BBeijing and Washington will continue to circle each other warily in 2026 even as China’s leadership struggles to balance economic growth against its control fixation, according to a report on next year’s outlook for China released on Wednesday by the Asia Society.
“As we look towards 2026, the story is not one of rises or triumph. It’s not black or white,” said Lizzi Lee, a fellow at the Society’s Centre for China Analysis and one of the report’s co-authors. “It is a story of transitions, trade-offs and tensions.”
The group expects US-China relations to be steadier next year after the sit-down in South Korea between US President Donald Trump and Chinese President Xi Jinping compared with 2025’s blistering threats, trade wars and perilous gamesmanship.
But any stability ahead is “rooted not in accommodation but in a shared recognition of each side’s capacity to inflict significant economic harm on the other”, said the report. “Both sides are racing to eliminate the other’s strategic chokepoints.”
Even as Washington works overtime to circumvent China’s dominant position in rare earth minerals, Beijing is determined to break the US lock on the most advanced semiconductors. That suggests any bilateral deal will be tactical rather than strategic as the world’s two largest economies elbow for position.
“Mutual suspicion will endure, and the political space for compromise will remain fragile and limited,” the report said.
Xi’s governance trade-offs and economic vulnerabilities
Asia Society added that China faces a dilemma as it tries to grow its way out of mounting local government debt, high youth unemployment, demographic headwinds and a swooning property market.
While Xi’s priorities after 13 years in power are clear – political control, national security, high-quality development, technological self-reliance and military modernisation – so are the trade-offs.
“Centralisation curbs initiative, securitisation unnerves investors, and technology-first policies risk crowding out household consumption,” Asia Society said. “How effectively the Party-state manages these trade-offs will determine whether Xi’s system of governance delivers resilience or rigidity in the years ahead.”
Unlike other year-end reports, the Centre for China Analysis said it is not trying to predict what Beijing will do in 2026 but rather spot ongoing trends that are worth watching closely – from Beijing’s leadership to Taiwan, trade and technology, social tensions, personal consumption and demography.
“To mistake China’s evolution for either inevitable decline or unstoppable rise is to risk misreading the world’s second-largest economy, as well as one-fifth of humanity,” the 96-page “China 2026 What to Watch” said. “At worst, policymaking based on mirror imaging can border on irresponsibility.”
The report identifies local government debt as China’s most immediate vulnerability, especially if it got serious enough that Communist Party cadres and civil servants go unpaid. Estimates place hidden liabilities at 90 trillion-110 trillion yuan (US$12 trillion-US$15 trillion), among the world’s largest.
Various sections of the report include likely, moderate and unlikely scenarios for how issues could unfold. The baseline for economic and tech vitality, for instance, assumes that things will pretty much continue as they are, with a systemic shock or major liberalisation push less probable.
Tensions in leadership, society and the Taiwan Strait
The coming years will see leadership tensions, the report argues, with those born in the 1970s making up some 60 per cent of provincial standing committees and 40 per cent of the Central Committee by 2027.
This will be an increasingly well educated and technologically savvy cohort, yet their advancement will depend at least as much on loyalty as talent, favouring a risk-averse bureaucracy that encourages stability but not necessarily innovation. Ideological conformity, the report added, could complicate compromise with Washington and heighten the risk of confrontation.
The series of essays leads off with Xi, painting a picture of a leader who has successfully consolidated his power and is poised to host the 21st Party Congress, but who has doubled down on a state-led economy, leading to successive crackdowns and the resuscitation of entrepreneurs.
“This is the ‘golden goose’ dilemma: The entrepreneurial class that laid the eggs of China’s tech revolution are also threatening, in the Party’s eyes, to fly too far afield. Xi’s strategy is not to kill the goose, but to tether it.”
“Innovation does not thrive on a leash,” the report added, citing the need for property rights protection, reliable dispute resolution and consistent regulatory enforcement, “China risks stalling at the halfway point.”
The report expects robotics, EVs, AI+ applications, green infrastructure and advanced manufacturing niches to continue generating impressive breakthroughs. But the impact will be muted, it adds, given the overhang of local debt, swooning property markets and demographics.
The report also highlights the need for genuine consumer-led growth after years of slogans as the 15th five-year plan is launched in 2026, and an end of “financial repression” whereby interest rates are held artificially low with funds channelled into industry.
But this would reduce state control, giving the government less revenue to fund and subsidise technology. The economic status quo, meanwhile, risks increased social instability, it added.
Asia Society sees the status quo prevailing in the Taiwan Strait in 2026, but notes that the definition of status quo is changing, with Beijing’s military becoming increasingly assertive in and around the self-governed island, creating a real dilemma for Beijing.
“They want to win the hearts and minds. They don’t want to use force,” said Neil Thomas, a Centre fellow and report co-author. “But they don’t have many levers at their disposal to influence Taiwan. That’s why they’re leaning on the military instrument, which unfortunately works at cross purposes.”
This, Thomas added, undercuts Beijing’s claims of eventual peaceful reunion. “You definitely have a predicament,” he added. “I think it’s going to get worse.”
Beijing sees Taiwan as part of China to be reunited by force if necessary. Most countries, including the US, do not recognise Taiwan as an independent state, but Washington is opposed to any attempt to take the self-governed island by force and is committed to supplying it with weapons.
High youth unemployment, demographics and growing inequality are also major challenges, with the Huron Report reporting that China now has 814 billionaires compared with America’s 800.
“At the same time, more than 200 million Chinese people are working precarious jobs in the gig economy,” said Barclay Bram, a Centre fellow and co-author. “So for all the strengths that China is able to project abroad … its biggest challenges might well end up being at home.”
An ageing population, meanwhile, leads to slower economic growth, fiscal stress, more need for aged care and further fertility decline.
But China is hardly alone. “From a broader policy perspective, China’s experience underscores a universal challenge: how to adapt growth models, welfare systems, and family policy to the realities of ageing societies,” the report said.