Can China Keep Up Its Economic Growth Amid Tariff War?

China’s economy started 2025 on a strong note, posting 5.4% year-on-year GDP growth in Q1—beating analyst forecasts of 5.1%. But while the data signals resilience, a storm may be brewing. With the U.S. imposing aggressive new tariffs on Chinese goods, economists warn that China’s growth trajectory could falter in the quarters ahead.

Key Takeaways:

• China’s Q1 2025 GDP growth came in at 5.4%, outperforming expectations.
• Major banks have slashed their full-year forecasts due to rising U.S. tariffs.
• Beijing is expected to respond with fiscal stimulus to maintain momentum.

A Strong Start, But Momentum May Fade

The Chinese economy matched Q4 2024’s 5.4% pace, supported by robust retail sales and industrial output in March. Retail surged 5.9% YoY, while factory production climbed 7.7%. These figures point to the effectiveness of China’s short-term stimulus policies—particularly consumption-based subsidies and trade-in programs for electronics and furniture.

However, quarter-on-quarter growth slowed from 1.6% in Q4 to 1.2% in Q1, showing signs of underlying weakness. The property sector remained a drag, with investment plunging nearly 10% in Q1.

The U.S. Tariff Shock Is the Biggest Threat

President Trump’s decision to raise tariffs to as high as 145% on Chinese goods represents a major threat to China’s export-led economy. China’s response—imposing 125% duties on U.S. imports—has escalated the trade conflict.

UBS, Nomura, and ANZ have all downgraded China’s full-year GDP forecasts, with UBS now projecting just 3.4% growth in 2025. That’s well below the official target of around 5.0%.

These forecasts reflect concerns that a sudden collapse in export activity—after a temporary surge in March from pre-tariff shipment rushes—could dramatically undercut China’s broader economic recovery.

Policy Response: Will China Ramp Up Stimulus?

Economists expect major stimulus efforts from Chinese authorities in the coming months. Measures could include:

• Large-scale fiscal expansion
• Further monetary easing
• Boosts to infrastructure spending
• Expanded consumer subsidies

But there are limits. China is already facing elevated youth unemployment, deflationary pressures, and a recent Fitch downgrade of its sovereign credit outlook due to rising debt. Balancing stimulus with fiscal responsibility will be a critical challenge.

A Balancing Act for Beijing

China finds itself at a crossroads: robust headline GDP growth masks deeper vulnerabilities in domestic demand and labor markets. The U.S. tariff escalation could trigger a reshuffling of supply chains, impacting China’s manufacturing sector and investor sentiment.

Premier Li Qiang has acknowledged “profound external changes” and emphasized the need to boost domestic consumption. However, the effectiveness of these strategies will depend heavily on the speed and scale of policy implementation.

FAQs

Why is China’s Q1 GDP growth significant?

It exceeded expectations at 5.4%, suggesting resilience—but sustainability is in question due to external shocks from U.S. tariffs.

How will the U.S. tariffs affect China?

They threaten to erode China’s export competitiveness, prompting a potential drop in trade volume and weakening economic momentum.

What can China do to offset the impact? 

Likely responses include fiscal stimulus, targeted subsidies, and infrastructure investment—but rising debt levels may limit flexibility.