Commentary: China’s Economy Needs a Hard Reset

For decades, China’s economic strategy has been guided by a pragmatic principle: identify key problems and devise targeted solutions. This has allowed for steady long-term development alongside responsive, short-term adjustments. However, during the country's 14th Five-Year Plan period (2021–2025), China has faced a new economic contradiction: the supply side is far stronger than domestic demand, and the trade surplus is far stronger than the national currency[para. 1]. This reveals a dangerously lopsided economic structure, prompting policymakers to consider major corrections in the upcoming 15th Five-Year Plan. Understanding the roots of this imbalance—specifically, a chronic shortfall in consumption—is essential to recommending solutions[para. 2].

China’s supply side demonstrates impressive strength, maintaining medium-to-high economic growth even through a challenging global environment and the pandemic. Through state support and market mechanisms, technological upgrading has occurred in both frontier and traditional industries, consolidating China’s competitive edge[para. 3]. Firsthand observations in leading cities show entrepreneurs and officials obsessed with finding real-world applications—known as “scenarios”—for technologies such as robotics. This drive indicates that China’s advanced regions are pushing the technological frontier, bringing the ambition to "catch up and surpass" the West closer to realization[para. 4].

Yet, this productive power has led to five interconnected problems: persistently weak aggregate demand resulting in low inflation and unemployment pressure, overreliance on foreign demand which highlights domestic weakness, sluggish consumption (particularly notable as China’s consumption rate is 20 percentage points below other G-20 nations), notably low household spending lagging by more than 15 percentage points compared to international norms, and a significant gap in services consumption due to insufficient government provision[para. 5]. Consequently, China operates a demand-constrained growth model where actual GDP growth consistently falls below its potential because it cannot consume what it produces[para. 6].

Externally, this is mirrored by a ballooning trade surplus. In 2024, it stood at about 27% of total exports and could exceed 30% in 2025. The goods-trade surplus is projected to surpass $1 trillion, making up over 40% of the global total. The International Monetary Fund now classifies China’s external position as "moderately imbalanced" due to this surplus[para. 7]. Paradoxically, the yuan has weakened by about 20% against the dollar and 15% against a basket of currencies over recent years—an unusual outcome for a rapidly growing economy that had previously experienced currency appreciation in line with the Balassa-Samuelson effect[para. 8].

While some external factors, including geopolitical tensions and high Western interest rates, play a role, the fundamental cause is weak domestic demand leading to low inflation and a soft currency, despite export strength[para. 9]. This links to China’s longstanding “catch-up” model, focusing public resources on industrial development and supply-side prowess rather than household welfare. As a result, China’s society saves and invests far more than it consumes, leading to persistent internal and external imbalances[para. 10][para. 11].

Traditional policy tools—boosting investment and exports—no longer suffice and exacerbate oversupply. However, given China’s improved technological capabilities, policymakers now believe it is feasible and necessary to shift resources toward household welfare and consumption, an agenda acknowledged in official statements and policy documents[para. 12][para. 13]. Recent initiatives include household subsidies and programs to promote consumer goods trade-ins[para. 14]. The 15th Five-Year Plan emphasizes that while industrial development remains vital, expanding domestic demand is now the core strategic anchor[para. 15].

Success requires deep reforms: reallocating investment resources towards enhancing public services, social security, and reforming the household registration system to remove barriers to consumption[para. 16]. Such rebalancing would transform China’s economic model to one with both robust supply and demand, help resolve trade tensions, support currency appreciation, and enable continued modernization[para. 17].