Deloitte China Monthly Report Issue 98

Economy

To step up consumption boosting measure

Can the Chinese economy sustain its momentum (5.4% yoy in Q1 2025) through more potent consumption-boosting measures? How would the economy be affected by the risk of higher oil price due to escalated tensions in the Middle East of late? And shall we set tariff aside, now that Beijing and Washington have cemented a trade deal in London on 10 June?

Q1 growth was pleasantly impressive for China, yet it must be assessed in a regional context. Apart from Korea, where domestic political turmoil caught up with real economy (GDP Q1 growth close to zero), economies in the Asia-Pacific region recorded impressive growth rate. The primary driver for this was exports, buoyed by frontloading and vigorous intra-regional trade (China’s export to the ASEAN region grew by 7.8% yoy in Q1 2025). Exporters’ rerouting and front-loading shipments in anticipation of higher tariffs since last October, when Trump’s victory seemed secured, will not come to an end, any time soon. President Trump’s temporary pause on tariffs, together with the trade deal between China and the US, has simply deferred some uncertainties. However, the stock market has assumed that most tariffs unveiled since Liberalization Day would be rolled back, which seems optimistic. Of course, the robust performance of exports is also propelled by powerful investment related to AI, which has also benefitted China. In this light, China's external sector is expected to stay strong in Q2.

Figure: Subsidies have incentivized Chinese consumers to loosen up wallets

^{Source: National Bureau of Statistics, Deloitte research}

The release of the May monthly data has reinforced the notion of China’s economic resilience. May retail sales have reached RMB 4.1 trillion with the highest monthly growth rate of 6.4% since 2024, on the back of various forms of "cash-for-clunker" programs. Such programs started with small appliances such as white goods but extended into many areas even to housing sector. Local governments in some cities where oversupply of new homes is more acute, have come up with various subsides for residents to move into newly built apartments (e.g. Wuhan, Tianjin). Other municipal governments (e.g. Shanghai), have leveraged surging demand for entertainment, including concerts and exhibitions, through tourism incentives. We have held the view that "cash-for-clunker" programs in the conventional sense of acquiring white goods at discount will have limitations and that it ought to be linked to housing demand (e.g., renovations). That is because Chinese consumers still view housing as both investment and consumption, and they tend to be more willing to spend on home improvement.

Of course, no policy is perfect. Such consumption induced may be temporary. Therefore, the external sector is so important for most regional economies including China. Export revenue will eventually be translated into domestic demand. Data of May has suggested that the overall picture in the housing sector remains unchanged, with both transaction values and prices trending lower on inventory overhang. Consolidation in housing market is inherently a multi-year undertaking. The latest game-changing boost to demand came from Guangzhou, a Tier-1 city that has lifted all purchase restrictions. Will Beijing, Shanghai and Shenzhen follow suit? Policy momentum clearly favors unlocking latent demand, whether pent-up or investment driven. What additional measures could be taken to stabilize the housing market, which accounts for more than two-thirds of consumers' wealth? The PBOC could certainly be slashing interest rates again. Would central bank's easing campaign be constrained by external factors?

Regarding external environment, let’s focus on geopolitics and interest rates which are also interconnected. The military conflict between Israel and Iran, triggered by Israel’s sudden attack on June 13, has seen a quick closure with President Trump announcing a truce on June 24. It is still too early to evaluate long-term changes in the regional landscape of the Middle East. However, in the short term, as crude oil price fell sharply after the initial spike even lower than it was before June 13, the market seemed to conclude that the situation in the Middle East will be contained.

Table. Reliance on crude oil imports by country or region in Asia Pacific

^{Source: Public information; Deloitte Research}

For large economies in Asia, particular China, Japan, and Korea, these three industrial powerhouses have significant reliance on crude oil import (see table above). Higher crude oil prices will act as a tax on these economies and put upward pressure on inflation. Lower crude price act as a tax cut from oil producing countries and therefore will give China more room for monetary easing. However, heightened geopolitical risks which are frequently accompanied by unilateral actions (military moves and sanctions) by the US are clearly accelerating the trend of de-dollarization which is underway. In our previous columns, we have raised the issue on a managed depreciation of the dollar against surplus economies’ currencies. We see this as a conditionality for keeping trade deals attainable because other measures won’t reduce the trade deficit between the US and surplus economies in the short term. Given that both Vietnam and Mexico continue to reroute China’s exports to the US, there will be persistent pressure on RMB’s appreciation. A stronger RMB will exacerbate deflation, but it will also allow the PBOC to cut interest rates with more leeway. Geopolitical risks may prompt the Trump Administration to push US allies to increase military expenditures, a de facto “burden sharing” coined by the US Treasury. This could become even more apparent after the “One, Big, Beautiful Bill” is passed (The One, Big, Beautiful Bill – The White House).  

