China’s weaker growth, labour market strains and shifting investor sentiment toward Chinese assets

China Slowdown, Jobs & Market Sentiment

China’s Strategic Recalibration in 2026: Navigating Weaker Growth, External Tensions, and Market Volatility

As 2026 progresses, China remains at a critical juncture, grappling with persistent economic headwinds, internal vulnerabilities, and a rapidly evolving global environment. While the nation’s long-term goals of technological sovereignty, resource independence, and regional influence persist, recent developments signal a deliberate effort to recalibrate strategies in response to mounting challenges. This complex landscape influences investor sentiment, policy choices, and China’s broader geopolitical stance.

Deepening Internal Challenges Amidst Sluggish Growth

China’s domestic economy continues to face significant pressures that threaten stability and long-term development:

Record Youth Unemployment: November 2025 data revealed youth unemployment among 16-to-24-year-olds reaching 17.3%, the highest on record. This surge highlights mismatch issues—particularly as sectors like technology, green energy, and services struggle to absorb a growing influx of graduates. Elevated youth unemployment not only dampens consumer confidence but also poses risks to social stability if sustained.
Property Sector Malaise: Despite a modest 6.6% YoY increase in retail sales in December 2025, the property market remains weak. Falling property prices and stagnant household incomes have eroded household wealth, leading to construction layoffs and a 1.7% contraction in fiscal revenues in 2025—the first decline since 2020. This ongoing slowdown constrains the government’s capacity for large-scale stimulus, prolonging economic sluggishness and adding to market uncertainty.
Demand and Fiscal Constraints: Consumer demand remains subdued amid cautious policy measures. Policymakers are wary of overheating financial markets, resulting in tighter credit conditions and restrained stimulus efforts. As a result, economic growth remains sluggish, and investor confidence stays fragile.

Policy Responses: Stabilization and Strategic Reinvestment

In response to these persistent challenges, China is deploying a multi-pronged approach emphasizing stability, technological advancement, and resource security:

Monetary Easing & Demand Support: The People’s Bank of China (PBOC) has maintained benchmark rates at 3% for 1-year loans and 3.5% for 5-year loans. Recent signals suggest a slight easing to encourage credit expansion, aiming to stimulate demand while maintaining financial stability.
Shift Toward Service-Led Growth and Employment: Recognizing the importance of long-term employment stability, China is prioritizing labor-intensive service sectors such as tourism, healthcare, education, and digital platforms. This strategic pivot seeks to reduce reliance on property and manufacturing, fostering more resilient employment and domestic consumption.
Major Investments in Technology & Green Energy: Capital injections continue into semiconductors, AI chips, and renewable energy:
- The CXMT IPO raised $4.2 billion to expand domestic chip manufacturing.
- Investments in renewables and electric vehicle (EV) batteries bolster China’s leadership in green technology and innovation.
Resource Security & Space Exploration: To mitigate geopolitical risks and secure critical inputs, China is expanding domestic mineral extraction, particularly rare earths and copper. Notably, recent policy moves include reducing the forward FX risk reserve ratio to zero, a significant step to ease FX hedging costs and support currency market functioning. Additionally, efforts in space-based resource exploration, such as lunar and asteroid mining, aim to diversify supply chains and enhance technological sovereignty.
Corporate Realignment & Hedging: Major firms are adapting by diversifying product portfolios and employing currency and geopolitical hedging:
- Alibaba’s T-Head is targeting an IPO to fund AI chip development.
- Geely aims for 6.5 million vehicle sales by 2030, focusing on electric mobility.
- ByteDance partners with Samsung to develop advanced chips, seeking to reduce reliance on foreign semiconductors.

These initiatives collectively aim to build resilience through technological independence, resource sovereignty, and regional integration.

External Dynamics: Reserves Rebalancing, Trade, and Geopolitical Tensions

China’s external environment reflects strategic shifts driven by geopolitical tensions and market adjustments:

Reserves Rebalancing & Financial Sovereignty: Recent data indicates China has reduced its US Treasury holdings to about $688 billion, the lowest in 17 years, as part of a long-term de-risking strategy. Meanwhile, gold reserves have surged, with prices surpassing $5,000 per ounce, serving as a hedge against dollar volatility and geopolitical risks. These moves underscore China’s push to diversify reserve holdings and strengthen financial sovereignty.
Trade Surplus & Regional Integration: In 2025, China achieved a record trade surplus of around $1.2 trillion, driven by intra-ASEAN trade and the RCEP agreement. The country is reducing dependence on Western markets and deepening regional economic ties, positioning itself as Asia’s central trade hub and fostering regional resilience.
US-China Tensions & Trade Policies: Tensions persist:
- The Biden administration considers new tariffs and export controls targeting AI chips and advanced technologies, potentially accelerating decoupling efforts.
- Despite this, trade continues pragmatically; recent US soybean imports (~12 million tons) exemplify a nuanced approach balancing cooperation and competition.
Currency & Capital Flows: The yuan has experienced moderate depreciation, especially as mainland stocks declined over 2% amid growth concerns and geopolitical uncertainties. The exodus of roughly $68 billion by state-backed investors signals risk aversion. Meanwhile, the dollar’s recent rebound, driven by hawkish Federal Reserve signals, complicates capital inflow prospects and increases market volatility.

