Analysis

China Consumer Spending Falls for First Time Since Covid (2026)

Published

2 months ago

June 16, 2026

China consumer spending decline has arrived with a bluntness that Beijing’s statisticians rarely allow to surface unmediated. In May 2026, retail sales dropped 0.6% year-on-year — the first fall since China’s reopening from Covid lockdowns in late 2022. Fixed-asset investment contracted a deeper-than-expected 4.1% in the first five months of the year. Home prices fell at a quicker pace. Taken together, these figures don’t describe a soft patch. They describe a structural rupture between an economy that produces and an economy that consumes — and the gap is widening at exactly the wrong moment.

The Broader Landscape: Growth Without Demand

To understand May’s retail sales data, you have to understand what China’s economy has become over the past four years. Growth continues to rely on strong manufacturing and exports, while consumption remains weak. This is not a secret Beijing has tried to hide — it’s a consequence of deliberate policy choices made when the property sector began its long collapse after 2021.

Why has China’s consumer spending declined?

China’s consumer spending decline reflects four reinforcing forces: a multi-year property crash that has destroyed household wealth; youth unemployment above 16% suppressing income expectations; persistent deflation incentivising households to defer purchases; and a social safety net too thin to replace precautionary saving.

China’s trade surplus reached $1.19 trillion in 2025, the largest ever recorded by any country. Exports climbed 5.5% and accounted for a third of economic growth — the highest share since 1997. For an economy Beijing has repeatedly pledged to rebalance toward domestic consumption, that figure is damning. The rebalancing hasn’t happened. It has, if anything, moved in reverse.

The IMF’s 2026 Article IV Consultation flagged that deflationary pressures are in part related to the demand slump, including from the protracted property sector correction and the local government debt overhang that limits indebted local governments’ ability to counter the negative demand shock. In plain terms: households aren’t spending because they don’t feel wealthy, and local governments can’t compensate because they’re already drowning in debt.

The Core Development: What the Numbers Actually Say

The May retail sales print was worse than every economist forecast in Bloomberg’s survey. After a surprise acceleration to start the year, the world’s second-biggest economy cooled rapidly, with investment resuming declines and consumption hobbled by a weak job market and faster-falling prices.

The breakdown by category matters. Automobile sales remain negative. Home appliances — a sector that benefited from government trade-in subsidies through 2025 — have decelerated sharply as that stimulus exhausted itself. Clothing and textiles are effectively flat. The only consistent bright spots are communication equipment and a narrow set of discretionary tech categories.

Youth unemployment for 18–24 year-olds stood at 16.9% in 2025 and is not expected to ease this year. That figure briefly exceeded 21% in 2023, at which point Beijing quietly stopped publishing it. Its reappearance in the data — even at a lower level — reflects a labour market that has failed an entire generation of university graduates. The sectors that historically absorbed them — property development, education, technology platforms — have all contracted simultaneously. Consumer surveys report a shift toward “thrift culture,” with secondhand goods markets booming and luxury spending slowing.

Home prices in China have been falling for four and a half years — a household wealth destruction on par with America’s 2008 crash, except it’s still accelerating. In a country where residential property has historically represented the primary store of household wealth, this matters for consumer psychology in ways that interest rate cuts or voucher schemes cannot easily reverse.

The hoped-for transition from investment-led growth to a more consumption-driven model has stalled. Beijing knows this. The question is whether it has the political appetite — and the remaining fiscal headroom — to do anything meaningful about it.

Why Exports Can’t Save China From Itself

China’s Dual Circulation Strategy Was Supposed to Solve Exactly This Problem — So Why Hasn’t It?

Announced in 2020, the dual circulation strategy promised to reinvigorate domestic demand as the primary engine of growth while maintaining China’s export capacity. The theory was sound. The execution has been absent. Instead, China’s industrial policies have enhanced manufacturing competitiveness, aimed at boosting exports globally while simultaneously increasing domestic self-reliance, thereby constraining import demand. It’s export-led growth wearing the clothes of rebalancing.

Why Has China’s Consumer Spending Declined?

China’s consumer spending decline reflects four reinforcing forces: a multi-year property crash that has destroyed household wealth; youth unemployment above 16% that suppresses income expectations; persistent deflation that incentivises households to defer purchases; and a social safety net too thin to replace precautionary saving. Together, these structural headwinds overwhelm cyclical stimulus.

