China’s GDP growth rose to 4.5% y/y in Q3, after slipping to 4.3% in Q2. That puts it right at the bottom edge of Beijing’s 4.5–5% target range.
On the surface, that looks like a real pickup. A closer look tells a less encouraging story.
Nearly all of the growth came from China’s record trade surplus, which rose almost 30% y/y. Consumption and investment added very little.
Joe Peissel calls it “hollow growth.”
On this episode, Dinny McMahon (Trivium’s Head of Markets Research) fills in for regular host Andrew Polk. He sits down with Joe (Trivium’s Lead Macroeconomist) to unpack:
Why nominal GDP grew 6%, its fastest pace since 2022, and why that comes from cost pressures caused by the Iran war rather than a healthier economy
The price-versus-volume story behind September’s export boom
Why September’s pickup in retail sales and services spending owes more to the iPhone 18 launch and an early Mid-Autumn holiday than to any real recovery in consumption
Why Beijing’s latest support package, including its new mortgage subsidy, will help China hit its growth target but won’t fix weak demand
And why Beijing’s bet that tech-led growth will eventually lift household spending isn’t paying off
Transcript
Dinny MacMahon: Welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Head of Trivium’s Markets Practice, Dinny McMahon, standing in for your usual host, Andrew Polk, who I believe is having a nice lie-in this morning. And today, I’m joined by my colleague, Trivium’s Lead Macroeconomist, Joe Peissel. How are you doing, Joe?
Joe Peissel: Hey Dinny, I’m good, thanks, and very envious that Andrew’s having a nice lie-in.
Dinny: Aren’t we all? Joe is here to discuss China’s third-quarter GDP data that dropped a couple of days ago. But before we get into that, Andrew would never forgive me, literally, if I skipped the vibe check. So, Joe, how’s your vibe?
Joe: Well, I’ve got a cold. I don’t know if you can tell. I’m kind of over the worst of it. But equally, I don’t want to put a downer on the pod. So, I mean, bad vibes from the cold, good vibes from talking to you, Dinny, as always. How about that?
Dinny: Sweet talker. Okay, I can cope with that. As for me, I am just digging autumn. I mean, when I was in Chicago, autumn was always that sort of bit of a blink, and you miss it sort of thing. But I’m just enjoying this slow-change season in North Carolina. I mean, the summer has been so hot and steamy, you’d sort of barely want to step outside. But with the weather like this, it’s just been delightful. So, that’s my vibe, sort of just enjoying this interregnum before the winter hits.
Joe: Yeah, it sounds glorious. I mean, it’s raining here, and it’s windy, and it’s cold. So, your vibes sound better than mine.
Dinny: Yeah. Well, the listeners can’t see the sort of backdrop to where I’m doing the podcast. I mean, I feel like I’m living in a forest. So, yeah, very happy to be in this part of the world. Anyway, with that out of the way, we also have to do some quick housekeeping. So, a quick reminder, we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate China’s policy landscape.
That, of course, includes domestic policy in China, but it also includes policy towards China out of Western capitals like D.C., London, Brussels, and others. So, if you need any help on that front, please reach out to us at hq@triviumchina.com. We’d love to have a conversation about how we can support your business or your fund. Or if you just have comments on the pod content, reach out to us. We always love to hear feedback from our listeners. And then finally, please do tell your friends and colleagues about Trivium, both about the business and about the podcast. It really helps us grow the company, and we truly appreciate the word-of-mouth recommendations.
And while you’re at it, leave us a rating on your favorite podcast platform. So, with that out of the way, let’s get into it. Joe, are you ready to roll?
Joe: I’m ready to roll, Dinny?
Dinny: Okay, let’s do it. Well, at the beginning of the year, China set a GDP growth target range of 4.5% to 5%. And at the time, the Premier even said that they were going to aim for higher, which in hindsight was a bit ambitious. But the range seemed reasonable and things got off to a good start. But in the second quarter, the growth slipped out of the range to 4.3%. But the latest data for the third quarter shows that it’s come back a bit. It’s now at 4.5%, right? Smack bang on the lower edge of that range. So Joe, have things really picked up? And if so, what’s driving it?
