International Institute for Middle East and Balkan Studies (IFIMES)[1] from Ljubljana, regularly analyses developments in the Middle East, the Balkans and around the world. In the article “Between Deficit and Dialogue – Seeking Balance in Europe-China Relations,” Paweł Gałecki, Creative Tower Brand Owner and international relations expert, examines the performance of the Chinese economy in the first half of 2026, highlighting its resilience driven by exports and high-tech industries while also addressing persistent structural challenges, including weak domestic consumption and the prolonged real estate downturn. The analysis further explores the implications for the European Union, Central and Eastern Europe, and the Western Balkans, emphasizing the importance of industrial modernization, resilient supply chains, strategic investments, and balanced trade policies in an increasingly competitive and geopolitically complex environment.
Data for the first half of 2026 show that the Chinese economy maintains moderate growth while simultaneously facing structural challenges. China's GDP grew by 4.7% (year-on-year) in the first half of 2026, generating approximately 69.57 trillion yuan (about 10.25 trillion USD). Growth accelerated to 5.0% in Q1, then slowed to 4.3% in Q2, reflecting tensions between short-term resilience and long-term structural problems. International financial institutions (IMF and World Bank) have revised their forecasts and suggest China will maintain growth at 4.3% - 4.6% in coming years.
Growth in the first half of 2026 was primarily driven by exports and investments in high-tech sectors, while domestic consumption remains weak. Nominal growth in disposable income per capita reached 5.2% (year-on-year), translating to real growth of approximately 4.2% after adjusting for price factors. Household consumption in Q1 2026 grew by 2.6% (year-on-year), and retail sales of consumer goods reached 24.87 trillion yuan (+1.3% year-on-year). Weak dynamics in categories such as transportation, telecommunications, education, entertainment, and household equipment indicate limited household propensity for non-essential spending.
A significant factor constraining demand was the real estate market. Real housing prices fell by approximately 23% from their peak in July 2021, real estate investments contracted by 16.2% (year-on-year) in the January - May 2026 period, and total fixed asset investments declined by 5.7% (year-on-year) in the first half of 2026. Developer financing decreased substantially, with total developer financing down 21% and domestic bank loans to developers down 36% in May 2026. The volume of unfinished, pre-sold units is significant, creating liquidity pressure and negative wealth effects for households.
Official labor market indicators show relative stability. The urban unemployment rate stood at 5.0% in June 2026, with an average unemployment rate of 5.2% for the first half of the year. Signals such as declining average weekly working hours indicate underutilized production capacity. Youth unemployment remains high (approximately 15 - 16%), which poses a particular problem. The government introduced an Employment Stabilization Action Plan with three priorities: stabilizing employment in key traditional sectors; supporting job creation through consumption and investment stimulus; and improving job quality (training, employment services).
Chinese authorities are pursuing expansionary fiscal policy and accommodative monetary policy. The consolidated fiscal deficit is estimated at approximately 7.6 - 8.1% of GDP in 2026. Issuance of special local bonds has been increased (limit of 4.7 trillion yuan in 2026) and is largely allocated to infrastructure projects. The People's Bank of China has lowered the required reserve ratio and the benchmark LPR rate (one-year LPR from 3.65% in January 2025 to 3.35% in mid-2026), and the reserve requirement ratio (RRR) from 11.5% to ~10.0% in 2026 to release liquidity. Nevertheless, credit growth slowed to 7.7% (year-on-year) in May 2026, reflecting both bank caution and weak credit demand from enterprises and households. Monetary policy also employs targeted refinancing instruments for priority sectors: SMEs, agriculture, and green technologies.
Low CPI inflation in the first half of 2026 averaged approximately 1.0%, with core inflation at +1.2%, providing room for continued stimulus policy. PPI remains under deflationary pressure at −0.3% (year-on-year) in May 2026, though this represents improvement after a period of deeper deflation in 2023 - 2024. Low consumer inflation reflects weaker consumption and excess production capacity.
