The Chinese economy, the world’s second-largest, is grappling with a confluence of structural and cyclical challenges that have slowed its growth trajectory and raised concerns about its long-term sustainability. These issues stem from decades of investment- and export-led growth, compounded by recent policy missteps and external pressures. Below is a detailed explanation of the key issues facing the local Chinese economy and an analysis of whether China can export its way out of its domestic crisis, drawing on current dynamics and historical context.

Issues Facing the Local Chinese Economy

• Real Estate Sector Crisis:

  • Background: The property sector, accounting for approximately 25–30% of China’s GDP, has been a cornerstone of economic growth for decades. However, excessive investment and speculative borrowing led to a massive housing bubble. Since 2020, Beijing’s efforts to curb this bubble through stricter lending regulations have triggered a collapse in the sector.

• • Current Impact: Major developers like Evergrande and Country Garden have defaulted on debts, leaving behind unsold apartments, stalled projects, and significant job losses. Property prices have fallen 20–30% since their peak in 2021, eroding household wealth and consumer confidence. This has created a negative wealth effect, prompting households to save more and spend less.

• • Consequences: Local governments, heavily reliant on land sales for revenue, face dwindling tax collections, exacerbating their fiscal constraints. The crisis has also strained the banking sector, as many loans are tied to real estate. With household debt rising to over 60% of GDP, the property downturn poses risks to economic and social stability.

• Weak Domestic Consumption:

  • Structural Issue: China’s economy has historically been driven by investment and exports rather than household consumption, which accounts for only about 40% of GDP—significantly lower than in advanced economies (60–70%) and even middle-income peers. High savings rates, driven by financial repression (state-controlled banks offering low interest rates) and a weak social safety net, discourage spending.

• • Current Challenges: The real estate collapse and economic uncertainty have further reduced consumer confidence, leading to precautionary saving. Retail sales growth in 2024 was half that of the previous year, reflecting sluggish demand. Efforts to boost consumption through stimulus, such as partial rebates for specific purchases, have had limited success.

• • Implications: Low consumption limits the economy’s ability to absorb domestically produced goods, increasing reliance on exports and exacerbating overcapacity issues.

• Overcapacity and Industrial Involution:

• • Overcapacity: China’s industrial policy, which prioritizes state-designated sectors like electric vehicles (EVs), solar panels, and batteries, has led to massive, duplicative investments by local governments. This results in overproduction, a phenomenon known as nei juan (involution), where firms engage in fierce price wars and produce at low or no profit margins to outcompete rivals.

• • Impact: Finite domestic demand cannot absorb this excess supply, forcing firms to export surplus goods, which heightens trade tensions with partners like the U.S. and EU. This overcapacity is a structural issue rooted in China’s state-led investment model, which prioritizes scale over innovation.

• Local Government Debt:

  • Scale: Local governments owe over 100 trillion renminbi (approximately $14 trillion), with 60% classified as off-balance-sheet debt. This debt accumulated from years of funding infrastructure and real estate projects, often financed through land sales, which have dried up due to the property crisis.

• • Fiscal Strain: Declining tax revenues and rising debt servicing costs have left local governments financially strained, limiting their ability to fund stimulus or public services. Beijing’s $1.4 trillion refinancing program in 2024 aims to alleviate this, but it may not address the underlying structural issues.

• High Youth Unemployment and Demographic Decline:

  • Youth Unemployment: Official figures show youth unemployment at 17.6% in 2024, down from a peak of 21.3% in 2023, but still high. Millions of college graduates face poor job prospects, contributing to social discontent and reduced consumer spending.

• • Aging Population: China’s working-age population is shrinking due to decades of the one-child policy and low birth rates. The population declined in 2022 and 2023, and by 2035, 30% of the population is expected to be over 60. This demographic shift reduces the labor supply and increases pressure on pension and healthcare systems, constraining economic growth.

• Deflationary Pressures:

  • Current Situation: Weak domestic demand and overcapacity have pushed China toward deflation. Goldman Sachs projects a 0% Consumer Price Index (CPI) growth and a 1.6% decline in the Producer Price Index (PPI) for 2025, compared to 0.2% CPI growth and a 2.2% PPI drop in 2024.

