China’s Growth Target Achieved
China reached its 5% growth target for 2025, with fourth-quarter growth meeting market predictions. Export strength and manufacturing played a pivotal role, while the services sector provided stability. However, domestic demand weakened, particularly due to falling investment, which may necessitate further policy support.
China’s GDP increased by 4.5% year-on-year in Q4, helping achieve the 5% target for 2025. Industrial output thrived owing to exports, which climbed 5.5% for the year, resulting in a goods trade surplus of roughly 6% of GDP. Exports contributed 1.6 percentage points to growth, with the services sector also aiding expansion. Yet, investment weakened beyond housing, and consumption decreased as the impact of a goods trade-in programme waned, despite solid income growth.
By year-end, deflationary pressures had eased, but supply-demand imbalances might still affect industrial profits and investment. New loans in Chinese Yuan dropped for both households and businesses. The continued decline in housing fixed asset investment further affected total investment, and falling home prices dampened consumer confidence.
Economic Transformation Focus
Growth is projected at 4.6% for 2026, with potential revisions to the target between 4.5-5.0%. The government is likely to focus on economic transformation for sustainable growth, directing policy support towards high-tech and green industries, alongside boosting service-sector consumption.
Given that China’s 2025 growth was driven by exports while domestic demand faltered, we see a divided market ahead. The ongoing weakness in the property sector, with new home prices reported to have fallen for the tenth straight month in December 2025, suggests downside risk for assets tied to construction and banking. We should consider protective put options on ETFs tracking Chinese real estate and financial firms.
The record goods trade surplus from 2025 creates a complex situation for the yuan. While a surplus is typically bullish for a currency, the weak domestic data and likelihood of policy easing from the People’s Bank of China will act as a headwind. This points toward a strategy of selling yuan volatility, as authorities will likely aim for currency stability to support exporters without spooking capital markets.
We anticipate that any new stimulus will be highly targeted, avoiding the old property-led growth model. The focus on high-tech and green industries means we should look for opportunities in call options on specific semiconductor and electric vehicle company stocks. In contrast, futures contracts for industrial commodities like iron ore may face continued pressure from declining investment.
Deflationary pressures, confirmed by the latest Consumer Price Index data for December 2025 showing a 0.5% year-over-year decline, make monetary easing almost certain. The sharp drop in new loans during Q4 2025 reinforces this view, signaling an urgent need to lower borrowing costs. We should position for lower interest rates by looking at long positions in Chinese government bond futures.
