TOKYO — Chinese stocks just had a remarkable week, with stellar news from startup Moonshot AI delivering a DeepSeek-like jolt to a fragile market. Its new AI model reminded investors how fast China Inc. is closing the technology gap with Silicon Valley.
But as China’s “new economy” grabs the headlines, its “old economy” troubles are grabbing the wrong kind of global attention at a rough moment for Xi Jinping’s Communist Party.
A giant property crisis, near-record youth unemployment, dismal local government finances and weak consumer demand are weighing on markets — and Beijing’s “national team” is back in action.
Xi’s inner circle has reactivated its usual cast of regulators, state-backed investors, insurers and asset managers to circle the wagons after a chaotic tech-share selloff. On Sunday alone, funds tied to Beijing announced purchases of nearly US$8.9 billion in stocks.
National-team deployments have a track record of stabilizing Shanghai shares. The most famous came in summer 2015, when shares fell by a third in a few weeks.
That crisis triggered a whole-of-government response: waves of state funding into markets, trading suspensions across thousands of companies, a freeze on IPOs, and rules letting mainlanders pledge homes as collateral for margin loans. Beijing even rolled out marketing campaigns framing stock-buying as a patriotic act.
The team has been called back repeatedly since: during the 2018 margin-call crisis tied to share-pledge financing, in 2021-22 amid Covid, in 2023 when certain ETFs ran into trouble, in 2025 amid fallout from US President Trump’s tariffs, and now, as tech stocks wobble again.
This round follows investor unease over lofty chip valuations, not helped by wild swings in South Korean and Taiwanese markets. So far, the effort to put a floor under stocks is working.
The national team’s reported buying of China’s largest chip-heavy fund, the ChinaAMC STAR 50 ETF, calmed nerves after a 17% plunge last week — the most intense selloff, driven by funds unwinding leveraged positions, since 2015.
By Tuesday, concerted buying sent the STAR 50 index up 11%, its biggest single-day rally in roughly two years. The broader Shanghai Shenzhen CSI 300 Index is now up 1.7% year to date.
“The national team’s buying of the STAR 50 ETF provided exactly that signal, prompting funds to wade back in after interpreting the move as an official vote of confidence,” Zhuang Jiapeng, fund manager at Shenzhen JM Capital, tells Bloomberg. It also reassured AI investors who, Zhuang says, “had been searching for any sign that policymakers were still willing to back the trade.”
Such interventions treat symptoms, not causes. “China’s national team is offering market protection, not macro repair,” says Geoffrey Yu, strategist at BNY Mellon. “State-backed equity purchases can stabilize benchmarks and reduce downside pressure, but they don’t solve weak domestic demand or the property drag. Beijing can protect prices, but confidence still requires a stronger growth impulse.”
The underlying economic strains aren’t something 27% year-on-year export growth in June can fix — even as that trade performance puts Beijing on track for a second straight year of surpluses topping $1 trillion.
Gavekal Dragonomics notes China’s ratio of annual exports to total manufacturing sales rose to 24% in the first four months of 2026 — the highest since 2001, when China joined the World Trade Organization.
In 2019, the ratio was 18.3%. This year’s level “would be considered high for a small export-focused country,” Gavekal economists write. “For the world’s second largest economy, it’s remarkable.”
The trouble is domestic headwinds may be too strong for exports to offset. Xu Tianchen, an economist at the Economist Intelligence Unit, expects “continued export strength, mostly driven by AI” with help from a more expansionary policy mix. “But,” he says, “domestic demand remains a drag. Retail sales remain pretty flat and fixed asset investment was negative last month.”
Economist Carlos Casanova at Union Bancaire Privée says the 5.3% gain in industrial production is “increasingly concentrated in high tech and semiconductor-related goods. In other words, the gap between exports and industrial output widened, suggesting that the current export-at-all-costs strategy is delivering limited spillovers to the broader economy and raising doubts about its durability.”
Domestic demand remains “subdued,” Casanova adds, while fixed asset investment fell 5.7% year-to-date in June, led by an 8.5% contraction in private investment. Real estate investment fell 18.0% year-to-date; residential property sales fell 13.7%.
Exports, in other words, are no longer the cure-all they once were — not while domestic trends batter both household and business confidence.
The AI supercycle is reinforcing the strong side of China’s K-shaped economy by lifting production. But Citigroup Chief China Economist Xiangrong Yu notes “the benefits of this boom, however, aren’t spreading evenly across the broader economy. Consumer confidence remains subdued, having stayed negative for more than four years.”
