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CHINAS ECONOMIC SLOWDOWNAND ITS IMPACT ON TRADING PARTNERS Edited by Arthur R.Kroeber and Jonathon MarekNBR Board of AdvisorsWilliam Abnett NBRSe Hyun Ahn University of SeoulDennis C.Blair Admiral,U.S.Navy(ret.)Ketty Chen Taiwan Foundation for DemocracyChun In-Bum Lt.General,ROK Army(ret.)Josh Corless ConocoPhillipsLinda Distlerath PhRMA(ret.)Nelson Dong Dorsey&Whitney LLP(ret.)Nicholas Eberstadt American Enterprise InstituteKarl Eikenberry Former Ambassador(U.S.);Lt.General,U.S.Army(ret.)Bates Gill NBRStephen Hanson College of William and MaryHarry Harding University of Virginia(ret.)Mikkal Herberg University of California San DiegoCarla A.Hills Hills&CompanyRobert Holleyman Office of the U.S.Trade Representative(ret.)Mark Jones Kingswood Capital SolutionsAmit Kapoor India Council on CompetitivenessTariq Karim Former Ambassador(Bangladesh);Independent UniversityHeino Klinck U.S.Army/Department of Defense(ret.)David Lampton Johns Hopkins University Stephen Lanza Lt.General,U.S.Army(ret.)Nicholas Lardy Peterson Institute for International EconomicsRichard Lawless New Magellan VenturesWilliam McCahill Department of State(ret.)Dewardric L.McNeal Longview GlobalMeredith Miller NBRTami Overby Albright Stonebridge GroupJohn S.Park Harvard Kennedy SchoolPamela Passman APCO WorldwideRajeswari Rajagopalan Australian Strategic Policy InstituteEvans Revere Department of State(ret.)Clarine Nardi Riddle Kasowitz Benson Torres LLPRyo Sahashi University of TokyoUlrike Schaede University of California San DiegoRobert Scher BP(ret.);Department of Defense(ret.)David Shambaugh George Washington UniversityBenjamin Shobert OptumMike Studeman Rear Admiral,U.S.Navy(ret.)Travis Sullivan Boeing CompanyAlison Szalwinski The Asia GroupTravis Tanner Greenpoint GroupArzan Tarapore Stanford UniversityJessica Teets Middlebury CollegeDebra Waggoner Corning(ret.)Dana White Juno CollectiveNBR Chairs and CounselorsRichard J.Ellings NBR(ret.)Thomas B.Fargo Admiral,U.S.Navy(ret.)Aaron L.Friedberg Princeton UniversityCharlene Barshefsky U.S.Trade Representative(ret.)Charles W.Boustany Jr.U.S.House of Representatives(ret.)Norman D.Dicks U.S.House of Representatives(ret.)Roy Kamphausen NBR(Special Advisor)Ashley J.Tellis Carnegie Endowment for International PeaceNBR Board of DirectorsJohn V.Rindlaub(Chair)Regional President(ret.)Wells Fargo Asia Pacific Ahn Ho-young Former Ambassador(South Korea)Richard J.Ellings President Emeritus and Counselor NBR(ret.)Jonathan W.Greenert Admiral,U.S.Navy(ret.)Charles Hooper Senior Counselor The Cohen GroupQuentin W.Kuhrau(Treasurer)Chief Executive Officer Unico Properties LLCMelody Meyer President Melody Meyer Energy LLCHuan Nguyen Rear Admiral(ret.),U.S.Navy;Senior Advisor to Naval Sea Systems CommandLong Nguyen Chairman,President,and CEO Pragmatics,Inc.Jonathan Roberts Founder and Partner Ignition PartnersTom Robertson Corporate Vice President and Deputy General Counsel MicrosoftCynthia A.Watson Professor and Dean Emerita National War CollegeMichael Wills President NBRHonorary DirectorGeorge F.Russell Jr.Chairman Emeritus Russell Investmentsthe national bureau of asian researchnbr special report#118|june 2025chinas economic slowdownand Its Impact on Trading PartnersEdited byArthur R.Kroeber and Jonathon Marekthe national bureau of asian researchThe NBR Special Report provides access to current research on special topics conducted by the worlds leading experts in Asian affairs.The views expressed in these reports are those of the authors and do not necessarily reflect the views of other NBR research associates or institutions that support NBR.The National Bureau of Asian Research helps decision-makers better understand Asia and craft concrete,actionable policy.NBR is an independent research institution based in Seattle and Washington,D.C.We bring world-class scholarship to bear on the evolving strategic environment in Asia through original,policy-relevant research,and we invest in our future by training the next generation of Asia specialists.Our research is conducted by a global network of specialists and tackles critical issues identified by stakeholders in anticipation of future challenges.The findings are a result of independent scholarship and do not reflect institutional perspectives.Our rigorous standards facilitate informed decision-making based on knowledge rather than ideology.Established in 1989,NBR is a legacy organization of Senator Henry M.Jackson,who foresaw the national need for an institution to study and inform public policy on Asia in both the public and private sectors.Building on Senator Jacksons bipartisan approach,NBR engages policymakers looking for reliable Asia expertise through sustained interaction in high-trust,nonpartisan settings.Our experts and research have shaped congressional legislation and administration policies,brought issues to the top of the U.S.foreign policy agenda,and attracted worldwide media attention.We mobilize expertise on Asia for a more effective foreign policy.NBR receives support from foundations,corporations,government(including foreign governments of allies and liberal democracies),and public agencies,and philanthropic individuals.NBR reserves the right to publish findings.We do not undertake classified or proprietary research work,and we observe policies to avoid conflicts of interest.To download issues of the NBR Special Report,please visit the NBR website http:/www.nbr.org.This report may be reproduced for personal use.Otherwise,the NBR Special Report may not be reproduced in full without the written permission of NBR.When information from NBR publications is cited or quoted,please cite the author and The National Bureau of Asian Research.This is the one-hundred-and-eighteenth NBR Special Report.NBR is a tax-exempt,nonprofit corporation under I.R.C.Sec.501(c)(3),qualified to receive tax-exempt contributions.2025 by The National Bureau of Asian Research.Cover design and illustration by Nate Christenson.For further information about NBR,contact:The National Bureau of Asian Research One Union Square 600 University Street,Suite 1012 Seattle,Washington 98101206-632-7370 Phone nbrnbr.org E-mail http:/www.nbr.orgchinas economic slowdownand Its Impact on Trading PartnersTABLE OF CONTENTS v ForewordJonathon Marek 1 Chinas Slowing Economic Growth:Causes and ImpactsArthur R.Kroeber 23 Chinas International Economic Narratives in an Age of Slowing GrowthDavid Gitter 45 The Trajectory and Implications of Chinas Economic SlowdownArthur R.Kroeber,Ana Horigoshi,and Rodney Knight 57 What Chinas Economic Slowdown Means for Key Countries:Case Studies59 Brazil Ana Horigoshi and Jonathan Solis70 Germany Ana Horigoshi and Rodney Knight80 Indonesia Bryan Burgess and Ana Horigoshi91 Nigeria Ana Horigoshi and Rodney Knight100 Paraguay Ana Horigoshi and Jonathan Solisnbr special report#118|june 2025FOREWORD MAREKvFOREWORDOver the four decades from the beginning of reform and opening in 1978 to the last year before the Covid-19 pandemic in 2019,the economy of the Peoples Republic of China(PRC)was defined by rapid expansion.GDP growth exceeded 10%in fifteen of those years and only dropped below 5%twice.Neither global economic events,such as the 1997 Asian financial crisis and the 2008 global recession,nor domestic political or policy shifts seemed capable of knocking the PRC economy off its trajectory.This growth pattern,and in particular an infrastructure-and investment-driven growth model designed to fuel a boom in manufacturing exports,fundamentally reshaped the global economy and upended supply chains as companies around the world relocated manufacturing operations to the PRC.This came to be known as the“China shock.”While the scale of the impact was massive globally,its particular manifestations varied based on the nature of each countrys economic relationship with the PRC.For commodity exporters like Brazil and Indonesia,rapid growth in Chinese demand led to higher prices and windfall profits.For manufacturing sectors across the industrialized world,however,competition from Chinese firmswhich often gained an advantage through expansive state subsidies,questionable labor practices,and intellectual property theftmade the China shock a uniquely disruptive experience.For many developing countries,the rate of growth suggested that the so-called China model might be an example worth following,with closer political and economic alignment with the PRC providing not only access to investment or development finance but also a set of economic policies to emulate.Over the past several years,however,a new China shock is manifestingan epochal development that will similarly reshape how the PRCs economic interlocutors engage with the country.Like the first China shock,the fundamental cause of the shift can be found in the rate and pattern of Chinese economic growth.Unlike the first shock,however,this one is the result of meaningfully slower growth.A 5%growth rate,which had been the bare minimum one could have expected for 40 years,now represents an ambitious target for the countrys leadership.The imperative to understand the causes of this economic slowdown,analyze its trajectory,and examine its implications for Chinas trade and investment partners around the world is the motivating factor behind this study.The first chapter analyzes the numerous factors driving this slowdown.Some are immutable:the natural tendency of growth to slow as a country develops and matures economically,the decline of growth engines such as infrastructure and housing,and a deteriorating demographic situation.Others,however,are driven by a pattern of government policy decisions over the past decaderanging from short-term macroeconomic management to longer-term strategic choicesthat have undermined or deprioritized economic growth.Of course,Chinas economy is not collapsing.However,given its scale,the rate of its slowdown,and the changes in its growth model,previous approaches to economic engagement with the PRC,many of which are characterized by disproportionate levels of reliance on the country as a market or source of supply,are no longer viable.Despite PRC efforts to advance a misleading set of narratives regarding the value of economic engagement,as discussed in the second chapter,the data presented in this report tells a different story.Recognizing the immense implications of this viNBR SPECIAL REPORT JUNE 2025reality for countries and companies that have aligned their economic strategies with a Chinese economic trajectory that no longer exists,this report ultimately seeks to understand the impacts of Chinas slowdown on countries that engage with the PRC through trade,investment,and other economic channels and to provide guidance for these actors on how to restructure their engagement to align with the new reality.Our analysis proceeds both quantitatively and qualitatively,seeking first to map out the likely path of the PRCs slowing economya topic covered in both chapters 1 and 3and then to examine the specific channels through which this slowdown will affect other countries.That examination proceeds from both the top down,through identifying a series of high-level impacts that will be felt by various types of economies,and from the bottom up,through conducting five country-specific case studies that provide tangible evidence of cross-country trends and assess the implications for countries seeking to re-evaluate their models of economic engagement with China.The countries selected as case studiesBrazil,Germany,Indonesia,Nigeria,and Paraguayare intended to be diverse and representative of a variety of different approaches to trade and investment relations with China.This ensures that the reports analysis and policy implications are useful for not only the five countries but also the dozens of others that are similarly situated.This project would not have been possible without the diligent efforts of the project team under the guidance of Principal Investigator Arthur Kroeber,whose knowledge of the PRC economy knows no bounds.AidData,in particular through the contributions of Ana Horigoshi and Rodney Knight,has been a perfect partner,providing a robust empirical foundation and unparalleled analytical rigor to strengthen the projects conclusions.The regional expertise of Ana and Rod,as well as Bryan Burgess and Jonathan Solis,was similarly instrumental to the projects case studies.NBR Nonresident Fellow David Gitter eagerly