China’s exports have been the good-news story in an otherwise mixed economic picture. They’re not just holding up; through the first four months of 2026 they were running about 14% to 15% above the same period a year earlier, according to figures cited by the US-China Economic and Security Review Commission and Vanguard’s economic outlook. That’s the kind of number that would normally signal a healthy economy. The complication is what’s happening underneath it.

A growth model showing its age

Manufacturing capacity utilization fell to 73.9% in early 2026 — near a decade low outside of the pandemic shutdowns, per the Commission’s bulletin. That’s the tell. China is producing and shipping more, but a growing share of its industrial base is running under capacity, which points to a structural mismatch: the country’s manufacturing engine has outgrown both its domestic consumption and, increasingly, what the rest of the world is willing to absorb without pushback.

Goldman Sachs Research, in a report cited by Goldman Sachs’ own analysis, forecasts 4.8% real GDP growth for 2026 — above consensus expectations of 4.5% — driven substantially by continued export strength and a softening drag from the property downturn. But that same report flags the labor market as a genuine weak spot: hiring, measured across a weighted average of PMI employment sub-indexes, is at its most depressed level in a decade outside Covid, and urban nominal wage growth slowed to just 3.8% year-on-year in Q3 2025.

Why Beijing isn’t reaching for stimulus

Given the export strength, one might expect policymakers to feel less urgency about consumption-side stimulus. That’s roughly what’s happening — and it’s a deliberate choice, not an oversight. Xi Jinping’s government remains committed to dominating high-value manufacturing, which means comprehensive fiscal stimulus aimed at consumers remains unlikely even as domestic demand stays soft, according to the Commission’s bulletin.

The People’s Bank of China is expected to hold its policy rate steady through the rest of the year, preferring targeted structural tools over a broad-based rate cut, per Vanguard’s forecast. That’s a notably cautious stance given how weak the property sector remains — property investment indicators are down 50% to 80% from their 2020–21 peaks, and a “meaningful domestic-demand turnaround remains elusive,” in Vanguard’s own words.

The regulatory push to keep capital at home

Two moves by Chinese regulators in mid-2026 point to where Beijing’s real priority sits: keeping household savings and private capital funneled toward domestic industrial policy rather than flowing overseas. New rules taking effect July 1 restrict outbound investment that could be used to export restricted technology or expertise under the guise of ordinary capital flows, with violations carrying fines, visa restrictions and industry blacklisting, according to the Commission’s bulletin. The regulations follow Beijing’s move to block the founders of AI firm Manus from completing a sale to Meta, even after the company had relocated its headquarters from China to Singapore — a signal that Beijing is willing to reach across borders to keep promising tech assets tethered to domestic or Hong Kong listings.

The currency and trade angle

Goldman’s team makes an out-of-consensus call worth flagging: it expects China’s current account surplus to rise to 4.2% of GDP in 2026, up from 3.6% in 2025, while the broader analyst consensus surveyed by Bloomberg expects a decline to 2.5%. The divergence comes down to export resilience — falling export prices are making Chinese goods more competitive even as the yuan is expected to appreciate slightly, with export-price inflation in dollar terms forecast to turn positive, rising to 0.7% from -2.7% the prior year.

The bottom line

China’s economy in 2026 is a study in contrasts: robust headline export growth sitting on top of underutilized factories, a weak labor market, and a property sector still in its fifth year of decline. The World Bank’s own baseline, published in its country program materials, projects growth moderating toward 4.0% by 2026 — a more conservative read than Goldman’s. Either way, the consensus across forecasters is the same: exports are carrying more of China’s growth than is healthy for the long run, and Beijing’s policy choices this year suggest it’s betting on technological dominance to eventually solve the demand problem, rather than opening the stimulus taps to solve it directly.

The US Treasury Department has moved aggressively against a sanctions-evasion network linking Russia and China, exposing a secret payment channel used to facilitate cross-border transactions for sensitive exports and designating a Kyrgyz Republic-based financial institution accused of helping Moscow evade restrictions, according to the US Treasury’s official press release.

Inside the Evasion Network

The scheme relied on so-called “ruble clearing platforms” that facilitate non-cash mutual settlement for payments tied to sanctioned goods. US-designated Russian financial institutions including Sberbank, Alfa-Bank, Sovcombank, T-Bank, and Bank Tochka were reportedly participants. Treasury identified Russia-based and China-based trading companies acting as counterparties in the network, while also designating Keremet Bank, which Treasury says was purchased specifically to create a new sanctions-evasion hub for Russian import payments and export receipts. Treasury simultaneously re-designated nearly 100 entities under Executive Order 13662, reinforcing risk exposure for any foreign party continuing to work with Russia’s military-industrial base.

