What is really occurring concerning the Chinese Economy
Michael Roberts is an Economist in the City of London and a prolific blogger.
Cross-posted from Michael Roberts’ blog
Photo: Wikimedia Commons
China’s second quarter GDP growth saw a significant deceleration, down to 4.3% year over year from 5.0% in the first quarter and weaker than forecast. This was the slowest growth in any quarter since the pandemic lockdown hit in 2022. But, even with this Q2 slowdown, China’s real GDP growth for the first half of 2026 remains within the government’s target range at 4.7% YoY.
Nevertheless, Western ‘experts’ continue to argue that this slowdown confirms their view that China is heading down towards stagnation. Take the points raised by Richi Sharma in the FT, made before this latest growth figure. “Though many forecasters keep expecting China to surpass the US as the world’s leading economy, its growth peaked in 2021. Since then, China’s share of global GDP has fallen in nominal terms from 18 to 16.5 per cent, while the US share has risen to 26 per cent. China’s growth rate has dropped below the rest of the world, including the US. In real terms, independent estimates now put China’s growth in real terms closer to zero than to the official target of 4.5 to 5 per cent.”
Let me answer these points one by one. First, China’s real GDP growth rate may have peaked in 2014, but the gap between China’s average growth rate since then and that of G7 economies has not disappeared. On average since 2014, China’s growth rate has been over 4% points higher than the average growth rate in the G7.
Yes, China’s share of global GDP has declined in nominal terms, but that is not the case in real terms. So Sharma is being disengenuous here. The contraction in nominal terms is primarily caused by a weakening Chinese yuan against a very strong US dollar and domestic deflation. Because nominal GDP is calculated in current US dollars, exchange rate and price shifts artificially compress the size of China’s economy on the global stage. In real terms, using Purchasing Power Parity (PPP), we can eliminate the effect of currency exchange fluctuations. Then, instead of a fall in China’s share of world GDP of 1.5-2.0% points, in real terms there has been a rise of 1.4% points.
Historical Trend Data (2021–2026)
| Year | Nominal Share of Global GDP | Real (PPP) Share of Global GDP |
| 2021 | 18.74% (Peak) | 18.5% |
| 2022 | 18.09% | 18.7% |
| 2023 | 17.28% | 18.99% |
| 2024 | 17.00% | 19.31% |
| 2025 | 16.70% | 19.63% |
| 2026 (Current) | 16.50% | 19.89% |
Sources: Compiled from tracking by the IMF DataMapper, Statista, and TheGlobalEconomy.
Also China’s growth rate has not “dropped below the rest of the world” as Sharma claims. Here he falls back on “independent estimates now put China’s growth in real terms closer to zero than to the official target of 4.5 to 5 per cent.” What are these ‘independent’ estimates? They come from one particular source, the Rhodium Group, a Western research unit that claims to be China ‘experts’. The Rhodium Group does away with the official GDP estimates, arguing that they are biased upwards and do not take into account weak domestic economic activity.
Rhodium claims to estimate China’s growth from the bottom up by disaggregating expenditures (not production) in sectors. Their ‘disaggregation’ method basically boils down to reducing official fixed asset investment figures by a significant multiple to the level of investment expenditure on the property sector. And the property sector, as is well known, has been in a serious slump for some time. In effect, Rhodium reduces China’s investment growth rate (which overall is falling 5.7% yoy) to the real estate investment growth rate, which is falling at 18% yoy, dragging down the overall rate. If you use property investment as the measure of China’s investment rate, no wonder you reach zero for overall growth.
Rhodium estimates China’s growth rate just from ‘demand’ data, like retail sales, credit growth and ‘consumer confidence’. It ignores ‘supply’ indicators like industrial production, exports and manufacturing in general. But most Western estimates of China’s GDP do not go down the Rhodium road. The Bank of Finland, for example, also does not accept the official figures, and instead tracks production metrics like electricity generation, rail freight and net exports. It finds China’s real GDP growth is about 1% point below the official data, but that still means it’s around 4% a year.
Indeed, China’s industrial production rose 5.4% in the fist half of 2026, with manufacturing up 6% and the tech sector up 14%.