On interest rates, it is hardly surprising for the Fed to keep the Fed Fund Rates unchanged because the impact of tariffs has not yet shown up in inflation measures. So where do we go from here as far as tariffs are concerned? For China, the outcome in London was a reconfirmation of the Geneva agreement. The 55% tariffs touted by President Trump is misleading in the sense that the original 25% tariffs implemented during the first term of the Trump Administration have largely been absorbed by the market over the past seven years, while the 20% ‘fentanyl’ tariffs could be removed through collaborative efforts between the two countries to curtail exports of fentanyl precursors from China. The bottom line is China could easily cope with an average tariff rate at 35%.

Meanwhile, trade negotiations between the US and other major trading partners have not gone smoothly. The lack of progress in this aspect is also caused by geopolitical risks, which at least act as distractions. The legal hurdles presented by the US court on tariffs will be likely to result in more sectorial tariffs, as evidenced by 50% on white goods whose materials are made from steel.

Overall, we expect a reciprocal tariff of 10% (against all trading partners) to remain, but sectoral tariffs and non-trade barriers may pop up more frequently. The chief implication for China is to step up consumption-boosting measures to reduce its reliance on overseas market. It is also safe to assume that under somewhat higher tariffs and a more fragmented global trading system, the US won’t be able to rely on tariffs as a significant revenue source. Therefore, US interest rates could well stay at an elevated level in 2025. Potential jitters in the US treasury market may also highlight the uncomfortable truth faced by global investors – fiscal woes in rich countries. This will reinforce the urgency for China to unlock domestic demand.

In conclusion, various consumption-boosting measures have begun to bear fruits, but more could be done. To start with the obvious, all first-tier cities could do away with purchase restrictions as what Guangzhou has done. If cash-for-clunker were widely implemented in the housing sector, it also effectively means easier financing for homeowners. The reality is that the housing market holds the key to consumer psyche. The extraordinary success of Pop Mart has also suggested that consumer behaviors have undergone significant changes across generations, offering insights for consumption measures aimed at young consumers.

Financial Services

Finance strengthens supporting consumption expansion and technological innovation

The Central Economic Work Conference has made "vigorously boosting consumption, increasing investment returns and comprehensively expanding domestic demand" as the top priority tasks for 2025. At present, global trade frictions are intensifying, and the supporting role of external demand for economic growth is weakening. Boosting consumption and accelerating independent innovation in science and technology have become the keys to maintaining stable growth. Further efforts by financial institutions to boost consumption and support technological innovation are both policy orientations and the focus of their own high-quality development.

Qualitative change of the credit structure of financial institutions.

On May 7th, the Information Office of the State Council held a press conference to introduce a package of financial policies to support stabilizing the market and expectations. Mr. Pan Gongsheng, governor of PBOC, announced a 0.5 percent point cut in the reserve requirement ratio (RRR) and a 0.1 percent point reduction in the policy interest rate, guiding the LPR lowering simultaneously in May. RRR cut and interest rate cut are respectively quantitative and price-based monetary policy tools, used to regulate market liquidity and currency prices. Structural monetary policy tools (namely re-lending) are used to promote the resolution of structural contradictions and problems in economic development.

The re-lending provided by PBOC to financial institutions encourages and guides commercial banks to independently issue loans to market entities, thereby driving changes in the credit structure of the banking industry. In recent years, the credit structure of financial institutions has undergone a qualitative change: the risk exposure of commercial banks to real estate and local financing platforms in their balance sheets has gradually narrowed, and loans have been continuously directed towards major national strategies, key areas and weak links, including technological innovation, green development and manufacturing. As of the end of March this year, the loan balance of technology-based small and medium-sized enterprises exceeded RMB 3.3 trillion, increasing by 24% yoy, has been exceeding 20% for three consecutive years. The loan balance of "specialized, refined, distinctive and innovative" enterprises exceeded RMB 6.3 trillion, increasing by 15.1% yoy, significantly exceeding the average loan growth rate of 7.4%.

