China’s Slow Economy Seems Set to Go Even Slower in 2026
Udumbara
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As 2025 draws to a close, it might be a good time to take stock of China’s troubled economy and assess its prospects for the new year. The picture is mixed, as is always the case for China and other economies.
Although there are some positive signs, many of the problems that have plagued China for some years remain unresolved, most notably the ongoing property crisis. The prognosis is that the slowing so evident in recent months will likely dominate in 2026.
Still, serious questions about the nation’s economic and financial prospects remain. At the top of that list is the ongoing property crisis. The recent financial rehabilitation among large property developers will give them the flexibility they have lacked since the crisis broke out in 2021. Still, before they can turn decline into growth, they must sell off, no doubt at a loss, the poorly conceived and now largely empty apartment buildings they constructed during the boom years prior to the COVID-19 pandemic.
Major property developers will also need to complete the apartments they had presold but never finished because of their financial troubles. Only after they take these steps, which a S&P Global analysis estimates will take until 2027, can property development make a positive economic contribution to growth.
Although Beijing’s exuberant investment in technologies has added to growth since 2023 and will likely do so in 2026, it has limits. For one, the technology sector constitutes only about 10 percent of the economy and so cannot fully offset losses in the property sector, which at its peak accounted for about 25 percent of the country’s gross domestic product (GDP).
What raises even more serious questions is the uneven nature of this technology investment boom. The growth in the capacity to produce these high-tech products has outstripped China’s domestic needs, creating deflationary pressure that has generally brought down producer prices by more than 5 percent over the last two years. Deflation itself retards growth prospects by inducing households and businesses to delay spending on the expectation that they will get lower prices in the future.
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Beijing’s investment has created yet another problematic imbalance. The push in quantum computing and AI has outstripped China’s ability to produce the advanced computer chips these efforts need. It does not help, of course, that American export restraints have cut off China’s ability to supplement domestic chip production with imports of advanced chips from, say, the U.S.-based Nvidia.
The shortage of chips in China has forced workarounds and even impelled Beijing to get involved in the allocation of the output from China’s premier chipmaker, Semiconductor Manufacturing International Corporation. The shortfall and workarounds have slowed and made the technology effort less efficient and more prone to error.
The biggest problem in this area comes from the downward pressure the property crisis has put on residential real estate generally. Because of the previous overbuilding and the lack of financing in the area since 2021, residential real estate prices have fallen some 20 percent since the start of the crisis. Since most household wealth in China is tied up in the family home, these real estate price declines have hit family net worth hard and constrained spending accordingly. The Chinese consumer will not return until this situation turns around. Subsidized appliance sales are far from enough.
This array of adverse pressures has brought little cheer to China’s economy in the second half of 2025. The growth pace of industrial production has slowed by almost a third since last spring. According to Beijing’s National Bureau of Statistics, the so-called PMI Index of manufacturing activity hit a value of 49.0 this past October, the most recent period for which data are available. Anything below 50 signals a decline. Though the services twin of this index did show expansion, the slow 4.6 percent rate of advance in sales of services was considerably slower than earlier this year or in 2024.
Retail sales in October showed a meager 2.7 percent gain over the same time last year. Especially noteworthy was the outright decline in auto sales, indicating that Beijing’s subsidy program—already too small to solve the general problem—is losing its effect, even in its narrow area of focus.
These recent data flows and the problems behind them impart a definite negative tilt to the growth prospects from 2026. The negative tilt might shift upward if Beijing acknowledges the need for a broader-based stimulus program, especially for the Chinese consumer. Still, the recent five-year plan suggests that there is little likelihood of such a move. China’s economy is large and diverse enough to make outright economic decline unlikely, but still, slower growth seems to be in the cards.
