PUBLISHED June 28, 2026
A Domestic Economy Largely Insulated From the Middle East
According to BBVA Research economists Jinyue Dong, Betty Huang, and Le Xia, the Chinese economy is domestic-driven, and the Iran war’s impact on China’s economic growth and inflation has been limited compared with other Asian economies. This stands in sharp contrast to Japan and South Korea, where the conflict has driven significant downward revisions to growth forecasts — a difference rooted in China’s lower dependence on imported energy relative to the size of its economy, and in the sheer scale of domestic demand and supply dynamics that dominate its growth story regardless of what happens abroad.
“Strong Supply and Weak Demand” Persists
Economically, the pattern of “strong supply and weak demand” continues to define China’s situation. From the supply side, China is transitioning from being a manufacturing factory to a manufacturing power — upgrading the sophistication of what it produces even as overall capacity remains excessive relative to domestic absorption. From the demand side, sluggish retail sales reflect the fading effect of national subsidies, while weak fixed asset investment is mainly attributable to the housing market crash and the broader deleveraging campaign targeting indebted developers and local governments.
The Housing Market Crash Deepens
China’s real estate market has continued its decline through 2026, with new home prices across 70 major Chinese cities falling 3.5% year-on-year in May. Total real estate investment dropped by 16.2% during the first five months of the year, and the land area covered by ongoing construction activity declined by 12.3%. The crisis has transformed the property sector from a long-standing economic engine into a severe growth drag, with wealthy investors increasingly redirecting capital away from real estate toward government-backed infrastructure and technology projects instead.
The construction steel industry has become one of the most visible casualties of the property crisis, as the share of construction in total national steel usage has officially dropped below fifty percent for the first time. Major steel mills are struggling to manage massive, expensive overcapacity as their primary corporate buyers disappear — a vivid illustration of how the housing collapse is rippling through China’s broader industrial base and global raw material markets simultaneously.
The construction steel industry has become one of the most visible casualties of the property crisis, as the share of construction in total national steel usage has officially dropped below fifty percent for the first time. Major steel mills are struggling to manage massive, expensive overcapacity as their primary corporate buyers disappear — a vivid illustration of how the housing collapse is rippling through China’s broader industrial base and global raw material markets simultaneously.
Despite these structural headwinds, BBVA maintains its 2026 GDP forecast at 4.5%, in line with the authorities’ own 4.5-5% growth target announced at March’s “Two Sessions” meetings, and also maintains its 2027 forecast at 4.2%. The steadiness of these projections, even amid a deepening property crisis, reflects the extent to which Beijing’s growth target appears achievable primarily through continued state-led investment and export performance rather than a genuine recovery in private consumption or the housing sector.
BBVA has raised its CPI forecast to 1.2% and its PPI forecast to 1.4% for 2026 — modest upward revisions that nonetheless mark a notable shift for an economy that has been suffering from economy-wide deflation for three consecutive years, the longest such streak since China’s transition to a market economy in the late 1970s. The deflationary pressure has been driven by a feedback loop between weak consumer demand and industrial overcapacity, with manufacturers’ excess supply continuing to drag down prices even as the rest of the world grapples with an entirely different inflation problem driven by the Middle East energy shock.
BBVA predicts there will be no rate cut or reserve requirement ratio cut for the remainder of the year, as the People’s Bank of China maintains a “wait-and-see” attitude similar to other major central banks navigating the current period of geopolitical uncertainty. Notably, BBVA also flags that geopolitical risks affecting China have eased, partially attributable to a visit by President Trump to China — a development that stands in contrast to the broader pattern of rising trade and geopolitical friction that has characterized much of the past year, and one that may offer Beijing some additional breathing room as it works through its domestic structural challenges.
Despite these structural headwinds, BBVA maintains its 2026 GDP forecast at 4.5%, in line with the authorities’ own 4.5-5% growth target announced at March’s “Two Sessions” meetings, and also maintains its 2027 forecast at 4.2%. The steadiness of these projections, even amid a deepening property crisis, reflects the extent to which Beijing’s growth target appears achievable primarily through continued state-led investment and export performance rather than a genuine recovery in private consumption or the housing sector.
BBVA has raised its CPI forecast to 1.2% and its PPI forecast to 1.4% for 2026 — modest upward revisions that nonetheless mark a notable shift for an economy that has been suffering from economy-wide deflation for three consecutive years, the longest such streak since China’s transition to a market economy in the late 1970s. The deflationary pressure has been driven by a feedback loop between weak consumer demand and industrial overcapacity, with manufacturers’ excess supply continuing to drag down prices even as the rest of the world grapples with an entirely different inflation problem driven by the Middle East energy shock.
BBVA predicts there will be no rate cut or reserve requirement ratio cut for the remainder of the year, as the People’s Bank of China maintains a “wait-and-see” attitude similar to other major central banks navigating the current period of geopolitical uncertainty. Notably, BBVA also flags that geopolitical risks affecting China have eased, partially attributable to a visit by President Trump to China — a development that stands in contrast to the broader pattern of rising trade and geopolitical friction that has characterized much of the past year, and one that may offer Beijing some additional breathing room as it works through its domestic structural challenges.
