OECD Economic Outlook, Volume 2025 Issue 2

China

Economic growth will remain unchanged from 2024 at 5% in 2025 and weaken to 4.4% in 2026 and 4.3% in 2027. Consumption will be dampened by high precautionary savings and the payback effect of the trade‑in programme that had led to front-loading of purchases of durable goods to benefit from lower prices. Real estate investment will continue to contract, and prices fall as excess capacity is worked off. The anti‑involution campaign, aiming at addressing high competition and excess capacity, is expected to weigh on business investment, but infrastructure investment should pick up with the new Five-Year Plan. Exports will be constrained by the US tariff increase. Anti-involution policies will likely help CPI inflation to remain positive and contain the fall of producer prices. The main risks stem from trade uncertainties and how overcapacity is managed, while reforms and new projects could invigorate private investment more strongly.

Monetary policy remains supportive, though the scope for further rate cuts is limited as they hurt bank profitability amidst asset quality concerns. Fiscal policies have become more supportive in 2025 with the deficit target increased by a percentage point of GDP. Wide-ranging reforms are needed to ensure sufficient competition in all industries, reduce the regulatory burden and strengthen market access for private companies and strengthen social protection.

Growth has been strong, but headwinds are strengthening

Annual growth was 5.2% in the first three quarters of 2025. Consumption has been supported by the expansion of a trade-in programme, including cars and home electronics, although in the second half of the year the payback effect has started to materialise with leading indicators and factory production plans foreshadowing a slowing. Overall investment has been weak, as real estate construction continues to contract, business investment in industries affected by excess capacity has been hit by the anti-involution campaign, and infrastructure projects are being completed as the end of the planning period is reached. Industry capacity utilisation rates are at relatively low levels, further weighing on business investment. Reduced food price deflation and higher inflation of non-food goods and many services helped CPI inflation turn positive in October. Producer prices have continued to fall, though to a lesser extent as the anti‑involution measures have begun to have an impact.

After having benefitted from front-loading in anticipation of new tariffs early in 2025, exports to the United States have subsequently declined. The US share of Chinese merchandise exports shrank to 11.4% in the first three quarters of 2025, falling four percentage points in the past two years, whereas exports to most other destinations have been expanding rapidly. China’s temporary imposition of additional export controls on rare earth metals in April and October contributed to risks of supply-chain disruptions, raising uncertainty. The current account deficit is expected to reach around 3% of GDP.

China 1

Source: CEIC.

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China: Demand, output and prices

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China 2

Source: CEIC.

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Fiscal and monetary policies remain supportive

Fiscal policy has been expansionary in 2025 with the introduction of a number of measures to support incomes and boost consumption, in addition to the trade-in programme for cars and household appliances. The stock market boom has boosted fiscal revenues through stamp duties and higher tax collection. The next Five-Year Plan, starting in 2026, will bring about new infrastructure projects, including the mega-size dam on the Yarlung Tsangbo river in Tibet. Spending on this project represents around 1% of GDP each year in the next five years and will be completed by 2030. Use by local governments of special bonds will be more flexible, boosting infrastructure spending, but more stringent accounting rules will seek to raise accountability and efficiency. A recent measure injects capital into new projects and thus kickstarts more investment projects.

The monetary policy rate will remain unchanged and room for cuts in other rates, such as the effective lending rate, is shrinking in the context of asset quality concerns. Deposit rate cuts particularly hurt smaller banks with a narrower deposit base. The stock market boom may have a limited effect on consumption. The requirement for banks to publish all loan-related costs in a transparent manner will improve access to financing.

Growth is expected to remain broadly stable over the next two years

Growth is expected to ease from 5% in 2025 to 4.4% in 2026 and 4.3% 2027 due the payback effect of the trade-in programme, continuing adjustment in the real estate sector, the unfolding of the anti-involution campaign and higher trade barriers. Consumption will be supported by higher social transfers, higher incomes due to wage progression rules and the introduction of more public holidays, although household savings will remain high in the absence of a stronger social safety net. A series of new infrastructure projects will mitigate at least in part the impact of real estate adjustment and the anti-involution campaign on investment. Higher tariffs on trade with the United States will contribute to lowering exports and imports, though the impact will be mitigated by lower administrative burdens on firms, a full VAT refund on exports, the critical nature of some trade and through stronger exports to other markets. Inflation will remain low, with CPI inflation turning positive and PPI inflation less negative as the anti-involution campaign unfolds.

Risks to growth are broadly balanced. Anti-involution measures may lower investment in industries with overcapacity by more than expected. A further increase in tariffs and heightening trade uncertainties could take a toll on exports. Some measures aimed at boosting consumption, such as more public holidays, may not bring about the desired impact as higher incomes and a stronger social safety remain key factors in spending decision. In contrast, reducing the mortgage burden and targeting low-income groups with transfers may result in somewhat higher consumption. Delaying addressing the funding gap at sub-national government levels may lead to further accumulation of implicit debt and costlier resolution later.

Ambitious structural reforms are needed to rebalance growth

While China’s potential growth is slowing due to population ageing, there is ample room for structural reforms to keep growth at a reasonably strong level in the medium term. Cut-throat competition, excess capacities and erosion of profit margins in manufacturing are now being addressed, but greater consumer protection, more stringent implementation of environmental regulations and enhanced product quality control could ensure that enterprises do not cut costs at the expense of ignoring those regulations, and that they engage in orderly competition. To boost competition and efficiency in services, strengthening the Fair Competition Review Mechanism (subjecting all new and existing regulations to competition principles) and abolishing local protectionism in the form of administrative monopolies should be pursued. Contracts to deliver infrastructure projects should be broken up to the extent possible as long as project feasibility and efficiency are not affected. Subsidies announced to boost investment should be subject to cost-benefit analysis and a fair competition review. The process to establish a company should be simplified, including all steps in the existing online one-stop shops. Expanded social transfers will boost consumption, but to exploit its potential, bolder social security reforms are needed. Unemployment insurance coverage needs to be extended to all, and pensions provide at least a minimum standard of living to all eligible people. Furthermore, the list of treatments and medicines covered by health insurance needs to be widened so that health costs do not push people into poverty.