China’s Economic Engine Flashes Warning Signals

The narrative surrounding the world’s second-largest economy took a sombre turn this week as fresh data for November 2025 revealed a deepening slowdown. The Leading Economic Index (LEI) for China, a critical barometer used to anticipate turning points in the business cycle, declined by 0.3 per cent in November. This follows a sharper 0.8 per cent decrease in October, cementing a downward trend that has global capital markets on high alert.

For the six-month period ending in November 2025, the index contracted by 2.1 per cent, accelerating from a 1.6 per cent decline in the previous half-year. This persistent weakness has once again triggered a technical recession signal, suggesting that the headwinds facing Beijing are intensifying rather than dissipating. For investors holding exposure to Asian equities or commodities, this data serves as a critical checkpoint for portfolio allocation in 2026.

The primary driver behind this contraction appears to be a crisis of confidence among Chinese households. According to the data, "consumer confidence continued to be the primary drag on the index," outweighing minor improvements in other sectors. This sentiment is echoed by sluggish retail sales and "weak hiring intentions," creating a feedback loop that stifles domestic consumption.

Furthermore, the logistics prosperity index and new export orders recorded notable negative contributions. This is particularly concerning for global trade watchers, as it indicates that external demand for Chinese goods is softening alongside internal demand. When the manufacturing hub of the world sees a drop in logistics and new orders, it often acts as a precursor to reduced industrial output globally. While there was some growth in building construction and imports of machinery, these bright spots were insufficient to offset the widespread weakness across the remaining components of the economy.

Beyond the fragility of consumer demand, the supply side of the economy is also showing signs of fatigue. Indicators such as Industrial Value Added and Manufacturing Purchasing Managers' Indexes (PMIs) have "lost some momentum." This was reflected in the Coincident Economic Index (CEI)—which measures current economic activity—plunging by 1.0 per cent in November.

This stalling momentum complicates the picture for policymakers. While real GDP growth is still forecast to hit 5.0 per cent for the full year of 2025, projections for 2026 see this slowing to 4.5 per cent. A deceleration of this magnitude in China acts as a deflationary force for the global economy. For the US Federal Reserve and the European Central Bank, a cooling China reduces demand for oil and raw materials, potentially helping to cap global inflation but simultaneously threatening global growth prospects.

The data paints a picture of an economy facing significant structural "headwinds." With the recession signal triggered, the demand side remains subdued due to persistently low consumer confidence. For international investors, this suggests that the volatility seen in Chinese equities may persist into the first quarter of 2026.

However, the divergence between sectors offers some nuance. The uptick in machinery imports and construction starts suggests that targeted stimulus or infrastructure spending is finding some traction, even if it hasn't trickled down to the average consumer. Investors should watch closely whether Beijing deploys more aggressive fiscal stimulus to counter these trends. Until consumer sentiment stabilises, the "recession signal" will remain a looming shadow over global market sentiment.