On China's Economic Growth, Slowdown, Possible Policy Paths
Summary:
• China's Economy Grows by +4.8% (Year-on-year) in Q3. A slowdown compared to the previous two quarters.
• However this hasn't been reflected in the markets and is viewed as a non-issue in the the Zero Equilibrium camp. And perhaps by China a well.
• This is as relative to it's peers, China has a more balanced and stable macroeconomic outlook with debt and reserves strategically positioned, and aligned with Beijing's economic ambitions.
• China is armed with more fiscal space and monetary ammunition than it's peers, with lower inflationary pressures and a sizeable amount of gold in it's reserves insulating the domestic economy from exchange rate and price fluctuations.
Growth Slows Down the Most in Q3:
Economic growth slowed to 4.8% between July and September after being adjusted for inflation. Absent those adjustments, growth was under 4% given prices falling for the 10th straight quarter.
The Property Market Effect:
The housing market was majorly responsible for majority of the slowdown, with prices dipping in the three months months to complete a 9 month property price decline of -7.6% whilst property investment slumped almost twice the amount by -14%.
The housing market also saw a decline in property spending of -0.5%. However traders are looking to trade talks between China and the United States for clarity.
Trade Focus and Forward Expectations:
The focus on trade talks show investors are forward looking, and unperturbed – or just so to a minor degree – by current consumer weakness and deflation as those two reinforce each other, and the former dampened by falling housing prices, the foundation of the country's economic woes.
Still the economy is far from being in decline, even though we may have to temper expectations on the pace of growth. However, just as investors are forward looking, focusing on factors that affect the real economy long-term, so seems the CCP.
ZE On China's Policy Path: The focus switch from Growth to Stability
Up until recently, Beijing in the past, has had a reputation and tendency to rush in with monetary and/or fiscal stimulus in turbulent times. That has not happened in 2025, despite the slowing growth as GDP for the first three quarters stand at 5.2% even though it slowed to 4.8% in Q3.
This ZE presumes is a recognition of the fact that a slowing China is not a declining one. And even the “low” 4.8% growth in GDP today, surpasses the double digit growth in absolute terms earlier in the decade, given the base at which they are rising from.
To put this into perspective in the year 2000 the Chinese economy added a +10.6% growth in GDP, from 1.2 trillion, meaning output grew in monetary value by $128 billion, the Year-on-year growth of 4.8% for an $18 trillion economy, is +$864 billion.
China's Relative Economic Stability:
Compared to it's major peers, the Chinese economy is fairly stable, whilst Europe is battling with debt crisis, tight budgets and currency debasement risks, and the US battling inflation, in China prices are fairly stable and even moving in the opposite direction (declining).
Whilst household debt erodes savings in the US, China has a fairly decent savings rate of about ~42%. US deals with a weak consumer, whilst China deals with a less confident consumer.
China inflation is the lowest amongst the country groups below (Germany US, Japan, UK, France). Meaning, it has an higher real wage on average and more room to cut interest rates without threatening domestic price stability.
The two charts explain this economic posture, one of; persistent output growth, high savings rate, and low inflation, all the above being signs economy that is stable and armed with economic leverage, from my view.
The China Demand Management Policy and Broader Economic Leverage:
Demand management policies under a low inflationary and high output policies tend to have quicker and larger effects, as real disposable income is not jeopardized by robust fiscal expansion and the central bank armed with ammunition for and a market ready absorb a robust monetary stimulus, with gold to back the currency up, preventing a rapid slide.
The above is a chart showing the five year performance of the Yuan against the US dollar, down USD has appreciated about 6% from 2020 October till date, most of that rise has happened in 2022 with the yuan foning a bottom at RMB7.3300/$1in the second half, before rising to five year peak of 6.7900/$ level, (ie USD fell from near RMB 7.4/$1 to below 6.8/$1).
Since then it's hovered around RMB7/$1, with USDCNY posting a Year-on-year % change of 0.19%. Coincidentally, China resumed it's “Phase 4” gold purchase in late 2022 with gold holdings up to 2,250 tomes though some analysts nelvee it may be closer to 4,000 tonnes given chatter about it's undeclared holdings.
The theme is simple,
- Hedge against the USD,
- Support the Internationalization of the Yuan (RMB),
- Build a foundation for BRICS De-dollarization initiatives, and
- Give the PBOC a higher level of monetary sovereignty to rival the US Federal Reserve.
The above implies the economy has a stable monetary system, as well as a robust real sector for which fiscal policy finds a ready purpose – resource mobilization. China happens to have both.
Monetary Strength:
With its large gold ammasment in the past three years and a move to make Shanghai a trading hub for the metal, the PBOC has gained sufficient monetary policy ammunition and increased it's monetary sovereignty. As the yuan is not only strengthened by real output (export) demand, but also by the price appreciation of a key reserve asset – the yellow metal.
An extra layer of protection lies in the fact that China's PBOC has no small amount of USD assets (dollar and Treasuries) in it's Reserve, with which it's used to finance it's long Gold positions.
Fiscal Policy Strength:
A more resilient and internationally accepted Yuan (RMB) means that should need be, the country can expand not just monetary stimulus, but fiscal stimulus as well, as the associated deterioration of the Yuan's objective exchange-value is eased out by the efficiency of production, and it's real exchange-ratio (i.e., FX rates backed by it's possession of the yellow metal and USD assets).
The country's debt at all levels of government is also largely held by local investors and this gives it's an edge over the US with relatively more foreign holdings of its debt.
ZE Macro Note and Remarks on the World's Number 2 Economy:
At this points the country is not under any threat of a bond vigilante attack, and neither is there a fear of a run on it's strategically distributed debt.
Exports are not slowing even in the wake of tarrifs, and trade is more de-dollarized, giving it an extra edge with the economy less exposed and affected by USD or Federal Reserve policy. China doesn't need the US dollar for about a third of its trade with its major partners.
Unemployment, for the year has averaged 5.2% in these first nine months, which is very much in line with the last five years, and way below the spike seen in 2022. (See Chart below)
(China Unemployment 2020-2025 nine month average)
For a country with such a large population and labor force, a 5.2% unemployment rate is as close to full employment as a 4.3% unemployment rate in the US.
ZE Policy Remarks and Macro Note:
From the above, we opine that, the Chinese governments economic policy is focused on structure and not momentum, as it tilts towards strengthening, reforming or enacting new and even innovative policy and regulations to support industrial growth and boost local demand.
Businesses, at this point are more in need of sales than finance, an attestation to a fairly resilient market, given the property market slump.
With its gold holdings and probably new additions yet, Beijing has created not just monetary ammunition, but fiscal space, as the currency can withstand new money creation associated with either of the twin demand management policies.
Risks to the economy pale in comparison to it's OECD peers, but the PBOC has lesser monetary ammunition than the Republic's Finance Ministry has fiscal space. However, they both reinforce each other, and future monetary easing would depend on the level of fiscal expansion warranted.
This means the PBOC backstopping Chinese debt, to keep yields in check, with other factors such as prices, unemployment etc., influencing modalities but not volume.
Any policy move would likely (and should) be both purposeful and eased in, especially on the monetary side, as the economy may need to absorb the bouts of past liquidity injections.
Future directional movement in economic growth is not expected to be rapid, that is to say that the economy isn't expected to decelerate or accelerate rapidly. Hence, a fairly stable China going forward. We put the ten year annualized average growth rate at 4.2%.
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