dampened either its exports or its manufacturing output (yet).
On April 2, Donald Trump’s administration in the United States imposed double-digit tariff rates on almost every country in the world, including China — though it quickly delayed the largest increases for a 90-day review period. The “Liberation Day” announcement, as Trump called it, forced Beijing not just to retaliate, but to speed up the process of diversifying its economy from the United States. To that end, China’s policymakers have two twin goals: expanding exports to other parts of the world while also focusing on boosting household consumption, which remains stuck at around 40 percent, far lower than the OECD average of 60 percent.
Amid Trump’s renewed trade war, Chinese policymakers doubled down on export diversification. Trade with ASEAN (15.9 percent of China’s total trade) and key European economies (12.6 percent) expanded significantly. Amid those efforts, despite the U.S. tariffs, China notched a trade surplus of $586 billion in the first half of 2025, larger than the same period in 2024. That surplus is equivalent to more than 6 percent of China’s GDP, the highest recorded rate since 2013.
Despite the trade friction between the two superpowers, China’s exports to the U.S. stabilized in the second quarter of 2025 due to temporary tariff reprieves and partial agreements brokered during high-level meetings in Geneva and London. These diplomatic efforts injected a degree of predictability into the trade environment. However, the broader strategic shift remains intact: Beijing is decoupling in economic relations and trying to reduce its structural dependency on the U.S. market in favor of a more geopolitically diverse portfolio.
China remains the world’s manufacturing powerhouse. Its industrial production rose by 6.8 percent in June, beating the forecast of 5.6 percent. Chinese factories have diversified supply chain opportunities in markets other than the United States, which is a significant factor in resiliency of industrial production.
Despite these external opportunities, China still faces serious structural domestic economic challenges. Household consumption has remained stagnant for two decades at around 35-40 percent, coupled with exceptionally high saving rates. In addition, the youth and skilled unemployment rates have touched 15 percent, according to official data. While exports provide crucial support to the economy, China’s leadership is aware of and indeed often acknowledges these domestic challenges.
Beijing has implemented targeted fiscal measures to stimulate consumer spending and shift away from investment-heavy growth. National and provincial subsidy programs sought to expand domestic household consumption. Borrowed from the post-Global Financial Crisis “cash-for-clunkers” program, China expanded this program to incentivize consumers to replace outdated products – including automobiles, electronics, home appliances, and more – with environmentally friendly alternatives. From January to May 2025, subsidies supported the purchase of over 77 million household appliances, 56 million electronic devices, and 6.5 million electric bikes. More than 57 million home decor items also received support.
Consequently, retail data showed a 6.4 percent year-on-year rise in May, surpassing expectations. However, the impact was short-lived; growth slowed to 4.8 percent in June, falling short of the projected 5.3 percent. The factors behind this decline can be the earlier-than-usual online shopping promotions in May and administrative disruptions to the subsidy rollout in June. Still, despite the recent decline, Beijing’s policies of combining fiscal stimulus with green development goals have led to a moderate upward trend in consumption.
The real estate sector is more problematic. The property sector, which has long been the backbone of local economies in China, is facing more severe regulatory challenges. Many urban Chinese had invested their savings in real estate (more than 70 percent of household wealth), and with the regulatory crackdown and ensuing downturn, they lost their initial value. Meanwhile, according to the latest data, new-home prices in 70 major cities in June fell by 0.27 percent compared to May, marking the steepest decline in eight months. Second-hand home prices experienced an even more pronounced drop of 0.61 percent, their most significant monthly decline since September.
The increasing number of cities reporting falling prices suggests that the weakness in China’s real estate sector is not abating but spreading. The downturn is exacerbated by the declining real wages of urban middle classes and a rising gap between the rich and the poor. The poor and middle classes cannot afford real estate in China due to rising prices.
The real estate sector presents two interconnected challenges. First, the downturn reduces consumer confidence, particularly among lower-middle and upper-middle class households, who rely on property as a significant source of wealth. Second, it undermines local government revenues, which are heavily dependent on land sales. This could reduce future fiscal policy options.
China’s economic performance in the first half of 2025 was encouraging, as expanded export growth and a domestic stimulus program helped tackle external shocks and internal deceleration. However, short-term resilience does not guarantee long-term transformation. Despite China’s trade diversification ambitions, internal pressures like stagnant consumption, falling property prices, and a low consumption-to-GDP ratio persist. While the economy has remained stable in 2025, sustained momentum will require systemic reforms to boost household incomes, expand public services, and enhance labor mobility.
Beijing’s leadership recognizes the structural challenges, but policy solutions remain uneven. China’s test lies in embracing a proactive, reform-driven approach to economic rebalancing. Its success will determine China’s economic growth in the second half of 2020 and shape the global economy.