and deftly undertook the monumental task of condensing the entire apparatus of PRC propagandizing and narrative-crafting around its economy and international economic engagement into a single,cohesive chapter.And finally,I am immensely grateful to the rest of the NBR teamDoug Strub and Alison Szalwinski for their leadership and vision,Fern Hinrix for her research support,and Josh Ziemkowski for his editorial expertise.Jonathon MarekSenior Project Manager for Technology and Geoeconomic Affairs,NBR1the national bureau of asian researchnbr special report#118|june 2025ARTHUR R.KROEBER is Partner and Head of Research at Gavekal Dragonomics and an Adjunct Professor of Economics at the NYU Stern School of Business.He can be reached at.Chinas Slowing Economic Growth:Causes and ImpactsArthur R.KroeberEXECUTIVE SUMMARYThis chapter analyzes Chinas economic slowdown and considers the implications of the countrys growth trajectory for its trade and investment partners.MAIN ARGUMENTOver the past decade,China has seen a steady decline in its real GDP growth rate.This rate has declined from an average of 10%in 19802012 to around 7%in the seven years preceding the Covid-19 pandemic(201319)and to less than 5%in the years since China exited the pandemic.Many independent forecasts suggest that the Chinese economy will continue to slow in the coming years.The International Monetary Fund,for instance,projects that the countrys real growth rate could slow to around 3%by 2030.Chinas economic slowdown results from a mix of structural factors(such as demographics and the exhaustion of returns from infrastructure spending)and policy choices related to both long-term development strategy and short-term macroeconomic management.Under current policy conditions,China will probably record 4%5%real GDP growth in 202526,falling to 3%4%thereafter.There is little chance of macro policy becoming dramatically more stimulative.Deflationary pressure will likely persist,resulting from both the impact of the property sector collapse and the governments policies of increasing the supply of manufactured goods while doing little to support aggregate demand.As a result,nominal growth will not be much stronger than real growth.POLICY IMPLICATIONS Sluggish growth will not prevent Chinas manufacturing sector from thriving,particularly given the governments industrial policies and the countrys rising share in global export markets.Protectionist efforts to reduce the flow of Chinese exports in global markets will struggle to reverse this trend.China could achieve much stronger growth results with a more stimulative policy mix,including greater support for the property sector;interest rate cuts and currency depreciation;more fiscal spending to boost aggregate demand;and service-sector deregulation.Chinas investment and trade partners will need to contend with an economy whose demand for imports is sluggish and increasingly skewed away from manufactures toward commodities and other inputs,while the countrys exports are increasingly competitive on global markets.Successful responses will require tapping into Chinas shifting patterns of commodity demand and extracting maximum advantage from its outbound direct investment flows.3CAUSES AND IMPACTS u KROEBEROver the past decade China has seen a steady decline in its real GDP growth rate.This rate has declined from an average of 10%in 19802012 to around 7%in the seven years preceding the Covid-19 pandemic(201319)and to less than 5%in the years since China exited the pandemic.Many independent forecasts suggest that Chinas economy will continue to slow in the coming years.The International Monetary Fund,for instance,projects that the real growth rate could slow to around 3%by 2030.1This chapter examines the sources of Chinas economic slowdown,presents policy choices that could improve or degrade Chinas growth prospects,comments on the trajectory of the countrys economic policy,and analyzes changes in the composition of growth.It then concludes by discussing the implications of Chinas growth trajectory for the countrys trade and investment partners,which will be examined in more detail in chapter 3 of this report.Causes of Chinas Slowing Growth:Structural FactorsIn the first two decades of this century,China was considered a“miracle economy.”The Chinese economy grew at an average rate of over 10%until 2012 and at a slower,but still very respectable,rate of around 7%until the onset of the Covid-19 pandemic in 2020.2 In 2021,China had the pandemic largely under control,while the rest of the world struggled with rolling lockdowns.As a result,its two-year average growth rate in 202021(slightly over 5%)was among the worlds strongest.In 2022,however,the tables turned and Chinas economy ground to a virtual standstill under pressure from the fast-spreading Omicron variant of Covid-19 and the collapse of the property market,while most other economies returned to normal.In the years since emerging from the pandemic,Chinas growth has been much weaker than expected,and the country has struggled to hit its target of 5%real growth.Weak growth,combined with deflationary pressure and high debt levels,has led to much speculation that China is headed for a repeat of Japans zero-growth“lost decade”of the 1990s.Chinas economic slowdown is real and permanent,and even more striking when looking at measures other than the real(constant-price)GDP growth rate(see Figure 1).The countrys trend rate in real growth has indeed decelerated from a peak of around 12%in the early 2000s to around 5%in 2024.The slowdown in nominal growth has been even more dramatic,from a peak of around 18%in 200510 to just over 4%in 2024.When nominal growth is converted into U.S.dollarstaking account of exchange-rate movementsthe downshift is even more dramatic,falling from a peak rate of over 20%to under 5%.This trend has been persistent over more than a decade,suggesting that deep structural forces are at play,in addition to the shorter-term buffets of the pandemic and property crashes.We can divide the sources of Chinas slowdown into two broad categories:(1)structural factors,such as the countrys stage of development and demographics,and(2)policy reasons relating to the governments long-term development aims and short-term macroeconomic management.1 International Monetary Fund,“Peoples Republic of China:2024 Article IV Consultation,”IMF Country Report,no.24/258,August 2024,https:/www.imf.org/en/Publications/CR/Issues/2024/08/01/Peoples-Republic-of-China-2024-Article-IV-Consultation-Press-Release-Staff-Report-and-552803.Some private-sector estimates are even more pessimistic.See,for example,Roland Rajah and Alyssa Leng,“Revising Down the Rise of China,”Lowy Institute,March 14,2022,https:/www.lowyinstitute.org/publications/revising-down-rise-china.2 Unless otherwise noted,macroeconomic figures for this report are drawn from World Bank,World Development Indicators,https:/databank.worldbank.org/source/world-development-indicators);IMF,World Economic Outlook,https:/www.imf.org/en/Publications/SPROLLs/world-economic-outlook-databases;and Chinas National Bureau of Statistics,accessed via the CEIC database,available at https:/ i g u r e 1 Chinas GDP slowdown in three measuress o u r c e:National Bureau of Statistics,accessed via the CEIC database,https:/ World Bank,World Development Indicators,https:/databank.worldbank.org/source/world-development-indicators.4NBR SPECIAL REPORT u JUNE 2025This breakdown is inevitably arbitrarystructural factors are also affected by policy decisionsbut still useful in helping understand both the nature of the slowdown and the potential impact of different policy choices on Chinas growth trajectory.The main structural factors are the natural tendency of high-growth developing economies to slow down as they get richer;the exhaustion of growth potential in housing and infrastructure,which powered much of Chinas growth in the first two decades of the twentieth century;and demographic decline.A significant part of Chinas growth slowdown is simply the natural and unavoidable consequence of getting richer.When a country is relatively poor,it can generate huge productivity gains,and hence rapid economic growth,by yoking its low-wage labor force to modern technology.3 As the country grows richer,the big gains achieved by moving workers from low-productivity jobs(e.g.,in traditional agriculture)to high-productivity ones(e.g.,in export manufacturing)run out,and growth slows as it needs to come more from hard-won improvements in efficiency and technology.Chinas economic trajectory closely resembles that of its East Asian neighborsJapan,South Korea,and Taiwanall of which enjoyed long periods of 8%growth,followed by significant decelerations.In the decade after they hit Chinas current income level(about$20,000 per person at purchasing power parity),Taiwans per-capita real GDP growth averaged 6.5%,South Koreas 3 Alexander Gerschenkron,Economic Backwardness in Historical Perspective(Cambridge:Harvard University Press,1962).f i g u r e 2 Comparison of Chinas growth(19902023)with Japan(195593)Japan 1981s o u r c e:World Bank,World Development Indicators;and Penn World Table.5CAUSES AND IMPACTS u KROEBER5.5%,and Japans slightly over 4%.4 At a first approximation,Chinas trajectory over the next decade is likely to follow that of Japan in the 1980s(see Figure 2)rather than the higher-growth paths of its smaller neighbors.The reason is simply that South Korea and Taiwan,as relatively small countries,could rely very heavily on exports to power their growth.Although China is a big exporter that runs a large trade surplus,as a large continental economy its ability to increase the export share of GDP is constrained.South Koreas export-to-GDP ratio was around 30%in the 1980s and 1990s and rose to over 35%in the 2000s.Chinas export ratio,conversely,peaked at 35%in 20067 and then fell after the global financial crisis,as the country turned more to domestic demand(see Figure 3).Its reliance on exports increased again in the early 2020s with a government campaign to shift capital into technology-intensive manufacturing.Even so,the export-to-GDP ratio rose only slightly.Export-led manufacturing will continue to be a key part of Chinas development strategy,and Chinese firms will expand their share of global markets.But it is unlikely that exports alone can generate a major reacceleration of growth in a$18 trillion economy.5The second structural factor is the exhaustion of infrastructure and housing,which were major drivers of growth in the first two decades of the 21st century.This factor is linked to a slowdown in the rate of urbanization(see Figure 4).The urban population share rose from 19%in 1980 to 50%in 2010in absolute terms,from 191 million to 670 million.By 2024,the urban population 4 These figures are all based on purchasing power parity.The figures for Japan are from the Penn World Table,and those for China are from the IMFs World Economic Outlook.5 Data on export/GDP ratios is from the World Bank,World Development Indicators,https:/databank.worldbank.org/source/world-development-indicators.The IMFs 2024 Article IV Consultation projects a decline in Chinas export/GDP ratio.f i g u r e 3 Chinas export/GDP ratio,19952023s o u r c e:National Bureau of Statistics,accessed via the CEIC database.f i g u r e 4 Rate of urbanization,200020302000200520102015202020252030051015202530Annual increase in population(million)YearActualUN model projections o u r c e:National Bureau of Statistics,accessed via the CEIC database;and UN Population Division,World Population Prospects 2024.6NBR SPECIAL REPORT u JUNE 20257CAUSES AND IMPACTS u KROEBERhad risen to 944 million,or 67%of the national total.In other words,from the 1980s until the late 2010s,Chinas urban population grew by around 20 million per year.Since 2020,however,the country has added only around 10 million new urbanites per year,and urban population growth is expected to decline further in the coming years.New urban residents are important drivers of demand not just for housing but for all the goods and services that power a modern economy.As urban population growth slows,so too will the economy.In the late 1990s,the government deregulated the urban housing market,setting off a construction frenzy that saw household fixed investmentin essence,housing purchasessoar from about 6%of GDP in the late 1990s to a peak of 16%in 2013.6 Economists generally estimate that including indirect