GDP outlook strengthened despite near-term challenges
Despite weak sentiment ahead of the Golden Week holiday, economists continued to raise GDP estimates for 2025. The World Bank projects GDP growth of 4.8%, up from 4.0% in April, while expecting the economy to expand by 4.2% in 2026. The World Bank blamed weak external demand and reduced fiscal stimulus measures for the recession in 2026.
The outlook for 2026 contrasts with expectations that Beijing has set a 4.5% to 5% GDP growth target for the year.
CN Wire reported:
“China will set a GDP growth target of 4.5%-5.0% for the next five years at the Fourth Plenum later this month. Given persistent deflation pressures, any clear emphasis on nominal GDP growth or the introduction of a binding inflation target for the next five years would be a positive surprise for the market,” UBS economist Ning Zhang said in a research note.
While technological progress and industrial upgrading are likely to be the focal point, Zhang highlighted consumption as a key stimulus focus, saying:
“The new five-year plan will place greater emphasis on boosting consumption with possible measures including increasing fiscal spending to improve the social safety net.”
Trade tensions rise ahead of APEC summit
Given the assessment of holiday spending and China’s economic outlook, traders may overestimate trade growth.
US-China trade tensions escalated further during the Golden Week holidays as markets look ahead to the APEC summit on October 31-November 1.
This week, news broke that US lawmakers are seeking a blanket ban on the sale of chip-making equipment to China. China has reduced its dependence on American chips by developing its own alternatives. The ban on chip-making equipment could be an effort to slow China’s move toward self-reliance and stop a flood of cheap Chinese-made chips into the global market.
Beijing sent its pre-APEC summit message, banning exports of technologies allegedly linked to rare earth mining, refining, metal smelting, magnet manufacturing and recycling. According to MKTNews.com:
“The rules, effective Dec. 1, require foreign firms and individuals to obtain export licenses for dual-use items before shipment.”
Rare earth minerals and semiconductor-related export restrictions are likely to be discussed at the APEC summit. US President Trump and China’s President Xi are set to meet at a summit, potentially reaching a trade deal.
The outcome of the APEC summit could lead to a significant shift in sentiment, especially if the US lifts tariffs on Chinese shipments.
Mainland equity markets get a post-holiday boost
Despite weak consumption data, investors remain optimistic on expectations of policy stimulus. Mainland equity markets reopened on Thursday, October 9 with market sentiment on firmer footing.
The CSI 300 rose 1.17% in morning trading, while the Shanghai Composite Index rose 0.75%. Notably, the CSI 300 reached its highest level since January 2022, while the Shanghai Composite Index hit a new decade high.
Importantly, both indices hit new 2025 highs, fueling the market rally. Year-to-date, the CSI 300 and Shanghai Composite Index have increased by 19.53% and 16.80% respectively. For context, the Hang Seng Index is projected to rise 33.65% in 2025.
Despite new highs by 2025, downside risks remain. If President Trump and President Xi do not reach an agreement, sentiment may deteriorate. Stalled talks and escalating US-China trade tensions could weigh on risk sentiment. The absence of further policy support from Beijing could also weigh on risk assets if upcoming economic data indicates any further slowdown in momentum.
However, a trade deal and meaningful policy measures could signal an uptick in the fourth quarter.
