China | Beijing's dilemma between export boom and domestic market stagnation: Structural export dependency as a growth trap

### Deflation, real estate crash, consumer collapse: Is Beijing's planned economy spiraling out of control? ### "Lost decades" for China? Why Beijing now faces Japan's fate ### The second China shock is rolling in: How Beijing is exporting its economic crisis to Germany ### Growth engine sputtering, youth without jobs: Is China heading for a social explosion? ###

Trade surplus versus weak consumption: China's structural problem – China between record trade and collapse of domestic demand

China's economy is sending profoundly contradictory signals in the fall of 2025, revealing a fundamental crisis in its decades-long successful growth model. While the country is breaking export records with a trade surplus of $875 billion, the domestic economy is collapsing: Gross domestic product is threatening to miss the official five percent target with expected growth of only 4.7 percent, retail sales are stagnating, and the real estate crisis is worsening.

This dramatic gap between booming foreign trade and collapsing domestic demand is no accident, but rather a symptom of a deep structural illness. China's economic model, based on exports, infrastructure investment, and an overheated real estate sector, is exhausted. The export boom is, in reality, a desperate attempt to escape: companies are flooding global markets with cheap products to reduce their massive overcapacities, thereby exporting domestic deflation. The core problem lies in the chronically weak purchasing power of the Chinese population: private consumption accounts for only around 40 percent of economic output—a figure far below the global average, which undermines the system's stability.

This creates a dangerous dilemma for the political leadership in Beijing. It is under immense pressure to transition to a more sustainable, consumption-driven model. However, this would require far-reaching and politically risky reforms of the social welfare system and a redistribution of wealth. Given persistent deflation, a ticking time bomb of debt for local governments, and alarmingly high youth unemployment, China is threatened with a period of stagnation modeled on Japan – with far-reaching consequences for the global economic order.

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When economic data falls, political pressure to act increases – a capitalist truism that also applies to centrally planned economies

China's economy found itself in a bind in the third quarter of 2025, exposing fundamental design flaws in its existing growth model. According to surveys, gross domestic product (GDP) is projected to expand by only 4.7 percent year-on-year – the weakest figure in twelve months and well below the target of five percent. This slowdown is occurring in a paradoxical environment: While China is posting record exports and has accumulated a trade surplus of $875 billion so far in 2025, domestic demand is collapsing. Retail sales grew by just three percent in September, industrial production expanded by only about five percent, and real estate investment continues to decline. This discrepancy between booming foreign trade and a stagnating domestic economy reveals the central structural problem: China's consumption currently accounts for only about 40 percent of GDP, compared to a global average of 56 percent. In developed economies such as the USA, the share of consumption in GDP is over 65 percent, and in Japan and South Korea it is also significantly higher than in China.

This structural imbalance is no accident, but rather the result of decades of economic policy decisions. The Chinese growth model has traditionally rested on three pillars: export-oriented industrialization, massive infrastructure investment, and real estate development. All three pillars are now showing signs of fatigue simultaneously. The export boom of 2025 masks the fundamental weakness – it stems primarily from the desperate attempt by Chinese companies to offload excess capacity on global markets while domestic demand collapses. China's trade surplus reached a record high of $586 billion in the first half of 2025, but this success reflects not economic strength, but rather catastrophic domestic demand. The People's Republic is exporting its deflationary tendencies, as producer prices have been falling for 35 months and the average price of Chinese exports is declining.

The political decision-makers in Beijing are thus faced with a fundamental dilemma: the existing growth model is exhausted, yet the transition to a consumption-driven economic model based on Western examples requires far-reaching structural reforms that carry political risks. The latest economic data from October 2025 massively increases the pressure on the government. Analysts unanimously emphasize that without substantial stimulus measures to boost domestic consumption, the five percent growth target will be missed. The Politburo of the Communist Party is expected to convene in October to discuss the 15th Five-Year Plan – a meeting of paramount importance given the current situation. The expectation in the financial markets is clear: additional stimulus measures are only a matter of time. However, previous stimulus packages have been half-hearted and have systematically failed to meet expectations.

