China’s Economy Is Weaker Than You Think
The country appears to have the upper hand in the trade war—but it is drowning in liabilities.
“If you want to strike China on the cheek, China will strike you back.” So declared Victor Gao, a lawyer and vocal supporter of China’s ruling Communist Party, in a recent debate with former U.S. State Department official Elliott Abrams. The two were sparring on a Saudi news network, but Gao’s remarks were quoted approvingly in the China Daily, a paper owned by the CCP’s propaganda department. His toe-to-toe, blow-for-blow defiance was typical of the tone that China’s leadership adopted at the outset of their latest trade war with America. As Donald Trump ramped up tariffs on Chinese goods, ultimately reaching 145%, China implemented its own 125% tariffs and insisted that it was not interested in negotiation unless Trump retreated from his policy first.
That pride and bellicosity are consistent with how the world views China at the moment—a tightly-run ship moving into a Chinese Century and in position to be the prime beneficiary as the United States self-destructs. But a closer look shows that the picture is much more complicated. China has gotten very good at hiding high debt rates and low income levels in the economic face it presents to the world. Government interference in the economy has resulted in prodigious waste and overinvestment in unproductive sectors. China’s dizzying growth is real, but the underlying strength of the economy will be seriously tested in the trade war.
The Trade War
Going into this uncertain period, China does seem to have a few trump cards in its hand. Put simply, Chinese imports are more difficult for the United States to replace than vice-versa. Among the goods supplied by China—which has a $300 billion trade surplus with the United States—are valuable shipments of smartphones and computers, industrial machinery, and rare-earth minerals (used in various high-tech products such as EV batteries and advanced weaponry). American exports to China also comprise some sophisticated goods like aircraft parts and chemicals, but are weighted towards fossil fuels and agricultural products (soybeans were the biggest single export in 2024). What is more, around 40% of U.S. imports from China are components used by America’s own manufacturing sector. So Trump’s tariffs will hurt not just American consumers, but American factories and farms, the same parts of the economy that he is supposedly trying to support.
China can also seek other destinations for its exports. It is true that many countries will be reluctant to accept an overspill of cheap Chinese goods, which would undercut domestic competition, but nor will U.S. Treasury Secretary Scott Bessent have an easy time marshalling allies to his own cause. China has used its position as a global manufacturing hub to dominate the supply chains for many crucial resources and products. Japan, India, and Australia are among the major economies that trade more with China than with the United States, and they will not find Chinese imports any easier to replace than America will.
Then there is the question of social and political resilience. Given the country’s speech restrictions and dearth of reliable data, it’s difficult to judge the attitudes of Chinese people towards their government. But the fervent nationalism of the China Daily is likely closer to the popular sentiment than most Westerners realise. The historian Odd Arne Westad has compared contemporary China to 19th century Europe in its embrace of nationalist ideologies. I have personally heard young Chinese people insist that the 1989 Tiananmen Square protests, which ended with the Communist government massacring its own citizens, were really organized by Americans. The Chinese state can draw on such sentiments to justify the hardships produced by an extended confrontation with the United States, whereas even Trump’s committed supporters are not united behind his eccentric trade policies.
China’s Liabilities
And yet, all of this amounts to just half of the story. We might ask why, if China’s position is so secure, has it already softened its position, agreeing to negotiate with the American tariffs still in place? Talks began in Switzerland earlier this month after Chinese state media signalled the leadership’s openness to dialogue, leading to a temporary agreement to lower tariffs on both sides. Or consider another discrepancy. If China is such an economic powerhouse, selling its goods around the world, why do we keep hearing that it is drowning in debt? Why, for that matter, do Chinese people remain on average so poor, with a disposable income per head of less than $6,000 each year?
These questions point to the fact that, for all its undoubted strengths, China’s economic model has profound weaknesses, and the two are closely linked. The country is so dominant when it comes to making and building things because the state has structured the economy to prioritize massive investments in housing, infrastructure, and manufacturing. Many Chinese firms are effectively subsidized to one degree or another, and frequently produce more than China or the world wants to buy. The nation’s warehouses bulge with unsold stock, its urban lots with abandoned cars and share bikes, all casualties of ill-conceived government schemes. The problem, aside from waste, is that these investments have long yielded diminishing returns in terms of sustainable economic growth. China has therefore become dependent on growing levels of debt.
