China Faces 2026 Policy Test as Property Slump, Weak Spending and Deflation Persist

Beijing’s annual Central Economic Work Conference, expected in the coming days, will outline priorities for 2026 at a moment when confidence in China’s global standing contrasts sharply with enduring vulnerabilities at home. Economists point to three areas—real estate, consumer demand and deflationary pressure—that continue to weigh on the world’s second-largest economy even as its diplomats project greater assertiveness abroad.

Property downturn deepens

Housing market stress intensified in 2025. China Vanke, once among the country’s top developers by sales, is seeking to postpone repayment of a 2 billion-yuan (US$283 million) onshore bond due 15 December. The request prompted S&P Global Ratings to cut Vanke’s credit rating, underscoring a sector-wide liquidity squeeze that began in 2021.

Domestic sales numbers illustrate the drag. Goldman Sachs estimates that nationwide new-home transactions in November fell 20 % to 30 % from a year earlier, while average monthly sales remain 65.3 billion yuan below 2024 levels. Analysts note that a mortgage-subsidy scheme reportedly under discussion is unlikely to reverse the downward trend quickly.

The erosion of buyer confidence, already fragile after multiple developer defaults, risks becoming self-reinforcing. If Vanke, a company long viewed as a bellwether for sector stability, moves toward distressed financing, sentiment could deteriorate further and ripple into broader economic activity.

Consumption needs traction

Policymakers have signaled a pivot toward boosting domestic demand. After a five-year planning meeting in late October, authorities pledged stronger support for consumer industries. On 29 November, six ministries jointly released a roadmap covering products from electronics to sporting goods. The document targets at least three sectors reaching 1 trillion yuan in annual output and 10 others surpassing 100 billion yuan by 2027.

The blueprint, however, offered few details on financing or execution. Goldman Sachs described the plan as supply-side focused, with a notable emphasis on integrating artificial intelligence into manufacturing and services. Analysts argue that durable spending growth will require measures that lift employment and household income.

Household finances show signs of strain. Natixis reports that the ratio of bad consumer loans rose to 1.33 % in the first half of 2025, exceeding the 1.2 % figure for corporate borrowers. While companies can restructure, individual borrowers have fewer options in an environment where property values and labor-market conditions remain under pressure.

Deflationary headwinds linger

Persistent discounting by retailers and heightened price sensitivity among consumers continue to suppress inflation. Headline consumer prices have hovered near zero for months, and core CPI, which excludes energy and food, rose only 1.2 % in October. Nomura estimates that roughly a quarter of that increase stemmed from surging gold prices; removing that effect leaves core inflation at just 0.9 %.

This weak pricing environment was evident during China’s biggest shopping period, when extended October-to-November promotions pushed sales up 14.2 %, far below the previous year’s 26.6 % gain. Economists contend that prolonged deflation discourages corporate investment, as firms question their ability to earn adequate returns in a low-price landscape.

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November inflation data are due 10 December, with retail sales, industrial production and fixed-asset investment scheduled for release on 15 December. Many analysts expect additional policy easing in early 2026 to underpin the next five-year plan.

Market snapshot and ancillary developments

The CSI 300 index was little changed at midday Wednesday and is up 0.65 % for the week, extending 2025 gains to 15.73 %. Hong Kong’s Hang Seng Index fell 0.9 % but remains 28.85 % higher year-to-date. Offshore yuan trading at 7.0609 to the U.S. dollar marks its strongest level since October 2024.

Beyond macroeconomic indicators, regulators have cautioned about overcapacity in emerging sectors. The National Development and Reform Commission warned of a potential glut in humanoid robots as more than 150 companies enter the field; guidelines are forthcoming. In technology, Alibaba launched US$500 AI-enabled smart glasses, entering a segment where Meta’s Ray-Ban Display is not officially sold in China.

The corporate sector also mobilized after Hong Kong’s deadliest fire since 1948. Firms including Tencent and Ant Group pledged millions of yuan to support rescue and recovery efforts; local authorities have confirmed at least 156 fatalities.

Next on the agenda

French President Emmanuel Macron will visit China from 3–5 December, followed by the release of November trade statistics on 8 December. The International Monetary Fund, which most recently forecast 5 % growth for China in 2025, has urged structural reforms to balance supply-side expansion with stronger domestic demand, according to its latest country surveillance report.

For Beijing, the immediate challenge is to translate global confidence into domestic resilience as 2026 approaches. The forthcoming economic work conference will signal how leaders intend to stem property losses, revive consumer sentiment and nudge prices back toward healthier levels.

Crédito da imagem: Str | AFP | Getty Images