UBS Economics-China Economic Perspectives _Q3 growth slowed with divergenc...-118351089

ab20 October 2025Global ResearchChina Economic PerspectivesQ3 growth slowed with divergence; more softness ahead Slower Q3 GDP growth, with solid exports & IP but slower consumption & FAIQ3 GDP growth softened to a still solid 4.8% YoY from 5.2% in Q2. Deflation persisted in Q3 with GDP deflator narrowing slightly to -1.0% YoY. Growth resilience in Q3 was supported by solid growth of exports and emerging sectors, which further bolstered industrial production. Meanwhile, property downturn intensified compared to Q2, FAI growth unexpectedly slipped into YoY contraction, and retail sales growth moderated, particularly in categories benefiting from trade-in subsidies. Conversely, the Q3 household survey indicated slower YoY growth in both disposable income and consumer expenditures compared to Q2. September data reflected weaker-than-anticipated FAI growth, a further decline in property sales and investment, and slower retail sales growth, while exports and industrial production remained solid, the latter partly due to seasonal factors.Q4 growth to slow further, bringing 2025 full year growth to 4.8%Despite recent volatility in US-China trade relations, we continue to expect that additional US tariffs on China will largely remain at current levels over the next several quarters (see more discussions). Net exports have been a significant driver to China’s growth YTD (contributing 1.5ppt of the 5.2% GDP growth in Q1-Q3), but we anticipate they will become less supportive in Q4 and into 2026 due to slowdown in export growth. Meanwhile, we foresee consumption growth slowing further due to a high base effect from trade-in subsidies, and the property downturn persisting in the absence of major policy stimulus. Infrastructure and manufacturing investment may turn less negative YoY modestly from the surprising contraction in Q3.We expect Q4 GDP growth to decelerate further to about 4% YoY, bringing full-year 2025 GDP growth of 4.8% (compared to our previous projection of 4.7%).Modest policy easing is on the wayOn the fiscal front, the government has announced the issuance of RMB 500bn in policy bank special bonds, which will serve as capital investment for targeted infrastructure and strategic industrial projects. Additionally, the central government has decided to advance the 2026 quota of special refinancing local government bonds to 2025 to facilitate LGFV debt swaps and the repayment of corporate arrears, and has allowed local governments to use RMB 500bn of the LG bond quota (from the available ceiling-outstanding gap) to replenish local fiscal resources, support LGFV debt swaps, and fund public project investments. In terms of monetary policy, we continue to expect the PBC to reduce policy rates by 20bp over the next three to four quarters, following anticipated rate cuts by the Federal Reserve and ongoing domestic deflationary pressures, with a 10bp cut possible as early as Q4 2025.The 4th plenum to discuss China’s future for the next five yearsThe o