1 Weak November data, limited policy tool kit bode ill for China’s economy
Economic indicators show worsening of China’s real economy
Nov. 30
The National Bureau of Statistics released China’s Purchasing Managers’ Index data for November.
- In November, China’s official manufacturing PMI was 49.2. Although this was 0.2 percentage points higher than the previous month, it remained in contraction territory. This marks the eighth consecutive month of contraction; China’s PMI only saw a slight expansion in February and March this year. Breaking down the figures:
- Large enterprises: 49.3, down 0.6 points from the previous month.
- Medium and small enterprises: 48.9 and 49.1 respectively, rising by 0.2 and 2.0 percentage points from the previous month.
- Production index: 50.0, up 0.3 points from the previous month.
- New orders index: 49.2, up 0.4 points from the previous month.
- Raw material inventory index: 47.3, unchanged from the previous month.
- Employment index: 48.4, up 0.1 points from the previous month.
- In November, the non-manufacturing business activity index and the services business activity index both fell below the 50.0 line separating expansion from contraction for the first time since September 2023 to 49.5, ending a 25-month streak of continuous expansion.
Dec. 1
The RatingDog China Manufacturing PMI, compiled by S&P Global, fell from 50.6 in October to 49.9. This marks the first deterioration in manufacturing conditions since July.
Our take
1. Beijing’s official economic data for November confirms the same structural downturn that October’s financial and fiscal numbers laid bare — only worse. As previously analyzed (see here and here), October revealed surging money supply juxtaposed against collapsing household and corporate credit demand, a shrinking tax base, and roughly half of all new social financing propped up by government borrowing alone. November has accelerated the contraction:
- Official manufacturing PMI remained in sub-50 territory for an eighth straight month.
- Both the non-manufacturing business activity index and the services index flipped into contraction, the first time both have been below 50 simultaneously since September 2023.
- Critically, the RatingDog PMI — a closely watched gauge of coastal SMEs and export-oriented firms — also turned negative, underscoring that weakness is no longer confined to heavy industry but is spreading across the real economy.
The result is domestic demand that remains weak, a metastasizing property crisis, fading export momentum amid global trade uncertainty, and China’s deflationary doom loop entering a self-reinforcing death spiral. A genuine recovery looks increasingly remote.
The drag from real estate has become even more pronounced. On December 1, China Real Estate Information Corp. (CRIC) reported that sales at the top 100 developers plunged 36 percent year-on-year in November, only a modest improvement from October’s 42 percent collapse and still deep in depression territory. China Index Academy data released the same day showed average secondary-home prices across 100 cities falling 7.95 percent year-on-year, with the pace of decline accelerating month-on-month as elevated listings and buyer wait-and-see sentiment feed a vicious circle.
The price collapse also appears to be triggering a second-order banking crisis. Commercial properties and homes pledged as collateral for the explosion of “business loans” taken out by SMEs and sole proprietors during the pandemic have lost massive value, driving loan delinquencies sharply higher. Court-ordered auctions of repossessed properties have surged. At the end of September, outstanding small and individually owned business operating loans reached 36.1 trillion yuan, or roughly three times the pre-pandemic level according to UBS head of China property research John Lam. Lam warned, “Facing negative equity, the homeowners might end up in a situation where they have to pay the shortfall. They might have to sell the properties themselves or will be forced to sell them.” UBS now forecasts 1.47 million auctioned units in 2026, rising to 2.43 million in 2027 (based on a 1.6 percent NPL scenario). Official data already show the banking sector NPL ratio at 1.52 percent in Q3, inching toward the critical threshold.
2. November’s real-economy contraction underscores Beijing’s deepening fiscal bind. The CCP authorities are resorting to quasi-monetary financing via bond issuance to prop up investment, but local-government debt burdens are ballooning uncontrollably. Nearly 50 percent of new provincial bonds are rollovers, with interest payments alone devouring about 15 percent of fresh proceeds. This leaves scant headroom to meaningfully reflate the economy.
i) The People’s Bank of China is aggressively injecting liquidity through “outright reverse repos,” enabling banks to snap up government debt in a classic case of kicking the can down the road. This stopgap is unsustainable, verging on outright debt monetization.