Households, Yu adds, “continue to save heavily, maintain large excess deposits, and show limited willingness to take on additional borrowing. Meanwhile, fading policy support and earlier stimulus effects contributed to a contraction in retail sales in May, the first decline since Covid.” Property markets, Yu says, “tell a similar story.”
Conditions have improved in some Tier-1 cities benefiting from AI-related activity, Yu explains, but the broader national market remains weak. “More generally, AI is creating pockets of strength rather than generating a broad recovery in domestic demand.”
Investment trends show the same split: AI-related investment stays robust on hyperscaler, data-center and digital-infrastructure spending, while “investment in many traditional sectors faces mounting headwinds from delayed fiscal deployment, uncertainty linked to geopolitical developments, anti-involution pressures, and squeezed profit margins.” China’s reflation story, Yu notes, reflects the same uneven pattern.
The deeper problem is that Xi keeps deferring the reforms needed to stabilize China’s investment climate. The property crisis is now in its fifth year, producing the longest deflationary streak since the 1997 Asian crisis. Weak household demand and near-record youth unemployment are crushing confidence — which helps explain why China’s 1.4 billion people still save more than they spend.
Defeating deflation for good means getting Chinese households to deploy the more than $22 trillion in savings they’re sitting on. This stockpile is more than four times Japan’s annual gross domestic product, whose lost decades show the cost of complacency. The two problems are linked: roughly 70% of household wealth is tied to property.
If China’s economy became more transparent and stable, and offered real alternatives to owning property, citizens might feel less urgency to send their money abroad. Team Xi is mistaken if it thinks the answer is limiting options to move money overseas. What’s needed is the harder work of building trust — enough to make Chinese households want to invest at home.
Beijing’s renewed efforts to support China’s volatile stock markets are another stop-gap step. Encouraging pensions and mutual funds to invest more in domestic stocks and prodding mainland households to buy more shares are fine for the current quarter – not for the longer term. Such steps are only necessary, though, because Team Xi has been too slow to address the economy’s cracks.
One big debate in financial circles is whether Beijing might resort to weakening the yuan to boost growth. The pros are obvious. A weaker exchange rate would further boost exports, a key reason why China may reach 4.5%-5% growth this year.
Yet the cons are stopping Team Xi from going the weaker yuan route. For one thing, it might make it harder for highly indebted property developers to make payments on offshore bonds. That would increase default risks in Asia’s biggest economy. Seeing #ChinaEvergrande trending again is not what Xi’s party wants in 2025.
For another: the monetary easing required to depress the yuan could squander years of deleveraging efforts. In recent years, Beijing has made important strides in reducing China’s financial excesses and improving the quality of gross domestic product.
As a result, Xi and Premier Li Qiang have been reluctant to let the People’s Bank of China ease more assertively, even as deflation deepens.
Xi’s government has proved more skilled at talking the talk than walking the walk on earning the trust of global investors. Too often, Xi’s reform team put the proverbial cart before the horse.
Team Xi has tended to over-promise and under-deliver on financial reforms. And to think that pulling in more foreign capital is a reform all its own. It’s been slower to strengthen China’s financial system ahead of those waves of overseas capital.
For example, China’s inclusion in the WTO did less to recalibrate its growth engines these last 25 years than to remake the global economic system to its advantage. The 2016 inclusion of the yuan in the International Monetary Fund’s special-drawing-rights basket didn’t stop Beijing from imposing capital control or accelerate capital liberalization nearly as much as hoped.
In 2019, A-share stocks being added to the MSCI index didn’t suddenly make China’s financial system sounder, the government more transparent, companies more shareholder-friendly or the ginormous shadow-banking world any less of a menace.
Strengthening China Inc. — and generating a genuine stock rally with national-team support — requires significant heavy lifting to curb the dominance of state-owned enterprises, increase economic space for the private sector and eliminate the risk of dueling bubbles in debt, credit, assets and pollution.
The key now is for vibrant debt capital markets to help catalyze growth of all sectors, but particularly those in the high-tech space — the realm Premier Li has been elevating over the last year.
It’s also important that Beijing end the regulatory volatility of recent years, particularly concerning internet companies. More international capital markets would accelerate China’s move upmarket.
This week’s bounce in Shanghai shares may suggest investors are giving Team Xi the benefit of the doubt. It’s high time, though, that Beijing stepped up efforts to raise its financial game so that stocks soar for the right reasons, not state help.
Follow William Pesek on X at @WilliamPesek
