Consequences be damned. China loves its own economic model

THE BIG debate about the Chinese economy has long pitted those who see it as a bubble waiting to burst against those who judge it a sustainable success. A new debate is now emerging, which is potentially far nastier. Much of the world falls into one camp: admiring China’s accomplishments, but also reeling from a deluge of Chinese exports. In the other camp is China, utterly convinced of the rightness of its economic model.

This debate is not so much about what the future may bring but about defining the economy’s basic condition today. The external view, held by many foreign officials and economists, is that China is beset with challenges, from persistent deflation to a collapsing property market and anaemic consumer spending. Exporting the fruits of industrial overcapacity to the rest of the world is seen as a lifeline. The official Chinese view, by contrast, is that these problems are sideshows to the main event: an economy breaking through to new technological frontiers.

This is not an abstract disagreement. It helps explain the ferocity of the trade war between America and China. Prominent members of the Trump administration believe China’s economy is so weak that tariffs and export controls will have it crying for mercy. Mr Trump himself flirts with this: on October 12th he posted that Xi Jinping, China’s leader, does not want a “depression for his country”. Chinese officials, by contrast, project total confidence in their economy. It is as if each side inhabits a different reality.

A recent set of articles in the People’s Daily, the Communist Party’s main newspaper, offers a window onto the Chinese view of this debate. Over eight days, from September 30th to October 7th, it ran editorials about the economy—a prelude to a meeting later this month when senior cadres will draw up the country’s latest five-year plan. They appeared under the pen name Zhong Caiwen, indicating that they represent the views of the party’s main body for setting economic and financial policy. Put simply, the editorials were authoritative. And they were uncompromising.

The various arguments, played out over more than 10,000 characters, boil down to four messages. First, contrary to naysayers, the editorials say that China’s economy is in great health. It is in the midst of a transition from traditional sources of growth—a reference to labour and heavy investment—to new ones, especially innovation and green tech. The fact that China leads the world in international patent applications (70,160 in 2024, 30% more than America in second place) is furnished as evidence.

Next, the editorials insist that China is profoundly resilient. They note risks, including American protectionism and weak consumer demand at home, but treat them almost as inconveniences. One editorial repeats Mr Xi’s line that “China is an ocean, not a pond”—big enough, that is, to cope with anything.

Third, the editorials portray China as providing certainty to the rest of the world in the form of policy continuity and a vast market. China has long been an engine of growth but now it is also a “stabilising anchor”. That provides an obvious contrast with America’s new love affair with tariffs.

A final argument is that China’s systemic advantages are what has made it so competitive internationally. The editorials reject the accusation that China has subsidised its firms in order to dominate global supply chains. Rather, export strength is a testament to its governance, its sheer scale and its hard-working people. It is a “contribution, not a threat, to the world”.

It would be a mistake to dismiss these editorials as empty propaganda. China, of course, has much to be proud of after four-plus decades of rapid development. Its capacity for innovation is extremely impressive, as is its industrial strength. China is in a better position to withstand American pressure today than just five years ago, during Mr Trump’s first trade war. Moreover, the editorials matter because they appear to reflect the deeply held beliefs of Mr Xi, judging from his speeches and writings over the years.

Yet that makes their blind spots all the more alarming. It is pure hubris to brush aside China’s domestic weakness as a mere squall buffeting a giant economy. For years property (broadly defined) accounted for about a quarter of China’s GDP. Its malaise is painful and will probably be long-lasting; by weighing on both economic activity and wealth, it has become a drag on incomes and consumer spending. An obvious solution would be to use the tax and benefits systems to boost consumers’ incomes. But that runs up against Mr Xi’s aversion to “welfarism”. It also does not square with his belief that innovation has picked up China’s growth baton from heavy investment. Alas, the income gains benefit a narrower slice of the population. You cannot eat patent applications.

Even more worrying for the rest of the world is China’s refusal to grapple with industrial overcapacity. It does not matter whether Chinese intentions are defensive (blunting American pressure) or offensive (controlling global choke points). High production of cars, solar panels and the like is the result of an economic model predicated on excessive investment in these targeted sectors, especially when so many other policies also restrain consumption. Supply is bound to outstrip demand. Struggling foreign companies can expect little sympathy from China.

One boast in the editorials was telling: that China is the only country that hosts every category of industry, as defined by international standards. This, in the official view, makes China the ultimate guarantor of global supply chains and economic development. But a guarantor also has blocking power, as seen in the way China has wielded its dominance in rare earths to gain leverage in its trade war with America. China wants to present itself as a force for stability. It often looks more like a force for itself. ■