Joe: Yeah, well, headline growth has picked up, right? It’s kind of a modest improvement from Q2 on a year-on-year basis. And then if we look at the quarterly breakdown, quarter on quarter, so, how much economic activity there was in Q3 relative to Q2, that grew by 1.2%. And this is seasonally adjusted, right? To account for any sort of implications due to seasonal fluctuations. So, 1.2% quarter on quarter growth, that’s up from 0.9% quarter on quarter growth that we saw in Q2. So yeah, that suggests that the economy’s grown faster. There’s actually some acceleration of this momentum.
On the surface, it looks like a genuine pickup, right? If we look at the headline data. If we break that down into separate growth components, though, we see that nearly all of the growth is coming from exports, or more specifically from China’s record trade surplus. So, the difference between what it exports and imports. So, this grew by almost 30% year on year in Q3, China’s trade surplus. So, it’s going from one record-breaking year to another record-breaking year. This is doing all the work, all the heavy lifting for China’s GDP growth.
If we look at other areas of the economy, domestic consumption or investment, they’re doing very little. Investments fall in, consumption’s kind of bumbling along, really low growth rates. So, yes, headline growth has picked up, but in the macro wrap that we published today, we refer to as hollow growth. It’s really relying on one growth driver only.
Dinny: Well, one of the other things that jumped out at me from that note that you wrote is that nominal GDP grew at 6.0%. Now that’s much higher than the 4.5% real GDP number. I mean, that’s significant in and of itself, but it’s particularly significant given that for about the last three years, nominal growth has lagged GDP. So, what’s going on here? I mean, why is there such a divergence with the real GDP number? And before you get into that, can you just give us a quick breakdown of what the difference between nominal and real GDP actually is? Why we care about either or both or one more than the other?
Joe: Sure. So, we generally look at real GDP. That’s the headline growth. That’s the 4.5% that you see in newspaper headlines. And that’s also what the government is referring to when it says it’s four and a half to five percent growth. This is real GDP growth. What we mean by real growth is stripping out price effects. So, you can think of economic activity in simple terms is the amount of output that is produced multiplied by the prices it’s sold for.
And that’s economic activity. The issue with that measure is that if you have inflation, but no increase in volume output, then it looks like there’s been a large increase in economic activity, when in reality, it’s just an inflationary phenomenon. And actually, in terms of economic activity, the amount that manufacturers produce or the amount that consumers consume in volume terms hasn’t actually gone up. So, real GDP is important because it tells us what the economy is producing in volume terms, more or less. That’s a bit of a simplification. But this is why we generally care about real GDP.
Nominal GDP incorporates that price effect. So that is output multiplied by price. And, although we generally talk about real GDP, nominal figures are also important, mainly or primarily because they’re heavily correlated. Nominal GDP is heavily correlated with a bunch of other indicators that we care about, things like corporate profits, things like tax revenues, tax receipts. So, that’s the difference. Nominal GDP incorporates price effects, whereas real GDP strips them out. So, as you said, in Q3, nominal growth was 6%. And this is the fastest growth we’ve seen in, I think, four years since 2022.
Now, that gap between real and nominal growth, that’s what we call the GDP deflator. And that’s a measure of economy-wide deflation. As you rightly said, the GDP deflator has been negative, been in deflationary territory for the past three years. So, we’ve seen nominal growth actually slower than real growth. And over the past couple of quarters, that’s reversed. Nominal growth is now going faster than real growth, which is what you normally expect in a healthy economy. So, so far, so good.
The issue is this large gap between real and nominal growth. And that is driven more or less by price effects from the Iran war. So, what we’re seeing is higher input costs are creating this cost-push inflation that’s inflating the value of economic activity, but it’s not actually translating into any additional volume terms. It doesn’t necessarily mean manufacturers are producing more or consumers are consuming more. It just means they’re paying more for those goods and services. And we see that particularly in the September data. So, in September, PPI, producer price inflation, grew 5% year on year, really fast, really high rates of inflation.
And in fact, that is the fastest growth in PPI since the energy shock hit in March. So, cost pressure has come back in a big way. That’s why we’re seeing such high nominal growth. It’s just an inflationary phenomenon. It’s not necessarily good news for the economy.
