Andy’s view
The Chinese economy has changed fundamentally in recent years. Once driven by investment, it is now dependent on exports. But this new growth paradigm, like the one that preceded it, is unsustainable. A global backlash looms in 2026, and a fundamental question for the year ahead is whether the world’s second-biggest economy can shift the drivers of its growth toward consumption.
Don’t count on that happening. Chinese leader Xi Jinping’s political goal — to build China into a technology superpower that rivals, or overtakes, the US — tops any concerns he may have over what has become a two-speed economy: a booming export-driven one led by EVs, solar panels, and other green hardware, and a domestic one mired in pitiless competition among businesses for scarce profits, rising joblessness, and crushing deflation.
Chinese economists and analysts I talked to concur that the outlook for 2026 is bleak. I spoke to several, but — in keeping with Beijing’s tight control of its economic image — the vast majority refused to speak on the record. Of those who did, some key themes emerged.
The unresolved property debacle
Ning Zhu, a professor of finance at the Shanghai Advanced Institute of Finance, calculates that real estate prices nationwide are down about 40% from their peak and new housing supply stands at a staggering 7-8 billion square meters (75-86 billion square feet) — more than enough to meet total demand for the next five years. Unsurprisingly, rents are declining, further dragging down real estate values.
“Will the market reach bottom in 2026? Probably not,” Zhu, whose book China’s Guaranteed Bubble foretold the collapse, told me.
Involution’s destructive effects
Struggling businesses are engaged in a suicidal form of price competition known as “involution,” and government efforts to arrest the trend are failing. Chucheng Feng, a partner at Hutong Research in Beijing, is on the lookout for signs that the leadership will unleash anti-corruption forces on the problem this year, targeting and punishing local government officials who prop up zombie firms in order to ward off political backlash. Such a move, Feng said, “would help determine whether China can meaningfully shift away from an investment- and industrial-heavy growth model toward one driven by consumption and services.”
Yet the odds are stacked against that outcome. Ironically, China’s ostensibly Communist government is fanatically committed to Big Business, particularly the state-owned variety. Xi himself rails against “welfarism,” which he thinks encourages sloth, even though one way to encourage more consumer spending would be to expand the social safety net to reduce precautionary savings by households.
The fallout from the AI race
Xi is convinced that China is in a fight-to-the-finish against the US, and control over high-tech supply chains is its ultimate defense.
With that in mind, China is pursuing a strategy for artificial intelligence that prioritizes its deployment to enhance the country’s vast industrial base, a key strategic advantage. Yanmei Xie, an economist at the Mercator Institute for China Studies, explains the logic of Beijing’s approach: “Let the Americans squander their wealth to chase the elusive artificial general intelligence, the thinking goes; China will be firmly grounded in practical applications.”
The downside, Xie says, is that productivity-enhancing technology is deflationary — doubly so in China where any sector prioritized by the state is fated toward involution. “In an economy already plagued by a supply glut and limp demand, behold the curious phenomenon of an AI tech boom deepening China’s deflationary bust,” she cautioned.
The global backlash
In an age of protectionism, exports are a precarious basis for growth. A key concern of Chinese analysts in the year ahead is the potential for wealthy countries to shut off their markets. Europe, in particular, faces a stark choice: hold back the tide of Chinese goods with tariffs and other protectionist policies, or accept forced deindustrialization and increased dependence on China.
Swaths of German industry, especially its Mittelstand — the small and medium-sized companies that form the backbone of Europe’s largest economy — have been rendered uncompetitive by Chinese products that are often just as good but a fraction of the price. Even with tariffs as high as 45%, Chinese EVs are making rapid inroads into European vehicle markets, threatening a key source of employment. Emmanuel Macron, the French president, says Europe faces a “life or death” moment.
Superpower bargains
Washington discovered last year that playing hardball with Beijing on trade can be unwise: US President Donald Trump was forced to mostly unwind his “Liberation Day” tariffs after China started throttling exports of rare earth magnets, threatening widespread closures of American factories producing everything from cars to missiles.
Trump is keen to seal a “grand bargain” with Xi, and an opportunity will come in April during a planned summit in Beijing. Wang Huiyao, the founder of the Center for China and Globalization, is cautiously optimistic about the result: “While structural competition is unlikely to disappear, 2026 could be shaped by a renewed emphasis on stability and risk management,” he told me. “If managed well, three or four leader-level summits could help anchor relations promoting strategic stability over strategic rivalry.”
Room for Disagreement
In a leader headlined “Don’t fear China’s trillion-dollar trade surplus,” The Economist downplayed the Chinese trade challenge, arguing that in many big economies, inflation is above central bank targets and “spending is strong enough to keep unemployment low at home with a bit left over to purchase China’s excess production, too.” In fact, it insisted that China’s surplus was more a problem for itself, since its inflation rate is dangerously weak, and relying on exports to keep growth on track could “prove to be a mistake.”