The picture is more complicated than simple demand weakness. China’s exports entered 2026 with surprising strength — in the first quarter alone, the country’s 12-month rolling trade surplus climbed to a record $1.1 trillion, while the current account surplus reached a decade high of 3.7% of GDP. On the surface, the economy is humming. Factories are running. Ships are leaving port. The problem is that this industrial activity increasingly bypasses Chinese households entirely.

Beijing bet big that high-tech manufacturing would fill the gap left by property. Instead, state-driven investment has created overcapacity, and weak domestic demand means there aren’t enough buyers to absorb it. The excess production has to go somewhere — and it goes abroad, amplifying the very trade tensions that now threaten the export engine itself.

High US trade tariffs, geopolitical tensions, persistent weak domestic demand and a slowing global economy will harm the country’s outlook. The IMF projects GDP growth decelerating to 4.2% in 2026 from 4.8% in 2025. For a government that has set a target of 4.5–5%, this is threading a very narrow needle with fiscal tools that are visibly blunting.

Implications and Second-Order Effects: When China’s Imbalance Becomes the World’s Problem

The geopolitical friction generated by China’s export surge is no longer theoretical. China’s trade surplus surged to a record $1.2 trillion in 2025, marking a new milestone in its integration into, and dominance of, the global trading system. That surplus represents, at its core, the gap between what China produces and what Chinese households are willing or able to buy. When domestic demand fails, the excess floods global markets. When global markets push back — through tariffs, anti-dumping investigations, and industrial policy of their own — China’s export channel narrows.

China’s consumer spending fell 0.6% in May 2026 — the first decline since Covid lockdowns. Here’s why deflation, property collapse, and export reliance are widening a structural fault line in the world’s second-largest economy.

The deeper concern is that China could become even more dependent on exports just as the global system becomes less capable — or less politically willing — to absorb persistent Chinese surpluses. The United States has already demonstrated, through successive rounds of tariff escalation, that it will absorb Chinese goods up to a political pain threshold. Europe is moving in the same direction on electric vehicles. Emerging markets — Southeast Asia, Africa, Latin America — have absorbed some of the redirected export flows:

Exports to Africa surged 26% in 2025
Exports to Southeast Asian countries jumped 13%
Exports to the European Union rose 8%
Exports to Latin America grew 7%

Yet these markets have shallower financial buffers and less import capacity than the advanced economies China is losing access to.

For global commodity markets, the implications are significant. Weak Chinese consumer demand suppresses imports of consumer goods, materials, and energy. Lower Chinese inflation relative to trading partners has resulted in significant real exchange rate depreciation. A cheaper renminbi makes Chinese exports more competitive — compounding the very imbalance that is already stoking tensions. It also exports deflationary pressure to trading partners whose own manufacturers cannot compete on price.

For multinational firms with significant China revenue exposure — luxury goods producers, automotive brands, consumer electronics companies — the May data signals that recovery strategies premised on a Chinese consumer revival need revising. That revival is not imminent.

Competing Perspectives: The Case for Optimism, and Why It’s Hard to Sustain

It would be a mistake to dismiss the bullish case entirely. China’s Q1 2026 GDP print came in at 5%, beating the consensus forecast of 4.8%. Strong investment in infrastructure and manufacturing, led by state-owned enterprises, was crucial in returning fixed-asset investment growth to positive territory. The Lunar New Year effect temporarily boosted retail sales in the January–February window. Jacqueline Rong, chief China economist at BNP Paribas, has maintained that “we continue to expect exports to act as a big growth driver in 2026.”

There is also a plausible argument that Beijing has more tools at its disposal than it has yet chosen to use. Expanding social protection coverage to rural migrant workers and gig workers, and gradually raising benefits of the voluntary pension scheme for rural residents, would strengthen household confidence, reduce precautionary saving, and lift spending among households with a higher propensity to consume. These are not impossible reforms — they are simply politically uncomfortable ones, since they require transferring resources from state-owned enterprises and local governments to households.

Yet the optimists face a difficult arithmetic. China’s fiscal deficit is expected to exceed 8% of GDP, fuelling an upward trend in government debt from less than 60% of GDP in the pre-Covid period to more than 100% forecast in 2026. The room for additional stimulus is narrowing. The IMF’s Article IV assessment noted that an inadequate policy response risks continued build-up of debt and financial vulnerabilities, with the eventual adjustment leading to larger and compounding costs in terms of growth and employment in the future.

The Eurasia Group‘s assessment, placing China’s deflation trap as one of its top seven global risks for 2026, captures the central dilemma: Beijing has the means to prevent a crisis, but living standards will deteriorate, the fallout will spread abroad, and the world’s second-largest economy will remain stuck in a trap of its own making.

