China is singing off the same hymn sheet

Export diversification pays dividends
China’s economy grew 5% year-on-year (YoY) in 2025, in line with the government’s growth target. It was striking that despite all the noise around tariffs, the share of GDP growth accounted for by exports rose last year (see Chart 1).¹

Although China’s exports contributed meaningfully to GDP growth, there was a significant shift in where goods were being sent. Exports to the US fell 19.9% year-on-year in 2025 but exports overall rose 5.4% YoY, reflecting an increase in exports to economies outside of the US. While this may, in part, reflect transshipments of Chinese goods to the US via third-party countries, it is also the result of a broader export diversification strategy being implemented by Beijing. We wrote about the potential for tariffs to create a “China shock 2.0” in a note in June last year and, indeed, this appears to be playing out.²

Consumer trade-in program sees success
Although consumption was robust last year, there was a significant boost from the consumer trade-in program. This allows consumers to trade in household appliances and vehicles for new ones at a subsidised price. The success of the scheme, which was first introduced in March 2024, is evident from the fact household appliances sales grew at a faster average rate than total retail sales in 2025 (see Chart 2). It is also notable that the program was less successful for vehicles.³

When a consumer buys a household appliance such as a new fridge, for example, they are not then likely to buy another one for many years. It is therefore positive that in 2026, the trade-in scheme will be expanded to include digital and smart products. While this may support consumption in 2026, the benefits are likely to be asymmetrically distributed throughout the year, with most of the funding for the program being spent in the first half of the year. This was also the case in 2025 and reflects Beijing’s desire to start the year with strong data and provide a cushion between the GDP growth rate and the government’s target.⁴

Structural challenges persist
However, the muted level of total retail sales highlights that underlying domestic demand remains weak. Rather than a cyclical downturn, this reflects structural challenges facing China’s economy. For example, the deleveraging of the property sector in China has been accompanied by a large decline in house prices (see Chart 3).

This matters because around 70% of household wealth in China is estimated to be accounted for by real estate.⁵ Lower house prices could therefore dampen demand due to a negative wealth effect (the wealth effect refers to a phenomenon where households spend more and save less when their wealth increases, even if their income is unchanged, due to the feeling of being more financially secure). A paper published by the Bank for International Settlements finds that house prices have a statistically significant impact on consumption in Tier 1 and 2 cities in China, and that a 10% increase in house prices leads to a 1.6% increase in consumption.⁶

Based on national data, we estimate that new and second-hand house prices in seventy medium and large cities have fallen by 10.4% and 20.3% respectively from their peaks in August 2021. Taking an average house price decline of 15.3% would therefore suggest around a 2.5% decline in consumption due to the wealth effect. Furthermore, this is a simplified way of looking at the situation and it likely underestimates the decline in consumption due to the wealth effect since more household wealth will be tied up in second-hand homes than in new homes.

Consistent growth outlook
Nonetheless, the outlook for China’s economy remains broadly unchanged from 2025, a year in which GDP growth was supported by export diversification and the consumer trade-in program. Exports are likely to remain a key pillar of GDP growth, benefitting from the aforementioned diversification as well as a robust global economy. Frontloaded stimulus papered over cracks stemming from structural issues and resulted in uneven growth which faded towards the end of the year. It is likely that the same trend is visible in 2026. 

EFG’s Outlook 2026 highlighted our view that China is set to lead emerging market growth this year, despite structural headwinds.⁷ A key watchpoint will be March’s National People’s Congress, which will set a range of numeric goals for growth, inflation and budget deficits.

¹ The tit-for-tat trade war between China and the US in 2025 saw additional tariffs imposed by the US on imports of Chinese goods jump from 10% to 145% before eventually settling back at 20% in a deal agreed in November 2025 and currently set to expire in November 2026.
² See previous Infocus note, ‘Trump 2.0 and the potential for China shock 2.0’ 
³ The economics of the consumer trade-in program was explained in more detail in a previous Macro Flash Note, ‘China’s NPC steps up stimulus amid challenging external environment’
⁴ The amount spent by China’s National Development and Reform Commission and the Ministry of Finance in H1 2025 was around 15% higher than the amount spent in H2.
⁵ https://www.ft.com/content/004a9e76-5c1f-4b78-b223-ef324bce81a2
⁶ It is reasonable to argue that while a house price increase could lead to an increase in consumption through the wealth effect, it is also possible that higher consumption and economic growth can drive housing demand and prices. The challenge of reverse causality is addressed in the paper, which is available at the following link: https://www.bis.org/publ/work1319.pdf
⁷ https://www.efginternational.com/uk/insights/outlook-2026/2026/1-us-economy-set-to-lead-growth.html