effects(among other effects,the stimulus of steel,cement,and other heavy industries and purchases of household furnishings),the real estate sector accounted for 250%of GDP during the 2010s.7State-led infrastructure spending was first boosted in the late 1990s with the issuance of special bonds to finance expressway construction and other projects.It continued in the 2000s with the rapid buildout of ports,telecom and power networks,and other infrastructure required to support the manufacturing boom that followed Chinas entry into the World Trade Organization in 2001.Spending on infrastructure received another massive push in 200910,when in response to the global financial crisis the government pumped a stimulus of roughly 15%of two-year GDP into housing and infrastructure projects,financed largely by local governments raising loans against their land holdings.8Much of this investment was needed:in the early 2000s,China suffered from severe shortages of housing and infrastructure.The economic return on investment for the early infrastructure and housing projects was extremely high.Yet,over the next two decades China went from shortage to glut.Housing starts went from severely lagging the growth in urban population to overshooting it.After peaking in 2013,household investment in housing steadily declined to about 12%of GDP in 2020.Since then,it has fallen to around half that as the result of tight policy controls,which are discussed in the next section.9 Meanwhile the buildout of massiveand increasingly underutilizedroad,railway,and power systems meant that by the late 2010s the marginal economic benefit of new infrastructure projects approached zero.Despite these diminishing returns,central and local governments continue to have strong incentives to invest in infrastructure:such investments are the main tool for providing support to the economy during cyclical downturns.The third structural factor is the reversal of the“demographic dividend.”The simple account of the economic impact of demographics is that economies tend to grow more quickly when the working-age cohort(defined as ages 1564)rises as a share of the total population and grow more slowly when the working-age share shrinks:the demographic dividend,followed by demographic drag.10 The reality is a bit more nuanced.India,for instance,has persistently grown more slowly 6 Andrew Batson and Xiaoxi Zhang,“Timing the Property Downturn,”Gavekal Dragonomics,September 5,2024,https:/ Kenneth Rogoff and Yuanchen Wang,“Chinas Real Estate Challenge,”Finance and Development Magazine,December 2024,https:/www.imf.org/en/Publications/fandd/issues/2024/12/chinas-real-estate-challenge-kenneth-rogoff.8 Victor Shih,“Big Rock Candy Mountain,”China Economic Quarterly 14,no.2(2010):2632.9 Batson and Zhang,“Timing the Property Downturn.”10 David E.Bloom,David Canning,and Jaypee Sevilla,The Demographic Dividend:New Perspectives on the Economic Consequences of Population Change(Santa Monica:RAND Corporation,2003),https:/www.rand.org/pubs/monograph_reports/MR1274.f i g u r e 5 Chinas aging population,19802040s o u r c e:UN Population Division,World Population Prospects 2024.n o t e:Data represents the medium-fertility projection.8NBR SPECIAL REPORT u JUNE 2025than China,despite enjoying a similar demographic dividend.Demographersincluding the inventor of the term“demographic dividend”have tempered their claims about the malign economic effects of aging populations,noting that much of the impact can be offset by delaying retirement ages and other policy interventions.11Nonetheless,there is little doubt that demography has shifted from a positive to a negative factor for China(see Figure 5).Between 1980 and 2010,the working-age cohorts share of the population rose from 59%to 73%(in absolute terms,from 600 million people to nearly 1 billion).Chinas average growth during those three decades was about 10%a year.Since 2010,the working-age share has fallen to 69%,and this has coincided with a fall in the average growth rate to 7%in the 2010s and about 5%in the 2020s.In the late 2020s,this decline in the working-age share will accelerate,and by 2045(at the latest)it will be back to its 1980 figure of 59%.In absolute terms,the working-age population will be about 800 million,roughly midway between its 1980 level and the 2010 peak.Furthermore,the population share of retirement-age people is inexorably rising,from about 5%in 1980 to 15%in 2025 and 30%by midcentury.By then,the ratio of working-age people to retirees will be roughly the same as it is in Japan today.As the supply of productive workers shrinks,and the proportion of retirees requiring pension and healthcare assistance grows,economy-wide productivity growth,and hence GDP growth,can be expected to slow.Most of this demographic decline would have happened anyway,as it has in every other industrial economy.11 Bloom et al.,The Demographic Dividend.f i g u r e 6 Chinas labor force participation compared with other countries,20002024s o u r c e:International Labour Organization;China data estimated from census data in National Bureau of Statistics,accessed via the CEIC database;and Arthur Kroeber and Ernan Cui,“How to Fight The Demographic Drag,”Gavekal Dragonomics,Research Note,February 28,2024.9CAUSES AND IMPACTS u KROEBERBut the decline was probably intensified by Beijings reluctance to loosen restrictions on childbirth,which were fully abolished only in 2021.Just how much economic slowing will be driven by demographic drag,however,is unclear.Recent research by the originators of the demographic dividend idea has found that countries can offset up to half of the loss in growth due to demographic drag as citizens extend their productive years by living longer and healthier lives.12 On top of this,Chinas working-age population is very inefficiently deployed.Labor-force participation for those 50 and up is far lower in China than in most member economies of the Organisation for Economic Co-operation and Development(OECD)(see Figure 6).Restrictions on mobility through the hukou(residence permit)system prevent workers from moving to cities,where there is most demand for their skills.Over-regulation of services leads to an excess of low-productivity workers in state-controlled industries and an artificial suppression of higher-productivity employment in the private sector.There is thus plenty of potential policy space for China to offset demographic drag by eliminating barriers to employment for those in their 50s and 60s,boosting labor efficiency through abolishing the 12 Rainer Kotschy and David Bloom,“Economic Prospects in the Face of Population Ageing,”Centre for Economic Policy Research,VoxEU,October 22,2023,https:/cepr.org/voxeu/columns/economic-growth-prospects-face-population-ageing.10NBR SPECIAL REPORT u JUNE 2025remaining barriers to labor mobility,and deregulating service sectors.13 At the same time,there is a significant risk that the demographic drag could have an outsized impact if compounded by policy inflexibility.Causes of Chinas Slowing Growth:Policy FactorsThe factors we have considered so far are all structural and basically unavoidable,although policy can sometimes mitigate or exacerbate their impacts on growth(especially when it comes to demographics and other structural factors that affect productivity).But policy choices by the government not related to structural economic trends have also played a role in Chinas economic slowdown,especially since 2020.Some of these policies are“strategic,”in that they relate to a deliberate,long-run development strategy.At the other end of the spectrum are more“tactical”policies relating to short-term management of the economic cycle.In practice,it is not easy to distinguish neatly between the two,since all policies harbor both short-and long-term effects.But we can identify a linked set of policies that have tended to put downward pressure on growth over the past decade or more.Moving roughly from the more strategic to the more tactical these are the following:Reduced emphasis on market-oriented reforms and increased reliance on state guidance,starting around 2008.Efforts to constrain the growth of credit and reduce financial risk,beginning in late 2016.Efforts to forcibly shift capital away from real estate,infrastructure,and consumer services and toward technology-intensive manufacturing,accelerating after 2020.A crackdown on consumer-facing internet platforms in 202123.The maintenance of relatively tight monetary and fiscal policies in the post-pandemic period of 202324,adjusted with a careful economic support package announced in October 2024.Market Reforms vs.State GuidanceA story commonly told about China is that the last two decades have seen a shift from a broadly pro-market orientation to a policy mix that puts more emphasis on state guidance.14 An alleged consequence of this shift is that productivity growth has fallen for three basic reasons.First,pro-market policies give more space to private firms,which consistently earn a higher rate of return on capital(i.e.,are more productive)than state firms.15 Policies that constrain the private sector or favor the state sector therefore probably reduce productivity growth(see Figure 7).Second,there is evidence that much of Chinas rapid productivity growth in the past came from“creative destruction”in the business sector:less efficient firms going out of business while more efficient firms thrive.It appears that the rate of creative destruction has gone down(i.e.,inefficient firms 13 Arthur Kroeber and Ernan Cui,“How to Fight the Demographic Drag,”Gavekal Dragonomics,February 28,2024.14 Barry Naughton,“Grand Steerage as the New Paradigm for State-Economy Relations,”in CPC Futures:The New Era of Socialism with Chinese Characteristics,ed.Frank N.Pieke and Bert Hofman(Singapore:NUS Press,2022),https:/epress.nus.edu.sg/cpcfutures.15 David Dollar and Shang-jin Wei,“Das(Wasted)Kapital:Firm Ownership and Investment Efficiency in China,”National Bureau of Economic Research,Working Paper,no.13103,May 2007,https:/www.nber.org/system/files/working_papers/w13103/w13103.pdf.f i g u r e 7 Factor contributions to annual GDP growths o u r c e:Adapted from Roland Rajah and Alyssa Leng,“Revising Down the Rise of China,”Lowy Institute,March 14,2022;and Richard Herd,“Estimating Capital Formation and Capital Stock by Economic Sector in China:The Implications for Productivity Growth,”World Bank,Policy Research Working Paper,no.9317,July 2020,25.11CAUSES AND IMPACTS u KROEBERare surviving longer thanks to various forms of state support).16 Finally,the increase of the states role in the economy has led to an increase in the share of capital spending going to infrastructure,which has produced declining returns,and a decrease in the share going to business investment,which is more likely to underpin future productivity gains.There is almost certainly some truth in this narrative.In particular,it is clear that in the late 2010s housing and infrastructure increased their share of fixed investment at the expense of business investment.Up to around 2010,roughly half of fixed investment was in the business sector.But in 201519 that share fell to one-third,while the infrastructure and housing share rose to two-thirds(see Figure 8).17We need to be cautious,however,about how much of Chinas slowing growth can be pinned on a decline in productivity supposedly driven by more state-centric policies.For one thing,productivity growth has slowed in virtually every economy in the world since around 2005,for reasons that are not well understood.18 It is likely that Chinas productivity slowdown is both for 16 Loren Brandt et al.,“Chinas Productivity Slowdown and Future Growth Potential,”World Bank,Policy Research Working Paper,no.9298,June 2020,https:/openknowledge.worldbank.org/handle/10986/33993.17 Richard Herd,“Estimating Capital Formation and Capital Stock by Economic Sector in China:The Implications for Productivity Growth,”World Bank,Policy Research Working Paper,no.9317,July 2020,25,https:/openknowledge.worldbank.org/handle/10986/34126.18 See,for instance,Georg Erber,Ulrich Fritsche,and Patrick Christian Harms,“The Global Productivity Slowdown:Diagnosis,Causes and Remedies,”Intereconomics,January/February 2017,https:/www.intereconomics.eu/contents/year/2017/number/1/article/the-global-productivity-slowdown-diagnosis-causes-and-remedies.html;and Alistair Dieppe,ed.,Global Productivity:Trends,Drivers,and Policies(Washington,D.C.:World