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From Mao to Xi: The economic policy genealogy of the current crisis

The roots of today's economic crisis reach far back into the transformation history of the People's Republic. After the death of Mao Zedong in 1976 and the beginning of the reform era under Deng Xiaoping in 1978, China experienced an unprecedented economic rise. The opening-up policy and gradual market liberalization lifted hundreds of millions of people out of poverty and catapulted the country to become the world's second-largest economy. China's gross domestic product, adjusted for purchasing power parity, is now about 25 percent larger than that of the USA, although these figures are quite controversial and China's actual economic output may be even higher.

China's success was based on a specific development model: export-oriented industrialization with low labor costs, massive infrastructure investments, and a technological catch-up process through technology transfer and increasingly domestic innovation. Membership in the World Trade Organization from 2001 onward gave this model an additional boost. However, this growth model contained structural imbalances that were long masked by high growth rates. China's consumption rate remained systematically low, while its investment rate climbed to unsustainable levels. After the global financial crisis of 2008/2009, China responded with a massive economic stimulus program that focused primarily on infrastructure investment and real estate development. This response stabilized the global economy in the short term but created enormous problems in the long run.

The debt-financed growth model of the past 15 years has led to several structural distortions. First, the debt of local governments and their so-called Local Government Financing Vehicles (LGFVs) exploded. These quasi-governmental platforms circumvent formal debt limits and accumulated an estimated 60 trillion yuan in debt by the end of 2024—in addition to official local government debt of 48 trillion yuan. Total local government debt reached 92 trillion yuan, or 76 percent of GDP, compared to 62.2 percent in 2019. The International Monetary Fund estimates LGFV debt for 2023 at nine trillion dollars. This debt was primarily used for infrastructure projects, the economic returns of which are often questionable. Local government revenues were largely based on land sales to real estate developers—a system that collapsed with the bursting of the housing bubble.

Secondly, the real estate bubble led to systemic risks. At one point, the real estate sector accounted for over 20 percent of China's economic output. Real estate developers accumulated extreme debt burdens, selling apartments before they were completed and using the proceeds to finance further projects – a classic Ponzi scheme. When the government intervened with regulations in 2020 to limit excessive debt, the system collapsed. Evergrande, Country Garden, and around 75 percent of the largest developers from 2020 are now insolvent. An estimated 20 million unfinished apartments exist nationwide, buyers have stopped payments, and real estate prices have been falling continuously for years. In July 2025, prices for newly built apartments fell by 0.31 percent per month, while prices for existing properties fell by 0.55 percent per month. The crisis has now lasted for over four years with no end in sight.

Third, the overemphasis on investment led to massive overcapacities in numerous industries. With the industrial policy initiative "Made in China 2025," launched in 2015, Beijing aimed to transform the country into a leading technology nation. The strategy targeted self-sufficiency rates of 70 percent for core materials and components in key industries by 2025. Provinces and cities implemented these targets with enormous subsidies – often without coordination, resulting in ruinous overcapacities. This is particularly dramatic in the solar industry: In 2023 alone, China installed 216 gigawatts of solar capacity – fifteen times that of Germany. Chinese solar production far exceeds the capacity of its own electricity grid and global markets. Similar overcapacities exist in electric vehicles, wind energy, the steel industry, and other sectors. These overcapacities are leading to price wars that are even pushing Chinese manufacturers into the red.

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Anatomy of an economic crisis: Deflation, unemployment and loss of confidence

China's current economic situation can be precisely characterized by several quantitative and qualitative indicators. GDP growth slowed to 1.1 percent in the second quarter of 2025 compared to the previous quarter, which corresponds to annualized growth of approximately 4.4 percent – ​​below the five percent target. Analysts expect annual growth of only 4.5 to 4.7 percent for the third quarter. The International Monetary Fund forecasts overall growth of 4.8 percent for 2025 and only 4.2 percent for 2026. Some forecasts even predict only 4.4 percent for 2025. This puts China at risk of missing its official growth target, which would be politically highly sensitive.

