The Bear Case for China

Despite its global ambitions, China stands on shaky economic ground. Its stock market has barely moved in the past 16 years, reflecting deep-rooted structural issues. From a collapsing property sector to mounting local debt and demographic decline, sustained U.S. pressure could push China toward stagnation or even a prolonged recession.

China faces significant internal constraints and vulnerabilities that may cause it to wilt under sustained U.S. pressure, potentially leading to recession or prolonged economic slowdown. Here are the key factors.

1. Demographic Time Bomb

• Shrinking Population: China’s population has been declining for three consecutive years, with a decrease of 1.39 million people in 2024, bringing the total population to approximately 1.408 billion. The working-age population is shrinking while the elderly population grows rapidly; in 2024, about 22% of the population (310.3 million) was aged 60 or over, up from 297 million in 2023 (re: Reuters).
• Low Fertility Rate: Despite ending the one-child policy and offering incentives, China’s fertility rate remains extremely low, around 1.0–1.2 births per woman, well below the replacement rate of 2.1.
• Economic Consequences: The shrinking workforce reduces economic growth potential, while rising healthcare and pension costs strain public finances. The elderly dependency ratio is projected to reach nearly 52% by 2050, meaning one elderly person for every two working-age individuals, severely burdening the economy. This demographic shift dampens consumer demand and productivity.

2. Property Market Crisis

• Massive Overbuilding and Decline: The real estate sector, once contributing up to 30% of GDP, is in prolonged decline. Major developers such as Evergrande and Country Garden have defaulted or face collapse, causing ghost cities and unpaid suppliers.
• Household Wealth Erosion: Real estate forms the bulk of middle-class wealth, so falling property prices erode consumer confidence and spending.
• Systemic Risk: Local governments depend heavily on land sales for revenue, which are drying up, straining public finances and increasing the risk of a broader debt crisis.

3. Local Government Debt Crisis

• Hidden Liabilities: Local Government Financing Vehicles (LGFVs) have accumulated off-balance-sheet debt exceeding 100% of GDP by some estimates, creating a large hidden debt burden.
• Dwindling Revenue: With collapsing land sales and exhausted COVID stimulus, many provinces struggle to pay civil servant salaries and meet obligations.
• Limited Bailout Capacity: The central government is reluctant to assume full responsibility, risking defaults and austerity measures that could further depress growth.

4. Weak Domestic Consumption

• High Savings, Low Confidence: Chinese households save heavily due to poor social security, job market instability, and fear of future lockdowns, limiting consumption growth.
• Youth Unemployment Crisis: Youth unemployment (ages 16–24) exceeds 20%, causing social discontent and long-term economic damage through deferred homeownership and lost productivity.
• Ineffective Stimulus: Unlike the U.S., China struggles to boost consumption via cash handouts or welfare expansion, due to its ideological focus on production rather than consumption.

5. Authoritarian Clampdown on Private Sector

• Tech Crackdown: The government’s regulatory actions against giants like Alibaba, Ant Group, and Tencent wiped out trillions in market value. A legend like Jack Ma simply disappeared.
• Chilling Effect: Entrepreneurs hesitate to innovate or take risks; foreign investment in Chinese tech has declined amid uncertainty.
• Innovation Slowdown: Political control and suppression of dissent hinder startup growth and advanced industry development.

6. Global Decoupling and U.S. Pressure

• Supply Chain Shifts: U.S. and European companies are diversifying supply chains away from China to countries like Vietnam, India, and Mexico (“China+1” strategy).
• Tech Bans and Chip Restrictions: U.S. export controls on advanced semiconductors (e.g., from ASML and Nvidia) limit China’s progress in AI, quantum computing, and defense technologies.
• Tariffs and Sanctions: The U.S. and allies can impose tariffs, restrict capital flows, or enact financial sanctions, especially in scenarios like a Taiwan conflict.
• Dollar System Access: China remains reliant on dollar-based trade and finance; any restrictions could trigger liquidity crises.

7. Fragile Social Contract

• Rising Discontent: Protests during “Zero COVID,” online dissent on jobs, wages, and censorship reflect growing unease.
• No Safety Valve: Lack of democratic outlets or press freedom means dissatisfaction may erupt unpredictably.
• Tightrope Governance: The CCP must balance authoritarian control with economic growth; mounting pressures increase political risk.

8. Stagnation of China’s Stock Market Over 16 Years

China’s stock market has barely moved in the last 16 years despite unprecedented economic growth. For example, the SSE 180 index was at about 8,400 points in 2009 and remains roughly at the same level in 2025, showing virtually no net gains over this period. Similarly, the Shanghai Composite Index peaked at 6,124 in 2007 but has since declined and fluctuated around 3,200–3,300 in recent years, reflecting stagnation rather than growth.

Their stock market remains stagnant despite years of economic growth due to heavy state intervention, limited liberalization, and a disconnect between growth sectors and listed firms. With dominance of state-owned enterprises, speculative retail trading, and restricted foreign access, the market lacks the dynamism and confidence seen in more open economies. This stagnation reflects deeper structural issues in China’s financial markets and economy.

Comparison with India

In contrast, India’s BSE Sensex has experienced robust growth, rising nearly tenfold from around 8,000 points in 2009 to over 78,000 points in 2025. Despite periodic crashes triggered by global and domestic shocks, the Indian market has demonstrated resilience and strong long-term returns, supported by greater market liberalization, diverse private sector participation, and growing investor confidence.

This contrast underscores the relative dynamism and investor optimism in India’s capital markets compared to the constrained and controlled environment in China’s equity markets. The disconnect in China between economic growth and stock market performance highlights structural weaknesses in China’s financial markets, contributing to the broader economic vulnerabilities under sustained external and internal pressures.

Conclusion

China’s economic engine is faltering due to demographic decline, a collapsing property market, massive local government debt, weak consumption, stifled private sector innovation, and external pressures from the U.S.-led decoupling and sanctions. Without bold reforms which appear unlikely under Xi Jinping the country risks sliding into prolonged stagnation or recession, similar to Japan’s lost decades but with fewer political tools to manage the fallout.

These vulnerabilities make China susceptible to sustained U.S. pressure, which could exacerbate internal fault lines and trigger a significant economic slowdown. And we are not even talking about geopolitical quagmires that China could get pulled into (such as African overreach, potential Taiwan conflict).