Deloitte China Monthly Report Issue 100

Economy

2025 growth target hit with flying colors while trade deal looming

Is the 2H of 2025 experiencing a slowdown? Does deflation remain the main economic challenge? Would the long-anticipated U.S.–China trade deal materialize in late Q4, following a series of tough measures from both sides since early October—such as export controls (software from the U.S. and rare earths from China), an expanded entity list, and additional tariffs? Would the tariffs imposed on Chinese exports to the U.S. be raised to astronomical levels—well above 100%—as once suggested by President Trump on social media?  Global financial markets have experienced heightened volatility, as expected, but eventually resumed their ascent amid falling interest rates, conciliatory gestures from the Trump administration, and clarifications from China’s Ministry of Commerce. 

China's economy achieved a 4.8% YoY growth rate in the third quarter of this year. As we have been flagging in previous monthly publications, some slowdown following the torrid 1H (5.3%) would be inevitable for expected reasons — property sector woes (property investment dropped by 13.9% in Jan–Sep 2025) and petering-out export growth (YoY growth rate of 8.3% for September while 4.4% for August). But the 2025 GDP growth target of “around 5%” remains on track. Deflation is not a short-term phenomenon because of the duration of property sector consolidation and pervasive over-capacity in the manufacturing sector. However, vastly improved industrial profits in August (20.4%) have come as a pleasant surprise. We attribute this turnaround to the government-led anti-involution campaign. The anti-involution initiative will weigh on economic growth due to forced cuts in production, but eased involution will improve corporate margins. Investors have clearly taken notice of this policy shift this year by posting consistent gains in both the domestic A-share market (at 10-year high) and Hong Kong. Economic growth and profits are likely to remain a trade-off going forward. If certain parts of the old economy have to be consolidated while the new economy emerges as a growth driver, then headline growth can’t be artificially propped up by fiscal stimulus. This thinking is in line with the government’s repeated pledge of higher-quality growth. Based on that argument, a bazooka should never be contemplated in the post-Covid period. Therefore, we also think the 2026 growth target will have to be set at a slightly lower level — around 4.5%.

Chart: Policy initiatives of anti-involution have boosted investors’ sentiment

Source: Wind

Over-capacity can only be resolved gradually through recalibrated fiscal policy, which will be more geared toward consumption and expanded export markets. If the consumption/GDP ratio rises significantly, then China may run a trade deficit — which is unlikely, at least next a few years. However, if export growth has to be sustained beyond relying on rapid growth in the Global South, then China must open its domestic market more to ease trade tensions with developed economies. China’s exports, notwithstanding their super competitiveness, have faced evident headwinds even in markets where host countries rely on Chinese investment (e.g., anti-dumping cases in Thailand, Brazil, and Russia). In fact, China’s auto exports to Russia have dropped by a whopping 55% this year.

Meanwhile, if the once-mighty property market stabilizes, consumers may take on more leverage. At this juncture, the prevailing sentiment in the property market is that capital gains are less likely given the supply overhang, while rental yields are not high enough to offset borrowing costs. Can this psychology be reversed? The stock market’s renewed bullish sentiment is certainly a welcome respite to consumer confidence (as seen during the 8-day National Day and Mid-Autumn Festival holiday, when total domestic tourism spending reached 809 billion yuan — an increase of 108.2 billion yuan compared with the 7-day National Day holiday in 2024). But the property market simply has an outsized impact on consumers’ balance sheets (accounting for two-thirds of household wealth). What can be done?

To start with, measures that could be easily implemented — demand restrictions in major cities are being gradually phased out, but the pace could certainly have been more decisive. For example, purchases for many first-time buyers are often tied to social security contributions and resident permits. This is a hurdle for pent-up demand. The trade-in or cash-for-clunker programs have been effective in boosting sales of small appliances (from January to September 2025, retail sales of home appliances and audio-visual equipment increased by 25.3% YoY) and even vehicles, but such schemes could certainly be extended to home-improvement-related consumption. Of course, verification may result in administrative hassles, but the point is that Chinese consumers blur the line between consumption and investment when it comes to homes. The most controversial issue is the extent to which the government should help property developers. The argument against this is moral hazard. But given the clear policy direction on advanced manufacturing and the green economy, it is unlikely that ailing developers would resume their investment frenzy.