Bank,2021).f i g u r e 8 Investment in business and infrastructure as a share of GDP201519s o u r c e:Adapted from Rajah and Leng,“Revising Down The Rise of China”;and Herd,“Estimating Capital Formation and Capital Stock by Economic Sector in China.”12NBR SPECIAL REPORT u JUNE 2025reasons that are specific to China and for reasons that are more global in nature.For another thing,while economists agree that productivity(more precisely,total factor productivity)is the most important driver of long-term economic growth,they do not agree on what causes productivity or even how to measure it consistently.19 The basic problem is that there is no standard method for deciding where additions to capital end and productivity begins.This is an especially large problem for China,which has a very high rate of capital formation(consistently above 40%of GDP)and a statistical system that is heavily biased toward the measurement of physical capital.Controlling Financial Risk and Limiting DebtThe second key policy choice with a major impact on growth is the effort to control debt and financial risk.Up until the 20089 financial crisis,Chinas gross debt(borrowing by the government,households,and nonfinancial corporations)was relatively stable,and not excessively high,at less than 150%of GDP.In the following decade,though,debt rose dramatically.The main reason was that,in response to the financial crisis,the government launched a debt-financed fiscal stimulus program totaling around 15%of aggregate GDP from late 2008 through 2010.20 One of the main mechanisms was local governments use of special-purpose companies to borrow 19 For a good explanation of the problems with measuring productivity,see John G.Fernald,Robert Inklaar,and Dimitrije Ruzic,“The Productivity Slowdown in Advanced Economies:Common Shocks or Common Trends?”Federal Reserve Bank of San Francisco,February 1,2023,https:/www.frbsf.org/research-and-insights/publications/working-papers/2023/02/the-productivity-slowdown-in-advanced-economies-common-shocks-or-common-trends.20 Shih,“Big Rock Candy Mountain.”f i g u r e 9 Debt as a share of GDP,20002024s o u r c e:Chinese Academy of Social Sciences,Center for National Balance Sheets of Institutions for Finance and Development,accessed via the CEIC database.13CAUSES AND IMPACTS u KROEBERagainst the land assets that they controlled(local-government financing vehicles,or LGFVs).Local governments used these borrowed funds to build infrastructure(thereby exacerbating the structural decline in the contribution of infrastructure to growth),help state enterprises buy assets,and cover regular operating expenses.Although local governments were the main culprits,there were other drivers of debt.Financial deregulation between 2009 and 2017 made it much easier for companies and households to borrow,using increasingly complicated structures involving a plethora of non-bank lenders(so-called shadow banking).The long property boom resulted in a big rise in both mortgages and loans to property developers.As a result,gross debt had risen to about 250%of GDP by 2017(see Figure 9).The risk that this debt buildup will trigger a dramatic financial crisis is low.Because almost all the debt is issued by local banks in local currency,foreign creditors cannot prompt a crisis by calling in their loans.Moreover,with the government controlling all of the lenders and many of the borrowers,no group of domestic private actors is big enough to set off a crisis.And the systemically important banks back their loans with a huge pool of low-risk deposits,made possible because of the high national savings rate(around 44%of GDP)and tight capital controls that make it very hard for Chinese citizens to move their money abroad.21 Nonetheless,there is significant risk that excessive debt,used largely to finance low-productivity investments,will be a long-term drag on Chinas growth potential.Hence,this factor is closer to the strategic than the tactical end of the policy spectrum.The government is well 21“China Gross Saving Rate,”CEIC database,https:/ SPECIAL REPORT u JUNE 2025aware of this risk,which is why efforts to control the buildup of debt have been a constant feature of Xi Jinpings time in office.In 201315,local governments were allowed to borrow directly for the first time.The hope was that they would refinance their LGFV debt at lower rates and slow down their debt accumulation;instead,they refinanced and kept borrowing through LGFVs.In 201517,the government launched a campaign to reduce debt and excess capacity in heavy industry(“supply-side structural reform”).This was largely successful,and Chinese companies running real businesses in competitive sectors generally do not have unusually high debt levels.22 In the official debt breakdown shown in Figure 8,over half of the nations gross debt is classified as“corporate.”Yet,this includes a large amount of LGFV debt,which is technically corporatebecause the borrowers are companies not government entitiesbut in reality is disguised local government debt.Starting in 2017,the government launched a“financial de-risking”campaign in order to eliminate risky shadow banking and make it harder for companies and households to pile up debt.This campaign was also successful,although at some cost.Private companies,which are largely shut out of the formal banking system,lost access to a key source of credit,and arguably the recentralization of credit creation in the big state-owned banks made capital allocation more risk-averse and less efficient.23 The re-regulation of finance almost certainly improved financial stability,but it might have had a negative impact on Chinas economic growth.Despite all these efforts,debt has continued to grow and now stands at around 300%of Chinas GDP according to official data.24 The root cause is that many local governments do not have enough revenue sources to fund their operating and capital expendituresespecially since the collapse of the property market,which is discussed laterand transfers from the central government do not fully cover the shortfall.As a result,local governments resort to borrowing to make up their deficits.The solution is comprehensive fiscal reform that would enable localities to match expenditures with revenues,but there is no imminent prospect of such reform taking place.Instead,local governments are going through another round of refinancing,swapping out old debts for new ones with lower interest rates and longer repayment terms.The debt problem impedes growth in two ways.First,the large stock of debt financing low-return investments means that less money is available to finance high-return projects.Second,the desire to prevent debt levels from rising much more means that the government is reluctant to engage in strong monetary or fiscal stimulus to boost the economy when it is weakas was the case in 202324.Crushing the Property Sector and Shifting Capital to High-Tech ManufacturingThe third major set of policies affecting Chinas growth trajectory is the governments drive to reallocate capital away from real estate and toward technology-intensive manufacturing.High-tech manufacturing has long been a focus of Chinese industrial policy,but this focus has intensified in the last decade,essentially for two reasons.First,the government recognized that 22 Thomas Gatley,“The Promise and Peril of Industrial Policy,”Gavekal Dragonomics,August 21,2024,https:/ average debt-to-equity ratio of all listed nonfinancial firms in China fell from 65%in 2013 to 52%in 2023.Excluding real estate firms,the decline in this leverage ratio was steeper,from 62%to 47%.Both state and private firms saw roughly comparable declines.23 Nicholas R.Lardy,The State Strikes Back:The End of Economic Reform in China?(Washington,D.C.:Peterson Institute for International Economics,2019).24 China Academy of Social Sciences,Center for National Balance Sheets of Institutions for Finance and Development,accessed via CEIC database.15CAUSES AND IMPACTS u KROEBERthe infrastructure and property boom was structurally running out of steam,that a new growth engine was required,and that this new engine should rely mainly on innovation and higher total factor productivity rather than on endless inputs of capital.25 Second,the 201819 trade war with the United States and the subsequent U.S.imposition of tight sanctions and technology export controls cemented the leaderships belief that China needed to become self-sufficient in key technologies.A decisive moment in this shift occurred in August 2020,when Beijing issued the“three red lines”policy requiring that property developers drastically reduce their debt and instructing banks to curtail credit to developers.26 This policy can be seen both as an extension of the financial de-risking campaign(because it aimed to reduce property-related debt)and as a move in the capital-reallocation strategy(because it freed up banks to lend more to high-tech manufacturing).The three red lines precipitated a collapse in the national property market.Over the next three years,housing sales fell by half,and the number of new houses under construction fell by over 60%.Most property market indicators began to stabilize in late 2024,but the majority of private(and even some state-owned)developers were still in financial distress.The real estate sector will probably not return to growth until 2026 or 2027a trend that will inevitably constrain GDP growth,given the sectors significant share of GDP,as was discussed earlier.The property crash has produced numerous spillover effectsnotably,lower demand for heavy industrial products and their commodity inputs and a hit to consumer confidence(discussed later).The impact on heavy industry,though substantial,was actually not quite as dramatic as might have been expected,given the large role of housing in the demand for materials.One reason was continued government support for infrastructure investment,despite diminishing returns.Another was rising reliance on export markets,reflecting the disparate channels through which slowing growth can affect trade and investment partners(discussed later).Steel exports,for instance,doubled from 54 million tons in 2020 to 110 million tons in 2024.China exported about 40%more steel than either Japan or the United States produced in that year.27These efforts to force China into a hard techoriented growth track have had a dramatic impact on the composition of the countrys economy.Their ultimate effect on growth is somewhat less clear.The effort to reallocate capital away from property and into manufacturing has succeeded:the volume of new loans to industry rose eightfold between 2019 and 2023,from 590 billion renminbi to 4.8 trillion renminbi(or from$85 billion to$670 billion)(see Figure 10).28 The success of Chinese high-tech manufacturing is now globally evidentand keenly felt by trading partnersthrough Chinas huge exports of electric cars and batteries and massive increases in semiconductor production.Meanwhile,household investment in property has shriveled back to approximately its pre-2000 level.29 On the whole,the most likely outcome of the industrial policyled growth model is for sectoral success in many of the targeted high-tech industries,but also for significantly 25 Central Committee of the Communist Party of China and the State Council of the Peoples Republic of China,“Outline of the National Innovation-Driven Development Strategy,”May 19,2016,trans.Center for Security and Emerging Technology,https:/cset.georgetown.edu/publication/outline-of-the-national-innovation-driven-development-strategy.26“What Chinas Three Red Lines Mean for Property Firms,”Bloomberg,October 8,2020,https:/ Jing Zhang,“Chinas Steel Exports Face Rising Trade Barriers as Antidumping Cases Surge,”S&P Global,February 25,2025,https:/ Data is from Chinas National Bureau of Statistics,accessed via CEIC database.29 Batson and Zhang,“Timing The Property Downturn.”f i g u r e 1 0 Bank lending shift from property to industry(net new medium-/long-term bank loans by sector)s o u r c e:National Bureau of Statistics,accessed via the CEIC database.16NBR SPECIAL REPORT u JUNE 2025weaker growth than would be possible under a more demand-focused strategy.The basic reason is that it is not obvious how successes in high-tech production will create spillovers driving higher productivity and wages in services,which account for the majority of employment and all net new job creation.30Internet Crackdown and Declining Private-Sector ConfidenceAnother policy move executed at around the same time as the three red lines was a severe crackdown on internet companies that began in November 2020 with the cancellation of the initial public offering of Ant Group,a financial-technology spinoff of the e-commerce behemoth Alibaba.After the cancellation,restrictive policies engulfed most of Chinas top internet firms for about two years.The end result of the campaign was that all internet firms were subjected to much tighter regulation,effective prohibitions on certain business activities(such as fintech or online healthcare),and strict controls on collecting,storing,and monetizing data as well as on these firms ability to operate internationally.The internet crackdown had several motivations:a desire to control the financial and social risks posed by unregulated growth in the sector,a desire to prevent internet firms and their founders from becoming alternative sources of political power,and the perceived privilege of investments in hard technologies like semiconductors,industrial automation,and green technology over consumer services.The latter perception was based on the theory that long-term growth in 30 Arthur R.Kroeber,“The Venture Capital State:Implications for Chinas Growth,”in Not Just Another Cold War:The Global Implications of the U.S.