Domestic demand is showing widespread weakness. Retail sales grew by five percent in the first five months of 2025, but growth of only three percent is forecast for September. Industrial production expanded by over seven percent in March 2025, but analysts expect growth of only around five percent for September. Investment is developing particularly alarmingly: real estate investment shrank by twelve percent in the first seven months of 2024, and overall investment activity has stagnated so far in 2025. This weakness in investment is remarkable, given that China has traditionally experienced strong investment-driven growth.

Deflationary tendencies are intensifying. Consumer prices fell by 0.4 percent year-on-year in August 2025 – the first time in three months that they have been negative. Analysts had only expected a decline of 0.2 percent. While consumer prices remained slightly positive in September, the deflationary pressure is unmistakable. Producer prices are developing even more dramatically: they have been falling for 35 consecutive months. In August, they fell by 2.9 percent, and in September by 2.3 percent. This persistent producer deflation reflects overcapacity and weak demand. China is effectively in a deflationary environment, which is dampening consumption as consumers postpone purchases in anticipation of further price declines.

The labor market is showing significant strain, particularly among young people. Youth unemployment for 16- to 24-year-olds (excluding students) rose to 18.9 percent in August 2025 – the highest level since December 2023. It had already reached 17.8 percent in July, after standing at 14.5 percent in June. These dramatic fluctuations and the high level reflect structural problems in the labor market. Graduates are finding it difficult to secure employment as sectors such as technology, real estate, and education are under pressure. Small and medium-sized enterprises – key employers of young people – are struggling with tight financing conditions. The overall unemployment rate in urban areas rose to 5.3 percent in August. The government temporarily suspended the publication of youth unemployment figures in 2023 after they exceeded 21 percent and subsequently adjusted the methodology.

Consumer confidence remains historically low despite signs of recovery. While the Primary Consumer Sentiment Index was higher in October 2025 than in previous months, the consumer climate is fragile. Several factors are systematically hindering private consumption: First, the housing crisis is eroding wealth, as residential real estate constitutes the majority of household assets for Chinese families. Falling property prices diminish perceived prosperity and increase precautionary saving. Second, many households are paying off mortgages early instead of consuming to avoid over-indebtedness. Third, the social safety net is inadequate, forcing precautionary saving. Pensions do not provide sufficient coverage for all segments of the population, healthcare requires substantial co-payments, and unemployment insurance and social assistance remain rudimentary. Fourth, high youth unemployment and precarious employment create anxieties about the future.

A recent reform of mandatory social security contributions is paradoxically exacerbating the situation. From September 2025, all employers will be required to pay social security contributions for all their permanent employees – a practice that has often been circumvented until now. While this reform is intended to strengthen the social safety net and rehabilitate pension funds in the long term, it places a burden on both employers and employees in the short term. Small businesses face rising costs, and employees receive lower net wages. During a period of economic weakness, this reform intensifies the pressure on consumption and employment, even though the long-term intention – strengthening social security – is fundamentally sound.

Despite massive government intervention, the real estate sector shows no signs of stabilization. In May 2024, and repeatedly since, the government announced measures including a reduction in equity requirements for first-time buyers from 20 to 15 percent, the removal of minimum mortgage interest rates, and a 300 billion yuan program to purchase unfinished properties for conversion into social housing. In November 2024, China nearly doubled the loan volume on the so-called "white list" for real estate projects and developers. Financing for unfinished projects was massively increased. Nevertheless, prices continue to fall, and sales are collapsing. The rating agency Fitch describes the market recovery as fragile and dependent on economic activity, employment, and household income—all weakened factors. Nomura economists warn of an impending demand crisis in the second half of the year.

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Between stagnation and stimulus: How different systems react to growth crises

A comparative look at other economies and their handling of structural economic problems sheds light on the Chinese situation. The cases of Japan, the USA, and Germany are particularly instructive, as they represent different development models and crisis responses.

