Why China's economy has slowed down. Analysis
China's economy has slowed down its growth. According to the results of the second quarter, the country's GDP grew by 4.3%, not reaching the targets and expectations of investors. China's problems are falling investment and weak retail consumption. The Chinese economy continues to exist in an imbalance between growing exports and weak domestic demand. What problems this threatens in the future and how to fix them are described in the Izvestia article.
What the data says
• The key indicator indicating a slowdown in the growth of the Chinese economy was the level of GDP for the second quarter of 2026. According to the National Bureau of Statistics of the People's Republic of China, the economy grew by 4.3% compared to the same period last year. This did not meet the expectations of either the country's authorities or investors. Beijing sets a target for economic growth of 4.5–5% for 2026. Analysts assumed that the figure of 4.5% would be reached.
• The 4.3% growth rate was one of the worst for China since the government began publishing quarterly GDP data and targeting it in the early 1990s. The situation was only worse during the COVID-19 pandemic, when the country's economy was under severe restrictions.
• The results of the second quarter contrast with the beginning of the year. In the first quarter, an increase of 5% was recorded. In the first half of the year, GDP grew by 4.7%. On a quarterly basis, China's economy grew by 0.9%, which is the slowest growth rate in more than two years.
• Other important indicators for assessing the state of the economy gave a contradictory picture. Industrial production exceeded forecasts and grew by 5.3%. The urban unemployment rate has dropped to 5%. Retail sales rose 1% after a 0.6% drop in May, the first since the coronavirus restrictions were lifted. At the same time, investments in fixed assets decreased by 5.7% in the first half of the year, accelerating the decline from 4.1% in the first five months of the year.
Strengths of the economy
• The available data does not indicate a decline in the Chinese economy. However, they confirm the existence of a number of alarming factors that are already forming a noticeable imbalance between export production and domestic consumption. The persistence of this trend in the long term already threatens to undermine the stability of the world's second largest economy.
• China continues to rapidly increase exports, and this is the main driver of the economy, contributing to its movement. It grew by 27% in June and by 17.6% in the first half of the year. The surge in growth is provided by products related to artificial intelligence. The boom in this industry has led to an increase in sales of semiconductors, computing equipment, and other electronic components. Exports of electric vehicles, batteries, solar panels, and industrial equipment are growing along with them.
• In part, the sharp spike in exports is related to the global economy. In the face of uncertainty due to the US tariff policy and the situation in the Middle East, exporters accelerated the shipment of goods as long as there is steady demand for them. However, the main export successes are primarily related to the policy of the Chinese authorities, which encourages new production with loans, subsidies and tax benefits, placing the greatest emphasis on new and high-tech sectors of the economy.
The crisis of domestic consumption
• However, the Chinese economy also has a significant drawback, which is stagnant domestic consumption. Demand for our own products is nowhere near as high as it could be, especially in contrast to the growing exports. The Chinese economy produces many goods, but they are in demand only in the rest of the world, while even sales of electric vehicles, which have become a symbol of modern Chinese industry, are falling domestically. This is what is dragging down the dynamics of the export economy. The bigger the gap, the more it will affect the overall picture.
• A serious problem is created by the situation in the Chinese real estate market, where investments are no longer falling by 5.7%, as in the economy as a whole, but by 18% at once. This is the sharpest decline since 1992, and it provokes unhealthy concerns about the financial condition of developers, the completion of construction projects, and the sale of housing that has already been built. Real estate prices are falling, and this is bad for a country that considered construction to be the engine of its growth. Millions of Chinese families invested in buying housing, only to find that it is not in demand, does not make a profit, does not create activity in related sectors of the economy and puts pressure on the financial sector, which overestimated the construction rush.
• The unhealthy situation in the real estate market provokes savings behavior among the population. They prefer to avoid major purchases, as they fear financial turmoil in the future. The situation on the labor market does not help to raise confidence either. Chinese youth live in conditions of fierce competition for a narrowing number of vacancies, which is also under pressure from automation and robotization processes. Although the Chinese economy is becoming more efficient and producing more goods for export, it is not generating jobs or generating more income for the population. It is worth mentioning separately that the Chinese government is directing budget incentives to the development of production and is in no hurry to invest in the social protection system in order to give its citizens more confidence in the future.
What is the threat of maintaining the imbalance?
• If domestic demand remains weak and export markets start to close, for which there are certain concerns, there will be a surplus of products. Companies will be forced to stop production and cut costs by cutting salaries, their profits will fall, and inefficient industries will go bankrupt. All this, again, will affect consumer demand, which will continue to fall and affect the overall state of the economy.
• China can maintain its economic model if there is confidence that its products will be in demand. However, increasingly, events are taking place in the world that undermine this confidence. Its trading partners, primarily the United States and the European Union, want to reduce their trade deficit with China by using either tariffs or regulation and localization requirements. Exports are turning from a foundation for economic stability into a source of foreign policy tension that does not go away without a trace.
• The state of the Chinese economy will be increasingly influenced by factors beyond Beijing's control. These include fluctuations in energy prices, geopolitical risks, a possible recession among trading partners, currency exchange rates, and sanctions. China could grow rapidly due to the development of the global economy, and it has actively used this in previous decades. But if the situation in the rest of the world worsens, it is the Chinese economy that will experience the more severe consequences.
• Within the country, the imbalance will be reflected in the form of falling incomes of the population and tension in the labor market. While funds are mainly invested in export industries, the country's residents face underdeveloped services, healthcare, and education. Given that China's population is aging and shrinking, this further deprives the consumer market of the investments it needs. The population is gradually losing its footing to survive a real economic and financial crisis, if it ever occurs in an extreme form.
How can China fix the situation
• The Chinese government is expected to accelerate the implementation of economic stimulus measures adopted in the first half of the year or introduce additional measures. At the same time, it will begin implementing the recently adopted five-year plan to stimulate consumption and strengthen domestic demand. It envisions reaching a retail turnover of $9 trillion by 2030 from the current $7.4 trillion. The plan includes the expansion of consumer services, the development of healthcare, culture, tourism, sports and education, the promotion of digital consumption and spending related to artificial intelligence.
• Some of the measures to stimulate demand have already been introduced. In 2026, China raised pensions, lowered mortgage rates, and increased quotas for government purchases among small and medium-sized businesses. One of the notable measures was the simplification of the visa regime for foreign tourists. In recent years, China has either abolished visas altogether or relaxed transit rules.
• In addition to rapid incentives, China also needs to implement structural reforms that will take effect only after a few years. One of the directions is to increase the income of the population. Currently, the share of wages in China's GDP is below 50%, while in developed countries it can exceed 60%. An increase in the minimum wage, a reduction in income taxes, retraining and the transfer of workers from export industries to the service sector can help.
• Another important component is social protection. There are still some phenomena in China that would be surprising in developed countries. For example, the pension system of China is clearly divided into urban and rural, and the latter brings elderly people many times less income. Education in China is based on the "nine years free" principle, which is why kindergartens and universities are paid. Medical insurance does not cover the costs of serious illnesses. All this leads to the fact that the population prefers to accumulate rather than spend.
China also needs fundamental changes in its economic model, even if they require years of changes. Reducing export orientation can be achieved by opening the domestic market to imports, imposing export duties on cheap products, moving production inland, developing tourism, tax breaks for small and medium-sized businesses, and tax deductions for social spending.
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