UBS Economics-China Economic Perspectives _Across-the-board weakness in Au...-117768371

ab15 September 2025Global ResearchChina Economic PerspectivesAcross-the-board weakness in August growthWeak growth momentum extended in AugustDomestic activities weakened across the board in August, surprising the market on the downside again. Overall FAI growth declined more by -6.3% YoY with both infrastructure and manufacturing investment weakening, the latter partly affected by the anti-involution campaign. The property downturn deepened and housing prices fell further. Retail sales growth edged down to 3.4% YoY, with sales growth of products with trade-in subsidies decelerating further. Industrial production growth cooled to 5.2% YoY while service production index growth edged down to 5.6% YoY. The previously resilient export growth has begun to fade, easing to 4.4% YoY, with a deeper YoY decline in exports to the US. CPI fell into YoY deflation again (-0.4% YoY) on weak food prices, while PPI narrowed YoY contraction thanks to sequential increase of upstream prices and a low base. TSF credit growth edged down by 0.2ppt to 8.8% YoY as expected on weak bank loans and government bonds. More growth slowdown ahead in Q4 2025Growth weakness in July and August is likely to bring down Q3 GDP growth to 4.5-5% YoY (UBSe: 4.7%). Looking ahead, we see further growth deceleration in Q4. Consumption growth may decelerate further on soft household income growth and high base effect from trade-in subsidies. Property downturn may continue in the absence of major progress in inventory destocking. Exports growth is set to decelerate further on the payback of previous front-loading and expected global demand softness. Meanwhile, infrastructure and manufacturing investment may improve a bit from the surprising contraction in July-August. Overall speaking, we continue to expect Q4 GDP growth to weaken to below 4% YoY and full year 2025 growth to average at 4.7% (see latest view). Additional policy support needed, but likely data dependent & modest in scaleGiven the softening activities in Q3 and expected more weakness in Q4, we believe additional policy support is needed. The current policy response is likely to be data dependent and modest in scale. We think the government may focus on delivering the planned policy support measures in the coming several weeks and possibly roll out some additional stimulus in Q4. The government may increase broad fiscal support by around 0.5% of GDP, possibly underpinned by policy banks’ special bond issuance and front-loading some of new local government bond quota for 2026. We continue to expect another 20bp policy rate cut in the next 2-3 quarters amid lingering deflation and uncertainties, while PBC’s more use of targeted easing measures may delay the timing of an overall policy rate cut. In addition, the impact of recent relaxation of home purchase restrictions in tier-1 cities may be limited, while further decline of property sales and housing prices may trigger some additional easing measures in end-2025 and 2026.This r