Why is China's economy slowing down? Structural recession seen from real estate, deflation, and population decline

[Summary]

China's economy is still growing at a higher rate than Japan or Europe.

According to the National Bureau of Statistics of China, the real GDP growth rate in 2025 was 5.0%. If you look at the numbers alone, Japan is not a low-growth country.

Still, the reason investors around the world are wary of China's economy is not just because of the business cycle, but because the growth model itself is beginning to change.

The point is not just the real estate recession.

• Limitations of the real estate dependency model
• Deflation pressure and slump in consumption
• Youth employment and middle class anxiety
• EV, solar and battery oversupply
• Trade friction with the US and Europe *Population decline and aging
• National advancement and withdrawal and risk avoidance for private companies *Geopolitical discount due to Russia's approach

These things are happening at the same time.

In other words, the question of the Chinese economy is not whether it will suddenly collapse.

Rather, what is more troubling is the possibility that low growth, low prices, oversupply, and an exodus of foreign capital will continue for a long time.

Here, we will organize the slowdown in the growth rate of the Chinese economy as a "compound recession."

First, the conclusion

The slowdown in China's economy is a little different from a normal economic recession.

In a normal economic recession, if demand is boosted through monetary easing and fiscal stimulus, the economy will recover to some extent.

However, in China today, multiple factors such as real estate, population, employment, private investment, and external demand are weighing on the country at the same time.

At its core is the following composition:

Key point
↓
Key point
↓
Key point
↓
Key point
↓
Key point

This is the difficulty of the Chinese economy.

It's still growing.

However, it is difficult to return to the previous model of boosting sales through real estate and infrastructure investment.

Investors are looking at the quality of growth rather than the growth rate itself.

Why is even 5% growth considered worrying?

China's real GDP growth rate in 2025 was 5.0%.

If you think about it normally, it's not a bad number.

However, the IMF expects China's growth rate to slow to 4.5% in 2026 due to the impact of tariffs and trade policy uncertainty.

What's important here is not the small numbers like 5% or 4.5%.

China's economy is finding it difficult to return to its previous high growth rate.

In the past, China grew through three factors:

However, now all three are changing at the same time.

Real estate continued to adjust, exports encountered friction with the United States and Europe, and the population entered a period of decline.

Therefore, we cannot rest assured just by looking at the growth rate on the surface.

Here's a rough comparison:

Why is the real estate recession so severe?

When looking at the Chinese economy, the first thing that cannot be overlooked is real estate.

According to the National Bureau of Statistics of China, real estate development investment in 2025 decreased by 17.2% compared to the previous year. Housing investment also fell by 16.3%.

This is not just a slump in some industries.

In China, real estate has been deeply connected to households, local governments, finance, construction, and materials industries.

Particularly large is the land finance of local governments.

Local governments have used the proceeds from the sale of land use rights to fund infrastructure investment and urban development.

In other words, the structure was such that as real estate prices rose, development increased, and land was sold, local finances benefited.

When this cycle rotates in reverse, it becomes quite heavy.

Key point
↓
Key point
↓
Key point
↓
Key point
↓
Key point

This is the fear of China's real estate recession.

This is not just a problem for real estate companies, but also for local finances and household psychology.

Furthermore, local governments also have the issue of LGFV (Local Financing Platform).

LGFV is a funding source that local governments have used to promote infrastructure investment. In China's 2025 Article IV, the IMF talks about restructuring unsustainable LGFV debt and strengthening the fiscal framework to prevent future debt expansion.

In other words, the problem is not just that land income has decreased.

The burden of repaying debts accumulated from past infrastructure investments is also weighing down local finances.

If you don't look at this, you will misread the depth of the real estate recession.

And the problem doesn't stop with real estate.

When household budgets and local finances cool down due to real estate, the next thing that takes effect is consumption and prices.

Balance sheet composition close to recession

China's real estate recession is sometimes compared to Japan's Heisei recession.

Of course, the systems and political systems are different.

However, there are some similarities.

This means that households and businesses will lean toward ``reducing debt'' and ``protecting cash'' rather than ``borrowing more.''

This is close to a balance sheet recession.

As housing prices fall and concerns about the future increase, households tend to prioritize saving over consumption.

When demand is weak, companies also prioritize cost reduction over capital investment.

Even with monetary easing, the number of people who want to borrow money does not increase.

This is where it gets tricky.

It's not as simple as lowering interest rates and bringing things back all at once.

Deflation pressure and slump in consumption

Another problem with the Chinese economy is weak prices.

The IMF's China report states that the PPI has been declining for a long time, and the CPI is also lacking in strength.

However, it is better to look at the question, ``Is China really deflationary?'' a little differently.

Even if the statistical CPI is slightly positive, if the PPI continues to decline, real estate prices are weak, and wage expectations are sluggish, households and businesses will feel quite depressed.

In other words, deflationary pressure in China cannot be seen simply by looking at whether the CPI is negative.

At first glance, the fact that prices do not rise looks good for consumers.

