China's economy reported a 5% growth in GDP last year, meeting official government targets. This expansion was heavily fueled by a record-breaking trade surplus of $1.19 trillion, an increase of 20%, as exports surged to global markets.
However, this headline figure conceals significant underlying weaknesses. A severe downturn in the nation's vast property sector and persistently weak consumer demand are creating deflationary pressures and raising concerns about the sustainability of its current economic model.
Key Takeaways
- China's GDP grew by 5% in 2025, driven by a record $1.19 trillion trade surplus.
- The domestic economy is struggling, with a major real estate crisis and weak consumer spending.
- Property investment plummeted by 17.2%, and fixed-asset investment saw its first annual drop in nearly three decades.
- Experts warn that relying on exports is unsustainable and risks increasing global trade tensions.
An Economy of Contradictions
On the surface, China's economic performance appears robust. Exports climbed 5.5% and were responsible for a third of all economic growth in 2025, a level not seen since 1997. Shipments of goods to the European Union, Africa, and Latin America bolstered these figures, showcasing the country's manufacturing power.
In stark contrast, imports remained almost flat, a clear indicator of sluggish demand at home. This internal weakness is reflected in other key data points. Retail sales growth slowed dramatically toward the end of the year, rising just 0.9% in December compared to 6.4% in May.
Even the pace of overall growth showed signs of deceleration, with GDP expanding 4.5% in the fourth quarter, down from 4.8% in the third quarter.
The Property Market's Long Shadow
At the heart of China's domestic troubles is the ongoing collapse of its real estate market. The sector, which once accounted for roughly a quarter of the country's GDP, is in a state of free-fall. Last year, investment in property development dropped by a staggering 17.2%.
This decline had a profound impact on broader investment. Fixed-asset investment recorded its first annual decrease in data going back nearly 30 years. The situation was particularly dire in December, when it collapsed by 15%.
A Glut of Empty Homes
An estimated 80 million homes across China remain unsold or vacant, a legacy of a construction bubble that has now burst. This massive oversupply continues to suppress prices, sales, and new construction projects.
For millions of Chinese households, real estate is the primary store of wealth. The crisis has had a devastating effect on their financial security. According to Jeremy Mark, a scholar at the Atlantic Council and a former IMF official, an estimated 85% of the price gains in real estate since 2021 have been wiped out.
"This marks the virtual abandonment of an industry that once accounted for about one-quarter of China’s gross domestic product and roughly 15% of the nonfarm workforce," Mark wrote recently.
A Cycle of Deflation and Fear
The shockwaves from the property crisis are spreading throughout the economy. With their life savings diminished, consumers are hoarding cash instead of spending it. This has forced businesses to cut prices, wages, and staff to stay competitive, creating a dangerous deflationary cycle.
What is Deflation?
Deflation is a persistent fall in the general price level of goods and services. When consumers expect prices to keep dropping, they delay purchases, which further reduces demand and forces businesses to cut prices even more. This can lead to economic stagnation and rising unemployment.
This feedback loop is now visible in official figures. Consumer prices have remained flat, while producer prices—the prices factories charge wholesalers—have been in negative territory. An economy-wide price gauge indicates that China has been experiencing deflation for three consecutive years, the longest period since its transition to a market economy began in the late 1970s.
An Unsustainable Path Forward
While Beijing's focus on high-tech manufacturing and exports has provided a short-term boost, many economists argue this model is becoming unsustainable. The flood of Chinese goods into global markets is already prompting a backlash.
The European Union, India, and Indonesia have already imposed targeted tariffs on certain Chinese products. The concern is that as China produces more than its own population can consume, it will increasingly rely on selling its surplus abroad, potentially sparking wider trade conflicts.
International bodies are taking notice. Kristalina Georgieva, Managing Director of the International Monetary Fund, issued a warning in December.
"As the second-largest economy in the world, China is simply too big to generate much growth from exports, and continuing to depend on export-led growth risks furthering global trade tensions," Georgieva stated.
Looking ahead, the challenges are significant. Fitch Ratings has projected that China's GDP growth will slow to 4.1% this year, citing constrained domestic demand and investment headwinds. Rebuilding consumer confidence and finding a new engine for growth to replace the shattered property sector will be a daunting task for the country's leadership.
