Rebalancing remains elusive in China's stimulus-driven economy

In a recent article, Alicia García Herrero and Jianwei Xu, both esteemed economists, discuss China's economic trajectory and the challenges it faces.

Despite global expectations for China to rebalance its economy, the authors argue that this rebalancing will not occur soon. The fiscal impulse in China has turned positive, but the focus remains on infrastructure projects rather than stimulating consumption. This is evident in the surge of local government special bond issuance, with most funds being used for municipal construction, industrial park infrastructure, transportation projects, and public housing.

China's ongoing stimulus is primarily directed towards infrastructure, meaning that no significant near-term surge in global demand resulting from increased Chinese consumption should be expected. This is a concern for some, as the potential of a consumption-driven strategy in China to alleviate trade tensions with the US and EU is discussed. However, the authors argue that prioritizing consumption in China may conflict with its focus on technological upgrading and innovation.

The Chinese government seems convinced that the current growth model, which focuses on increasing China's global market share of industrial production and exports, remains the right one. This is evident in the measures taken to maintain financial stability, such as a 6 trillion renminbi local-government bond-swap program and monetary policy adjustments like a 50-basis-point cut in the reserve requirement ratio, a 20-basis-point reduction in the seven-day reverse repo rate, and a 30-basis-point cut in the one-year medium-term lending facility rate.

However, this growth model has its challenges. Overcapacity in China's industrial production is a concern, arising because expanding production capacity is outpacing domestic demand. Chinese industrial production growth has resulted in overcapacity, with capacity utilisation declining and producer and export prices dropping in most months since the start of 2025.

The ongoing trade tensions with the US, exemplified by tariffs reaching up to 30%, continue to depress the Chinese industrial sector, limiting room for a consumption-led shift despite US pressure. The Chinese leadership fears that deep structural reforms needed to rebalance the economy would threaten political stability, so it maintains reliance on exports and investment rather than boosting domestic consumption.

Despite these challenges, China's growth model has been successful in increasing its global share of manufactured exports significantly. Chinese exports grew by 6.1% year-on-year in the first seven months of 2025, outpacing GDP growth, despite a decline in shipments to the US.

The article is part of the project Dealing with a resurgent China (DWARC), funded by the European Union's HORIZON Research and Innovation Actions. The authors' insights provide a valuable perspective on China's economic strategies and the challenges it faces in navigating the complex global economic landscape.

Jianwei Xu, a Non-resident Fellow at our website and a senior economist at Natixis, Asia Pacific, and Alicia García Herrero, a Senior Fellow at our website, Chief Economist for Asia Pacific at French investment bank Natixis, and an independent Board Member of AGEAS insurance group, are the authors of the article.