Dinny: Okay, well, I think that’s got some implications for trade as well. So let’s go back and talk a little bit about the trade surplus. Because, as you said, I mean, this is the thing that’s propping up growth at the moment. Now, it was probably what, about 15 years ago or so that there used to be an argument, because this isn’t the first time that we’ve seen large trade surpluses from China. I mean, they’ve never been this big before, but China’s trade surplus has been kind of an ongoing source of contention for the world for at least 20 years at this point.
I think it’s maybe 15 years ago, there was an argument that was like, look, don’t worry about China’s trade surplus. It’ll eventually ride itself. China is a growing, maturing economy. And ultimately, an economy the size of China can’t grow forever from exports. I mean, it’s just, it’s too disruptive. It’s too much of a burden on the rest of the world. Everything will eventually right itself. And clearly that’s wrong because we’re now seeing China, the second biggest economy in the world, effectively drawing the lion’s share of its economic growth quarter on quarter from its trade surplus. So, what is driving this surplus?
What exactly is it that is allowing the world’s second biggest economy to extract so much value from net exports?
Joe: Yeah. So, I think going back to this idea before that China’s exports won’t keep, or China’s trade surplus won’t keep growing. There’s also this idea, as China gets richer, its consumers are going to buy more goods. And so these imports are going to go up. And that just hasn’t happened for various reasons. So yeah, as I mentioned earlier, the surplus across Q3 was another record. It was around the region of $365 billion.
That’s up almost 30% from Q3 2025. And in September alone, exports grew by over 36%. That is just mind-blowing rates of growth. That’s the fastest growth in exports in over 15 years, not including disruptions during the pandemic, which led to all these weird data distortions. So, if we kind of exclude pandemic years, September’s growth in exports was the fastest we’ve seen in over a decade and a half. Now, it’s important to note that a lot of that growth is due to increases in export price, not necessarily in export volume.
And I’m going to give you some numbers to demonstrate this. So, semiconductor exports, China’s semiconductor exports, in value terms, they increased over 100%. They more than doubled in September in value terms. But if we look at chip exports in volume terms, they increased by 2%. So, this is entirely a price story, right? Chip exports went up so much because of an increase in price, not an increase in volume. If we look at mobile phone exports, they grew 15% in value terms. In volume terms, they actually fell by 13%.
So, exporters are shipping less mobile phone units now than they were this time last year. But they’re earning more money for every unit sold because they’ve increased prices. And we see the same story in all sorts of other export categories — in home appliances, in various metal exports, where the value of these goods is growing a lot faster than it is in volume terms.
Now, this value surge is coming off the back of what is really a global AI memory chip shortage because of the AI boom. So that’s leading to a spike in the price of memory chips, which are really important components in a bunch of electronic goods like mobile phones, for example. and also high commodity prices and high energy prices from the Iran war. So what that means is that at some point, presumably, this price shock starts to fade. And when it does, China’s export growth is going to slow.
And that emphasizes or highlights that China’s GDP growth, now that it is relying on this single growth driver, is actually quite vulnerable because it’s really reliant on this huge price surge on the back of the memory chip shortage and the high commodity and energy prices. The other challenge for Chinese exporters is, of course, geopolitical tensions and trade tensions. And the EU is a good example here because China and EU recently held trade talks.
So, China’s surplus with the EU hit an all-time record in September. It was, I think, close to 35 billion. And there’s kind of growing pushback in Brussels against what they term these unsustainable trade surpluses that are hollowing out European industry. So, from a Chinese growth perspective, relying on this growth driver leaves you vulnerable, not only to a time when this price shock fades, and exporters can no longer sell their goods at an elevated price, but also to trade tensions, for example, with the EU or with other trade partners like the U.S., and so forth.
Dinny: So, what we’ve pretty much got then is a growth machine that’s being held up almost exclusively by exports, but the foundation, I mean, almost kind of the reliability of that growth from exports being able to continue indefinitely is very much under question, if for no other reasons and for geopolitical reasons. And I guess also because of the potential for price adjustments.
So, I guess the question is, and it’s something that we come back to again and again on the podcast is, is where does consumption stand in all this? Because you can’t really comfortably and securely run an economy on sort of one pillar, which is really seemingly what China is doing at the moment. So, in September, we saw retail sales growth pick up 1.1%. Now, the thing is that it’s quite good relative to August. I mean, in August, growth collapsed to sort of 0.4%. So it is a meaningful pickup in September. Yeah, it’s not much, but it’s something. I guess the question is, is this something to cheer about?