However, the economy as a whole is a little different.

Companies cannot raise prices.

Inventory increases.

Profit rate decreases.

Wages will be less likely to grow.

If this trend continues, consumers will close their wallets even more.

In China, the term "consumption downgrade" is also used. Rather than buying expensive things, we choose things that are cheap, necessary, and unlikely to fail.

The problem is that consumers haven't just gotten stingier.

Behind this is the anxiety of the middle class.

• Educational expenses *Medical expenses
• Mortgage loan
• Retirement funds
• Employment insecurity

Considering these factors, households cannot easily increase consumption.

It's not just ``I don't spend because the economy is bad,'' but also ``I save because I'm worried about the future.''

Anxiety about youth employment

Youth employment in China is also an issue that the market is concerned about.

In 2023, publication of the youth unemployment rate was suspended and then resumed with a new statistical method.

You shouldn't read this with excitement.

A review of statistical methods itself can be undertaken in any country.

However, it is certain that youth employment is a very sensitive topic both politically and economically.

If young people are worried about finding employment, consumption will be less likely to grow.

Buy a house, buy a car, get married, have children.

This long-term consumption behavior is postponed.

The real estate recession and youth employment may seem like separate issues, but they are actually connected.

Will "Shinzo-sama" become the next growth engine?

The Chinese government is strongly promoting the sophistication of the manufacturing industry as a growth sector that will replace real estate.

“Shinzo-sama” is often mentioned.

It's definitely strong here.

Chinese companies are among the world's top in mass production capacity, cost competitiveness, and supply chain depth.

However, just because it is strong, other problems have arisen.

There is an oversupply.

Price competition for EVs is intense, and an increasing number of companies are finding it difficult to maintain profits even if sales volume increases.

Even with solar power and batteries, if the supply capacity becomes too large, prices will fall.

In other words,

salesKey point
Key point

It's easy to fall into the trap of selling too much at a low profit.

This is similar to the Chinese economy as a whole.

Production capacity is strong.

However, domestic demand is weak and there are limits to external demand.

Therefore, excess supply goes out into the world, leading to trade friction.

Moreover, this oversupply does not end only within China.

Around the world, the question of how to perceive Chinese products is now becoming a political issue.

Will the world be able to fully absorb Chinese products?

If China tries to compensate for the lack of domestic demand with exports, friction with the United States and Europe will increase.

The EU has imposed additional tariffs on Chinese-made battery EVs following an anti-subsidy investigation. The European Commission announced that it will impose fixed countervailing duties on Chinese BEVs in October 2024, with tax rates set on a company-by-company basis.

This is not simply a story about Chinese products being bad.

The problem is the receiver of the world.

If China's supply capacity is too large, companies from other countries will be drawn into price competition.

As a result, the United States and Europe will be more likely to tighten tariffs and regulations on the grounds of protecting domestic industries and national security.

From China's perspective, they want to make money by exporting.

From the perspective of the US and Europe, they do not want to be forced into oversupply.

This discrepancy will continue to cause friction.

Population decline lowers potential growth rate

Population is difficult to change with short-term economic measures.

According to the National Bureau of Statistics of China's 2025 Statistical Bulletin, the natural increase rate is -2.41 per mille.

Population decline and aging will reduce long-term potential growth rates.

There will be fewer people working.

Housing demand will weaken.

Social security burden will become heavier.

Stronger tendency to save.

This effect does not occur all at once.

However, it gradually works.

If we look at China's economic problems simply by saying that the economy is bad this year, we will miss this part.

The essence is not a short-term recession, but rather a decline in the potential growth rate itself.

National advancement and democratic retreat and decline in private sector vitality

Another thing that investors are looking at is the relationship between politics and private companies.

In China, policy objectives such as national security, social control, and common wealth are strongly considered.

In this trend, regulations on Alibaba, Tencent, the education industry, etc. were tightened.

Again, it would be sloppy to look at this simply as ``the government is crushing private companies.''

From the Chinese government's perspective, there are aspects of monopoly, financial risks, rising educational costs, data management, and security concerns.

However, from the perspective of investors and private companies, it becomes difficult to predict rule changes.

As a result, companies are less likely to take risks.

Entrepreneurs refrain from making large investments.

Foreign capital lowers the valuation multiple of Chinese stocks.

This makes it easier for this flow to occur.

National advancement and withdrawal is a movement in which the state-owned sector and the government's leadership become stronger, and the degree of freedom in the private sector decreases.

Although growth rate alone is not visible, it has a significant effect on stock market valuation.

Approaching Russia and sanctions risks

Geopolitics cannot be ignored when looking at the Chinese economy.

Since Russia's invasion of Ukraine, economic relations between China and Russia have become closer than ever.

• Russian energy import
• RMB payment
• BRICS and non-dollar bloc concept
• Regulatory issues surrounding machinery and dual-use technology

China's aim is to reduce its dependence on the United States and strengthen its non-Western economic zone.

On the other hand, from a Western perspective, China appears to be supporting the Russian economy.

