China’s Export-Led Stability Masks Weak Consumption and Mounting Fiscal Pressures

China’s economy continues to grow steadily, supported mainly by strong exports to emerging markets, while weak household consumption, a prolonged property downturn, and tight local government finances weigh on domestic demand. The World Bank warns that sustaining growth will require deeper reforms to boost consumer confidence, stabilize housing, and strengthen social protection rather than relying on short-term stimulus alone.

Prepared by the World Bank Group using data from China’s National Bureau of Statistics, the People’s Bank of China, the Ministry of Finance, SAFE, and CEIC, the December 2025 China Economic Update shows an economy that is still growing but increasingly dependent on external demand. China’s GDP expanded steadily in the third quarter of 2025, with year-to-date growth reaching 5.2 percent. Exports played a decisive role in keeping growth on track, while domestic demand remained weak. This imbalance highlights a key challenge facing China: headline stability masks growing internal strains that could weigh on future performance.

Exports Remain the Main Support

China’s export sector has continued to perform strongly despite trade policy uncertainty. Shipments to emerging markets, especially ASEAN countries and Africa, rose sharply, offsetting a steep fall in exports to the United States. Medium-technology manufactured goods, such as vehicles and machinery, led these gains, allowing China to expand its global market share. Imports also recovered in the second half of 2025, driven by strong demand for commodities and inputs used in electric vehicles, renewable energy, semiconductors, and AI-related production. This helped widen the current account surplus, although large capital outflows accompanied it as Chinese investors moved funds overseas and foreign investors reduced exposure to Chinese assets.

Weak Consumption and a Fragile Labor Market

At home, household spending remains cautious. Consumers are holding back due to uncertain job prospects, slow income growth, and falling housing wealth. While the official urban unemployment rate has stayed relatively stable, job creation has weakened in construction and services, particularly affecting migrant and informal workers. Youth unemployment remains high, reflecting both slower hiring and a growing number of university graduates. Government subsidies for consumer goods and social services provided only short-lived relief, and retail sales growth slowed again in the second half of the year. These trends show that confidence among households has not recovered, limiting consumption’s contribution to growth.

Property and Local Government Pressures

The property sector continues to be China’s biggest drag. After a brief stabilization following policy easing in late 2024, housing activity weakened again in 2025. New home sales fell to about half of their 2021 peak, and prices for both new and existing homes continued to decline. Although homes have become more affordable relative to income, prices remain high by regional standards, suggesting the adjustment is not yet over. The prolonged downturn has reduced household wealth and sharply cut local government land revenues. Many local governments now face tight budgets and rising debt, particularly in poorer regions, raising concerns about widening regional inequality and limited capacity to support growth through infrastructure and social spending.

Low Inflation, Cautious Policy, and the Road Ahead

Inflation has remained very low throughout 2025. Consumer prices have been close to flat, while producer prices have continued to fall due to weak demand and excess capacity. Although the People’s Bank of China has supplied ample liquidity, real interest rates remain relatively high, and private credit demand is weak. Much of recent credit growth has come from government bond issuance rather than household or business borrowing. Banks remain stable but face shrinking profit margins, while equity markets have performed well thanks to low valuations and strong liquidity.

Looking ahead, the World Bank expects China’s growth to slow gradually to 4.9 percent in 2025 and 4.4 percent in 2026. Consumption is likely to stay weak, investment gains are modest, and poverty reduction is to continue, but at a slower pace. The report argues that lasting improvement will require deeper reforms rather than short-term stimulus alone. Strengthening social protection, reducing households’ need to save excessively, stabilizing the property sector, improving the business environment, and fixing local government finances are seen as essential steps. Together, these changes could help China rebalance toward more sustainable, consumption-driven growth as it prepares for the next Five-Year Plan.