China’s economy lost momentum in August as factory output, retail sales and investment all weakened, highlighting the growing challenge for Beijing to sustain its official growth target of “around 5%” for the year. The slowdown reflects not only cyclical pressures but also deeper structural strains in the property market, household spending, and external trade environment, casting doubt on the government’s ability to engineer a strong finish to 2025 without a fresh wave of stimulus.

Policymakers had hoped for a steady rebound after a resilient first half of the year, but August data suggests that the drivers of growth are faltering at the same time. Industrial output slowed to its weakest pace in a year, retail sales disappointed again, and investment stalled. These indicators point to both waning domestic demand and persistent external headwinds, leaving Beijing in a precarious balancing act between stabilising short-term activity and managing long-term risks.

Industrial slowdown and manufacturing pressures

The manufacturing sector, long the backbone of China’s economic model, showed renewed weakness in August. Output rose just 5.2% from a year earlier, missing forecasts and marking a retreat from July’s stronger print. The slowdown stems partly from falling orders in sectors such as electronics and machinery, where global demand has been cooling, but also from overcapacity and a government clampdown on destructive price wars in areas like electric vehicles and solar panels.

Many manufacturers have been redirecting exports away from the United States toward emerging markets in Southeast Asia, Africa and Latin America. While this strategy has cushioned some of the blow from tariffs and trade uncertainty, it has not been sufficient to offset weak domestic demand and the drag from the property sector. Companies are also grappling with higher input costs, tighter environmental regulations, and power shortages linked to record heatwaves and prolonged rainfall, all of which disrupted factory operations during the summer.

Retail sales signal fragile consumer confidence

If factories are struggling with output, households are proving equally hesitant to spend. Retail sales grew just 3.4% in August, the slowest pace since late 2024, and well below expectations. Despite government efforts to support consumption through subsidies and targeted loan programs, Chinese consumers remain cautious.

The property downturn plays a central role in this hesitancy. As home values decline, household wealth shrinks, eroding consumer confidence and discouraging discretionary spending. Job market uncertainty compounds the problem: unemployment rose to 5.3% in August, its highest in six months, while youth unemployment remains elevated. Together, these factors weigh heavily on spending patterns, with households prioritising essentials over big-ticket items such as cars, appliances and luxury goods.

The government has attempted to boost consumption with measures like subsidies for electric vehicle purchases and loans for household durables, but their effect has been muted so far. Economists argue that without a broader improvement in income growth and job stability, consumer sentiment is unlikely to rebound meaningfully.

Property crisis deepens economic malaise

Nowhere is the drag on growth more evident than in the real estate sector. New home prices fell again in August, down 0.3% from July and 2.5% year-on-year, continuing a slump that has eroded household wealth and undermined the confidence of both buyers and developers. Fixed-asset investment also slowed sharply, rising just 0.5% in the first eight months of the year, marking its weakest performance outside the pandemic years.

Developers are struggling to complete projects amid tight financing conditions, while local governments reliant on land sales are facing revenue shortfalls. The crisis has spread into the banking system, raising concerns about financial stability. For households, falling property values not only limit wealth but also reduce access to mortgage financing, feeding into the cycle of weak consumption and low investment.

Policymakers have sought to stabilise the sector through credit easing and targeted support for state-backed developers, but these measures have yet to reverse the broader decline. With property once accounting for nearly a quarter of GDP when linked industries are included, its continued weakness is one of the clearest reasons why August’s slump casts doubt on the annual growth target.

Trade uncertainty and global headwinds

External trade dynamics are also weighing on the economy. While Chinese exporters have redirected shipments away from the U.S. toward alternative markets, overall export growth has slowed amid softer global demand and intensifying trade frictions. Ongoing disputes over technology access, especially in semiconductors, have limited China’s ability to expand into advanced manufacturing markets.

At the same time, weak external demand has forced Chinese producers into increasingly competitive price wars abroad, squeezing margins and adding to domestic overcapacity. This global environment makes it harder for China to rely on trade as a growth engine, especially when domestic consumption is already subdued.

Adding to cyclical pressures, extreme weather events further constrained growth in August. Record heat disrupted electricity supply in some industrial hubs, while prolonged rains hindered logistics and agricultural output. These disruptions underscore the vulnerability of production chains to climate shocks, a challenge that Beijing must increasingly manage alongside cyclical economic policy.

Yet beyond weather, there are deeper structural issues limiting growth momentum. Years of heavy reliance on infrastructure and property-driven expansion have left a legacy of debt and overcapacity. As fiscal support wanes and Beijing tries to rein in excesses, the economy struggles to find sustainable new drivers. While technology and green industries hold long-term promise, they cannot yet compensate for the drag from property and subdued consumer demand.

Policy dilemmas and the road ahead

The weak August data raises a clear policy dilemma for Beijing. On one hand, hitting the “around 5%” growth target may now require additional stimulus — whether through rate cuts, reserve requirement reductions, or more aggressive fiscal spending. On the other hand, excessive easing risks fueling debt burdens, worsening overcapacity, and undermining financial stability.

Officials have signalled a willingness to deploy more tools, but they remain cautious about overcommitting. The risk is that incremental measures may prove insufficient to lift momentum in time to secure the year-end target, while bolder steps could deepen structural vulnerabilities. With confidence among households and private firms at low levels, stimulus alone may not be enough to restore momentum.

What the August slump reveals most clearly is that China’s growth model is under strain. The property sector’s long decline, weak consumer confidence, and shifting trade dynamics suggest the economy faces not just a cyclical slowdown, but a more fundamental challenge in sustaining robust expansion. For policymakers, the August figures are more than a data point: they are a warning that the path to “around 5%” growth is narrowing fast.

(Adapted from Reuters.com)

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