China’s Economy Stumbles Into 2026 as Domestic Demand Falters
China’s economy entered the new year on shaky footing, adding pressure on policymakers to step up support as weakness at home increasingly overshadows solid export performance.
Key Takeaways
- China’s economy slowed sharply in January, with services activity contracting and domestic demand staying weak.
- Exports remain resilient, but the recovery is increasingly unbalanced and losing momentum.
- The data strengthens expectations that the People’s Bank of China will cut reserve requirements in the first quarter.
Recent activity data points to a broad-based slowdown in January, according to Bloomberg. Official purchasing managers’ indexes showed an unexpected loss of momentum, with services and construction slipping into contraction at the fastest pace since late 2022. While overseas demand has remained a bright spot, it is no longer enough to counterbalance soft consumption and fragile investment conditions domestically.
The sharp contraction in non-manufacturing activity highlights growing stress in areas closely tied to household spending and property-related services. Economists warn that without a rebound in consumer confidence, the drag from services could deepen as the year progresses.
Exports hold up, but recovery remains uneven
A separate private survey released at the start of the week painted a more optimistic picture for export-focused manufacturers, underlining the economy’s growing imbalance. Firms exposed to global demand continue to benefit from overseas orders, even as domestic-oriented sectors struggle to regain momentum.
Economic momentum has been weakening for months, and policymakers appear reluctant to roll out aggressive stimulus. Concerns around local government debt remain a key constraint, while expectations are rising that China may lower its national growth target for the first time in four years. President Xi Jinping has already signaled greater acceptance of slower and uneven growth across regions.
Policy focus shifts toward liquidity support
The latest data has strengthened the case for near-term policy easing, particularly through a reduction in banks’ reserve requirements. Most economists now expect the People’s Bank of China to move in the first quarter, freeing up cash for lending as consumption stays weak and export growth is expected to slow after a record trade surplus in 2025.
Efforts to jumpstart spending, including 62.5 billion yuan ($9 billion) in subsidies, have delivered limited results so far. The muted response suggests deeper structural issues, with households remaining cautious despite targeted support measures.
Manufacturing split highlights structural challenges
One of the clearest signals from the data is the widening gap within the factory sector. High-tech manufacturing stayed in expansion at 52, while the broader manufacturing landscape continues to be weighed down by a persistent investment slump.
“The key for China is to boost domestic demand. A revival of the housing market is badly needed,” said Raymond Yeung, chief economist for Greater China at ANZ.
There was a small silver lining in pricing indicators, with both input and output prices edging higher on rising commodity costs. While this offers some relief from deflationary pressure, economists caution that stronger domestic demand will be crucial to sustain any improvement in the months ahead.
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