Will China continue to track under the radar in 2026?

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The prospects for the world’s second largest economy.

Amidst all the ebbs and flows of the Middle East conflict, the global economy has been weathering the fallout reasonably well. Although downside risks remain given the fragile geopolitical environment, progress towards another US-Iran ceasefire deal over the past week has seen oil prices ease once again and buoyed optimism around continued resilience in the global economy. Diminishing concerns around the Middle East, combined with strong earnings reports, has helped push Australian and global equity markets to record highs this week.

With focus squarely on the Middle East and AI developments, the Chinese economy has tended to track under the radar in 2026. A quietening down of the US tariff disputes seen last year, after the US Supreme Court ruled in February many of the tariffs were unlawful, has also helped keep China’s economy out of the spotlight.

Momentum is fading

However, incoming economic data is clearly revealing a loss of momentum in the Chinese economy over recent months. Following a strong start to the year, China’s economy surprised to the downside in the June quarter. Year-ended real GDP growth slowed from 5.0% to a 4.3% pace in the June quarter, the weakest growth seen since 2022 when COVID lockdowns depressed activity.

Although most hard activity data is yet to be released for July, Chinese survey indicators remain weak. The official composite PMI survey fell in July, dropping to its lowest level since 2022 with softer conditions evident across both the services and manufacturing sectors. While adverse weather events likely contributed to the softer survey results, the Chinese economy remains plagued by weak domestic demand in 2026.
 

 

Following a strong start to the year, China’s economy surprised to the downside in the June quarter.

 

The property market still weighs heavily

The property market downturn continues to weigh on the Chinese economy. Notwithstanding a raft of policy measures undertaken by China’s government to shore up the property market and developer financing over the past five years, significant challenges remain. House prices are continuing to decline, with prices for existing homes more than 20% below their peak. Inventories of unsold new homes remain significant, undermining buyer confidence. Property sales continue to fall and are less than ½ the amount seen at their peak in mid-2021. The weak fundamentals are weighing heavily on real estate development investment, which has fallen a further 18% in H1 2026 compared to a year earlier.

Consumers stay cautious

The ongoing property sector headwinds are continuing to weigh on Chinese consumers. Year-ended growth in retail sales has slowed to just 1.0% over the year to June, although the weakness is partly due to the end of fiscal measures that boosted spending last year. Nonetheless, given the uncertainty around the property market and a limited social safety net, Chinese consumers continue to prefer precautionary savings over lifting their spending.
 

 

Chinese consumers continue to prefer precautionary savings over lifting their spending.

 

Industry and exports are holding the line

The area that has been propping up the Chinese economy has been the industrial sector and associated exports. China has been able to re-direct exports away from the US following the tariff disputes last year and the AI-boom has been fuelling global demand for Chinese technology and semiconductor exports. Government industrial policies to shift China’s manufacturing sector into more high-tech and higher value-added products has also supported activity. This has seen Chinese nominal exports increase almost 24% over the year to July and industrial production growth remain solid at 5.3% over the year to June.

Where to from here?

Following the July Politburo meeting, Chinese authorities are likely to step up fiscal spending to help stabilise growth. While this will help at the margin, we do not expect a large-scale fiscal response. As a result, our forecasts are looking for Chinese real GDP growth to average 4.5% in 2026, at the bottom end of the authorities’ 4½-5% target range, with growth easing to a 4.2% pace in 2027.

Structural headwinds build over the longer term

Over the longer term, ongoing structural headwinds are likely to weigh on China’s growth potential. The resolution of the property market imbalances is unlikely to be swift and will ultimately require ongoing state-sponsored restructurings. Local government finances will remain under severe pressure, and more significant fiscal reform is required to place local government finances on a sustainable footing. These property and fiscal headwinds, as well as the Government’s industrial policy priorities, are expected to limit the pace that China seeks to transition towards a consumption-led growth model.

Demographic headwinds are also expected to build in China over the coming decade. The UN projects the working age population (15-64 years) in China will decline by 0.6ppts per annum over the ten years to 2035. Reflecting the declining population and an expected moderation in productivity growth, QIC forecasts real GDP growth in China will slow to around a 3½% pace on average over the coming decade.

The bigger risks lie in geopolitics

Where could we be most significantly surprised around China’s long-run economic outlook? In our view, this is less likely to be around China’s domestic imbalances, potential reforms or internal growth drivers. Rather the surprises are more likely to reflect a more severe escalation in geopolitical tensions, including global trade fragmentation and protectionism or even threats of military conflict, potentially over Taiwan. While China’s economy has been going under the radar in H1 2026, it is unlikely to remain so for long.