China’s economy is growing, but it’s stuck in a deflationary trap

For China, hitting its annual growth target is as much a political victory as an economic one. It is proof that Beijing can weather slowing global demand, a slumping housing sector, and mounting pressure from Washington.

Against that backdrop, China announced last week that its economy grew 5% in 2025, neatly hitting the government’s official GDP goal. But for ordinary Chinese households, the picture looks far less reassuring. Jobs are scarcer, property values are falling, and spending is scarce.

China’s economy is being shaped by competition with the US. In the US, GDP is descriptive. It reflects what consumers and companies actually do. In China, GDP is directive. China’s GDP target is a political commitment, and hitting it signals state capacity and stability. Unlike in market economies, Beijing can mobilize spending and investment to ensure the target is reached, even if that growth doesn’t come from a thriving population. “China is still a planned economy,” says Dan Wang, an expert on China’s economy at Eurasia Group. “The government sets the target first. Hitting it is essential for confidence.”

At first glance, that looks like a win for the Chinese Communist Party. But China’s economy today is being shaped less by thriving citizens than by its rivalry with Washington. After the Biden administration tightened technology controls on semiconductor chips, Beijing doubled down on exports, automation, and self-sufficiency, – moves that left it better prepared for Trump’s tariffs. As Dr. Nicholas Lardy, senior fellow at the Peterson Institute for International Economics, notes, the tariffs “did not have the effect they were intended to have,” because they only pushed China to new markets. Much of that resilience comes from China’s private sector, Lardy says, noting that the vast majority of exports are produced by private firms or foreign-invested companies that can quickly pivot to new markets when conditions change.

But that flexibility comes with a conundrum: cut prices to break into non-US markets, or transship goods to the US through third-party countries. Either option squeezes margins – and helps explain why over 25% of listed Chinese companies are now unprofitable. Paired with a lack of domestic consumption, this is putting China in a “deflationary trap” of its own making – as our parent company, Eurasia Group, explained in its 2026 Top Risks Report.

The world is buying what China isn’t. Household consumption now makes up less than 40% of China’s economic output, far below global norms of roughly 54%. Instead, growth is being driven by manufacturing and exports.

“There’s a lot of misinterpretation about China’s exports ‘booming,’” Lardy says. “Exports grew about 5.5%. That’s not a boom.” What made the country’s trade surplus explode to a record $1.2 trllion in 2025, he explains, was something else: imports barely grew at all because of a lack of domestic demand. Meanwhile, China made up for the exports it lost to the US in emerging markets in Central Asia, Latin America, and Africa.

Housing sits at the center of the consumer spending problem.Property isn’t just an asset in China – it is the foundation of family, a requirement for marriage in many places. But since prices peaked in 2021, many urban households have seen values fall by roughly 30%, discouraging spending.

Beijing isn’t trying to reverse that. Instead, it's doubling down on a future economy based on high-tech manufacturing, AI, and automation. Strategically, that approach is working. The shift has strengthened China’s position during a war with the US over trade, tech, and critical minerals dominance. But at home, it’s been costly: these new industries produce far less jobs. Meanwhile, China is producing a record 12.2 million university graduates a year, many of whom are ending up as delivery drivers, unemployed, or in other low-skilled jobs. “It’s a huge waste of talent,” Wang says.

Why continue on this path? The ultimate driver of China’s trade-off between jobs and for automation is competition with the US. Export strength, technological independence, and industrial dominance are seen by the CCP as matters of national security, even if they come at the expense of job creation and consumer welfare.

“Housing will keep falling for several more years while growth shifts to technology,” predicts Wang. “The adjustment period won’t be comfortable for people in China.”

The headline numbers may say China is growing, but the lived reality tells a different story: an economy sliding into lower growth, where with resilience abroad masks deflationary pressure at home.