How long can it last? That always seems to be the most salient question about China. Decades of unprecedented 10% economic growth. A political system under authoritarian communist control since 1949. Environmental degradation, corruption, and income inequality tearing at the fabric of social stability. By defying history and logic, modern China has stayed the course considerably longer than most optimists, me included, ever imagined.
As you learn quickly on Wall Street, the past invariably offers promises to be broken. That could finally be the case for China as it comes face to face with yet another major gambit — unsustainable economic imbalances. The latest statistics hint at the severity of this problem. Not only did overall economic growth at 4.3% in the second quarter of 2026 slip below the lower bound of this year’s modest 4 ½% to 5.0% growth target set just a few months ago, but an unfathomable dichotomy has opened up in the structure of its gigantic economy.
At midyear 2026, the only source of meaningful strength on the demand side of the Chinese economy was in the export sector, where the monthly numbers point to a 27% increase in the year ending in June. By contrast, over the same period, overall economic growth was dragged down by paltry increases in consumer-driven retail sales (+1%) and sagging fixed investment (-5.7%). While this weakness in domestic demand has been only partly offset by resilience in external demand — providing a modest 5.3% boost to industrial production — the contrast between China’s moribund consumer economy and the resilient producer economy couldn’t be any sharper.
Imbalances don’t last forever. At some point, as we discovered during the Global Financial Crisis, they signal a breaking point. Former Premier Wen Jiabao’s famous 2007 warning about an unstable and unbalanced Chinese economy sparked a vigorous rebalancing debate. That gave rise to several major domestic policy initiatives such as the Common Prosperity Campaign to address an unequal distribution of income and wealth, supply side structural reforms to avoid a Japanese-style productivity slump, and a deleveraging campaign to cope with a major property sector crisis. While the jury is still out on the ultimate effectiveness of these policies, Beijing at least gets credit for trying.
Since the days of Wen Jiabao, I have bemoaned the plight of subpar Chinese consumption. Over the years, China’s leadership has paid only lip service to this issue, although rhetorical support has increased somewhat over the past nine months. But the lack of discernible follow-through on the policy front remains discouraging. A recent article in the July 14 issue of Qiushi, the Party’s leading theoretical (ideological) journal that XI Jinping often uses as a platform for major pronouncements, attempts to explain why. Written by Xu Qiyuan, Deputy Director of the Institute of World Economics and Politics and fellow of the Chinese Academy of Social Sciences, the article (“Raising the Consumption Rate by Smoothing Economic Circulation”) draws a sharp distinction between the need for a new circular (or endogenous) model of household spending and timeworn transitory stimuli derisively dubbed “helicopter” money.
This doesn’t make much sense. Xu is not only contradicting China’s favored consumption policy initiative — an aggressive trade-in campaign for cars and other consumer durables — but he explains away a low consumption share of GDP as the inevitable outgrowth of an arithmetic “mismatch” arising from its leapfrog development model that drew disproportionate support from investment and exports. Curiously, Xu does not advocate abandoning this approach but merely offers a redefinition of investment to include human and social capital that “realign(s) investment with the requirements of high-quality development” intended to make society better off.
Xu Qiyuan is, in effect, arguing that investment-led Chinese growth, the essence of its producer model, is here to stay in one form or another. By inference, the same would apply to China’s rock-bottom share of household consumption.
This is tightly aligned with the views of Xi Jinping, who has thrown his full support behind a strategy aimed at improving Chinese living standards and competitiveness through emphasis on “new quality productive forces” such as artificial intelligence, green technologies, electric vehicles, and other areas of advanced manufacturing.
This points to an important shift in the China debate. With domestic demand weak and getting weaker, the producer model is a recipe for excess supply that will flood foreign markets. Consequently, unlike the internal deliberations that that took place in the years immediately following Wen Jiabao’s critique, China will now be facing tough foreign feedback over the external implications of its unflinching support for a producer economy. This increases the likelihood of protectionist actions, not just in the United States, but also in Europe and even the Global South (including India and the smaller ASEAN economies).
With good reason. China’s manufacturing sector already accounts for approximately 30% of value added in global manufacturing. A United Nations study suggests this share could rise toward 45% by 2030. This would surpass previous peaks of Britain in the mid 19th century and the United States in the immediate aftermath of World War II. But there is big difference between today’s China and earlier industrial powers: Unlike China, both the British and American economies of yesteryear enjoyed solid support from their domestic consumers.
China has long excelled in its economic identity as a producer. This goes back to Mao’s penchant for Stalinist central planning. China’s leaders, however, know little of the aspirational characteristics of the consumer model. Staying the current course is no longer an option. It is not just a test of the character of its own economy, but a test of the future for the global economy. China is demanding far too much of a world fixated on cheap consumer goods. Upping the ante on its producer model without supporting domestic Chinese consumption, is a recipe doomed to failure. How long can it last? Not much longer.
The common prosperity (共同富裕) policy basically peaked when Alibaba and other Chinese tech companies were making substantial donations during the industry crackdown 2022, most notably captured by the "temporary ban" of Ma Yun. In recent years the Chinese government has circled back to supporting the tech industry in order to compete with the US.
The core issue of the relatively low Chinese GDP consumption share remains the disposable income, which is hard to lift when the Chinese economy is running on competitive cost cutting mercantilist strategy. You would need redistribution/social safety net policies to be more aggressive and work out perfectly. The problem is that this would definitely have "the new productive forces" take a hit from a cost perspective.
Yes, if another nation is willing to become the consumer of last resort.
Surplus countries recycle export earnings into reserve assets, while the US absorbs their excess savings and production through persistent deficits. The producer’s surplus and the consumer’s deficit are two sides of the same global imbalance.