TOKYO – China gave global investors one of 2026’s biggest AI thrills. Yet the country that helped ignite excitement about artificial intelligence is home to one of the worst-performing major stock markets. While AI fever has propelled Seoul, Taipei and Tokyo higher, Chinese shares are stuck in reverse.
So what gives? Several forces, actually. Weak household demand, for one. Consumer spending continues to disappoint, weighing on the earnings potential of mainland internet companies, automakers, and retailers.
With the property sector — where 70% of household assets are concentrated — still sliding, it’s hard to see a strong economic-fundamentals argument. Chronically weak consumer spending threatens future profits at internet companies and automakers.
At the same time, China arguably has the wrong kind of AI exposure. Until now, the AI boom has favored chip makers over the cloud and internet companies investing in AI. A dearth of representative hardware manufacturers leaves China at a structural disadvantage relative to South Korea and Taiwan.
China also faces loads of regulatory and geopolitical risks. These include the US-China trade and tech wars, of course. But since President Xi Jinping’s late 2020 tech crackdown, Chinese shares have too often traded at a discount as investors factored in headwinds and the lack of transparency that characterizes the mainland market.
The former challenge is a giant property crisis that’s fueling deflation and slamming business and household spending. The latter is capital markets that aren’t ready for global primetime.
All this helps explain why the Shanghai Shenzhen CSI 300 Index is down nearly 6% this year, while Korea’s Kospi and Taiwan Stock Exchange Weighted Index are both up more than 65%.
This despite China not exactly having an earnings problem. In the April-June quarter, onshore-listed companies reported their biggest profit gain in five years — nearly 26%.
Chinese bond yields, meanwhile, have tumbled this year even as the yuan gains. This suggests investors lack confidence that Team Xi’s stimulus efforts are enough to revive domestic demand. The 10-year yield is around 1.67%, suggesting hopes that deflation is firmly in the rearview mirror aren’t panning out.
Moody’s Ratings analyst Elaine Xu notes that China’s latest financial policy package should modestly improve credit transmission through policy banks and targeted lending facilities. But, Xu says, “it’s unlikely to materially lift broader credit demand or alter the property sector’s weak trajectory.”
The measures should lower funding costs, expand policy lending tools and reduce effective mortgage costs for eligible first-time buyers, reinforcing a more supportive policy stance as growth slows. This, however, “is consistent with policymakers’ preference for selective easing through the financial system rather than broad-based stimulus,” Xu explains.
True, the People’s Bank of China recently cut the one-year pledged supplementary lending rate by 25 basis points to 1.5%, broadened the facility’s scope to cover additional infrastructure-related investment and increased relending quotas for technology, private enterprises, farms and small businesses.
These steps, Xu notes, “should improve funding conditions for policy-directed lending and help channel credit towards priority sectors, especially those where state-linked banks and policy banks are central to transmission. Nevertheless, a jump in broader credit growth is unlikely, because targeted funding support does not by itself create stronger private borrowing demand.”
With the economy “very weak,” Charles Wang, chairman of Shenzhen Dragon Pacific Capital Management, doubts Beijing’s plans are “adequate” to revive property or consumption.
Duncan Wrigley, economist at Pantheon Macroeconomics, adds that steps to date “won’t solve China’s structural imbalances, with sluggish domestic demand and high reliance on exports.”
This export reliance is part of the challenge. Since the pre-Xi days of Hu Jintao, Beijing has been pledging to recalibrate growth engines toward domestic demand and away from overseas shipments.
Yet with China’s trade surplus widening – it hit a record $1.2 trillion in 2025, despite US tariffs – economists worry we’ll see Team Xi doubling down on exports at a moment when it should be accelerating structural reforms.
The real problem is China’s K-shaped economy. It’s defined by a booming high-tech export sector alongside a weak domestic property and consumption market. The issue now is that the K-shaped split is only becoming more pronounced.
As exports power ahead, consumer spending and property continue to lag, widening the gulf between China’s external strength and domestic weakness.
That’s a far cry from the narrative that prevailed a year ago, when gains across stocks, bonds and the yuan sparked hopes that China was emerging from the ranks of “uninvestable” markets.
It’s more than that, of course. As Sophie Huynh, a fund manager at BNP Paribas Asset Management, tells Bloomberg, the Chinese yuan also “has totally disconnected from interest-rate differentials since the start of the year, thanks to the firm trade surplus, yuan internationalization and capital inflows.”
What’s needed, analysts say, is for Xi’s Communist Party to make good on its 2013 pledge to give market forces a “decisive” role in Beijing decision-making. This means, in part, taking steps to put the proverbial horse before the cart. Over the last decade, Xi’s party has tended to over-promise and under-deliver on reform.
During the Xi era, China has opened equity markets ever wider to overseas investors. Beijing has done the same with government bonds, which are being added to top global indexes.
Trouble is, access to exchanges in Shanghai and Shenzhen often outpaces the domestic reforms needed to ready China Inc. for the global prime time. While China’s “new economy” grabs the headlines, its “old economy” is getting the wrong kind of global attention at a rough moment for Xi’s party.
Nike this week pointed to China as it cut its sales outlook. Revenues in the sports brand’s second-largest market are down 29% to $5.8 billion since its peak in 2021.
“Our Nike performance business is not yet large enough to offset the pressure we’re seeing in Nike sportswear, Jordan brand, and Greater China,” CEO Elliott Hill said in an earnings call. Reviving things “will take time,” he said.
As Beijing juggles a giant property crisis, near-record youth unemployment, dismal local government finances and weak consumer demand, officials haven’t been shy about calling up the “national team” to save the day.
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. 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 exchange-traded funds ran into trouble, in 2025 amid fallout from US President Trump’s tariffs, and now, as global tech stocks wobble again.
One big change between now and 2015 is AI’s role in propelling not just global equities higher but Asian gross domestic product, too.
Take South Korea, where exports jumped 83.5% in September year-on-year to a record $120.9 billion as semiconductor shipments more than tripled. It was the 16th consecutive month of export growth. Such gains are looking more like those from the Asian Tigers era, not those of a mature $1.9 trillion economy.
And these gains would probably be much larger if not for US tariffs and other global challenges. As Korea’s Industry Minister Kim Jung-kwan puts it: “While the achievement of annual exports of $1 trillion is expected, the strengthening of global protectionism and the tense situation in the Middle East region still remain big variables for our exports.”
China, of course, is working from its own playbook, one that even detractors grudgingly admit has a way of beating the odds. Myriad times since 1997, analysts, investors and short sellers predicted a credit-and-debt-fueled crash. It has yet to arrive.
Even so, certain laws of gravity still apply to economies transitioning from state-driven, export-led growth to services, innovation and domestic consumption.
One of those laws states that developing economies should build credible and trusted capital markets before trillions of dollars of outside capital arrive.
Regulators, it follows, must increase transparency, prod companies to raise their governance game, devise reliable surveillance mechanisms like credit rating agencies and strengthen the financial architecture before the world shows up.
On Xi’s watch, China has become less transparent and the media less free. And this is the problem facing Xiconomics: too often China has believed it can build a world-class financial system after, not before, waves of foreign capital arrive.
But as China watches from the sidelines while the Al boom lifts Korean, Taiwanese and Japanese bourses, the world is watching China, too.
It means Team Xi is very much on the clock and has less and less room for error. Over the last decade, China was speeding up Asia’s economic clock. Now AI is doing the same to China, prodding Xi to hasten long-delayed and much-needed reforms.
Follow William Pesek on X at @WilliamPesek
