Introduction
Western media has recently reported on slower economic growth in China’s domestic economy, noting record low consumer confidence, lowered retail sales, and a prolonged real estate crisis. According to Reuters, retail sales rose 0.4% year-on-year, below the expected 0.8% for August [1]. With an economic model relying heavily on property investments and development, the slowdown is causing households, in particular, tier 1 and 2 cities, such as megacities and big provincial capitals, to face lowered housing wealth [2]. Real-estate development investments fell 19.9% from January to August 2026, compared to the same period last year.
In turn, China is an exceptionally strong exporter, and industrial output reportedly grew 5.2% compared to August 2025, surpassing the expected 4.8% with “strong expansion in equipment and high-tech manufacturing” [1]. Low domestic demand and real exchange-rate depreciation are contributing to strengthening export competitiveness [3]. The duality of the Chinese economy becomes apparent, and one is left wondering how the world’s second-largest economy can suffer from a prolonged domestic slowdown while simultaneously becoming an ever more powerful competitor abroad [4].
The Chinese domestic economy, in short
Property has since the abolition of the allocated public housing in 1998, been a major driver for the Chinese economy [5]. The property development industry acts as a barometer for the overall economy, stimulated by urbanisation, rising incomes, easy access to credit, and a policy and financial system that encouraged property development and investment. The real estate sector provides a useful starting point, before considering its wider effects on consumer spending. Not only did this contribute to an increase in housing wealth, it also stimulated various related industries such as steel, cement, and other construction materials. Both development and investment companies, contractors, and primary industries in raw materials, experienced an upturn during the first two decades of this century. Housing prices rose dramatically and fuelled an incredible expansion within the property development sector.
Perpetual pre-selling apartments to finance construction caused developers to become increasingly reliant on loans and presales to finance their quick expansion [6]. Beijing grew worried, and in 2016 Chinese officials adopted the principle “houses are for living in, not for speculation” [7]. By 2021, it was noted that sales prices had risen by an average of 350% since 2006 [6]. To put that into perspective, housing prices rose on average 80% for a comparable period in the UK [8].
The property sector grew vulnerable to any volatility in the market, and Beijing set forth regulations to deleverage the property sector. Property related industries accounted for roughly 20% of total value added in 2020, proving its significance in relation to the domestic economy at large [6].
The Case of Evergrande
When Beijing regulated housing developers in 2020 by its “Three Red Lines” benchmarks (in order to limit debt growth in the sector), it restricted credit access to developers, forcing them to deleverage [9]. That was when Evergrande headlined Western media, in September 2021. The massive conglomerate with property at its core, had abundant access to credit, enabling it to diversify in other sectors and thus, perfectly represented the Chinese boom years. Driven by its presale model of borrowing capital in order to buy land, it sold apartments before they were built, and used buyer deposits which granted more credit to repeat this process. While working during upturns in the economy, any slowdown would pose a massive threat to these developers. The IMF reported in 2021 that the property developer’s reliance on presales accounted for over one-third of funding, up from 25% in 2014, which reportedly “increases its vulnerability to sector wide confidence shocks and runs” [9]. Evergrande had $300 billion in liabilities. Without new borrowing abilities and new buyer deposits to fuel the business, two of Evergrande’s critical sources of income fell sharply, leading to a major halt in its cash flows [9].
While Beijing prioritised finishing people’s apartments, Evergrande defaulted on most of its $300 billion in debts and was delisted from the Hong Kong Stock Exchange by August 2025. Evergrande has since faced a legal battle with PwC, been fined $1.31 billion, with its founder facing lifetime imprisonment, and five other senior executives receiving between 6 and 18-year prison sentences [10]. Evergrande, an example beyond that of ordinary systemic vulnerabilities in the Chinese economy, proved how developers were able to operate under Beijing’s policies. Its business model was developed within an institutionalised system that encouraged quick expansion and increased debts [11]. The introduction of Three Red Lines benchmarks exposed the vulnerability of highly leveraged developers but also served as proof that Beijing was finally deleveraging the property sector [9].
The saturation of the housing market, and the maturing of urbanisation, together with the Three Red Line regulatory guideline, as well as loss of confidence and weaker housing demand caused many properties to diminish in value [6]. This created a cycle of falling prices, causing buyers to wait and speculate, sales declining and developers cutting prices, which further weakens developer revenues.
