Total retail sales of consumer goods rose 3.7%, but December figures showing a 0.9% year-over-year increase and a 0.12% month-over-month decrease suggest that the full-year figure was helped by policy initiatives undertaken early in 2025.
The Purchasing Managers’ Index (PMI) was in positive territory at 50.1 in December, but producers face headwinds. Underlying PMI trends for manufacturers in November showed that, despite strength in exports, overall orders were weak because of fragile domestic demand, while margins and profits were being squeezed by rising raw material costs and downward pressure on retail prices. The non-manufacturing sector, particularly property and consumer-facing services, was even less robust. For industrial enterprises overall, profit growth during the first 11 months of 2025 was negligible, just 0.1%.
Outlook Faces Risks on Both Sides
A more detailed picture of China’s policy outlook will emerge at the National People’s Congress in March, when the 15th Five-Year Plan will be approved, and shortly afterward with the first-quarter data release and Politburo economic meeting. But the broad objectives—to rebalance the economy by reducing dependence on exports and encouraging domestic demand growth—are unlikely to change. There are risks on both sides, in our view.
The outlook for global growth, while relatively benign on fundamentals, is complicated by geopolitical volatility. The short-term risk to China’s exports from US tariffs appears to have abated, following the one-year trade truce between President Xi Jinping and President Donald Trump in South Korea in November 2025. China’s success in diversifying its export markets is another positive. But a new challenge is emerging as some of China’s non-US trading partners push back against the deflationary effects that China’s competitively priced goods are having on their domestic markets.
On the demand side, the government has indicated that the consumption subsidy program will widen to include new items in 2026. But the additions—such as elevators in older residential buildings and fire-and-rescue equipment—are likely to be incremental rather than far-reaching in effect.
The big challenge is to find a new engine for domestic growth. Policy currently focuses on innovation and research and development in artificial intelligence, robotics, hydrogen and fusion energy, and other technology areas. But these are capital-intensive industries that are unlikely to create employment on a scale that would translate to significant growth in consumer demand.
Accommodative Settings Favor Bonds
China’s policymakers are acutely aware of the need to rebalance the economy, but in the absence of a more aggressive push to revive demand, we expect the imbalance to persist. The deflationary environment (the 2025 Consumer Price Index remained the same as the previous year’s, while producer prices for industrial products fell 2.6%) and accommodative policy settings underpin, in our view, a positive outlook this year for investors in Chinese government bonds.
