Stock Markets in 2026: Will China Hurt Traders Next Year?

China's Economic Outlook for 2026 & Global Implications

Key Concepts:

• Nominal GDP: The total value of goods and services produced in a country, measured at current prices.
• Real GDP: Nominal GDP adjusted for inflation, reflecting the actual volume of production.
• Deflation: A sustained decrease in the general price level of goods and services.
• PMI (Purchasing Managers' Index): An indicator of the economic health of the manufacturing and service sectors. A reading above 50 indicates expansion, below 50 indicates contraction.
• Credit Impulse: The change in the flow of new credit as a percentage of GDP, indicating the potential impact of credit on economic activity.
• Foreign Direct Investment (FDI): Investment made to acquire lasting or long-term interest in enterprises operating outside of the investor's home country.
• Trade-in Programs: Government initiatives encouraging consumers to replace older goods with newer, more efficient models.
• Delobbalization: The process of reducing international interdependence, often through trade barriers and reshoring of production.

I. The Dire State of China’s Economy: Deflation & Weak Demand

The analysis begins with a concerning assessment of China’s economic health, highlighting a persistent deflationary trend since early 2023. A key indicator is the divergence between Real GDP and Nominal GDP. Normally, Nominal GDP exceeds Real GDP due to the impact of inflation. However, in China, Real GDP has been higher than Nominal GDP for two and a half years. This signifies a negative inflation rate – deflation – across the entire economy. Ilia Spieac explains this means “inflation must be negative…you must be subtracting negative inflation from real GDP to arrive at the nominal number.”

This deflation isn’t a sign of economic strength, but rather a symptom of weak demand. Falling prices indicate consumers aren’t willing to spend, forcing businesses to lower prices to clear inventory. Spieac describes the entire economy as being “in the bargain bin to clear demand.” This lack of demand is further evidenced by the widening gap between long-term household savings deposits (like CDs) and demand deposits (checking accounts). Consumers are prioritizing saving over spending, indicating a lack of confidence in the economic outlook.

II. Recent Economic Data: PMI, Inflation & Trade

Recent data reinforces the pessimistic outlook. Composite PMI data, from both official government sources and SNP Global, shows the Chinese economy hovering around the 50 mark, indicating near standstill growth with a slight bias towards contraction. While official numbers show marginally positive growth, the S&P Global estimate is more volatile, but also suggests limited acceleration.

Wholesale inflation has been negative since mid-2022, and consumer inflation remains near zero, demonstrating the persistence of deflationary pressures.

Regarding external trade, imports have been weak, reflecting domestic demand issues. While exports initially saw a boost due to companies front-running anticipated US tariffs, this growth has slowed. China is attempting to circumvent tariffs by routing exports through countries like Vietnam and Azerbaijan, with estimates suggesting over half of the export boom to these countries is for this purpose. However, overall trade remains sluggish.

Data comparing actual economic performance to economists’ forecasts reveals a consistent pattern of underperformance since May, indicating that economic models are overly optimistic.

III. Stimulus Efforts & Their Limited Impact

Beijing has implemented various stimulus measures, including loosening credit conditions, allowing regional governments to borrow more, and offering trade-in programs for appliances. However, these efforts appear to be ineffective. Bloomberg’s credit impulse index, measuring the share of new loans in GDP, shows only anemic improvement, and much of the positive year-on-year change is attributed to a rebasing effect from the deeply negative figures of the previous year.

Foreign direct investment (FDI) has been plummeting for nearly two years, indicating capital flight from China. Spieac notes that even the slight rebound in FDI is likely a statistical anomaly due to the extremely low base from the previous year.

IV. Global Implications & The US Economy

China’s economic weakness poses a significant risk to the global economy, which relies on three major engines of growth: the US, the Eurozone, and China. China’s anemic performance means it cannot act as a backstop if the US or Eurozone economies falter.

The recent US GDP data (4.3% growth in Q3, exceeding expectations by a full percentage point) is encouraging, driven by a significant rebound in consumer spending. However, the Eurozone economy is showing signs of weakness, having lost momentum after previous attempts at recovery.

This sets the stage for a potentially precarious situation in 2026, where the US may be the only major economy driving global growth, particularly as the long-term implications of tariffs and the sustainability of the AI boom become clearer. The US economy’s reliance on a globalized supply chain for AI also presents a vulnerability in a world of increasing geopolitical tensions.

V. Positioning & Outlook

Ilia Spieac outlines his current market positioning, reflecting his bearish outlook:

• Long Metals (especially Gold): Increased exposure to gold due to its continued rally.
• Short US Dollar: Uniformly short the US dollar, anticipating further downside.
• Long Canadian Dollar: Added a long position in the Canadian dollar.
• Short Risk: Maintaining short positions through various instruments.
• Bitcoin: Holding remnants of existing positions.
• Long-Term Positions: Maintaining long positions in MSOS (marijuana stocks) with expirations in January 2027, and Brazilian stocks, viewing potential pullbacks as buying opportunities.

Notable Quotes:

• “For basically 2 years now, China is in a state of economywide deflation.” – Ilia Spieac
• “The entirety of the economy is essentially in the bargain bin to clear demand.” – Ilia Spieac
• “If China is going to be this anemic, well then it's just not going to be a backs stop for the global economy if something were to uh go wrong with either the US or the Euro zone.” – Ilia Spieac

Conclusion:

The analysis paints a concerning picture of China’s economic outlook for 2026, characterized by persistent deflation, weak demand, and limited effectiveness of stimulus measures. This poses a significant risk to the global economy, particularly if the US and Eurozone economies also face challenges. The US economy, while currently showing strength, may find itself increasingly isolated as a driver of global growth, facing vulnerabilities related to tariffs, supply chain disruptions, and geopolitical tensions. Spieac’s market positioning reflects a bearish outlook, emphasizing safe-haven assets and short positions in the US dollar.