China's Economy: Exports Boom, But Is Anyone Spending at Home?

Nathaniel Wright

Data Interpretation

Remarks of Officials

Economic

Central Bank

China–U.S. Trade War

Summary:

China met its 2025 growth target, but an export-driven boom masks deep domestic spending woes and deflation risks.

China's economy hit its official 5% growth target for 2025, but a closer look reveals an unbalanced recovery. While record-breaking exports powered the nation's performance, stubbornly weak spending at home dragged growth to its slowest pace in three years, raising questions about the sustainability of its economic model.

In the final quarter of 2025, the country's gross domestic product (GDP) expanded by just 4.5%, highlighting a significant loss of momentum. This slowdown, influenced by the lingering effects of Donald Trump's trade war, underscores a critical weakness: China's reliance on selling to the world while its own consumers and businesses hold back.

A Record Trade Surplus Masks Domestic Fragility

The standout success story for China's economy in 2025 was international trade. The country achieved a massive trade surplus of nearly $1.2 trillion, meaning it sold far more goods abroad than it purchased.

This export boom was impressive, especially as sales to the United States dropped by about 20% due to trade tariffs. To compensate, Chinese exporters successfully pivoted to other global markets, increasing sales to Africa, Southeast Asia, Europe, and Latin America. These strong export figures were the primary driver that enabled Beijing to meet its annual growth target.

Inside China: Stagnant Spending and Deflation Risks

The strength in exports, however, paints a misleading picture of the economy's overall health. Back at home, the story was one of stagnation.

• Weak Consumer Demand: Chinese consumers were reluctant to spend, leading to sluggish retail sales.

• Low Business Investment: Companies showed little appetite for expansion, with fixed-asset investment—a major engine of economic activity—either falling or growing only slightly in 2025.

This persistent lack of domestic spending has pushed the economy toward deflation, a cycle of falling prices. When consumers and businesses expect prices to drop further, they delay purchases, which in turn slows down economic activity even more. The clear imbalance between a booming export sector and a sluggish domestic market points to fundamental structural issues.

Beijing's Policy Crossroads: How to Boost the Homefront

Chinese leaders have acknowledged the need for a strategic shift away from export dependency and toward an economy driven by domestic consumption. The challenge now is figuring out how to unlock spending and boost confidence among households and businesses.

One primary tool is monetary policy. China's central bank has already started cutting some interest rates to make it cheaper for families and companies to borrow money for homes, new ventures, and other purchases. These cuts have targeted key industries like technology and agriculture, but broader stimulus may be needed.

Looking ahead, the road appears challenging. Economists forecast that growth could slow further to around 4.5% in 2026. If the global demand for Chinese exports weakens, Beijing will have to rely more heavily on other policies, such as increased government spending, to prop up the economy.

For Chinese families and workers, this economic environment likely means slower income gains and fewer new jobs until consumer confidence recovers. Small businesses, from local stores to restaurants, will continue to face pressure if people choose to save rather than spend. For now, China's powerful export machine remains the key pillar holding its economy aloft.

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Samantha Luan

Political

Economic

US companies are more upbeat about doing business in China after a trade truce between President Donald Trump and Chinese leader Xi Jinping, according to a survey by the American Chamber of Commerce in China.

About 48% of respondents said they're optimistic about China's market growth over the next two years, up 11 percentage points from the previous year. Another 27% remained neutral.

Relations between Washington and Beijing have steadied after Trump and Xi met in South Korea on Oct. 30, where they struck a trade truce and agreed to pause tariffs on each other for a year. The two leaders are slated to meet four times in 2026, including a likely visit by Trump to China in April, though his recent tariff threats over Iran risk triggering new tensions.

Most surveyed firms remained downbeat about US-China relations over the next two years, but the level of pessimism moderated to 52% from 65% in the previous report, AmCham said.

The survey also challenges the idea that multinationals are rushing to move operations out of China amid concerns over US tariffs. About 71% of respondents said they have no intention to relocate their business overseas, citing China's strategic importance as a key reason for staying.

About 57% of US companies said they plan to increase investment in China, driven by the country's long-term market potential and strategic value. Those looking to scale back cited uncertainty in bilateral relations and worries about economic growth.

Companies' financial performance improved in 2025 as well. About 52% of firms reported being profitable or very profitable, up six percentage points compared to the previous year. The services sector recorded the strongest gains, with 61% of companies reporting profitability.

Still, many firms reported continued non-tariff barriers over the past year, including slower customs clearance, delays in licensing and approvals, as well as tighter export control regulations as a result of trade tensions.

