Data from the first half show that China”s economic growth has outperformed expectations, with overall performance remaining robust — a testament to the economy’s strong resilience and vitality. However, the latest figures indicate that the economy still faces multiple challenges in the second half of the year.
These challenges include a worsening external environment compounded by the gradual fading of the “front-loaded “exports effect, which may weigh on external demand; and persistent weakness in the property market that could trigger volatility during its bottoming-out process.
Also, we face continued downward price pressure, with the GDP deflator, PPI and CPI all indicating relatively low price levels and potential contraction in domestic demand. The nationwide “anti-involution” campaign, launched earlier this year, has yet to deliver its intended benefits but is expected to exert some short-term impact on both supply and demand.
Given these factors, concerns over the challenges ahead have been voiced from various quarters. Notably, some overseas institutions have taken a pessimistic view, suggesting China’s economy may reach a turning point by midyear, with a “steep drop” in demand.
Such assessments have sparked heated debate and merit in-depth analysis, particularly on four core issues.
First, while the property market has largely passed its most dangerous phase and is on track for a soft landing, questions remain over whether it will exert greater drag on the economy in the second half.
Some analysts point to a 23 percent year-on-year drop in newly developed floor space as evidence that housing prices, demand and liquidity among developers will continue to face significant challenges, making property market weakness a key cause of any sharp downturn.
This concern is not without merit. Yet a closer look reveals that such assessments often overlook the unique characteristics of China’s property market and its policy framework.
The sector’s impact on the broader economy has already diminished significantly from 2022 to 2024. According to estimates by Soochow Securities based on input/output tables, property’s contribution to GDP in 2024 was about 13 trillion yuan ($1.81 trillion), or 9.6 percent of GDP — down from roughly 14.5 percent in 2016 and 2020.
This suggests that even if property-related indicators remain sluggish this year, their drag on the overall economy will be far less than last year.
Fears of the “gray rhino” event — particularly around debt repayment issues faced by developers such as Vanke during Spring Festival — have not materialized as expected.
Through coordinated efforts among investors, local governments and creditors, liquidity pressures are increasingly being addressed through asset disposals rather than sales alone. In June, despite a repayment peak, no major defaults occurred. Vanke, for instance, has largely cleared its offshore debt and faces no repayment pressure for such liabilities until 2027.
The central government continues to attach great importance to the property issue, with policy support still being strengthened. The recent Central Urban Work Conference signaled a new phase in property financing, with urban renewal and new urbanization set to accelerate financing channels and asset clearances.
As such, fears of a major property market shake-up in the second half appear unfounded, and the “gray rhino” scenario can largely be ruled out under the current policy backdrop. Nonetheless, property remains a key pillar of macroeconomic stability, and strong policy measures will be essential to ensure overall economic steadiness.
Second, while exports will face headwinds in the coming months, predictions of a “cliff-like” decline underestimate China’s trade resilience and overstate the role of the front-loaded exports effect.
Some analysts argue that the fading of this effect — alongside new US tariff measures — could cause a sharp drop in export indicators after Aug 12. While this reasoning has a basis, it requires a more nuanced look at two questions.
One is how much front-loaded exports contributed to the 7.2 percent year-on-year growth in exports in the first half. Estimates vary among research teams, ranging from 3 to 10 percentage points, depending on methodology.
Yet if we take regions without front-loaded exports as a reference, the calculated scale of such front-loading is far smaller than expected. Enhanced competitiveness of Chinese exports, along with the restructuring of various trade segments in the post-globalization era, may well be among the core drivers behind China’s resilient export growth.
We therefore conclude that while front-loading does exist and may amplify quarterly fluctuations in export data, it is not the decisive factor shaping the overall trajectory of exports.
The other is the actual scale of additional US tariffs. From the latest rounds of negotiations, it appears that the most extreme scenarios in the tariff dispute may have already been mitigated.
More importantly, China’s export potential to Latin America, ASEAN, other Global South countries and the EU deserves close attention, particularly as global supply chains undergo reconfiguration and the US enters a “post-tariff era”. Capital goods from China, in particular, are expected to see robust overseas demand in the near term.
In short, while a sharp export drop is theoretically possible, it is unlikely to occur. Policy cushioning, along with China’s trade elasticity, resilience and competitive strengths, should continue to anchor economic fundamentals.
Third, concerns that consumption stimulus policies may face diminishing returns also warrant careful analysis. Some point to the June slowdown in retail sales growth as evidence that consumption could be entering a sustained downturn, with much of the earlier boost stemming from the trade-in policy.
Indeed, by May 31, the policy had generated 1.1 trillion yuan in sales across five major product categories, lifting overall retail sales growth by nearly 2 percentage points over the period — at a cost of 162 billion yuan in fiscal spending. Critics question whether the remaining 138 billion yuan budget will be sufficient to sustain momentum.
Yet the expanded scope of the program, coupled with local fiscal support, is expected to maintain its overall impact. Moreover, the trade-in program is just one of 30 measures in a special action plan for boosting consumption issued by the State Council, China’s Cabinet, in March, which also includes policies to improve livelihoods, raise incomes, ease supply constraints and foster new consumption scenarios.
Thus, fears of a consumption “cliff “appear overblown. Recent fluctuations are likely due to temporary factors, and as these fade, policies will continue to promote sustained and deeper consumption growth.
Finally, addressing the “low-price effect” is now a central policy priority to prevent a faster economic contraction. While lower costs — driven by technological advances and imported disinflation — have helped ease prices, corporate profits have also declined, with profit margins falling more rapidly, underscoring the seriousness of “involution-style” cutthroat competition.
Efforts to curb “involution-style” competition are underway, and while micro-level improvements are expected, the widening negative GDP deflator remains a pressing macroeconomic challenge.
Some of the more pessimistic views on the economic outlook appear to misjudge the nature and scale of these four key issues, and often fail to factor in the potential strength of forthcoming policy measures.
In the second half, China will face certain challenges in maintaining steady growth. The country cannot afford to become complacent simply because the GDP grew 5.3 percent in the first half.
Instead, it must act with a strong sense of urgency to further roll out policies aimed at expanding domestic demand, while making forward-looking adjustments to address the four key issues currently at play.
At the same time, it is crucial to gain a deeper understanding of the fundamental features of China’s economy — particularly its flexibility, resilience, capacity to withstand external shocks and the strength of its policy responses.
A precise grasp of these attributes will enable the country to prepare in advance for the second half of the year, keep overall economic performance on a relatively steady course, and lay a solid foundation for economic adjustment and governance in the year ahead.
The writer is president of the Shanghai University of Finance and Economics.
The article is translated from a recent speech by Liu at China Macroeconomy Forum.
The views do not necessarily reflect those of China Daily.