China’s Great Wall of Worry Extends

Chinese GDP growth decelerated to 4.8% y/y in Q3 from Q2’s 5.2%, keying an oft-recited hard-landing chorus: China’s economy, many allege, is on the verge of collapse from its ongoing property bust, deflation and trade war with the US.^[i] All three “negatives” are, to varying degrees, real. But for investors, the problem with these reflex headline takes is they are all well-known—and surprise moves markets most. On that front, China’s economy and trade continue chugging along better than feared, boosting global growth and stocks.

Reports highlighted Q3 Chinese growth as the slowest since Q3 2024’s 4.6%.^[ii] They characterized it as “fragile,” afflicted with “deepening structural imbalances” and desperate for stimulus, as economists and analysts anxiously await a new five-year plan to dig China out of its alleged rut.^[iii]

The same sentiment accompanied the latest monthly data releases, with a focus on “China’s lopsided growth.”^[iv] September retail sales’ 3.0% y/y was the slowest since last November, while year-to-date fixed asset investment fell -0.5% versus 2024’s first nine months, the first contraction in five years.

Coverage even pooh-poohed faster industrial production growth. September factory output accelerated from August’s 5.2% y/y to 6.5%—the upper end of its growth range over the past two years. Rather than hail industrial strength, the financial press says it signals China’s supposed export dependence “papering over deeper vulnerabilities” as domestic consumption and investment falter—another shoe to drop weighing on sentiment.^[v]

Yet despite the supposed problems under the hood, GDP is tracking its roughly 5% growth target. Cumulative GDP growth is 5.2% y/y in 2025’s first three quarters.^[vi] Yes, this was driven partly by surging exports as year-to-date outbound Chinese shipments rose 6.2% y/y—but that was as exports to the US fell -16.9%. China’s non-US trade is more than covering American losses. To us, this shows the opposite of dependence—how China is benefiting from broad global demand.

Now, here too, Chinese exports to the rest of the world aren’t without their critics. For example, the EU is planning a 50% tariff on steel imports and cutting its tariff-free quota by -47%. Mexico, too, is considering similar. But that would affect a sliver of total Chinese trade and GDP—not a material headwind at this point.

Moreover, like in the developed world, China’s economy is mostly services, which generates 56% of GDP.^[vii] In Q3, services added 3.0 percentage points to headline growth, topping exports, as year-over-year expansion exceeded 5% for the fourth straight quarter. Meanwhile, on the expenditures side, goods and services consumption’s share of GDP growth expanded to 56.5%. With so much attention on exports and housing, consumption’s and services’ steady growth quietly undercuts popular notions the economy is “unbalanced” and crippled by an extended property downturn.^[viii]

That isn’t to say China has no issues. Yet those that exist (e.g., slumping real estate and slowing household spending) are widely documented. All in all, growth in China may cool some, but it should still be sufficient to support global demand. And that is before any stimulus further boosts domestic consumption.

For instance, most observers attribute retail sales’ slowdown to fading effects from China’s goods trade-in program. Whether the Politburo acts to provide additional consumer-centered support is an area of extensive debate among China watchers. Some think policymakers will do what it takes to ensure growth (and social harmony, which we have long witnessed), while others anticipate more focus on structural reforms—like to its pension system—aimed at the country’s long-term development.

Regardless, with fear still running high—and expectations so low—we think attitudes toward China, global growth and trade are poised for positive surprise. Chinese growth keeps trucking on without big stimulus, yet few seem able to fathom it, which says more about sentiment than reality in the world’s second largest economy—more bricks in China’s great wall of worry for stocks to climb.