Fundamental Questions About China’s Economic Resilience
Udumbara
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It is no secret that China faces economic challenges—some immediate, such as the ongoing and severe property crisis and the West’s growing hostility to China trade—and two other problems that are more fundamental and long-lasting.
The first of these fundamental problems is demographic. Decades of low birth rates have set the country up for a shrinking population and, more significantly from an economic perspective, a declining number of youthful workers to replace the large generation now on the verge of retirement. This developing labor shortage, even with the help of artificial intelligence, will limit the economy’s productive power.
The other fundamental issue has received less media attention but may be even more significant. The growth model that had propelled powerful growth for decades since the 1970s seems to have run its course and can no longer serve as an engine of growth. Yet the Chinese Communist Party (CCP) is having difficulty relinquishing it and accepting that China must content itself with a much slower pace of growth, say 2–3 percent a year.
Within Beijing’s leadership circles, the need to adjust the nation’s economic model has gained traction. Without directly referencing the increasing failures of the old ways, Beijing now admits that China needs to emphasize the consumer sector over the long-standing push to industrialize. For years, the International Monetary Fund has advised China to shift its economic emphasis in this way. Chinese officials in Beijing have also paid lip service to the need for years, but have done little.
Now, however, a consumer focus has taken pride of place in most important Party meetings, including the Politburo last September, the National Development and Reform Commission last spring, the last Economic Work Conference, and the recent Fourth Party Plenum.
For all this rhetorical support, however, China has had a hard time making a pro-consumer adjustment. Rather than practical measures to shift the economy’s engine of growth, all Beijing has managed to do is implement what can only be described as weak policy initiatives. Last year’s effort was limited to subsidies for consumer loans and a trade-in policy, under which authorities subsidized the trade-in of older appliances and cars to encourage Chinese households to purchase new ones.
For 2026, the entire effort to boost the consumer consists of a continuation of the trade-in subsidies and an extension of the loan subsidies to include credit card installments. The mediocre response households had to last year’s effort leaves little room for optimism about the coming year.
To a large extent, Beijing’s inability to do more for the consumer would seem to hinge on communist ideology. As with all communist systems, the CCP favors centralized control. Beijing’s planners insist that they should direct what China produces in what volumes and how that product should be distributed. These planners rely heavily on local governments to enforce these controls.
But to get consumers spending, the economy would need to produce what households want, and in the volumes they want, not, as now, producing according to what the bureaucrats in Beijing and local officials want. This need to move away from centralized control is a high ideological hurdle for Beijing to jump. Even the trade-in policy is a disguised form of centralized control.
On top of this powerful ideological leaning is the tempting legacy of industrialization’s past successes. Those in charge can look back over about 50 years in which China grew at a fantastic pace, propelled by two engines: exports and investment, especially in infrastructure, are simply reluctant to shift from what once served them so well.
What makes it hard to abandon these old ways is how easy it once was for the planners to direct that effort. All they needed to do was look at the developed West to know what was needed—build roads, for instance, rail links, power stations, port facilities, factories, and the like. While China remained underdeveloped, the results from such emphases were impressive and also gratified the centralizing biases of Party members. But now that China caught up with the developed world, this model has begun to break down.
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For one, planners have had much greater difficulty determining what to emphasize. For another, the more China developed its industrial capacity, the lower were the economic returns from projects that once seemed to jet-propel the economy.
Yet the legacy of past success keeps driving planners to continue along the old lines. Thus, housing was the way to go 50 years ago. Chinese workers were poorly housed, often in factory dormitories. Building apartment blocks offered the economy a great boost. But the planners continued long after the needs were nearly satisfied. They pumped up home construction to some 30 percent of all economic activity. That outlandish extreme does much to explain the long-lasting nature of the property crisis.
But this effort has already begun to fail. Especially since these investment efforts have raised production capacities far in excess of any domestic needs, and the West has begun to reject Chinese products, it has become increasingly difficult for China to discharge the debt piled up to sustain the effort.
Non-financial debt in China—for private companies, state-owned enterprises, and the government—has begun to verge on 300 percent of the country’s gross domestic product. That compares with slightly more than 200 percent in the United States and the European Union. The return on investment available for China to discharge this debt has plummeted from 1.6 percent at the turn of the century to 0.2 percent as of 2025.
If Beijing stays on its current course—bowing to communist ideology and repeating past practice, though it no longer serves as well as it once did—the economy could stall. Even if Beijing removes these barriers to adjustment and adopts a more consumer-led growth model, China has no hope of recapturing the growth momentum it once enjoyed and once seemed unstoppable. Even with needed adjustments, China will have to content itself with real growth rates of 2–3 percent a year, much like the rest of the developed world.