The consensus among economists is that China desperately needs to shift towards higher levels of household spending. Rather than pumping cash into more railways, cars, and factory machinery, the government should try to raise the spending power of Chinese consumers, creating domestic demand for goods and services. It has taken some tentative steps in this direction, but China’s economy and society have already become too brittle for the Party to risk dramatic reforms. So for the most part, it has doubled down on borrowing and investment in pursuit of an increasingly hollow image of development.
Xiang Songzuo, an economist at Beijing’s Renmin University, summarized the country’s problems bluntly in 2019: “Basically China’s economy is all built on speculation and everything is over-leveraged.” The most infamous example was the real estate sector, a gigantic bubble that accounted for more than a quarter of national economic output before collapsing in 2021. As a result, tens of millions of apartments have no residents, millions have been sold but not finished, and those that are inhabited are declining in value. That is not to mention the financial losses incurred by local governments and large companies. But the implosion of the property market has not slowed down Chinese borrowing. To the contrary, government sector debt, including local government financing vehicles and associated funds, stood at 124% of GDP in 2024, while China’s total debt was measured at 312% of GDP. Both figures have risen steeply over the past five years.
Ordinary Chinese have paid a steep price for the state’s focus on infrastructure and industry. Household income has lagged behind economic growth, and, despite having a communist government, China’s welfare services remain meagre. Social spending is kept down in part by the hukou system of residency permits, which denies China’s vast army of rural migrant workers access to healthcare and unemployment insurance, pension benefits, or schooling in the cities where they toil. Putting aside basic questions of justice, households in such circumstances do not provide a lot of demand for goods and services, since they have to save to insure against hardship and debt.
Nor does their insecurity bode well for the CCP’s vision of a high-skilled, high-tech economy. The Chinese education system remains poor overall, especially in rural areas where the hukou system confines 70% of children. Meanwhile, the manufacturing and construction jobs that so many workers benefited from are becoming much less abundant. Chinese wages may not be high, but they are high enough to incentivise the offshoring of labour-intensive industries like garments and electronics to other parts of Asia. So rather than moving up the value chain into higher-paying employment, Chinese workers are instead entering the informal economy, working as drivers, casual labourers, or street sellers.
If such flaws in the Chinese model are underappreciated in the West, it is partly because the authorities hide them from view. The China Daily does not devote a lot of space to the country’s failings, with the exception of President Xi’s never-ending anti-corruption drive within the Party (an initiative that has naturally been more successful at removing potential opposition than actual corruption, which remains endemic). There is a certain shimmering quality to a great deal of what the outside world sees of China. International agencies such as the Program for International Student Assessment (PISA) give glowing assessments based on the Potemkin projects they are shown. Before he became paramount leader, Xi’s major gig was the 2008 Beijing Olympics, a spectacle so successful at laundering China’s reputation that, when I visited the capital more than fifteen years later, it was still being celebrated in museum exhibits.
To quote a metaphor used by the historian Frank Dikötter, “China is a tanker that looks impressively shipshape from a distance, with the captain and his lieutenants standing proudly on the bridge, while below deck sailors are desperately pumping water and plugging holes to keep the vessel afloat.” This does not mean that China is bound to crumble in a prolonged trade war. Its strengths may be matched by weaknesses, but they are still real strengths, and have been chosen in part for a situation like this one. China has a strong grip on the world’s supply chains, a high degree of self-reliance, and an ability to compete with the United States in advanced technology. Still, the CCP’s apparent eagerness to negotiate over tariffs is suggestive. It may well show that, as Peking University professor Michael Pettis has argued, China is becoming increasingly dependent on trade surpluses as one of the few ways it can deliver growth without incurring more debt.
That, in turn, raises the question of why the Chinese leadership has not taken more decisive action to rebalance its economy in the ways that all agree it should. The answer is surely that it would require a painful readjustment in the short term, as powerful industries are forced to do without subsidies they have long enjoyed. Yet this is precisely the kind of long-term governance China’s dictatorship is meant to excel at. The fact that it cannot take this step suggests that, for all China’s nationalism, the Party does not feel as secure as it lets on.
Wessie du Toit writes about design, culture, and other aspects of the modern world. His Substack is The Pathos of Things.
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Good piece, though I generally reject expressions like “winning the trade war” or “having the upper hand in the trade war.” A trade war is destructive to other countries and to oneself. So “winning the trade war” really means “We are cutting off fewer of our fingers than you are cutting off of yours.
Dysfunctional economic policy with a ruthlessly effective bureaucracy is still dysfunctional economic policy.