China Q2 GDP growth expected around 5% on tariff relief, subdued domestic demand

China Q2 GDP growth expected around 5% on tariff relief, subdued domestic demand

How Is Tariff Relief Shaping Q2 GDP Growth?

• Robust short-term export rebound: With U.S.-China tariff tensions easing in May, container bookings from China to the U.S. surged 277% in the first week. By early June, freight rates on U.S. West and East Coast routes had risen 33% and 23%, respectively from early April levels. The rush to secure shipments within the lower-tariff window has provided a significant boost to China's Q2 exports, supporting GDP growth at around 5%.

• Tariff easing underpins production recovery: The production sub-index of China's manufacturing PMI climbed to 50.7 in May, returning to expansion territory. Heavy-duty truck (HDT) mileage, a key gauge of industrial activity, saw its year-on-year decline narrow from 7.5% in early May to just 1%-2% in late May. The tariff "cooling-off period" has lifted business confidence and production expectations.

Policy Efforts Struggle to Revive Domestic Demand

• Fiscal stimulus shows signs of fatigue: In April-May, 673.3 billion yuan in new special-purpose bonds were issued, accounting for 15.3% of the annual quota. In May alone, the issuance reached this year's monthly high at 443.2 billion yuan, with nearly half directed toward infrastructure projects. Another 430 billion yuan or more is expected to be issued in June. However, official data suggests that fiscal policy-driven investment growth has not delivered the anticipated momentum. China's fixed-asset investment rose by 3.7% YoY in the first five months, down 0.3pp from the January-April period.

• Sluggish consumption persists: May marked the fourth consecutive month of CPI decline, while PPI posted its steepest drop in nearly two years. Consumer confidence remained weak, with the index at just 87.8%. Consumption growth is reliant on the government's consumer goods "trade-in" programs, yet over half of the 300-billion-yuan subsidy has already been used, with many regions suspending applications. The traditional June consumption peak is unlikely to reverse the month-on-month slowdown.

2025 Full-Year Outlook

• Moderate growth with structural headwinds: Major international institutions widely project China's full-year GDP growth at 4.5% to 4.8%, while subdued domestic demand continues to weigh on inflation, making it difficult for CPI to reach the 2% target (CPI declined 0.1% YoY in January-May). On the supply side, policy remains focused on security over short-term growth, with manufacturing investment driving technological self-sufficiency. However, structural rebalancing of supply and demand is expected to take 3-5 years.

• Dual-track development in energy and petrochemicals: Since 2025, new projects have concentrated on energy storage and transport infrastructure (e.g. LNG receiving terminals and oil & gas pipelines) and green transition initiatives (green hydrogen production and refining sector upgrades). However, two-thirds of these projects remain in early-stage preparation, with large-scale capacity additions expected during the 15th Five-Year Plan period (2026-2030).

• Strategic considerations for energy and petrochemical companies: Against a backdrop of heightened security requirements and industry upgrading, companies are advised to adopt a long-term approach to green transition opportunities. Priority areas include green hydrogen, biodiesel, and high-value fine chemical projects. Technology exporters can leverage opportunities in equipment supply and actively engage in shaping industry standards.