What Pythagoras’ theorem can teach us about the Fed

China’s GDP growth averaged 5.3% year-on-year in H1 2025, above the government’s full-year target of “around 5%”. Just over half of this growth came from consumption and about 30% came from net exports, with gross capital formation accounting for the remainder.¹

With the main drivers of growth being consumption and exports, it is important to look at the reasons for strength in these factors the first half of the year and assess whether these are sustainable. In the case of consumption, one can look at retail sales data (see Chart 1). 
 

Chart 1. Chinese retail sales (% change, year-on-year)

Source: LSEG Data & Analytics and EFGAM calculations. Data as at 23 July 2025.

Retail sales have been robust in 2025, supported by the consumer trade-in program. This allows Chinese consumers to trade in old household appliances and vehicles for new ones at a subsidised price. As shown in the chart above, the program has been extremely successful for household appliances, but less so for vehicles. 

However, if retail sales are being propped up by a trade-in program, then it calls into question the sustainability of consumption growth at the levels seen in H1. When a household buys a new fridge, for example, it is not then likely to buy another one for many years. Thus, this purchase represents households pulling forward plans to replace appliances to take advantage of subsidised prices, rather than sustainable underlying demand. 

In addition, the program has been funded by RMB 300bn of Chinese ultra-long treasury bonds. Of this, RMB 162bn was spent in H1, meaning that without further government stimulus, the funds available for H2 are around 15% lower than the actual spend in H1. Thus, while consumption is unlikely to decline significantly, it is also unlikely to continue to support GDP growth to the same extent as in H1. 

The same can be said of exports. Export growth was remarkably strong in H1 when one considers the significant increase in trade tensions with the US.² In January, exports were supported by a frontloading of orders ahead of an expected increase on tariffs charged in the US on Chinese goods (see Chart 2). 
 

Chart 2. Chinese exports (% change, year-on-year)

Source: LSEG Data & Analytics and EFGAM calculations. Data as at 23 July 2025.

As the higher tariff rate materialised, exports to the US collapsed. However, overall exports remained robust, supported by an increase in exports to Association of Southeast Asian Nations (ASEAN) countries. This could reflect transshipment of Chinese goods via ASEAN countries to the US to avoid higher tariff rates. 

However, as was the case with retail sales, this calls into question the sustainability of export growth at the levels seen in H1. This is due to the fact that the US is implementing measures to prevent transshipment of Chinese goods via ASEAN countries. The most prominent piece of evidence to date is the US’s trade agreement with Vietnam on 02 July. The US agreed to impose 20% tariffs on Vietnamese goods imported to the US but will impose a higher rate of 40% on goods that pass through Vietnam but originate in a different country. 

It will be important to watch for similar terms in any trade deals agreed between the US and other ASEAN countries. If such terms are agreed, China may find it difficult to maintain the growth rate of exports seen in H1. 

While consumption and exports are likely to slow in H2, they are unlikely to do so to an extent that means the government’s self-imposed GDP growth target is not achieved. If GDP rose 4.8% in 2025, the government could feasibly claim its target has been met. As such, China’s average growth rate could slow to 4.3% year-on-year in H2 and still be viewed as acceptable by Beijing. 

To some extent, this is a double-edged sword. Beijing has been reticent to stimulate the economy more than it deems necessary to ensure the growth target is achieved. Thus, with a target that appears to be easily attainable, there is a lower probability of significant government stimulus in H2. 

In summary, Chinese GDP growth was strong in H1, reflecting the success of the consumer trade-in program and frontloading/transshipments of exports. It is unlikely that these factors will be able to support the economy to the same extent in H2, meaning growth is likely to fade. Nonetheless, the growth target of “around 5%” appears easily attainable meaning the government is likely to feel less pressure to stimulate the economy, despite weak underlying demand. 
 

¹ The contributions of final consumption, net exports and gross capital formation to GDP growth in H1 were 52.3%, 31.2% and 16.8% respectively. 
² See Macro Flash Note: ‘US and China climb down tariff ladder, outlook remains uncertain’