China’s factory output and retail sales grew at their weakest pace in over a year in October, piling pressure on policymakers to revamp the $19 trillion export-driven economy as a trade war with the U.S. and weak domestic demand heighten risks to growth.
For decades, the officials charged with keeping the world’s second-largest economy humming have had the option of spurring its vast industrial complex to boost exports should consumers tighten spending at home, or reaching into the public purse to fund GDP-boosting infrastructure projects.
But U.S. President Donald Trump’s tariff war is providing a stark reminder of the manufacturing juggernaut’s reliance on the world’s largest consumer market, and even an economy of China’s size can only squeeze so much growth from building more industrial parks, power substations and dams.
Friday’s indicators gave little hope for a quick turnaround, and the worse the data gets every month, the more urgent the need for reform becomes.
“China’s economy is facing pressures from all sides,” said Fred Neumann, chief Asia economist at HSBC.
“The strong lift from exports that supported growth in recent quarters will be hard to sustain into next year, even if U.S. import tariffs now turned out lower than feared. That leaves domestic demand to pick up the slack, but without significant further stimulus, it will be hard to reverse recent slowing in both investment and consumption,” he added.
Industrial output grew 4.9% year-on-year in October, National Bureau of Statistics (NBS) data showed, the weakest annual pace since August 2024, compared with a 6.5% rise in September. It missed a 5.5% increase forecast in a Reuters poll.
Retail sales, a gauge of consumption, expanded 2.9% last month, also their worst pace since August last year, and cooled from a 3.0% rise in September. They compared with a forecast gain of 2.8%.
NEW POLICY DIRECTION NEEDED
Policymakers acknowledge the need for change to address historical supply-demand imbalances, lift household consumption and tackle towering local government debt that keeps provinces – many with economies the size of nations – from being self-reliant.
All the same, they also recognise structural reform will be painful, and is fraught with political risk at a time when Trump’s trade war has ramped up pressure on the economy.
“The external environment remains fraught with instability and uncertainty, while domestic structural adjustments face considerable pressure,” Fu Linghui, a spokesperson at the NBS told a press conference following the data release.
China’s exports unexpectedly crumbled in October, data showed last week, as producers struggle to turn a profit in other markets after months of front-loading to beat Trump’s tariff threats.
Surprisingly, China’s car sales also snapped an eight-month growth streak, despite expectations purchases would accelerate before the phase-out of various tax breaks and government subsidies. That’s worrying as the fourth quarter is typically the strongest for auto sales, and the slump came even with an extra day due to a national holiday last month compared with 2024.
The October headline retail figure was bumped up by China’s Singles’ Day shopping festival, which wrapped up on Wednesday after more than a month of promotions on the country’s biggest e-commerce platforms. However, consumer sentiment remained muted compared with previous years, suggesting that even steep price drops are failing to entice shoppers.
“The loss of momentum in the second half of the year remains a little disappointing given the stated importance of domestic demand,” said Lynn Song, chief economist for Greater China at ING.
Song attributed the slowdown to the phase-out of the government’s trade-in subsidy scheme, adding that “a new policy direction will likely be needed to support consumption next year.”
ECONOMY UNDERMINED BY STRUCTURAL ISSUES
The investment slump will be equally troubling for policymakers as low confidence drags on the economy.
Fixed asset investment shrank 1.7% in the first 10 months year-on-year, compared with an expected 0.8% drop, having contracted 0.5% over the January-September period.
China’s ruling Communist Party met last month to chart the country’s economic course for the next five years, pledging to lift household consumption’s share of GDP “significantly” while also stressing the need to reinforce its vast industrial base.
That has some economists speculating whether Beijing will likely be tempted again to take the path of least resistance, reaching for its usual playbook of channelling resources to large firms while bypassing private producers and households.
And there are signs this is happening already.
“The headline figure is being propped up by state-owned enterprises in infrastructure,” said Yuhan Zhang, principal economist at the Conference Board’s China Center.
A protracted slowdown in the nation’s property sector, a key store of household wealth, also showed no sign of abating, with new home prices falling at their fastest monthly pace in a year.
“Structural issues are dragging down growth,” said Xu Tianchen, senior economist at the Economist Intelligence Unit.
“There remains room for stimulus, but officials would rather reserve it for 2026. China only needs 4.5%-4.6% growth for the fourth quarter to meet the 5% growth target, so their willingness to introduce more stimulus is not strong.”
(Reuters)