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Has China’s Economy Really Turned the Corner?  Looking Behind the Latest Economic Numbers

Data from the first few months of this year suggested that the Chinese economy might at long last be starting to pull out of its prolonged post-Covid funk.  These green shoots include the producer price index (PPI) moving back into positive territory, a strong rebound in corporate profits, and possible bottoming out of the years-long property slump.  However, closer scrutiny of those numbers, along with more recent ones, points to continued strong headwinds facing the world’s second largest economy.

The PPI shot up 2.8% in April and 3.9% in May over the same time last year, after ticking up 0.5% in March over the same time last year.  These increases reversed a 41-month streak of negative PPI readings.  The consumer price index (CPI) also rose, albeit much more modestly, going up by 1.2% in April and May over the same times last year.   

The recent jump in the PPI coincided with the Iran War oil supply shock.  While China was certainly better prepared to weather this interruption than its northeast Asian neighbors, analysis fromthe Center for Strategic and International Studies China Power Project, indicates that the conflict spilled over into broader Chinese manufacturing supply chains.  These became increasingly unstable in the face of soaring energy and commodity prices.  Although the spike in raw material prices benefited upstream industries, like oil and mining, downstream energy intensive sectors, such as steel, automobiles, and household appliances, have been especially hard hit (more on that in the discussion of corporate profits just below).  

The PPI spike stemming from the Iran War’s shutoff of Persian Gulf oil, which supplies 38-40% of Chinese domestic oil consumption, has, for now at least, headed off the threat of deflation.  Its role in doing that has almost certainly outweighed the government’s attempt to curb competitive downward price spirals among manufacturers caused by excess capacity, or “involution” (内卷 [nèi juàn]).  The impact of this effort has been decidedly mixed and modest.  As Alicia Garcia-Herrero and Jianwei Xu of the Brussels-based think tank Bruegel argue, anti-involution policies have not addressed a root cause of this problem, the misallocation of resources to prop up uncompetitive “zombie” firms.

Thus, one delicious irony of the war of choice Trump initiated with Israel against Iran is that he has done considerably more than Xi to reduce China’s chances of falling into a deflationary spiral—as the President is fond of saying, “I alone can fix it,” and this may be a rare case where he is actually right.  For the time being, Trump has unwittingly made the Chinese PPI great again.  

Industrial profits are another economic indicator that spiked upward in 2026.  This rise contrasts sharply with theprevious four years, when profits flatlined in 2025 after declining for three years in a row.  They jumped 15.5% during the first quarter of the year before surging 24.7% in April, boosting the growth rate for the first four months of 2026 to 18.2%.  But Bloomberg notes that the recovery in profits is “K-Shaped,” extending mainly to sectors involved in the global AI/high-tech boom and upstream industries benefiting from higher oil prices noted a little earlier.  Consumer facing finished manufactured goods firms, on the other hand, have been taking it on the chin.  For example, top Chinese EV producer, BYD, saw its first quarter profits fall 55.4%, the steepest dive since 2020, in spite of record overseas sales as a share of its total vehicle sales.  

“Profit divergence is pronounced,” notes Tianchen Xu, at the Economist Intelligence Unit, adding that growth in earnings is “mainly driven by upstream price increases and AI, while downstream sectors still face significant profit pressure due to rising upstream costs and intensified involution.”  

Unlike industrial profits, factory output sharply decelerated in March and April,[10] rising by 4.1% from a year earlier in April, down from the 5.7% increase in March (the growth in February was 6.3%).  It then ticked up slightly in May, increasing 4.5% from a year earlier.  The April figure came in well below the Reuters poll forecasting a 5.9%, marking the slowest growth since 2023.  The official Purchasing Managers’ Index (PMI) also fell in April, dropping from 50.3 to 50.0—anything below 50 denotes contraction—after going up following January. 

      

The unofficial yardstick for private manufacturing activity, the “RatingDog” PMI, compiled by S&P Global that focuses heavily on export-oriented small and medium-sized firms, has undergone a similar roller coaster ride over thepast few months.  The “RatingDog” fell to 51.8 in May, down from 52.2 in April, but above the March figure of 50.8

The growth of retail sales, a key gauge of consumer demand, continued to lag behind the growth in manufacturing output, nearlyflatlining in April, rising by just 0.2% after increasing 1.7% in March and 2.8% in February.  Retail sales then slid 0.6% in May, the first monthly fall since December 2022.  The May decline occurred despite China’s Labor Day holiday, when increased tourism typically boosts consumer purchases.  Although the number of Chinese traveling domestically during the holiday rose this year, per capitaspending lagged behind that of the previous year.

