China’s Q2 Economic Slowdown Looms as U.S. Trade War Intensifies

Trade tensions with the U.S. hammer China's growth—just as the world's second-largest economy tries to shake off its post-pandemic slump.

Why it matters: The dragon isn't just coughing smoke—it's choking on tariffs. Beijing's 'decoupling-proof' economy now faces its toughest stress test since 2020.

The big picture: Forget soft landing—China's heading for a turbulent touchdown. Factory output stutters, export orders shrink, and that $18 trillion GDP engine? Running on fumes.

Between the lines: While Wall Street hedges with gold and crypto, China's old-school playbook—infrastructure splurges and forced lending—looks about as effective as a bamboo firewall.

Bottom line: In global economics, there are no permanent allies—only permanent interests. And right now, China's interest payments are coming due.

Beijing may announce more spending

Morgan Stanley anticipates that Beijing may roll out an extra fiscal package ranging from 500 billion to 1 trillion yuan starting towards the end of Q3.

June customs figures indicated a rebound in inbound shipments and a modest uptick in exports, driven by a rush to beat an early‑August tariff ceasefire deadline with the United States. Other June metrics on factory activity and consumer spending are forecast to decelerate further.

Quarter‑on‑quarter, the Reuters survey predicts GDP will have risen by 0.9% in Q2, after a 1.2% gain in Q1. Furthermore, analysts expect growth to moderate to roughly 4.6% in 2025, falling short of official ambitions, and slip to around 4.2% in 2026.

Investors are turning their attention to the late‑July Politburo session, anticipating cues on future policy moves and potential new economic support.

According to the survey, experts foresee a 10‑basis‑point reduction in the People’s Bank of China seven‑day reverse repo rate, and a comparable decrease to the loan prime rate, sometime in Q4.

Job market makes output cuts risky

So far this year, authorities have stepped up public works funding and expanded household subsidy programs, while the central bank in May trimmed borrowing costs and pumped cash into markets to offset trade‑related headwinds.

However, experts warn these measures might not be enough to stop the ongoing price drops. June’s producer price index plunged at a rate unseen in roughly two years, underlining persistent deflationary trends.

Observers expect officials to step up cuts to excess factory production and look for new ways to encourage domestic spending.

Analysts say it’s tricky to cut excess output without triggering major layoffs in a weakening job market.

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