China tests its stride for the Year of the Horse

What awaits the Chinese economy this new year amid wobbly domestic consumption and a highly uncertain global market?

China managed to hit its 5 per cent growth target in 2025 despite a plethora of domestic and external challenges hounding the economy. Faced by the threat of ultra-high tariffs for US-bound exports, Beijing made new friends and rapidly diversified destinations for goods trade. To perk up household consumption, the central government extended additional subsidies alongside an anti-involution crackdown to bust artificially low producer prices.

Global banks are expecting the National People’s Congress to announce a growth goal of 4.5-5 per cent this 2026, a tempered outlook when compared to the 5 per cent target that has been set and met in previous years. Can China leap ahead during the Year of the Fire Horse – the Chinese zodiac that supposedly signals intense, rapid changes – or will structural imbalances pose as major hurdles ahead?

Quality of growth

The International Monetary Fund (IMF) has flagged persistently weak domestic demand as a key risk for China’s economy, and in February suggested that the export-reliant country accelerate its transition towards domestic consumption-led growth. This improves China’s resilience against external shocks like the US’ tariff war and builds on China’s domestic consumer base of over a billion people to propel its economic expansion. However, this is not as easy as it sounds: China has consistently lagged behind peers in terms of final consumption expenditure, which refers to total spending by households and government units. China’s final consumption expenditure has averaged 54 per cent of GDP between 2005 to 2024 per World Bank data, which is significantly lower than the US with 83 per cent, Japan with 75 per cent and India with 69 per cent.

Further, Graph 1 illustrates the steady decline in total retail sales growth since mid-2025, indicating softer household expenditure activity throughout the year. The 0.9 per cent increase recorded in December is the slowest pace since January 2023, reflecting subdued consumer activity following China’s residential property downturn. Consumer confidence has also remained muted, with household optimism far from recovering to the highs seen prior to the property crisis at home.

The same graph also shows highly erratic global trade volumes: China’s net exports have been fluctuating between high growth – representing heavy frontloading of shipments to beat the imposition of higher US duties – and sporadic slowdowns as traders take a wait-and-see approach. All these data points reflect the high degree of uncertainty regarding local and global economic conditions, which is likely to continue and even escalate in 2026.

We at Lundgreen’s have remained so upbeat about China’s growth trajectory over the past decade, but we have also raised concerns regarding the volume of consumption subsidies handed out by the government to sustain such a pace. The country’s debt burden has been mounting, with its debt-to-GDP ratio rising from 33.2 per cent in 2011 to an estimated 96.3 per cent in 2025. By 2026, the IMF projects government debt to be larger than national output, which is far from desirable in the eyes of investors. The IMF’s suggestion of significantly lifting domestic spending to drive GDP growth would probably require additional financial aid from the state through tax breaks and other types of subsidies, both of which will push China’s borrowing requirements even higher.

Waning tech tailwind

China stocks rode high in 2025 thanks to the excitement over generative artificial intelligence (AI), particularly the development of Zhejiang-based DeepSeek as a cheaper counterpart of Silicon Valley’s ChatGPT. The initial hype appears to have simmered down, with some quarters expressing fears of an AI bubble – a view that we do not agree with. This concern has pulled equities sharply lower from earlier record-highs, and Chinese tech stocks have not been spared. Graph 2 shows how far tech-focused stock indices have fallen from peak levels as AI fears grew. The first trough was in April, a knee-jerk reaction to US President Donald Trump’s outsized tariffs. Subsequent declines in November-December mirrored a Wall Street tech selloff due to bubble fears, while the more recent episode was due to the surprise news of higher taxes on telecommunications services. In particular, market players grew anxious that other tech-related products and services could be the target for new taxes, too.

The Hang Seng Tech Index, which is dominated by tech firms from the Mainland, entered bear territory mid-February as shares fell by more than 20 per cent from its October peak level. Despite these drawdowns, we advise investors to stay on hold rather than dump their stock portfolios altogether – rather, they can take this as an opportunity to recalibrate asset allocations. We keep our overweight risk towards Chinese equities, as we remain of the view that shares here are undervalued relative to their strong growth potential.

The nine-day Lunar New Year trading break likely helped reorient market sentiment, although the holiday cheer was short-lived. Equities declined further in early March amid attacks in the Middle East, which added a new layer of uncertainty among investors worldwide.

Rekindling 2025’s tech-driven rally entails pushing expansion and innovation in the AI space, and this is more than just releasing new chatbots. The rise of goods and services towards AI systems by the private sector and not just by state-owned companies would help restore enthusiasm towards China stocks, alongside structural reforms that would help China gallop ahead and achieve its growth goals.