Reviewing the May economic numbers and widening gap between the growth rates of industrial output vs. retail sales, Peking University professor of finance, Michael Pettis, observed on X, “The economy continues to be structurally locked into increasing production at the expense of consumption, even though China suffers from many years of growing excess capacity.”

The anemic consumer spending data, combined with the wide spread between China’s March-May PPI vs. CPI increases, underscores that the resurgence in inflation falls into the “cost-push” category.  Factory gate prices rose because of higher input costs associated with the Iran War supply shock, as opposed to rising domestic demand for goods, or “demand-pull” inflation.  The latest data on prices does not, then, herald any movement toward the long-desired rebalancing of China’s economy toward greater household consumption.   

Breaking down the recent retail sales data reveals a strong contrast between demand for staple items, like food, alcohol, and tobacco, as well as cosmetics and personal computers, I-phones, and the like vs. larger ticket durable goods.  While purchases of the former held up, sales of the latter plunged in April, with sales of household appliances and furniture declining by 15.5% and 10.4%, respectively, year-on-year.  It is worth noting that these goods were major beneficiaries of recent provincial and local government retail trade-in programs aimed at boosting consumer spending.  These subsidies “front-loaded” the demand for them in 2025 and early 2026, with the latest fall-off in sales underscoring their short-lived impact in raising consumption.  Sales of automobiles have fared even worse, slumping by 21.6% in April and 22.3% in May from a year earlier, leading to a drop of 19.7% for the first five months of 2026.  

Reviewing these trends, Yuhan Zhang, principal economist at the Conference Board’s China Center, notes that the “still weak” household demand points to the “two-speed” nature of consumption in China.  Households are steadily spending on necessities, small lifestyle products, and tech upgrades, while eschewing big-ticket, credit driven purchases tied to housing and income growth.  

In a desperate bid to boost consumption, local governments are adopting longerspring break holidays for schools in the expectation that the extra time off will lead to more family outings and raise retail purchases.  As Pettis declared in a May 30^th Blue Sky post, this idea is “especially silly,” ignoring the underlying structural factors constraining household spending.    

One of these factors that is less emphasized in discussions of structural impediments to raising consumption in China is its high level of socio-economic inequality.  The most common measure of inequality is the Gini Index coefficient, under which a score of 0.00 denotes perfect equality, while a score of 0.40 is the threshold number for a highly unequal society.  According to China National Bureau of Statistics (NBS) calculations, the Chinese Gini Coefficient has fluctuated between 0.40 and 0.50 since 1999.  However, a May 2022 Center for Strategicand International Studies (CSIS) deep dive into socio-economic inequality in China argues that the NBS Gini calculations are too low.  Other estimates, utilizing different numbers and methodology, such as the highly regarded China Family Panel Studies from Peking University, point to higher and rising levels of inequality up to 2019, the last year for which such data exists.

A more recent estimate of China’s Gini coefficient by Professor Li Shi, dean of the Institute for Common Prosperity and Development at Zhejiang University, measures accumulated wealth, such as real estate, property, financial assets and the like.  Using this data, Li found that the Chinese Gini coefficient has surged from 0.45 in 1995 to 0.70 in2023.

According to a 2018 IMF working paper, China’s elevated socio-economic inequality is one of the drivers of its high savings rate, which is the obverse of having high levels of household consumption.  The paper notes that with their large fortunes, wealthy Chinese devote a lower share of their income to buying goods and services compared to saving and investing it.  Among lower-income households, the CSIS inequality deep dive stresses the continued wide income gap between rural vs. urban China, as well as the changing nature of work among city-dwellers.  Regarding the latter, it stresses the steep rise in the number of urban Chinese doing “flexible” employment in the informal economy.

Due to the precarious and uncertain nature of their income stream, workers in the burgeoning urban informal sector, who now number around 300 million,[27] are incentivized to limit spending and save as much money as possible.  Moreover, because they lack formal labor contracts, informal sector workers are not eligible for the relatively generous pensions and health care benefits provided by the Basic Pension Insurance for Urban Employees and Urban Employee Basic Health Insurance programs.  That forces them to accumulate substantial “precautionary” savings to deal with health emergencies and old age.  This behavior dovetails with the findings of Dobson, Ramlogan-Dobson, and Stobl’s rigorous cross-national analysis of the informal sector’s impact on savings.  They found a strong positive relationship between the informal economy and savings when the former, as has been the case in China, expands rapidly to take in half or more of the labor force.

