China's industry continues to shrink: Red alert in Beijing – November data reveals the failure of the domestic market strategy
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Published on: December 1, 2025 / Updated on: December 1, 2025 – Author: Konrad Wolfenstein
China's industry continues to shrink: Red alert in Beijing – November data reveals the failure of the domestic market strategy – Image: Xpert.Digital
No salvation through consumption: Why China's service sector is suddenly becoming its Achilles' heel
### Double downturn in China: November figures prove the failure of restructuring ### Service providers in crisis: The hoped-for stabilizer fails ### Structural meltdown: The dangerous synchronicity of the recession ###
Why industry and service providers are collapsing simultaneously in China: The synchronous collapse reveals structural weaknesses
The Chinese economy is sending out warning signals that could hardly be louder: For the first time since the end of pandemic restrictions, both the industrial and service sectors are shrinking in tandem. The latest data from November 2025 marks a dangerous turning point that calls into question the entire government narrative of a smooth transition to a consumer society.
For a long time, the service sector was considered the robust anchor meant to compensate for the weakness of Chinese factories. But this safety net has snapped. While the world hoped for a recovery in the world's second-largest economy, the indicators now point in a different direction: Deflationary tendencies are taking hold, the real estate crisis is eroding the wealth of the middle class, and the hoped-for "post-Covid euphoria" has given way to a structural propensity to save.
For Beijing, the situation is more precarious than ever before. The leadership is caught in the crossfire between internal structural problems – from youth unemployment to municipal debt – and an increasingly hostile external environment marked by trade wars and tariffs. The synchronized warning signs from the industrial and service sectors are forcing the government to a crossroads: Are the current piecemeal stimulus measures still sufficient, or is the entire growth model of the last four decades on the verge of collapse?
The following analysis dissects the anatomy of this downturn. It sheds light on the historical errors, the current data, and the global consequences of a crisis that is no longer just a Chinese problem, but is becoming a stress test for the entire global economy.
The failure of the compensation strategy: When the tertiary sector can no longer support the economy
Status Quo: Synchronous downturn and its global impact
The latest economic data from China marks a turning point with implications far beyond the country's borders. In November 2025, the official Purchasing Managers' Index (PMI) for the non-manufacturing sector fell to 49.5 points, contracting for the first time since December 2022. At the same time, the manufacturing PMI remained unchanged at 49.2 points, signaling the eighth consecutive month of contraction in the manufacturing sector. This synchronicity of declines in both sectors represents a qualitatively new development, as the service sector had previously acted as a buffer against industrial weakness.
The relevance of this development for the global economy can hardly be overstated. As the world's second-largest economy, with a gross domestic product of 134.91 trillion yuan (approximately US$18.8 trillion) in 2024, China makes a significant contribution to global growth. In 2024, Chinese manufacturing exports, at US$3.26 trillion, exceeded the combined export output of the United States, Germany, and Japan for the first time. A sustained decline in demand in China would therefore inevitably disrupt global supply chains, commodity markets, and investment flows.
The current situation reveals a fundamental dilemma: The Chinese leadership must decide whether to push ahead with painful structural reforms or to support domestic demand in the short term with further economic stimulus programs. This is compounded by escalating trade tensions with the US, where tariffs of over 100 percent on Chinese imports are threatened. This external pressure coincides with internal disruptions such as the ongoing housing crisis, high municipal debt, and structurally weak domestic demand. The following analysis examines the historical roots, current drivers, international comparisons, and possible development paths of this multifaceted problem.
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The historical path to the dead end: From opening to stagnation
China's current economic situation can only be understood against the backdrop of the fundamental transformations of the past four decades. The reforms under Deng Xiaoping from 1978 onward laid the foundation for an export-oriented growth model based on low labor costs, massive infrastructure investments, and state-directed industrial policy. This model enabled China to experience unprecedented economic growth, transforming the country from a developing nation into a global economic power within just a few decades.
