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China’s economy met the government’s official growth target in 2025, with official figures showing real gross domestic product (GDP) expanded by 5%.

Exports played an outsized role in delivering this headline growth. Despite a simmering trade war with the United States, China finished up the year with a record-breaking trade surplus of US$1.2 trillion as it lifted exports to new markets in the rest of the world.

Yet behind these headline figures, China’s economy continues to face some stubborn headwinds. Consumer spending remains subdued. Exports—while strong—face mounting global uncertainty. And government expenditure is constrained by public sector debt pressures.

Adding to this, China’s population continued to shrink for the fourth straight year in 2025 as the birth rate reached a record low, reinforcing concerns an aging population will hold back the economy in coming years.

A shrinking population isn’t necessarily incompatible with rising living standards. What matters is whether productivity growth can compensate for a smaller workforce.

For China, that means domestic investment, rather than consumption or expansionary government spending, is likely to be the key mechanism for sustaining growth.

Problems at home

Recent data suggest China’s weak household consumption is not merely a temporary, post-pandemic phenomenon but instead reflects deeper structural factors.

While China’s GDP growth reached its annual target in 2025, retail sales grew by only 0.9% year-on-year in December, the slowest pace since late 2022.

This highlights the fragility of consumer demand, despite policy measures aimed at supporting spending.

Although the services sector continues to expand and accounts for more than half of GDP, household consumption as a share of the economy remains low by international standards.

High savings rates, lingering uncertainty linked to the property downturn, and concerns about job and income security continue to weigh on spending decisions.

This is consistent with long-running trends identified in academic research. Policies to stimulate consumption can boost spending in the short term, but they have not fundamentally altered households’ preferences to save rather than spend.

Strong exports

Manufacturing output remained resilient, and net exports contributed significantly to overall expansion. This helped offset weak domestic demand.

China’s exports to the US did fall in 2025. But a shift to new markets in Southeast Asia, South America, Europe and Africa more than offset this decline.

However, China’s reliance on net exports as a source of growth is vulnerable. While exports contributed unusually heavily to growth in 2025, this pattern may be difficult to repeat amid protectionist pressures and potential tariff escalations.

Constraints on government spending

In theory, government spending could step in to stabilize demand. Right now, that’s difficult in practice.

Local governments face high debt burdens, falling revenues from land sales and rising pressures related to social programs and maintaining infrastructure.

This limits their capacity for large-scale government spending without making financial risks worse.

Despite this, China continues to generate very high national savings. In 2024, China’s national savings reached 43.4% of GDP. Meanwhile, consumption as a share of GDP—the reverse side of the savings rate—remained around 20 percentage points below the global average.

Turning savings into investment

If a country’s savings are not absorbed domestically through productive investment, they end up fueling a current account surplus. This can expose an economy to tensions with trading partners.

In 2025, investment in fixed assets (long-term investments such as buildings and equipment) fell 3.8%, with property investment plunging by about 17%.

This signals both the scale of the investment decline in the real estate sector and the need to pivot investment toward higher-returning sectors, such as manufacturing, services and technology.

In the long run, channeling China’s high national savings into efficient domestic investment could have greater impact than government stimulus measures. That’s as long as capital is allocated to productive firms and sectors rather than bridges to nowhere.

A shrinking population

China’s shrinking population adds a further important dimension to this challenge. Population contraction is not necessarily incompatible with rising living standards.

But it creates a need to boost productivity, through technological progress, innovation and upskilling the labor force.

Official statistics already show technology-intensive services and high-value manufacturing segments are expanding faster than the rest of the economy.

China’s 2025 growth outcome masks a set of enduring structural realities. Consumer spending is likely to remain subdued, exports face increasing global uncertainty, and fiscal policy is constrained by debt burdens.

The key policy challenge, therefore, is not to reverse demographic trends at any cost. It is to accelerate the transition toward a more productive, capital- and knowledge-intensive growth model.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Citation: To sustain prosperity as its population shrinks, China will have to invest big at home (2026, January 20) retrieved 20 January 2026 from https://phys.org/news/2026-01-sustain-prosperity-population-china-invest.html

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