As 2026 begins, China presents a complex paradox. It is a country facing visible economic strain and structural challenges at home, yet projecting growing strategic confidence abroad. Political control has tightened domestically even as Beijing expands its diplomatic, economic and institutional footprint globally. For India, this combination of Chinese assertiveness and anxiety — along with shifts in the approach of the United States towards both Beijing and New Delhi — has narrowed strategic space and made an already difficult relationship more complicated.
A perceptible change in China’s strategic psychology
Until late 2024, informal Track 2 dialogues revealed deep concern within Chinese strategic circles about economic slowdown and U.S. containment. By mid-2025, this mood had shifted dramatically. A sense of regained momentum — at times bordering on hubris — became evident. Many in Beijing believed China had navigated great-power competition more effectively than expected, secured tactical advantages in trade and tariff disputes, and managed escalation with Washington on favourable terms.
This confidence has been reinforced by China’s expanding influence in the Global South, its deepening alignment with Russia, and its ability to stabilise relations with most major powers, barring Japan. Yet, beneath this assertiveness lies an awareness of unresolved domestic weaknesses and a challenging international environment.
Economic headwinds and the turn inward
China’s economic performance in 2025 was weaker than official growth figures of around 5% suggest. Domestic demand remained subdued, the property sector continued to drag confidence, and deflationary pressures persisted, with producer prices remaining negative for over three years. Productivity growth and corporate profitability were tepid, while local governments faced acute fiscal stress.
Instead of a consumption-led recovery, Beijing doubled down on a state-led economic model. Policy emphasis has shifted decisively towards advanced manufacturing, semiconductors, Artificial Intelligence, green energy, and dual-use technologies. The forthcoming 15th Five-Year Plan (2026–30) prioritises technological self-reliance and supply-chain insulation, reflecting leadership anxieties about vulnerability to external shocks.
Export dependence and “China Shock 2.0”
Ironically, this inward turn has coincided with growing reliance on exports to offset weak domestic demand. China’s trade surplus crossed $1 trillion in the first 11 months of 2025, as it tightened its grip over global value chains in electric vehicles, batteries, solar panels and industrial machinery. This resurgence of export dominance — often termed “China Shock 2.0” — has begun to disrupt both developed and developing economies.
Warnings from institutions such as the International Monetary Fund underline the risks. China’s scale now makes it impossible to export its way out of slowdown without intensifying global trade tensions. For India, the implications are stark: a trade deficit projected to exceed $110 billion in 2025, and deepening dependence on Chinese inputs across pharmaceuticals, electronics, green energy and rare earths.
Political consolidation and military assertiveness
Domestically, 2025 witnessed further political consolidation under . Information controls tightened, ideological discipline hardened, and national security expanded its reach into economic and social domains. At the same time, the party-state’s internal strains were visible in the large-scale removal of senior military officers.
The People’s Liberation Army continued to modernise rapidly, expanding both conventional and nuclear capabilities. Emerging shifts in nuclear doctrine, including movement towards an “early warning counter-strike” posture, suggest a more assertive and risk-tolerant military outlook.
Recalibrated great-power dynamics
Externally, the most consequential development was the recalibration of U.S.–China relations under President ’s second term. Under the U.S. National Security Strategy 2025, China is framed less as a systemic rival and more as an economic competitor. The Indo-Pacific has lost salience as Washington’s strategic centre of gravity, replaced by a sharper focus on the Western Hemisphere.
Yet rivalry remains intact. U.S. actions such as regime change operations in Venezuela — which harmed Chinese investments — and Beijing’s sharp responses underline continuing strategic competition. The Trump–Xi meeting in Busan in October produced limited de-escalation through tariff tweaks and selective easing of export controls, but these were transactional adjustments rather than a durable accommodation.
Implications for India’s strategic position
For India, these shifts are sobering. The momentum in India–U.S. relations has slowed amid friction over trade, Russia, and Pakistan. While Washington remains opposed to Chinese hegemony in Asia, it is less inclined to prioritise India as a central counterweight to China. Simultaneously, Chinese analysts increasingly argue that India’s interest in stabilising ties with Beijing stems from uncertainty in its U.S. partnership — a perception that reduces Beijing’s incentive to accommodate Indian concerns.
China’s global outreach and its limits
China has attached growing strategic importance to the Global South, projecting itself as a stabilising leader amid Western retrenchment. Through initiatives such as the Belt and Road, expanded BRICS and SCO, and institutions like the AIIB and NDB, Beijing is pushing a China-centric global architecture. However, concerns persist across regions over debt, opaque financing, environmental costs and erosion of policy autonomy.
At the same time, China has shown clear red lines. Its harsh reaction to Japanese comments on Taiwan and continued sensitivity on “core interests” demonstrate that stabilisation does not mean compromise.
India–China ties: stabilisation without resolution
India–China relations in 2025 saw cautious stabilisation, aided by summit-level meetings and diplomatic exchanges. However, structural issues remain unresolved. Along the border, disengagement has not led to de-escalation, and buffer zones continue to restrict India’s patrolling rights. If such arrangements harden, China stands to gain incrementally through grey-zone tactics.
Negative signals persist, including China–Pakistan military coordination, hydropower projects in Tibet, restrictions on rare earth exports, and renewed assertions over Arunachal Pradesh. India has responded with calibrated engagement while strengthening deterrence and accelerating domestic capabilities.
What to note for Prelims?
- China’s economic slowdown despite official growth figures.
- Concept of “China Shock 2.0” and its global trade implications.
- Role of Five-Year Plans in China’s economic strategy.
- Grey-zone tactics and buffer zones in border management.
What to note for Mains?
- Impact of U.S.–China tactical accommodation on middle powers like India.
- Link between China’s domestic economic model and foreign policy assertiveness.
- India’s strategic options amid narrowing external balancing space.
- Challenges posed by China’s Global South outreach and institutional expansion.