The accession negotiations to the World Trade Organization in 2001 marked another turning point. WTO membership accelerated China's integration into global value chains and made the country the world's workshop. Between 2000 and 2024, China's exports grew from US$249 billion to US$3.57 trillion, representing an average annual growth rate of 11.7 percent. China's share of global manufacturing exports rose from 0.8 percent in 1980 to 20 percent in 2023.
The global financial crisis of 2008 first revealed the fragility of this model. When Western demand collapsed, Beijing responded with a massive stimulus package of four trillion yuan, primarily invested in infrastructure and real estate. While this program prevented a recession, it also laid the foundations for today's structural problems: overinvestment in the real estate sector, rampant local government debt through so-called Local Government Financing Vehicles, and chronic overcapacity in heavy industry.
The Made in China 2025 initiative, announced in 2015, represented an attempt to shift the growth model towards higher-value production and technological self-sufficiency. The stated goal was a 70 percent self-sufficiency rate for semiconductors by 2025. Although these ambitious targets were not fully met, China made substantial progress: the self-sufficiency rate for semiconductors increased from 5 percent in 2018 to nearly 30 percent by 2024.
The COVID-19 pandemic and the strict zero-COVID policy until the end of 2022 left deep scars on the Chinese economy. The prolonged lockdowns weighed on private consumption, increased local government debt due to rising expenditures and falling revenues, and severely damaged household confidence. The consumer confidence index, which stood at 104 points in December 2019, fell to a historic low of 94 points in August 2024.
The introduction of the Dual Circulation Strategy in 2020 marked China's strategic adjustment to a more hostile international environment. This strategy aims to reduce dependence on foreign markets, strengthen domestic demand, and achieve technological self-reliance in key sectors. Domestic circulation is to be prioritized over international trade, without completely abandoning global exchange.
The Third Plenum of the 20th Central Committee in July 2024 reaffirmed this strategic direction and announced reforms to the fiscal and tax system, as well as a redistribution of responsibilities between central and local governments. However, the announced measures fell short of the expectations of many analysts, who considered more far-reaching structural reforms necessary.
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Anatomy of the problems: real estate bubble, mountains of debt and overproduction
China's current economic weakness results from the interplay of several fundamental factors, the interactions of which form a complex web of causes and effects.
The real estate crisis as a systemic risk
The real estate sector, which once accounted for roughly 25 to 30 percent of China's economic output, is undergoing a profound correction. Since its peak in 2021, real estate sales have plummeted dramatically: with a projected sales volume of nine trillion yuan or less in 2025, the market has halved in just four years, from 18.2 trillion yuan in 2021. Investment in real estate fell by 14.7 percent in the first ten months of 2025.
The stock of completed but unsold housing increased to 762 million square meters by August 2025, up from 753 million square meters in December 2024. This oversupply is putting downward pressure on prices and increasing the wait-and-see attitude of potential buyers. Property prices are now in their fourth consecutive year of decline, with S&P Global Ratings forecasting a further drop in primary market prices of 15 to 25 percent.
Crucially, the crisis has had a behavior-changing effect: Chinese households have traditionally invested a large portion of their assets in real estate. The ongoing price decline is undermining consumer confidence and encouraging increased savings. The household savings rate stood at 24.5 percent in 2024, after reaching a peak of 34.3 percent in 2022. This figure is significantly higher than pre-pandemic levels and reflects a structural reluctance among consumers.
The debt problem of local governments
The financial situation of Chinese local governments has deteriorated dramatically. By the end of 2024, official local government debt amounted to 47.5 trillion yuan, while hidden debt through Local Government Financing Vehicles is estimated at an additional 60 trillion yuan. According to the International Monetary Fund, total government debt, including hidden liabilities, reached 124 percent of GDP.
This debt stems from a structural imbalance between spending responsibilities and revenue sources. Local governments bear over 80 percent of public spending but have limited tax revenue. The collapse of land sales revenues due to the real estate crisis has dramatically widened this funding gap. In November 2024, the National People's Congress approved a 10 trillion yuan debt restructuring package intended to alleviate the financial pressure on local governments.