The survey was conducted from Oct. 22 to Nov. 20, and drew responses from 368 member companies.

Source: Bloomberg Europe

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Gerik

Economic

Changing Tastes In A Traditionally Neutral Market

Car colour is rarely treated as a core commercial indicator, yet it often mirrors broader shifts in consumer sentiment. In recent years, UK buyers have gravitated toward muted tones such as grey, narrowing the visual diversity of the market. This prompted public calls from industry leaders, including Fiat chief executive Olivier Francois in 2023, to reintroduce more expressive colour options.

The transition toward electric vehicles has added a new layer to these preferences. According to the Society of Motor Manufacturers and Traders, green tinted cars sold in 2025 reached their highest volume in 20 years, marking a notable departure from the long standing dominance of neutral shades.

Electric Vehicles And The Rise Of Green

British motorists purchased 99,793 green cars in 2025, an increase of 46.3 percent compared with 2024. These vehicles accounted for almost 5 percent of total car sales during the year. The SMMT noted that many buyers increasingly associate the colour green with the country’s broader decarbonisation push, suggesting that visual identity is becoming intertwined with environmental intent.

This shift has unfolded alongside rapid electrification of the UK car market. Electrified vehicles, including battery electric, hybrid electric and plug in hybrid models, reached a combined market share of more than 48 percent last year. This expansion has been supported by a national framework targeting net zero carbon emissions by 2035, reinforcing the link between policy direction and consumer behaviour without implying a direct one step outcome.

Battery Electric Models Drive The Trend

Within the green segment, battery electric vehicles showed particularly strong growth. Sales of green tinted battery electric cars almost doubled to 23,249 units, according to the SMMT. This development reflects how EV adoption is influencing not only drivetrain choices but also aesthetic decisions, as buyers align product appearance with perceived environmental values.

While colour alone does not alter emissions performance, the coincidence of rising EV adoption and increased demand for green vehicles suggests a broader cultural alignment taking shape within the market.

Manufacturers Respond To Evolving Demand

Automakers are adjusting to these changes by broadening their offerings. SMMT chief executive Mike Hawes said manufacturers are expanding model ranges, colour palettes and finishes to match shifting consumer preferences. This response reflects a recognition that design choices can reinforce brand positioning in an increasingly competitive EV landscape.

Taken together, the surge in green car sales illustrates how the electric transition is influencing consumer expression as well as technology uptake. As electrified vehicles approach half of all UK car sales, subtle markers such as colour are becoming part of the narrative of change shaping Britain’s automotive market.

Source: Reuters

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Gerik

Economic

Forex

Stronger Data Reinforces Dollar Momentum

The US dollar extended its recent strength and was positioned to secure a third weekly advance, supported by economic indicators that suggest the US economy remains resilient. The greenback rose earlier in the week following an unexpected decline in weekly jobless claims and then held steady during Asian trading hours. These developments have contributed to a reassessment of how soon the Federal Reserve may begin easing policy.

Initial claims for state unemployment benefits fell by 9,000 to a seasonally adjusted 198,000 for the week ended January 10, significantly below the Reuters survey forecast of 215,000. This data point has been interpreted as evidence of labor market stability. The link between stronger employment indicators and reduced expectations for rate cuts reflects a causal transmission channel through monetary policy expectations rather than a simple statistical coincidence.

Rate Cut Expectations Shift Further Out

Fed funds futures have pushed expectations for the next interest rate cut to June, reversing earlier assumptions that easing could begin sooner. This shift follows not only the improvement in employment related data but also comments from central bank officials emphasizing lingering inflation risks.

Chicago Fed President Austan Goolsbee stated that the central bank should prioritize lowering inflation, citing ample signs of stability in the labor market. Kansas City Fed President Jeff Schmid described inflation as still too hot, while San Francisco Fed President Mary Daly said recent US economic data appeared encouraging. Together, these remarks have reinforced the perception that policymakers remain cautious about easing too quickly. The relationship between hawkish rhetoric and dollar strength reflects correlation through market expectations rather than direct policy action.

Currency Performance Across Major Markets

The dollar index, which tracks the US currency against a basket of major peers, was little changed at 99.36 but remained on course for a weekly gain of 0.2 percent. The euro traded steadily at 1.1607 dollars, showing limited reaction to the shifting US outlook.