In light of the constrained role of the fiscal lever, monetary policy could be bolder — especially against the backdrop of a strengthening RMB. The dollar’s safe-haven currency status has been eroded due to a host of factors — ultra-loose fiscal policy and political interference faced by the Fed. But so far, the dollar has mainly depreciated against the euro, while most Asian currencies remain undervalued. One could argue that the dollar would have fallen more if not for the fact that most investors’ diversification away from the greenback has moved into gold and crypto.

Chart: The dollar has lost ground against the euro and may depreciate against Asian currencies (most are anchoring around the RMB)

Source: Wind

The question going forward is whether a long-awaited US-China deal would entail some upward adjustment by surplus countries such as China and Japan. According to Bloomberg (https://www.bloomberg.com/news/articles/2025-10-03/china-pushes-trump-to-drop-curbs-as-it-dangles-investment-pledge), China has presented a massive investment proposal to the US of $1 trillion in exchange for lower tariffs and alleged abuses on the grounds of national security. We have been of the view that a trade deal is unlikely to amount to a grand bargain given such protracted distrust between the two sides. Besides, geopolitical complexities would make a grand balance almost impossible. However, positive developments since the Geneva talks (May 18, 2025) and subsequent rounds of negotiations have indicated that neither side wants to see a downward spiral in bilateral relations.

Unlike other trading partners who have merely taken what has been presented to them, China’s resolve and its stronghold on rare earths have altered the trade-war dynamic. Let’s assume such a simple trade deal will be more lasting than the Phase One trade deal in 2018 — what will be the necessary elements? It goes without saying that China will have to step up purchases of soybeans and commercial aircraft in exchange for reduced tariffs. For other trading partners who have signed trade deals, investment commitments have been made (e.g., Japan and Korea). Could Chinese companies be allowed to set up factories with local partners? What if China increases its holdings of Treasury bills and notes? Global financial markets have done extremely well since mid-April, mainly due to the tariff pause and AI-induced corporate investment boom. But US long-term interest rates still remain too high (above 4%) for consumers. If tariffs for China could come down, say to 30%, many Chinese companies would have less incentive to engage in tariff arbitrage, which could trigger further transshipment crackdowns from the US. Continued appreciation of the RMB would also put pressure on other regional economies to follow. A stronger RMB would also allow the PBOC to cut interest rates with much less concern over exchange-rate volatility. In short, even a small deal accompanied by improved communication between policymakers could create a more conducive environment for policy coordination. 

Retail

Policy support and consumption upgrading create new opportunities for service growth

China's consumption structure is undergoing a transformation, with the share of household spending on services rising year by year. Against the backdrop of current consumer pressure and a weak recovery in goods consumption,  sectors such as culture and entertainment, tourism, transportation, sports and health, elderly care, and childcare have significant development potential. Service consumption is gradually becoming the dominant form of consumption and will play an increasingly important role in driving economic growth. In the first half of 2025, the value-added output of the service sector accounted for 59.1% of GDP, contributing over 60% to GDP growth. At the same time, service consumption and related industries directly reflect the quality of residents' lives and societal vitality. Industries such as tourism, catering, cultural entertainment, and health services can also directly boost employment. Service consumption has become a key force driving growth in the consumer market. From January to September 2025, service retail sales increased by 5.2% year-on-year, outpacing the growth rate of retail goods sales.

Recently, the Ministry of Commerce and eight other departments jointly issued the "Several Policy Measures on Expanding Service Consumption." Centered on "innovating diversified consumption scenarios and expanding service consumption," the policy focuses on cultivating platforms to promote service consumption, enriching high-quality service supply, and supporting areas including foreign-invested service consumption, film and animation, sports events, non-academic training, elderly care, domestic services, childcare, as well as mid-to-high-end medical services and leisure resorts.

Meanwhile, the measures aim to stimulate new growth in service consumption, with strengthened fiscal and financial support as a key priority. On one hand, the policy targets inbound consumption by expanding the list of visa-exempt countries and optimizing pre-arrival entry policies. On the other hand, it promotes digital service consumption by encouraging e-commerce platforms to develop new information-based consumption products, scenarios, and hotspots. According to data from the National Committee on Aging, travelers aged 60 and above already account for more than 20% of total domestic tourists, indicating that senior tourism is transitioning from a niche to a mainstream market.