An Economy Running Hardest Where It Least Needs To

China’s May retail sales figure is a single data point. But it arrives after years of data points that tell the same story in different registers — falling home prices, a thrift-culture among the young, record trade surpluses that reflect not economic confidence but its absence. The country is producing at extraordinary scale and consuming at a rate that cannot sustain the social contract its leadership has promised.

The irony is that China’s export machine is, in part, a symptom of consumer failure — not its cause. If Chinese households were spending, fewer goods would need to leave the country. The trade tensions Beijing faces internationally are, at their root, a domestic policy problem that has been exported.

How Beijing responds to that paradox — whether through genuine redistribution toward households, continued reliance on fiscal and industrial tools, or the minimalist interventionism that has defined the Xi era — will shape not only China’s trajectory but the architecture of global trade for the decade ahead.

An economy that cannot consume what it produces is not, in the end, an economy in balance. It is an economy in tension with itself.

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Analysis

Pakistan’s $10bn US Facility Request: Inside the New Gulf Capital Triangle

Published

2 days ago

July 30, 2026

Abdul Rahman

Pakistan’s finance minister spent the week of July 20 in Washington doing something Islamabad has rarely been able to do from a position of relative strength: asking for a safety net rather than a rescue. In meetings with US Treasury Secretary Scott Bessent, Muhammad Aurangzeb requested a $10 billion Exchange Stabilisation Support Facility, framing it as insurance for a currency and reserves position that, by his own account, has already stabilised without emergency help — improved fiscal and external balances, record remittances and stronger reserves.

The request is easy to read as routine diplomacy. It is more useful read as a symptom of a structural shift now visible across three of the markets in this briefing set — Pakistan, the UAE, and the United States — in how mid-sized emerging economies are financing themselves after two years of IMF-led stabilisation.

The numbers behind the ask

Pakistan’s economy grew 3.7% in FY26, the fastest pace in four years but still short of official targets, according to the government’s own economic survey. The same survey reported a KSE-100 rally of 18.4% in the July–March period, a current account deficit contained near zero, and public debt-to-GDP falling from a 2023 peak of 75% to 68.5%. The IMF’s own country data lists 2026 real GDP growth at 3.6% and consumer price inflation cooling to 7.2%, a marked drop from the double-digit prints of recent years.

None of that happened by accident. It followed the disbursement structure typical of Pakistan’s current IMF-EFF arrangement: $1.2 billion in EFF funding, plus $2.7 billion from multilateral partners, $1.1 billion in bilateral development financing and $2 billion via Naya Pakistan Certificates during the July–March window alone. A separate IMF staff report on the programme’s second review flagged that Pakistan met most quantitative benchmarks but missed a structural condition on sugar-import tax exemptions and delayed cabinet approval of sovereign wealth fund governance reforms — a reminder that “stabilised” and “reformed” are not the same thing in IMF language.

Why Washington, and why now

The $10 billion ask did not happen in isolation. Aurangzeb’s Washington trip also included direct engagement on the broader US tariff regime announced under the International Emergency Economic Powers Act, and a separate meeting with Honeywell Technologies about modernising Pakistan’s refinery sector. According to Pakistan’s finance ministry, both governments agreed to identify near-term investment transactions and finalise a strategic economic framework, expected to be signed on the sidelines of the UN General Assembly in September 2026.

That timeline matters. It places a formal US-Pakistan economic framework roughly two months after the current 60-day IMF review cycle and in the same window that Gulf sovereign investors — the UAE and Saudi Arabia chief among them — have been rolling over short-term deposits with the State Bank of Pakistan, a practice that has quietly become one of Islamabad’s most reliable bridge-financing tools. Business Recorder’s economy desk reported friendly countries rolling over roughly $6 billion in July 2026 alone, extending a pattern that predates this administration but has become more central to it.

The Gulf link most coverage misses

Coverage of Pakistan’s IMF programme tends to treat Washington, Riyadh, Abu Dhabi and the multilateral lenders as separate storylines. They are increasingly one story. The UAE’s own trade data shows non-oil foreign trade approaching AED 2 trillion in the first half of 2026, a record, with the emirate simultaneously deepening financial-sector ties across South Asia, Africa and now — via a newly concluded Comprehensive Economic Partnership Agreement — Canada. Pakistan sits inside that same Gulf capital web: its rupee stability, its remittance base (heavily Gulf-sourced), and its rollover financing all trace back to the same handful of Gulf treasuries that are simultaneously recycling petrodollars into Dubai property, Abu Dhabi sovereign funds, and now formal free-trade frameworks with Western economies.