Financial support for consumption: there is still room for further efforts

The main goal of the current national economic policy is to expand domestic demand and vigorously boost consumption, among which service consumption is an important focus for the upgrading and expansion of consumption. In recent years, the growth rate of domestic consumption has slowed down. Structurally speaking, the growth of traditional commodity consumption has gradually come under pressure, while the demand for service consumption has continued to heat up. PBOC's " Monetary Policy Report Q1 2025" mentions that: "structural contradictions in the consumption sector remain prominent. There is a gap in personalized and high-quality supply in service consumption areas such as culture, sports and tourism, elderly care and child care, and medical and health care. The infrastructure construction and logistics distribution system for service consumption in counties are not yet complete."

To expand the supply of service consumption and boost relative demand, PBOC has set up RMB 500 billion of re-lending for service consumption and elderly care, to encourage financial institutions to increase credit support for service consumption fields such as accommodation and catering, culture, sports and entertainment, and education, as well as the elderly care industry. This policy will be implemented until the end of 2027. The re-lending interest rate is 1.5%, and the recipients include 21 national financial institutions and five city commercial banks which are systemically important financial institutions.

On June 24th, PBOC with six authority departments jointly issued the "Guidelines on financial support for boosting and expanding consumption", further strengthening the supply of consumer finance and helping to unleash the potential for consumption growth.

Chart: consumption growth is slows down (%)

^{Data source: State Statistics Bureau, PBOC}

Technology finance: establishing the system and achieving integrated development of technology, finance and industry

To build the technology finance system that is compatible with technological innovation and strengthen financial support for major national science and technology tasks and small and medium-sized technology enterprises, the MOST, PBOC, NFRA, CSRC, NDRC, MOF, and SASAC of the State Council have recently jointly formulated and released the "Several Policy Measures for Accelerating the Construction of the Technology Finance System to Strongly Support High-level technological Self-reliance and Self-improvement", which, states to make comprehensive efforts in venture capital, bank credit, capital markets, and technology insurance to provide full life-cycle and full-chain financial services for technological innovation.

These measures will lead long-term and high-quality capital into the field of scientific and technological innovation, aiming to achieve in-depth integration and development of the technological, industrial and financial resources represented by national strategic scientific and technological forces such as national laboratories and leading technology enterprises. While cultivating and developing new quality productive forces, they will also promote the structural transformation and high-quality development of financial institutions themselves.

Table: Policy measures increase financing support for technology innovation enterprises

^{Source: NFRA, PBOC, Deloitte research}

When it comes to the implementation of policies, special attention should be paid to the following aspects: 1) enhancing the efficiency of bank-enterprise cooperation. Establish the identification standards for technology-based enterprises and the project recommendation mechanism to facilitate precise identification and provide financing; 2) sharing of public information on science and technology to provide data support for investment and financing decisions;; 3) for small and medium-sized enterprises, the role of government financing guarantees should be leveraged to encourage financial institutions to enhance their risk tolerance and do a good job in compensating for risks in science and technology finance.

In brief, the tariff dispute is still ongoing and there is still uncertainty in the external environment. Against this backdrop, it is even more urgent to cultivate new types of productive forces and transform from an investment-oriented society to a consumption-oriented one. It is expected that in the second half of the year, the incremental policies targeting key areas such as consumption, technological innovation, and real estate may be further intensified. Besides, NFRA will introduce a series of policies for banking and insurance sectors to escort trade. Financial institutions have therefore gradually been achieving their own strategic transformation and high-quality development in this process.

