China’s economy is structurally weaker than it appears and overly dependent on government-subsidized exports.
On the surface, China is on track for another year with a trade surplus topping $1 trillion. Exports surged last month by 24 percent year-over-year, according to data published Friday.
But the domestic economy is showing prolonged weakness. China’s growth dropped to 4.3 percent in the second quarter of 2026, the lowest in three years, even according to the government’s suspect accounting. Home prices have slumped, and developers and local governments are reeling under piles of debt. Youth unemployment has remained stubbornly around 15 percent.
With weak consumer demand at home, China subsidizes global exports to gin up growth. Makers of electric vehicles, steel companies and other industries receive access to cheap loans, tax breaks, free or inexpensive land at government-run industrial parks, and sometimes direct grants.
This isn’t new. From 2005 to 2024, Chinese firms across 15 sectors received three to eight times more government support than firms in other major economies, according to the Organization for Economic Cooperation and Development.
Chinese citizens have always been steadfast savers, but the stagnant economy has made them even more reluctant to open their wallets. Retail sales fell in May for the first time since pandemic lockdowns. Fixed asset investment — purchases of factories, buildings and machinery — fell 4.1 percent from January to May.
China’s leaders have been talking for decades about the need to restructure the economy to decrease reliance on exports and juice consumer spending. In 2007, then-Prime Minister Wen Jiabao described China’s economic development as “unsteady, unbalanced, uncoordinated and unsustainable.” But little has changed in the subsequent two decades.
President Donald Trump, during his first term, made “structural reform” of China’s economy an element of his “Phase One” trade deal, which was supposed to ease the trade war. But the main demand — for China to limit state subsidies — was deferred to a later stage that never materialized. In any event, Beijing never showed any inclination to comply.
Despite saying otherwise, China’s leaders may not actually want to shift toward a consumer-centric economy. The main obstacle is political. Ordinary Chinese save so much because government-backed pensions, health insurance, education funds and basic incomes are woefully inadequate.
Absent a safety net, Chinese maintain precautionary savings. Bolstering consumer spending would mean, first, transferring wealth from the state sector and government-backed producers to individuals. Any totalitarian government would be loath to do that because it could pose a threat to its power.
That’s why Chinese President Xi Jinping has resisted numerous reforms that economists say would actually encourage people to spend more and save less. Xi also decries what he calls “welfarism,” or the state providing people with too broad a safety net.
With Xi scheduled to visit Washington on Sept. 24, China’s addiction to exports provides the United States leverage in trade negotiations. Yes, the U.S. needs rare-earth elements and critical minerals from China. But it’s a two-way street.
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