Paper growth: How China’s economic model is running out of steam

China entered 2026 with an economy that, on the surface, looks more resilient than it is beneath the surface. Beijing’s official GDP figure of 5.0 percent growth for 2025 met the government’s annual target, but that number obscures a structural problem that President Xi Jinping’s economic policy has consistently failed to solve: the growth is being carried almost entirely by exports rather than domestic demand.

China’s trade surplus jumped 20 percent to a record $1.19 trillion in 2025, with exports accounting for a third of economic growth, the highest share since 1997. That is not a sign of an economy firing on all cylinders. It is a sign of one limping forward on a single leg, and that leg is now under significant external pressure. Independent analysts at the Rhodium Group estimate that real GDP growth in 2025 was somewhere between 2.5 and 3.0 percent, roughly half of what the National Bureau of Statistics reported, with fixed asset investment declining 11 percent in nominal terms between July and November compared to the same period a year earlier.

The gap between the official figure and the independent estimate is itself a measure of how far Xi’s economic framework has drifted from the realities confronting ordinary households and private businesses.The property sector, now in its fifth consecutive year of contraction since the market peaked in 2021, remains the economy’s most visible wound. Approximately 80 million unsold or vacant homes continue to weigh on sales, prices, construction starts, and completions.

New housing starts are running at roughly 75 percent below peak levels, and property investment has fallen by around 50 percent from its high point.

The downstream consequences for local government finances have been severe and are still unfolding. Land lease revenues, which once formed the backbone of municipal budgets, continued contracting through 2025. Consolidated fiscal revenue growth across local governments edged into positive territory in the first ten months of 2025, but only at 0.2 percent year-on-year.

In late 2024, Beijing launched a 10 trillion yuan debt-swap program to refinance the liabilities of local government financing vehicles into formal bonds at lower interest rates and longer maturities, but the scale of the problem means that many municipalities will spend years in fiscal austerity, cutting infrastructure spending and social services at precisely the moment when public support for consumption is most needed.Deflation has become the defining macroeconomic condition of this period, and Xi’s administration has not managed it effectively. An economy-wide price gauge shows China has been experiencing deflation for three consecutive years, the longest such streak since its transition to a market economy in the late 1970s. Producer prices fell 3.6 percent year-on-year in June 2025, the ninth consecutive month of factory-gate deflation and the sharpest single monthly drop in nearly two years.

Consumer prices have been essentially flat across 2025 as a whole, with core inflation remaining below 1 percent. The IMF’s December 2025 Article IV assessment was unusually direct in its diagnosis, noting that the prolonged property sector adjustment, its spillovers into local government finances, and subdued consumer confidence have led to weak domestic demand and deflationary pressures, with the current account surplus projected to reach 3.3 percent of GDP in 2025.

The Fund explicitly warned that China’s large economy makes continued reliance on exports unviable and politically unsustainable for its trading partners.Consumer spending has not recovered in any meaningful structural sense. Retail sales grew just 3.7 percent in nominal terms across 2025, well below the rates needed to rebalance an economy of China’s size away from investment and exports. Household savings rates have remained elevated as families brace for unemployment risk, inadequate pension coverage, and the continued erosion of housing wealth.

Youth unemployment, even after the statistical revision that stripped students from the calculation, hit 16.9 percent for the 16-to-24 age cohort in February 2025.

The World Bank’s December 2025 China Economic Update noted that consumer spending growth was expected to remain subdued into 2026, constrained by a soft labor market and continued property price adjustments.The demographic backdrop compounds the downward trend in the economy.

China’s newborn population fell to 7.92 million in 2025, the lowest figure since records began in 1949, as the total population declined for a fourth consecutive year. Government childbirth subsidies have been expanded, but they have not reversed the trend. A shrinking labor force, combined with an aging population drawing on an underfunded pension system, adds a long-run fiscal dimension to problems that already look acute in the short run.

The external trade environment in China has further deteriorated. US tariffs on Chinese goods surged to over 100 percent in April 2025 before a partial truce brought them down to 30 percent in May. The European Union’s anti-subsidy duties on Chinese electric vehicles, imposed in mid-2024, have been followed by additional trade friction across multiple sectors. Fitch Ratings in January 2026 projected that China’s growth would slow to 4.1 percent in 2026, with domestic demand remaining constrained by sluggish consumer confidence, deflationary pressures, and investment headwinds that now extend well beyond the property sector.

The World Bank projects 4.4 percent for 2026; the IMF projects 4.5 percent.Against this economic backdrop, Xi Jinping’s physical condition has become a separate and related source of institutional uncertainty. Reports in overseas Chinese media have alleged that Xi sought treatment for a cerebral aneurysm as far back as late 2021. His absence from the BRICS Summit in Brazil and the cancellation of a planned APEC meeting with President Trump in South Korea in October 2025, described by some analysts as reflecting internal pressure rather than scheduling, fed speculation about both his health and his grip on Party politics.

The 21st Party Congress is scheduled for 2027, and the question of who leads China into it, in what condition, and with what mandate, now sits at the center of every serious forecast about the China’s economic trajectory. Xi’s policy framework on stabilizing is facing immense internal and external pressures. Without a credible shift toward household-level reform, the headline growth figures will continue to mask an economy that is structurally weaker than it appears.