China’s Economy Faces Growing Strains Amid Debt, Deflation, and Demographic Decline

China’s economy is grappling with intensifying challenges as mounting debt, persistent deflation, and an aging population weigh heavily on growth and confidence, according to a recent report by Yardeni Research. Despite government efforts to stimulate domestic consumption, the world’s second-largest economy remains heavily dependent on exports to drive expansion. Analysts warn that China’s surplus production is increasingly being dumped in global markets, escalating trade tensions with the United States and other major economies.

The ongoing property crisis continues to drag on growth. New home prices fell 2.2% year over year in September 2025 — the 26th straight month of decline — signaling weak demand and excessive supply. This prolonged downturn has eroded household wealth, undermining consumer confidence and curbing spending. Retail sales rose just 3% year over year in September, the slowest pace since August 2024. When adjusted for a 0.8% decline in consumer prices, sales increased by 3.8%, still lagging behind industrial output growth and reinforcing deflationary pressures.

The People’s Bank of China has responded with monetary easing — cutting reserve requirements and lowering interest rates — yet lending growth remains sluggish. Bank loans expanded only 6.6% year over year, nearly half the rate from three years ago, bringing total loans to a record $38 trillion. Meanwhile, government bond yields have fallen below 2%, reflecting weak investor confidence in the recovery.

While Chinese stocks have shown mixed performance over the past 18 years, the FTSE China Index has climbed 34.7% year-to-date in 2025, with Basic Materials, Health Care, Consumer Discretionary, and Technology sectors leading gains. However, Yardeni Research cautions that without stronger domestic demand and structural reforms, China’s reliance on exports and credit growth may continue to limit sustainable economic recovery.