Thus, to really ramp up consumption, China has to go well beyond weak palliatives, such as offering short-lived trade-in schemes and other subsidies to get people to buy stuff.  It will need to find ways of transferring income to less affluent households and reducing their economic insecurity by strengthening social protection.  Doing this will both take time and be a very heavy lift.  

In addition to scaling back on purchases, Chinese households have been aggressively deleveraging.  In April alone, Yicai notes that the amount they owed to lenders fell by 786 billion RMB ($115.6 billion), the steepest decline since records began on such activity.  Wen Bin, chief economist at China Minsheng Bank, observes in Yicai that households still have work to do in repairing their balance sheets, making them reluctant to take on more debt, either for buying higher priced durable goods, like automobiles and appliances, or taking on mortgages.  The latest data on home loans suggests that people remain wary of borrowing to buy new apartments.  While this behavior will enable of households to purchase more goods and services down the road, it does not bode well for consumption now and into the immediate future.   

Aside from the rise in the PPI and rebound in corporate profits, housing prices have been cited as another early 2026 Chinese economy green shoot.  For example, Reuters calculated that new housing prices dipped just 0.1% in April, down from a 0.2% drop in March and marking the slowest decline in a year.  Two other encouraging data points reported in the South China Morning Post include prices for newly built residential properties per square meter across the top 100 Chinese cities and January-May sales by the top 100 developers.  The former edged up by 0.16% in May from April and 2.03% year-on-year, with the drop in the latter indicator easing for the third straight month in a row in May.  While the data on housing is typically “noisy,” these trends could be seen as signs that long-awaited bottoming out of the real estate slump may have finally arrived or might not be far off.   

This bottoming out of the housing crisis, however, is occurring in fits and starts.  The pace of year-on-year price declines actually accelerated from late 2025 up to now (see the above line chart).  Reuters also reported that in May, new home prices in 70 major Chinese cities slipped 0.2%, a slightly worse showing than April’s 0.1% fall. 

Moreover, the nascent recovery in residential real estate has been very uneven, driven almost entirely by top tier Chinese cities.  Calculations of April new home prices noted earlier from Reuters indicate that new home prices in such metropolises, particularly Shanghai and Shenzhen, rose 0.1% month-on-month, while prices in second- and third-tier cites fell by 0.1% and 0.3%, respectively.  It bears noting that despite their recent appreciation, prices in first-tier cities are still down from a year ago and way below their 2021 peak.  The situation for residents of lower tier cities, which are home to a much large number of Chinese and have huge numbers of unsold apartments, is even more dire.  In a 2022 IMF Working Paper, Kenneth Rogoff of Harvard University and Yang Yuanchen of the IMF, estimate that between now and 2035, real estate construction in such places will have to contract by roughly 30% to bring supply back into balance with demand and raise housing prices.  

Thus, for a large share of Chinese, the fallout from the post-2021 real estate meltdown will continue limiting their household wealth, 60-70% of which is typically tied up in property, and, by extension, their ability to consume goods and services.  The nationwide China Household Finance survey,[35] conducted every two years by the Southwestern University of Finance in Chengdu, found that the wealth of urban households had shrunk to $130,000 by the summer of 2025, down from $163,000 two years earlier.

Besides dampening household wealth and consumption, China’s real estate meltdown has dragged down fixed asset investment (FAI), which has been a major economic growth driver for its economy.  FAI fell by 3.8% in 2025 compared to 2024, the first yearly decline in this data point prior since 1989.  The 2025 drop in FAI was fueled by a 17.2% decline in property investment—excluding that category, FAI contracted by just 0.5%, mainly due to a 2.2% reduction in infrastructure investment. 

After modestly rising by 1.7% during the first quarter of 2026, FAI dropped sharply in April and May, causing it to decline by 1.6% in January-April and 4.1% in January-May compared to the previous year.  Once again, the main driver of this trend was property investment, which contracted 13.7% in January-April and 16.2% in January-May compared to the previous year.  However, the post-March FAI decrease wasalso fueled by falling infrastructure investment, while manufacturing FAI declined in May for the first time since December 2020.        

