China hits its GDP target—in a weird way

IN A CHAOTIC world, China did the predictable thing. Its economy met the official growth target for 2025, according to figures released on January 19th, just as it had the year before and the year before that. GDP grew by 5%, although China’s population fell even faster than forecast. Growth was boosted by a record trade surplus, which reached almost $1.2trn, despite the country’s tariff war with America (see chart 1).

The unexpected strength of China’s exports last year made up for the weakness of other sources of spending. The government had set itself the task of “vigorously boosting consumption”, but households did not play along. They saved an even higher share of their income in 2025 (32%) than they had the year before (31.7%). It is not as if Chinese consumers already possess all that their hearts could desire. In a press conference, Kang Yi, head of the National Bureau of Statistics, pointed out that China has just 53 private cars for every 100 households. America has 197 cars and other “light-duty” vehicles.

China has usually relied on investment spending to keep its economy humming. But according to the official figures, fixed-asset investment (FAI) shrank in 2025 for the first time since 1989 (see chart 2). The slump in property investment continued, accompanied by a decline in infrastructure spending and negligible growth (0.6%) in manufacturing investment. The combined figure is so awful that many economists refuse to take it at face value.

Another official measure of investment—gross capital formation—suggests that capital spending continued to expand, albeit slowly, last year. Investment accounted for 0.75 percentage points of China’s overall growth, a seventh of the total, according to Mr Kang. For that to be true, investment must have increased by about 2% in real terms.

Some of the glaring gap between the two statistics may reflect technical differences. FAI is not adjusted for inflation, excludes inventories and includes land purchases. But it is also possible that China’s local governments are now understating the growth of FAI to make up for overstatements in the past.

China’s weak domestic demand and strong supply stand in prominent “contradiction”, noted Mr Kang. To resolve that contradiction, the superpower still relies on foreigners to buy all the stuff it cannot sell at home. Some of China’s trading partners, however, are losing patience, fearful that the flood of Chinese goods will wipe out their own industries. Mexico, for example, began the year by instituting tariffs of up to 50% on over 1,400 goods—including car parts, toys, dental floss, even playing cards—from countries outside its trade agreements, China chief among them.

The trillion-dollar surplus has also drawn renewed attention to what many see as China’s trump card: its tightly managed exchange rate. Thanks to soft demand and persistent deflation, the prices of China’s goods have fallen relative to prices elsewhere. Adjusted for this shift, China’s exchange rate weakened by more than 18% between March 2022 and July 2025. This fall in the “real” (inflation-adjusted) exchange rate has made China’s exports cheaper, thereby “worsening external imbalances”, pointed out Kristalina Georgieva, head of the IMF, last month.

This criticism may be starting to register with China’s leaders. They have begun to throw a few sops to the country’s trading partners: making tax breaks for exporters less generous, for example. China has also reached an initial agreement with the European Union to set floors under the prices of its exports of electric vehicles. And during a visit to Beijing by Canada’s prime minister, Mark Carney, China agreed to cut tariffs on Canadian rapeseed (canola) and to exempt the country’s lobsters, crabs and peas from retaliatory tariffs for at least nine months.

China has also allowed the yuan to strengthen a little. After the tariff truce with America in the middle of 2025, the currency began to rise on a trade-weighted basis. A doveish turn by America’s Federal Reserve has reinforced this trend. In the last days of 2025 the yuan moved below seven to the dollar for the first time since 2023 (see chart 3).

A dearer exchange rate might mollify China’s trading partners. But it could also intensify China’s deflationary pressures. A stronger yuan would narrow the country’s external imbalance (the gap between its exports and imports) but worsen its internal imbalance (the gap between what it can produce and what actually finds a buyer). The best response to that contradiction would be further fiscal stimulus, according to Xiangrong Yu of Citigroup, a bank, as well as reforms to strengthen China’s social safety-net.

Fiscal stimulus would lift Chinese spending, contributing to both growth and inflation. The increase in Chinese prices at home would strengthen the real exchange rate, just as deflation has weakened it. Even the IMF is keen. “We strongly support the government coming up with fiscal and monetary policy measures…to support the shift towards more domestic consumption,” said Ms Georgieva last month. And on January 19th the fund’s chief economist, Pierre-Olivier Gourinchas, urged China to rebalance the economy by spending more on cleaning up the property sector (and less on manufacturing subsidies).

China meets its growth target with monotonous predictability. But how it meets the target can defy expectations. Last year the strength of exports stunned everyone. This year China may have to spring a surprise by listening to the IMF instead. ■