Despite grim concerns about the state of the Chinese economy at the start of this year, and a bruising trade war with the United States since President Donald Trump returned to the White House, China enters 2026 enjoying a “vibe shift” in terms of its outward-facing confidence. Much of this relates to Beijing’s ability to emerge victorious over the U.S. in Trump’s tariff showdown, but China has also wielded its outsized market power elsewhere, especially against Europe. After the European Union imposed protective tariffs on Chinese electric vehicles in late 2024, Beijing imposed hard-hitting export restrictions on critical minerals, as well as retaliatory levies on European goods including dairy, pork and spirits.
Even as it has thrown its weight around, however, the fundamental domestic challenges to China’s economic growth—primarily weak consumer demand—have not gone away. And it is unclear whether the country’s outward-facing bravado will filter down to affect household confidence, which remains exceptionally low, and boost spending.
The recent Central Economic Work Conference, which meets each December to plan out economic strategy for the upcoming year, made it clear that boosting domestic demand will be a focus in 2026 for a second year in a row. But there is a contradiction between China’s external projection of strength and its weak economy at home that highlights why domestic demand is such a difficult problem to resolve: What looks like strength abroad—China’s excess industrial capacity, which the regime calls “involution”—drives the low confidence at home.