Given the large quantity of unsold flats and villas in China, a sharp fall in property FAI is a badly needed corrective for bringing the supply of housing back in line with the demand for it.  But the slump in property FAI and residential and non-residential and consequent rductio construction activity is severely impacting builders and related industries, such as steel and cement.   

To counteract the impact of the property sector’s decline on GDP growth, Chinese authorities have sought to maintain high levels of manufacturing FAI, particularly in so-called “New Productive Forces,” such as newer technologically advanced industries, AI, and information technology services.  Investment in these sectors grew by 28.4% in 2025, which certainly help limit the deceleration that occurred in manufacturing FAI during 2025.  

The slackening pace manufacturing FAI in 2025, as well as its fall into negative territory in May of this year (see the above line graph), might be taken as a sign that Chinese Government authorities have gotten serious about combating “involution.”  As noted earlier, the PPI finally getting out from underwater is also being cited as evidence that anti-involution policies may be starting to bear fruit.  

My earlier comments regarding what is driving the sudden jump in the PPI cast doubt on that last claim.  Another reason to be skeptical here, beyond the previously cited material on government efforts to limit involution, is Pettis’s important contribution to the debate on this matter.  In an August 2025 Carnegie China article, Pettis observes that anti-involution measures have been one-sidedly sectoral in scope.  Government authorities have succeeded in stamping out involution in particular industries.  One notable 2025 instance of that was polysilicon production for solar panels, where a fund was created to consolidate and shut down about a third of productive capacity in that sector.  The problem, as Pettis notes, is that with Beijing’s economic growth strategy prioritizing raising manufacturing output, combating involution in one sector must be offset by efforts to increase investment and production elsewhere.  In the summer of 2025, the People’s Bank of China announced plans to increase support for other “key sectors,” notably petrochemicals.       

The latest involution poster child is humanoid robotics, a paradigmatic case of a “New Productive Forces” industry if there ever was one.  As has been the case with other such sectors, heavy investment and subsidies, including from Provincial Governments bent on creating regional champions and boosting their GDP growth rates to please Beijing, has rapidly expanded capacity and output.  China is now the global champion in humanoid robot production, accounting for 90% of these units shipped worldwide and is installing more industrial robots than the rest of the world combined.  Fears about excess capacity in this industry are now being aired, with Yao Maoqing, senior partner vice president at Shanghai-based AgiBot stating in Caixin Global, “The industry is already seeing signs of involution, particularly in semi-humanoid robots and entertainment-oriented robots, where barriers are lower and prices are falling quickly.” 

The 2026 data is therefore hardly indicative of an economy on the mend, with the signs of revival being, at best, rather mixed.  While the strong January-April rebound in corporate profits is welcome news, it has bypassed many industries, particularly consumer facing manufacturers, such as automobiles.  Despite the much better profitability numbers, involution issues persist, particularly in the “new productive forces” industries Beijing has targeted for investment and output expansion to maintain GDP growth rates.  Finally, the post-February deceleration in industrial output has been paralleled by a sharper falloff in retail sales, underscoring ongoing weakness in household consumption.          

Raising household consumption, in turn, will be a heavy lift, due to shifts in China’s labor market and ongoing weakness in residential real estate.  In the case of the latter, the long-awaited bottoming out of the property meltdown is coming about, if at all, in fits and starts.  It has also been confined to top-tier cities, bypassing lower tier metropolises and their much greater numbers of homeowners.  The housing market will through this year and into the next year continue weighing down household consumption.

The other 2026 green shoot in the Chinese economy is the PPI’s move back into positive territory, along with more modest increases in the CPI.  With these trends, the threat of China falling into a deflationary spiral has become less imminent.  The question is whether the PPI and CPI’s upward movement is a blip on the screen.  What makes this a real possibility is the reluctance of Chinese consumers to open up their wallets and “cost-push” nature, stemming from the Iran War price shock, of the recent rise in the PPI.  Once that supply shock dissipates, the PPI could go back underwater.

