TOKYO – Chinese stocks just had an incredible week, with great news from AI startup Moonshot delivering a DeepSeek-like jolt to a fragile market. Its new artificial intelligence model reminded investors how quickly China Inc. is closing the technology gap with Silicon Valley.
But while China’s “new economy” grabs the headlines, its “old economy” problems are attracting the wrong kind of global attention at a difficult time for Xi Jinping’s Communist Party.
A massive property crisis, near-record youth unemployment, bleak local government finances and weak consumer demand are weighing on markets – and Beijing.”NAtIONAL” 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 sell-off in tech stocks. On Sunday alone, Beijing-linked funds announced purchases of nearly $8.9 billion in stocks.
National team deployments have a history of stabilizing Shanghai stocks. The most famous came in the summer of 2015, when shares fell by a third in a matter of weeks.
That crisis triggered a whole-of-government response: waves of state funding in the markets, trading suspensions in thousands of companies, freezes on IPOs and rules allowing continents mortgage house as collateral for margin loans. Beijing even ran marketing campaigns framing the stock purchase as an act of patriotism.
The team has been called on repeatedly since then: during the 2018 equity financing margin crisis, in 2021-22 in the midst of Covid, in 2023 when several ETFs ran into trouble, in 2025 amid the fallout from US President Trump’s tariffs, and now as tech stocks swing again.
This round follows investor concern over high chip valuations, not helped by wild swings in South Korean and Taiwanese markets. So far, trying to put a floor under stocks is working.
The reported purchase by the national team of China’s largest chip fund, ChinaAMC STAR 50 ETF, calmed the nerves after a 17% drop last week – the most intense sell-off, fueled by deleveraging funds, since 2015.
Through Tuesday, the concerted buying boosted the STAR 50 index by 11%, its biggest one-day gain in about two years. The broadest Shanghai Shenzhen CSI 300 index is now 1.7% increase year to date.
“The national team’s purchase of the STAR 50 ETF gave just that signal, causing funds to bounce back after interpreting the move as an official vote of confidence,” Zhuang Jiapeng, fund manager at Shenzhen JM Capital, told Bloomberg. It also reassured AI investors, who, Zhuang says, “had been looking for some sign that policymakers were still willing to support 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 capital purchases can stabilize standards and reduce downside pressure, but they do not solve weak domestic demand or property drag. Beijing can protect prices, but confidence still requires stronger growth spurt.”
Underlying economic strains are not something the 27% year-on-year export growth in June can fix – even as trade performance puts Beijing on track for a second straight year. Excesses reaching $1 trillion.
Gavekal Dragonomics notes that the ratio of China’s 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 wrote. “For the world’s second-largest economy, it’s remarkable.”
The problem is that domestic headwinds can be too strong for exports to offset. Xu Tianchen, an economist at the Economist Intelligence Unit, expects “continued export strength, mainly run by AI” with the help of a more expansionary policy mix. “But,” he says, “domestic demand remains a bottleneck. Retail sales remain fairly 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 goods and semiconductors. In other words, the gap between exports and industrial production widened, suggesting that the current export-at-any-cost strategy is bringing more limited doubts to its economy.”
Domestic demand remains “smothered”, Casanova added, while fixed asset investment fell 5.7% year-on-year in June, led by an 8.5% contraction in private investment. Investments in real estate fell 18.0% year-on-year; Sales of residential properties fell by 13.7%.
Exports, in other words, are no longer the panacea they once were—not while domestic trends hit both households and business confidence.
The AI supercycle is reinforcing the strong side of China’s K-shaped economy by boosting output. But Citigroup’s chief China economist Xiangrong Yu notes “the benefits of this boom, however, are not spreading evenly across the wider economy. Consumer confidence remains subdued, having remained negative for more than four years.”
Households, Yu adds, “continue to save heavily, hold large excess deposits and show limited willingness to take on additional loans. Meanwhile, waning policy support and previous 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. “Overall, AI is creating pockets of strength rather than generating a broad recovery in domestic demand.”
Investment trends show the same divide: AI-related investment remains strong in hyperscale, data center and digital infrastructure spending, while “investment in many traditional sectors faces growing headwinds from delayed fiscal policy, uncertainty related to geopolitical developments, anti-involutionary pressures and marries”. China’s reflation history, Yu notes, reflects the same uneven pattern.
The deeper problem is that Xi continues to delay reforms needed to stabilize China’s investment climate. The property crisis is now in its fifth year, producing the longest deflationary band since the Asian crisis of 1997. 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.
Beating deflation for good means forcing Chinese households to spend more than $22 trillion in savings they’ve been sitting on. This reserve is more than four times the annual gross domestic product of Japan, whose lost decades show the cost of complacency. The two problems are linked: approximately 70% of family wealth is tied up in 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 wrong if it thinks the answer is limited ability to move money overseas. What is needed is more hard work on building confidence – enough to make Chinese families want to invest in homes.
Beijing’s renewed efforts to prop up China’s volatile stock markets are another stopgap. Encouraging pensions and mutual funds to invest more in domestic stocks and encouraging mainland households to buy more shares are good for the current quarter – not longer term. However, such steps are only necessary because Team Xi has been too slow to address the cracks in the economy.
A big debate in financial circles is whether Beijing can use the weakening yuan to boost growth. The pros are obvious. A weaker exchange rate would further boost exports, a major reason why China may reach a growth of 4.5%-5% this year.
However, the disadvantages are preventing Team Xi from going the weaker yuan route. For one thing, it could make it harder for highly indebted property developers to make payments offshore bonds. That would raise 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 devalue the yuan could squander years of efforts to lower the level. In recent years, Beijing has made significant strides in reducing China’s financial surpluses and improving the quality of its gross domestic product.
As a result, Xi and Premier Li Qiang have been reluctant to let the People’s Bank of China ease more decisively, even as deflation deepens.
Xi’s government has proved better at talking than winning the trust of global investors. All too often, Xi’s reform team has put the proverbial cart before the horse.
The Xi team has tended to over-promise and under-deliver on financial reforms. And to think that attracting more foreign capital is a single reform. It has been slower to strengthen China’s financial system ahead of those waves of overseas capital.
For example, China’s inclusion in the WTO has done less to recalibrate its growth engines these past 25 years than to remake the global economic system in it. ADVANTAGE. The yuan’s 2016 inclusion in the International Monetary Fund’s basket of special drawing rights did not stop Beijing from imposing capital controls or accelerating capital liberalization nearly as much as expected.
In 2019, A-shares being added to the MSCI index didn’t suddenly make China’s financial system sounder, its government more transparent, companies more shareholder-friendly, or the giant world of shadow banking less of a threat.
Strengthening China Inc. — and generating a genuine stock-picking with the support of the national team — requires significant divestment 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 buoyant debt capital markets to help catalyze the growth of all sectors, but particularly those in the high-tech space – the Premier Li sphere has risen over the past year.
It is also important for Beijing to end the regulatory instability of recent years, particularly regarding Internet companies. More international capital markets would accelerate China’s market growth.
This week’s bounce in Shanghai stocks may suggest investors are giving Team Xi the benefit of the doubt. It’s time, however, for Beijing to step up efforts to raise its financial game so that stocks rise for the right reasons, not state aid.
Follow William Pesek on X at @WilliamPesek
