In 2021, I wrote an essay entitled Spinoza’s Legacy (included in www.peterdehaan.org), in which I identified challenges for China’s economy. The first one was public investment overstretch, as a result of the government boosting the implementation of Made in China 2025 (MIC), turning China into a self-reliant, green, and innovative manufacturing power. MIC was very successfully implemented. For example, high-tech manufacturing had grown by 8.9% last year, much faster than the economy as a whole. However, investment overstretch led to wasted investments undermining China’s total factor productivity (TFP), upon which President Xi pushed for ‘new productive forces’. China was also accused of unfair international competition, resulting from subsidising export products, such as electric vehicles. A third challenge concerned employment: Would there be enough Chinese high-tech capacity available to match high-tech demand triggered by MIC?

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By the time I completed my essay, real estate investor Evergrande went bankrupt in 2021. Consumer confidence plummeted and China’s economy started to suffer from deflation. Since then, China’s government undertakes various  attempts to deal with the problem.

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Take the fall-out of Evergrande’s demise. In 2021, still 80% of household wealth was invested in real estate; now the figure is 70%. House prices fell sharply. In 2024, 80 million flats remained unsold. Scores of developers have gone bust. Also, dampening of consumer confidence triggered sluggish  housing demand.

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To date, house prices are not falling as much as they did. In Beijing, Shanghai, Guangzhou, and Shenzhen, houses are now being sold in a shorter period of time than before, although this is not yet the case for the housing market in general. The central government encouraged local governments to buy up excess housing. The renovation of shantytowns could create demand for 1 million new homes. Just recently, the central bank cut interest rates to counter deflation and invite consumers to again invest their savings in housing. Although house prices continue to drop, the real estate crash is bottoming out.

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As for China’s TFP, from 1978 to 2022 TFP grew on average 2.73%; however, over the past decade TFP growth has shown a slower upward trend.

What about employment, including the demand for high-tech staff? Renowned Chinese scientists return to China to continue their work at first class universities, such as Zejiang University, home of Deep Seek. In 2021, President Xi set a goal to make China attract global talent by 2030 and become the top destination for the brightest by 2035. In the past, millions of young Chinese students went to America to study. President Trump’s policy to clamp down on American universities prompted Western scholars to look for greener pastures elsewhere, including China. This also goes for students. More than half of the post-doctoral students in the US are foreign, most of them Chinese.  This does not imply that demand for high-tech capacity will all be filled by returned scholars and post-doc students, but it helps. In addition, the quality of education of two top Chinese universities is rapidly improving: Peking University now ranks 14th on the QS World University Rankings, while Tsinghua University is 20th on the list.

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Employment opportunities for young people without a university degree are limited;  youth unemployment is high: 17.6%. Growth of the labour-intensive  services sector is the best option for employment creation. Consumers now spend more on services than on manufactured goods. Services now contribute 57% of the country’s GDP and employ 49% of the working-age population. The government is subsidising loans for firms in services  such as entertainment, tourism, sport, and  health care. Also  consumers benefit from government subsidies to stimulate demand. This is a new phenomenon as in the past the government stimulated investment, not consumption, let alone consumption of services. Two hundred million people are gig workers; a huge number. They encounter difficulties in finding a formal job, buying property and accessing public services, including pension funds. In future, this may create problems for the government, ranging from further undermining TFP growth, homelessness and social unrest.

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Growth of the manufacturing sector is reaching its limits; there is overcapacity, triggering price wars in China and dumping of Chinese goods overseas. This phenomenon is called involutionary competition, i.e., gaining a market share through lowering prices, forcing competitors to do the same. A race to the bottom is the result. For example, a Chinese citizen can now buy an electric car for only $8,000. The government is now introducing production quotas, a floor under prices, and capacity cuts in oversupplied industries. To further limit competition, the government also stimulates mergers.  

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Now, what about China fighting deflation? The government has increased its deficit to 4% of GDP to: (i) prop up consumer demand, (ii) counter shrinking property investment, and (iii) compensate lower exports. As the Chinese economy was slowing down, Keynesian fiscal stimulus was introduced, including dole-outs for low-income earners. At the end of 2024, the government also announced that it would apply a loose monetary policy. But can the government afford it? Not really. In mid-2024, the IMF calculated that China’s augmented debt, including local government debt, stood at 124% of GDP, while overall non-financial debt reached 312%; both sobering percentages. The IMF warned that in the medium-term China may run the risk of so-called debt stress.

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Is China going to achieve its targeted 5% growth this year and overcome deflation? Once the government will have stabilised the housing market; regained consumer confidence;  subsidies will have boosted demand; and the government prevents the country’s downgrading by credit rating institutes, China’s economy would indeed have ‘rebounded, and is on an upward trajectory’,  as president Xi concluded in his  New Year Address on 31 December 2024. Whether this was wishful thinking on the president’s part, the future will tell.  

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Peter de Haan                                                                                                                                                                                                         October 2025