Assuming that does not happen, rising prices makes one modest but much less difficult to implement fix for boosting consumption more feasible.  That fix, which Professor Jeff Frieden at Columbia University passed on to me in email correspondence, is having the RMB appreciate in value to raise household purchasing power, thereby bumping up consumption.  Doing that earlier this year, when the PPI was still underwater and the CPI was falling or flatlining, would have exerted downward pressure on prices, exacerbating the threat of deflation.  The recent PPI and CPI increases make that “deflation dilemma” much less acute.  While the structural constraints on Chinese consumer spending will limit the impact of RMB appreciation in increasing consumption, moving that needle even a little bit would be a good thing.  Moreover, the RMB has room to appreciate:  according to GoldmanSachs, as of May, the currency was undervalued by over 20%. 

But RMB appreciation comes with other unwelcome tradeoffs for Beijing.  One is exacerbating capital flight out of China.  Last year, the International Institute of Finance estimates that individuals, companies, and financial institutions moved $807 billion out of the country, the highest level of capital flight ever recorded.  A higher valued RMB would enable very affluent Chinese households to snap more foreign assets by lowering the cost of doing that.  Alarmed by the increased flow of funds out of the country, Chinese authorities have tightened capital controls to staunchsuch activity; however, the success of this latest crackdown is by no means assured.  Rich Chinese seeking greater security for their wealth by moving it out of the People’s Republic through purchases of foreign assets, especially properties, have displayed considerableingenuity in getting around such restrictions.  

Another tradeoff with broader macro-economic implications concerns the impact of an appreciating RMB on Chinese exports.  These have continued to surge, putting China on a pace to surpass its record $1.2 trillion 2025 tradesurplus, and have been the one consistent bright spot in its economy.  To be sure, the importance of an undervalued RMB in boosting exports is a contentious issue, with a recentOECD study stressing China’s generous subsidies for manufacturers, which greatly exceed those of its advanced industrialized competitors.  But as the rest of the economy flashes signs of weakness, the government will be reluctant to do anything that might diminish exports.  Commenting on the weak April retail sales data in Reuters, Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, notes, “The strong performance of the exporters helped mitigate the weaknesses in domestic demand.”

Back on January 8^th, Brad Setser, an economist and senior fellow at the Council on Foreign Relations, predicted in his “Follow the Money Blog” that the desire to support a hobbled economy with high exports would help lead China to resist growing pressure for RMB appreciation tied to, among things, its burgeoning trade surplus.  This prediction has so far been borne out:  on January 1^st of this year, the RMB was just under 7.00 to the dollar and by the time of this writing (June 24^th), it had risen to 6.80, an increase of just 2.8%.  Goldman Sachs strategist Kamakshya Trivedipredicts that the RMB will further appreciate to 6.50 to the dollar by the end of this year, or an increase of 7%.  The latter rise is still well below the 20%+ appreciation Goldman Sachs believes is needed to bring the RMB-Dollar exchange in line with China’s trade surplus (if, as is likely the case, that surplus keeps on rising).  

The economic data for the first half of 2026 will undoubtedly strengthen calls that have long been made, both outside and within China, for fundamental rebalancing of its economy toward greater household consumption.  This was not, alas, what Xi and the Chinese leadership seemed to have in framing the country’s new Five-Year Economic Plan in a policy document drawn up during the October 20-23 Chinese Communist Party plenum.  Commenting in Reuters on that blueprint, Chen Bo, senior research fellow at the National University of Singapore’s East Asian Institute, notes that it “definitely” emphasizes and re-emphasizes “support for high-tech research and industrial development.”  He adds, alluding to the backdrop of intensified Sino-American economic rivalry, that for Beijing, “In terms of a country’s hard power, manufacturing is still a top priority” and when conflict arises between that objective and raising consumption, “what ultimately matters is manufacturing.”

In other words, Xi and his leadership team seem bent on sticking to the old playbook for maintaining high GDP growth.  In his reaction to the May economic data on X, Pettis argues, “So far this year’s numbers show that China’s economy has further increased its already-excessive dependence on surging debt and soaring trade surpluses to keep GDP growth from slowing.”  He further observes that trying to sustain this growth model will force China “into very a difficult adjustment” involving a “sharp slowdown in near-term growth,” which will be more severe the longer the government sticks to its current course.   

Well, as they would say in the old country, i.e. China, “这个习近平种想法只会把中国的经济引入死胡同 (Zhègè Xí Jìnpíng zhǒng Xiǎngfǎ zhǐ huì bǎ Zhōngguóde Jīngjì yĭnrù Sǐhútòng).”  In English: “This sort of Xi Jinping thinking is only leading China’s economy into a blind/death alley.”