For an outsider, China appears to be sitting comfortably at the top of the global economic food chain. Its carmaker, BYD, is now the world’s largest electric vehicle exporter. The country installs twice as many solar panels as the rest of the world combined, and its companies control 90% of the world’s rare earths processing capacity. In the digital realm, its AI models and social media applications are now genuinely comparable with their US equivalents.
When the US imposed tariffs on Chinese goods last year, Beijing pivoted its trade to other partners with apparent ease. As the world’s second-largest economy, China now runs a $1tn goods trade surplus with the rest of the world. However, behind this global dominance and ambitions of future economic hegemony lies a deep-seated domestic imbalance.
Strategy and medium-term planThe National People’s Congress (NPC) is being held this March, where the new five-year plan for 2026-2030 is expected to be formally approved. This follows recommendations by the de facto decision-makers of the Communist Party of China (CPC) made public in December. The focus areas have largely remained within the framing of economic self-sufficiency rather than outright growth. These recommendations stress the foundations of a "modernized industrial system", pursuing integrated development in core technologies such as semiconductors, AI, aerospace and new energy.
Beijing is still favouring structural investment in digital and physical infrastructure over a consumption-based model. According to the CPC, the "conditions for the underlying trend of long-term growth remain unchanged". They have, however, ignored that the model relies heavily on investment-led development that is dependent on future export expansion to partners who are increasingly dissatisfied with Beijing’s trade practices. This strategy has embedded diminishing economic returns as the return on investment declines.
Investment as a gift and a curseChina’s economic model has long relied on high levels of investment in infrastructure, manufacturing and real estate. This has been funded by foreign direct investment and, lately, incredibly high domestic saving rates. Household savings are channelled through a unique banking system where state-owned commercial banks, overseen by the PBoC, provide funding to strategically important industries.
As noted by the ECB, total investment as a share of GDP remains above 40% in China, while in typical developed countries it stands at 20%. Even in post-Soviet countries transitioning to free markets, this averaged only about 30%. This overextension has had severe consequences. A large share of investment went into the property market until 2021, when the government tried to limit loose conditions. That resulted in a sharp slowdown, highlighted by the default of the country’s second-largest real estate developer, Evergrande Group, as it failed to meet its debt obligations.
According to the Wall Street Journal, $18tn of value was destroyed when the housing bubble burst, a loss of $60,000 per household. The economy still holds 79mn vacant units. A former deputy head of the statistics agency noted that even China’s 1.4bn population cannot fill them. Since the collapse, the government has tried to spur growth with more investment in industry, almost exclusively executed by state-owned companies. This causes overcapacity in sectors where the consequences are felt outside Chinese borders.
The investment is accommodated by state subsidies. As noted by the IMF economic assessment, indirect subsidies are common in the form of preferential lending and land allocation. With these, China continues to export deflation. Furthermore, the indebtedness of local governments remains a concern. The Reserve Bank of Australia estimated in 2024 that the size of local government financing vehicles (LGFVs) is close to 50% of GDP.
The savings glut and risk assetsThe high investment rate is supported by an extremely conservative society with high precautionary savings. The IMF puts China’s household saving rate above 20%, which compares with 3.6% in the US and 9.5% in the UK. Household consumption accounted for only 40% of GDP in 2023, compared with 68% in the US. According to Martin Wolf in the Financial Times, household disposable income is only 60% of GDP.
China eventually needs to pivot to a consumption-led model, with Michael Pettis pointing out that investments are only useful until the return outstrips the debt-to-GDP ratio. For risk assets, including cryptocurrencies, a sustained push to "unleash" Chinese consumption would be a structural shift. A fall in Chinese savings could reduce the amount of available capital, nudging global yields higher. While improved global growth is supportive of risk, less excess liquidity could create headwinds for speculative assets. The net effect will depend on whether this shift meaningfully alters the global financial trajectory.
Correction note: We earlier erroneously referenced Strategy in the 1st paragraph. Now replaced with BYD.
