Top economist on China's near-term economic outlook and policy pathways
Lu Ting, Chief China Economist at Nomura, advocates bold measures -- debt clearance to shore up the housing market and comprehensive social-security system reform -- to stabilize growth.
Time for the monthly economic wrap-up.
China's April economic data are in, with industrial output expanding 6.1 percent year on year, meeting forecasts, and retail sales climbing 5.1 percent, missing expectations.
And it has seemingly become a pattern, as Michael Pettis noted,
it is still proving very difficult for China to increase consumption in line with production, which is why China must continue to expand investment (with much of it directed into manufacturing) and run massive trade surpluses.
On May 21, the China Macroeconomy Forum (CMF) at Renmin University of China convened a monthly seminar titled "From Policy to Practice: Stabilizing the Economy and Advancing Long-Term Reform"(政策落地促进经济企稳，长期动能亟待改革攻坚). Eight leading economists shared their thoughts on April's economic performance and mapped out the economic outlook for the rest of the year.
Today's newsletter features the speech addressed on the seminar by Dr. Lu Ting (陆挺), Chief China Economist at Nomura.
Analyzing China's economic outlook for the coming months, Dr. Lu sees growth slipping by more than a full percentage point in the second half (H2) versus H1.
He warns that in H2, China will face a steeper export slog, and consumer‐goods "trade-in" schemes will struggle to deliver further upside—and may even backfire.
Dr. Lu also flags a prolonged property slump, as well as lingering overcapacity in the "new trio" sectors (EVs, lithium batteries, and solar cells), which are set to drag on manufacturing investment.
Dr. Lu's prescription begins with defending the RMB's stability. Moreover, with exports under pressure, he argues, shoring up the property market is vital—not just via conventional tools such as rate cuts and lifting restrictions, but through a comprehensive debt-clearance of troubled developers.
Finally, given the fading returns from "trade-in" schemes, he renews his call for institutional social-security reform, above all by boosting rural pensions to underpin consumption. Dr. Lu notes that, for an economy increasingly relies on consumption as its main growth driver, an enhanced pension system and healthcare coverage have become more important than ever.
Below is the full translation of Dr. Lu's speech. Please note that the translation has not been reviewed by him.
陆挺：对中国经济形势的中短期分析与政策建议
Lu Ting: Analysis of China's Economic Situation in the Short and Medium Term and Policy Recommendations
I. Short- and Medium-Term Analysis of China's Economic Outlook
In the coming one to two months, China's economic performance is expected to remain relatively robust. One of the main reasons for this outlook is the backlog of export orders accumulated in earlier periods. Given that another round of trade negotiations is scheduled within the next ninety days and that the outcome of these talks remains uncertain, there is a strong likelihood of "front-loading" exports in anticipation of possible trade barriers. As a result, China's export growth in May and June is projected to remain at an elevated level, likely comparable to the 8% growth observed in April. The other reason lies in that, consumer goods trade-in programs are continuing to boost retail sales.
Taking both factors into account, China's Q2 GDP growth is expected to remain steady at around 4.8%. However, it is anticipated that the economic outlook in the second half of the year (H2) will face greater challenges, for the following reasons:
First, from the export perspective, the effective tariff rate imposed by the United States on Chinese products has increased by roughly 35 percentage points compared to last year. Notably, tariffs on items worth $800 or less exports to the United States have risen from zero (de minimis exemption) to approximately 54%, a very large increase that will materially constrain China's exports to the U.S. While it is important not to exaggerate this effect, it must be recognized that, after the initial surge of "front-loaded" exports, there is a real risk of a substantial contraction in exports to the United States.
Second, regarding durable goods consumption, the positive effects of recent stimulus policies—such as last year's incentives for vechicles and home appliances and this year's measures for electronic products—are likely to wane as the two waves of the trade-in programs reach their peak. By H2, we should not expect to see any appreciable boost in durable-goods spending; indeed, there is a real possibility of a modest downturn, given the scale of prior stimulus. After all, the growth in demand for durable consumer goods cannot be sustained at high rates indefinitely.
Third, the real estate sector, a crucial pillar of China's domestic demand, has now been in contraction for five consecutive years. The sector continues to shrink at an annualized rate of about 10%, and new housing starts remain down roughly 22% year-on-year. Under these conditions, it will be difficult to stabilize domestic demand. The real-estate market is intimately tied to local government finances, exerts a profound influence on infrastructure investment, and shapes household consumption through its impacts on wealth and employment. Currently, with the exception of a few cities, housing prices are experiencing modest declines, eroding household net worth.
