China faces what the economist Albert Hirschman noted decades ago: explosive growth is unbalanced, and success embeds that unevenness into political, business and cultural institutions, making change tough. China now stands at this crossroads.
The Asian giant’s economic growth, which previously relied on exports and a debt-driven construction boom, is facing headwinds: the disastrous crash from a real estate investment spree, big losses hitting the banks, and local governments facing a crippling debt crisis. With households highly indebted, China cannot just build more apartments to sell. Sustaining an export-led boom will become harder as anti-dumping measures and Donald Trump’s tariffs hit. All this when Chinese firms report plunging profits.
This moment is ripe for “Xiconomics” – Xi Jinping’s vision of separate but interconnected domestic and global markets. The trade expert Michael Pettis argues that China must pivot to consumption-led growth as other sectors weaken. To do so, China needs a larger, wealthier middle class with a taste for “bourgeois” luxuries. This requires strengthening domestic demand, investing in technology, reducing reliance on key imports and bolstering self-reliance.
Yet China’s leaders seem wary of pushing too far, too fast. The problem is not economics but politics. Transitioning from a workforce of lower-wage factory labour to an affluent white-collar middle class would require the outsourcing of assembly lines to nearby countries, such as Vietnam, and other countries connected to China through its roads, railways and seaports under the belt and road initiative. But such an economic shift brings disruptions with potentially destabilising consequences on an unprecedented and global scale.
Consider how long Britain took to transform its economy: in 1979, manufacturing employed a quarter to a third of its workforce and contributed similarly to national income – about where China stands today. Three decades of Thatcher-era shock therapy and New Labour City-led globalisation were needed to shift Britain to a service-dominated, consumption-based economy, with manufacturing reduced to just a tenth of the economy. Replicating this transition in China is a daunting challenge.
China’s Communist leadership remains sensitive to issues of inequality, unemployment and social exclusion, leading to the development of a hi-tech, repressive surveillance state. Despite authoritarian constraints, protests still occur: China Labour Bulletin’s strike map recorded 719 labour protests in the first half of this year alone, up from 696 in the same period last year. This shift toward internal demand is progressing slowly, as closing too many factories could trigger widespread unrest, potentially threatening the regime.
Yet if China proceeds cautiously, it risks stifling its shift to a consumption-driven economy, leaving it vulnerable to economic stagnation, social unrest and dependence on volatile global markets – a combination that could ultimately erode both economic resilience and political stability. As Ian Johnson observes in his book Sparks, China faces a unique challenge as its leader ages and the economy slows, confronting ranks of dissenters “conditioned to see defeat as merely temporary”. At 75, the People’s Republic of China has already outlasted the Soviet Union, which survived 74 years. How much longer it endures will depend on the choices made today.