China’s Banks Start Saying No

The pressure appears to be working, at least partially. Russian banking sources describe a dramatic slowdown in cross-border payment flows, not only with China but also with Central Asian intermediaries such as Kyrgyzstan and Uzbekistan. A Moscow-based banker quoted by CEPA described the situation bluntly, noting that money has largely stopped flowing and only a narrow set of intermediary countries remain viable, according to CEPA’s analysis of the sanctions squeeze. Chinese banks have reportedly begun refusing payments from Russia and rejecting transactions where Russian names appear anywhere in supporting paperwork — a shift CEPA attributes to a US threat late last year to impose secondary sanctions on Chinese banks, cutting them off from dollar access.

The Scale of China’s Role

China has become indispensable to Russia’s wartime economy. Bilateral trade between the two countries hit a record $237 billion in 2023, up nearly 70% since 2021, and China has supplied more than 90% of Russia’s semiconductor imports since the invasion of Ukraine began, more than half of which were Western-branded or produced, according to CSIS’s research on sanctions and Russia’s economic transformation. China’s imports from Russia rose 60% between 2021 and 2024, according to a Congressional Research Service report.

The Crypto Workaround — And Its Limits

As traditional banking channels tighten, Russian banks are being pushed toward cryptocurrency settlement, though CEPA reports Chinese counterparties treat crypto transactions with Russia as fast but increasingly costly, further raising the effective price of Russian imports. The sanctioned Russian exchange Garantex has been under US sanctions since April 2022, and few jurisdictions remain willing to accept Russian crypto transfers, though Russian bankers reportedly expect the UAE to emerge as a more permissive hub for such flows.

The EU’s Parallel Track

The squeeze is not solely an American project. The European Council voted on June 18–19, 2026, to extend EU economic sanctions against Russia for a further twelve months, through July 2027, while calling for swift adoption of a 21st sanctions package targeting Russia’s shadow fleet, energy revenues, and banking system, according to the Council of the EU’s official statement. For global banks and multinational corporates, the compounding effect of US and EU enforcement means compliance risk tied to any residual Russia exposure — even indirect exposure routed through Chinese or Central Asian intermediaries — is rising sharply heading into the second half of 2026.

China’s economy is being pulled in two directions at once. Fixed-asset investment fell 4.1% year-on-year in the first five months of 2026 — the steepest decline since May 2020 — while exports surged 19.6% in May alone, powered overwhelmingly by semiconductor and AI-hardware demand, according to Deloitte’s Weekly Global Economic Update.

The Property Sector’s Deepening Slide

Property investment within that fixed-asset figure fell 16.2% year-on-year, the sharpest drop recorded in the current downturn. Roughly two-thirds of Chinese household wealth is held in property, so the sustained decline in home values is pushing consumers toward higher savings and lower spending as they attempt to rebuild balance sheets, per Deloitte’s analysis from chief global economist Ira Kalish. Government efforts to stabilize the housing market have so far failed to reverse the trend, with the excess capacity built during the prior debt-fueled construction boom still working through the system.

Exports Riding the Global AI Supercycle

The export side of the ledger tells a starkly different story. Semiconductor exports rose 110% year-on-year in May, mobile phone exports climbed 44%, and exports of automatic data-processing machines — the category covering computer and data-storage components — increased 66%. The May export growth of 19.6% was the second-largest year-on-year increase since January 2022, trailing only the 39.6% surge recorded in January–February 2026. Part of that strength reflects inventory build-up by global buyers anticipating further supply-chain disruption from the ongoing Middle East conflict.

Tariff Investigations Add a New Layer of Risk

Even as exports boom, the trade environment China and its partners face is becoming more adversarial. The US administration has launched an investigation into 60 countries — including the European Union — to determine whether they are importing goods made with forced labor, with the goal of imposing tariffs ranging from 10% to 12.5%. The move sets the stage for renewed friction even after the US and EU reached a trade agreement approved by the European Parliament the previous year, according to Deloitte’s tracking of the administration’s tariff strategy.

The China-Russia Financial Relationship Under New Strain

China’s export strength has not shielded it from secondary pressure tied to its economic relationship with Russia. US Treasury sanctions actions have begun targeting cross-border payment channels between Russian and Chinese entities used to facilitate sensitive-goods transactions, and Chinese banks have reportedly started refusing payments from Russian counterparties amid the threat of US secondary sanctions, according to CEPA’s analysis of the sanctions squeeze. China has supplied more than 90% of Russia’s semiconductor imports since the Ukraine war began, per CSIS’s research on sanctions reshaping Russia’s economy, making Beijing’s compliance posture a critical swing factor for Moscow’s continued access to Western-branded technology.

What It Means for the Regional Outlook

Asia House projects China’s growth easing modestly from 4.8% in 2025 to 4.6% in 2026, a relatively soft landing given the scale of tariffs imposed on Chinese exports, reflecting redirected trade flows toward Asian and European markets and a weaker real effective exchange rate, according to Asia House’s Annual Outlook. For ASEAN economies plugged into China’s supply chains — Malaysia and Vietnam in particular — the divergence between China’s property drag and export strength will remain a key variable shaping regional growth through the rest of 2026.