-China Rivalry,ed.Brd Nikolas Vik Steen(New York:Oxford University Press,2025),75100.17CAUSES AND IMPACTS u KROEBERproductivity comes more from the these technologies than from consumer services,despite the fact that the less state-influenced,consumer-focused service sector has generally outperformed in terms of returns on capital.While the tighter internet policy affected a minuscule proportion of Chinese private companies,some of the largest and most internationally prominent companies were among those affected.31 The signaling effect was clear:the kind of freewheeling entrepreneurship that had led to the spectacular growth and innovation in Chinas internet sector in the preceding two decades would no longer be tolerated.Instead,future growth in high technology would focus on the hardware sectors that were favored by government industrial policy and posed no risk of social destabilization.This signaling effect doubtless contributed to the sustained downturn in private-sector business and consumer confidence that has plagued the economy since early 2022.Several other factors depressed confidence.Covid-19 lockdowns swept the country in 2022,and unlike in the United States and Europe,people who lost incomes or jobs received no support from the government.As a result,precautionary saving rose and did not fall much after Covid-19 restrictions were lifted at the end of the year.The property crash not only eroded the main store of wealth for households but also hurt small business owners,who often relied on their homes or other property assets to raise loans.Many small businesses had already been hurt by the crackdown on shadow banking.The slowdown of consumer spending meant that consumer-facing businesses were reluctant to invest and hire new employees.This led to a self-reinforcing growth-slowing cycle,as households cut back on spending because they were pessimistic about their employment prospects.Fiscal and Monetary Policy StancesTo summarize,over the past decadeand especially since 2020Chinas leadership has undertaken a suite of strategic policies designed to increase the states control over the economy,reduce debt and financial risk,and remake the Chinese economy as one driven mainly by technology-intensive manufacturing rather than investment in infrastructure and real estate.The stated intention of these measures was to put economic growth on a more sustainable footing and to boost total factor productivity.(Whether the policies are likely to succeed in achieving these goals is another matter,discussed in the next section.)In the short run,however,the overall impact of this policy package has been to reduce economic growth.The basic problem is that the real estate sector directly and indirectly accounted for more than a quarter of Chinas economy;hence,cutting it in half created a massive hole in aggregate demand,which no amount of manufacturing investment could fill.32 Normally,governments respond to shortfalls in aggregate demand by launching stimulus through monetary policy(lower interest rates)or fiscal policy(more government spending).Until the autumn of 2024,Chinas government was reluctant to do either.Why was this the case?The basic reason seems to be that Xi Jinping and his top economic officials believed that a short-term hit to growth is the price to pay for the strategic reorientation of the economy.Their apparent conviction is that long-term growth is driven by investments in the right technology,and that 31 Tianlei Huang and Nicholas R.Lardy,“Is the Sky Really Falling for Private Firms in China?”Peterson Institute for International Economics,October 14,2021,https:/ Gerard DiPippo,“Focus on the New Economy,Not the Old:Why Chinas Economic Slowdown Understates Gains,”RAND Corporation,February 18,2025,https:/www.rand.org/pubs/commentary/2025/02/focus-on-the-new-economy-not-the-old-why-chinas-economic.html.18NBR SPECIAL REPORT u JUNE 2025aggregate demand will eventually pick up once enough of those investments pay off.Short-term efforts to boost demand do not contribute to growth in the long run,and could even create more problems by adding to Chinas already high debt level.33 Nonetheless,by the late summer of 2024,it had become clear that the economy was slowing sharply,and deflationary pressures were deepening.In response,the government in October launched an economic stabilization package,including fiscal and monetary stimulus and measures to support the property and stock markets.Rollout of the program was done in stages,with many of the fiscal measures not being implemented until the release of the 2025 budget at the National Peoples Congress in March 2025.34 Yet,the measures already were having a modest positive effect in the fourth quarter of 2024:retail spending and industrial production had risen significantly,property sales stabilized(at very low levels),and economy-wide deflation fell slightly.At the National Peoples Congress the government set a real GDP growth target of“around 5%”for 2025 and stepped up its rhetoric in support of boosting consumer demand.China will probably achieve 4.5%5%real growth in 2025.Policy statements since October 2024 have made it clear that the government will add stimulus as needed to achieve the target,and various projections reflect that likely outcome.35 Significant additional stimulus will be needed to offset the negative effect of the additional tariffs imposed on Chinese goods by the Trump administration,which will suppress export growth.36However,this stabilization masks substantial problems.Thanks to persistent deflation,nominal growth in China will be weaker than real growth.The downdrafts in consumer and business confidence are unlikely to be corrected soon.The strategic policy direction of focusing on industrial policy as a driver of growth will probably stay in place,ensuring a deflationary bias.The structural factors driving slower GDP growth are thus not going away.In fact,over the next several years,Chinas economy will continue to decelerate.Note on U.S.Tariff PolicyThe above analysis was completed before the Trump administrations tariff announcements of April 2025 that raised tariffs on Chinese imports to over 100%,which subsequently were reduced to around 40%under a temporary agreement reached on May 12.37 If these tariffs stay in place or are increased again,Chinas GDP growth in 2025 will probably be reduced by between 0.5 and 2 percentage points(depending on the actual tariff level),unless the government unleashes 33 Lingling Wei,“China Isnt Planning a Bazooka Stimulusat Least Not This Year,”Wall Street Journal,November 4,2024.https:/ 34 Key elements of the package included interest rate cuts,new or increased funding lines from the Peoples Bank of China to support the purchase of stocks and unsold property,a pledge to issue 10 trillion renminbi in new central government bonds to refinance local government debt and recapitalize the major banks,a target of increasing the central governments deficit spending starting in 2025,various programs to support the property market,and subsidies to encourage both businesses and households to upgrade old appliances and equipment.35 See,for example,“China Sets Bullish Growth Goal of about 5%,Despite U.S.Tariffs,”Bloomberg,March 5,2025;and OECD,OECD Economic Outlook,Interim Report March 2025:Steering through Uncertainty(Paris:OECD Publishing,2025),https:/www.oecd.org/en/publications/oecd-economic-outlook-interim-report-march-2025_89af4857-en.html.36 As of the time of writing in May 2025,U.S.tariffs on most Chinese imports stood at approximately 40%,comprising a 10fective tariff rate resulting from tariffs imposed in 201823,a new 10seline tariff applied to all U.S.imports,and an additional 20%tariff ostensibly in retaliation for Chinas failure to control the export of fentanyl precursor chemicals.37 Daisuke Wakabayashi,Amy Chang Chien,and Alan Rappeport,“U.S.and China Agree to Temporarily Slash Tariffs in Bid to Defuse Trade War,”New York Times,May 12,2025,https:/ of the effective tariff rate on Chinese imports after the Geneva agreement range from 33%to 51%;the actual tariff regime is now so complex that a precise figure is hard to calculate.See“State of U.S.Tariffs:May 12,2025,”Budget Lab at Yale,https:/budgetlab.yale.edu/research/state-us-tariffs-may-12-2025;Chad P.Bown,“U.S.-China Trade War Tariffs:An Up-to-Date Chart,”Peterson Institute of International Economics,May 14,2025,https:/ Arendse Huld,“Breaking Down the U.S.-China Trade Tariffs:Whats in Effect Now?”China Briefing,May 23,2025,https:/www.china- AND IMPACTS u KROEBERadditional fiscal and monetary stimulus.Because of concerns about debt sustainability,the government will likely compromise by providing additional stimulus,while also accepting lower growth.Assuming that the tariffs remain in place beyond the short term,China will probably adjust its policy to enhance the focus on promoting domestic demand and cultivating new export markets for its manufacturers.Given its large internal market and strong comparative advantage in manufacturing,China should be able to weather the trade war stormespecially with all of its competitors in Asia also being subject to high U.S.tariffs.If these tariffs persist in the long run,Chinese growth rates will be somewhat lower than described in this chapter,but so will the growth of most other countries in the world.Chinas growth will still decelerate,but it is possible that growth will be driven more by demand from domestic consumption than by industrial policyled investment.If so,this would be marginally positive for most of Chinas trade partners.Assessment and ConclusionsChinas economy is slowing for a wide range of structural and policy reasons,and continued deceleration is likely to occur throughout the 2020s.Xi Jinping and his advisers now see the governments central economic management task as building up the nations technological capacities,not maximizing growth.Because of this strong supply-side policy bias,disinflationary pressure will be persistent.Although consumer price inflation hovered just above zero in 202324,the broadest measure of economy-wide inflation,the GDP deflator,was negative for seven straight quarters through the end of 2024.Deceleration,however,is not synonymous with disaster.Chinas economy is still by a wide margin the worlds second-largest,with a GDP of roughly$18 trillion,and despite some misplaced concerns,it is unlikely to replicate Japans experience of a zero-growth“lost decade.”38 Even if its average real growth slows to 3%over the next decade,as long as the exchange rate stays stable,China will contribute more than twice as much to global GDP growth over the decade as India,which is expected to grow at least twice as fast.39The comparison with 1990s Japan is worth a closer look.There are some superficial similarities:both countries experienced a huge property market collapse,had high debt levels,and experienced sustained deflation.But the differences are more salient.The Japanese asset price bubble of the 1980s was severe:the prices of both land and equities rose sixfold between 1980 and 1989.40 This necessitated a correspondingly large collapse in asset prices(around 80%)after 1990.China has suffered no such asset bubble:domestic equity prices rose by just 15%in the 2010s,and the official index of new urban housing prices rose by just 65%.41 Its property sector had a problem of severe overbuilding,but not of wildly inflated prices.The other critical difference is that in Japan banks 38 This concern has been frequently aired in the media since 2023.See,for instance,“Does China Face a Lost Decade,”Economist,September 10,2023,https:/ Chinas 2024 GDP was$18.8 trillion at current exchange rates;Indias was$3.9 trillion.If Chinas real GDP grows at an average of 3.5%starting in 2025,and Indias grows at 7%,then(ignoring exchange rate movements)China will add$7.7 trillion to GDP over the next decade,while India will add$3.77 trillion.Data is from World Bank,World Development Indicators.40 Shuichi Uemura and Takeshi Kimura,“Japanese Share Prices,”Bank for International Settlements,BIS Conference Papers,no.5,March 1998,http:/bis.org/publ/confp05g.pdf.41 Chinas data,which is an average of 70 cities,understates the rapid price appreciation of housing in the most desirable cities such as Beijing,Shanghai,and Shenzhen.But BIS data on home prices,which tries to create a standardized measure across countries,reports that prices in China rose 54%from the beginning of 2010 to the peak in mid-2021.By contrast,home prices rose by 128%in Japan in the decade before the 1991 peak and by 149%in the United States in the decade before the 2006 peak.