Looking at China’s industry, it’s clear that external demand is the key factor behind the rise, with rail, ships, and aerospace up 18.2%, autos up 8.7%, and computers, communications, and electronic equipment up 15.7%,. Semiconductor production hit a 17-month high of 25.4% yoy amid the continued tech boom.
This is not to dismiss the current slowdown in overall investment growth. Fixed asset investment dropped 5.7% yoy over the first half of the year and marked the lowest level since May 2020. Private sector investment fell 8.5% and state-owned investment also fell further, down to 2.3%. Both private and state-owned enterprises appear to be postponing capital expenditure plans, adding to an already weak investment environment.
What is behind this? The culprit is the continued slump in the property sector and difficulties for local governments in dealing with the buildup in debt that spiralled during the property boom. These are the drivers of the relatively weak domestic demand.
Property prices are still falling, if now at a much slower pace, with even some cities now experinencing a small rise. But even excluding the property sector, fixed-asset investment was still down by 2.7% in the six months to June, slipping further from a 1.2% fall in the first five months of the year.
The other factor depressing domestic demand is the overhang of debt left by the property bust, which is now mainly concentrated in local governments. Loans made by local governments to private developers during the property bubble remain on the books and so many are paralysed in doing any further investments as a result. While central government and the state banks are expanding investment and credit into ‘new productive forces’ ie. the tech and solar sectors , local governments cannot follow.
So a big reason why China’s overall investment has dropped is the leftover of the property and local government financing spree. China’s Communist leaders made a big mistake. They allowed the urbanisation of China and the rise of its cities and the homes in them to be put into the hands of the private sector. They did not institute a state run and controlled national housing development program and instead got local governments to finance private property developers.
Thus the Chinese government allowed a massive expansion of unproductive and speculative investment by the capitalist sector of the economy. In the drive to build enough houses and infrastructure for the sharply rising urban population, central and local governments left the job to private developers. Instead of building houses for rent, they opted for the ‘free market’ solution of private developers building for sale. Of course, homes needed to be built, but as President Xi put it belatedly, “homes are for living in, not for speculation.”
As a result, the bulk of China’s ‘zombie companies’ are property developers, still acting as a drag on overall growth and investment domestically. Local governments have been left to absorb a lot of these bad debts from local banks and property developers — while they’ve been saddled with restrictive debt issuance limits, and Beijing is still signalling limited support.
China’s economic expansion is still on, but it is heavily dependent on export trade. Despite Trump’s tariffs and other sanctions (which are added to each day!), China’s exports to the rest of the world have reached record levels. China’s exports surged 27% year-on-year to a historic, record high of $412 billion in June 2026. This growth propelled China’s total export value for the first half of 2026 to $2.12 trillion (a 17.6% year-on-year increase. This boom was heavily accelerated by two primary catalysts: the global artificial intelligence infrastructure rush and a massive scaling of green technology shipments.
I won’t go into the relentless arguments presented by the Western ‘experts’ that China is causing ‘global imbalances’ from its export success and shifting ‘overcapacity’ through dumping goods at very cheap prices on world markets. I have dealt with these arguments in previous posts. But there is a new attack. It is the claim that China’s huge rising share of global exports is ‘crowding out’ other Global South exporting economies. This is a particularly ludicrous argument. Western ‘experts’ never worried about China’s export success two decades ago when they thought it was based on US and European companies based in China. But now that China has developed its own industrial firms and leads the way in key export sectors, these experts claim it is damaging ‘poor’ countries.
Vietnam lends the lie to that. It is an economy that has a similar model to China ie state-led and state-owned sector, alongside a capitalist sector. Vietnam’s share of global exports has risen significantly over the last ten years, increasing from approximately 1.2% a decade ago to around 1.35% now.
China is not ‘crowding out’ Vietnam.The failure of other countries to build export market share is more down to most Global South economies being dominated by foreign multinationals and having no significant state sector or independent plan. Imperialism has made it impossible for the Global South to ‘catch up’, not China.
China is not expanding domestically fast enough, even though real consumer spending has averaged over 6% a year since 2014 – hardly a snail’s pace as in the G7. However, it seems likely that the property bust is bottoming and local governments are beginning to deal with their debt overhang. And investment in new tech sectors is rocketing. So there is every reason to expect China to meet its current growth target of 4.5-5.0% this year.
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