China’s Q3 GDP Growth Hits 4.5%: Export Surge Masks a Two-Speed Economy

A Headline That Flatters

China’s economy grew at 4.5 per cent in the third quarter of 2025, the National Bureau of Statistics confirmed on Monday — a figure that beat the Reuters poll consensus of 4.4 per cent and marked a recovery from the more-than-three-year low of 4.3 per cent recorded in the April-to-June period. On a sequential basis, the economy expanded 1.2 per cent quarter-on-quarter, surpassing expectations of 1.1 per cent and accelerating sharply from the 0.9 per cent registered in Q2. For the first nine months of the year, cumulative growth stood at 4.6 per cent, keeping Beijing comfortably within its stated annual target band of 4.5 to 5.0 per cent.

The number looks solid. What it conceals is more instructive.

The Export Engine and Its Limits

The primary driver of Q3 outperformance was a surge in external trade. China’s trade surplus widened more than expected in September, putting the country on course to surpass last year’s record US$1.2 trillion surplus — itself a figure that reshaped global trade flows. Policymakers have, in effect, bet the growth target on exports, leaning into the global AI-driven technology boom to sustain factory output and manufacturing employment while domestic demand remains structurally weak.

Industrial output grew 5.5 per cent year-on-year in September, up from 5.2 per cent in August and the strongest pace in six months. That resilience reflects a deliberate policy choice: Beijing has redirected credit and state resources away from the property sector and towards high-end manufacturing, the digital economy, and modern services. According to Mao Shengyong, deputy head of the NBS, these new growth drivers collectively contributed more than 40 per cent to economic expansion in the first three quarters.

The export engine, however, faces mounting headwinds. Trade tensions with the European Union are escalating, and a prospective deal to limit Chinese hybrid-vehicle shipments could erode one of the country’s most dynamic export categories. The AI cycle that has turbocharged demand for Chinese-manufactured components and electronics will not sustain its current trajectory indefinitely.

Consumption: Still the Weak Link

Retail sales rose 1.1 per cent year-on-year in September, accelerating from August’s 0.4 per cent increase and marking the fastest growth since March. That improvement is real, but the baseline it builds from is modest. Consumer spending remains subdued in structural terms, and the gap between production-side momentum and household demand continues to define the uneven character of this recovery.

“The key macroeconomic message is that China’s economy is still supply- and production-side driven,” said Yuhan Zhang, principal economist at The Conference Board’s China Center. “This supports near-term growth and industrial upgrading, while continued efforts to strengthen household consumption, services demand, and consumer confidence would make the recovery more balanced and sustainable.”

That framing — cautious, structural, forward-looking — captures the central tension in China’s current growth model with precision.

Fiscal Support: Deployed, But Unevenly Absorbed

Beijing has not been passive. Authorities expanded support for home buyers, steered cheaper credit into infrastructure and technology sectors, and allocated 550 billion yuan (approximately US$82.3 billion) in unused government debt quotas to ease local government financing constraints. An additional 800 billion yuan policy-based financing tool was activated to spur infrastructure investment, alongside expanded loan interest subsidies for small private firms and consumers.

The results on the ground have been mixed at best.

Infrastructure investment contracted 4.2 per cent despite the stimulus push. Fixed-asset investment fell 7.2 per cent in the first nine months of the year, declining at the same pace as the January-to-August period. Property investment remained deeply depressed, dropping 20.6 per cent over the same span. “Improved government investment helped arrest the consistent worsening in fixed asset investment,” noted Tianchen Xu, senior economist at the Economist Intelligence Unit — a carefully worded observation that stops well short of declaring a turnaround.

Local Government Stress as a Structural Risk

The fiscal position of local governments deserves particular attention. Much of China’s infrastructure investment pipeline depends on sub-national authorities that are themselves under significant financial strain — a consequence of land revenue collapse following the property sector’s prolonged contraction. Dan Wang, China director at Eurasia Group, warned that fiscal pressures on local governments could delay infrastructure projects and pose a tangible risk to growth momentum heading into 2026.

Where Full-Year Growth Lands

Dan Wang told CNA’s Asia First that she anticipates full-year growth of approximately 4.7 per cent, placing China near the middle of its official target range. “Exports will remain strong at least throughout the rest of the year, given that the AI cycle is still rising,” she said, while flagging that fourth-quarter stimulus measures would provide additional support to the headline figure.

That projection is plausible — but it rests on a growth architecture that analysts across the spectrum describe as imbalanced. A two-speed economy, where robust factory output and record trade surpluses mask weak private consumption and declining property investment, can sustain a target band. Whether it can sustain the kind of broad-based recovery that generates durable household income growth is a different question entirely.

China’s policymakers know the distinction. The debate is over how urgently they choose to act on it.