What is important here is partial sanctions on Chinese companies and Chinese financial institutions rather than full sanctions on the entire Chinese economy.

Companies that are particularly likely to be wary of include companies exporting to Russia, dual-use technology, semiconductors, AI-related businesses, and state-owned banks.

Investors hate unpredictable risks.

Taiwan emergency, US-China conflict, semiconductor regulations, financial sanctions, supply chain disruption.

When these risks combine, there is a risk premium for investing in China.

In other words, China's economy is susceptible not only to a real estate recession but also to a geopolitical discount.

Even if we advocate eliminating the dollar, dependence on the dollar zone remains

What is easy to overlook here is the dependence on the dollar system.

China is moving forward with renminbi settlement and the idea of ​​a non-dollar zone.

However, in actual international finance, the US dollar still has an overwhelming presence. BIS concludes that the US dollar is dominant as a funding and investment currency in international finance, and its status as a trade invoice and reserve currency also supports its international use.

Analysis by the US Federal Reserve also shows that the US dollar will have a very high share in trade finance in 2024.

In other words, even if China advocates ``de-dollarization'', a complete decoupling would also bring great pain to China.

This is where geopolitical risk becomes difficult.

Even as relations with the United States and Europe deteriorate, China is not completely free from the dollar zone, semiconductor supply chains, and foreign capital markets.

Therefore, investors look not only at China's growth rate, but also at the "risk cost of investing in China."

Impact on Japan

The slowdown in China's economy also affects Japan.

There are three points to look at.

1. China's deflationary exports

When oversupply increases in China, cheap products will be shipped overseas.

For Japanese companies, there is also the benefit of lower component prices.

On the other hand, price competition can become severe for finished products and industrial materials.

Deflation in China is not just a problem within China.

It may be exported to the world.

2. Review of dependence on China

Companies can more easily decentralize their supply chains.

This is the so-called China Plus One.

Possible destinations include ASEAN, India, and Mexico.

For Japanese companies, not only the slowing growth of the Chinese market but also the cost of reorganizing their production systems will be an issue.

3. Changes in inbound

Chinese tourists are no longer just buying big-ticket items like they used to.

The nature of consumption is changing, including thrift-mindedness, experiential consumption, individual travel, and local tourism.

When looking at Japanese retail, department stores, and tourism, we want to look at not only the number of Chinese customers, but also the unit price and consumption content.

Will China collapse?

It is better to make a clear distinction here.

China's economy will not collapse tomorrow.

It has huge domestic demand, a strong manufacturing industry, government policy space, foreign exchange reserves, and a technological base.

It is easy to say that ``China has collapsed,'' but the reality is a much more subtle and long story.

Rather, the problem is not sudden death but chronic illness.

Low growth, low prices, oversupply, declining private sector vitality, and geopolitical risks will continue for a long time.

For investors, this scenario is rather troubling.

China's economy will not suddenly disappear.

However, it is no longer the driver of the global economy that it once was.

I think this temperature is the closest.

Checkpoints that investors should look at

When looking at the Chinese economy, GDP growth rate alone is not enough.

I would like to see the following indicators side by side.

• Real estate development investment
• Housing sales area/sales amount *CPI and PPI
• Youth unemployment rate
• Retail sales
• Private fixed asset investment
• Price competition in EVs, batteries, and solar power
• Tariffs and export regulations in the US and Europe
• Demographics
• Foreign investment attitude towards China

Of particular importance are real estate, prices, employment, and export friction.

Unless these four factors improve at the same time, the outlook for China's economy will not become brighter.

Summary

The slowdown in China's economic growth rate is not just an economic downturn.

The real estate dependency model has reached its limits, and deflationary pressures, population decline, job insecurity, oversupply, and geopolitical risks are all converging.

Therefore, what we should be looking at is not "Will China collapse?"

Rather,

• Will low growth persist?
• To what extent will the real estate recession dampen household sentiment?
• Will oversupply in the manufacturing industry increase global friction?
• Will private companies and foreign capital be able to take risks again?

It is.

China is still huge.

However, it is difficult to return to the previous growth model that relies on real estate and exports.

I think that the Chinese economy is now at a stage where we will focus on the quality and sustainability of growth rather than its high growth rate.

Illustration

The vicious cycle of the Chinese economy

Friction between China and the world

Source/Reference materials

• China National Bureau of Statistics "2025 GDP Flash Report"
• China National Bureau of Statistics “2025 Real Estate Development Investment”
• National Bureau of Statistics of China “2025 National Economic and Social Development Statistics Bulletin”
• IMF “China 2025 Article IV Consultation” February 2026
• IMF “People’s Republic of China: 2025 Article IV Consultation Staff Report”
• European Commission “BEV from China anti-subsidy duties”
• AP News “China starts publishing youth jobless data again”
• Times Higher Education “China pauses youth unemployment updates”
• Federal Reserve “Internationalization of the Chinese renminbi: progress and outlook” August 2024
• BIS “US dollar funding: an international perspective”