Overall, indicators show that the short-term financing risk is medium. The indicators that need monitoring in the short run are the overall fiscal deficit and domestic credit growth, especially in the context of challenging local government finances and the property sector downturn. Domestic credit to the private sector relative to GDP remains elevated compared to that of emerging peers (208% in Q2 2025). However, we believe that authorities have the necessary tools to manage and keep risks under control for now. At the same time, business insolvencies surged in 2025, with a growth rate of +8%, compared to +3% in 2024. We forecast a similar growth of +7% for 2026 followed by a decline to +4% in 2027. 

While rising geopolitical tensions are likely to reshuffle trade and investment patterns, China will not lose its position as a critical end-supplier due to complex inter-linkages in the global supply chain. In the medium run, China’s main challenge is managing the transition to a lower pace of potential growth as the economy matures. What’s at stake is finding new growth drivers (innovation, private consumption, services etc.) while navigating vulnerabilities (debt burden, geopolitical tensions, aging population etc.).  

Looking at external account balances, China continues to exhibit current account surpluses, although these are likely to soften in the coming years. Geopolitical tensions in 2025 (especially in the first half of the year) often involved China, but the country was able to find new export markets, while imports remained subdued in the context of soft domestic demand. The current account balance likely hit around 2% of GDP in 2025 (after 2.3% in 2024 and 1.4% in 2023) and is likely to remain around this level in 2026 and 2027. Trade restrictions in the context of the renewed US trade war should ultimately weigh on Chinese exports going into 2026. In terms of the capital account balance, after a temporary rebound in H2 2024, net outflows returned in 2025 are likely to continue on the back of limited inflows and rising outbound flows from China.

Our proprietary model that tracks the structural business environment across nearly 200 countries suggests that the business environment in China has deteriorated over the past years amid the broad-based economic slowdown, weaker business sentiment and rising geopolitical tensions. The World Bank Institute’s annual Worldwide Governance Indicators suggest that there has been a decline in regulatory quality, although there have been improvements in the rule of law and control of corruption. In addition, the Index of Economic Freedom from the Heritage Foundation assigns a rank of 151 out of 184 countries in 2025, compared with 107 in 2021, reflecting a deterioration in scores that reflect freedom in terms of business and investment, judicial effectiveness, fiscal health and property rights. Lastly, China ranks relatively low based on our proprietary “Environmental Sustainability Index”, at 126 out of 210 economies (though better than 159 the previous year), suggesting that while it exhibits strengths in water stress and energy use per GDP, there is potential for improvement in terms of the recycling rate, renewable electricity output and CO2 emissions per GDP.