Recent data on the surface may suggest that the Chinese economy is holding up well. With export as the driving force, China achieved a trade surplus of 1.2 trillion US dollars. The Chinese Communist Party (CCP) is also vigorously promoting industries such as electric vehicles, solar panels, shipbuilding, and humanoid robots. However, two key indicators—China’s declining global economic share and the worsening and shrinking credit quality—indicate major economic troubles for the CCP, resulting in a shrinking global influence.
Data shows that, calculated in US dollars, China’s share of global GDP reached nearly 18.5% at its peak in 2021, dropping to around 16.5% by the end of last year. This decline in China’s global share signifies a worrying trend. Some experts who previously predicted that China’s economy would eventually surpass that of the United States are now left pondering the reality.
A new analysis by The Wall Street Journal indicates that the commonly used measure among economists— the proportion of a country’s economy in US dollar terms— shows a declining global economic share for China.
Although the CCP still claims that the economy will grow by 4.5% to 5% this year, this growth rate falls short of any year since the early 1990s. The article further points out that China’s domestic deflation and the weakening of the Yuan have weakened the relative size of the Chinese economy when priced in US dollars. This implies that while the quantity of goods produced in the Chinese economy is significant, the dollar value of these goods has remained stagnant.
In the eyes of the CCP, the economy is a source of pride and symbolizes geopolitical power. Mark Williams, Chief Asia Economist at Capital Economics, noted that the CCP’s attempt to create a global image of rising power is undoubtedly a significant effort.
The article highlights that the shrinking global share of the Chinese economy has led to a decrease in returns for global companies with significant investments in China when measured in US dollars. Several years ago, when China’s global economic share began to decline, it caught some global companies off guard.
In 2016, the Chairman of Spanish retail giant Inditex (owner of the Zara brand), Pablo Isla, declared in Beijing that the company would focus on the Chinese market. From 2010 to 2018, Inditex opened an average of one new store per week in China, with the mainland having nearly 600 stores by 2018.
However, China’s economic challenges soon became apparent. Starting in 2015, the Yuan began weakening, leading to a decrease in the value of sales converted from Yuan to Euros or US Dollars. Subsequent deflation, coupled with intensifying competition from local brands, made the days tough for Western brands in China.
Williams mentioned that while many saw the Chinese market as vast and fast-growing and wanted to enter it, when measured in US dollars, the Chinese market did not actually grow. Foreign companies selling in China earned in US dollars, resulting in significant discounts.
From 2018 to 2026, Inditex drastically reduced the number of stores in mainland China, cutting almost 80%. Presently, its sales in the Americas and even Spain exceed its total sales in Asia and other regions.
The article suggests that China’s current economic challenges bear a similarity to Japan’s economic development trajectory of the past. In 1995, Japan’s economy nearly reached three-quarters the size of the US economy. Japanese companies were highly active globally, mostly in the automotive industry. However, the subsequent weakening of the Yen and deflation eroded Japan’s purchasing power, causing its economy to shrink to less than 15% the size of the US economy. Though Japan’s economic influence remains considerable, it is no longer the global economic powerhouse it was in the late 20th century.
The article deliberates on whether China’s economic development could follow Japan’s path. At present, many of China’s thorny issues stem from the stagnation of its dollar economy. Fierce domestic competition in China has led to price and profit declines, coupled with the weakening Yuan, forcing many Chinese enterprises to focus on exports rather than domestic sales, hoping to support profits by earning more dollars or Euros.
Data shows that in the first two months of this year, China’s export volume surged by 22%. This stark increase in exports from China has put pressure on foreign manufacturers such as Germany and Indonesia, leading to strained trade relations. Last month, the International Monetary Fund (IMF) pointed out that one reason for China’s strong export growth was the actual depreciation of the Chinese exchange rate, urging the CCP to boost domestic consumption.
The article states that even the CCP acknowledges that the economy relies too heavily on external demand. Over the past few months, the Yuan’s exchange rate against the US Dollar has been strengthening, hinting at a potential rebound in China’s global economic share measured in US dollars.
The latest official data from the CCP claims that industrial production in the first two months of this year exceeded that of December last year, growing by 6.3% year-on-year, higher than the expected 5%. Retail sales also increased by 2.8%, surpassing the forecast of 2.5%.
However, The Wall Street Journal suggests that the problem lies in the fact that even the CCP does not believe that the economy is improving, as evidenced by the recent GDP growth target range of 4.5% to 5%. By significantly lowering the economic growth figures, the CCP is cautioning local officials against over-lending and engaging in superficial government projects to embellish data while also being forced to confront reality.
The article notes that the CCP’s GDP growth figures serve the purpose of covering up lies and deception, but exaggerating them too much risks losing credibility even among the foolish. Lowering the GDP target significantly reflects the CCP’s maximum limit of self-deception. When even the CCP begins to tone down its self-deception, serious trouble is looming.
Another article from The Wall Street Journal highlights that credit is shrinking, confirming that the CCP’s policy efforts are diminishing, causing China’s economy to lose momentum. Since Xi Jinping initiated structural adjustments in the real estate sector in August 2020, the CCP has either cautiously attempted to guide economic restructuring or resorted to reckless actions, leading to some companies going bankrupt, pressuring local governments overly reliant on real estate loans to address issues, or using traditional policy tools like credit subsidies to contain economic decline.
China’s rapid economic growth over the past few decades has primarily been driven by rapid credit expansion. While China’s new bank loans increased by nearly $680 billion, the growth pace of credit has significantly slowed down: the year-on-year growth rate dropped to 6.1% in January, far below the average annual growth rates of 9% from 2017 to 2024 and 18.1% from 2007 to 2016.
China’s excessive reliance on wasteful lending in the past has caused severe economic imbalances. Although reducing loan sizes and improving loan quality should generally be positive, data indicates that in December last year, close to 58% of China’s loans had interest rates equal to or below the official benchmark rate of 3%, and this proportion has steadily increased in recent years.
This suggests that banks find it challenging to improve loan quality and identify borrowers who can generate returns above 3%—mostly lending to inefficient state-owned enterprises and projects related to local governments, where profits are severely squeezed, hindering future productive lending. This signals that the CCP’s primary policy tools are waning. Rhodium Group believes this marks the beginning of a long-term decline.
The article warns that during a slow and persistent economic decline, there may occasionally be temporary exciting numbers, like the recent data released by the CCP, but one should not mistakenly interpret them as signs of economic recovery.