Analysis: In China’s Two-Speed Economy, Old Burdens Weigh on Broader Recovery

1. China’s economic recovery following the COVID-19 pandemic is best described as a “two-speed economy,” characterized by fast-growing new sectors coexisting with constrained traditional industries. This divergence has played a stabilizing role for overall growth, but the unevenness limits the durability and breadth of the recovery, making the future outlook complex and nuanced[para. 1].

2. According to the ASEAN+3 Macroeconomic Research Office’s (AMRO) Annual Consultation Report, sectors such as electric vehicles, advanced manufacturing, and green technology are expanding quickly, buoyed by industrial upgrades, supportive policies, and solid external demand, especially outside the U.S. Even as foreign direct investment (FDI) becomes more focused, flows continue into these high-tech, policy-aligned areas. These trends have bolstered export activity and economic growth despite increasing global trade tensions[para. 2][para. 3].

3. Despite their momentum, new economy sectors still constitute a relatively small share of China’s economy, limiting their capacity to spur large-scale job creation, broad income growth, or robust consumption. Their rapid growth has introduced specific risks, including the potential for oversupply, fierce price competition, and heightened protectionist actions by trade partners. Thus, expansion in these sectors alone does not guarantee balanced, sustainable growth[para. 4].

4. Traditional sectors, particularly real estate, have lagged, contributing to slow, fragile growth in other parts of the economy. The prolonged property downturn continues to affect household confidence and the fiscal position of local governments. Efforts to support the sector—lowering mortgage rates, reducing down payments, and increasing credit support—have yielded only a modest rebound due to lingering weak demand, high inventories (especially in lower-tier cities), and continued developer distress[para. 5].

5. The fiscal impact has been significant, primarily due to diminished land sale revenues, which expose weaknesses in the land-based fiscal system critical to local governments. Even with increased central government transfers and bond issuance, many local governments—especially in lower-tier regions—face chronic revenue weaknesses, large social spending commitments, off-balance-sheet debts, and stricter borrowing limits, reducing their ability to counteract economic weaknesses with fiscal support[para. 6].

6. Consumers remain cautious, with confidence undermined by weak income growth and housing-related wealth losses. While consumption rebounded in 2025, much of the surge was attributed to fiscal subsidies, especially programs incentivizing consumer goods trade-ins. These initiatives boosted short-term demand but are unlikely to sustain long-term consumption growth[para. 7].

7. In September 2024, the government introduced a comprehensive stimulus package—including monetary easing, fiscal expansion, and targeted property measures—which helped stabilize GDP growth at 5% in 2025. Export strength and consumption, especially those redirected to markets outside the U.S., underpinned this stability. Still, inflation remained subdued, indicative of ongoing slack in demand[para. 8].

8. AMRO projects that growth will moderate to 4.6% in 2026. Risks skew to the downside, with delayed property recovery, financial strains among some local governments, and vulnerabilities in smaller banks threatening confidence. Heightened geopolitical tensions or geoeconomic fragmentation could further stress trade and investment, though swifter resolution of property and fiscal issues could improve outcomes[para. 9].

9. China’s core policy challenge is transitioning from merely maintaining near-term growth to narrowing gaps between its divergent growth paths and enabling a more balanced long-term transition[para. 10].

10. Short-term policy should prioritize continued fiscal support (especially for vulnerable local governments and household consumption), sustaining an accommodative monetary stance, and targeted efforts to address property market overhang, chiefly in lower-tier cities[para. 11].

11. Medium-term reforms are essential. These include restructuring central-local fiscal relations, boosting household consumption through more equitable income distribution and stronger social security, and focusing on public services and human capital investment[para. 12].

12. Industrial policy and financial reforms must shift toward higher productivity, encourage private investment, and smooth the green and digital transition without fueling external tensions. More effective financial market reforms and better monetary policy transmission will improve capital allocation and long-term growth[para. 13].

13. In summary, China’s two-speed economy is a sign of deep structural transformation. The government’s ability to sustain high-growth sectors and address structural constraints will determine the country’s future economic trajectory and its broader implications for the regional and global economy[para. 14].

14. The analysis is authored by Jae Young Lee, AMRO’s group head and lead economist[para. 15].

15. Views expressed in the text are those of the author and do not necessarily reflect the positions of Caixin[para. 16].