1. China’s growing economic imbalances
China stands at the crossroads of global geopolitics and economic transformation. After decades of rapid expansion, the country now faces mounting internal challenges: aging demographics, a bloated real estate sector, industrial overcapacity, deflationary pressures, and fiscal degradation.
According to TAC ECONOMICS, these structural weaknesses have led to a WatchList Indication on Economic Activity for 2026–2028 — signaling an increased risk of a major cyclical shock around 2027.
2. Geopolitics and Trade: Tensions heating up
The ongoing US-China strategic rivalry continues to dominate the global economic landscape. Under President Donald Trump’s second administration, trade tensions flared again in early 2025, with tariffs climbing above 125% before easing slightly.
While some Chinese exporters managed to adapt — notably through trade diversion and increased market share in Southeast Asia and Europe — exports to the US fell 23% year-on-year between April and July 2025.
Even if a new trade deal emerges, tariffs are unlikely to return to pre-2020 levels, meaning that China’s export-led model faces lasting constraints. The growing technological rift — with US restrictions on AI chips and semiconductor equipment and China’s retaliatory curbs on rare earth exports — further compounds uncertainty.
3. Economic growth under pressure
Despite these external shocks, China’s GDP growth held at +5.4% in Q1 and +5.2% in Q2 2025, thanks to fiscal and monetary support. The People’s Bank of China implemented modest easing, cutting reserve requirements and interest rates, while fiscal spending pushed the deficit to -8.6% of GDP.
However, TAC ECONOMICS highlights that producer price deflation and weak manufacturing activity reveal underlying fragility. With industrial overcapacity and sluggish domestic demand, structural rebalancing toward consumption remains elusive.
Their models project a decline in trend growth to around 4.0–4.5%, with GDP expected to average +4.4% in H2 2025 and +3.9% in 2026.
4. Rising financial risks and the debt overhang
China’s total credit financing — spanning private and government sectors — reached 330% of GDP by mid-2025, up 50 percentage points since 2022. This unprecedented leverage amplifies the risk of financial instability.
TAC ECONOMICS’ Economic & Financial Risk Rating has deteriorated sharply, rising nearly 10 points in just five quarters, reflecting mounting strain in both cyclical momentum and the banking system.
Moreover, TAC’s AI-driven early warning models have triggered a WatchList Indication, pointing to a high probability of a systemic shock by 2027. Such a downturn could bring:
- A wave of corporate and local government defaults
- A sharp contraction in domestic demand
- Potential currency weakening
5. Outlook: Managing the coming turbulence
China’s policymakers face a delicate balancing act — stimulating domestic consumption, containing debt, and navigating geopolitical volatility. If managed prudently, the turbulence may remain controlled. If not, 2027 could bring the country’s most severe cyclical correction since the 2008 global financial crisis.
As TAC ECONOMICS concludes, Beijing’s ability to “master this cooking dish” will determine whether China serves up a carefully managed slowdown — or a burnt recipe of financial and political instability.
.
Latest posts
