[NEW YORK] China’s stronger-than-expected growth in the first quarter revealed a growing dependence on foreign demand, a key vulnerability that raises the threat of a sharper economic hit as trade tensions soar.
Nearly 40 per cent of first-quarter expansion in gross domestic product – which came in at 5.4 per cent – was driven by net exports, the highest share for this period in over a decade. That’s also up from last year, when trade accounted for almost a third of overall growth.
That heavy dependence on foreign demand comes at a precarious time. With the US ramping up tariffs on Chinese goods and global demand weakening amid the broader fallout from US President Donald Trump’s chaotic trade policies, the export engine helping power China’s recovery may be at risk of stalling.
The strong contribution from trade also shows how fragile the domestic economy remains as it faces pressure from deflation, sluggish consumer demand and a prolonged property slump. Economists including from Citigroup and UBS Group have cut their 2025 growth forecasts to around 4 per cent or lower, calling for more stimulus to stabilise the economy.
China’s trade surplus with the US totalled US$77 billion in the first quarter, accounting for 28 per cent of its overall goods trade surplus, and that figure is expected to shrink as tariffs hit, with Goldman Sachs economists warning exports may slow sharply this month.
Bloomberg Economics has warned the new US duties will “crush” exports as it cut its forecast for GDP growth this year to 4.2 per cent.
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The fiscal data released late last week also points to underlying weakness in the economy, with tax revenues shrinking 3.5 per cent in the first quarter. That’s well below the 4.6 per cent growth in nominal GDP.
Part of the revenue shortfall likely stems from increased rebates for exporters and other tax breaks.
Export tax rebates rose 14 per cent from the same period a year earlier. Export-related tax returns as a share of foreign shipments climbed to 12.3 per cent in January to March, pointing to faster payouts to help the finances of Chinese companies.
Land sales also continued to slump, with revenue down 16 per cent in the first quarter after three straight years of declines.
The continued contraction in land sales and tax revenues meant total income under the two major budgets fell 2.6 per cent to 6.9 trillion yuan (S$1.2 trillion) in the first quarter. That slowdown in revenue precedes the full impact of the US tariffs, suggesting the government will have to go even further into debt to try and support the economy.
While the Chinese government has pledged to counter external shocks with stronger efforts to drive domestic demand, the latest budget data shows infrastructure investment is still lagging.
Expenditure in areas such as urban and rural development, water conservation and transportation under the general public budget – the government’s main book – contracted 4.2 per cent in the first quarter from a year earlier, the first drop in two years.
That trend may need to be reversed quickly if global trade takes a bigger hit from rising tariff uncertainty.
“China may add stimulus in the second half of the year, or even the fourth quarter,” said Lu Ting, chief China economist at Nomura Holdings, at a media roundtable in Beijing on Thursday.
“What is most urgent for the authorities now is to accelerate the fiscal spending already planned, come up with some good proposals, and implement them earnestly,” he said. “More can be done in stimulating consumption and stabilising the property market.” BLOOMBERG