• • Impact: Deflation discourages consumption, as consumers delay purchases expecting lower prices, and squeezes corporate profit margins, particularly for exporters redirecting goods to the domestic market. Beijing views low prices as a buffer for household savings, but prolonged deflation risks a deeper economic spiral.

• Geopolitical and Trade Tensions:

  • Tariffs and Restrictions: U.S. tariffs on Chinese goods, raised to 145% in 2025 under President Trump, have severely impacted exports to the U.S., China’s largest market. The EU and other partners have also imposed tariffs on Chinese EVs and solar panels, citing overcapacity and dumping.

• • Foreign Investment Decline: Geopolitical tensions and policies like the U.S. Inflation Reduction Act have reduced foreign direct investment (FDI) into China, while capital outflows have increased. U.S. Commerce Secretary Gina Raimondo called China “uninvestable” for some American firms, reflecting a loss of confidence.

• • Global Supply Chain Shifts: Countries like Japan and ASEAN nations are relocating labor-intensive industries away from China due to rising labor costs and trade barriers, threatening China’s manufacturing dominance.

• Policy Missteps and Centralization:

  • Zero-COVID Legacy: Beijing’s draconian zero-COVID policies (2020–2022) disrupted economic activity, decimated consumer and business confidence, and contributed to a slower-than-expected recovery post-2022.

• • State-Led Approach: Under Xi Jinping, China has doubled down on state control, prioritizing self-reliance in technology and heavy industry over market-oriented reforms. Crackdowns on private sector firms (e.g., Alibaba, Tencent) have stifled innovation and investment, while resources are diverted to state-owned enterprises (SOEs) and high-tech sectors like semiconductors and AI.

• • Lack of Structural Reforms: Despite calls from the IMF and economists for reforms to boost household consumption (e.g., improving the social safety net), Beijing has been slow to act, focusing instead on supply-side measures like industrial subsidies.

China’s historical growth model relied heavily on exports, which grew from $14 billion in 1979 to $3.59 trillion in 2022, making it the world’s largest exporter. However, the current domestic crisis, coupled with global economic and geopolitical shifts, makes exporting out of the crisis challenging, if not infeasible. Below is an analysis of why this strategy is unlikely to succeed and the alternatives China is pursuing.

Why Exporting Out Is Difficult

• Global Trade Barriers:

  • U.S. Tariffs: The escalation of U.S. tariffs to 145% in 2025 has drastically reduced demand for Chinese goods in the U.S., which accounted for a significant portion of China’s exports. Retaliatory tariffs from China (125%) and restrictions on critical inputs like graphite further complicate trade.

• • EU and Other Markets: The EU has imposed tariffs on Chinese EVs, solar panels, and batteries, citing unfair subsidies and overcapacity. Other countries, wary of China’s export-driven strategy, are also erecting barriers, limiting access to alternative markets.

• • Impact on Exporters: High tariffs force exporters to redirect goods to the domestic market, where weak demand and price wars erode profit margins. Some firms operate at a loss to avoid factory closures, while others face bankruptcy, threatening 16 million jobs (over 2% of China’s labor force).

• Overcapacity and Global Resistance:

  • China’s overcapacity in sectors like steel, EVs, and solar panels floods global markets with cheap goods, prompting accusations of dumping. This has led to anti-dumping taxes and trade restrictions, as seen with steel exports, which declined from 2018 to 2021.

• • The Belt and Road Initiative (BRI), which facilitated exports of construction overcapacity, is slowing due to fiscal constraints and loan defaults in recipient countries. China is now prioritizing low-risk BRI projects, limiting its ability to offload excess capacity abroad.

• Weak Domestic Demand:

  • Export-led growth relies on domestic economic stability to sustain production. However, sluggish consumption and deflation mean that redirecting export goods to the domestic market leads to oversupply and falling prices, exacerbating deflationary pressures.

• • Posts on X highlight that China’s export slowdown is driven by tariffs and weak domestic recovery, with goods piling up in ports and inventories rising, signaling that exports cannot offset domestic weaknesses.

