The favourable Jan-Feb data were encouraging. Retail sales improved with consumption boosting measures and a buoyant stock market. Fixed asset investment also gained traction. Growth was unevenly distributed, however.

Trade

Export growth slowed from 10.7% YoY in December to 2.3% in Jan-Feb 2025. Outward shipment bounded to US and EU decelerated due to ongoing trade tensions. Products that saw double-digit growth in 2024, such as home appliances and automobiles, only posted modest gains in the Jan-Feb25. Meanwhile, electronics remained the best-performing products, with automatic data processors recording solid growth amid improved regional demand.

Industrial production

Industrial production growth remained steady at 5.9% YoY in Jan-Feb, largely comparable with the 6.2% in December. Amongst all, EV and industrial robotics surged 47.7% and 27.0% YoY, supported by equipment upgrade initiatives.

Looking ahead, production and exports performance could improve amid front-load activities. Leading indicator such as the official PMI rebounded to expansion zone of 50.2 in February, with new export orders and output sub-PMIs continuing with their upward march. Caixin SME exporter-focused index also stayed above the expansionary threshold at 50.8.

Property

Real estate investment was a drag but showing initial improvement, down 9.8% in Jan-Feb vs. -10.8% in Dec 24, with residential floor space started decreasing 28.9% YoY so far this year. Property developers are prioritizing the completion of unfinished homes. Residential inventory remained at 26.7 months on a 12months moving average basis in January, with a 9.1% decline in primary market sales transaction.

Fixed asset investment

Headline fixed asset investment (FAI) improved to 4.1% YoY in first two months. State-sector investment, primary driver of FAI growth, increased to 7.0% YoY YTD. Automobile and equipment and tools purchases, ticked up by 27.0% and 18.0% YoY, thanks to the government initiatives. Private investment also improved from -0.1% last year to flat, backed by narrowed decline in foreign direct investment.

Retail sales

Retail sales growth increased from 3.7% YoY in December to 4.0% in Jan-Feb. Spending on sports and recreational goods and communication equipment surged. However, weak demand for big-ticket items, such as automobiles, continued to weigh on growth.

Retail sector performance could stabilize in the year ahead, in our view. Beijing spared no effort in supporting consumption sentiment. This included the CNY300bn consumption upgrade subsidy announced in the Two Sessions, which is equivalent to 0.6% of retail sales. Also, the government announced a 30-items guideline on 16^th March to boost spending through promoting wage growth and supporting childbirth.

Money supply

M1 remained in expansionary territory for the third consecutive month, thanks to ongoing stimulus measures and improving equity market sentiment. The narrowing gap between short-term M1 and time deposit M2 growth suggests households are more willing to hold liquid cash for consumption, and corporates are more willing to do the capex expansion.

Loans

Credit demand remained weak amid high real financing costs. Loan growth slowed to 7.3% YoY in February, with new mid-long-term corporate loans contracting -13.0% in the first two months. Household medium- to long-term loans fell -27.7% YoY on property market routs.

Inflation

Consumer prices fell -0.7% YoY in February, averaging a -0.1% decline for Jan-Feb. Core CPI fell further from 0.4% in Dec 24 to 0.25% in Jan-Feb, largely mirrors the subdued retail sales data. Meanwhile, producer prices recorded their 29th consecutive contraction at -2.3 as overcapacity wobbles. Persistent weak aggregate demand will continue to weigh on the growth, and this is why the government revised down the CPI target from 3% in 2024 to 2% in 2025.

Looking ahead

For China to achieve its 5.0% GDP growth target in 2025, incremental stimulus will be indispensable. Beijing has raised fiscal deficit target from 3.0% of GDP in 2024 to 4.0% in 2025. Special local government bond issuance will also be increased from RMB3.9trn to RMB 4.4trn to help absorbing excess residential property supply. Monetary easing is also essential for policy transmission. We expect a 15bps 1Y LPR cut to be executed in 2Q25, and another 15bps in 2H25.


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