Overcapacity and price war
Another key factor is the chronic overcapacity in numerous industrial sectors. Capacity utilization regularly falls below 75 percent in several industries. In the electric vehicle sector alone, overcapacity exceeds the market volume by an estimated five to ten million vehicles annually. In the photovoltaic industry, overcapacity caused losses of an estimated 40 billion US dollars along the entire value chain in 2024.
These overcapacities result from the interplay of government subsidies, provincial competition for growth targets, and the protection of state-owned enterprises. Local governments compete intensely for investment and GDP growth, leading to a multiplication of production capacities. The consequence is fierce price wars that erode companies' profit margins and generate deflationary pressure.
Goldman Sachs analyzed seven sectors, including air conditioners, solar panels, lithium batteries, electric vehicles, power semiconductors, steel, and construction machinery. In five of these sectors, Chinese capacity exceeds total global demand.
Deflationary tendencies
China is on track for a third consecutive year of falling prices in 2025. The producer price index remains consistently negative, while the consumer price index stays near zero. Goldman Sachs forecasts consumer price inflation of zero percent for 2025, down from 0.2 percent the previous year.
This deflation creates a vicious cycle: Falling prices increase real debt levels, squeeze corporate profits, and encourage restraint in consumption in anticipation of further price declines. Deflation also makes it more difficult to manage the debt burden, as nominal GDP growth lags significantly behind official real growth targets.
Labor market tensions
The labor market is showing worrying signs, particularly among young people. Youth unemployment (16 to 24 years old, excluding students) reached a record high of 18.9 percent in August 2025 under the new methodology that has been in effect since December 2023. In 2025, 12.22 million university graduates entered the labor market, 430,000 more than in the previous year.
At the same time, job postings for university graduates fell by 22 percent in the first half of 2025, while the number of job seekers rose by eight percent. This structural imbalance between the supply of skilled workers and the demand for white-collar positions reflects the withdrawal of formerly major employers in the technology, real estate, and tutoring sectors.
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Fact check: What the current economic indicators really reveal
Current economic data paints a differentiated picture of an economy under pressure, but one that has not yet entered an acute crisis.
Gross domestic product grew by 4.8 percent in the third quarter of 2025 compared to the previous year, a slowdown from 5.2 percent in the second quarter. The government is targeting growth of around five percent for the full year 2025, which is considered ambitious given the multiple challenges facing the economy. 2024 closed with growth of 5.0 percent, thus meeting the official target, with the fourth quarter being particularly strong at 5.4 percent.
Purchasing managers' indices signal continued weakness in the manufacturing sector. The official NBS Manufacturing PMI stood at 49.2 points in November 2025, marking the eighth consecutive month below the expansion threshold of 50 points. The private RatingDog PMI unexpectedly fell to 49.9 points, after analysts had expected 50.5 points.
The collapse of the services sector is particularly noteworthy. The official non-manufacturing PMI fell to 49.5 points from 50.1 in October, the first contraction since December 2022. This development is especially worrying, as the services sector should be compensating for weakness in industry and driving consumption growth.
Retail sales grew by only 2.9 percent year-on-year in October 2025, marking the fifth consecutive month of decline. This is significantly below the level required for a substantial recovery in domestic demand. Industrial production proved more robust, rising by 4.9 percent in October, but fell short of expectations of 5.0 percent and the 6.5 percent recorded in September.
Foreign trade is under increasing pressure. China's exports unexpectedly shrank by 1.1 percent year-on-year in October 2025, the first decline in almost two years. The effects of exports being brought forward in anticipation of higher US tariffs appear to be waning. Nevertheless, foreign trade remains a pillar of support: in 2024, China's exports reached a value of US$3.57 trillion, an increase of 5.8 percent.
