As 2026 dawns, headwinds are multiplying for many of the world’s economies, and even China hasn’t been able to shake off the uncertainty.
The world’s second-largest economy has been one of the great success stories of the last 50 years, growing at the astonishing pace of 10 percent per year and becoming a dominant player in global trade.
But high youth unemployment, stubbornly low consumption, deflation, and a persistent real-estate crisis are challenging China’s businesses and government. Its annual GDP growth has cooled to around 5 percent. And that’s before considering the recent escalation of trade tensions with the United States, as tariff rates in both countries have climbed to unprecedented levels.
Against this tumultuous backdrop, the Kellogg School convened an international roundtable of economists, policy experts, and journalists to discuss the state of the Chinese economy—from real estate, stock markets, industrial policy, and tariffs to science, technology, education, and labor.
Co-organizer Nancy Qian, James J. O’Connor Professor of Managerial Economics & Decision Sciences at Kellogg and co-director of the Global Poverty Research Lab, analyzes the most important takeaways from this unique discussion.
China’s real-estate anxieties linger
When Chinese real estate giant Evergrande filed for bankruptcy in 2023, many observers predicted it would trigger the kind of financial crisis that hit Japan in the 1990s and the U.S. in the 2000s.
But that hasn’t happened yet. While real-estate values have continued to sink outside of China’s largest cities, the damage has not spread to other economic sectors, as it did when the U.S. crisis brought down giants like Lehman Brothers and AIG.
“One thing people are concerned about is how the real-estate crisis will lead to a banking crisis,” Qian says. “You can’t have a crisis if you don’t have a run on banks, and you won’t have a run on banks in China because everything’s controlled by the state. But it’s not like the problem goes away, it’s just going to show up in a very different way.”
Indeed, anxieties about a crisis linger because of real estate’s importance to the Chinese economy. China’s financial markets, including its domestic stock market, remain underdeveloped, leaving households with few alternative investment options. Provincial and city governments have also borrowed heavily against real-estate assets to fund local initiatives.
“It’s intersecting with these deeper fundamental issues where the financial market isn’t that developed and the state controls a lot of assets,” says Qian. “Some of those assets might be bad assets, and that means that there will be problems. Everyone seems to agree on that, but we don’t exactly know how they’re going to manifest, because we’ve never had a situation like this before, where there’s a huge economy with so much state control.”
The trade war is not just about trade
The start of the second Trump administration brought a severe spike in tariffs against Chinese imports to the U.S.—and retaliatory tariffs and export controls on rare-earth minerals from China. Yet this was only the latest chapter in a trade conflict that started with the first Trump presidency and continued during the Biden administration.
As a result, trade between the two countries has shrunk dramatically from its peak in 2018. That drop may explain why higher tariffs have yet to translate to a large increase in U.S. inflation or severe damage to either economy.
Instead, it’s more accurate to interpret the trade threats of the past year as posturing in a new geopolitical order, Qian says.
“If you look at the way that economists have discussed trade in the last 20 years, we discuss it in a vacuum with no politics,” says Qian, who is introducing a course on “geo-economics” at Kellogg this spring. “Now we’re forced to be a little bit more honest and say that actually a lot of economic transactions, they always had geopolitical intent in the background.”
From this perspective, the aggressive tactics of the U.S. and China over the last year may be intended as messaging towards the rest of the world, not each other. Qian sees a shift towards a world divided into three “spheres of influence”—the U.S., China, and Russia. This realignment means less focus on multinational cooperation over trade and more shows of strength on trade and political issues.
As a result, countries and businesses caught in the middle of this jousting will need to watch out for signs of geopolitical instability as much as changes in trade policy.
“While tariffs might go up or down, other things might happen to make people not want to trade,” Qian says. “China could expand its footprint into Southeast Asia in a way that’s very destabilizing for businesses. Or the U.S. could keep talking about Greenland, reducing support for NATO. I see all of this as these countries testing the waters.”
Today’s technology race flips the Cold War script
One way China has strengthened its position in this geopolitical landscape is by reducing its reliance on the U.S. and other countries for phones, computer chips, and other key technologies.
“Technological self-sufficiency” has appeared in the government’s last two five-year plans and is expected to feature again in its next plan. The country’s massive investment in education, manufacturing, and innovation is starting to bear fruit, with China becoming a leader in emerging technologies such as AI, robotics, and electric vehicles.
It’s tempting to think of this high-tech race as an update on the U.S.–Soviet competition of the Cold War around nuclear technology, space exploration, and other strategic areas. But Qian says that’s not the right framing.
“That’s a very misleading comparison in the sense that, during the Cold War, yes, there were two sides, but the difference is that the U.S. side had almost every single developed country with it while the Soviets were quite isolated,” she says. “That’s not true today. China isn’t actually being isolated, and the current U.S. strategy is isolating itself.”
If there’s a comparison to the post-WWII superpowers to be made, it’s a reversal of historical roles, she says. Where the United States spent heavily on science and opened its doors to talent from around the globe in the 20th century, it’s now cutting research funding and limiting immigration at a time when China has announced new visas for skilled workers.
“During the Cold War, the U.S. spent huge amounts of money on basic science … but that’s not what the U.S. government is doing now. Federal government spending on basic scientific research hasn’t changed since the 1980s,” Qian says. “In contrast, it’s China that is spending huge amounts of money on technology and R&D. So, if anything, China is taking the American Cold War playbook and trying to implement the same strategies.”
Cracks are showing in China’s educational system
China’s hard push into technology was assisted by its centralized education system, including the Gaokao, the country’s National College Entrance Examination. Instituted after the Cultural Revolution in the 1970s, the universal exam allows the government to funnel students into priority areas such as science and engineering by setting higher quotas in those fields.
Chinese citizens generally view the system as transparent and objective, an opportunity for social mobility that is free from corruption and political favoritism. But the prominence of the system also creates intense pressure to score highly on the exam, leading many households to spend heavily on tutoring and education. Today, a tightening job market is further raising the stakes and creating frustration with the Gaokao system.
“The ultimate problem is that there aren’t enough jobs that pay well, and because of that, there’s just a lot of competition,” Qian says. “That’s similar to any other economy, except in China, the system is more rigid. There are very few paths to a good career except schooling.”
Even students who choose—or are sorted by exams into—more-vocational tracks face career uncertainty. The technological focus of the Chinese economy is also leading more manufacturers into automation, and many factory jobs now also require college degrees.
“When that technology comes, and it makes labor irrelevant, they are going to have a whole generation of people who can only do low-skill jobs that are no longer needed because they’re now done by robots,” Qian says. “It’s going to be very difficult for the Chinese people and the government to deal with.”