From the demand side, consumer spending patterns are increasingly shifting toward the consumption of services. As residents' income levels continue to rise, consumer demands are becoming more diverse and individualised. By the end of September 2025, per capita consumer expenditure had increased by 39.5% compared to the same period in 2019. Meanwhile, the shares of transportation and communication, education, culture, and entertainment—categories within service consumption—have all risen compared to the same period in 2019.

Consumers across different age groups exhibit distinct service consumption needs. Younger consumers prioritize personalized and social experiences, driving the rise of the concert economy, premium camping, and event-based spending. According to CCTV, during the first half of 2025, 511 major sports events were monitored across seven provinces including Hebei, Zhejiang, and Fujian, generating over 160 billion yuan in sports-related consumption.

Middle-aged family groups tend to prefer family-oriented, educational, and cultural tourism, as well as field trip experiences that blend learning with leisure. According to the "2024–2025 China Educational Travel Economic Market Operation Monitoring Report," the scale of China's educational travel market is expected to exceed 213.2 billion yuan in 2025, with a growth rate of over 15%. Meanwhile, as population ageing deeps, the post-1960s generation of seniors is showing growing demand for cultural tourism and long-stay travel, in addition to traditional healthcare and elderly care services. For example, senior-focused tourist trains have become increasingly popular among middle-aged and elderly travelers. In 2024, a total of 1,860 tourist trains were operated domestically, carrying over one million passengers, with elderly travelers accounting for nearly 80% of the total. In the first half of 2025, 972 tourist trains were operated, a year-on-year increase of 23.2%.

Figure: Changes in the share of eight major categories of per capita consumption expenditure 

Source: National Bureau of Statistics

From the supply side, service consumption is gradually moving toward chain operations, digitalization, and diversification. On one hand, the level of standardization in service consumption sectors such as hotels, restaurants, and tea shops is rapidly improving. The catering industry has achieved scalable growth through a dual-channel strategy of "dine-in + takeout," while chain brands have strengthened their risk resilience through standardized operations. According to CCFA, the chain penetration rate in the catering industry has increased from 18% in 2021 to 23% in 2024.

On the other hand, digital technologies are driving the integration of online and offline service consumption, with widespread adoption of new models such as contactless services and smart ordering systems. Big data and artificial intelligence are enhancing service-matching efficiency—for example, travel platforms use algorithmic recommendations and hotels deploy service robots to enhance personalized experiences.

Furthermore, service consumption scenarios are becoming increasingly diversified, accelerating cross-sector integration. New formats such as restaurant with co-branded IPs, cultural tourism combined with sports, and elderly care integrated with healthcare services continue to emerge. For instance, milk tea and Western fast-food brands collaborating with IPs not only provide emotional value to consumers but also help companies achieve countercyclical growth in a sluggish catering market. KFC and Pizza Hut, both under Yum China, carried out over 50 IP collaborations in 2025 (as of mid-September), collectively contributing to strong financial performance in the first half of 2025, with improved profit margins for both brands.

Amid favorable policies for service consumption and the ongoing trend of consumption upgrading (消费升级) toward services, companies can focus on three key opportunities. First, they should explore growth opportunities arising from the expansion of niche markets, such as medical and health services, cultural tourism and leisure, education and training, elderly care, and sports and fitness, all of which offer ample room for growth supported by policy incentives and rising demand. Second, companies should seize opportunities in digital and scenario-based innovation, leveraging intelligent platforms, membership systems, and immersive experiences to enhance service quality and customer loyalty. Finally, businesses can explore opportunities in cross-industry integration and value extension, such as combining services with retail, entertainment, and wellness sectors to create hybrid consumption scenarios and increase value-added output.

Energy

Can China’s chemical giants break through?

On September 25, seven ministries, including the Ministry of Industry and Information Technology (MIIT), jointly released the Action Plan for Stabilizing Growth in the Petrochemical and Chemical Industry (2025-2026). The plan lists enhancing high-end supply as its top priority and explicitly supports breakthroughs in key products such as electronic chemicals, high-end polyolefins, high-performance fibres, specialty rubbers, and high-performance membranes.

Advanced materials form the foundation of strategic emerging industries and represent areas where China still faces technological bottlenecks. They have thus become a key direction for industrial advancement. Leading chemical companies play a central role in this transformation, and understanding their strategies for expanding into to new materials is essential to identifying future industrial opportunities.