Joe: No. Next question. No, I’m kidding. No, it’s not. I mean, the fact that we’re celebrating 1.1% growth in retail sales tells us everything we need to know about China’s consumption dynamics, right? 1.1% growth, still extremely low. Despite the pickup from August, it’s still a bleak outlook for Chinese consumption. I think the more positive data point we can take from September is services consumption. So consumption of services, so things like tourism and eating out and entertainment. This rose by 5.8% in September.
So, really decent growth in consumption of services. But the issue is, both with the services consumption growth, but also with this modest pickup in retail sales, or the consumer goods sales growth, is that it’s being affected by short-term factors. So, the reason retail sales of consumer goods picked up to 1.1% is mainly driven by sales of mobile phones, which grew over 30% year on year. And that’s driven by the launch of the iPhone 18, which had this really successful product launch in China in September and led to a surge in mobile phone sales.
This lifted aggregate consumer goods sales. But that’s just a short-term, one-month boost to consumer goods sales. We’re not expecting that to carry on. Same idea with services consumption. As I said earlier, that grew 5.8%, really decent growth rate. But that’s partly impacted because China’s mid-autumn festival took place, I think it’s September 25th this year, whereas last year, it took place in October. So, in September this year, consumers have had an extra day of holiday, which is going to lead to a boost in things like tourism spending, entertainment, accommodation, transport. All of these things are leading to greater aggregate growth of services consumption.
But again, that’s a short-term phenomenon. And in fact, I expect a lot of this growth to reverse in the October data once the holiday effect drops out, once the iPhone effect fades out as well. So, I mean, to wrap all this up, the story of consumption is, yes, September’s data was an improvement, but it’s just a short-term phenomenon. Consumption is very much still in the doldrums.
Dinny: Yeah, that’s a good point about the holidays, Joe, because I mean, this year, the Mid-Autumn Festival and the National Day holiday were so close to each other that I think a bunch of people, I think it was certainly the case in our office, that people took off the days between the two holidays. And guess what? They all fell in September. So it’s not even just the formal days, but people taking additional days off to effectively get sort of an uber-long break. And as you said, this is not going to repeat. This is not going to boost the October data.
So, the bright, any sort of silver lining we had in September is going to dissipate for the data for October, which kind of begs the question, what does the run to the end of the year look like for the economy? I mean, I sort of started off by talking about the growth target for the year, 4.5 to 5%. In the next few months, we’ll get a sense of whether Beijing achieved that or not. What should we expect over the next couple of months before 2027 kicks off?
Joe: Much the same as we’ve seen so far, really. China’s supply side will do well. So manufacturing in September grew 6%, and it’s going to continue to grow strong. High-tech sectors, they’re expanded by double digits year on year. So, we can think of things like electric vehicles, ships, aerospace equipment, the higher value add semiconductor chips. Output manufacturing of these products is going to continue to grow strongly. And of course, China is going to continue to rely on exports to boost growth.
The domestic economy, domestic demand is going to stay weak. Investment’s likely going to continue declining. So very much an extension of what we’ve seen over the past couple of quarters. In terms of actual GDP growth, year to date, the economy has expanded 4.6%. So, it’s within China’s target of 4.5% to 5%. And it’s very likely the economy is going to hit its growth target, particularly with this recent policy support package. I know you talked about this in another podcast, Dinny, in late September, policymakers released a package of policy support.
So, we saw extensions of cheap credit, additional borrowing quotas for local government, a mortgage subsidy. All of these policies will help guide the economy to hit its growth target. But nothing that Beijing has released so far is actually going to fix the underlying issues in consumption and private investment, which is why we’re just going to see more of the same.
Dinny: Well, I mean, on that bright note, from where I’m sitting, it kind of feels like China’s economy is kind of in a weird spot at the moment, right? So, as you said, we finally got a bit of stimulus. We’ve been waiting for ages to see whether Beijing would sort of pump a little bit more credit or support into the economy. We finally got that end of September, beginning of October. The policy banks are being deployed to invest more in infrastructure. And there’s an extra, what? 550 billion renminbi for local governments to deploy before the end of the year. Some of it’s to supplement the budgets, some of it’s for infrastructure.
