China’s current economic challenges, exacerbated by the escalating trade war with the United States, are well known to all. However, what is less discussed is Beijing’s strategy to tackle these issues – a heavy focus on investing in technological productivity, which seems to be making the situation worse.
Some predict a collapse of the Chinese economy, a conclusion that may be exaggerated given China’s large economy supported by a well-educated population. But it is becoming increasingly clear that China will need several more years to regain its once-enviable economic growth momentum.
Various signs of decay in China’s economy are evident across major economic indicators. Recently, a detailed report by the renowned firm, RAND Corporation, highlighted a housing crisis that began in 2021, leading to a significant decline in economic growth due to decreasing consumer spending and reduced private sector capital investment.
For instance, China’s actual GDP at the end of last year was over 5% lower than the trend prior to 2019. Consumer spending, capital investment, exports, and all major sectors are lagging behind historical trends. In terms of value-added – an index roughly reflecting the complexity of each product – over the past five years, China has even lost its edge over the United States in manufacturing.
Consumer confidence in China is about 30% lower than pre-pandemic levels. Even the highly prioritized and heavily invested high-tech output in Beijing has seen a slower growth rate, around 11% in 2024 compared to an average growth rate of 25% in 2018-2019.
In response to these economic downturns, Beijing’s planners have pushed for significant investments in developing key technological productivity through state-owned enterprises. These investments have primarily focused on what planners describe as the industries of the future, such as electric vehicles (EVs), semiconductors, artificial intelligence, and biopharmaceuticals. The efforts in these areas have surged to a staggering extent and are considered as potential economic “hidden advantages” to overcome other shortcomings. However, it turns out that this push not only fails to solve economic issues but exacerbates the economic challenges.
This massive investment and production have had little impact on driving China’s economic recovery and have instead led to imbalance. As Beijing has failed to revive consumer and corporate spending, China’s domestic economy struggles to absorb the new technological productivity.
The flood of products brought by Beijing’s efforts has put downward pressure on prices, calling into question the feasibility of the increased technological productivity. Furthermore, it has resulted in widespread deflation in consumer prices and producers’ levels, causing Chinese households and businesses to delay consumption, expecting further price declines in the future, thus hindering other economic recovery efforts.
What’s worse for China is that overcapacity forces the country to seek export growth at a very disadvantageous time. Fundamentally, this export demand is hindering Beijing’s other goals, specifically expanding China’s domestic demand to reduce reliance on other economies.
Despite the potential value that Beijing’s technological productivity “solution” may bring, it has not addressed China’s overall economic problems as RAND Corporation suggested. In reality, it has failed to spur economic development and has made comprehensive economic solutions even more challenging.