Recession with Chinese Characteristics

The Trump-Xi summit was interpreted by some,  including Xi , to represent America’s decline and China’s rise. While  President Trump’s behavior  often suggests decline, one way or another, China’s rise should be questioned. Due to policy choices and demography, China’s  long-term economic future  is grim. Perhaps more surprising: in the short term, China’s purely domestic economy may have been shrinking for at least two years. “Domestic,” of course, has a giant qualifier. The goods trade surplus neared $1 trillion in 2024,  $1.2 trillion in 2025 , and is on course to be extremely large again in 2026. This matters a good deal, even to the internal economy. The money earned by goods exports can spill into internal sectors—offering revenue that can be used at home to pay wages, fund research and development and so on. Internal sectors can be healthier than they look on their own. Still, the internal sector is the larger part of the economy and the target of most policy aimed at prosperity and vibrancy. It shouldn’t be propped up by foreign demand. Xi Jinping has stated an intent to  make the world more dependent  on China and China less dependent on the world. With exports soaring and imports stuttering, the somewhat ironic result that China has become reliant on foreign markets for growth. Utterly reliant. One form of GDP accounting breaks the total into net exports plus internal investment and consumption, public and private. In 2024, using official data on  GDP  and the  exchange rate , the increment to nominal GDP was about $770 billion, with a goods trade surplus of about $990 billion. Goods trade is one component of net exports. The other, services trade, showed a  $160 billion deficit . This implies a small decline in the size of the domestic economy. Last year saw a larger decline. Using official statistics,  the increment to nominal GDP  was $760 billion. The  services trade deficit was close to $120 billion  and the goods trade surplus was a staggering $1.19 trillion. The purely domestic economy thus shrank by $300 billion. Again, this is just a simple form of accounting, neither causal nor conclusive. But it’s no longer a small aberration.   The start of 2026 is clouded by uncorrected seasonality and as yet incomplete data and revisions. Nonetheless, in the first quarter the  goods trade surplus  was again clearly larger than the  increment to nominal GDP  as a whole. There was apparently no change in April—the consumption and investment indicators signaled contraction while the goods trade surplus  touched $85 billion . (And this obviously didn’t begin with the Iran war.) Other salient indicators show a similar picture. For the first time since the data was anywhere close to being meaningful, more than 5000 listed non-financials reported  three consecutive years of earnings declines  2023–25. A national household finance survey conducted by a Chinese university showed  wealth declining sharply  from summer 2023 to summer 2025 (latest available). National wealth as a whole  did grow in 2024 , though this more fully captures net exports. Going back farther, some observers foresaw a boom when zero-Covid policies were lifted. Never happened. Instead, core internal economic indicators were weaker  2022–25 than 2016–19  while net exports were far stronger. A single angle on always questionable Chinese data is never definitive but internal weakness looks to have since evolved into outright contraction. The post Recession with Chinese Characteristics appeared first on American Enterprise Institute - AEI .