Despite China’s growing economic footprint and impressive technological advances, the country continues to grapple with deep structural vulnerabilities. Persistent deflationary pressures remain a major concern, with the consumer price index declining by 0.8% year-on-year. The property sector has been severely distressed, with new housing prices falling by 4.5% over the past year. Moreover, demographic challenges are worsening, as the nationwide birth rate dwindles to 6.7 per 1,000 people and the urban youth unemployment rate climbs to 16.5%.
Socioeconomic imbalances further complicate the picture. According to the National Bureau of Statistics of China, the per capita disposable income of urban households is more than three times higher than that of rural households. Chinese financial system vulnerabilities weigh heavily on the country’s long-term prospects. The equity market remains highly volatile, dominated by speculative domestic retail investors who account for approximately 80% of trading volume. This undermines its role as a vehicle for long-term wealth management for households and efficient corporate capital allocation. Meanwhile, although China’s onshore RMB bond market has surpassed USD 21 trillion in size, it remains heavily skewed toward public-sector issuances, dwarfing a thin and illiquid corporate bond segment. Structural deficiencies — including inadequate credit risk pricing, weak governance, and accountability challenges — continue to deter foreign investor participation.
In the absence of deep and well-functioning capital markets, Chinese banks continue to play an outsized financing role for the broader economy, raising systemic risk if their balance sheets are not properly managed. Recent announcements of renewed U.S. tariffs under the Trump administration further underscore the external headwinds China faces. Yet such trade measures, while disruptive, remain secondary to the country’s entrenched structural vulnerabilities. To sustain long-term growth, it will be important to advance comprehensive policy reforms — including easing household registration restrictions to promote labor mobility, overhauling pension systems, and deepening capital market development — that can strengthen the foundations of China’s economic development.
Dai Kadomae, CFA, CPA
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