Leading chemical firms accelerate into advanced materials

The push by top chemical companies into the advanced materials stems from three converging forces:

1. Profit structure under pressure.

Traditional bulk chemicals have long relied on a scale-cycle-price spread model. However, intensified price volatility and industry competition have driven down profit margins. In the first half of 2025, the chemical raw materials and products sector recorded RMB 4.5 trillion in revenue and RMB 180 billion in profit, representing 0.67% year-on-year growth in revenue but a 9% decline in profit, with an average profit margin of only 4%. To seek new profit curves, leading companies are shifting toward high-margin and more resilient segments, with advanced materials emerging as the natural next step.

2. Downstream demand creating a window of opportunity

Strategic industries such as new energy, semiconductor, and aerospace are expanding rapidly, yet many industries remain dependent on imported materials. With their scale, capital depth and process expertise, China’s chemical leaders are best placed to capture higher value opportunities.

3. Policy and compliance reinforcing certainty

The dual-carbon strategy and tightening global environmental regulations, including the EU Battery Regulation and carbon footprint requirements, have made measurable, verifiable sustainability an essential entry ticket to global markets. Leading chemical firms with integrated raw material and process control capabilities will enjoy a distinct advantage in meeting these compliance and certification standards.

Source: Wind

Two directions, three rules, four entry points

Chemical companies’ shift into advanced materials follows a clear playbook: two strategic directions, three guiding rules and four main entry points.

Two directions

First, major commodity chemical producers are moving up the value chain through-petrochemical integration. By merging refining and chemical production, they are internalizing key feedstocks such as ethylene, aromatics, and VDF, rather than relying on imports.  This integration connects raw materials to  advanced reaction systems, enabling self-sufficiency in precursors, tighter cost control, and continuous process innovation.

Second, fine chemical firms are pushing for functional breakthroughs.  Instead of supplying generic intermediates, they are developing high-purity, high-stability specialty intermediates and applying functional processing technologies to capture global high-margin niches such as electronic chemicals, pharmaceutical ingredients and functional polymers.

Three rules

1. Target chokepoints. Focus on areas with high technical barriers, urgent import-substitution needs and strong customer lock-in. Success in these areas often brings long-term contracts and pricing power. Sinopec and Wanhua Chemical, for instance, have built integrated ethylene-LAO-POE chains, extending upstream to master entire reaction system rather than remaining mere material suppliers.

2. Start with adjacency. Rather than leaping across value chains, leading firms expand into adjacent segments that share  intermediates or unit operations. Moves such as expanding from refining into POE, PC and carbonate solvents, from phosphate mining into lithium iron phosphate, or from VDF into PVDF demonstrate how companies are reducing complexity while improving success rates. Dongyue Group, for example, evolved from basic fluorochemicals to high-end fluoropolymers and built an integrated chain that now extends into electrolyte solvents for new-energy batteries.

3. Follow customer pull. In sectors with high technical complexity and well-defined applications, “customer-driven co-development” is becoming the new norm. Battery manufacturers co-develop novel electrolyte additives with fine-chemical producers, while automakers collaborate with engineering-plastic suppliers on lightweight composites.

As demand from new-energy, electronics and semiconductor industries accelerates, materials producers are transforming from passive suppliers to co-creators of performance—where what can be made becomes what will be used.

• Four entry points

Source: Deloitte Research

With the rollout of the Action Plan, advanced materials have emerged as the primary pathway for steady yet progressive growth. Firms that can master key technologies, collaborate closely with downstream users, and maintain global competitiveness through green compliance will be best placed to move beyond cyclical constraints and achieve sustained, quality growth.

G&PS

The Pressure by Local Government Hidden Debt is Easing

In 2025, the issuance of local government bonds targets two main objectives: financing project construction and resolving existing debts. The issuance of new local special-purpose bonds has accelerated significantly since May. From January to August, RMB 3.26 trillion of new local government special-purpose bonds were issued, accounting for 74% of the annual quota. According to data from the Enterprise Early Warning System, the scale of new special-purpose bonds used for debt relief reached RMB 968 billion, or 30% of the total. These funds were primarily used for the government's existing investment projects, settling arrears to enterprises. The remaining funds were directed toward municipal and industrial park facilities (RMB 629.4 billion), transportation infrastructure (RMB 417.3 billion), land reserves (RMB 324 billion), and affordable housing projects (RMB 271 billion).

