China's economy expanded at a 5% annual pace in 2025, successfully meeting the government's official target for growth of "about 5%" despite facing significant trade pressures and domestic economic challenges. The world's second-largest economy demonstrated resilience through strong export performance, though growth momentum decelerated notably in the final quarter of the year.

Quarterly Performance Shows Slowing Momentum

Economic growth slowed considerably in the fourth quarter of 2025, declining to a 4.5% annual rate according to government data released Monday. This represented the weakest quarterly performance since late 2022 during the COVID-19 pandemic period. The deceleration marked a notable shift from the previous quarter's 4.8% growth rate.

Export Strength Drives Economic Performance

Strong exports emerged as the primary driver of China's economic expansion, helping to offset weaknesses in domestic consumer spending and business investment. The export performance contributed to a record trade surplus of $1.2 trillion for the year. This export-led growth model proved crucial in maintaining economic stability despite internal challenges including a prolonged property market slump and lingering effects from pandemic disruptions.

Chinese exports faced pressure from increased US tariffs following Trump's return to office, but this decline was successfully offset by expanded shipments to other global markets. However, the sustainability of this export-driven approach faces growing uncertainty as other economies consider implementing protective trade measures.

Domestic Challenges Persist

China's leaders have consistently emphasized boosting domestic demand as a key policy priority, but these efforts have shown limited effectiveness. Several government initiatives aimed at stimulating internal consumption have experienced mixed results:

• Vehicle Trade-in Program: Designed to encourage replacement of older cars with energy-efficient models, but has been losing momentum in recent months
• Home Appliance Subsidies: Trade-in programs for refrigerators, washing machines, and televisions continue but may face scaling back
• Property Market Stabilization: Remains crucial for reviving public confidence and household consumption

According to Chi Lo, senior market strategist for Asia Pacific at BNP Paribas Asset Management, "Stabilisation, not necessarily recovery, of the domestic property market is key to revive public confidence and, hence, household consumption and private investment growth."

Future Growth Outlook and Challenges

Looking ahead, economists anticipate slower growth in 2026, with Deutsche Bank forecasting approximately 4.5% economic expansion. The government's growth targets have gradually declined over recent years, moving from 6% to 6.5% in 2019 to the current "around 5%" target for 2025.

Investments in artificial intelligence and advanced technologies remain a key priority for China's leadership as the country seeks to boost self-reliance and compete globally. However, many ordinary citizens and small businesses continue to face economic uncertainty regarding employment and income stability. Some analysts, including the Rhodium Group think tank, suggest China's actual economic growth may have been slower than official figures indicate, estimating growth between 2.5% to 3% for the year.

China's record $1.2 trillion trade surplus is reshaping global capital flows as private investors increasingly deploy export earnings into overseas markets, marking a departure from the country's traditional centralized foreign exchange management system. Approximately two-thirds of foreign assets generated primarily from global trade are now held by companies, individuals, and state lenders rather than remaining in central bank coffers.

Surge in Private Overseas Investments

Chinese non-official sector investors expanded their foreign asset holdings by over $1 trillion in the first three quarters of the year, more than doubling the annual average growth of the past decade according to China's currency market regulator data. This surge resulted in $535 billion worth of Chinese private purchases of overseas securities, including US stocks, European bonds, and mutual funds through September.

The increase through September exceeded any full-year growth over the past two decades and significantly outpaced China's direct foreign investments used for building factories, warehouses, or expanding operations abroad.

Shift From Centralized Management

This development represents the culmination of a two-decade campaign by Beijing to implement "storing foreign-exchange with the people" instead of concentrating reserves with the central bank. The transformation accelerated following Donald Trump's reelection to the US presidency and gained urgency after G7 countries froze approximately $300 billion of Russian central bank reserves following the Ukraine invasion.

Under the previous system, exporters were required to surrender dollar earnings to state authorities in exchange for yuan. The current mechanism allows exporters to retain foreign currency at commercial lenders or on their books, effectively bypassing the People's Bank of China's balance sheet.

Market Impact and Scale

By September's end, Chinese private investors held $7.8 trillion in foreign assets, with growth outpacing official reserve accumulation by nearly five times. The total foreign assets held by China's non-official sector now exceed Japan's entire offshore investment portfolio, despite Japan being Asia's second-largest economy with substantial international holdings.

The scale represents more than a quarter of the $30 trillion US Treasury market, highlighting the significant liquidity pool now controlled by Chinese private entities.

Risks and Market Sensitivity

Unlike official reserves managed with long-term stability mandates, private sector foreign exchange holdings respond more directly to market sentiment. Rapid yuan appreciation or rising Chinese interest rates could trigger coordinated repatriation efforts as investors seek to lock in gains.

Peiqian Liu, Asia economist at Fidelity International, warned that rapid yuan appreciation and fund repatriation could create "a chain reaction of exporters settling their foreign exchange and capital inflows increasing, leading to a fundamental directional reversal."

Global Financial Implications

The shift embeds Chinese institutions deeper into global financial infrastructure, making them more resistant to sanctions while becoming harder for Western regulators to monitor. For global markets, sudden repatriation of these funds could withdraw substantial liquidity, potentially triggering sharp sell-offs in risk assets and increased borrowing costs worldwide.

Bank of China International Securities economists, including former State Administration of Foreign Exchange official Guan Tao, suggest that 2025 may mark China's transition toward becoming a mature net creditor nation, with heightened private sector sensitivity to yuan appreciation creating new dynamics in global capital flows.