What China’s 5.2% growth really means and why talent are leaving coastal China

1. How should the Q2 GDP growth of 5.2% be evaluated?

China’s real GDP (gross domestic product) for the second quarter (Q2: April–June) this year grew 5.2% year on year (y/y).

This was slightly higher than China’s real growth potential because it was due in part to a rebound from a rather low rate of 4.7% for the same period a year earlier.

GDP grew 1.1% in Q2 from a quarter earlier, or an annualized rate of 4.4%. It was lower than the annualized rate of 4.8% for Q1 (January–March).

An analysis of the growth rate for Q2 shows that the contribution from external demand to GDP was up 1.2% y/y, a decrease from the 2.1% y/y for the preceding quarter. The y/y increase in the contribution from external demand exceeded 2% for three quarters in a row from Q3 (July–September) last year to Q1 this year.

The contribution from external demand was almost zero in the pre-pandemic era, when the Chinese economy remained brisk.

The contribution from external demand rose from the second half of last year largely because a decline in domestic demand dragged down imports, which in turn increased the trade surplus. In that sense, the Q2 2025 figure is more like what it used to be.

Of the external demand, exports (on a renminbi basis; the same applies hereafter) to the US plunged 22.9% y/y owing to Trump’s tariffs.

The drop, however, was offset by increases in exports to the Association of Southeast Asian Nations (ASEAN), up 19.0% y/y, and to the EU, up 10.6% y/y. Overall exports for Q2 grew 7.6% y/y, a slight increase from 6.3% y/y in the previous quarter.

This was an unexpected result.

The sharp rise in exports to ASEAN is largely attributable to transshipment to the US.

Meanwhile, imports for Q2 grew 0.3% y/y, an increase from the preceding quarter, which saw a decrease of 6.0% y/y. This was the main factor behind the lower contribution from external demand to GDP.

Still, Q2 saw a fairly high growth of 5.2%, underpinned by domestic demand. (The contribution from domestic demand grew 3.3% in Q1 and 4.0% in Q2.)

2. Growth underpinned by economic stimulus measures implemented last autumn

An analysis of domestic demand shows consumption grew slightly faster. (The y/y increase in year-to-date (YTD) total retail sales of consumer goods rose from 4.6% in Q1 to 5.0% in Q2.) On the other hand, investment slowed. (The y/y increase in YTD fixed asset investment fell from 4.2% to 2.8% during the same period.)

Nevertheless, investment grew faster in real terms owing to a larger decline in producer prices. (Contribution to real GDP from consumption decreased 2.8% y/y in Q1 to 2.7% y/y in Q2, while that from investments rose from 0.5% y/y to 1.3% y/y during the same period.)

Domestic demand was underpinned by two major pillars: fiscal support measures for local governments and consumption stimulus measures, both of which the central government implemented last autumn at the expense of increasing fiscal deficits.

The consumption-stimulating measures focus on government subsidies that encourage consumers to replace their aging home appliances such as washing machines, refrigerators, and air conditioners, as well as automobiles and smartphones.

This is known as the “trade-in program.”

Combined subsidies from the central government, local governments, and retailers mean substantial discounts for a wide range of products.

A Chinese told me that she bought three air conditioners as the unit price was reduced from the original price of 3,100 yuan (approx. 62,000 yen) to 1,300 yuan (approx. 26,000 yen).

Many of my Chinese friends I interviewed in Beijing last week said they took advantage of this program to replace their cars, home appliances, smartphones, and other products.

On the investment front, domestic demand is also propped up by measures to promote equipment renewal investment, as well as by measures to support key infrastructure construction that are aimed at upgrading industries, promoting the coordinated development of the economic areas, including the Yangtze River Economic Belt, securing stable supply of food and energy, and improving the environment.

The Chinese economy used to be such that even without government subsidy programs, private enterprises played a central role in taking on innovation in various industrial sectors, thereby creating new large corporations one after another and spawning startups.

Behind this lay a fast-growing economy supported by huge economic benefits of the construction of intercity expressways and high-speed railways as well as by the expansion of housing construction and consumption associated with urbanization.

Now that China’s period of rapid growth of more than four decades has come to an end, the willingness of private enterprises to invest has substantially waned, slowing down voluntary investments supported by innovation.

The sectors still characterized by the marked willingness to take on challenges by taking advantage of innovation are largely limited to those supported by government industrial policies. These include semiconductors, artificial intelligence (AI), robots, electric vehicles, and biotechnology.

Consumption, which is leading the current economy, may also slow down. Economists predict that if the government halts the trade-in program, consumer confidence will wane as well. After all, consumption is dependent upon the subsidy program.

The willingness to consume and make voluntary investments remains low because private enterprises and consumers, both of which have led the development of the Chinese economy, have yet to recover their confidence in their future.

3. Outlook and risks

Future prospects indicate that a growth in domestic demand will continue to support economic growth in Q3 (July–September) in such a way to offset a fall in external demand.

In Q3 last year, local government fiscal difficulties worsened, dragging down domestic demand. The contribution to real GDP from domestic demand fell from 4.2% y/y in Q2 2024 to 2.5% y/y in Q3 2024. It will likely rebound to grow faster y/y in Q3 2025.

Nevertheless, because government measures to stimulate consumption and investment led to the recovery of domestic demand from Q4 (October–December) last year (with its contribution to real GDP increasing 2.9% y/y in Q4 2024), the y/y increase in domestic demand will likely slow down as a rebound.