The Japanese yen strengthened slightly by 0.05 percent to 158.58 per dollar, though it was still set to weaken around 0.5 percent over the week. Current levels continue to raise the risk of intervention by Japanese authorities, who have repeatedly warned against one way moves in foreign exchange markets. Brief rebounds in the yen have tended to coincide with such warnings, a pattern that reflects correlation rather than a lasting shift in currency fundamentals.

Japan Policy Uncertainty Adds Pressure On The Yen

The yen has been under pressure as investors factor in the possibility that Prime Minister Sanae Takaichi could gain greater scope to pursue fiscally expansionist policies, depending on the outcome of a snap election expected early next month. At the same time, expectations of near term tightening by the Bank of Japan remain limited. According to a Reuters poll published on Thursday, economists expect the BOJ to wait until July before raising its key interest rate again.

This divergence between US and Japanese policy expectations continues to weigh on the yen through a causal interest rate differential channel, reinforcing demand for the dollar.

ECB Stability And Global Policy Context

Elsewhere, European Central Bank chief economist Philip Lane said the ECB would not debate interest rate changes in the near term if the euro zone economy remains on track. However, he cautioned that new shocks, including a potential deviation by the Federal Reserve from its mandate, could disrupt the outlook. The ECB has held rates steady since ending a rapid easing cycle in June and has signaled little urgency to adjust policy again.

The contrast between a steady ECB stance and a Fed perceived as firmly focused on inflation control has contributed to ongoing dollar support, reflecting relative policy expectations across jurisdictions.

Other Currencies And Digital Assets

The Australian dollar was little changed at 0.6699 dollars, while the New Zealand dollar edged up 0.05 percent to 0.5745 dollars. In cryptocurrency markets, bitcoin rose 0.2 percent to 95,760.92 dollars and ether gained 0.8 percent to 3,323.82 dollars.

Overall, the dollar’s advance continues to be underpinned by data that challenge assumptions of imminent Fed easing, with market pricing increasingly reflecting a higher for longer interest rate environment.

Source: Reuters

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Winkelmann

Stocks

China is pulling the plug on a key advantage held by high-frequency traders, removing servers dedicated to those firms out of local exchanges' data centers, according to people familiar with the matter.

Commodities futures exchanges in Shanghai and Guangzhou are among those that have ordered local brokers to shift servers for their clients out of data centers run by the bourses, according to the people, who said the move was led by regulators. The change doesn't only affect high-frequency firms but they are likely to feel the biggest impact. The Shanghai Futures Exchange has told brokers they need to get equipment for high-speed clients out by the end of next month, while other clients need to do so by April 30, the people said.

The clampdown will hit China's army of domestic high-frequency firms but will also impact a swathe of global firms that are active in the country. Citadel Securities, Jane Street Group and Jump Trading are among the foreign firms whose access to servers is being affected, the people said, declining to be named as the matter is private.

The changes threaten a speed advantage that high-frequency traders, made famous by Michael Lewis' bestseller Flash Boys, and quant hedge funds have long used to beat rivals. By using servers located in the exchanges' own data centers, these firms can get slightly quicker execution than others — an edge in markets where every millisecond counts.

Trading firms don't directly place their servers within the exchanges but they can do so with the help of local brokerages, who offer the service as a way of securing business. Some Chinese brokers are shifting high-frequency clients' servers out of the Shenzhen Stock Exchange's data centers, one person said.

Representatives for China's securities regulator and Citadel Securities didn't respond to requests for comment. Jane Street, Jump and Hudson River declined to comment.

The move is the latest sign that officials are focused on levelling the playing for investors and ensuring market stability after stocks rallied to multi-year highs this month. Regulators tightened rules on margin trading earlier this week in a bid to cool leveraged bets. They have also scrutinized some ETF trades by foreign market makers.

Futures exchanges have made preliminary plans to add two milliseconds of latency to any servers that connect from third-party computer rooms, two of the people said. It's not clear if other exchanges are considering the same approach.

The delay will be in addition to the time lag trading firms experience from moving servers away from exchanges, the people said.

A delay of just a few milliseconds would be imperceptible to most investors but it could be enough to impact global firms' high-frequency trading in stock index futures, convertible bonds and commodities. Some of their trading strategies may not be viable without the fastest access, though it's unclear how the firms might adapt as they try to stay a step ahead of rivals.

It's unclear whether the timing and details of the changes will apply uniformly across brokers and exchanges.

Chinese quants had assets under management of around 1.7 trillion yuan ($244 billion) by June, according to estimates by Citic Securities Co., a local investment bank. But global giants like Tower Research Capital, Jump and Optiver Holding BV have regularly managed to beat local players, especially in the futures market, according to the people. Optiver declined to comment. Tower didn't respond to requests for comment.

