This article was first published in Caixin Global on February 11, 2026.
China’s post-pandemic recovery is no longer a straightforward story of rebound or slowdown. It is better understood as a two-speed economy — one in which fast-expanding new sectors are gaining traction, while traditional growth engines remain structurally constrained. This divergence has helped stabilize growth, but it has also limited the breadth and durability of the recovery.
According to AMRO’s 2025 Annual Consultation Report on China, emerging sectors have continued to expand rapidly even as legacy sectors — most notably the property sector — weigh on domestic demand. Understanding this two-speed dynamic is essential to assessing both China’s near-term outlook and the credibility of its longer-term growth transition.
The momentum in the new sectors is unmistakable. New economy sectors such as electric vehicles, advanced manufacturing and green technologies have recorded strong growth, supported by industrial upgrading, targeted policy support and resilient external demand from markets outside the U.S. Goods exports have remained robust, and while foreign direct investment has become more selective, inflows continue to favor high-tech and policy-aligned industries. Together, these factors have anchored overall economic growth even as global trade tensions intensify.
Yet this faster-growing segment of the economy has clear limits. New economy sectors remain relatively small and concentrated, constraining their ability to generate broad-based employment, income growth and consumption. Rapid expansion has also introduced new risks, including cyclical oversupply, intensifying price competition and rising protectionist pressures abroad. Rapid growth in new sectors does not necessarily translate into balanced and self-sustaining growth.
At the same time, growth in other parts of the economy has been slower and more fragile. The prolonged downturn in the property sector continues to cast a long shadow over household confidence and local government finances. Weak demand, high inventories — particularly in lower-tier cities — and ongoing developer stress have kept the recovery in real estate subdued, despite targeted measures such as lower mortgage rates, reduced down payments and expanded credit support for viable projects.
The fiscal spillovers have been significant. The sharp decline in land sale revenues has exposed vulnerabilities in the land-based fiscal model of local governments. While central government transfers and expanded bond issuance have provided partial relief, many local governments — especially in lower-tier regions — remain constrained by weak revenues, sizable social spending obligations, off-balance-sheet debt repayment pressures and tighter borrowing controls. These constraints have limited local governments’ capacity to provide countercyclical support, dampening the overall fiscal impulse even amid an expansionary nationwide fiscal stance.
Household behavior reflects these structural headwinds. Consumer confidence remains fragile, shaped by subdued income prospects and property-related wealth losses. Although consumption recorded solid growth in 2025, much of the momentum was driven by fiscal subsidies through consumer goods trade-in programs. These measures helped stabilize demand, but they largely front-loaded purchases of durable goods and are unlikely to sustain consumption growth on their own.
Policy support from the government has nonetheless played a critical stabilizing role in narrowing the gap between these divergent growth dynamics. A broad stimulus package introduced in September 2024 — combining monetary easing, fiscal expansion and targeted property measures — helped revive growth momentum. GDP growth stabilized at 5% in 2025, supported by firmer consumption and resilient exports, underpinned by diversification away from the U.S. toward other markets. Inflation, however, remained subdued, underscoring persistent demand-side slack.
Looking ahead, growth is expected to remain stable, with AMRO projecting a moderation to 4.6% in 2026. Risks remain tilted to the downside, as a delayed recovery in real estate, rising financial strains among some local governments, and pockets of vulnerability in some smaller banks could weigh on confidence. Externally, potential escalation in geopolitical tensions and deepening geoeconomic fragmentation could pose additional challenges to trade and investment. On the other hand, a faster resolution of the property sector overhang and local government financing difficulties could provide a larger-than-expected boost to economic activity than the baseline forecast suggests.
The main policy challenge, therefore, is not whether China can maintain growth in the short term, but whether it can narrow the gap between these contrasting growth patterns and engineer a more balanced transition.
In the near term, policy priorities should focus on sustaining growth and stability. Continued fiscal support remains essential, particularly measures that ease pressures on local governments while directly strengthening household incomes and consumption. Monetary policy should remain accommodative and well calibrated, complementing fiscal efforts while safeguarding financial stability. Addressing stalled pre-sold projects and excessive housing inventories — especially in lower-tier cities — may require targeted direct fiscal support and stronger coordination between the central and local governments.
Over the medium term, deeper structural reforms will be critical. Placing local government finances on a sound and sustainable footing will require further reform of central-local fiscal relations. Equally important is fostering more resilient and inclusive household consumption, supported by a higher labor share of income and a people-centered fiscal framework that prioritizes public services, social protection and human capital investment.
Industrial policy will also need recalibration. Incentive systems that have encouraged concentrated investment and episodic oversupply should give way to a more disciplined approach — one that raises productivity, crowds in private investment, and supports green and digital transformation without amplifying external frictions. Deeper financial sector and capital market reforms, supported by stronger monetary policy transmission, would further improve the allocative efficiency of capital.
China’s two-speed recovery is not a sign of stalled progress, but of an economy in transition. How effectively policymakers sustain momentum on the faster-growing sectors while addressing structural drag on the more constrained parts of the economy will shape China’s growth trajectory in the years ahead, with important implications for the regional and global economy.