At the beginning of the year, China’s economy demonstrated resilience despite the increase in tariffs imposed by President Trump, indicating that government stimulus measures are beginning to spur consumer spending.

In January and February, retail sales in the world’s second-largest economy rose by 4 percent compared to the same period last year, surpassing December’s 3.7 percent annual increase and exceeding analysts’ expectations.

Experts from Pantheon Macroeconomics noted that these figures reflect a strengthening in consumer spending during the early months of the year. China publishes combined economic data for January and February to eliminate the distortions caused by the lunar new year holiday, which typically boosts retail sales.

The strongest demand was observed in household appliances and consumer electronics, driven by trade-in programs allowing consumers to exchange older items for subsidies on new purchases. Additionally, categories associated with “discretionary consumption” showed improvements over the two-month period.

Lynn Song, the chief economist for Greater China at ING, commented that beneficiaries of the trade-in policy—including sectors like automobiles, home appliances, renovation materials, electric bicycles, and electronics—are likely to see growth that outpace overall retail sales numbers.

Further data revealed that industrial output increased by 5.9 percent year-on-year, surpassing consensus forecasts, although it was slightly below December’s figure of 6.2 percent.

This positive data reflects periods before and after the US implemented an additional 20 percent tax on Chinese imports. The escalating trade tensions between the US and China could potentially suppress demand for Chinese goods abroad.

However, Pantheon Macroeconomics indicated that increased borrowing by the Chinese government should help mitigate the negative impact of slowing exports due to intensified trade disputes.

Song cautioned that if tariffs increasingly affect external demand, it could be challenging for domestic consumption to absorb all manufacturing output.

This month, China’s foreign affairs ministry reiterated its commitment to “fight to the end” against the US in a “tariff war” or any other conflict. In response to US tariffs, China has imposed taxes on approximately $22 billion worth of American products, particularly targeting agricultural goods to impact Trump’s rural support base.

Recently, the Chinese Communist Party (CCP) announced a “special action plan” containing economic policies intended to boost household consumption. This plan identified eight key challenges that need addressing to encourage increased consumer spending.

Economists have suggested that for China’s economy to sustain high growth rates, a shift from an investment-driven model to a consumption-driven one is necessary. The CCP reaffirmed its goal to achieve a 5 percent GDP growth rate by 2025 during its recent annual legislative sessions. The Organisation for Economic Co-operation and Development (OECD) predicts that China’s economy will expand by 4.8 percent this year.

A real estate crisis, partly due to government restrictions on excessive borrowing within the sector, has affected the Chinese economy over the past four years. This has led to decreased consumer confidence, a significant rise in youth unemployment, and subdued demand, contributing to negative inflation rates. Monday’s data revealed that new home prices in China fell by 4.8 percent annually.

In response to the economic challenges, the CCP has enacted measures such as reducing interest rates, increasing government borrowing, and implementing various support mechanisms for the financial markets.

Chinese stocks have surged significantly over the past month, driven by heightened investor interest in the country’s artificial intelligence sector following the launch of Deepseek’s R1 model earlier in the year. Since the start of the year, the blue-chip CSI 300 stock index has risen by 4.62 percent, in contrast to Wall Street’s S&P 500, which has seen a decline of around 4 percent.

Analysis

In the fluctuating context of trade relations under President Trump, the pressure on China to alleviate consumer hesitance is increasingly significant. The CCP has acknowledged this and tailored its latest policy approaches to drive the economy toward a more consumer-oriented model. Economists believe this transition is crucial for maintaining the nation’s growth targets.

The CCP recently introduced a comprehensive 30-point plan aimed at stimulating consumer spending. Analysts at Gavekal Dragonomics stated that this plan emphasizes the CCP’s commitment to encouraging consumerism, although they suggested that actions must be taken in the coming months to sustain growth.

This effort builds on existing stimulus measures initiated since 2022, which include reducing interest rates, raising centralized borrowing, and providing financial support to local governments, among other initiatives.

China is coping with an environment where domestic supply outstrips demand, leading to deflationary pressures. Confidence has waned due to ongoing issues in the real estate sector, which has absorbed excessive investment in development projects that ultimately failed to attract buyers. Consequently, the nation’s savings rate remains elevated while attractive investment opportunities are limited.

Current initiatives have sought to encourage consumer spending, such as a trade-in scheme offering incentives for upgrading household appliances and vehicles by exchanging older models.

Recent data indicated an annual increase of 26.2 percent in sales of communication devices during January and February, with household goods and furniture sales climbing by 10.9 percent and 11.7 percent, respectively. However, auto sales recorded a decline of 4.4 percent year-on-year.

Among the three countries affected by President Trump’s tariffs since he took office in January, China is the only one that has not received any reprieve. The president has previously delayed import tariffs on both Mexico and Canada.

The increased barriers to the US market leave China with two paths: either improving exports to alternative markets or bolstering domestic sales. A combination of both strategies is likely to be the result, with a strong focus on the latter.