G&PS

Optimizing the utilization of urban construction land

In June 2025, the Ministry of Natural Resources released the second batch of 18 typical pilot cases for the redevelopment of inefficient land, covering 17 cities including Beijing, Guangzhou, Suzhou, Qingdao, Zhangzhou, and Yichang. Inefficient land refers to existing urban construction land characterized by fragmented layouts, outdated infrastructure, low utilization efficiency, and misaligned land functions. Redeveloping such land aims to enhance land use efficiency, drive urban renewal, and foster economic development. Over the long-term development, China's industrial parks have accumulated a large amount of idle or inefficient land due to fragmented planning and inefficient resource utilization . In recent years, the central government has profoundly recognized the importance of intensive land use. In September 2023, the Ministry of Natural Resources launched a new round of pilot projects for the redevelopment of inefficient land in 43 cities across 15 provinces and municipalities. These pilots were set up to explore innovative policy measures and establish more effective incentive and regulatory mechanisms for revitalizing inefficient land. All participating cities have finalized their pilot project plans, including the identification and redevelopment of inefficient land. They had also organized and implemented several redevelopment projects. Currently, the pilot cities have identified 2,091.1 square kilometers of inefficient land and implemented redevelopment on 1,042.5 square kilometers.

In 2025, the pilot cities clarified their redevelopment goals for inefficient land. For example, Shanghai issued "Taking Special Action Plan for the 2025 Annual Implementation of Industrial Land 'Two Assessments, One List, and One Revitalization'." It aims to redevelop 30 square kilometers of inefficient industrial land in 2025. Shanghai conducted a comprehensive survey of its industrial land, creating a database of 48,501 plots of industrial land spanning 728 square kilometers. Based on this, it proposed a classification-based plan for targeted land treatment. Class A and B land will be supported through incentive programs that promote urban renewal, capacity expansion and efficiency, technological innovation, and special support for industrial parks. For Class C and D land, the government will develop plans for reclamation, reserve management, downsizing. Specifically, Class C land is intended for monitoring and temporary retention, while Class D land will be prioritized for land reclamation, reservation, and size reduction. At the same time, Shanghai is pioneering new methods for comprehensive value assessment of industrial land, actively seeking legal foundation, and formulating fair compensation standards for land reserve and reclamation.

Figure: The methods adopted by Shanghai for organizing and revitalizing inefficient industrial land

For local governments, redeveloping inefficient land can effectively improve land productivity. For example, the Xiamen government recovered and re-planned the inefficient industrial land and transferred its usage rights to Tongzhi Electronics, a leading autonomous driving company urgently seeking to expand production. The project led to the construction of a 61,000-square-meter R&D and manufacturing complex, increasing the plot ratio from 0.6 to 3.8. The expected output value per square meter of land is projected to increase by more than fivefold, significantly boosting land productivity. At the beginning of this year, Xiamen Municipality issued the "Policy Guidance for the Redevelopment of Inefficient Land (2025 Edition)," which encourages the adoption of more innovative redevelopment models. In addition to land recovery and reassignment, the government supports land users in redeveloping inefficient land through independent development, joint operation, equity participation, transfer, and other approaches. The city has also delegated approval authority for increasing the capacity and efficiency of industrial land and increases support for mortgage loans on construction projects.

For industrial park operators, redeveloping inefficient land and upgrading outdated industrial facilities can significantly boost rental income and expand access to financing for park operations. In February 2025, Huaxia Jinyu Intelligent Manufacturing Industrial Park REIT was listed on the Shanghai Stock Exchange and became the first publicly offered REIT in China to use a renovated industrial park as its underlying asset. The original furniture factory was turned into a precision instrument laboratory for biopharmaceutical firms, while the high-ceiling space into a testing platform for artificial intelligence companies. This strategic transformation attracted nearly 300 technology companies, including industry leaders such as Megvii Technology, Galaxy Space, and Guoneng Rixin. The high-tech companies now account for over 80% of the tenant base. Jinyu Intelligent Manufacturing Industrial Park, for instance, achieved impressive occupancy rates of 93.55% in 2021, 97.61% in 2022, and 95.57% in 2023. Such stable rental incomes provided a robust cash flow for the REITs insurance. By optimizing cash flow, the park enhanced the valuation of its underlying assets and secured a higher level of financing. The funds raised through REITs were used for park upgrades and to attract more high-quality companies. These investments, in turn, enhanced the development of the industrial park, further increased asset value, and created a virtuous cycle of growth.

As the focus of industrial park development shifts to optimizing existing land resources, revitalizing inefficient land has become a long-term task that requires ongoing innovation and exploration. By unleashing potential, embracing innovative approaches, and upgrading support services, idle industrial land can be transformed into higher-quality spaces that support the development of emerging industries and provide a strong foundation for future productivity growth.

