China's economic reset is only just beginning

[WORLD] China’s economy may have weathered the worst of the trade war for now, but it is not yet in the clear. The latest standoff between US and Chinese officials—this time over the breakdown of tariff negotiations—has reminded markets that geopolitical uncertainty is far from over. While Beijing has demonstrated short-term resilience, the deeper question remains: what kind of economy will China become in the post-trade-war world? This is not just a story about tariffs. It’s about whether China can pivot from an export-led, property-driven growth model to something more balanced and sustainable—and how bumpy that journey might be.

Trade Tensions Are a Symptom, Not the Disease

The drama of US-China trade relations often grabs headlines, but the underlying economic symptoms go deeper. China has long relied on export surpluses, industrial production, and state-directed investment to drive growth. These engines have begun to sputter. Recent data show a cooling in factory output and a continued slump in real estate investment—two areas heavily exposed to global cycles and capital-intensive growth.

Despite some easing of tariffs earlier this year, the return of rhetoric from Washington—especially accusations that China violated the May 12 deal—suggests that volatility in bilateral ties will persist. Even without new tariffs, firms face uncertainty around compliance, supply chains, and investment flows. Global businesses have learned to hedge against “China risk”—a long-term behavioral shift that may not reverse anytime soon.

The Real Problem Is Domestic Rebalancing

What China faces now is a structural crossroads. With slowing population growth, high youth unemployment, and excess housing stock, Beijing is under pressure to rewire its economy. But consumption, the supposed new growth engine, is not keeping pace. Household debt is rising, wage growth is uneven, and social safety nets remain weak, limiting domestic spending power.

Policy responses have so far leaned on targeted fiscal easing and sector-specific stimulus, but reforms have lagged behind. A true rebalancing would require unleashing private enterprise, liberalizing capital markets, and accepting slower—but healthier—growth. The political appetite for such change remains ambiguous.

Global Investors Are Watching Closely

China’s future growth path will influence global markets. Already, we’ve seen capital outflows increase as foreign investors worry about China’s regulatory unpredictability. Meanwhile, Beijing is cautiously courting foreign capital with bond market openings and easing restrictions on foreign financial firms. But confidence remains fragile.

If China cannot clarify its long-term economic strategy, it risks a credibility gap with global investors. And if tensions with the US escalate further, decoupling will accelerate—impacting everything from semiconductors to renewables to higher education partnerships.

What We Think

China’s post-trade-war moment should be a strategic inflection point. Instead, it’s being muddled by short-term firefighting and renewed external tensions. A sustainable economic future for China requires deep structural reform, not just managed stimulus and diplomatic patchwork. The risks of inaction are growing. For global markets, the uncertainty around China isn’t just geopolitical—it’s foundational. Until Beijing signals a clear, coherent pivot, investors and businesses will remain cautious, and China’s growth potential will stay capped. The aftershocks of the trade war are fading—but the real shake-up may still be ahead.