Investment activity presents a mixed picture. While total investment in tangible assets grew moderately, real estate investment plummeted by 13.9 percent. Private investment outside the real estate sector increased by only 2.1 percent, signaling a lack of confidence in the private sector.
On the financing side, the government is taking an active approach. The fiscal deficit has been raised to a new record high of four percent of GDP in 2025, with planned borrowing of 11.86 trillion yuan. The consumer spending incentive program for replacing old appliances has been doubled to 300 billion yuan. The central bank has loosened monetary policy, with further interest rate cuts of up to 40 basis points expected.
The inflow of foreign direct investment remains a concern. In the first ten months of 2025, actual FDI inflows fell by 10.3 percent to 621.93 billion yuan. At the same time, the number of newly established foreign-financed enterprises rose by 14.7 percent, indicating continued strategic interest coupled with a reluctance to invest.
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From boom to stagnation? What Vietnam and Germany reveal about China's future
International context: Lessons from Vietnam and Germany
A comparison with other economies highlights both the specifics of the Chinese situation and possible alternative development paths.
Vietnam: Rise to an alternative manufacturing location
Over the past decade, Vietnam has established itself as one of the major beneficiaries of the global supply chain shift. The country achieved economic growth of 7.09 percent in 2024, exceeding both the government's target of 6.5 percent and analysts' forecasts. Exports rose by 14 percent to US$405 billion, driven by electronics, smartphones, and apparel.
Several factors explain Vietnam's success. First, the country has benefited from the diversification of global supply chains away from China. Companies like Samsung, Foxconn, and Apple have shifted significant production capacity to Vietnam. Samsung alone has invested US$18 billion in Vietnam. Second, free trade agreements such as the CPTPP, RCEP, and the EU-Vietnam Agreement provide duty-free access to key markets. Third, Vietnam combines competitive labor costs with a young, growing workforce.
Vietnam's industrial diversification is remarkable: While traditional sectors like textiles and footwear remain strong, the focus is increasingly shifting towards high-tech industries. By 2025, Vietnam is projected to account for four percent of global electronics exports, compared to just one percent in 2010. Allianz Research ranked Vietnam as the second most promising next-generation trading hub, surpassed only by the United Arab Emirates.
However, Vietnam is not immune to the risks of the US-China trade conflict. As a key location for Chinese offshore manufacturing, Vietnam itself could become a target of tariffs should Washington suspect the circumvention of trade barriers. Furthermore, the increasing flood of Chinese exports could crowd out local industries: China's exports to ASEAN rose by another 12 percent in 2024.
Germany: Industrial recession and structural challenges
Germany offers a striking contrast as an established industrial nation in a prolonged recession. The HCOB Manufacturing PMI fell to 48.4 points in November 2025, the sharpest decline in six months. The manufacturing sector has been grappling with structural challenges for years, including high energy costs, bureaucratic hurdles, and slow digitalization.
Similarities with China can be seen in the industrial downturn and the dependence on manufacturing. However, differences exist in the underlying causes: while China suffers from overcapacity and weak domestic demand, Germany struggles with high production costs and structural change in the automotive industry. Both countries share the challenge of demographic change, although China's demographic shift is even more dramatic.
Germany's experience illustrates the risks of excessive reliance on manufacturing. While the industrial sector's share of German GDP is lower than China's, its export dependence is similarly high. The German economy demonstrates how even highly developed industrialized nations can experience prolonged periods of industrial weakness if structural adjustments are not made.
Similarities and differences
Both comparisons highlight key challenges for export-oriented industrialized nations. Vietnam demonstrates that success is possible through favorable demographic structures, strategic trade agreements, and open markets for foreign investment, while Germany illustrates that even established industrialized nations are vulnerable to structural change and external shocks. China's position is unique in that it simultaneously faces the size and complexity of an established economic power and the structural transformation challenges of a developing country.
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Controversies and risks: Data doubts, stimulus debates and geopolitical tensions
China's current economic situation is the subject of intense scientific and political debates, revealing divergent assessments and controversial viewpoints.
