China’s economic engine showed a pronounced loss of momentum in the latest monthly data, with both factory output and retail sales posting their weakest growth in more than a year. The figures underscore the challenges faced by policymakers as a prolonged property downturn, fragile consumer confidence, and soft external demand place renewed pressure on Asia’s largest economy.
A New Wave of Weak Indicators
China’s October 2025 economic data revealed industrial output grew just 4.9% year-on-year, marking the weakest annual pace since August 2024 and falling short of the 5.5% increase forecast by analysts. This represented a sharp deceleration from September’s 6.5% growth rate.
Retail sales, a key gauge of domestic consumption, expanded a mere 2.9% last month—also the worst performance since August 2024—cooling from September’s 3.0% rise. These twin indicators are closely watched as high-frequency signals of China’s industrial health and domestic demand, and their simultaneous weakness paints a troubling picture.
The disappointing data prompted HSBC’s chief Asia economist Fred Neumann to observe that “China’s economy is facing pressures from all sides,” noting that the export boost supporting recent quarters will be hard to sustain, leaving domestic demand to fill the gap.
The timing couldn’t be more challenging. With the world’s second-largest economy valued at $19 trillion, Beijing confronts a fundamental question: Can traditional policy levers still ignite growth, or does China need a more radical economic transformation?
Drivers Behind the Slowdown
The Property Sector’s Relentless Drag
Perhaps most alarming, new home prices fell at their fastest monthly pace in a year during October, with no signs that the property sector’s protracted slowdown is abating. Since the implementation of the “three red lines” policy in 2020, which aimed to deleverage developers, China’s real estate crisis has deepened, exposing systemic risks across the financial system.
By March 2025, the inventory of unsold homes reached a record 421.58 million square meters, while 77 property developers defaulted on their debts between 2020 and August 2025. This matters profoundly because real estate historically accounted for 20-30% of China’s GDP when including upstream and downstream sectors.
According to Fitch Ratings, China’s new home sales by area may decline an additional 15-20% from current levels before the sector stabilizes, with transactions by value potentially dropping another 7-10% in 2026.
Investment Collapse and Fiscal Constraints
Fixed asset investment shrank 1.7% in the first ten months of 2025 compared to the same period last year—significantly worse than the expected 0.8% drop and marking the first contraction since 2020 during the pandemic.
Within investment, property spending continued to decline, shrinking 14.7% in the year through October compared with a 13.9% contraction in the first nine months. This drag is compounded by local government debt constraints, which limit provinces’ ability to fund infrastructure projects that have traditionally served as economic backstops.
Estimates suggest off-the-book local government debt ranges from $7 trillion to $11 trillion, with hundreds of billions at risk of default.
External Headwinds and Trade Tensions
The external environment offers little relief. China’s exports unexpectedly contracted in October as producers struggled to maintain profitability in foreign markets after months of front-loading shipments to beat anticipated U.S. tariff threats.
Under a Trump administration, potential trade disputes could lead to yuan depreciation driven by current account deterioration and adverse capital flows. The manufacturing sector’s vulnerability to U.S. tariffs highlights China’s continued reliance on the world’s largest consumer market—a dependency that limits Beijing’s policy flexibility.
Sector-Level Breakdown
Manufacturing: Losing Steam
China’s manufacturing activity contracted more than expected in October, falling to the lowest level in six months, as the weeklong National Day holiday shuttered factories across the country. Electronics, machinery, and export-oriented production all showed weakness, reflecting both domestic demand softness and external pressures.
With construction and real estate sectors accounting for 40-45% of China’s total steel demand, the property crisis directly translates into weakened demand for iron ore, steel, and copper. Producer prices have contracted for 32 consecutive months as of May 2025, intensifying deflationary pressures.
Retail: Consumer Confidence Crumbles
Surprisingly, China’s car sales snapped an eight-month growth streak in October, despite expectations that purchases would accelerate before the phase-out of various tax breaks and government subsidies—particularly concerning given that the fourth quarter is typically the strongest period for auto sales.
The October retail figures received a temporary boost from China’s Singles’ Day shopping festival, yet consumer sentiment remained muted compared with previous years, suggesting that even steep price discounts are failing to entice shoppers.
ING’s chief economist for Greater China, Lynn Song, noted the “loss of momentum in the second half of the year remains a little disappointing given the stated importance of domestic demand.”
Policy Response & Debates
Current Measures Fall Short
By the end of July 2025, over RMB 2.6 trillion in local government special-purpose bonds had been issued, funding projects like the renovation of 25,000 old residential compounds—yet these initiatives only indirectly support construction activity.
Beijing has deployed an extensive policy toolkit including cutting interest rates on existing mortgages by 0.5 percentage points (saving 50 million households approximately 150 billion yuan annually), reducing minimum down payments to historic lows (15% for first homes, 25% for second homes), and easing purchase restrictions in major cities.