China's stock exchanges define high-frequency trading as more than 300 orders and cancellations per second through one account or more than 20,000 requests in a single day. Such accounts dropped 20% in 2024 to about 1,600 as of June 30 that year, the China Securities Regulatory Commission has said.

The attempt to shift high-frequency traders away from exchanges comes after Beijing's years of unease with these firms, who add liquidity to markets but also enjoy execution advantages that are unthinkable for mom-and-pop investors.

Two years ago, regulators imposed tighter rules on automated stock trading. Officials have also threatened to raise fees on high-frequency traders, although so far they haven't done so.

Officials elsewhere have also made moves to curb the advantages of high-speed traders. Last year, Thailand's stock exchange said it would tighten rules on high-frequency trading, part of a wider move to restore market confidence.

Source: Bloomberg Europe

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Gerik

Economic

A Headline Decline Shaped By Seasonal Noise

New applications for US unemployment benefits fell unexpectedly last week, offering a superficially positive signal that contrasts with broader labor market dynamics. Initial claims for state unemployment benefits declined by 9,000 to a seasonally adjusted 198,000 for the week ending January 10, undershooting the Reuters consensus forecast of 215,000. Continuing claims, which track the number of people receiving benefits after an initial week and often serve as a proxy for hiring conditions, also dropped by 19,000 to 1.884 million for the week ending January 3.

However, this decline appears closely associated with persistent difficulties in adjusting the data for seasonal fluctuations at the turn of the year. Unadjusted claims actually rose by 31,984 to 330,684, while the government’s seasonal adjustment model had anticipated an increase of 45,652. This divergence highlights a statistical correlation between calendar effects and reported claims rather than a clear signal of improved labor demand.

Low Hire Low Fire Dynamics Remain Entrenched

Economists continue to characterize the US labor market as operating in a low hire, low fire equilibrium. According to Nancy Vanden Houten, lead US economist at Oxford Economics, the claims data, despite recent volatility, still points to broadly stable employment conditions. This stability reflects limited layoffs alongside restrained hiring, leaving overall labor market momentum subdued.

Several structural forces are shaping this pattern. Aggressive trade and immigration policies under President Donald Trump have reduced both the demand for workers and the available labor supply. At the same time, businesses are investing heavily in artificial intelligence, introducing uncertainty around future staffing needs. The relationship here reflects correlation rather than direct transmission, with technological adoption coinciding with cautious hiring behavior rather than uniformly replacing jobs.

Seasonal Patterns And Short Term Interpretation Risks

Economists caution that seasonally adjusted claims data often follow a predictable pattern, typically bottoming out in January before rising into the summer months. Gisela Young of Citigroup noted that this pattern could repeat in the coming weeks, suggesting limited scope for further declines in initial claims. She added that some residual seasonality may only be corrected later in the spring when seasonal factors are updated.

This reinforces the view that the latest drop in claims should not be interpreted as a definitive improvement in labor market health. Instead, it underscores how statistical adjustments can temporarily distort short term signals without altering the underlying employment trajectory.

Federal Reserve Signals Reinforce Labor Market Stasis

Additional evidence of labor market inertia emerged from the Federal Reserve’s Beige Book report released on Wednesday. The report indicated that employment levels were mostly unchanged in early January. Several districts reported increased reliance on temporary workers, a strategy firms described as a way to maintain flexibility in an uncertain environment.

When hiring did occur, it was largely directed toward filling existing vacancies rather than creating new positions. This behavior suggests a stabilizing mechanism rather than an expansionary one, reflecting correlation with broader economic uncertainty rather than a renewed growth impulse.

Job Growth Slows As Job Search Becomes Harder

Recent employment data further illustrate the lack of momentum. Nonfarm payrolls increased by just 50,000 jobs in December. Over the entirety of 2025, the economy added 584,000 jobs, the weakest annual gain in five years, averaging roughly 49,000 new positions per month. The unemployment rate edged down to 4.4 percent from 4.5 percent in November, yet long term unemployment remains elevated.

Job market perceptions among consumers have deteriorated, particularly for recent college graduates and new entrants who are not eligible for unemployment benefits. According to Stuart Hoffman, senior economic advisor at PNC Financial, finding a job has become more difficult than during the early post pandemic recovery period through the first quarter of 2025. This reflects a disconnect between low layoffs and limited hiring, rather than a tightening labor market.

