Key takeaways
- China’s economy had a strong start to 2025, with domestic demand and manufacturing data beating expectations. The government has also outlined further plans to boost consumption this year.
- External risks related to U.S. trade policy have intensified as tit-for-tat tariff retaliation has escalated, weighing on China’s growth outlook.
- China has set an economic growth target of 5% for 2025, unchanged from last year, despite rising geopolitical and trade tensions.
China is stepping up its efforts to bolster growth and laying out plans to boost monetary and fiscal stimulus as it prepares for a year of uncertainty with the latest U.S.–led tariffs taking effect.
After a strong recovery toward the end of last year, China hit its 5% growth handle, boosted in large part by exports–but will this be possible again following the substantial escalation in trade tensions?
How will US tariffs on China impact economic growth?
China’s economy had a solid start to the year as supportive government policy helped to boost domestic demand and manufacturing activity expanded at the fastest pace in a year in March.
Strong government bond issuance, trade-in and tech upgrade schemes combined with the pickup in new orders kept first quarter (1Q) growth steady at around 5.4% year-on-year.
But U.S. trade policy risks have intensified to unexpected levels, with the Trump administration announcing fresh sweeping levies on China, as it paused a host of global tariffs that were set to take effect for other trading partners around the world.
The latest U.S. tariff increase brought levies on Chinese imports to 145%, exempting some widely used tech devices and components for the time being, with a universal 10% tariff affecting all other trading partners.
In response to the Trump Administration’s reciprocal tariffs, China announced it would increase the tariff rate on all U.S. imports from 34% to 125%.
China also added 11 U.S. companies to the Unreliable Entity List and 16 U.S. companies to the Export Control List, impose export controls on seven rare earth-related minerals, launch an anti-monopoly investigation on the Dupont China Group and launch anti-dumping investigations on imports of medical CT Tubes originating from the U.S. and India.
This is a step change from China’s response to the previous two rounds of 10% U.S. tariff increases in February and March, where the reaction was more targeted.
The intensifying trade tensions are set to lead to a deceleration in China’s economic growth in coming quarters, according to J.P. Morgan Research current forecasts.
“The 34% reciprocal tariff led us to revise down full-year GDP growth forecast. First, regarding the trade channel, the larger-than-expected tariff increase from the U.S. implies a larger decline in China’s exports to the U.S. and a weaker global economic outlook that will lead to a modest decline in China’s exports to the rest of the world,” said Haibin Zhu, chief China economist and head of Greater China Economic Research at J.P. Morgan.
The higher-than-expected U.S. tariffs on China and the rest of the world are expected to drag China's economic growth by about 0.7 percentage points, according to J.P. Morgan Research. After taking into account additional fiscal stimulus later this year, the full-year growth forecast is marked down marginally from 4.6% prior to the tariff announcement to 4.4%.
China’s real GDP growth vs. government’s growth target
China has set an economic growth target of 5% for 2025, unchanged from last year, despite rising geopolitical and trade tensions.
“Overall, we estimate an additional drag via the trade channel of 0.3% of GDP. Second, indirect impacts via weaker consumption and investment in export-related sectors and weaker business sentiment amid higher external uncertainties tend to drag China’s growth by 0.4 percentage points. In a static analysis, the two channels point to about 0.7‑percentage‑point drag on China’s GDP growth,” added Zhu.
So far, China is the first country to respond to U.S. reciprocal tariffs with equal magnitude countermeasures. The possible retaliation and escalation from other trading partners will increase the possibility of a recession in the U.S. and global economy, leading to weaker demand and growth prospects.
The odds of a U.S. and global recession stand at around 60%, according to J.P. Morgan Research forecasts, with the baseline call being for a U.S. recession.
There is the potential that other trading partners may raise tariffs on Chinese goods to protect their own industries, or as a negotiation strategy with the U.S. (in exchange for U.S. tariff reduction).
“While weaker U.S. demand has a marginal impact on China’s growth forecast, the weaker demand from the rest of the world will compromise China’s effort to expand exports to the non-U.S. market as an offsetting measure,” said Zhu.
China growth forecasts
J.P. Morgan Research predicts China’s economic growth will slow to 4.4% in 2025, with higher-than-expected U.S. tariffs forecast to drag China's economic growth by about 0.7 percentage points.
What policy measures will China take to counter tariff risks?
China’s tariff retaliation is just one aspect of its response, with the government announcing an array of stimulus measures to offset trade risks as it aims to maintain the growth target of around 5% for 2025.
Chinese policymakers have pledged to step up monetary and fiscal support to soften the impact of tariffs on growth, including incentives to boost domestic consumption and investment.
China’s net exports are a big growth driver
China’s exports are a large contributor to its headline GDP growth.
Before tariff measures were announced in April, the government raised its fiscal deficit target to 4% of GDP, up from 3% in the previous year to support the target. It aims to create 12 million jobs and boost investment with the issuance of special-purpose and ultralong treasury bonds.
An estimated 400–600 billion Chinese yuan (CNY) ($55–$83 billion) or 0.3–0.5% of GDP in consumption support is expected, according to J.P. Morgan Research forecasts, including trade-in subsidies for consumer goods, an increase in basic pension, subsidies for basic medicare and incentives to encourage new births.
Chinese banks are also cutting rates on personal loans to record lows, following government guidance urging banks to expand issuance of loans, relax credit limits and interest rates.
“Our forecast of additional fiscal support in the third quarter does not mean the government will take no action before that time. But in the near term, the government will utilize existing policy options first.”
Haibin Zhu
Chief China economist and head of Greater China Economic Research, J.P. Morgan
In terms of additional pro-growth economic policy, an additional 1 trillion yuan in government bonds will likely be announced in the third quarter (0.7% of GDP) to boost domestic demand and mitigate the drag on economic growth.
“These measures may still prioritize investment and policy incentives to increase the consumption package remains weak. Trade-in subsidies are a preferred option but their policy effect will fade. The most important consideration for policymakers is what policy measures will have a quick impact on growth, rather than economic efficiency or long-term impact,” said Zhu.
"Our forecast of additional fiscal support in the third quarter does not mean the government will take no action before that time. But in the near term, the government will utilize existing policy options first," added Zhu.
Around 30 basis points (bps) in rate cuts and 100 bps in reserve requirement ratio (RRR) cuts — or the amount of liquidity that banks are required to hold as reserves — are also expected, according to J.P. Morgan Research. Cutting the RRR allows lenders to increase their capacity to extend loans and encourage spending in the broader economy.
The People's Bank of China (PBoC) is likely to resume RRR cuts with a 50 bps cut anticipated in April and a policy rate reduction (20 bps cut in the second quarter), followed by another 50 bps RRR cut and 10 bps policy rate cut in the second half of the year, as noted by J.P. Morgan Research. The PBoC may also revisit the exchange rate policy.
“While we do not think CNY depreciation will be used as a policy response to tariff risk as observed in 2018–19, it seems that managed yuan weakness is what the PBoC has signaled as tolerable with recent range break in the fix [above 7.20],” said Zhu.
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