However, as S&P Global Ratings director Edward Chan emphasized, “homebuyer sentiment is still quite volatile,” and the government will need to “persist in supporting the sector and stimulating demand to help restore homebuyers’ confidence.”
The Stimulus Debate
Xu Tianchen, senior economist at the Economist Intelligence Unit, pointed out a crucial political calculation: “There remains room for stimulus, but officials would rather reserve it for 2026. China only needs 4.5%-4.6% growth for the fourth quarter to meet the 5% growth target, so their willingness to introduce more stimulus is not strong.”
China’s ruling Communist Party pledged last month to lift household consumption’s share of GDP “significantly” while also stressing the need to reinforce its vast industrial base—leading some economists to question whether Beijing will simply reach for its usual playbook of channeling resources to large state-owned enterprises while bypassing private producers and households.
Implications for Global Markets
Currency Pressures and Regional Spillover
The Chinese yuan’s depreciation is having an outsized impact on peer currencies in Asia, Latin America, and Central and Eastern Europe, with correlations rising between the yuan and currencies like the Singapore dollar, Thai baht, and Mexican peso.
The yuan has depreciated modestly despite official intervention, due to capital outflows and interest rate differentials, while the U.S. dollar and Japanese yen have benefited from risk-off sentiment tied to concerns about China’s economic health.
Commodity Markets Under Pressure
Iron ore prices tumbled to multi-month lows in early November 2025, with port inventories surging to 138.44 million tons as of November 7, highlighting a significant supply-demand imbalance. Chinese steel producers are implementing widespread production cuts due to margin compression.
Commodity exporters such as Chile, Peru, South Africa, and Australia are seeing reduced demand from China, leading to cooling global prices with knock-on effects on investment, tax revenues, and broader business sentiment.
Industrial metals face subdued demand due to the global economic slowdown, especially in investment-heavy sectors, with iron ore prices projected to fall while copper shows stronger growth potential driven by electric vehicle and renewable energy demand.
Equity Market Implications
Chinese equities remain under pressure, with the Hang Seng and CSI 300 indexes trailing global peers in 2025. Emerging market assets more broadly face headwinds from China’s slowdown, as investor sentiment sours on Asia-Pacific growth prospects.
Forward-Looking Scenarios
Data to Monitor
Investors and policymakers should closely track several key indicators in coming months:
- Property metrics: New home prices, sales volumes, and developer default rates
- Consumption indicators: Retail sales, auto sales, and consumer confidence surveys
- Industrial activity: Manufacturing PMI, industrial profits, and capacity utilization
- External sector: Export performance, trade balance, and yuan exchange rate movements
- Policy signals: Central bank actions, fiscal stimulus announcements, and regulatory changes
Baseline Recovery vs. Prolonged Stagnation
Most analysts believe China’s GDP growth could settle into a lower band of 3-4% if structural reforms don’t accelerate, compared to the official 5% target for 2025. The International Monetary Fund projects China’s real growth rate could slow to around 3% by 2030.
The optimistic scenario involves Beijing launching more comprehensive stimulus measures targeting household consumption directly, stabilizing the property sector through government purchases of excess inventory, and successfully pivoting toward a consumption-led growth model. This could support 4-5% growth through 2026.
The pessimistic scenario envisions continued property sector deterioration, escalating trade tensions with the U.S., and persistent deflationary pressures leading to a self-reinforcing cycle of weak demand and falling prices. Growth could fall below 3%, with significant implications for global commodity markets and emerging economies.
Global Conditions as Wild Cards
U.S. Federal Reserve policy remains critical—any additional monetary easing would typically enhance safe-haven assets, while tighter conditions could exacerbate yuan weakness and capital outflows from China.
For commodities reliant on Chinese demand like iron ore and copper, further price declines are likely, while geopolitical tensions could affect currency markets and trading relationships across Asia.
The Bottom Line
China’s latest economic data reveals an economy at a critical juncture. The simultaneous weakness in factory output and retail sales, combined with collapsing investment and a property sector in freefall, suggests that incremental policy adjustments may no longer suffice.
As one Atlantic Council analysis concluded, with millions of empty apartments, high youth unemployment, falling salaries, and policies prioritizing high-tech industries over traditional economic sectors, China appears on track to “muddle through”—delivering neither the robust growth of years past nor a decisive economic transformation.
For global investors and policymakers, the message is clear: China’s slowdown is structural, not cyclical. The era of China as the world’s primary growth engine may be ending, requiring fundamental adjustments to investment strategies, supply chains, and macroeconomic forecasts. The question is no longer whether China will slow, but how much—and how global markets will adapt to this new reality.
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