“Residential Property Prices,”BIS,Data Portal,https:/data.bis.org/topics/RPP.20NBR SPECIAL REPORT u JUNE 2025and industrial companies owned shares in each other,and the underlying value of these shares was heavily determined by land values.42 Thus,when inflated land values collapsed,both corporations and banks were caught together in a classic debt-deflation spiral in which everyone tries to sell assets at once to pay down debt,but the resulting fall in asset prices perversely causes the real value of debt to rise rather than fall.43 In China,cross-shareholdings of this type are prohibited(precisely because of the lessons from Japan),and the exposure of the large systemically important banks to property developers is relatively small.The result is that in contrast with the unified balance-sheet collapse that Japan suffered,Chinas problem is fragmented.Property developers,many local governments,and some state enterprises have big debt problems,whereas much of the productive corporate sector does not,and the banking system as a whole is still able to expand the total supply of credit.Chinas property and debt problems are very serious and will take more time to resolve,but they do not fundamentally constrain the nations ability to keep investing in productive new assets.The base case,therefore,is that Chinas economy continues to grow,but at a slower rate than in the past.The most likely trajectory over the next decade is a continued deceleration from the current real growth rate of 4%5%to 3%4%,followed by stabilization.Slower growth will be accompanied by persistent deflationary pressure,which China could export to the rest of the world through lower prices of manufactured goods.For the rest of the world,therefore,the key variable for gauging Chinas impact is not the speed of its growth but the changes in its composition.With respect to this point,the most important findings are the following:Despite much talk over the past decademost recently through discussions of“dual circulation”there is no sign that Chinas economy is fundamentally“rebalancing”from investment-led to consumption-led growth.Its policy clearly supports a continued high investment ratio of around 40%of GDP.However,the focus of investment is shifting away from property and infrastructure to technology-intensive manufacturing.This policy focus will keep the manufacturing share of GDP relatively high(probably above 20%)for some years to come.However,China is not immune to the natural tendency of economies to become more service-oriented as they grow richer.The service sector has,since the early 2010s,accounted for all net new job creation.As the service sectors share of GDP continues to grow,the trend rate of economic growth will fall,since as a general rule it is harder to generate rapid productivity gains in services than in manufacturing.Reliance on external demand will remain at least as high as it is today and could grow.The question is how much of this external demand will be tapped by exports,and how much by Chinese companies internationalizing their operations and setting up production bases overseas.China could certainly achieve a higher growth rate through a different policy mix.More growth-friendly policies would include a greater emphasis on domestic demand,deregulation of the service sector to push up productivity across the widest swath of workers,and comprehensive fiscal and financial reforms to boost capital efficiency.However,such a comprehensive change in policy direction is improbable under the current leadership,although piecemeal reform efforts 42 Uemura and Kimura,“Japanese Share Prices.”43 Irving Fisher,“The Debt-Deflation Theory of Great Depressions,”Econometrica 1,no.4(1933):33757,https:/fraser.stlouisfed.org/files/docs/meltzer/fisdeb33.pdf f i g u r e 11 Comparison of Chinas and Japans nominal GDP as percentage of U.S.nominal GDP%Japan 1995China 2021s o u r c e:International Monetary Fund,World Economic Outlook Database,https:/www.imf.org/en/Publications/SPROLLs/world-economic-outlook-databases.21CAUSES AND IMPACTS u KROEBERare possible.The industrial policyled growth model that began to be articulated with the Made in China 2025 plan in 2015 is now firmly entrenched throughout the Chinese system,and the political urgency of prioritizing technological development and self-sufficiency over GDP growth was cemented by the deterioration of relations with the United States over two successive U.S.administrations of different parties in 201724.On the other hand,the broad-based economic stabilization package launched in the autumn of 2024 shows the limits of the leaderships tolerance for a weak economy.Although debt levels are high,the central government still has significant spare capacity to mobilize resources to support growth if it feels that the need is urgent enough.It would therefore be unwise to bet on Chinas growth falling much below the 3%4%range in the coming decade.The cost of maintaining this spare capacity,however,is a high wall of capital controls to ensure that savings stay inside the country rather than leaking out through capital flight.This will constrain Chinas ability to internationalize its currency or underwrite large-scale non-dollar international payment systems.Chinas economic outlook over the next decade can be described in two pictures.The first shows that on its new,slower growth trajectory China is unlikely to overtake the United States as the worlds biggest economy,though it is equally unlikely to follow Japans relative decline after 1995(see Figure 11).Hence,while China will continue to play a central role in the global economy,it will fall short of playing a dominant one.As the second picture shows,however,Chinas position as the worlds biggest manufacturing power is secure and is unlikely to erode even as its growth slows(see Figure 12).Chinese industry enjoys economies of scale,a competitive domestic market that enables rapid innovation(as illustrated by the sudden emergence of Chinese companies as f i g u r e 1 2 Comparison of Chinas share of global manufacturing added with other countries,19802022s o u r c e:World Bank,World Development Indicators.22NBR SPECIAL REPORT u JUNE 2025global leaders in electric vehicle and battery technology),a large pool of well-trained and relatively low-cost labor,and ample government support.Efforts to stem the tide of Chinese-manufactured exports through protectionism,or to force reshoring or nearshoring of supply chains away from China,might succeed in a few targeted sectors but are unlikely to diminish the global market share of Chinese industrial companies.What they could do is accelerate the pace of globalization by Chinese firms,so that a greater proportion of those market-share gains come from localized production in other countries rather than exports from China.The economic challenge for the rest of the world,then,will be to maximize the benefits from a China that is growing more slowly but playing a more active role in global supply chains.23the national bureau of asian researchnbr special report#118|june 2025DAVID GITTER is a PhD student in the School of Public and International Affairs at Princeton University and the founder and principal of Erelas LLC,where he leads specialized research of Indo-Pacific affairs to inform public-and private-sector stakeholders.He is also a Nonresident Fellow at the National Bureau of Asian Research.He can be reached at.NOTE:The author is deeply grateful to Zaki Atia and John Broach,whose countless hours of Chinese-language research and insightful analytical contributions significantly informed and elevated this assessment.Chinas International Economic Narratives in an Age of Slowing GrowthDavid GitterEXECUTIVE SUMMARYThis chapter analyzes Chinas international messaging strategy for economic engagement amid domestic economic slowdown,low consumer spending,and eroding foreign investor confidence.MAIN ARGUMENTAs China faces an economic contraction and declining foreign investor confidence,Beijing seeks to reinject positivity into its economic image through external narratives that project strength,market liberalization,and support for globalization.Chinas international economic narratives are a facet of its broader set of economic challenges and subsequent engagement strategies with foreign stakeholders.Five central narratives support Chinas economic objectives:(1)attracting foreign investment,(2)convincing foreign investors of Chinas greater reform and liberalization,(3)advancing Chinas intellectual property and market access rights,(4)countering foreign de-risking efforts,and(5)navigating foreign trade barriers and technology restrictions.Beijings information operators use targeted messaging techniques to encourage favorable trade positions from foreign stakeholders while dissuading unwanted policies.Such increasingly asymmetrical trade practices,however,will likely undermine Beijings messaging as it seeks to counter international calls for the diversification of supply chains.POLICY IMPLICATIONS Despite growing trade frictions and international economists recommendations for China to transition to a consumer-driven economy,its policies signal that the country is unlikely to meaningfully liberalize its market in the near term as it doubles down on its export-led growth model.Nonetheless,Beijings official messaging to foreign investors aims to disavow criticisms surrounding trade deficits,low consumer confidence,and supply chain risks.Chinas carefully curated narratives surrounding its asserted world-class business environment,embrace of intellectual property rights,and promotion of the rule of law work to conceal the unequal treatment of foreign firms competing in the Chinese market.Foreign stakeholders who buy into these narratives in the pursuit of profitability may ultimately provide one-sided contributions to Chinas technological,talent,and supply chain ecosystems.Due to Beijings apparent unwillingness to abandon its export-led growth model,trade frictions will continue for the foreseeable future and likely induce protectionist policies globally to rebalance trade and reduce reliance on China.Beijing will find it increasingly challenging to convince foreign trade partners of the win-win nature of economic engagement as trade deficits widen.25CHINAS INTERNATIONAL ECONOMIC NARRATIVES u GITTERChinas international narratives about its economy play a key(albeit difficult to measure)role in ensuring that foreign countries and companies remain open to providing the capital,resources,talent,and market access on which the countrys continued economic health depends.These narratives are grounded in authoritative Chinese Communist Party(CCP)documents that are then tailored to the interests and sensibilities of their targeted foreign audiences.This chapter seeks to examine the strategies employed by Beijing to advance Chinas economic engagement interests with foreign stakeholders.While the