Export resilience despite domestic challenges: Key takeaways from China’s data release

Macro economy: external strength vs. internal weakness

China’s economic growth continued to show weakness, with a 4.5% year-over-year (y/y) real gross domestic product (GDP) growth in 4Q 2025, according to China’s National Bureau of Statistics (NBS). This marks the third straight quarter of slowing growth after a 5.4% increase in 1Q 2025, as shown in Exhibit 1. Recent data showed exports are holding up, but weak domestic demand continues to weigh on the broader economy.

Exports to the U.S. faced substantial headwinds after the Liberation Day tariff announcement last April, falling 26.4% y/y between April and December, compared to a 5.0% y/y rise in 1Q. However, exports to Europe, ASEAN, and other emerging markets offset the decline. Overall, China’s exports rose 5.5% in 2025, with a trade surplus of USD 1.2 trillion. Strong export momentum was supported by efficient manufacturing supply chains, low costs, and a weak currency. Beyond that, China’s leading position in advanced manufacturing is increasingly being solidified, which has also supported the resilience of exports. In December, China reported strong export growth of high-tech products (16.5% y/y), mechanical and electrical products (12.3% y/y), automobiles (72.1% y/y), and integrated circuits (47.3% y/y), even as labor-intensive exports fell 8.5%.

Manufacturing exports have kept industrial production resilient. In December, industrial output grew 5.2% y/y, with high-tech industries expanding 11.0%. This suggests ongoing improvement on the supply side, but weak domestic demand is worsening the imbalance.

Domestic demand has weakened notably. The real estate market correction and soft job market dampened consumer sentiment. “Trade-in” policies boosted retail growth from September 2024 but also created a high base effect. Subsidies focused on durable goods, limiting short-term repeat purchases and making the stimulative effect temporary. Consumption growth slowed from a peak of 6.4% y/y in May to 0.9% in December. Subsidized items saw sharp declines in December, especially automobiles (-5.0% y/y), home appliances (-18.7% y/y), and furniture (-2.2% y/y). With subsidies on consumer electronics such as smartphones having started in 1Q 2025, the high base effect may persist into 1Q 2026, further weighing on consumption.

Investment growth is also under pressure. In December, fixed asset investment fell 15.1% y/y, with real estate investment down 35.8% and infrastructure investment down 16.0%. The ongoing real estate correction has cut land sale revenues for local governments, limiting their ability to fund local investment. Additionally, “anti-involution” policies have restricted investment in industries with excess capacity.

Policy outlook: engineering a “slow bull” market

Against the backdrop of the stalling real estate engine, Chinese policymakers are pivoting toward advanced manufacturing and technology to forge new growth pillars. While current economic data suggests that lackluster domestic demand may hinder the achievement of this goal, robust export figures underscore the strengthening competitiveness of China’s manufacturing sector. This transition helps boost market expectations: first, to facilitate capital raising for tech enterprises, and second, to replace real estate as the primary vehicle for household wealth allocation. As a result, the policy intent is to engineer a sustainable “slow bull” market, leveraging it as a catalyst to jumpstart the broader economic recovery.

To achieve these objectives, regulators launched a series of reforms in September 2024, focusing on improving corporate governance, enhancing investor returns, and attracting more long-term capital. A pivotal shift was requiring insurance companies to raise stock allocations, which might help create sustainable long-term funds in the market. Furthermore, regulators remain vigilant against market volatility. Following the recent rally in the market, they have tightened oversight of abnormal trading behaviors to prevent overheating and the formation of short-term bubbles.

On the monetary policy front, the bias remains toward targeted and structural support rather than broad-based stimulus. In 2025, the People’s Bank of China (PBOC) only implemented a preemptive reserve requirement ratio (RRR) and interest rate cut in May, during the peak of the China-U.S. trade tensions. Since then, monetary operations have shifted toward maintaining liquidity stability. Last week, despite mounting pressure from domestic demand, the PBOC opted for a structural and targeted cut to re-lending rates to support specific sectors, while continuing to avoid comprehensive stimulus.

This policy style could persist into 2026, characterized by restrained RRR and interest rate cuts, alongside measured fiscal support. In terms of risks to the economy, China’s robust exports may trigger complaints and restrictive measures from trade partners, while an increasingly volatile geopolitical landscape could influence the stock market. The high reliance on artificial intelligence (AI) infrastructure investment might also lead to high volatility if there are temporary setbacks. Such headwinds might eventually compel policymakers to shift to more aggressive easing measures.

Investment implications

We believe regulators are prioritizing the creation of a sustainable, gradual uptrend in China’s stock market, rather than encouraging a rapid rally. This approach is supported by ongoing reforms and the continued allocation of insurance premiums to stocks. As shown in Exhibit 2, China's insurance market has gained momentum in 2024-2025. Quarterly premiums averaged CNY 1,738 billion in the first three quarters of 2025, 9% higher than the same period in 2024. This helps anchor long-term capital and market stability. 

Although short-term rallies in themes like aerospace have captured attention, companies with clear earnings visibility and consistent fundamentals remain the primary support for stocks. This suggests the divergence between the broader economy and the stock market may persist through 1H26, supporting materials, information technology, and industrials sectors, particularly those with significant exposure to overseas AI infrastructure investment.

In recent years, Chinese investors have rotated between growth stocks and high-dividend defensives, depending on valuations and technical factors, such as market positioning and momentum. We believe a balanced portfolio of both growth and high dividend strategies can help to manage volatility in a cost-effective manner. 
 

22db2996-f24c-11f0-b51a-e51667fd7f37