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China—Growth expectations upgraded, but deflation and overcapacity persist
Stronger-than-expected activity in H1 2025 and ongoing government support for consumption saw the IMF upgrade China’s GDP growth forecast to 4.8% in 2025 and 4.2% in 2026 (from 4.0% for both 2025 and 2026 in its April 2025 forecasts). China has been subject to the largest US tariff increase and the most volatility in announced tariff rates. Still, a decline in Chinese exports to the US has been more than offset by higher exports to other advanced economies and east Asia. Indeed, Chinese export prices have increased since the start of the year. While activity is likely to soften as export frontloading rebalances, China’s resilience to higher US tariffs is expected to continue. The Reserve Bank of Australia finds the US is largely reliant on imports from China and half of Chinese exports to the US are relatively easy to redirect to other markets.
Despite robust external demand and increasingly supportive fiscal policy—including a new subsidy for consumer loans announced this month—China faces persistent internal challenges. Oversupply and excessive competition (known in China as “involution”) are weighing on manufacturing and producer prices remain low (Chart). Authorities have responded with an “anti-involution” campaign, to deter firms sacrificing short term profitability to secure greater market share, which leads to excess capacity and diminishing returns on capital. Anti-involution has included a shift toward industrial consolidation, legislative change to curb predatory pricing, greater oversight of subsidies, and lifting of standards and regulatory oversight.
China’s improved outlook lifts expectations for Australia’s key commodity exports, despite the global economic slowdown. The implications of ‘anti-involution’ are more mixed. Reduced mining production capacity could support prices in oversupplied markets, particularly lithium, nickel and graphite. However, softer Chinese industrial momentum, compounded by the ongoing property market downturn, will weigh on demand for Australian inputs to manufacturing and construction, including copper, aluminium, iron ore and coking coal.