• Currency Dynamics:

  • Beijing may allow the renminbi (RMB) to depreciate to offset tariff impacts, making Chinese goods cheaper abroad. However, this risks capital outflows, reduces purchasing power for imports, and only partially mitigates tariff effects.

• Shifting Global Supply Chains:

  • As labor costs rise, low-end manufacturing is moving to ASEAN countries, reducing China’s export competitiveness in labor-intensive goods. Meanwhile, high-end industries like EVs face trade barriers, limiting their global reach.

• • China’s reliance on foreign markets is less viable now that it is an industrial powerhouse, not a small, developing economy. Global resistance to absorbing China’s surplus is growing.

Alternative Strategies and Their Challenges

China recognizes the limitations of an export-driven recovery and is attempting to pivot toward domestic consumption and self-reliance, but these face significant hurdles:

• Boosting Domestic Consumption:

  • Efforts: Beijing has introduced measures like consumer rebates, interest rate cuts, and stock market support to stimulate demand. The 2022 “Strategic Planning Outline for Expansion of Domestic Demand” outlined 38 measures to boost consumption over 2022–2035.

• • Challenges: Financial repression, high savings rates, and a weak social safety net discourage spending. The property crisis and declining household wealth further dampen confidence. Structural reforms, such as improving pensions and healthcare, are needed but have been slow to materialize.

• Technology and Self-Reliance:

  • Focus on High-Tech: Xi Jinping prioritizes “new quality productive forces” like AI, semiconductors, and green technology to drive growth. Investments in firms like DeepSeek aim to reduce reliance on foreign technology.

• • Challenges: High-tech sectors are a small share of GDP and cannot offset weaknesses in the broader economy. Trade restrictions on advanced chips and technology limit progress, and state-led innovation often lacks the efficiency of market-driven systems.

• Stimulus Measures:

  • Recent Actions: In 2024, Beijing implemented a $1.4 trillion local government debt refinancing program, cut interest rates, and announced a budget increase to support consumption and infrastructure.

• • Limitations: Past stimulus packages have exacerbated debt and overcapacity without addressing structural issues. Economists warn that further stimulus may only delay a deeper crisis, risking a Japanese-style “lost decade.”

• Diversifying Trade Partners:

  • Global South Focus: China is shifting export efforts to the Global South, particularly Southeast Asia and Latin America, through initiatives like the Regional Comprehensive Economic Partnership (RCEP).

• • Challenges: These markets cannot fully replace the U.S. and EU in scale, and debt sustainability issues in BRI countries limit investment. Geopolitical tensions also complicate trade expansion.

Historical Context and Feasibility

Historically, China used exports to recover from crises, such as the 2008 global financial crisis, when a $586 billion stimulus package boosted infrastructure and exports. However, the current environment differs significantly:

• In 2008, China was a smaller economy with less global resistance to its exports. Today, its size and overcapacity make export-led growth contentious.

• The 2008 stimulus relied on cheap labor and global demand, both of which are now constrained by rising costs and trade barriers.

• China’s debt-to-GDP ratio (over 300% including household, corporate, and government debt) limits fiscal space for large-scale stimulus, unlike in 2008.

Conclusion

China cannot export its way out of its current domestic crisis due to global trade barriers, overcapacity, and weak domestic demand. While exports remain a key growth driver (contributing 0.5 percentage points to GDP in 2024), they cannot address the structural issues plaguing the economy, such as the property crisis, low consumption, and local government debt. Posts on X underscore this, noting that tariffs and domestic weaknesses make export reliance unsustainable.

To resolve the crisis, China needs structural reforms to boost household consumption, improve the social safety net, and reduce state control over markets. However, Xi Jinping’s focus on self-reliance and state-led industrialization suggests a continuation of supply-side policies, which may exacerbate overcapacity and deflation. Without addressing these root causes, China risks a prolonged slowdown, potentially resembling Japan’s lost decade, with global implications given its role as a major economic driver. The West should engage China within the global trading system to encourage balanced growth, as isolation could push Beijing toward more aggressive nationalism or economic retrenchment, harming both China and the global economy.