The debate about true growth
A fundamental point of contention concerns the reliability of official statistics. The Rhodium Group estimates China's actual GDP growth in 2024 at only 2.4 to 2.8 percent, significantly below the official 5.0 percent. The divergence between nominal and real GDP growth, as well as persistently low price indicators, support this skeptical assessment. Critics point out that China has significantly missed its nominal GDP growth target in recent years: 4.6 percent compared to a target of 6.9 percent in 2023.
On the other hand, official bodies and some analysts argue that despite all the challenges, China remains one of the fastest-growing countries in the world and that structural adjustments are necessarily associated with temporary slowdowns in growth. The truth probably lies somewhere between these extremes, with methodological differences in measuring growth leaving considerable room for interpretation.
The Dilemma of Stimulus Policy
The question of whether and how strongly the government should stimulate the economy is dividing experts. Proponents of more aggressive measures argue that a substantial demand stimulus is necessary to break the deflationary cycle and support growth. Citigroup estimates that the Chinese government would need to invest 20 trillion yuan (approximately US$2.7 trillion) over five years to effectively address the supply-demand imbalance.
Critics, however, warn of the risks of further debt expansion. Total non-financial sector debt already reached 312 percent of GDP in 2024, making China one of the most indebted countries. Further stimulus through investment could exacerbate structural problems instead of solving them by perpetuating overcapacity and worsening the debt crisis.
The central government is showing restraint regarding massive transfer programs to households, which economists interpret as an indication of ideological preferences. Beijing appears to continue focusing on investment and production growth rather than directly promoting consumption.
Geopolitical risks and decoupling
The trade conflict with the US poses an existential risk to the Chinese growth model. The cumulative tariff burden on Chinese exports to the US now exceeds 100 percent. This is not merely a trade dispute, but part of a broader strategic rivalry that includes technological decoupling, investment restrictions, and export controls.
China's response to this challenge is the diversification of its export markets. The share of exports to the US fell from 19.18 percent in 2018 to 14.7 percent in 2024. ASEAN overtook the US and the EU as China's largest export market. However, this strategy has its limitations: ASEAN countries themselves are increasing safeguards against Chinese overcapacity, and the EU has imposed tariffs on Chinese electric vehicles.
Social implications
The economic challenges have significant social consequences. The record youth unemployment rate of 18.9 percent in August 2025 signals deep structural problems. The discrepancy between the qualifications of university graduates and the available jobs could have long-term consequences for productivity and social cohesion.
Consumer confidence remains near historic lows. The Consumer Confidence Index stood at 89.6 points in September 2025, significantly below the pre-pandemic levels of over 100. The increased propensity of households to save reflects deep uncertainty about the economic future and the social safety net.
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Future scenarios: Between stabilization, stagnation and potential crisis
The future development of the Chinese economy depends on a multitude of factors, which allow for different scenarios.
Scenario 1: Gradual stabilization
In the more optimistic scenario, the government succeeds in stabilizing the economy through a combination of targeted stimulus measures, structural reforms, and an easing of trade tensions. Real estate prices bottom out, consumer confidence gradually recovers, and the dual-circulation strategy shows initial success in the form of stronger domestic demand.
In this scenario, GDP growth would settle in the range of 4.0 to 4.5 percent, which corresponds to the IMF's forecast for potential growth. Deflationary tendencies would subside as supply and demand rebalance. Youth unemployment would decline, albeit slowly.
The likelihood of this scenario depends significantly on political decisions, particularly on Beijing's willingness to make substantial transfers to households and to push forward with structural reforms in the fiscal and social system.
Scenario 2: Prolonged stagnation
In the medium scenario, the Chinese economy remains in a phase of slow growth with persistent deflationary tendencies, similar to Japan's experience after 1990. Structural reforms remain insufficient, domestic demand recovers only sluggishly, and external burdens from trade conflicts persist.