Moreover, overcapacity in China's "new trio" sectors (EVs, lithium batteries, and solar cells) over recent years is likely to weigh on manufacturing investment in the coming months. Irrespective of the final outcome of the China–U.S. trade talks, the ongoing trade tensions will also likely weigh on investment in manufacturing. Taken together, these factors imply that H2 GDP growth could slow by more than one percentage point compared with H1. This is my overall assessment and forecast for China's economic outlook.
II. Relevant Policy Recommendations
From a policy standpoint, it is crucial to consider what measures can effectively stabilize the economy, promote recovery, and mitigate the negative effects of ongoing trade conflicts under current circumstances.
Since the U.S. began imposing blanket tariffs on a global scale on April 2, the Chinese government's response has been notably effective. The People's Bank of China has directly intervened in the stock market through relending and other tools, thereby stabilizing market expectations and limiting volatility. As a result, the stock market has largely recovered to pre-April levels. This intervention has played an important role in maintaining economic and financial stability.
Moreover, the decision to defend the RMB–USD exchange rate merits equal commendation. There was a period when the offshore renminbi depreciated to above 7.4 per USD; had depreciation been allowed to continue, it would have adversely affected the stability of the domestic property and equity markets as well as direct investment flows. Unlike in 2018-2019, when renminbi depreciation could offset higher U.S. Tariffs--thanks in part to a stable property market and manageable capital outflows--the situation has changed significantly. Since 2021, China's real estate market has entered a downward phase. For these reasons, maintaining exchange rate stability is a crucial policy choice, and I believe this should remain a priority in the near future.
As we look ahead to H2, it is important to consider what additional measures—beyond the reserve requirement and interest rate cuts implemented over the past month—can effectively stabilize the economy in the face of downward pressures.
On the one hand, fiscal policy should play a more prominent role: we ought to accelerate public spending and, within this year's approved quotas, ramp up both bond issuance and budgetary outlays. On the other hand, given the prevailing conditions, it is advisable to begin designing further easing and stimulus programs now, so that they can be phased in over the coming months to shore up market confidence and genuinely boost domestic demand. Several specific areas merit consideration:
Given the likelihood of a pronounced slowdown in export growth during H2, the stability of China's property market becomes all the more critical. Over the past four to five years, although the real-estate sector's activity has contracted by more than 50 percent, a roughly 45-percent surge in exports provided a powerful counterbalance, preventing the economy from falling into distress. However, in the coming quarters, China may face the dual headwinds of both waning exports and a continued downtrend in real-estate, making the property market stability far more consequential than before.
Ensuring the sector's stability requires more than conventional tools such as interest-rate cuts or the relaxation of purchase-restriction policies. It demands a thorough clearing of real-estate debt. In practice, this means allowing fundamentally insolvent developers to enter bankruptcy while supporting viable firms; it means preventing debt from accumulating indefinitely by enforcing proper repayment and requiring the construction—and delivery—of presold units. Where delivery proves infeasible, homebuyers should receive fair compensation. Experience from financial and real-estate crises around the world over the past several decades shows that a large-scale, centrally coordinated market cleanup—backed by central fiscal resources and led by the national government—is key to address this crisis.
With limited room remaining for further "trade-in" programs, we must turn to more structural and institutional measures to rekindle consumption. In particular, China should accelerate reforms of its social-security system. Recent debate has focused squarely on raising pension incomes for the 55 percent of retirees—primarily in rural areas—who currently receive an average government pension of only 243 yuan (roughly USD35) per month.
Boosting that benefit to 400 or even 500 yuan would not only enhance the consumption capacity of some 170 million seniors but also relieve the pension burden on 300 million migrant workers and improve their long-term income expectations. In an era when real estate, infrastructure investment, or exports once underpinned growth, the expansion of social welfare need not have been urgent. However, as the economy increasingly relies on consumption as its main growth driver, an enhanced pension system and healthcare coverage have become more important than ever.
Fiscal reform is essential. Since the central government launched a new round of local debt defusing in the Q4 of last year, local government debt conditions have improved somewhat. Nonetheless, many entrepreneurs still report that strained local finances are hampering the local business environment. With China's property sector shrinking for five years in a row and local government land sales revenues dropping by 11% in the first four months of 2025, reforming fiscal relations between the central and local governments—so that localities have independent sources of revenue beyond real estate—is an urgent task. Effective fiscal reform can improve market expectations, optimize the business environment, incentivize local governments to foster economic growth, and protect local private entrepreneurs. Such reforms are also key to curbing profit-driven law enforcement, which remains an impediment to boosting domestic demand.