China’s Economy Faces Crisis Despite Xi Jinping’s Push Amid Slumping Real Estate and Trade Frictions
Latest China Report.
Bubble bursts, real estate prices fall, domestic demand slumps, population declines, and trade friction
China’s GDP growth for 2025 increased by 5% compared to the previous year, achieving the government’s target of around 5%, but the outlook for the Chinese economy is fraught with both domestic and external challenges. It faces a quadruple threat of falling real estate prices, weak domestic demand, population decline, and trade frictions.
This assessment comes from journalist Kōta Takaguchi, an expert on China and author of works including China at Peak Out (Bunshun Shinsho). On the surface, China’s economy appears strong.
President Xi Jinping (72) spoke on February 14, ahead of the Spring Festival (Lunar New Year), declaring that China would accelerate the establishment of a new development paradigm, signaling a confident, go-ahead stance. Yet in reality, the situation is quite precarious.
China has strengthened its technological capabilities in AI and electric vehicles, achieving unmatched global production power. However, domestic consumption remains low, and demand cannot keep pace with an oversized supply. Since the 1970s, the Chinese government has prioritized investment in factories and infrastructure over consumer spending, maintaining a mindset of restrained consumption. In contrast, Japan experienced a rapid surge in consumer spending after its high economic growth period in the 1980s. China’s economy continues to operate under a “strong supply, weak demand” model, leading to a gradual slowdown in growth rates.
Additionally, the birthrate is declining. The population peaked at 1.41 billion in 2021 and has since started to decrease. The shrinking population further contracts domestic demand, accelerating the trend of oversupply.
The greatest risk remains the collapse of the real estate bubble. In the 2000s, fixed asset investment grew at high rates of 20–30% year-on-year, but by 2025 it turned negative. Financial difficulties have halted construction projects nationwide, leaving unfinished buildings abandoned.
The Chinese economy is about to enter a long period of deflation!
The pain from the real estate collapse in China extends beyond major developers—ordinary citizens are also heavily affected. Roughly 70% of Chinese household wealth is tied up in property, so the rapid price drop directly hits family finances, tightening consumer spending even further.
There’s a phenomenon known as the “lipstick effect,” where in times of economic downturn, consumers forego expensive goods but still buy small indulgences, like lipstick. For example, during the Spring Festival holiday, many people are opting for domestic trips rather than costly overseas travel.
Some travelers might argue that cities like Beijing and Shanghai appear lively and full of goods, suggesting there’s no recession. But that vibrancy is mostly visible in high-profile areas. Venture slightly into the suburbs or higher floors of office buildings, and you’ll see empty spaces with no tenants—places devoid of people or activity.
The situation is even worse in rural areas. During the property bubble, officials built infrastructure—stations, airports—in remote areas to boost their performance metrics during their tenure, regardless of actual demand. The maintenance of such infrastructure alone burdens local economies. Official unemployment figures hover around 5%, but this sample only covers urban populations. Including rural residents and migrant laborers would likely reveal worse conditions.
While domestic demand struggles, China relies on foreign demand to sustain its economy. Exports, especially in government-backed sectors like AI and electric vehicles (EVs), have grown substantially. However, trade tensions remain a concern. After U.S. tariffs imposed by former President Trump once exceeded 100%, China shifted its export focus toward other regions. For example, China’s trade surplus with the EU in 2025 reached a record ¥45 trillion. Exports in renminbi terms have grown 1.7 times over the past decade, while imports from the EU have increased only 1.3 times.
As a result, the trade surplus has doubled, sparking criticism from European leaders such as President Macron, who called the imbalance unsustainable and a matter of life or death for the EU. This tension could escalate into further trade frictions, including tariffs.
The chain of economic pressures—falling real estate prices → weak domestic consumption → rising exports → trade friction—paints a bleak picture for China’s economy, which is teetering on the edge of a prolonged deflationary period.
From the March 6, 2026 issue of “FRIDAY”
PHOTO： AFRO Kyodo News