China Research

Western view on China remains divided. Many analysts linked to macroeconomics and to financial stability remain worried or skeptical about the state of the Chinese economy. Corporate leaders in many industrial countries outside China feel on the other hand mostly scared about Chinese progress in certain high-tech segments and discuss scarcely the macroeconomic and financial problems of the country.

The absence of good economic news during summer

Without elaborating further all shortcomings of Chinese statistical quality, not even official Chinese statistics showed encouraging macroeconomic signals. Let’s give some disappointing examples that came in more lately:

– GDP rose in Q2 by only 4.3 percent yoy, below the official objective of 4.5-5 percent for this year and below market expectations. One cannot rule out that this number in reality may have been even weaker. It may be added that 4.3 percent was the lowest annual GDP increase since Q4 in 2022.

– Retail sales increased in July by just 0.6 percent yoy, down from 1 percent in June and below market expectations as well. Very weak car sales (-17 percent) contributed strongly to this disappointing number. Building materials, furniture and petroleum products fell also considerably in the same month.

– Fixed asset investment decreased by 6.7 percent yoy during the January–July period, worsening further compared to accumulated 5.7 percent in the first half of 2026. This number confirms the sluggish activity trend in the Chinese economy, particularly in the property sector.

– Foreign Direct Investment fell in value terms to 6,2 percent in July (June -5 percent) after having been in negative territory since June 2023, reflecting (somewhat?) declining foreign interest in the Chinese market and increasing uncertainty about Chinese growth prospects.

– The RatingDog China PMI – previously known as the Caixin PMI and put together by S&P – weakened for manufacturing to 50,9 in July and to 50,4 for services in the same month. Thus, PMI for manufacturing has been moving down since April this year. PMI for services reached in July the lowest level since September 2024.  

The only important positive statistical exception could be noted for (gross) exports which in July expanded strongly yoy in USD terms by 23,9 percent, to a high extent due to high global demand for high-tech components; the AI boom and the demand for electric vehicles continued to favor Chinese exports substantially. Anticipated shipments to the U.S. for tackling potentially new American tariffs could have been another explanation for the surging Chinese exports. China’s unsatisfactory domestic growth performance may have meant some extra political push to Chinese export efforts, too.

However, imports grew by as much as 27.5 percent last month but still leading to a trade surplus of 112 billion USD in July. This is 15 billion USD more than one year earlier – a development that may induce intensified trade frictions and also tougher trade negotiations by the U.S. and the EU with China this coming fall.

The unknown dimensions of fiscal and financial imbalances

It cannot be questioned that weakening or declining economic growth has a negative impact on China’s fiscal and financial stability. Certain concerns about this issue have been expressed in Western media more recently but without illuminating  details. These shortcomings can mainly be related to insufficient Chinese transparency both when it comes to the rapidly increasing central/local government debt (https://tradingeconomics.com/china/government-debt-to-gdp)  and the real state of all the insecure or bad loans of the financial system. More exact dimensions of these two – partly interlinked – issues remain therefore unknown but should cause worries, at least in the medium or the longer run.

A conundrum are also the potential volumes of future politically based growth support. Fiscal constraints are certainly considered by the political leadership -but also the urgent need of certain growth-supporting measures. I would guess that China’s political leaders prefer to go for quite cautious fiscal stimuli instead of really expansionary budgetary action. But who knows?

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University

China has in recent decades developed into a political and economic global powerhouse, passing by Russia in superpower terms and – in many respects – getting much closer to the United States. Is China in other words regaining its own historical status as the “Middle Kingdom” which still serves as the classical name for the modern China?

“Zhongguo” – then and today

In English, one usually applies the term of “Middle Kingdom” for the old China from back to some thousand years ago. Swedes speak about the “Mittens rike” and Germans about the “Reich der Mitte” – all of them expressing something like the “empire or country of the middle”.

Historically, the Chinese have been defining their country as “zhongguo” of which “zhong” meant middle and “guo” something like state or country. In the beginning, “zhongguo” was standing for the flourishing region along the Yellow River but started later to describe China as the self-image center of the universe. And still today, “zhongguo” is widely used by the Chinese and aims at the country as a whole and its sovereignty.

When regarding the latter aspect, I remember many discussions with the Chinese in the past two decades or so who seemed to be convinced that China rapidly was about to be re-organized as the political and economic center of the world. In many respects – though not all – this scenario of China’s ongoing move to really becoming the political and economic center of the modern world – is on its way to come true.

At least, we can recognize already some revival of the historical Chinese “Magic Kingdom” as the/a global center. But the Chinese political leadership certainly wants more than “some revival” …

I wish today all readers all the best until I come back after my summer break.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University