New ordinary special-purpose bonds focus on three core areas, with a notable increase in land reserves and affordable housing projects

New ordinary special-purpose bonds are concentrated in three major sectors, accounting for over 60% of total allocation. Municipal and industrial park facilities and transportation infrastructure continue to hold dominant positions. The share of funds allocated to land reserves has increased significantly to 14%, ranking third. Since the resumption of land reserve special-purpose bonds in October 2024, regions including Sichuan and Shanghai have issued more than RMB 300 billion in such bonds to acquire idle land by 2025. Funding for affordable housing projects has surpassed social welfare initiatives, prioritizing shantytown renovations to closely align with urban development needs.

Chart: Allocation of New Ordinary Special-Purpose Bonds Funds, January-August 2025 (%)

Data Source: Enterprise Early Warning System

Local government debt relief shows progress, but challenges remain

Three key tools are driving local government debt relief: special-purpose bonds for hidden debt swaps, special refinancing bonds, and new special-purpose bonds continue to drive progress. By the end of August, RMB 1.93 trillion of the planned RMB 2 trillion debt replacement bonds had been issued; special refinancing bonds reached nearly 380 billion yuan, and a total of RMB 968 billion in new special-purpose bonds has been issued.

The reduction of hidden local debt is advancing, with a notable contraction in its scale and an orderly exit of financing platforms underway. Debt relief has also progressed earlier than originally planned. By the end of August, 904 financing platforms declared they will no longer undertake government financing responsibilities, with over half having completed their exit. The funds already deployed for debt resolution account for over 50% of the hidden debt balance scheduled for resolution before 2028. A Ministry of Finance researcher predicts that the exit rate of financing platforms will exceed 90% by the end of 2026 and will largely have been completed by the first half of 2027, ahead of the original 2028 target to eliminate hidden debt.

The campaign of regions that have met the hidden debt relief target is expanding, with several key provinces removed from the high-risk watch list. Nevertheless, regulatory breaches in some areas remain a concern, and underlying risks need to be monitored. Three provincial-level administrative regions–Guangdong, Beijing and Shanghai–along with 25 prefecture-level cities and 138 districts and counties, have announced that they have achieved their hidden debt relief targets. Cleared areas continue to grow: Inner Mongolia has officially exited the list of key provinces, while Ningxia has met the exit criteria, effectively alleviating debt pressure. However, some regions continue to engage in non-compliant borrowing. For instance, Lingcheng District in Shandong formed debt through financing-based construction, while Wulong District in Chongqing did so via direct government loans to state-owned enterprises.

The resolution of operational debt focuses on urban investment bonds. Due to financing pressures, resolving urban investment debt remains challenging. By the end of August, the growth rate of interest-bearing debt for local government financing vehicles dropped to 4.66% for the first time, reducing interest payment costs. Nevertheless, net financing for urban investment bonds remained negative at RMB -344.7 billion. Financing volumes contracting and access to capital is becoming more difficult for urban investment enterprises. Raised funds have primarily been used to repay old debts with new borrowings (accounting for 96%), relying on debt rollover to maintain capital chains. Their own operational cash flow is insufficient to cover debts, casting doubts about their long-term debt-servicing capacity.

“Special-purpose bonds and dedicated loans” package accelerates settlement of overdue enterprise payments

Fiscal and financial tools are being deployed in tandem to expedite the clearance of government arrears to enterprises. The 2025 Two Sessions explicitly allocated a portion of the RMB 4.4 trillion in local government special-purpose bonds to absorb government arrears. Multiple regions adjusted budgets, disclosing dedicated funds exceeding RMB 150 billion for clearing. Concurrently, several national commercial banks launched special loans featuring low interest rates, fast approvals, and extended terms, providing over RMB 80 billion of support for more than 5,000 enterprises to bridge cash flow gaps.

Fiscal guarantees for repayment and financial relief for working capital not only alleviate government debt but also prevent enterprises from falling into operational crises while awaiting payment. This has driven a 0.9 percentage point increase in August's profits for industrial enterprises above designated size nationwide, with costs per RMB 100 of operating revenue decreasing by RMB 0.20 year-on-year. Overall, these measures help stabilize industrial and supply chains while preventing the spread of systemic risks.