China could have sped up its economy by using one of three levers for most of the last two decades. The economy could boost investment, increase property or export more goods to other countries.
One lever has been broken today, another one is under political constraint, and a third is stirring up resistance overseas.
The menu of options that are reliable is rapidly shrinking, even though the economy continues to grow.
No longer does investment produce the same response as it used to
China used to find relief from its problems through investment. The fixed asset investment in China fell by 2.6% during the first eleven months of this year, compared to the same period last 2024.
Property investment has fallen by nearly 16% in the same time period.
Property, which once accounted for a quarter (or more) of the economic output when other sectors are included, has now become a structural constraint.
Once, the sector was able to absorb capital quickly and spread growth. It now does the exact opposite and pulls down confidence.
Infrastructure was once the default option, but it is now also limited.
The local governments are facing tighter borrowing limitations and using their funding capacities to refinance current obligations instead of starting new projects.
The investment engine hasn’t disappeared. It has just become more slow, selective and weaker.
The slowdown is not just a coincidence. The policymakers are now more open about their intention to curb inefficient investments and excess capacity.
The scope of blunt stimuli has been reduced. Building more cannot be used to accelerate growth.
Consumption remains low despite targeted assistance
The household spending situation has been difficult to recover. In November, retail sales increased by just 1.3% from the previous year.
This was the lowest rate outside of the pandemic.
It is worrying that the retail sector has seen a slowdown for six consecutive months. This is the longest stretch since 2020.
It is important to look at the composition of expenditures. According to industry data and government statistics, auto sales have fallen by around 8% on an annual basis, while home appliance sales are down close to 19%.
Subventions for trade-ins had lifted both categories earlier. Demand followed when these effects faded.
It isn’t a case of a lack of liquid assets. The consumers are simply reluctant to spend.
The urban unemployment rate remained at 5.1%, and youth unemployment is still above 17.5%, which limits the confidence of income growth.
Falling property values continue to influence household behaviors.
The average home price in major cities fell again in November. This continued a slide that has lasted for several years.
Even modest drops in prices can have a significant impact on consumer spending. According to the International Monetary Fund, around 70% of wealth for households is derived from real estate.
Subsidies may shift the timing for purchases but cannot compensate for a persistent erosion in perceived wealth.
The export sector is driving growth and drawing scrutiny
Exports are absorbing much of the demand slack as domestic demand is under pressure.
The industrial production increased by 4.8% in November, compared to the same period last year, due to strong orders from overseas.
Customs data show that the result was a record-breaking trade surplus in 2025 of approximately $1.1 trillion during the first 11 months.
Exports are crucial in achieving the 5% government target.
Also, exports have lower immediate fiscal costs. Exports bypass the household’s confidence and do not depend on local government financial statements. They also deliver quickly.
This makes them appealing in a policy-constrained environment.
Costs are mounting. The persistent excess supply of goods has caused the producer price to deflation over the past three years.
Trade partners in Europe, the United States and other emerging markets are responding to threats of tariffs and barriers with new tariffs and additional barriers.
The export strength which once eased the pressure now generates it.
The markets are improving more quickly than fundamentals
China’s Financial Markets have moved the other way while the real economy is struggling to gain momentum.
In 2025 the combination of stocks, government bonds and the yuan will be higher than it has been in recent years.
As of the third-quarter, foreign investors have increased their holdings in Chinese stocks at the highest rate since 2020. Demand for sovereign bonds offshore has remained high despite the low yields.
It is expected that the yuan will gain its first annual value against the dollar in 2021.
This could have been about the policy. Authorities were introducing liquidity tools in order to help support equity markets, they eased regulatory pressures on certain parts of private sectors, and emphasized growth stability.
The valuations also played a part, as Chinese assets are still traded at a lower price than their global counterparts.
But the rally in markets hasn’t translated into an economic boost.
Market analysts estimate that households have gained 4.5 trillion Yuan in the last two years from the rise of equity prices. However, this is a small amount compared to the 20 trillion Yuan drop in the value of residential properties over the same time period.
Losses in the housing market simply overwhelms any wealth-effect from stock investments.
What makes next year harder than the current one
The policymakers pledged to continue their support by committing fiscal expenditures, issuing ultra-long term bonds and a moderate amount of monetary ease.
They are also practicing self-control.
A large-scale stimulus could resurrect debt problems, and undermine efforts to reduce overcapacity.
Beijing is avoiding fiscal and institution changes that would be required to boost the consumption of direct income transfers.
This results in a stabilization strategy rather than an acceleration one.
The growth is not reverse-engineered, it’s just supported. The markets respond positively to this reassurance. Both households and businesses remain cautious.
China has run out of cheap ways to grow, just as in the past.
Data shows that the economy still exports and produces goods, but it is increasingly struggling to convert these strengths into confidence in its own country.
The gap between China’s ability to do things and its ability to rely on others is the most important feature in its current economic outlook.
The post China’s traditional model of growth is failing may change as new information becomes available.