But even when you take all that together, no one’s under any illusions. I mean, this doesn’t really fix anything, right? I mean, particularly when it comes to the domestic economy, this sort of chronically weak household spending, this sort of downward slide of investment. This new support, I think, is really mostly about ensuring that growth hits the target and that investment recovers a bit. And it’s almost as though Beijing is waiting for the economy to right itself, which is kind of an idea that comes up a bit in some of the official commentary that you see in the state media. There’s this argument that China’s economy is currently occupying a gap, right? There’s this gap between the old economic growth model and the new one.
And that’s where things stand at the moment. We’re in this sort of gap. And there’s going to be pain before the economy emerges in its new form. And I think there might be an element of truth to that. I mean, at the moment, property is a drag on growth, and that will eventually change when investment stops falling. It might be another year, it might be another two or three, but at some point, when property rights itself, that will be a fill up to the economy. And if Beijing can get anti-involution right, it might be able to deliver better profit growth from new industries, and that’ll boost tax revenue and kind of give the government greater discretion on how it supports growth.
But, for whatever the reason, it seems as though we’re in a bit of a holding pattern at the moment where Beijing has just really decided to provide a little bit of support, but overall, the approach is to wait and see. Would you more or less agree with that, Joe?
Joe: Yeah, I agree. That’s their approach. I’m not convinced it’s going to work. So I think, as you said, Beijing’s effectively bet in that supply side tech growth lifts household demand and generates new growth drivers. But I think the issue is a lot of these new growth engines. So think of things like AI, high-tech sectors, high value manufacturing, often they employ fewer people. And so, we don’t necessarily, on aggregates, see an increased income flow to households. So, this transition that Beijing’s waiting for isn’t necessarily self-correcting.
And certainly, the data so far doesn’t show that this is happening. Income growth is falling, unemployment remains high and growing, actually, and consumer confidence is still in the doldrums. We wouldn’t expect any of these things to be happening if Beijing’s hypothesis that supply side tech growth lifts household demand was actually taking shape. I think maybe we’re looking at it, maybe I’m looking at it through too much of a short-term lens. And over the medium-longer term, this self-correcting idea can take place.
But certainly, for now, it’s not. Just quickly on the property downturn, I mean, it’s true at some point the property market stops falling and that’s a boon to the economy, I suppose. What we’re seeing now in the property market is a permanent deleveraging, right? As opposed to a cycle, a cyclical cycle waiting to pass. So even when the property sector does finally bottom out, which could still be years away, it’s never going to return to be a growth engine for the economy. So, the economy has permanently lost one of its most important growth engines.
Part of the stimulus “package” or support package that Beijing rolled out earlier this month was a mortgage subsidy. Are you optimistic about the impact that will have on property demand?
Joe: No. I mean, it may boost demand at the margin. This is a one percentage point interest subsidy for first-time home buyers, for homes that don’t exceed a certain price. The maximum savings, the maximum subsidy available is 50,000 RMB. I mean, that’s not going to move the needle for most buyers. It may do so in smaller markets where houses are cheaper. So think about third-tier cities, for example. But even then, buyers have these deflationary expectations. The reality is buyers expect house prices to keep falling. And so, from a first-time buyer perspective, waiting actually saves more than taking advantage of this subsidy.
And we see that now. I mean, the property markets in freefall, house prices continue to decline. So, a real fit for the real estate sector would require a much bigger fiscal commitment than this modest mortgage subsidy.
Dinny: No, no, fair enough. Well, by the sound of it, we are in a bit of a wait-and-see pattern. Although I think the real question is how long is Beijing willing to wait and see? If this doesn’t turn out to be self-correcting, at what point does Beijing do something about it? And on the other side of the equation, I mean, I guess it’s the other side of the same coin, how much pain is Beijing willing to take, and for how long? Anyway, I’m guessing this is going to be a theme of the conversations we’re going to be having for quite some time.
But having said that, thanks for all of this, Joe. It’s been really great to dive into this stuff with you, and I appreciate the time.
Joe: Yeah, thanks for having me on, Dinny.
Dinny: Thanks, everybody, for listening. Bye now.