China is pursuing an ambitious decarbonization strategy. The country occupies a dominant position in global production of key renewable energy technologies: controlling approximately 80% of photovoltaic panel production, 70 - 75% of lithium-ion battery production, and 60% of wind turbine production (IEA/World Bank). Electric vehicle production increased by 35% (year-on-year) in the first half of 2026, with EVs' share of new vehicle retail sales reaching 62.8% in June 2026. This creates both opportunities (cheaper renewable technologies, accelerated decarbonization) and challenges (competitive pressure, supply chain dependencies).
Chinese exports grew by 15.5% (year-on-year) in the January - May 2026 period, with a strong contribution from high-tech products (high-tech exports +31%). Simultaneously, exports of labor-intensive products remain weaker. Imports grew by 14.3% in the same period, but imports of consumer goods remain limited, further confirming lower domestic demand. The current account surplus remained at approximately 2.1% of GDP in 2026, with a projected decline to 0.9% in 2027 and 0.4% in 2028. Rising geopolitical tensions and protectionism (tariff exchanges and customs policy revisions) constrain prospects for further expansive export growth and raise risks of supply chain fragmentation.
Exports from Central and Eastern European countries to China focus on automotive parts, machinery, chemicals, and agri-food products. Poland exported approximately 3.2 billion EUR to China in 2025 (electrical machinery, mechanical apparatus, copper), Czechia approximately 2.8 billion EUR (automotive components), Hungary 2.1 billion EUR. The decline in Chinese demand, particularly in the real estate and construction sector (-16.2% year-on-year investments), weakens global demand for raw materials and components, which may negatively impact regional exporters. The automotive sector represents key exposure for Central and Eastern European countries. This sector generates a significant portion of GDP and exports in Czechia, Slovakia, Poland, and Hungary. The growing presence of Chinese EV manufacturers in Europe (including production localization in the EU and regional countries) increases price competition and margin pressure on local manufacturers and suppliers. In 2025, Chinese EV brands captured approximately 11% of the European market. This requires European strategies supporting modernization and a shift toward higher value-added components.
Chinese FDI in Central and Eastern Europe and the Western Balkans has grown significantly in the last decade, with total investment value in 2010–2025 exceeding 27 billion EUR. Main sectors include: automotive and components (~35%), ICT (~20%), energy and infrastructure (~18%). These investments bring benefits (technology transfer, jobs) but also risks concerning security, economic impact, and potential capital dependency. In response, many regional countries have tightened FDI control mechanisms. The pace of BRI project implementation in the region has slowed, and China's economic slowdown limits availability of cheap financing. The Western Balkans have experienced intensive Chinese presence, mainly in infrastructure and energy projects. Total value of Chinese projects in the region (2013–2025) amounted to approximately 12 billion USD. The largest engagement is observed in Serbia (transport and energy projects – total value >8 billion USD), Montenegro (Bar–Boljare highway, loan ≈944 million USD), North Macedonia (road infrastructure), Bosnia and Herzegovina (energy, road infrastructure). In many cases, financing was commercial with limited local contractor participation, which restricted technology transfer and local business development. Large projects financed by Chinese loans increased budgetary burdens. Montenegro exemplifies this, where the highway loan significantly raised public debt (GDP-level percentages), requiring support from the EU and international institutions. Lower-than-expected economic dynamics in China limit inflows of new BRI projects, which on one hand reduces excessive debt risk, on the other creates an investment gap requiring alternative financing sources.
China dominates the global renewable technology supply chain: PV panels (~80% market share), batteries (~75%), wind turbines (~60%), electrolyzers (~50%). This distribution has consequences for Europe. On one hand, cheap Chinese equipment enables rapid decarbonization (e.g., in Poland in 2025, ~8 GW of new PV capacity was installed, with
70 - 80% of modules originating from China or Chinese firms in Europe). Changes in global tariff systems and geopolitical tensions increasingly point toward a "in Europe for Europe" production direction. Joint-venture investments locating part of advanced technological production in European countries and cooperating with the local business environment may be the answer, potentially determining future market access, particularly in the European Union.