Market Reaction And Monetary Policy Outlook

Financial markets responded calmly to the data. US equities traded higher, the dollar strengthened against a basket of currencies, and Treasury yields showed mixed movements. These reactions suggest that investors view the claims data as consistent with a stable but unexciting economic backdrop.

Economists broadly expect the Federal Reserve to keep its benchmark overnight interest rate in the 3.50 percent to 3.75 percent range at its January 27 to 28 meeting. Rate cuts are anticipated later in the year as a precaution to support the labor market. Inflation pressures remained stable in December, although consumers continued to face higher food prices and rents.

Oxford Economics expects the Fed to hold policy steady until June, when the first of two rate cuts in its baseline scenario is projected. As inflation risks gradually ease, policymakers appear increasingly attentive to labor market conditions, giving them greater flexibility to respond should employment weakness intensify.

Source: Reuters

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Alice Winters

Data Interpretation

Political

Forex

Remarks of Officials

Economic

Central Bank

Most economists watching the Bank of Japan believe Governor Kazuo Ueda is raising interest rates too slowly, with baseline forecasts placing the next hike several months away. However, a falling yen is emerging as a critical X-factor that could force the central bank to act much sooner.

A Bloomberg survey of 52 economists highlights this tension. A weaker currency threatens to amplify price pressures in Japan, where inflation has already averaged above the BOJ's 2% target for the last four years.

Economists See BOJ Lagging on Normalization

Despite the BOJ raising its benchmark rate to a three-decade high on December 19, the consensus is that its policy normalization, which began in March 2024, is not keeping pace.

More than 60% of economists surveyed described the central bank's rate-hike cycle as either too slow or on the slow side. In contrast, only 35% viewed the cadence as appropriate. Looking ahead, about 68% of respondents expect the BOJ to settle into a rhythm of raising rates roughly once every six months.

The Yen: The Wild Card Forcing the BOJ's Hand

The Japanese yen is the single biggest variable that could upend the BOJ's cautious timeline. Three-quarters of the poll respondents said they see a growing risk of yen weakness prompting an earlier-than-expected rate increase.

"I expect the BOJ to wait about six months before its next rate hike," said Junki Iwahashi, an economist at Sumitomo Mitsui Trust Bank. "However, that timeline could be brought forward if the yen weakens beyond 160 per dollar, pushing up inflation expectations."

As of Friday morning in Tokyo, the yen was trading around 158.50 per dollar, just 2% shy of the low it hit in July 2024—its weakest level since 1986. The currency's decline has accelerated since October, when Prime Minister Sanae Takaichi, a long-time advocate for monetary and fiscal stimulus, took office.

Recent pressure has intensified amid news that Takaichi is planning a snap election next month. Market speculation is growing that a victory would give her a stronger mandate to implement expansionary fiscal measures, further weighing on the yen.

"The number of rate hikes will be largely determined by exchange-rate movements," noted Hiroshi Namioka, chief strategist at T&D Asset Management Co. "As long as the yen continues to weaken or remains persistently weak, the BOJ is likely to continue raising rates."

Survey Breakdown: When Will the Next Hike Arrive?

While the future pace is uncertain, the immediate outlook is clear. All 52 economists predict policymakers will keep the benchmark rate unchanged at 0.75% during the upcoming meeting on January 22-23.

For the next rate hike, the consensus points to the summer:

• July: The most popular choice, selected by 48% of economists.

• April & June: Each month was chosen by 17% of respondents.

Economic Outlook and Rising Terminal Rate

Reflecting expectations of a more active BOJ, the median projection for the terminal rate—the point where economists expect the hiking cycle to end—has climbed to 1.5%. This marks the highest estimate since the survey began asking the question at the end of 2023.

A key focus of next week's policy meeting will be the BOJ's updated quarterly economic outlook. This report will be the first to incorporate the economic stimulus package Takaichi's government compiled in November, offering potential clues about the central bank's stance.

Economists' median forecasts suggest the BOJ will maintain its current inflation outlook of 2.7% for the fiscal year ending in March and 1.8% for the following year. Meanwhile, growth forecasts are expected to see minor upward revisions to 0.9% and 0.8% for this fiscal year and the next, partly due to the stimulus.

Takeshi Minami, chief economist at Norinchukin Research Institute, argued that the central bank must shift gears. "In managing monetary policy in 2026, as the underlying inflation rate approaches 2%, the BOJ will be required to move away from its traditionally slow pace of rate hikes," he said. "Given current concerns about upside risks to inflation, it remains essential for the BOJ to maintain a 'fighting stance' that signals its willingness to continue raising rates."

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