August 11, 2026: Between April and June, the Chinese economy expanded more slowly than it had since 2022. The cause of this was declining household consumption, which blurred manufacturing efforts and exports. All this increased anxiety over the prospects of long-term sustainability and the creation of unbalanced growth.

Local and international economists expected five percent growth in the first quarter. Actual performance was 14 percent less. China's economy expanded at its slowest pace in over three years in the second quarter, with weak household consumption clouding prospects for strong manufacturing and intensifying concerns over the long-term sustainability of its unbalanced growth model.

All consumption is down in China, particularly among the affluent and the 200 million-strong middle class. Imports of high-end foreign goods have fallen by nearly half. These affluent Chinese have cut their consumption of non-essential items to a fraction of their normal levels. Chinese retail outlets are suffering, with layoffs and bankruptcies spreading. For the majority of Chinese, this means more unemployment and a desperate scramble to secure or create new jobs in the still-vibrant gig economy. High-tech export industries are still going strong, as is demand from overseas customers.

The current economic problems were not so much a surprise as a continuation of economic woes that have been underway for some time. Four years ago, China’s economic problems continued to worsen, notably in bank failures, unemployment rates, and economic growth. About a fifth of 16- to 34-year-olds in China seeking work failed to find it. That’s twice the rate for other industrialized countries. More of these young job seekers, especially recent university graduates, are settling for lower-paying, low-career-growth government jobs. The youth unemployment rate is partly due to the rapid growth in the number of university graduates. At the end of the 20th century, it was one million grads a year. Now it's 11 million a year.

The GDP growth rate continues to slide, and bank failures are growing. The government has stopped announcing annual GDP growth rates and now says it will do its best to sustain economic growth. Those efforts are concentrating on preventing a collapse of the financial system. Bank failures are a major and growing part of the problem. China implemented bank deposit insurance in 2015. It covers losses in bank failure of up to $75,000 per depositor. That protects all but a few percent of depositors, who hold less than half of banks' liquid assets. The problem is the bank must officially fail before depositors can get their money. Currently, nearly half a million depositors are unable to access their money, and the government further erodes confidence in the banking system by tolerating banks' excuses (“we are upgrading our software”) to delay triggering deposit insurance payouts. Customers who protest publicly are silenced by changing their health status to “infected”. Anyone with that designation cannot appear in public without risking arrest and confinement. The more frequently and longer these tactics are used, the more people will lose confidence in the banking system. There is already a lot of illegal activity and corruption in the banking system, and learning more about it has long-term effects on popular attitudes towards the government. This is one reason for the problems contained within Evergrande, the largest real estate firm in China. Evergrande is still sliding towards bankruptcy. Efforts to prevent that have failed so far.

China’s economy was already slowing down when the current covid19 shutdown in Shanghai and elsewhere made matters worse. There is also an unresolved real estate bubble, and more Chinese banks are experiencing liquidity problems as they struggle to meet withdrawal demands. The economic damage caused by all this led to a $5 trillion stimulus program to alleviate worker suffering and provide businesses with the cash needed to keep operating. The actual decline in GDP growth is a state secret but is believed to be severe enough to cause GDP to shrink and mark the official end of decades of high GDP growth. China’s economy, at $18 trillion (or less) per year, is the second-largest in the world. The Americans have economic problems, but not to the extent China does.

This is mainly about the size of their $117 trillion in government debt, which is nearly four times the size of the U.S. debt. China's debt is 6.5 times GDP, while the U.S. debt of $29 trillion is 1.26 times GDP. It’s worse when you take population size into account. China has about four times the population of the U.S., meaning the average Chinese person has about 16 percent of an American's income while carrying far more government debt per capita. Much of that debt stems from millions of housing units built by local governments that few Chinese can afford or choose not to consider, because many of these Ghost Cities are too far from where the jobs are or so defective as to be useless. China’s bond market is the second largest in the world after the United States. With this kind of debt, quality (the ability of debtors to repay) is a major factor. The quality of Chinese debt is much lower than the U.S. or the West in general, and the extent of this problem was deliberately hidden by debtors, especially local governments, for decades. Some of that bad debt is related to BRI (Belt and Road Initiative) projects, which is currently about $60 billion. Poor management, COVID-19, and local violence and corruption turned most of that debt into a liability, or worse, because default either means China assumes ownership of the project or the local government interferes and creates a diplomatic as well as economic problem. All this makes China’s real estate bubble far more dangerous than those encountered in previous major economies.

The situation in the South China Sea is becoming more difficult for China because the Philippines has implemented measures to reduce the Chinese threat by curbing corrupt Chinese influence in the country. That is the main reason why the new Filipino government is canceling three Chinese-financed railroad construction projects worth nine billion dollars. This was part of a $24 billion Chinese proposal for projects that improved Filipino ports and transportation networks. The cancellation of these projects has been under consideration for over a year due to vague loan terms and China's failure to perform. The Chinese are believed to be using the loan program as a weapon to coerce the Philippines into making concessions in the South China Sea.

A national opinion survey conducted at the end of June found that Filipinos trusted the United States, Australia and Japan the most while trusting China and Russia the least. Respondents were asked to rank a list of 10 nations by trustworthiness. The results of the survey, ranked by trust, were the United States, Australia, Japan, Germany, South Korea, Britain, Indonesia, India, Russia, and China. There was some support for China, but the U.S. had more than three times as much support. This meant the Americans had the support of most Filipinos while China had only a small minority. Only Russia and China had the majority of Filipinos mistrusting them. Trust of Russia used to be positive, but the February invasion of Ukraine and Chinese support for it made Russia nearly as untrustworthy as China to most Filipinos. Until China expanded its “lost territory” claims to the South China Sea nearly two decades ago. China was seen as a potential ally of, and investor in, the Philippines. Despite numerous Filipino diplomatic efforts, China refused to compromise on its claims. At this point, China is seen as the greatest threat to the Philippines, especially since the Chinese appear to have additional claims on Filipino territory and independence as a nation.