EU initiatives: the Net Zero Industry Act and Critical Raw Materials Act aim to increase clean energy technology production and diversify raw material sources. The plan is for 40% of installed clean energy technologies to be produced in the EU by 2030. This creates investment opportunities for Central and Eastern European and Western Balkan countries in areas such as: component production, battery cluster development, precision component and automation production, and critical raw material recycling and processing development. Considering sunshine levels in Balkan countries (often significantly better than other parts of Europe, e.g., Albania - over 300 sunny days per year), with appropriately targeted investments and transmission network supplementation, these countries can become key suppliers of clean energy for Europe's energy-intensive industries. Such investments may also accelerate EU accession processes, as clean energy today constitutes a strategic asset and can be an excellent bargaining card for accelerating accession.
In 2025, bilateral EU-China trade amounted to approximately 783 billion EUR (EU exports ≈229 billion EUR, imports from China ≈554 billion EUR), resulting in an EU deficit of ≈325 billion EUR. Import structure: electronics and electrical equipment (~35%), machinery (~22%), textiles, furniture. Rapid growth in Chinese EV and component exports (EVs and batteries ~7% of imports in 2025, dynamic growth since 2020) increases competitive pressure in key industrial sectors. In response to growing competition, the EU has applied a combination of defensive and offensive measures: anti-dumping and countervailing duties, CBAM (Carbon Border Adjustment Mechanism), FSR (Foreign Subsidies Regulation), FDI screening, and policies supporting expansion of European value chains (IPCEI, European Chips Act, European Battery Alliance). These actions aim to ensure a level playing field and rebuild strategic autonomy in technologies critical to Europe.
To effectively manage the European economy in the current geopolitical situation and capitalize on emerging opportunities, the following are necessary:
The signal for the EU, Central and Eastern Europe, and the Western Balkans is clear and unambiguous. Protection and transformation must occur simultaneously. Protection means applying trade and regulatory tools to safeguard strategic sectors. Transformation means investing in technologies, human capital, and infrastructure that enable competition under new conditions. For Central and Eastern Europe and the Western Balkans, this challenge has a particular dimension, forcing accelerated industrial modernization, more careful foreign investment management, and deeper cooperation with the European Union and international institutions. For the European Union, this is a moment for action: build resilient value chains, support green and digital transformation, while simultaneously conducting trade and investment policy based on transparent rules and international partnership. In practical terms, success will depend on the ability to act simultaneously on three levels: national (structural reforms and modernization), European (coordination of investments and protective instruments), and multilateral (dialogue, financial stability, reform support, creating international relations ultimately liberalizing mutual tariffs and restrictions).
If Europe seizes this political and investment window, it can transform challenges associated with the Chinese market into lasting development opportunities, in the form of stronger, more innovative, and resilient economies throughout the region. Considering changes in China's approach to imports and increasing openness to suppliers from other countries, including Europe, aimed at changing disproportions in international trade, this opportunity may have a dual character. On one hand, Europe can safeguard areas economically particularly valuable to it; on the other hand, it can reduce trade disproportion with China by increasing imports in that direction. In turn, investments in technologically advanced, energy-intensive initiatives in Europe will require additional clean energy, creating opportunities both for energy producers in the Baltic (such as Poland), but primarily for Balkan countries with excellent sunshine statistics, provided appropriate transmission networks are built, leveraging the European community's consumption potential and the Western Balkans' production potential.
The article presents the stance of the author and does not necessarily reflect the stance of IFIMES.
Ljubljana/ Warsaw, 6 October 2026
[1] IFIMES – International Institute for Middle East and Balkan Studies, based in Ljubljana, Slovenia, has Special Consultative status at ECOSOC/UN, New York, since 2018 and it’s publisher of the international scientific journal “European Perspectives”, link: https://www.europeanperspectives.org/en
