China’s headline economic figures suggest a country navigating a difficult global environment with reasonable stability. Exports are surging. The stock market performed well through 2025. The government has set a growth target of between 4.5% and 5% for 2026. But economists, international institutions, and China’s own policymakers know that behind those numbers lies a more complicated picture — one defined by a property sector in prolonged distress, consumer spending that has repeatedly failed to accelerate, and structural unemployment among young people that is becoming a persistent social challenge.
The Export Strength That Cannot Be Sustained
China’s exports in the first quarter of 2026 grew 14% year-on-year to $977.6 billion, according to China’s General Administration of Customs. Exports to countries in Southeast Asia and Africa grew 20% and 32% respectively. The EU also recorded a 21% increase as Chinese exports rebounded. Conversely, exports to the United States fell 16%.
In 2025, China posted a record trade surplus of nearly $1.2 trillion, as exports grew about 5.5% to roughly $3.8 trillion while imports remained flat. Shipments to the United States fell, but were compensated by growth in Southeast Asia, Europe, Africa and other markets.
In 2026, China is even more dependent on that surplus for growth. A downturn in export growth would have a much larger effect, given weak domestic demand and the limited scope for fiscal policy.
Analysts have flagged that this dependence is becoming politically untenable. The share of China’s exports destined for the United States fell from 19.2% in 2018 to 11% in 2025. Trade with emerging markets — including ASEAN, Latin America, Africa and Central Asia — has expanded more than 10% annually since 2021. That diversification provides a buffer, but the sheer scale of China’s export machine is generating friction with trading partners worldwide.
The Property Collapse
The most consequential drag on China’s domestic economy is the continued implosion of the property sector. Housing prices continued to fall in December 2025, dropping 2.7% year-on-year — the sharpest decline in five months — while property investment fell 17.2% over the year.
In the first five months of 2026, property investment fell a further 16.2%. Fixed-asset investment was down 4.1% from a year earlier — the steepest decline since May 2020. Even excluding property, fixed-asset investment was still down 1.2% from a year earlier. Investment in manufacturing was up only 0.4% from a year earlier, indicating that businesses may not be keen to increase capacity at a time of likely excess.
The slump has negatively affected construction activity, household wealth and local government finances. Millions of households have been left with unfinished homes or properties that have lost significant value, undermining confidence in what was once seen as the safest place to store savings. Falling land sales have squeezed local government revenues and increased debt.
Weak Consumption and the Savings Trap
Despite years of government pledges to rebalance toward domestic consumption, Chinese households are not spending. Retail sales growth bottomed out in December 2025 at 0.9% year-on-year, then rose slightly to 2.8% in early 2026 before slowing again to 1.7% in March. A 9.1% drop in auto sales for the first quarter dragged down retail spending.
Domestic consumption in China, at 39% of GDP, remains well below the roughly 60% typical of developed economies. This is predominantly due to lack of faith in government policies, negative sentiment about the future, high youth unemployment of around 20%, a lack of social safety nets such as unemployment allowances and free healthcare, and demographic challenges from lower birth rates and a declining population.
The dynamic is self-reinforcing. Households that have lost wealth through falling property values and fear job insecurity save rather than spend. Businesses facing flat domestic demand cut back on investment. Local governments starved of land sale revenues reduce infrastructure spending. Beijing’s dilemma is that growth can be boosted through stimulus, but this will lead to rising debt. At the same time, China must reduce its reliance on exports in an increasingly uncertain trade environment.
The Global Consequences
The scale of China’s economic transition has direct consequences for the rest of the world. As construction-led growth fades, China’s import demand shifts from raw materials toward technological inputs and consumer goods, reorienting trade relationships accordingly. With domestic demand still weak, Chinese firms seek overseas markets and production bases, intensifying export competition globally.
This is being felt in manufacturing economies from Germany to Vietnam, where Chinese exporters in sectors from electric vehicles to solar panels to steel are arriving at scale. The US administration recently inaugurated an investigation of 60 countries, with the goal of imposing tariffs ranging from 10% to 12.5% on their exports to the United States, including the European Union — a move partly driven by concern that Chinese goods are being re-routed through third countries.
Meanwhile, the Middle East conflict has added a further layer of complexity. China’s property sector continued to weigh on economic activity. New-home prices in China’s first-tier cities rose for the third consecutive month, suggesting policy support may be gaining some traction in the largest housing markets, while the People’s Bank of China announced steps to increase the use of overnight reverse repo operations and support the offshore use of the renminbi.
What Beijing Is Doing — and Why It May Not Be Enough
Chinese policymakers have presented the reduced growth target of 4.5–5% not as a sign of weakness but as a deliberate pivot toward high-quality growth, with emphasis on productivity, technological upgrading and comprehensive development. The government is channelling significant resources into AI, robotics, quantum computing and clean energy sectors.
But critics note that these sectors are not labour-intensive and have contributed to rising youth unemployment rather than alleviating it. Whether China can successfully rebalance its economy will depend on whether it can channel high savings into broad-based, employment-generating activities rather than concentrating investment in a small number of high-tech sectors that create relatively few jobs.
For domestic demand to lift China above 2% genuine GDP growth in 2026, Beijing must reverse the systemic causes of household and business malaise or pile on costly demand subsidies. Growth can be boosted through stimulus, but at the cost of rising debt. Pledges have been abundant — yet China remains dependent on a trillion-dollar and growing trade surplus that extracts growth from others.
The gap between China’s headline growth story and its underlying economic reality is not new. What is new is that the gap is widening, the external environment is more hostile, and the domestic tools available to close it are becoming harder to deploy without making other problems worse.
