These are heady days for China. Increasingly, many are expressing view that China has won the trade war with the United States and now stands a credible chance of winning the AI-led tech race. Forecasters are starting to raise their sights on Chinese growth prospects. The Sino-American conflict seems to have stabilized, at least for the moment. And the Chinese leadership is largely staying the course with the formula that seems to be working. Who could ask for more?
Yet beneath the surface, there is still good reason for concern. Yes, this year China will hit its annual growth target of around 5%, accounting for about one-third of total global growth in 2025. Moreover, the IMF has just nudged up its forecast of Chinese GDP growth in 2026 by 0.3 percentage point to 4.5% — an outcome it dubs to be resilient even though it falls well short of the 8.1% average gains over the 20 years ending in 2024. Yet resilience on the surface masks a worrisome undercurrent in the recent economic data flow — too much reliance on external demand for its advanced manufacturing products and far too little support from the internal dynamics of domestic demand. At work are deepening imbalances in the Chinese economy that raise serious questions about the medium- to longer-term outlook.
You wouldn’t know that from accounts in China’s official State press of the all-important Central Economic Work Conference just held on December 10-11. According to a leading Chinese State organ, Xinhua’s News Service, this year’s CEWC stressed the need for “… for more proactive and impactful macro policies to be targeted to continuously expand domestic demand and optimize supply, while developing new quality productive forces …” Other than the word “proactive” there is little new in that statement compared with Beijing policy pronouncements over the past several years.
President Xi’s December 11 speech at the CEWC went a little further, stressing “… the contradiction between strong supply and weak demand …” I was encouraged that in summarizing the economic work for 2026, Xi put the strongest emphasis on “the principle of prioritizing domestic demand.” Compared with the results of the CCP’s Fourth Plenum of late October, when consumption was ranked number three behind industrial deepening and indigenous innovation, this is a welcome upgrade. But other than an oblique reference to macro policy stimulus through both “a moderately loose monetary policy” and a “proactive” fiscal policy stance, he offered few insights into how the imbalance between supply and demand should best be addressed.
Significantly, the discussion at the CEWC took little note of the recent data flow on the Chinese economy, which suggests these imbalances are now going from bad to worse. Consumer demand is languishing, capital spending has taken a sudden turn for the worse, and China’s current account surplus — the most comprehensive and timely measure of the imbalance between supply and demand — just hit a record $1 trillion in the first eleven months of this year (see chart below).
These data underscore the essence of China’s structural growth problem. Three major growth drivers are now under protracted downward pressure: the property sector, which remains weighed down by crisis-torn aftershocks; an investment sector, which at an outsize 40% of GDP has little upside; and an export-led impetus, which is bound to face protectionist pressures from the developed world. In light of these headwinds, China needs a new source of economic growth to hits its aspirational growth objectives for both 2035 and 2049. By my calculations, that would require per capita GDP growth to accelerate to a 5.75% average pace from 2030 to 2049 — up significantly from the 4.3% gains expected over 2022-30 but well short of the blistering 8.4% pace recorded during the high-growth era from 1981 to 2021.
The only major sector in the Chinese economy capable of filling that void is household consumption, which the latest available data put at just 39.6% of Chinese GDP as of 2023. I have been a broken record on this point for nearly 20 years, arguing in favor social safety net reforms (retirement and healthcare) as the most effective means to reduce the excesses of fear-driven precautionary saving and thereby stimulate discretionary household consumption. Recently, I changed my view on this recommendation — not because I have lost any confidence in the research that underpins the efficacy of this approach, but because I have conceded the point that it is China’s choice on how it wishes to tackle this daunting problem. Instead, I have chosen to place emphasis on the ends, not the means — namely a consumption target that would commit China to boost its consumption share of GDP by ten percentage points to 50% by 2035.
Barring such a consumer-led rebalancing, China’s growth prospects will fall well short of the aspirational growth trajectory it needs to fulfill the political contract that Xi Jinping has made with the Chinese people. While Xi’s recent speech at the CEWC stressed pro-consumption priorities, his specific policy recommendations were disappointing for two reasons: Frist, he threw out a laundry list of over 15 possible actions — ranging from my favorite (social safety net reforms) to my least favorite (consumer durable trade-in programs). These consumption stimulus proposals lacked focus and convincing analysis. Second, Xi’s only actionable policy actions proposed for 2026 were couched in the form of countercyclical monetary and fiscal stimulus; consumer-led rebalancing is a structural problem that needs far more than cyclical fine-tuning through lower interest rates and expanded budget deficits to insure success.
All this draws the current complacency over China into sharp question. Notwithstanding the IMF’s recent claims of resiliency, the economy is not performing well. Without consumer-led rebalancing to uncover a new source of economic growth, a further deterioration in the Chinese economy is a very real possibility. The heavy lifting of rebalancing is, of course, a Herculean task for any economy, including China. But time is now running out on initiating the actions that will be required to hit its mid-century aspirational growth promises.
If, on the other hand, Chinese leaders elect to stay the course with a mercantilist growth model —namely, drawing on the export-led Impetus of advanced manufacturing, in conjunction with a weaker renminbi — that could well set the stage for another round of its trade conflict with the developed world. This time the onus of conflict would undoubtedly shift to Europe, a possibility I warned of from Shanghai a couple months ago. The case for Chinese resiliency has largely been supported by an export diversification strategy away from the US in the face of Trump’s tariffs. Europe and the Global South have largely taken up the slack (see Bloomberg chart above). A protectionist pushback from Europe could sharply narrow China’s growth options, underscoring the more brittle aspects of its so-called economic resiliency.
China’s growth miracle reflects a nation and its leadership that had the courage to face daunting challenges from the early 1980s to early 2000s. It certainly has the capacity to do the same again. But will it rise to the occasion and seize the opportunities that will come from a consumer-led rebalancing? We will know soon enough.