On top of that, tariff talks between Washington and Beijing may be concluded by then, raising the possibility that tariffs will be raised substantially.

If these two factors push down the growth rate, the Chinese government is expected to further increase fiscal deficits to prop up growth.

In this way, the Chinese government is doing all it can to achieve a growth rate of about 5% this year as well.

However, China’s real potential growth rate is in the 4% range now. The longer China continues its efforts to achieve 5% growth using government stimulus measures, the greater the side effects will be. In the worst-case scenario, such efforts might invite an economic bubble like the one Japan experienced during the second half of the 1980s.

For a period of eight years from 2012 to 2019, the Chinese government carried out economic policies that reflected China’s real growth potential. By reducing the growth target gradually, it successfully maintained growth stability over the mid-to-long term.

Again, if China continues its current efforts to maintain the growth rate above its real growth potential over the mid-to-long-term, the side effects might be serious.

4. Structural changes toward an economy led by inland China

The preceding section reviewed China’s macroeconomic landscape. A look at the Chinese economy by region provides a different picture.

A week or so ago, I stayed in Wuhan before visiting Beijing. In Wuhan, I felt an economic vitality not seen in Beijing, Shanghai or Guangzhou along coastal China.

I got the same impression when I visited Chengdu in January this year.

My impression is supported by consumption data. The y/y change in total retail sales of consumer goods from January to May this year is down 3.1% for Beijing, up 1.4% for Shanghai, up 8.3% for Wuhan, and up 6.5% for Chengdu. There is a huge gap between the first two cities along coastal China and the last two cities in inland China.

The vitality of economic development, which used to be seen throughout China, is still felt in major inland cities (see my article “Although the Chinese economy continues to slow down, it deserves attention for sustained growth of the inland market,” posted in March).

Major inland cities that maintain vitality are represented by Wuhan, Chengdu, Hefei, and Changsha.

A common characteristic of these cities is that they are home to some of the most valued universities in China. They include Wuhan University and Huazhong University of Science and Technology, both in Wuhan, Sichuan University and the University of Electronic Science and Technology of China, both in Chengdu, the University of Science and Technology of China in Hefei and Hunan University in Changsha. Graduates from these universities are employed by local high-tech firms to support their high-level technological prowess and competitive edge.

The concentration of outstanding students and blue-chip companies, together with the local governments’ vigorous campaigns to lure businesses, is prompting some of China’s leading corporations to transfer their production bases to these cities. These corporations – including two display manufacturers, BOE Technology Group Co., Ltd. and TCL China Star Optoelectronics Technology, as well as EV manufacturer NIO Inc. – support local economies.

Beijing, Shanghai, Guangzhou, and Shenzhen along coastal China are characterized by housing rents that are too high for most university graduates, who would not dream of buying such housing because of the exorbitant prices.

Accordingly, graduates of good universities in these cities cannot afford to continue living there, let alone set up a household and keep residence there.

Company employees with a reasonable salary may face the risk of their salaries being cut or even being fired amid the prolonged economic doldrums.

In that case, they will have difficulty repaying the mortgage. If that happens, they may wish to sell their housing. But the selling price is most likely half the peak price. The sales proceeds may be too small to pay off the mortgage, leaving a large outstanding mortgage balance.

These risks are now widely recognized along costal China. Households of people in their 30s up to mid-40s cannot dispel such fears.

To lead a family life with peace of mind, a growing number of families give up on living in major cities along coastal China and move to major cities inland.

In search of such talent, blue-chip companies are concentrating in these cities, where innovation-oriented startups are being born.

In the past, those wishing to live inland found it difficult to find high-paying blue-chip companies there. Talented people had difficulty moving there from coastal areas.

They now find it easier to move inland as blue-chip companies are concentrating in major inland cities.

In this way, on the back of soaring real estate prices in coastal areas, industries and human resources are concentrating in major inland cities where good universities are located, thus giving rise to a new structure of economic development led by inland China.

5. What Japanese firms need to do

Japanese businesses need to accurately assess these regional structural changes of the Chinese economy and reorient their China business with focus on the inland market.

At the moment, however, few Japanese companies are adjusting their business operations in China while paying attention to the development of inland China.

Rather, more Japanese firms are downsizing their bases in inland China or even withdrawing them altogether.

This suggests that Japanese businesses, particularly their head offices, have little understanding of the regional structural changes described in the preceding section.

The first thing to do to rectify the situation is for company presidents to visit major inland cities several times a year to gain first-hand knowledge of the structural changes of the Chinese economy.

They need to assess the local needs for products and services and set out a policy to launch new business activities in a top-down manner.

The Chinese economy has slowed but is still undergoing rapid structural changes.

Japanese firms may not be able to capture the Chinese market unless their business activities catch up with that speed.

They can still enjoy great opportunities if they have an accurate assessment of new market needs and manage business activities accordingly.

This is substantiated by aggressive investment in China as practiced by Toyota Motor Corp. and Panasonic Corporation, for example.

Following the inauguration of the US Trump administration, countries shared a strong sense of crisis and began to transform the old way of thinking and take on new challenges.

Japanese businesses should take it to heart that unless they have such a strong sense of crisis and boldly launch new business activities, they will be left behind amid structural changes and fierce competition in the global market.