On Dec. 5, the PBOC rolled out 1 trillion yuan in outright repos to offset 1 trillion yuan in maturing three-month facilities. This brought the central bank’s de facto holdings of sovereign bonds to 5 trillion yuan since late October 2024. That sum rivals nearly half of the 10.1 trillion yuan in local-government bonds issued nationwide through November, per a Dec. 2 Yicai Global report. As we previously explained, what the PBoC has done amounts to veiled money-printing. Should such interventions eclipse 50 percent of fiscal revenues, China risks crossing the Rubicon into irreversible debt monetization, potentially shattering monetary credibility and igniting hyperinflationary risks.
ii) The CCP authorities are running out of fiscal space, with outlays cratering and investment firepower ebbing. PRC Ministry of Finance data show aggregate spending plunged 19.1 percent year-on-year to 2.4 trillion yuan in October, the lowest monthly print of 2025 and the first outright contraction. By contrast, June’s 4.2 trillion yuan spending marked a year-on-year gain of 17 percent. This signals eroding capacity for counter-cyclical fiscal pushes, with November’s real-economy slump portending equally dismal revenue inflows.
Consumer stimulus is equally tapped out. The 300 billion yuan in ultra-long special treasury bonds earmarked this year for trade-in programs has been exhausted, per a Dec. 5 Yicai report. Over 20 prefecture-level cities have already halted or scaled back auto trade-in subsidies. With the program’s core pillars — household appliances, EVs, and vehicle scrappage — now defunded, Beijing’s toolkit for demand ignition stands perilously bare.
3. Beijing’s limited room for maneuver suggests that the CCP’s upcoming Central Economic Work Conference in mid-December will offer little new measures to improve the economy and simply repeat the economic messaging from the Fourth Plenum of the 20th Central Committee. Put another way, Beijing will likely “report only good news but not bad,” claiming that China’s economy is “stable and improving” without introducing any measures capable of reversing the downturn.
2 How the CCP could respond to Trump’s new National Security Strategy
President Donald Trump issued a new National Security Strategy (NSS) on Nov. 4. The 33-page document lays out the Trump administration’s foreign policy worldview for Trump’s second term.
Noteworthy parts of the NSS with implications for China include:
Criticism of earlier American strategy
- Trump’s new NSS is very critical of the U.S. foreign policy establishment. The document slammed “American foreign policy elites” for convincing themselves that “permanent American domination of the entire world” — a “fundamentally undesirable and impossible goal” — was in the best interests of the United States. In doing so, the U.S. foreign policy establishment drained the country of funding; “hollowed out the very middle class and industrial base on which American economic and military preeminence depend”; allowed U.S. allies and partners to “offload the cost of their defense on the American people,” pull the U.S. into “conflicts and controversies central to their interests but peripheral or irrelevant to our own,” and “lashed American policy to a network of international institutions, some of which are driven by outright anti-Americanism and many by a transnationalism that explicitly seeks to dissolve individual state sovereignty.”
Trump’s focus
- Trump’s new NSS borrows many elements of his “America First” doctrine, including securing the U.S. from “military attack and hostile foreign influence”; having “full border control”; building a “resilient national infrastructure”; having the world’s most superior military, nuclear deterrent and missile defense, economy, industrial base, and energy sector; maintain the U.S.’s scientific, technological, and “soft power” edge; and “restoration and reinvigoration of American spiritual and cultural health.
- The NSS lists U.S. core foreign policy interests as:
- Ensure that the Western Hemisphere remains reasonably stable and well-governed enough to prevent and discourage mass migration to the United States; a Hemisphere whose governments cooperate with the U.S. “against narco-terrorists, cartels, and other transnational criminal organizations; a Hemisphere that “remains free of hostile foreign incursion or ownership of key assets, and that supports critical supply chains; and ensure America’s continued access to key strategic locations. “In other words, we will assert and enforce a ‘Trump Corollary’ to the Monroe Doctrine,” the NSS wrote.
- Halt and reverse the ongoing damage that foreign actors inflict on the U.S. economy while keeping the Indo-Pacific free and open, preserving freedom of navigation in all crucial sea lanes, and maintaining secure and reliable supply chains and access to critical materials.
- Support U.S. allies in preserving the freedom and security of Europe, while restoring Europe’s civilizational self-confidence and Western identity.
- Prevent an adversarial power from dominating the Middle East, its oil and gas supplies, and the chokepoints through which they pass while avoiding the “forever wars” that bogged the U.S. down in that region at great cost.
- Ensure that U.S. technology and U.S. standards — particularly in artificial intelligence, biotech, and quantum computing — drive the world forward.
China
- Trump’s new NSS calls for rebalancing “America’s economic relationship with China, prioritizing reciprocity and fairness to restore American economic independence.” Also, “trade with China should be balanced and focused on non-sensitive factors” and the U.S. should maintain “a genuinely mutually advantageous economic relationship with Beijing.” America’s economic focus must be accompanied by a “robust and ongoing focus on deterrence to prevent war in the Indo-Pacific.”
