Introduction

China's economy has faced a mixed start in 2025, with industrial output slowing down in the first two months of the year. Despite this slowdown, retail sales have shown a slight acceleration, reflecting the impact of government subsidies and holiday spending. As policymakers navigate through mounting pressures from U.S. trade tariffs and domestic economic challenges, the focus remains on bolstering domestic demand to achieve a sustainable economic recovery.

China's Industrial Output Slows Down

China's industrial output grew by 5.9% year-on-year in January and February, marking a decline from the 6.2% expansion recorded in December. Although this figure exceeded analysts' expectations of a 5.3% rise, it highlights the ongoing challenges faced by the manufacturing sector. The slowdown is partly attributed to weaker-than-expected exports and the impact of U.S. trade tariffs, which have increased by an additional 20% on all Chinese goods[1][2][3].

Key Challenges:

• Export Pressure: The U.S. tariffs have significantly affected China's export-driven economy, making it crucial for policymakers to diversify and strengthen domestic demand.
• Deflationary Pressures: Despite some growth, China's economy remains in deflation, indicating a need for more fiscal and monetary support to stimulate inflation and economic activity[3][4].
• Property Crisis: The prolonged property market crisis continues to weigh on consumer confidence and spending, affecting overall economic growth[5].

Retail Sales Show Resilience

Retail sales, a key indicator of consumer spending, rose by 4.0% in the first two months of 2025, marking the fastest growth rate since November 2024. This increase was partly driven by holiday spending during the Lunar New Year and government subsidies supporting purchases of home appliances and mobile phones[1][2][3].

Factors Contributing to Retail Growth:

• Holiday Spending: The 8-day Lunar New Year holidays boosted consumer spending, with record box office takings from films like "Nezha 2"[2][3].
• Government Subsidies: Targeted support for consumer goods has played a vital role in encouraging retail activity[3].

Policy Initiatives to Boost Domestic Demand

In response to these economic challenges, China's policymakers have announced several initiatives aimed at expanding domestic demand:

• Fiscal and Monetary Support: Leaders have pledged stronger fiscal and monetary backing to stabilize the economy, focusing on measures to increase household income and consumption[1][3].
• Trade-In Schemes: A 300 billion yuan ($41.5 billion) trade-in scheme for electric vehicles, appliances, and other goods has been expanded to encourage consumer spending[1][2].
• Childcare Subsidies: New childcare subsidies are part of a broader plan to support families and boost consumption[1][3].

Economic Growth Targets and Challenges

China's top leaders have set an economic growth target of "around 5%" for 2025. However, achieving this goal will be challenging due to ongoing pressures from weak exports, tepid household demand, and the protracted property crisis[1][3][5].

Broader Economic Indicators:

• Urban Unemployment: The jobless rate climbed to 5.4% in February, the highest in two years, indicating labor market challenges[2][3].
• Fixed Asset Investment: Investments in property and infrastructure rose by 4.1%, surpassing expectations but still reflecting a cautious economic environment[2][3].

Conclusion

As China navigates through these economic challenges, the emphasis on domestic demand and policy support will be crucial. While retail sales offer a positive note, the slowdown in industrial output and ongoing economic headwinds underscore the need for sustained policy efforts to ensure a stable economic recovery.