messaging techniques utilized by Beijing share commonalities with generalized norms of diplomacy and communication,their effectiveness stems from deliberate,audience-specific deployment to achieve their desired policy outcomes through consistent messaging across authoritative publications,diplomatic channels,and official statements.Beijings overarching public diplomacy objective is to guide global opinion and monopolize discourse on China abroad.In the realm of economic engagement,this involves a two-pronged approach of amplifying positive stories that highlight the success of Chinas economic model while suppressing competing economic narratives that Beijing sees as hostile to its agenda.1Beijings communication techniques have grown increasingly sophisticated.Once central leadership establishes key talking points or slogans,they are enshrined in party orthodoxy upon dissemination in National Party Congress documents,five-year plans,Central Economic Work Conferences,and the CCPs official mouthpieces,such as the Peoples Daily.2 In addition to tasking official messengers from channels such as the Ministry of Foreign Affairs(MFA)and the Ministry of Commerce(MOFCOM)with the repeated dissemination of these slogans,Beijing has become increasingly adept at expanding Chinas messaging in local media outlets abroada strategy it refers to as“borrowing mouths.”3 As of 2022,it had established over four hundred content-sharing partnerships with local media organizations.4 This approach effectively masks the Chinese governments role while leveraging local media credibility,often leaving citizens unaware that they are consuming curated content.Beijings economic messaging coherence proves most convincing when grounded in the partial truths and genuine concerns that resonate with foreign actors economically invested in the Chinese market,either by addressing their anxieties or by appealing to profit-driven aspirations.Chinas external-facing rhetorical strategy is specifically designed to exploit historical engagement strategies toward Beijing,which presupposed that supporting Chinese economic development would translate into democratic reforms and peaceful integration into the international systeman expectation that ultimately proved unfounded.5 Nonetheless,Beijings messengers still seek to exploit this diminishing expectation by curating an image of sustained market liberalization that fosters a welcoming environment to foreign investment.Beijings task is more difficult than it was a decade ago due to factors such as the challenges in recovering from the Covid-19 pandemic,heightened criticisms surrounding intellectual 1 Katja Drinhausen et al.,“Image Control:How China Struggles for Discourse Power,”Mercator Institute for China Studies(MERICS),September 2023,https:/www.stiftung-mercator.de/content/uploads/2024/07/MERICS-Report_Image-Control.pdf.2 Wu Guoguang,“Command Communication:The Politics of Editorial Formulation in the Peoples Daily,”China Quarterly 137(1994):194211.3 Drinhausen et al.,“Image Control.”4 Samantha Custer,“Minutes and Transcript:Quarterly Public Meeting on Understanding the PRCs Approach to Public Diplomacy,”U.S.Advisory Commission on Public Diplomacy,January 16,2025,5,https:/www.state.gov/wp-content/uploads/2025/02/ACPD-January-2025-QM-Transcript-Final.pdf.5 Aaron L.Friedberg,Getting China Wrong(Cambridge:Polity Press,2022).26NBR SPECIAL REPORT u JUNE 2025property(IP)theft,pressure from advanced democracies to reduce dependency on the Chinese supply chain,and rising tariffs and technology export controls.Perhaps most obviously,the CCP regimes many external-oriented messengers can only demur on Chinas failure to appreciably boost domestic demand,which has been hampered by the governments unwillingness to implement meaningful policies to spur this shift,as detailed in chapter 1 of this report.6 Messengers regularly understate the weakness in domestic demand and continue to play into foreign firms hopes for Chinas grand domestic market.In its internal and external promulgations,the Xi Jinping regime has consistently emphasized the importance of developing“new productive forces”that rely less on labor-intensive manufacturing and leverage new technologies to improve efficiency under a“new growth model.”7 To achieve the advanced industrialization and innovation levels sought by the regime as part of this model,foreign inputs remain critical in everything from semiconductors and artificial intelligence(AI)to operating systems and advanced manufacturing equipment.Moreover,another closely related goal is facilitating new sources of foreign technical know-how to reduce Chinas reliance on foreign“chokepoint”technologies as soon as possiblea concern exacerbated by U.S.president Donald Trumps second term.8 As alluded to above,foreign observers have noted Beijings 14th Five-Year Plan prioritized a strategic shift toward technological self-sufficiency and resiliency-building measures that bolster China against disruptions in global supply chains.Its rhetoric reflects these goals.Although Beijing today continues to benefit from comparative advantages in technology-intensive manufacturing,technical talent,and economies of scale,it must work harder to make sure that foreign stakeholders believe they can tap into these advantages.Foreign concerns regarding IP protection,new risks stemming from geopolitical competition,and Chinas drive for self-reliance must be addressed satisfactorily,if not directly.Beijings narratives,therefore,have also promoted the enhanced rule of law and protection of economic stakeholder rights,as well as the removal of structural barriers to international trade and investment.9 The imperative of Chinas“dual circulation”strategy presents unique challenges.By advancing an economic model where the Chinese economy features two growth enginesone focused domestically and the other externallyBeijing makes clear that domestic self-reliance is to be complemented by increased Chinese export dominance(an objective that is reinforced by the aforementioned weaknesses in domestic consumer demand).The result is a nonreciprocal approach by design,felt by Chinas trade partners at home(via trade imbalances,dumping,and other unfair trade practices)and within China(via a lack of market access and an unequal playing field).In this light,the issue of how external narratives navigate these nonreciprocal engagements is worthy of study.6 Michael Pettis,“Why Is It So Hard for China to Boost Domestic Demand?”Carnegie China,July 31,2024,https:/carnegieendowment.org/posts/2024/07/why-is-it-so-hard-for-china-to-boost-domestic-demand?lang=en.7 Xi Jinping,“中国共产党第二十次全国代表大会报告”Report of the 20th National Congress of the Communist Party of China,October 16,2022;Xi Jinping and Li Keqiang,“2020年中央经济工作会议公报”Communiqu of the Central Economic Work Conference 2020,December 18,2020;Xi Jinping and Li Keqiang,“2021年中央经济工作会议公报”Communiqu of the Central Economic Work Conference 2021,December 10,2021;Xi Jinping and Li Keqiang,“2022年中央经济工作会议公报”Communiqu of the Central Economic Work Conference 2022,December 16,2022;Xi Jinping and Li Qiang,“2023年中央经济工作会议公报”Communiqu of the Central Economic Work Conference 2023,October 31,2023;and Xi Jinping and Li Qiang,“2024年中央经济工作会议公报”Communiqu of the Central Economic Work Conference 2024,December 12,2024.8 19th Central Committee of the Chinese Communist Party,“中华人民共和国国民经济和社会发展第十四个五年规划和2035年远景目标纲要”Outline of the 14th Five-Year Plan for National Economic and Social Development of the Peoples Republic of China and the Long-Term Objectives for 2035,March 12,2021.9 19th Central Committee of the Chinese Communist Party,“第十四个五年规划”;and Xi,“中国共产党第二十次全国代表大会报告.”27CHINAS INTERNATIONAL ECONOMIC NARRATIVES u GITTERChinas increasingly domestically oriented direction also drives the CCP regimes defensive rhetorical emphasis on principled,win-win engagement with the world economy.Beijings international narratives thus declare Chinas outward embrace of globalization and economic integration with every region and contrast it with Washingtons agenda,which is portrayed as self-centered and short-sighted.These narratives advertise Chinas pursuit of integration through the Belt and Road Initiative(BRI),despite recent rhetoric signaling that investment is scaling down to“small but beautiful”BRI projects,and showcase Beijing as a champion of free trade in global bodies and groupings.10 What follows is an analysis of five broad external narratives that serve to facilitate five core imperatives of the Chinese economy:(1)narratives aimed at attracting foreign investment and trade,(2)domestic and international narratives for reform and liberalization,(3)narratives about intellectual property rights(IPR),fair market access,and rule of law,(4)trade dependency strategies and narratives against de-risking/decoupling,and(5)narratives regarding navigating global trade barriers and tech restrictions.These narrative-centered sections explain how the propaganda and information operators of the Peoples Republic of China(PRC)here defined as all CCP regime messengers tasked with communicating politically driven statements to advance regime goalsutilize specific techniques and even specific phrases in order to adaptively incentivize desired foreign actions while dissuading unwanted policies.Beijing employs three primary rhetorical tactics in its economic messaging abroad.First,“strategic redirection”pivots or deflects conversations away from criticism toward topics that present China more favorably.Second,“cherry-picking”involves citing carefully selected statisticsoften through“borrowed”foreign expertise to bolster credibilitywhile ignoring broader economic context.Third,“selective omissions”rhetorically misrepresent Chinas economic statecraft by highlighting only minor sectors that portray the countrys industrial policy in a positive light,while concealing less flattering aspects.International observers may be struck by the simplicity of the tactics outlined in this chapter and the transparent attempts to distort and co-opt international economic norms,but there need not be anything mysterious or complex in Beijings economic narratives to effectively sell its circumstantial needs.This chapter concludes with an overview of these techniques and a brief assessment of their efficacy.Narratives Aimed at Attracting Foreign Investment and TradeAs Chinas economic slowdown continues,the government faces a critical imperative to project confidence in the countrys economic trajectory as part of broader efforts to incentivize foreign investment and tradewhich it views as necessary components of an effective solution to address Chinas growth challenges.Following the Covid-19 pandemic,these challenges come at a pivotal time as the country adapts to what it acknowledges as a“new normal”a period described as 10“实打实、沉甸甸的成就习近平总书记出席第三次”一带一路”建设座谈会侧记”Real and Significant Achievements:A Side Note of General Secretary Xi Jinpings Attendance at the Third Symposium on the Construction of the Belt and Road Initiative,Xinhua,November 21,2021,http:/ Jinping,“Building an Open,Inclusive and Interconnected World for Common Development,”Third Belt and Road Forum for International Cooperation,October 18,2023,http:/www.beltandroadforum.org/english/n101/2023/1018/c124-1175.html;and Wang Hao and Chang Qin,“开创共建一带一路更加光明的未来习近平总书记在第四次一带一路建设工作座谈会上的重要讲话引发与会人员热烈反响”Creating a Brighter Future for the Joint Construction of the Belt and Road InitiativeGeneral Secretary Xi Jinpings Important Speech at the Fourth Symposium on the Construction of the Belt and Road Initiative Aroused Enthusiastic Responses from the Participants,Peoples Daily,December 3,2024,http:/ SPECIAL REPORT u JUNE 2025slower,but more sustainable,“high-quality”growth amid a complex global environment.11 Despite its recognition of these challenges,the PRCs economic narratives continue to promote the countrys growing domestic market as a primary incentive to attract foreign capital.Beijing presents a prima facie plausible case for this narrative.Its commitment to economic revitalization is repeatedly demonstrated in policy priorities and economic messaging present in the CCPs Central Economic Work Conference,where boosting domestic consumption consistently emerges as a fundamental objective.12 This focus was further reinforced on February 21,2025,when Premier Li Qiang convened a State Council study session specifically aimed at identifying and implementing measures to enhance consumer spending.13 