New Developments: US Federal Reserve Signals & Market Impact

A critical recent development is the Federal Reserve’s cautious stance:

According to a report by Michael S. Derby (Reuters, Feb 24), two Fed officials have indicated that there is no imminent need to change monetary policy, signaling patience amidst resilient US data. This dovish outlook suggests a pause on rate hikes or cuts, impacting global financial conditions.

Implications for China:

The pause in Fed rate hikes tends to stabilize the dollar, but risks of further appreciation remain if US economic resilience persists.
The yuan faces continued depreciation pressures, with market volatility heightened by risk aversion and geopolitical uncertainties.
Capital flows are likely to stay cautious, with risk-averse investors reducing exposure to Chinese assets amid ongoing geopolitical tensions and policy uncertainties.

Market Sentiment & New Financial Instruments

Recent market signals reflect China’s efforts to strengthen resource control and technological sovereignty:

Futures in Critical Minerals: The potential launch of rare-earth futures contracts on CME aims to enhance transparency and hedging capacity for vital minerals, aligning with China’s resource dominance and supply chain security strategies.
AI Sector Valuations & Risks: Despite sector corrections, AI stocks continue to trade at high premiums, as highlighted in “Follow the leverage to find risks”. Investors are cautioned about high leverage and valuation risks, emphasizing the need for prudence amid sector volatility.
Technological Scaling & Western Underestimations: Discussions like “China, AI, and Scale” highlight China’s massive data advantage and scaling capabilities, which could outpace Western efforts in AI and tech sovereignty.
Geopolitical Risks & Supply Chain Diversification: Heightened tensions over US export controls, tariffs, Taiwan, and the Russia-Ukraine conflict continue to amplify risks, prompting China to diversify supply chains and internalize critical manufacturing.
Regional Market Dynamics: In Hong Kong and neighboring markets, risk reassessment has prompted rebounds on hopes of less aggressive US trade measures, though tariff uncertainties sustain volatility.

Current Market Environment: Elevated Volatility & Short-Term Risks

Analyses underscore a volatile global landscape:

The “Trade Uncertainty” video highlights how geopolitical tensions and trade frictions fuel market swings.
The sell-off in AI and tech stocks driven by tariff fears and valuation concerns reflects investor caution.
FX fluctuations and capital outflows persist, with risk re-pricing especially in state-backed assets with currency hedging strategies.
The dollar’s recent rebound and yuan depreciation keep market volatility elevated, complicating short-term stabilization efforts.

Implications & Strategic Outlook

While China’s economic growth remains sluggish, its long-term strategic shift toward self-reliance, regional integration, and resource sovereignty is gaining momentum:

Technological Independence: Continued investments in semiconductors, AI, and green energy serve to reduce external vulnerabilities.
Resource & Supply Chain Diversification: Efforts include domestic mineral extraction and space exploration to diversify supply sources and strengthen sovereignty.
Regional Re-anchoring: Deepening trade relations via RCEP and ASEAN engagement aims to spread economic dependence and build regional resilience.

Near-term challenges involve:

FX volatility with the yuan depreciating gradually.
Ongoing capital flight driven by risk aversion.
The influence of US monetary policy signals, particularly the Fed’s cautious stance.

However, these headwinds may catalyze long-term reforms, fostering technological breakthroughs, resource autonomy, and regional cooperation.

Final Reflection: A Year of Calculated Recalibration

2026 is shaping up as a pivotal year for China—marked by internal reforms, resource reorientation, and geopolitical recalibration. Despite growth challenges, China’s focus on technological mastery, resource independence, and regional strength underscores a deliberate strategy to navigate uncertainties with resilience.

The recent policy move to cut the forward FX risk reserve ratio to zero signals an effort to ease FX hedging costs and support currency market functioning, indicating a proactive approach to manage FX risks amid volatile capital flows.

Market signals, including risk re-pricing, capital outflows, and geopolitical tensions, highlight an environment of elevated volatility. Yet, China’s long-term vision remains rooted in self-reliance and regional leadership, positioning it to adapt and evolve in an increasingly uncertain global landscape.

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