The five-year economic plan that the Chinese government issued in late October made clear that industrial investment and indigenous innovation will remain the centrepiece of the country’s strategic agenda. That’s a problem for China, because it suggests a concentration of resources on competing with the United States rather than undertaking reforms that would promote domestic consumption and improve citizens’ lives.
It risks deepening existing structural challenges, slowing economic growth and ultimately trapping China in a downward structural imbalance spiral.
Structural imbalance has been a persistent concern for China. Since China adopted the strategy of economic catch-up and opening to the global economy in 1978, the government has prioritised industrial growth and exports as the main drivers of development, while domestic consumption and citizens’ welfare were constrained. A result has been high saving rates. According to the World Bank, in 2018, before the trade war that began this year, household consumption accounted for 38.9 percent of China’s GDP, 24.1 percentage points below the global average. Meanwhile, foreign trade in goods and services represented 36.9 percent of GDP, compared with 27 percent in the US during the same period.
The rivalry between the US and China in industrial and export sectors has further aggravated existing structural imbalances within the economy. Xi is firmly convinced that ‘the East is rising, and the West is declining’ and, as an authoritarian leader, he seeks to steer the direction of global development. He also aims to broaden Beijing’s diplomatic leverage and to deter states that remain uncertain about aligning with Washington. As Washington has responded to Chinese economic policies, Beijing has further responded with confrontation: nearly every US sanction has prompted a reciprocal countermeasure from China.
Since 2018, US trade and technology controls on China have gradually formed an increasingly comprehensive and tightly woven containment framework. In pursuit of competitive advantage, the five-year plan shows that China’s national strategy has pivoted away from a purely development-centred paradigm towards one that emphasises national security. In doing so, Beijing has intensified its model of state capitalism. The central government has provided substantial financial support and industrial subsidies for a range of strategic technologies, including artificial intelligence, advanced manufacturing, new energy industries and space technologies. The inefficiently persistent scale-oriented expansion of state-owned enterprises has boosted outputs and squeezed private firms’ capacity, contributing to significant industrial overcapacity and intra-industry homogeneity, which in turn have exposed China to global pushback. Such mercantilist trade policy also impeded China’s 1.4 billion people from spending and exacerbated structural imbalance.
At the same time, China has been reversing market-oriented reforms as well as earlier moves towards modern democratic political reforms. The Chinese Communist Party’s control over the national system and civil society has severely undermined the population’s faith in the future, and foreign investment in China has declined to the lowest level since 1993. And China now faces the demographic challenges of a rapidly aging population. The consequence has been a slowdown in GDP growth, which was 5 percent in 2024, compared with 7.8 percent in 2012, when Xi assumed office. According to Rhodium Group, China’s GDP growth was between 2.4 and 2.8 percent in 2024.
GDP growth is the foundation of CCP’s ruling legitimacy. Xi stubbornly believes that social welfare will create idlers. To maintain annual GDP growth at approximately 5 percent, the leadership has increasingly relied on investment- and export-led strategies (now increasingly led by state enterprises), rather than strengthening household consumption capacity through a more comprehensive social security system. Twenty-four local governments across China have announced their 2025 priority investment project plans, indicating a combined investment commitment of 57.5 trillion yuan (US$8.1 trillion), compared with 51.4 billion yuan of the whole country in 2024. Exports of electric vehicles in the first 10 months of this year were 90.4 percent higher than a year earlier. But a smaller number of measures benefitting residents have been introduced, and China’s consumer confidence index remains near historic lows.
The consequence is a strange paradox: advanced technologies and robust industrial chains enable Beijing to expand its global influence, dominate export markets and emerge as the United States’ only rival capable of shaping the world. At the same time, personal consumption capacity is declining, weak demand and overcapacity is maintain deflationary pressure, and substantial public expenditures are straining fiscal resources.
The risk is that an intensifying rivalry with the US has stuck China with a rigidity-prone development path that relies more on an investment- and export-led growth model. That’s driving the country toward a Soviet-style trajectory of structural imbalance from which there is no easy exit.
China should recognise that its ongoing rivalry with the US is a simmer war. Structural imbalances require meaningful structural transformations and reforms, rather than further expanding industrial capacity and exports without introducing systematic measures to boost household income. Yet such reforms do not appear to be in the Chinese leadership’s plans.