However,official messaging on domestic consumption belies a broader strategic challenge facing the Chinese economy.Over the past decade,China has maintained a notably low consumption rate as a percentage of its GDPa persistent concern highlighted by international economists and discussed in detail in chapter 1.In response to international media ringing the alarm belloften eroding foreign investors confidence in the Chinese marketBeijing has developed a two-pronged messaging strategy disseminated for foreign audiences.First,it emphasizes concrete steps to transition toward a more consumer-driven economy.Second,it works to counter what Xinhuas English media has characterized as the“consumption crisis”myth shared overseas.14 The ultimate goal of this message is to portray China as a dynamic economy with a“prosperous and thriving”Chinese consumer market(中国消费市场的红火兴旺)that remains an attractive destination for global investment and imports.First,to assuage foreign investors concerns,Beijing communicates that its consumer spending issue is already under control through effective central government management.One key way it conveys this message is by highlighting a few selective economic policies that qualify as stimulus measures while deliberately omitting reference to its lack of stimulus in more consequential sectors.15 For example,China Daily,one of Beijings English-language party mouthpieces,identifies the lack of domestic demand perceived by economists and foreign investors as stemming from a“problem of income distribution,”emphasizing the need to direct more income from corporations to consumers.16 In this spirit,Beijing has touted to foreign audiences through State Council press conferences that it is cutting mortgage rates by 0.5%and issuing 300 billion yuan in government 11 Hu Jintao,“中国共产党第十八次全国代表大会报告”Report of the 18th National Congress of the Communist Party of China,November 8,2012.12 19th Central Committee of the Chinese Communist Party,“第十四个五年规划”;Xi and Li,“2020年中央经济工作会议”;Xi and Li,“2021年中央经济工作会议”;Xi and Li,“2022年中央经济工作会议”;Xi and Li,“2023年中央经济工作会议”;and Xi and Li,“2024年中央经济工作会议.”13“李强主持国务院第十二次专题学习”Li Qiang Presided over the 12th Special Study of the State Council,Xinhua,February 20,2025,http:/ Chinas Pro-Consumption Policies Are Not Meant to Be Effervescent Tablets,”Xinhua,November 13,2024,https:/ Daniel Zipser,“Robust Growth Dispels Myths about Chinas Consumption,”China Daily,November 25,2024,https:/ Zhu Chao and Lu Junyu,“外交部：中国消费市场红火兴旺反映各界对中国经济发展信心提升”Ministry of Foreign Affairs:The Booming Chinese Consumer Market Reflects the Growing Confidence of all Sectors in Chinas Economic Development,Xinhua,February 13,2025,http:/ Xu Gao,“Better Income Distribution Can Create Demand,”China Daily,September 11,2023,https:/ Ke and Ou Yangjie,“上半年最终消费支出对经济增长的贡献率达到77.2%消费对经济拉动作用逐步增强（年中经济观察）”Final Consumption Expenditure Contributed 77.2%to Economic Growth in the First Half of the Year the Role of Consumption in Driving the Economy has Gradually Increased(Midyear Economic Observation),Peoples Daily,July 27,2023,http:/ Lin Zhaomu,“增强消费对经济发展的基础性作用（人民要论）”Enhance the Fundamental Role of Consumption in Economic Development(Peoples Opinion),Peoples Daily,October 18,2023,http:/ INTERNATIONAL ECONOMIC NARRATIVES u GITTERbonds to facilitate the adoption of advanced industrial and consumer technology.17 While these stimulus measures are designed to incentivize trade-ins to promote greater consumption,in practice they offer a negligible economic impact and fail to provide the direct income support experts say is necessary to drive broader demand.Notably,both former U.S.Treasury secretary Janet Yellen and International Monetary Fund chief economist Pierre-Olivier Gourinchas made the case in October 2024 that Beijings current stimulus measures are not enough to boost domestic demand and absorb excess productionan argument supported by the analysis provided in chapters 1 and 3 of this report.18 Policy responses from the central government still fall short of the meaningful structural reforms that international observers have suggested are necessary to reinvigorate household consumption.For example,essays published by both the Financial Times and Rhodium Group have urged measures that include addressing Chinas rural-urban divide,allocating significant fiscal reserves into social welfare and financial stabilization,and implementing a comprehensive fiscal overhaul.19To attract foreign investment,official messaging also portrays China as encouraging a consumer-driven economy that is making strides to expand its imports,selectively highlighting a few industries where this holds true.20 For example,Chinese vice-premier Ding Xuexiang at Davos 2025 told the world,“We dont seek trade surplus;we want to import more competitive quality products and services to promote balanced trade.”21 Complementing this international narrative,Chinese media emphasizes that China is the“worlds second-largest importeraccounting for 10.6 percent of global imports.”22 Official messengers suggest that Beijing is pushing favorable policies for foreign goods to China while cherry-picking annual statistics that show import increases in select sectors such as wine,fruits,clothing,computer parts,electronic components,and manufacturing equipment.23Yet many of these imports,especially the ones with the highest increases,are often in areas where China is specifically seeking foreign technical expertise or has no real domestic alternative.24 For example,Beijing deliberately increased its imports of computer and electronic components before semiconductor export controls took effect and in anticipation of more stringent measures to come.Beijing highlights temporary increases in electronics imports as evidence of its commitment to addressing trade imbalances with other nations.However,these import surges are narrow 17“China Unveils Fresh Stimulus to Boost High-Quality Economic Development,”Xinhua,September 24,2024,https:/ Council of the Peoples Republic of China(PRC),“3000亿元国家支持！四部门喊你领更新换新补贴”300 Billion Yuan in National Support!Four Departments Are Calling on You to Receive the Renewal Subsidy,July 26,2024,https:/ Wang Keju,“Renewals,Trade-ins Unlock Investment,Consumption,”China Daily,October 28,2024,https:/ David Lawder,“Chinas Stimulus Measures Not Enough,Yellen and IMF Chief Economist Say,”Reuters,October 22,2024,https:/ Camille Boullenois et al.,“How Can China Boost Consumption?”Rhodium Group,February 10,2025,https:/ Haohsiang Ko,“China Government Spending on Citizens Lags Behind Economic Peers,”Financial Times,February 22,2025,https:/ Zhu Chao and Lu Junyu,“外交部:中国消费市场红火兴旺反映各界对中国经济发展信心提升”Ministry of Foreign Affairs:The Booming Chinese Consumer Market Reflects the Growing Confidence of All Sectors in Chinas Economic Development,Xinhua,February 14,2025,http:/ Ding Xuexiang,“Davos 2025:Special Address by Ding Xuexiang,Vice-Premier of the Peoples Republic of China,”World Economic Forum,January 21,2025,https:/www.weforum.org/stories/2025/01/davos-2025-special-address-ding-xuexiang-vice-premier-china.22 Zhang Yiyi,“Chinas Expanding Imports Boost Global Economic Growth Momentum:Report,”Global Times,November 3,2024,https:/ Foreign Trade Hits New High in 2024,”Xinhua,January 13,2025,https:/ Fan Feifei,“Consumers Pull Out All Stops for High-Quality,Foreign Brands,”China Daily,September 16,2024,https:/ 19th Central Committee of the Chinese Communist Party,“第十四个五年规划.”30NBR SPECIAL REPORT u JUNE 2025in scope,chiefly serving Chinas national interests tied to obtaining“chokehold technologies”rather than being emblematic of genuine trade diversification across multiple sectors.25 Beijings external narratives generalize from these anecdotes to foster positive foreign investor sentiment in preferred strategic industries.Foreign investors who buy into these narratives in the pursuit of profitability may ultimately provide one-sided contributions to Chinas technological,talent,and supply chain ecosystems.Alongside arguments about sufficient stimulus measures and increased imports,official messaging in some cases downright rejects the premise that there is any problem with consumer spending by suggesting that domestic consumption of foreign brands is currently enjoying an unprecedented high.Serving as a rebuttal to international economists,MFA spokespeople consistently communicate that Chinas consumer market is more“prosperous and thriving”than ever before and provides“opportunities for countries around the world.”26 However,the anecdotal data points used focus on Chinas 2025 Spring Festivala time similar to the end-of-year holiday season in the United Statesreflecting a seasonal uptick in consumer spending that does not accurately represent year-round consumption trends.27To push back against allegations of lagging consumption,CCP mouthpieces also cherry-pick select industries,such as cosmetics and skincare products,to highlight consumption of imports,but they fail to address broader concerns in the market like stagnant growth,low consumer confidence,and declining imports.28 China has more explicit,albeit conflicting,external narratives on such consumption.For example,two China Daily articles highlight increased demand for foreign brands,whereas another article contradicts them,stating that“young consumers no longer blindly pursue foreign brands and instead prefer local brands.”29 These contradictory narratives showcase the PRCs balancing act between projecting national confidence in Chinese products and enticing foreign brands to further invest in the Chinese market.In summary,through selective omissions,misrepresentations,and anecdotal cherry-picking,Beijings messaging on its lagging consumer market primarily communicates three narratives,each marked by a significant gap between rhetoric and reality.First,the central government argues that it is implementing sufficient stimulus measures to revitalize consumer confidence.In practice,most international economists(including Arthur Kroeber in chapter 1)believe these incremental measures fall short of the systemic reform needed to reverse Chinas household consumption slump.Second,Beijing implies it is broadly expanding imports in all sectors to 25“Commerce Strengthens Export Controls to Restrict Chinas Capability to Produce Advanced Semiconductors for Military Applications,”U.S.Department of Commerce,Bureau of Industry and Security,Press Release,December 2,2024,https:/www.bis.gov/press-release/commerce-strengthens-export-controls-restrict-chinas-capability-produce-advanced-semiconductors-military;Yuki Furukawa,“Japan Tightens Export Controls on More Chip and Quantum Tech,”Bloomberg,April 26,2024,https:/ to Expand Export Controls on Semiconductor Equipment,”Reuters,January 15,2025,https:/ C.Allen,Emily Benson,and Margot Putnam,“Japan and the Netherlands Announce Plans for New Export Controls on Semiconductor Equipment,”Center for Strategic and International Studies(CSIS),April 10,2023,https:/www.csis.org/analysis/japan-and-netherlands-announce-plans-new-export-controls-semiconductor-equipment;and Ben Jiang,“Chinas 2024 Chip Imports Surged 10.4%to US$385 Billion amid Tighter U.S.Tech Sanctions,”South China Morning Post,January 13,2025,https:/ Guo Jiakun,“2025年2月13日外交部发言人郭嘉昆主持例行记者会”Foreign Ministry Spokesperson Guo Jiakuns Regular Press Conference on February 13,2025,Ministry of Foreign Affairs(PRC),February 13,2025,https:/ Ibid.28 Fan,“Consumers Pull Out All Stops”;and Logan Wright et al.,“No Quick Fixes:Chinas Long-Term Consumption Growth,”Rhodium Group,July 18,2024,https:/ Fan,“Consumers Pull Out All Stops”;Zipser,“Robust Growth Dispels Myths”;and Guan Lixin,“The Young Lead New Trends in Consumption Market,”China Daily,January 4,2024,https:/ INTERNATIONAL ECONOMIC NARRATIVES u GITTERencourage a new economic growth model that drives higher consumer confidence and provides foreign firms more opportunities.However,the overall increase in imports is limited to specific sectors such as“chokehold technologies,”and,more crucially,these import statistics remain severely imbalanced relative to Chinas surge in exports.30 This reflects a strategy that is a featurenot a bugof Chinas current export-led growth model.Finally,Beijings third talking point attempts to dismiss household consumption concerns entirely,claiming that negative reports are merely a product of foreign exaggeration.Under even minimal scrutiny,however,this last argument loses credibility by contra
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