China’s economy is heading for a rough 2026

China’s macroeconomic outlook appears challenging heading into early 2026. Cyclical factors, such as expiring policy support and a high base, will weigh heavily on economic growth, while structural factors, including the housing recession, remain in play.

The base case for 2026 is that growth will look quite weak in the early months, forcing Beijing to launch more pro-growth measures in the spring, which should help lift growth in the second quarter (Q2) and beyond.  

The Chinese economy experienced a mini-cycle over the past year or so. After seeing dire growth numbers in the summer of 2024, Beijing launched several pro-growth policies from September to November 2024. These policies helped boost the economy, with real GDP growth bouncing to 5.4% in the fourth quarter (Q4) 2024 and the first quarter (Q1) 2025. 

The flip side of the policy-led mini rebound is that a lot of the policies have now expired or are expiring, which is putting pressure on growth. Growth already slowed quite a bit in recent months and could slow further. 

The consumer goods trade-in programmes are one of the most important expiring pro-growth policies. They have helped boost sales of consumer electronics and automobiles since September 2024. But that also means that a lot of demand for those products was brought forward. The subsidies allocated for the programmes this Q4 are also smaller than a year ago. Thus, home appliance sales have weakened greatly since the summer, and they even had a double-digit year-on-year (yoy) decline in October and November. If no new subsidies are introduced next year or if they are smaller, sales of home appliances will likely post bigger yoy declines. 

Car sales had double-digit yoy growth in volume for most of this year. Sales volume of new energy vehicles (NEVs) have been particularly strong. They also benefited from the trade-in programmes, and they are also facing the same issue as home appliances. 

NEV sales face another major headwind, however, as the tax benefits for NEVs are set to fade soon. NEVs have been exempt from the 10% purchase tax for many years, putting them at an advantage against internal combustion engine cars. However, starting in January 2026, they will face a 5% purchase tax, and from January 2028, they will be subject to the full 10% tax. 

It is likely that a lot of people are bringing forward purchases to avoid the upcoming tax, which is boosting this year’s sales but makes a big decline in 2026 likely. NEVs account for nearly half of new car sales in China, so a tax hike on NEVs will impact the overall car market. Historically, increases in the car purchase tax have usually led to drops in sales. The only exception was in 2023, when the Covid lockdown and reopening affected car sales much more than the tax policy. 

After four and a half years, the property market recession is still ongoing. This is a structural correction, and it will take some time for the market to hit the bottom. However, in the next few months, yoy growth will also suffer from the expiration of pro-growth policies. 

New home sales had a mini rebound in Q4 2024 and Q1 2025 thanks to easing policies introduced in late September 2024, but the rebound ended a few months ago, and the housing market has seen bigger yoy sales declines in recent months. The high base from the mini rebound is going to make the yoy numbers very ugly in Q4 2025 and Q1 2026 if Beijing does not implement effective measures to boost housing sales.  

China’s fiscal policy is more expansionary this year, with government bond issuance heavily front-loaded. Some funds were used to subsidise consumer goods sales, while more went into investment, helping to boost growth. The flip side is that growth will face significant downward pressure next year unless fiscal spending remains large and front-loaded.

Next year’s budget will not be released until March. The total deficit may remain equally large, but it looks unlikely that next year’s fiscal spending will be front-loaded. It was front-loaded this year because Beijing announced trillions of RMB in bond sales in October 2024, making bond sales in early 2025 possible. However, Beijing has not said anything about government bond sales in 2026, suggesting that they will start much later in the year. 

The credit cycle is also turning downwards, in large part related to the government bond issuance. Yoy growth of total credit had a mini rebound from 8% in November 2024 to 9% in July 2025, thanks to the much larger government bond sales, but it has slowed since August. Historically, credit deceleration has never lasted for less than 12 months. If the same pattern holds, which is very likely, we will see credit growth slow until at least the third quarter (Q3) next year. 

Exports have been doing very well and much better than expected this year. With sweeping tariffs from Trump, exports to the US in the first ten months fell by 18% yoy in US dollar (USD) terms, but total exports in USD terms were up 5% yoy, and in volume terms they were up even more. The decline in US-bound exports has been larger than it was during Trump 1.0 — not surprising because tariffs were hiked much more this time — but total exports have fared much better. 

But exports have their own cycles. On a six-month moving average basis, China’s exports have never posted positive growth for more than 24 consecutive months over the past decade, and growth has been positive for the last 20 months. Based on this historical pattern, there seems to be a good chance that export growth will also soften next year.  

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