After its real estate and stock market bubble burst in 1990/91, Japan endured three lost decades of low growth and deflation. The parallels to China are obvious: a real estate bubble, high debt, demographic change, and deflationary risks. Japan responded with decades of low interest rates, massive public infrastructure investment, and finally, quantitative easing by the central bank. The debt-to-GDP ratio exploded to over 250 percent. Nevertheless, a sustainable escape from the growth trap failed to materialize. Only recently has Japan shown more solid growth, driven by consumer demand and business investment. GDP grew by an annualized 2.2 percent in the second quarter of 2025. This success is based on structural labor market reforms, rising wages, and improved consumer confidence. Japanese experience teaches us that without structural reforms, monetary and fiscal stimuli are ineffective; escaping deflation and stagnation takes decades; and demographic change severely hinders consumption-driven growth.

The US represents the opposite model: a highly consumption-driven economy in which private consumption accounts for roughly two-thirds of GDP. The American economy has demonstrated remarkable resilience since the pandemic. GDP grew by 2.8 percent in the third quarter of 2024, primarily driven by private consumption. This strong consumption is based on several factors: relatively high real wages, a comprehensive social safety net including unemployment insurance, a developed credit market, and wealth effects from rising stock and real estate prices. However, this model achieves growth at the cost of high debt: American private debt reached a record high of $13.9 trillion at the end of June 2024, and mortgage loans, at $9.4 trillion, exceeded the pre-crisis level of 2008. The total US debt-to-GDP ratio stands at 351 percent. US consumers, with their purchasing power, represent 17 percent of global economic output – more than the entire GDP of China. This strong consumer spending supports the global economy, but is fragile in the long term due to high levels of debt. The US model illustrates this for China: consumption-driven growth requires higher wages, better social security, and a functioning credit market – all areas where China has some catching up to do.

Germany, in turn, represents an export-oriented model similar to China's, albeit with a significantly higher consumption rate. The German economy has largely stagnated since 2023, with the IMF forecasting growth of only 0.2 percent for 2025 and 0.9 percent for 2026. Germany suffers from similar problems to China: weak domestic demand, structural issues in key industries (automotive), dependence on exports, and demographic change. The development of trade with China is particularly relevant: German exports to China plummeted by 14.2 percent in the first five months of 2025, while imports from China rose by ten percent. The losses in the automotive industry are especially dramatic, with exports to China down 36 percent. At the same time, Germany is importing Chinese products at falling prices – China is exporting its deflation. This development demonstrates that China's overcapacity and aggressive export strategy are destabilizing trading partners; the second China shock is hitting developed industrial nations hard.

Another interesting case study is emerging economies like India or Brazil, which rely more heavily on domestic consumption. India is showing impressive growth of 6.6 percent in 2025 and 6.2 percent is projected for 2026. This growth is based on younger demographics, rising incomes, industrialization, and infrastructure investment. India's development model is shifting from consumption-driven to investment-driven growth, while China, conversely, would have to shift from investment to consumption. India's demographic dividend—a young, growing population—stands in stark contrast to China's aging society. Emerging economies as a whole are growing significantly faster in 2025, at 4.2 percent, than developed countries at 1.6 percent. Rising consumption in emerging markets is a megatrend from which China, as an exporter, could benefit—provided it resolves its overcapacity problems and avoids creating trade barriers through dumping exports.

The comparative analysis reveals China's dilemma: The Japanese scenario of a lost decade looms if structural reforms fail to materialize. The US model of consumption-driven growth requires profound social and economic transformation, which carries political risks. The German model demonstrates that export orientation is reaching its limits in a fragmented global economy with increasing trade barriers. At the same time, China is losing relative attractiveness compared to other emerging economies as an investment location and growth engine.

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Critical assessment: Structural obstacles, systemic risks and ideological barriers

A critical assessment of the Chinese economic situation must include several dimensions: economic risks, social disruptions, environmental costs, geopolitical implications, and the question of systemic reform capacity.