- To accomplish the NSS’s economic objectives with regard to China, the Trump administration calls for ending:
- Predatory, state-directed subsidies and industrial strategies.
- Unfair trading practices.
- Job destruction and deindustrialization.
- Grand-scale intellectual property theft and industrial espionage;
- Threats against our supply chains that risk U.S. access to critical resources, including minerals and rare earth elements.
- Exports of fentanyl precursors that fuel America’s opioid epidemic.
- Propaganda, influence operations, and other forms of cultural subversion.
- The NSS also calls on the U.S. to work with treaty allies and partners to “counteract predatory economic practices and use our combined economic power to help safeguard our prime position in the world economy and ensure that allied economies do not become subordinate to any competing power.” This includes improving commercial and other relations with India, as well as continued cooperation with Quad countries.
- The NSS notes that “America’s current account deficit is unsustainable” and wants to encourage “Europe, Japan, Korea, Australia, Canada, Mexico, and other prominent nations” to “rebalance China’s economy toward household consumption, because Southeast Asia, Latin America, and the Middle East cannot alone absorb China’s enormous excess capacity.”
- The NSS notes that “deterring a conflict over Taiwan, ideally by preserving military overmatch, is a priority” given Taiwan’s importance in semiconductor production and strategic position in the First Island Chain. “We will also maintain our longstanding declaratory policy on Taiwan, meaning that the United States does not support any unilateral change to the status quo in the Taiwan Strait,” the NSS wrote.
- The NSS urges Japan, South Korea, Australia, and Taiwan to increase defense spending with an eye on deterring adversaries and protecting the First Island Chain. The document also calls for hardening and strengthening U.S. military presence in the Western Pacific.
- The NSS admits that “America and its allies have not yet formulated, much less executed, a joint plan for the so-called ‘Global South’” even though they possess “tremendous resources.”
Europe
- Trump’s new NSS is very critical of Europe. In particular, the document notes that Europe is in danger of “civilizational erasure” given the “activities of the European Union and other transnational bodies that undermine political liberty and sovereignty, migration policies that are transforming the continent and creating strife, censorship of free speech and suppression of political opposition, cratering birthrates, and loss of national identities and self-confidence.”
- The NSS notes that it is a U.S. core interest to “negotiate an expeditious cessation of hostilities in Ukraine, in order to stabilize European economies, prevent unintended escalation or expansion of the war, and reestablish strategic stability with Russia, as well as to enable the post-hostilities reconstruction of Ukraine to enable its survival as a viable state.”
- The NSS says that the Ukraine War has increased Europe’s external dependencies, citing the case of how German chemical companies are “building some of the world’s largest processing plants in China, using Russian gas that they cannot obtain at home.”
- The NSS says that “The Trump Administration finds itself at odds with European officials who hold unrealistic expectations for the war perched in unstable minority governments, many of which trample on basic principles of democracy to suppress opposition. A large European majority wants peace, yet that desire is not translated into policy, in large measure because of those governments’ subversion of democratic processes.”
- The NSS calls for “ending the perception, and preventing the reality, of NATO as a perpetually expanding alliance.”
Our take
1. The CCP has reason to be both cheered and dismayed by President Trump’s new NSS.
On the one hand, the NSS’s advancement of Trump’s “America First” agenda and implicit abandonment of America’s “global policeman” role play into the CCP’s push to displace the U.S. as the global hegemon. In diplomatic exchanges and propaganda, the CCP has been promoting nonstop its concept of a “community of shared future for mankind,” “multilateralism,” the improvement of “global governance,” working with the “Global South,” and the upholding of international institutions that it has hijacked like the United Nations. Should the Trump administration adhere closely to its new NSS, the CCP would be presented with more opportunities to advance its hegemonic ambitions and make inroads into areas where the U.S. withdraws its presence.
The CCP could also be encouraged by the NSS’s relatively moderate positioning towards China. Notably, the NSS avoids the more adversarial language and stance towards the CCP and the PRC adopted during the first Trump administration in various policy documents. The NSS also eschews highlighting the ideological differences between the U.S. and the PRC, focusing instead on economic and military matters. Further, “China” is only directly mentioned in the economic context and indirectly referred to elsewhere. This signals to Beijing that President Trump is honoring the current U.S.-China détente, and frees up bandwidth for the Xi Jinping leadership to devote more attention to resolving domestic crises (including purging the military, stepping up “self-revolution” in the CCP, and finding solutions to China’s economic woes, etc.).
