Contrary to the narrative of China's inevitable rise, the U.S. economy has actually grown faster over the last five years. This fundamental shift challenges the perception that "time is on China's side" and grants Western governments more leverage than they currently realize.
Despite massive state focus, China's touted strategic sectors like NEVs and AI are projected to make up only about 6.3% of GDP by 2025. This slice is too small to drive aggregate growth, which remains dependent on the struggling domestic consumption and property sectors.
To escape its reliance on investment-led growth, China must broaden its tax base, with consumption taxes being the most viable option. However, this directly contradicts the urgent need to stimulate consumer spending, creating a difficult paradox for policymakers seeking to rebalance the economy.
In China's state-backed system, the government is expected to prevent collapses from external shocks. The real danger of a crisis comes from attempting reforms that disrupt the status quo and reveal underlying losses, making managed decay a more politically palatable option for leaders.
The collapse of Evergrande, China's largest developer, wasn't just a corporate failure; it was a systemic financial crisis. The aftermath—impaired policy tools, deflation, and slower growth—is consistent with the consequences of a major crisis, even without a "Lehman moment."
The collapse in domestic demand from the property sector has forced Chinese producers to find markets abroad. This has led to a rise in China's external surplus and deflationary pressure as firms cut prices to sell excess capacity, directly linking internal slowdown to external competitiveness.
There's a significant disconnect between on-the-ground reality in China and Western media coverage. Reporters see the structural jobs crisis for college graduates as the most pressing issue, while their editors prioritize stories on technology, missing the larger social and economic malaise.
Confronted with a failing economic model, China's leadership is opting for slow decay combined with a bet on technology to solve its problems, much like Brezhnev's Soviet Union. This avoids politically dangerous structural reforms but leads to long-term stagnation and mirrors the Soviet belief that tech could replace market mechanisms.
After a period of market-oriented experimentation with "shadow banking," China's financial system is recentralizing under direct Party control. Finance is increasingly treated as a utility to serve state goals, not as a market for efficient capital allocation, leading to weak credit demand and risk aversion among lenders.
With China's economic growth stagnating, the idea of a systemic rivalry where China overtakes the West in overall economic power is fading. The competition has shifted to specific industrial and technological sectors, which makes the threat more targeted and deterrable rather than an inexorable outcome.
Xi Jinping's strategy may not be about winning the GDP race but achieving dominance in critical global supply chains. By becoming central to industries like EVs, China gains geopolitical leverage, allowing it to sustain export growth and national power even if its broader domestic economy stagnates.
By pivoting to an export-driven model, China ironically becomes beholden to its customers' economic health. Its growth potential is now capped by the growth of external demand, meaning it has less control over its own pace of development and cannot easily grow faster than the rest of the world.