The Transformation of China’s Economic Miracle

Introduction

​China’s rapid economic growth is no short of a miracle in the global political economy. Many nations would want to emulate its consistent average of approximately 10% year-on-year growth between the 1980s and 2010s. Propelled by a rise in population, average hours worked, and labor productivity, China became the world’s second-largest economy by 2011. This strong performance has supported Beijing’s global economic engagement and legitimized the Chinese Communist Party’s (CCP) governance. Winning the ‘race to the bottom’, China positioned itself as the world’s assembly site, attracting crucial foreign investment. However, its astronomical growth has unambiguously slowed in recent years owing to a myriad politico-economic factors. Instead of its previous double-digit growth,  the Chinese economy is projected to maintain a growth rate of around 5%. While the economic disruption precipitated by the COVID-19 pandemic is often cited as the primary cause, structural and cyclical factors including significant domestic aggregate demand deficiency, loss in business confidence, over-reliance on exports, rising government debt, and a troubled real estate sector are all causes for concern. However, this article argues that chasing high growth figures is no longer the primary aim of the Chinese government. Instead, it has transitioned to focusing on sectors with global high-growth potential such as electric vehicles, battery technology, artificial intelligence, and renewable energy. Following a brief examination of China’s economic rise, the following article will analyze the politico-economic factors dampening its growth in recent years and assess its shifting economic priorities. Broadly, this article contends that while Chinese growth has undoubtedly declined, it continues to be a significant factor in the global political economy due to its entrenched integration in the global value chains, enabling it to leverage its advantages in emerging technologies. 

The Race to the Bottom and Industrialization

​China’s economic rise is often attributed to its ability to attract foreign companies to install factories and assembly lines in the country, positioning itself as the world’s one-stop manufacturing shop. Prominent corporations such as Apple, Volkswagen, Tesla, Siemens, and Nike have been sourcing, manufacturing, and assembling their products in China for decades. The concept of the ‘race to the bottom’ best explains this phenomenon, positing that countries compete to attract foreign businesses by providing the lowest production costs through lax labor laws, environmental regulations, and tax rates. This catalyzed China’s integration into the globalized economy, marked by the proliferation of cost-effective value chains as firms reinforce their efforts to increase profit margins. Further, China’s export-oriented manufacturing strategy has provided a significant boost to its rapid industrialization, facilitating the emergence of manufacturing centers such as Shanghai and Shenzhen. China only made up 3% of the world’s manufacturing exports in 1995, while its share had increased to 20% by 2020 (Baldwin, 2024). However, an overreliance on exports has led to significant challenges for the Chinese economy, evidenced by supply chain disruptions in the aftermath of COVID-19. Recurring lockdowns and factory closures have encouraged foreign firms driving Chinese growth to relocate to other countries to diversify their supply chains. Therefore, while impressive in the short term, China’s economic growth faces significant challenges in the years to come. This has informed Beijing’s shift to alternate export strategies to maintain China’s export competitiveness. 

Economic Slowdown and Underconsumption

​A significant share of the causes behind China’s economic slowdown stem from cyclical economic challenges including low consumption and declining aggregate demand. China has been known to suffer from relatively low levels of domestic aggregate demand compared to other major economies. This is the result of its investment-driven manufacturing-focused economic strategy, leaving a relatively small share of Chinese GDP for domestic consumption. Hence, while China accounts for 32% of global investment, it only makes up 13% of global consumption (Pettis, 2023). Household spending on goods and services accounts for 37% of China’s national income, placing it at the lowest levels of domestic consumption worldwide (Klein, 2024). By contrast, private consumption accounts for 67.7% of GDP in the United States (CEIC, 2024). In this context, China’s race to the bottom presents itself as a double-edged sword, being one of the primary drivers of its underconsumption problem. While Chinese workers add value by producing for foreign companies and Beijing’s State-Owned Enterprises (SOEs), they receive low compensations rendering them incapable of buying what they make. This has significant economic consequences for countries around the world as Chinese firms look to dump their products in foreign markets. Western firms hence find it difficult to compete with artificially cheap Chinese goods as they are forced to lower their prices to match Beijing’s low-cost exports.

​China’s property sector has been a primary concern for its regulators marked by declining construction projects and falling house prices. This is expected to exacerbate China’s underconsumption due to a reversal in the wealth effect, a behavioral economic theory positing that consumers spend more as their perceived wealth increases. A fall in real estate asset prices would therefore make Chinese households feel poorer, encouraging them to save more. Chinese households have a greater propensity to save compared to other nations, with household saving rates exceeding 30% of disposable income compared to around 8% in Europe and around 5% in the United States (Asia Society Policy Institute, 2024). Rising inequality has been another factor fueling the housing crisis. As wealthier individuals started holding more homes, housing prices increased, rendering low-income households incapable of affording homes in the short term. A 2020 IMF paper estimated that a 20% contraction of China’s real estate sector could lead to a 5-10% decline in its output (Rogoff and Yang, 2024). Therefore, it will be essential to stabilize the housing market to reverse the loss of confidence in China’s real estate sector and alleviate pressures on consumption.   

