(Yicai) May 13 -- China’s economy has generally performed well this year with most key indicators beating market expectations. Industrial production has grown at a solid pace, investment has returned to positive growth, exports have surged, prices have edged up and the unemployment rate has remained relatively stable. However, underlying risks persist, including an imbalance between strong supply and weak demand as well as a significant disparity between domestic and external demand.

Last year, the author had major concerns about persistently weak price levels. When prices are too low, and especially when they experience negative growth, this can easily trigger a downward spiral in market expectations, which is very harmful to economic development. Fortunately, price trends began to stabilize and recover from the fourth quarter of 2025, but whether this upward momentum can be sustained remains to be seen.

At the same time, the current price situation does provide some buffer against the impact of rising energy costs. However, it must be recognized that higher energy prices could have serious negative consequences, significantly squeezing corporate profit margins.

Demand Imbalance

Although many economic indicators are improving, consumption recovery has been very slow and private investment remains in a state of negative growth. Against this backdrop, even if the economy maintains stable growth, the pressure of “strong supply and weak demand” will not disappear. And even though the consumer price index, which is a measure of inflation, has begun to rise, this does not mean that consumption is experiencing a strong rebound. If the imbalance between supply and demand persists, it will further weigh on corporate earnings.

Domestic demand remains relatively weak, while external demand is very strong. On the surface, this may seem to support overall growth, but it also creates a series of challenges. Looking back at the past 20 years of China’s economic rebalancing, this adjustment is still ongoing.

In the first two months, China’s exports surged 19 percent year on year. While this provides the country with a more solid foundation for economic growth, other economies may be concerned about the potential impact of China’s large-scale exports on their own markets. Meanwhile, there is a significant divergence between emerging industries and traditional sectors within the domestic economy. Some new industries are growing strongly, while traditional industries are under considerable pressure.

Key Risks

There are both long-standing issues and newly emerging uncertainties in areas such as real estate, local government debt and population aging as well as the Middle East conflict. These factors will have a big impact on China’s economic trajectory this year and in the longer term.

In recent years, China’s economic slowdown has likely not been just a cyclical issue, but rather the result of a combination of cyclical and structural factors. The country is undergoing a profound structural transformation, which can be described as a shift in its growth model.

This transformation is reflected in several ways. On the supply side, growth in the past was largely supported by traditional industries, while future growth depended more on emerging sectors. This is also why China is focusing on developing new quality productive forces. On the demand side, past growth relied significantly on international markets, whereas future growth will need to be driven more by domestic demand.

Policy Priorities

In terms of macroeconomic policy, fiscal policy should be more proactive and monetary policy should remain moderately accommodative. However, it is important not to overestimate the impact of macroeconomic policies as their effectiveness is often limited.

Industrial policy should be more targeted and industry-specific, as this is key to addressing structural issues.

Deep reforms are key to restoring investor and consumer confidence. China’s reform and opening-up process has been highly successful, thanks to the continuous reform of systems and mechanisms which allows for ongoing optimization.

(The author, Huang Yiping, is Boya Distinguished Professor at Peking University, dean of the National School of Development and dean of Peking University’s Institute of South-South Cooperation and Development)

Editor: Kim Taylor