The Chinese economy strategic impasse

Jorge Costa Oliveira

China’s economy is undergoing one of the most difficult transitions in its modern history. The old growth model – driven by massive real estate investment, infrastructure spending and debt – is reaching its limits. In its place, Beijing is trying to build an economy centered on high technology, advanced manufacturing, artificial intelligence and domestic consumption. The problem is that China is attempting to create the new model before resolving the distortions left behind by the old one.
The result is a difficult transition unfolding amid weak confidence, demographic decline, deflationary pressures and growing international resistance.
After decades of extraordinary expansion, China’s slowdown now appears structural rather than temporary. In spite of the unbelievable official figures showing GDP growth of “5.2%” in 2023, “5%” in 2024 and “4.5%” in 2025, the trend is clear toward further deceleration throughout the decade (“3%” by 2030).
The biggest drag on the economy is the collapse of the property sector, once accounting for 25% of China’s GDP and the main engine of wealth creation for households and local governments. Today, unfinished “ghost cities,” falling prices and developer bankruptcies have destroyed vast amounts of household wealth and weakened consumer confidence.
Provincial governments have also been badly hit. They relied heavily on land sales to finance spending and infrastructure projects. As the property market deteriorated, many provincial administrations were left burdened with hidden debts and shrinking revenues.
China faces deflation caused by industrial overcapacity and weak domestic demand. Chinese consumers, still affected by the harsh Covid-zero lockdowns and property losses, have become highly cautious, preferring to save rather than spend. Even with lower interest rates and central bank stimulus, businesses and consumers remain reluctant to borrow or invest.
Foreign investment has weakened as geopolitical tensions rise and multinational companies diversify supply chains away from China. At the same time, the country faces worsening demographic problems, including a shrinking workforce and rapid aging.
Xi Jinping’s response is the strategy of “new quality productive forces,” aimed at shifting China away from property and traditional manufacture and heavy industry toward technological self-sufficiency and advanced manufacturing.
The most visible pillars are the so-called “three new” industries: electric vehicles, lithium-ion batteries and solar panels. China has poured state subsidies into these sectors, transforming them into global manufacturing leaders. Beijing is also investing heavily in artificial intelligence, semiconductors, robotics, aerospace and biotechnology.
The contradiction is that these sectors, despite rapid growth, are still too small to replace the economic weight of construction and traditional manufacturing. They cannot yet absorb the millions of workers displaced from declining industries.
This creates several paradoxes. China wants market efficiency while maintaining strong state control over the economy. Beijing promotes the “new economy” while still depending heavily on the old one to avoid instability. Xi also rejects large-scale welfare expansion or direct support for households, preferring to channel resources into industrial production instead of consumption.
The consequence is growing overcapacity, especially in sectors such as electric vehicles, forcing Chinese companies to rely increasingly on exports. This has triggered resistance from the United States, Europe and other economies accusing China of unfair subsidies and industrial dumping.
China finds itself at a strategic impasse. Xi Jinping’s model of “establishing the new before abolishing the old” is slowing the country’s economic growth. Beijing is being forced to focus more on its domestic market and redirect its export capacity toward the Global South. How China manages this transition will shape the global economy and geopolitical order for decades to come.

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