This has led to declining confidence in the housing market, increased saving by households and lowered spending in the economy overall. The Bank for International Settlements (an international financial institution serving, among other things, as a center for economic research) found that a 10% increase in housing prices is associated with a 1.6% increase in consumption in tier 1 and 2 cities, showing the relationship between housing wealth is on household consumption. Further findings show that 37% of retail consumption across all of China is accounted for by tier 1 and 2 cities, despite only including 49 of China’s cities. This goes to show how large a portion of the economy is linked to the real estate market [2]. The declining housing market is causing ripple effects across many consumer-based sectors of the domestic economy [12]. The IMF warned about weakening demand, and a downward turn of house-prices already in 2020, before Evergrande collapsed [9]. Having left consumers uncertain about the future, many are looking for stable employment and are continuing to save. The behaviour manifests in their spending habits, causing lower economic activity, and thus affecting the domestic economy [13].
Spillover effects of the domestic slowdown
While the domestic economy is weak, Chinese production capabilities remain enormous. Real exchange-rate depreciation between the yuan and foreign currencies, as well as lower inflation relative to its trading partners, allow for more competitive pricing, all whilst domestic consumers purchase less. Therefore, Chinese companies need international markets to absorb production.
The same happened after the 2025 tariff conflict between the US and China, where Chinese exports to the US dropped significantly. It led China to gain market share in other regions, such as South East Asia, mainly through semiconductors, electric components, and clean-tech exports. Reaching both emerging and mature economies, the domestic slowdown has increased the incentive to seek foreign demand. China also influences the whole world economy, by way of trading, producing, stimulating investments, and price competition. As countries abroad grow more reliant on Chinese imports, foreign domestic sectors must face Chinese firms’ economies of scale and other competitive advantages. International producers therefore face Chinese competitors with increasing competitive advantages [13].
Together with the slowdown at home, China is also importing fewer goods, and the IMF previously estimated the spillover effects on international trade. For instance, a negative one percentage point shock to China’s domestic demand for final goods will result in a 0.1 to a 0.2 percentage point reduction in the average country’s export growth [14]. Germany’s exports to China, for instance, have fallen over 12.3% between January and June of this year, one cited reason being “China’s weak domestic economy, and “increasing (Chinese) focus on domestic value chains.” At the same time, German imports from China have risen by 8.9% during the same period. The trade deficit now amounts to €55 billion [15],meaning that export-exposed sectors in European countries are vulnerable to Beijing’s decisions. Commodity exporters selling to China may also face downturns as China purchases less and prices cool down [14]. At the same time, Chinese exports grow, and as countries around the world face more competition with China, the Chinese domestic imbalance redistributes economic pressure internationally, lowering prices of consumer goods abroad such as EVs, solar panels, and electronics, thus benefitting foreign consumers [13].
Proposed reforms
The IMF’s general recommendation to combat the slowdown is to stimulate consumption. First, by handling unfinished housing and stabilising the property market, and decreasing the economy’s dependence on it, more resources can be spent on improving welfare. Healthcare and pension reforms are examples of safety nets leaving consumers more likely to spend more rather than save more. Reforming the Hukou system, China’s household registration, could also stimulate spending over time as the place where citizens are registered heavily affects their access to public services. Moving to a wealthier region doesn’t automatically give access to better benefits, and welfare provisions are often locally funded. Accessing them may require long term contracts, skilled talent schemes, or family investments. Research shows that households without local Hukou access save about 6.8 percentage points more of their disposable income [16]. Reforms to the Hukou system are included in the current five-year plan, from 2026 to 2030.
Conclusion
While domestic expenditure remains low, Chinese production capabilities remain incredibly strong. Beijing can ease monetary policy or incentivise growth by cheaper mortgages, but they cannot make consumers spend unless they want to. With a slowdown in the economy and an uncertain future, people all over China await reforms incentivising them to spend more [17]. The question is how long that will take, and how severe the slowdown in China will become first. Many foreign economies have come to rely heavily on the stability and continued growth in China, by adjustments to their market share, access to consumer goods, and the mutual benefits of trade, showing just how interdependent the world economy has become. How Beijing will treat this slowdown will show whether China can rebalance away from its property-reliant economy, towards household consumption, and what effects it will have on the international economy while that adjustment remains on course.
Edited by Adrian Kai Fraile Itagaki.
References
[Cover image] Chen, D. (2022) Former Evergrande Group Real Estate in Guiyuan Road, Shenzhen [photograph]. Wikimedia Commons, 22 December. Available at: https://commons.wikimedia.org/wiki/File:FORMER_EVERGRANDE_GROUP_REAL_ESTATE_IN_GUIYUAN_ROAD,_SHENZHEN_(53).jpg (Accessed: 16 September 2026). CC BY-SA 4.0.
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