Can China sustain its rise in a volatile world

AS 2026 begins, diametrically opposite claims about China's economic future abound. Some paint an optimistic picture, arguing that fears of crisis are overstated; others remain pessimistic, warning that debt, demographics and geopolitics point to prolonged stagnation. The reality lies somewhere in between. A more realistic reading suggests that China's economy in 2026 is navigating a narrow corridor — buoyed by manufacturing strength and state capacity but constrained by unresolved structural stresses. Understanding this in-between condition is crucial not only for China but also for the global economy and countries like India, which must increasingly engage with China as both a competitor and a system-shaping actor.

Although the official growth target for 2026 will be announced at the annual NPC session in March, most projections place China's growth in the mid-4 per cent range. On paper, that figure suggests stability. In practice, it conceals the uneven composition of growth. Unlike earlier phases of China's rise, today's expansion is not anchored in broad-based domestic demand or a buoyant property sector. It is sustained instead by selective strengths — above all, manufacturing and exports — while large segments of the domestic economy remain subdued. For all the hype surrounding President Xi Jinping's 'dual circulation' strategy, China's growth in 2025 remained export-driven, as efforts to revive domestic demand struggled amid persistent overcapacities.

China's principal source of resilience remains its extraordinary manufacturing capacity, which has been strengthened in recent years by a rapid expansion in advanced manufacturing. Chinese firms have deepened their dominance across various sectors, including electric vehicles, batteries, machinery, electronics and renewable energy equipment. The composition of China's trade surplus underscores this shift. Phones and telecom products contributed approximately $151 billion, while computers another $70 billion. In comparison, the automotive sector recorded a surplus of $66 billion in the first 10 months of 2025 — up sharply from a deficit just three years earlier. Supported by industrial policy, infrastructure and scale, Chinese manufacturing remains competitive even as global demand slows.

Having weathered tariffs imposed during the Trump administration and recorded a trade surplus approaching $1 trillion, China may appear to be in robust health. Much of this performance reflects its ability to redirect exports constrained by US tariffs towards Southeast Asia, Africa and Latin America. Exports have thus compensated for weak domestic consumption, allowing China to sustain growth without resorting to the kind of large-scale fiscal stimulus seen in earlier downturns.

However, in an increasingly volatile geopolitical environment, it remains uncertain how long China can rely on an export-led growth model. Manufacturing strength alone does little to restore confidence or correct the legacy of debt-driven expansion — a reality underscored by the strains facing China Vanke. Once a benchmark developer, Vanke is now grappling with severe liquidity pressures, having been forced into negotiations with banks and insurers after failing to secure debt extensions in late 2025. These developments underscore the limitations of export-led resilience in restoring domestic confidence.

Efforts to revive domestic demand face additional constraints. Consumer subsidies aimed at boosting purchases of goods, such as electric vehicles and televisions, are approaching saturation, even as households shift their spending towards services. Policymakers continue to struggle with how to stimulate demand in the service sector. Some analysts argue that authorities are less alarmed by the property slowdown because its contribution to overall economic activity has already declined — from about 25 per cent to 15 per cent — suggesting that much of the adjustment may already be behind them.

Persistent overcapacity continues to fuel deflationary pressure, raising the real burden of debt, squeezing corporate margins and dampening spending. While Beijing has signalled a willingness to be more proactive in managing local government debt and containing financial stress, there is little appetite for a return to property-led stimulus. The emphasis instead is on restructuring liabilities and managing adjustment. This approach was evident in early January 2026, when lenders agreed to defer interest payments for China Vanke, easing immediate pressure while leaving underlying vulnerabilities unresolved. That confidence was also reflected in Xi Jinping's New Year address, which downplayed near-term economic strains while highlighting advances in innovation, artificial intelligence and high-end manufacturing.

Crucially, China's internal adjustment will not remain confined within its borders. A growth model reliant on exports amid weak domestic demand is likely to generate external tensions. China's trillion-dollar trade surplus has already drawn sharp reactions. During a recent visit to Beijing, Emmanuel Macron warned that failure to address trade imbalances could prompt the EU to take countermeasures. Similar concerns are emerging across Southeast Asia and Africa, where Chinese exports are attractive but also pose a threat to local manufacturing. Accusations of overcapacity and unfair competition are resulting in tariffs, regulatory barriers and calls for de-risking.

For India, China's economic trajectory in 2026 offers neither a story of imminent decline nor a model to emulate. It highlights the tension inherent in sustaining growth through external demand while domestic confidence remains fragile. As China leverages manufacturing strength to offset internal constraints, the implications for India are strategic rather than immediate: intensified competition, pressure on domestic industry and a narrowing margin for complacency.

India's challenge is not to mirror China's scale, but to build its own sources of competitiveness, technological depth and policy credibility. In a fragmented global economy, the real test will be whether India's growth enhances strategic autonomy rather than dependence.