China’s policymakers can compete with the best when it comes to euphemism, and one new phrase worth taking note of is ‘jiegou fenhua’ or ‘structural divergence’ – a term the People’s Bank of China used in its July statement to describe what’s going on in the Chinese economy.
What it means is that the economy is running at two different speeds. The manufacturing sector and exports are enjoying a stellar performance, while indicators of household spending and satisfaction remain in the doldrums. This is by no means a new phenomenon: Chinese households’ gloom has deepened ever since the pandemic ended, while Chinese manufacturers have been accelerating their capture of global market share for almost the exact same length of time.
These features of China’s economy have been on full display in the economic data recently published by Beijing.
China’s $125 billion trade surplus for the month of June, for example, was its largest ever. Although Chinese import growth has been accelerating recently, the real news is the way in which Chinese manufacturers continue to dominate global markets.
Consider this: in recent months, the year-on-year growth rate of Chinese export volumes, boosted by rising AI investment, has been running at close to 15 per cent. Meanwhile, the growth rate of global import volumes is less than 5 per cent. As long as Chinese exports are growing more quickly than the world’s imports, China’s global market share is rising. And that has been true without interruption since early 2023.
Meanwhile, the misery of Chinese households is illustrated by their persistent reluctance to spend money. The National Bureau of Statistics of China (NBS) has published its quarterly survey of household income and consumption, and the data shows that the savings rate of urban households is now running close to 40 per cent. Pre-pandemic, that rate was closer to 33 per cent, already extraordinarily high.
The flipside of this is very weak retail sales growth, which was just 0.7 per cent during the first six months of 2026. For comparison, the same figure for the US was over 4 per cent.
Another consequence of such weak domestic spending is that few want to borrow: the growth rate of total social financing, China’s broadest measure of credit to the economy, has been setting new all-time lows in each of the last three months.
Property collapse
These two divergent stories about China’s economy share a common root. What connects them is the decision that the authorities took in 2020 to direct capital away from the property sector – on which the economy had come to rely heavily in the years after the Global Financial Crisis – and towards manufacturing.
The resulting property collapse is still very much ongoing: the average of real estate prices in 70 cities (published monthly by the NBS) fell once again in June, to a level more than 20 per cent below its peak in the summer of 2021.
That decline in property prices is at the absolute core of ‘structural divergence’, in three connected ways.
In the first place, Chinese households have taken a huge knock to their financial confidence, since real estate has been their main asset. This has led to a ‘negative wealth effect’: falling real estate prices cause households to lose confidence and make them more nervous about spending. This is not the only factor, but it’s a major one.
Second, weak domestic spending helps boost China’s exports. Although the global technology boom is certainly lending support to Chinese manufacturers, a surge in Chinese export growth would have happened regardless, since exports regularly do well when domestic spending is weak: Chinese firms look for markets abroad when domestic consumers are unwilling to spend. And since that unwillingness has been on constant display since real estate prices started to fall, the outperformance of exports is unsurprising.
Third, a natural consequence of weak domestic spending is that Chinese inflation has been incredibly low. That in turn keeps Chinese exports strong because of the way in which the difference between China’s inflation rate and that of its trading partners affects China’s international competitiveness. China’s trade-weighted, inflation-adjusted exchange rate has depreciated by around 15 per cent since early 2022, and almost all of that gain is because China’s inflation rate has been so low compared to that of its trading partners.
A deliberate strategy?
Since the phenomenon of ‘structural divergence’ seems to flow so obviously from China’s real estate collapse, one has to wonder why that collapse was induced by policymakers in Beijing.
One explanation is geopolitically innocent: since real estate investment had come to account for around a quarter of Chinese GDP, a rebalancing of the economy away from real estate made perfect sense on its own terms.
But another potential explanation has geopolitics more at the centre of Chinese decision-making.
One trend that Beijing won’t have failed to notice, as the 2010s unfolded, was the phenomenon of ‘US exceptionalism’ – the impressively strong recovery that the US staged after the 2008 crisis. Although that recovery had a lot to do with the increase in US budget deficits, US technology investment also played an important role.
It is worth suggesting, at least, that this episode of US exceptionalism might have convinced Chinese policymakers to reinforce their commitment to establishing China as a ‘manufacturing powerhouse’ in response to the dynamism of the US economy.
Powerhouse status has indeed been achieved, and China’s dominance of global manufacturing has given it enviable sources of leverage through the application of export controls. The most convincing example of this to date is the rare earth export licensing regime Beijing announced in April last year, which pushed the Trump administration to climb down from its threat of a 145 per cent tariff on Chinese goods.
But there could be plenty more to come. In March this year the Chinese Academy of Sciences identified 63 strategically sensitive technologies that might be eligible for effective export restrictions, including quantum devices, aerospace engineering components, biotechnology and electromagnetic catapult systems.