An Exchange Stabilisation Facility from the US Treasury would not replace that Gulf financing — it would sit alongside it, giving Pakistan a dollar-denominated backstop that is politically distinct from both the IMF and its Gulf creditors. For a country whose FY26 external financing already blends multilateral, bilateral, Gulf and diaspora sources, that diversification is arguably as important as the headline number.

What could go wrong

Pakistan’s economic survey data cuts both ways. Poverty climbed to 28.9% in FY2024-25 even as headline growth accelerated, and April 2026 inflation ticked back up to 10.9% before easing. A $10 billion facility addresses reserve adequacy and currency confidence; it does nothing for the domestic demand and poverty dynamics that Pakistani economists increasingly flag as the programme’s unfinished business. Whether Washington grants the facility — and on what conditionality — will be one of the more consequential but underreported bilateral economic decisions of the autumn.

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Analysis

China Criticizes US Bill Targeting Russian Oil Buyers — Why It Matters

Published

2 days ago

July 30, 2026

Abdul Rahman

On July 15, 2026, during a routine Chinese foreign ministry press briefing, spokesperson comments took on unusual significance for global energy and trade watchers: Beijing strongly criticized recent US sanctions measures affecting Cuba and, more consequentially, proposed US legislation specifically targeting major purchasers of Russian energy, according to sanctions-tracking analysis from law firm Steptoe. The pairing of Cuba sanctions criticism with concern over Russian-energy-buyer legislation is not coincidental — both represent the kind of secondary sanctions architecture that could eventually be extended to reach China’s own energy trade.

Why China has reason to be worried

China has emerged as one of the largest buyers of discounted Russian crude since 2022, alongside India, as Moscow redirected exports away from European markets closed off by sanctions. That trading relationship has functioned largely outside direct US sanctions exposure because existing measures have focused on Russian entities, vessels, and price-cap compliance rather than directly penalizing the buying countries themselves. Proposed legislation targeting “major purchasers of Russian energy” would represent a meaningful escalation — shifting from supply-side sanctions on Russia to demand-side sanctions on Russia’s customers, a category in which China is unambiguously the largest player.

The broader sanctions context this fits into

This is not an isolated legislative proposal. The EU Council has separately been expanding its own sanctions lists to include entities active in Russia’s energy sector, specifically firms producing automated control systems for oil and gas infrastructure — a sector the EU explicitly identifies as a substantial source of Russian government revenue, with designated entities subject to asset freezes and travel bans. That EU action, combined with the US legislative proposal China is objecting to, suggests a coordinated Western push in mid-2026 toward tightening the demand side of Russian energy sanctions after several years of focusing primarily on supply-side measures — price caps, shipping insurance restrictions, and tanker interdiction — that CREA’s own monthly tracking has repeatedly shown to be only partially effective.

Why demand-side sanctions would be harder for China to absorb than supply-side measures

China’s exposure to a demand-side sanctions regime differs meaningfully from Russia’s own exposure to supply-side measures. Russia has adapted to supply-side sanctions through shadow-fleet shipping, price discounting, and using non-sanctioned intermediary buyers — mechanisms that work precisely because the penalty falls on specific vessels, entities, or transactions rather than on the buying country’s broader economy. A US measure targeting “major purchasers” as a category would be far harder for China to route around through the kind of intermediary and shadow-fleet workarounds Russia itself has relied on, since it would target China’s status as a buyer directly rather than any specific transaction or vessel.

The timing question: why July 2026 specifically

The proposed legislation surfaces at a moment when Russian oil revenues are themselves in flux — recovering somewhat due to the Iran-war-driven price spike after falling to some of their lowest levels since the 2022 invasion earlier in 2026. A US Congress moving to tighten sanctions on Russia’s energy customers at precisely the moment Iran-war-driven prices are already inflating Russian oil revenue suggests lawmakers are attempting to prevent Moscow’s accidental windfall from becoming a durable financing lifeline — a goal that requires closing the demand-side gap that has persisted throughout the supply-side sanctions era to date.

What China’s public criticism signals diplomatically

Beijing’s decision to criticize the proposal publicly, rather than simply lobbying against it through diplomatic channels, is itself a signal. Chinese foreign ministry statements on sanctions issues are typically measured and procedural; explicit public criticism paired with a separate objection to Cuba sanctions suggests Beijing is framing this as part of a broader pattern of what it characterizes as unilateral US extraterritorial sanctions overreach, a framing China has used consistently in disputes over technology export controls and is now extending to energy trade.