​A declining population has presented itself as a long-term structural challenge facing China’s growth. An overworking population under China’s ‘996’ work culture, signifying 9 AM to 9 PM office hours, 6 days a week, has precipitated significant social and cultural changes in Chinese society. Its effects on reproductive rates are compounded by the one-child policy of 1979-2015, initiated to restrict families to a single child to curb the country’s population growth. Therefore, its birth rate has declined in recent years to 6.33 births per 1,000 people in 2023, down from a rate of 6.77 in 2022 (Master, 2024). This places China behind the United States, which recorded a birth rate of 10.74 births per 1,000 people in 2023 with the world average being 16.52 (USA Today, 2024). However, there still remains a high supply of educated youth competing for a relatively limited demand for high-skilled employment opportunities. Despite its large workforce, China is facing significant competition from developing economies such as India, Vietnam, and Cambodia featuring youthful, skilled labor. This further incentivizes multinational companies to shift their manufacturing sites to one of these emerging markets under a now prominent ‘China+1’ strategy aimed at diversifying supply chains. Hence, while not cause for immediate concern, a flattening population growth curve may present itself as a major hurdle to Beijing’s ambitions in the coming years.

​A growing budget deficit and rising debt burdens among provincial governments are starting to ring alarm bells among analysts. China’s debt-to-GDP ratio at the end of 2023’s last quarter stood at 299.9%, increasing to 307.7% at the end of 2024’s second quarter. The Chinese economy relied on increased leverage to finance a stimulus in the aftermath of the 2008-09 financial crisis, amounting to approximately 4 trillion renminbi, increasing its debt burden (Song, 2024). While efforts were made to deleverage the economy in the 2010s, the COVID-19 pandemic once again pushed the government towards debt-financed stimulus. As a result, outstanding local government debt amounted to roughly 45% of China’s GDP in mid-2023 (Asia Society Policy Institute, 2024). Declining government revenue exacerbates concerns associated with this increasing debt burden as there is less money the government can earmark for deleveraging. This calls for a reconsideration of government financing where productive investments are prioritized, even at the expense of the currently unsustainably high growth figures. Government investment only yields dividends when the value it creates exceeds, or at least matches, the cost of the investment. Currently, Beijing’s cost of investment is exceeding its returns, causing a rise in its debt-to-GDP ratio. Thus, cutting down on unproductive investment and striking an acceptable balance between lower growth and reducing leverage should be the CCP’s policy focus. 

Moving Up the Value Chain and Western Responses

​China’s economic challenges analyzed in the previous section have informed it’s shifting economic strategies. Technological advancement and a focus on state-supported manufacturing have enabled Chinese firms to consolidate their position in industries traditionally dominated by advanced Western nations. Beijing seeks to develop an advantage in strategic sectors such as electric vehicles, battery technology, green energy, and artificial intelligence. This has enabled China to reduce its reliance on low-value-added manufacturing and move up the global value chain, gaining a comparative advantage in high-tech exports. The European Central Bank noted Beijing’s advancement with concern as it exposed major EU countries such as Italy and Germany to amplified competition from Chinese firms across multiple sectors (Al-Haschimi and Spital, 2024). Its cost advantage is most evident in the case of solar panel manufacturing, where China can make solar panels for 16-19 cents per watt of generating capacity, whereas European manufacturers face costs of up to 30 cents, and American manufacturers of up to 28 cents (Bradsher, 2024). This has triggered several protectionist policy responses from Western economies in the form of tariffs and other trade barriers. For instance, The United States increased its tariffs on Chinese EVs and intermediate goods in their supply chains to 100%, while the EU introduced a dynamic tariff regime solely targeting Chinese EV imports in October 2024 (IISS, 2024). Trade tensions between the United States and China are expected to rise further under President Trump’s second term, exacerbating risks of contention between the two countries. Hence, while China may seek to engage in high-value-added manufacturing to diversify its exports, it faces significant resistance from the West in a geopolitically volatile climate.

Conclusion

​China’s economic miracle is undeniably entering a new chapter marked by slower yet more strategically balanced growth. While the country’s “race to the bottom” fueled its rapid industrial ascent, it contributed to underconsumption, a troubled real estate sector, and mounting local government debt. Facing these structural and cyclical pressures, Beijing has altered its economic strategy, shifting focus from simple cost competitiveness to higher-value industries, including electric vehicles, battery technology, artificial intelligence, and green energy. While these sectors promise robust future growth, protectionist policies from the West and intensifying geopolitical tensions pose new challenges. Nonetheless, China’s manufacturing might be difficult to replace in global value chains, reinforcing its central position in the evolving global political economy. 

Ishan Jasuja is a Fellow at the Sixteenth Council.