On the other hand, the Trump administration’s focus on securing the Western Hemisphere and deterring a conflict over Taiwan would prove disruptive to the CCP’s plans. The CCP has long sought to achieve “reunification” with Taiwan and views cross-Strait matters as an “internal affair” that “outsiders” should not concern themselves with. America’s insistence on preventing a military invasion of Taiwan (including ensuring U.S. military superiority, as well as getting Taiwan and China’s neighbors to up their defense spending) and restatement of its position not to support any “unilateral change to the status quo in the Taiwan Strait” — if followed through by the Trump administration — indirectly challenges the PRC’s claimed sovereignty over the ROC while making the People’s Liberation Army’s preparations for an invasion much more difficult.
Meanwhile, heightened U.S. focus on the Western Hemisphere — particularly guarding against subversion and influence operations, and even reserving them — makes it harder for the CCP to “encircle” the U.S. by drawing the latter’s neighbors (Canada and Latin American countries) closer into the PRC’s orbit, as well as subvert the United States through “unrestricted warfare.”
2. Beijing will not want to risk breaking the détente that it reached Washington back in October in Busan over the NSS and provoke renewed trade tensions with the U.S. while it perceives Trump’s political position to be relatively secure. Instead, the CCP will likely “delay and wait for change” before becoming more critical of the NSS and other aspects of Trump’s foreign policy that it disagrees with. For instance, the CCP could show greater recalcitrance after the U.S. mid-term elections in 2026, particularly if the Republicans suffer a sweeping defeat and the Trump administration faces the prospect of impeachments and investigations by a Democrat-controlled Congress.
Therefore, the CCP is likely to respond to Trump’s new NSS in several ways:
i) CCP propaganda outlets and the PRC foreign apparatus could release commentaries or statements critical of aspects of the NSS that draw close to Beijing’s “red lines” (such as Taiwan) while pushing the CCP’s foreign policy lines (“multilateralism,” “global governance,” etc.). The propaganda “struggle” with the U.S. over the NSS, however, is likely to be limited and constrained in the near term.
ii) The CCP could step up military operations and maneuvers in the East and South China Seas over the next couple of months to intimidate Taiwan and China’s neighbors into not cooperating fully with the U.S. and its strategies. A Dec. 4 Reuters report noted that the PRC had deployed a large number of naval and coast guard vessels (at one point exceeding 100) in waters stretching from the southern portion of the Yellow Sea through the East China Sea and into the South China Sea and the Pacific in recent weeks, citing four security officials in the region, as well as intelligence reports.
iii) The CCP could take advantage of the Trump administration’s criticism of Europe in the NSS to step up efforts to divide Europe and America. Already, Xi Jinping appeared to take extra effort in wooing France during French president Emmanuel Macron’s China trip from Dec. 3 to Dec. 5, including rolling out the red carpet for Macron in Beijing and accompanying him on a visit to Chengdu. Xi could provide similar treatment to UK prime minister Keir Starmer when the latter is expected to visit China in late January 2026, as well as for other important European leaders and dignitaries.
The CCP could potentially draw some European countries closer to the PRC in the short term. Major European economies are showing signs of weakness and some of these countries could believe that improved relations with the PRC could bring some economic relief. Also, European companies are growing more dependent on China due to the PRC increasing local content requirements for government procurement and European firms moving production into China to use as a base for exports, according to a Dec. 1 Financial Times report. The report cites Rhodium Group findings that EU manufacturing foreign direct investment had continued to flow into the PRC since 2021, with completed EU greenfield FDI hitting a record high of 3.6 billion euros in the second quarter of 2024. Former EU Chamber in China president Joerg Wuttke told Financial Times that European policies are partly at fault for European companies increasing their investment in China. “What Europe has to do is, first and foremost, fix themselves, deregulate, get energy prices down, get competitiveness up, raise education standards, particularly in engineering,” Wuttke said. “We can’t blame China for that.”
However, the CCP could find it hard to make breakthrough diplomatic gains in Europe over the long term. For one, European countries and businesses are increasingly wary of the CCP and the threat the regime poses to the rules-based international order, including Beijing’s support of Moscow in the Ukraine War, the PRC’s long-term espionage, cybersecurity, and influence operations in Europe and elsewhere, China’s dumping of overcapacity and state industrial subsidies, and the impact of Beijing’s tightening export controls on supply chains. European countries could also prefer to wait out the rest of Trump’s second term before reassessing their relationship with the U.S. instead of prematurely moving their eggs into the China basket. Finally, the CCP does not appear to be able to provide ailing European countries with a much-needed economic boost through various trade deals. For instance, Macron’s trip to China produced 12 cooperation agreements, but no major trade or business deals given the PRC’s limited ability to offer concessions in those areas.