What comes next

The practical test will be whether the proposed legislation advances through Congress with enough bipartisan and administration support to become binding policy, or whether it remains a negotiating lever — a credible threat used to extract concessions from China on other fronts (trade, technology, Taiwan) without ever being formally enacted. Given the scale of China’s Russian energy imports and the diplomatic and economic disruption a genuine demand-side sanctions regime would cause, most sanctions analysts view near-term full enactment as unlikely, though the legislative threat itself already appears to be shaping Chinese diplomatic posture.

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Analysis

Malaysia GDP Growth vs Stock Market: The 2026 Disconnect

Published

2 days ago

July 29, 2026

Abdul Rahman

Malaysia posted its biggest trade surplus on record and second-quarter GDP growth of 5.8% in 2026, yet its stock market has stubbornly refused to rally — a disconnect that is puzzling investors even as the country climbs global competitiveness rankings and hosts record investor turnout at its largest retail investing event.

Record Growth Meets a Muted Market

Malaysia’s economy expanded 5.8% year-on-year in the second quarter of 2026, underpinning what former senior investment banker Ian Yoong Kah Yin describes as one of the most competitive economies globally, buoyed by the country’s largest-ever trade surplus, according to reporting in The Star. Yet with the exception of the semiconductor and plantation sectors, Yoong notes that many shares on Bursa Malaysia remain undervalued relative to that underlying strength — a gap he summarised memorably: “It’s like we held a party and no one came.”

The disconnect comes even as Hong Leong Investment Bank upgraded Malaysia’s full-year 2026 growth forecast to 4.7% from 4.5%, citing stronger-than-expected performance in the electrical and electronics sector alongside resilient domestic demand, according to BusinessToday. Household loans grew 5.2% year-on-year and credit card spending rose 10.2%, signalling that consumer demand remains a genuine pillar of growth rather than a statistical artefact of export strength alone.

A Competitiveness Ranking Jump — and a Retail Investing Boom

Malaysia’s underlying reform story has been validated externally. The country climbed eight places to rank 15th among 70 economies in the 2026 IMD World Competitiveness Ranking, its best showing in recent years, following an 11-place jump the year before, according to The Star. Economists attribute the climb to policy reforms improving government and business efficiency, streamlined investment approvals, accelerated digitalisation, and stronger fiscal management.

Retail investor enthusiasm, meanwhile, appears robust even if institutional capital has been slower to follow. INVEST Fair 2026, Malaysia’s largest retail investment event, drew an expected 20,000 visitors across more than 70 hours of programming at Kuala Lumpur’s Mid Valley Exhibition Centre in July, according to event coverage on TradingView. Separately, a survey of more than 3,500 active users by digital wealth platform Versa found that 70% of respondents would prioritise investing over debt repayment or emergency savings if they received a sudden windfall, according to The Star — evidence of a pronounced retail “investment reflex” even amid broader questions about household financial resilience.

Fixed Income Is Where the Real Money Is Flowing

While equities lag, Malaysia’s fixed income market tells a different story. Employees Provident Fund chief investment officer Mohamad Hafiz Kassim told the Sasana Symposium 2026 that Malaysia is “punching above its weight” on global fixed income indexes, drawing outsized capital allocation given interest rate and yield differentials between Malaysian Government Securities and US Treasuries — a dynamic occurring even as the ringgit has remained notably stable, according to The Star. Speakers at the same event pointed to the broader global shift toward passive investing as a structural tailwind Malaysia is well-positioned to capture with continued policy follow-through.

What Explains the Equity Gap

Analysts point to several possible explanations for the growth-market disconnect: persistent foreign investor caution tied to regional and Middle East-driven geopolitical risk, a valuation overhang from prior years, and sector concentration that leaves broad indices under-exposed to the semiconductor and technology names actually capturing AI-linked investment flows. Whatever the cause, the gap represents either an opportunity for value-focused investors or a warning sign that Malaysia’s headline growth figures are not yet translating into corporate earnings momentum broad enough to move the market.

What to Watch

The second half of 2026 will test whether Malaysia’s fixed income strength and competitiveness gains eventually pull equity valuations upward, or whether the stock market’s caution proves to be the more accurate signal about underlying corporate health. Continued data centre and semiconductor investment, alongside any further IMD-style competitiveness validation, will be key catalysts to track.