Automotive

China’s auto exports shift gears amidst global headwinds

China’s passenger car exports, after experiencing an average annual growth rate of over 40% from 2021 to 2024, entered an adjustment period in 2025, with export growth slowing to 7% in the first five months. Factors such as sluggish global economic growth, escalating regional geopolitical conflicts, and rising overseas trade barriers are expected to shift China’s auto exports from “scale expansion” to a phase of structural adjustment.

ICE exports turned negative

Fuel vehicle exports, which account for 70% of passenger car exports, dropped from 39% growth last year to -12% this year, significantly impacted by slowing overseas demand and escalating trade barriers. Russia, the largest destination for Chinese fuel passenger cars for three consecutive years, once accounted for 31% of exports. However, in October last year, Russia increased its vehicle scrappage tax, significantly raising costs for Chinese and other imported cars. Coupled with stricter controls on parallel imports, rising domestic inflation, and higher car loan rates, auto sales in Russia faced significant pressure. As a result, Chinese passenger car exports to Russia fell 58% in the first five months of 2025, with Chinese brands’ market share in Russia dropping from a peak of 60% to 48%. 

^{Data source: China Association of Automobile Manufacturers}

Plug-in hybrids emerge as a new growth engine for NEV exports

In stark contrast, PHEV vehicles have emerged as a new engine for new energy vehicle NEV export growth. In the first five months of 2025, PHEV exports surged 179% year-on-year, accounting for 35% of NEV exports and becoming the core driver of passenger car export growth. Brazil and Mexico are the primary destinations for PHEV exports, with growing exports to the Middle East and Europe (e.g., the UK and Spain). As the EU’s countervailing tariffs on Chinese pure electric vehicles take effect, Chinese automakers are turning to PHEVs as a new breakthrough. In Q1 2025, BYD’s Seal U PHEV sold over 10,000 units in Europe, ranking as the fourth best-selling PHEV model. Chery and Geely also plan to launch PHEV products in Europe.

Mexico overtakes Russia as the top export destination

In the first five months of 2025, China’s passenger car exports to Mexico reached 200,000 units, up 30% year-on-year, making Mexico the largest export destination. Joint-venture automakers dominate exports to Mexico, with GM’s Chevrolet brand shifting production of its best-selling Aveo and Sonic models from Mexican to Chinese factories since 2018. Meanwhile, Chinese brands have rapidly risen in Mexico, with their market share growing from 1% in 2020 to 12% in 2024.

Challenges to export stability

• Rising hidden trade barriers: Beyond direct tariffs, Chinese auto exports face growing non-tariff barriers. For example, Brazil reinstated and implemented tiered import tariffs for NEVs starting January 2024, while Russia continues to raise scrappage taxes, increasing external risks for Chinese automakers. 
• Localized production competing with exports: By 2027, Chinese automakers’ overseas production capacity is expected to reach 1.5 million units, with BYD as a major contributor. Localized production will partially reduce direct export shares. 
• Overreliance on single markets: Heavy dependence on Russia in the past has exposed exports to demand fluctuations and policy risks, underscoring the need for diversified market strategies.

Structural opportunities remain despite challenges.

On the product differentiation front, PHEV technology is key headed to a breakthrough in overseas markets. With global electrification facing obstacles, PHEVs are gaining prominence. In Q1 2025, global (ex-China) PHEV sales grew 45%, outpacing the 37% growth of pure electric vehicles. Chinese PHEVs have established strong competitive advantages in cost, energy efficiency, and regional adaptability, positioning them as a key growth driver for China’s auto exports.

Open markets or trade-friendly countries are becoming strategic pillars for Chinese automakers’ global expansion. As overseas market penetration deepens, Chinese automakers are focusing on regions like Australia, the UK, the Middle East (e.g., Saudi Arabia, UAE), and ASEAN countries. These markets offer low tariff barriers, high policy compatibility, and urgent demand for NEV transitions, providing significant growth opportunities for Chinese brands.

Supply chain globalization. Suppliers in intelligent driving and smart cockpit technologies are accelerating overseas expansion. Beyond compliant product exports, they are building overseas factories, R&D centers, and service networks. Localized component production reduces costs, enhances supply chain stability, and supports Chinese automakers in delivering advanced cockpit and intelligent driving features in overseas markets.