In this scenario, GDP growth could fall to 3.0 to 4.0 percent, with persistently low or negative inflation rates. The debt problem would worsen as nominal growth lags behind debt servicing. Social discontent, particularly among young graduates, could increase.
Scenario 3: Escalation of the crisis
In the most pessimistic scenario, the structural problems escalate into a full-blown financial crisis. A collapse in the shadow banking sector or of the Local Government Financing Vehicles could trigger systemic risks. A dramatic escalation of the trade conflict with the US could cause exports to plummet and lead to massive job losses.
In this scenario, a GDP slump or even a recession would be possible, accompanied by sharp currency devaluations and capital flight. This scenario is currently considered unlikely given the considerable resources and instruments at the disposal of the Chinese government, but should not be completely ruled out.
Potential disruptions
Several factors could unexpectedly influence developments. A technological escalation of the conflict with the US, for example through stricter export controls on semiconductors, could severely impact China's high-tech sector. On the other hand, Chinese breakthroughs in semiconductor manufacturing could reduce dependence on Western technology more quickly than anticipated.
Climate policy decisions could also have a disruptive effect. China's dominant position in renewable energy and electric vehicles could prove to be a strategic advantage if global demand for these technologies picks up. At the same time, intensified trade conflicts could restrict market access, particularly in these sectors.
Demographic trends will limit growth potential in the long term. The shrinking working-age population and the rapid aging of society necessitate fundamental adjustments to the economic model, regardless of short-term economic fluctuations.
Action required and consequences for the global economy
The simultaneous weakness of China's industrial and service sectors marks a turning point, raising fundamental questions about the future growth model of the world's second-largest economy. The analysis reveals a complex web of interconnected challenges: a deep housing crisis eroding household wealth and confidence; local government debt restricting fiscal space; chronic overcapacity generating deflationary pressures; and an increasingly protectionist and hostile international environment.
The core diagnosis is that China's export-oriented, investment-driven growth model has reached its limits. Productivity reserves from urbanization and industrialization are being depleted, while the demographic dividend is turning into a demographic burden. The transition to a more consumption-driven model, which the government has been promoting for years, is progressing only slowly. At around 40 percent, the share of private consumption in GDP remains significantly below Western figures of 60 to 70 percent.
For policymakers in China, this presents clear imperatives for action. First, stabilizing the real estate sector requires decisive action, possibly including large-scale state purchases of surplus properties. Second, the fiscal imbalance between central and local governments must be fundamentally addressed, ideally through tax distribution reform. Third, substantial investment in the social safety net is needed to reduce increased household savings and stimulate consumption.
For international companies, this situation necessitates a reassessment of China as a sales market and production location. Weak domestic demand limits growth opportunities in the consumer goods sector, while regulatory uncertainty and geopolitical tensions increase investment risk. At the same time, China remains indispensable in many sectors due to its market size, infrastructure, and integrated supply chains. A strategy of selective investments with diversified regional alternatives appears advisable.
For global investors, this development signals increased caution regarding exposure to China in the real estate, local government finance, and consumer-related industries. Opportunities, however, exist in high-tech sectors, where China is making remarkable progress despite external obstacles, as well as in sectors benefiting from government support, such as renewable energy and electric mobility.
The long-term significance of current developments extends far beyond economic indicators. China is at a historic crossroads: If it succeeds in transitioning to a more sustainable, consumption-driven growth model, the country could continue its ascent and potentially become the world's largest economy in the coming decades. If this transition fails, a prolonged period of stagnation looms, with unforeseeable social and political consequences.
The November data, which show a simultaneous contraction in manufacturing and services for the first time in three years, are a warning sign, but not yet a crisis. They underscore the urgency of structural reforms and the limitations of purely monetary or fiscal measures. The coming quarters will reveal whether Beijing is prepared to make the necessary, but politically difficult, decisions, or whether it will continue its muddling through model. The international community will be watching closely, because China's economic future is also the future of the global economic order.
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