This article was originally published by Pacific Forum, a Honolulu-based foreign policy research institute founded in 1975.
In 2014, at the first meeting of its National Security Commission, China formally introduced the concept of “comprehensive national security” based on economic security.
Under this framework, safeguarding economic security requires improving China’s economic strength while containing financial risks and enhancing economic resilience. However, the unexpected COVID-19 pandemic has exposed China’s economic vulnerabilities, and its post-pandemic recovery has been slower than many observers had expected.
Challenges from the external environment have led theories such as “Peak China” to make pessimistic predictions about the future of the Chinese economy, warning that Beijing will become more aggressive if it loses the legitimacy rooted in decades of impressive economic growth.
Domestically, China faces challenges on two fronts: demographic change and financial risks concentrated in the real estate sector and local governments (LGs). The long-term effects of the one-child policy (1979-2015) and rising life expectancies are putting strain on China’s shrinking workforce and fragile social security network.
In the short term, high urban youth unemployment reflects cyclical and structural problems in China’s labor market. The highly competitive environment of city life and economic stress are causing China’s urban youth to “plateau,” reject the intensive work culture, and delay employment.
The financial stress of living in China is often linked to the country’s sky-high housing prices, which stem from China’s local governments’ reliance on land financing.
Since the late 1980s, land sales have become a major source of revenue for local governments, helping them to cover budget deficits and finance public expenditure. Local Government Financing Vehicles (LGFVs) were established to raise additional off-budget funds to stimulate the economy.
This reliance on land financing has led to inflated house prices, placing local governments, LGFVs and property developers under heavy debt and posing the risk of economic bubbles.
China implemented the “three red lines” policy package in 2020 to address high levels of debt in the real estate sector. However, the policy led to the default of many property developers, including Evergrande Group and Country Garden Holdings, sparking a crisis in the real estate sector.
The financial pressure on property developers has inevitably delayed the completion of housing construction projects, sparking protests by unpaid construction workers and home buyers across China. As a side effect, the shrinking real estate sector has also reduced revenue from land sales for local governments, leaving them financially vulnerable.
According to Caixin, China’s hidden debt, accumulated mainly through local government financial institutions, has reached $9.8 trillion. Increasing risks to China’s financial strength have led Moody’s and Fitch Group, the two major rating agencies, to revise China’s rating outlook from A1/A+ stable to negative, shaking market confidence.
These domestic challenges are compounded by external pressures, further complicating China’s economic landscape, where the boundaries between the private and public sectors are becoming increasingly blurred.
Maintaining economic security appears to mean subordinating economic development to national security, which is reflected in China’s uncertain policies and tightening control over the economy.
Foreign investors are becoming more cautious about investing in China, while the US-China trade war continues and competition between the two superpowers is intensifying, especially in the high-tech sector.
However, economic stabilization does not mean that China will stop economic reforms or close its doors to foreign investors. In 2015, recognizing the diminishing benefits of population growth and the risks of an unsustainable financial and non-financial sector, China launched “supply-side structural reform.”
The reforms focus on reducing overcapacity and excess inventory, lowering debt ratios, cutting costs and strengthening weaknesses in certain key industries. They also emphasize institutionalization to create a transparent investment environment for domestic and foreign investors. Expanding on this, China adopted the “dual circulation development paradigm” in 2020.
The strategy aims to boost domestic consumption, deepen supply-side structural reform, and achieve a high degree of self-reliance in high-tech sectors. Rather than turning entirely inward, China aims to reduce the risks of external vulnerabilities and build the resilience of its domestic economy.
Intentions are crucial when analysing China’s economic situation. From Beijing’s perspective, risk management efforts may be painful and costly in the short term, but they are essential for sustainable economic development in the long term. The traditional growth model driven by infrastructure investments is no longer sustainable due to LG’s debt and land depletion.
The restructuring of the real estate sector will be essential to prevent future economic bubbles. Moreover, the crackdown on big tech companies demonstrates China’s determination to rein in capitalism and ensure that these companies comply with national priorities on high-tech development and security.
In other words, by increasing control over the private sector in certain industries, China aims to align the interests of these companies with China’s national goal of high-quality development and to rein them in rather than crush them.
China’s state-led industrial policies have also been controversial. Western countries are concerned about China’s overcapacity and dumping practices. From China’s perspective, however, these policies are aimed at accelerating high-tech development by subsidizing both state-owned and private companies and creating a domestic competitive playing field.
This policy will help foster globally competitive high-tech giants while maintaining a well-functioning market mechanism. China sees the sanctions and export controls imposed by the U.S.-led coalition to exclude Chinese companies as an opportunity to force and encourage Chinese companies to close the technological gap with the U.S. and its allies, thus realizing its ambition to become a high-tech power.
In the long term, China will continue to advocate for free trade agreements and actively promote its Belt and Road Initiative to the world, but at its core, China believes that developing its own key technologies is essential to address current domestic and international challenges.
This approach will not only provide new impetus for economic growth, but also build China’s resilience against external risks and safeguard its economic security.
The results of China’s economic policies and reforms will ultimately be reflected in economic data. Given its sheer size, the future of the Chinese economy is a concern not only for the Chinese people but also for the international community, including the United States.
The United States views China as a competitor, and either underestimating or overestimating the Chinese economy could lead to strategic miscalculation. In this context, the United States should adopt a dual approach to managing its complex relationship with China, balancing engagement and strategic competition.
On the other hand, the Chinese market still offers great economic opportunities for U.S. companies, due to the growing middle-income class. The U.S. should promote trade dialogue and seek common ground to deepen trade relations with China in non-sensitive industries.
Further tariffs on Chinese imports would not only intensify current bilateral tensions, but would also harm domestic US consumers and drag the country towards a protectionist mindset.
Meanwhile, as China gains dominance in industries such as electric vehicles, the United States should consistently pursue similar industrial policies that encourage research and development with its allies to help compete for the top spot with China.
In conclusion, China is at a critical crossroads in its economic transformation. Domestically, the country continues to suffer from sluggish consumer spending, despite implementing policies to address demographic challenges and manage risks.
Internationally, through its industrial policies, China has monopolized the global market share of the “new big three” products: electric vehicles (EVs), lithium-ion batteries, and solar power generation products.
A survey by the South China Morning Post found that more than 86 percent of the goals set out in Made in China 2025 have been achieved, despite opposition from overseas.
The future trajectory of China’s economic transformation remains unclear, but given the potential spillover effects, it is not in the interest of the United States or other countries for the Chinese economy to collapse.
Pacific Forum president David Santoro and senior adviser Brad Glosserman say strategies aimed at “beating” China rather than beating it could backfire, and that China’s economic resilience could still contribute to regional stability and global prosperity.
Wenjing Wang (ww626@georgetown.edu) is a graduate student in Asian Studies at Georgetown University, specializing in politics and security, and international political economy. Wenjing’s research interests include economic security, U.S.-China relations, and Chinese soft power.
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