On an economic level, the current situation poses multiple dangers. The risk of a deflationary spiral along the lines of Japan's is real. Falling prices stifle consumption and investment, reduce corporate profits, increase real debt burdens, and lead to layoffs—a self-reinforcing downward process. Producer price deflation for the past 35 months demonstrates that this process is already well advanced. Second, the high levels of debt held by local governments, real estate developers, and corporations pose risks to financial stability. The IMF warns that China is on the verge of a debt-deflation trap. The debt levels of LGFVs and local governments are reaching problematic levels. Third, overcapacity could lead to massive company closures, as is already foreseeable in the solar industry. If companies are forced to sell systematically at or below production costs, their very existence is threatened. Fourth, China's aggressive export strategy carries the risk of escalating trade conflicts. The West is increasingly responding to Chinese dumping exports with tariffs and trade barriers.

The crisis harbors considerable potential for social conflict. High youth unemployment is creating a disillusioned generation. Almost one in five young people cannot find employment, despite often having excellent qualifications. This phenomenon—highly qualified academics without adequate employment—is politically explosive. At the same time, social inequalities are increasing. The housing crisis primarily affects the middle class, who have invested their assets in real estate and are now suffering losses in value or stuck with unfinished properties. The new social security obligations disproportionately burden low-income earners and small businesses. The inadequate social safety net forces precautionary saving and inhibits consumption. These social tensions could erupt in protests, which would put the political system under pressure.

The ecological consequences are ambivalent. On the one hand, China's massive expansion of renewable energies is leading to global progress in decarbonization. The overcapacities in solar and wind power are reducing costs worldwide and accelerating the energy transition. On the other hand, these overcapacities result from wasteful, uncoordinated industrial policies. Resources are allocated inefficiently, and environmental impacts from production are considerable. The overproduction of electric cars is leading to price wars that jeopardize quality and sustainability. Moreover, China's energy supply remains primarily based on coal, which counteracts climate protection efforts.

Geopolitically, China's economic model is exacerbating international tensions. The enormous trade surplus of over $875 billion so far in 2025 is provoking trading partners. This surplus does not reflect strength, but rather disastrous domestic demand and a desperate export strategy. China is flooding markets with subsidized products, threatening domestic industries. The reactions are predictable: The EU is imposing tariffs on Chinese electric cars, and the US is threatening massive tariff increases. An escalating trade war between the US and China would severely burden the global economy. The IMF explicitly warns against this scenario. Furthermore, China is increasingly using its monopoly position in critical raw materials and technologies as a strategic weapon. Export controls on rare earths, lithium, graphite, and other materials are intensifying geopolitical tensions.

The central question is whether the Chinese system is capable of the necessary structural reforms. The consensus among economists is clear: China must strengthen domestic consumption, expand its social safety net, reduce overcapacity, and transform its economic model. However, these reforms require political decisions that infringe upon special interests and will lead to short-term losses in growth. Strengthening social security necessitates higher taxes or levies. Reducing overcapacity will result in bankruptcies and job losses. Reducing export dependency will diminish the revenues of export-oriented industries and regions. Consolidating local government finances requires tax reforms and centralization, which threatens regional interests.

So far, the reform efforts have shown little impact. The 10 trillion yuan stimulus package announced in November 2024 focused primarily on resolving local government debt, not on stimulating consumption. Concrete figures on consumption promotion were lacking. The measures had a stabilizing rather than growth-promoting effect. In December 2024, the Politburo announced a more proactive fiscal policy and moderately loose monetary policy for 2025 – the most aggressive stimulus tone in ten years. However, implementation remains uncertain. Announcements to date have systematically disappointed due to a lack of concrete measures and figures. The focus on stimulating consumption as a top priority, announced in March 2025, has not yet been substantially implemented. The 300 billion yuan planned for consumption subsidies in 2025 seems modest in light of an economic output of over 18 trillion dollars.

A structural problem is the dominance of political over economic rationality. President Xi Jinping increasingly emphasizes security aspects and national self-sufficiency. The Made in China 2025 strategy and the 14th Five-Year Plan emphasize technological self-sufficiency and domestic market orientation in line with a Dual Circulation Strategy. This strategy aims to make China less vulnerable to external shocks. However, it risks entrenching inefficiencies and stifling innovation. The emphasis on state-directed industrial policy has led to the overcapacities described. A reversal of this approach would require an ideological shift.

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Between controlled change and creeping Japanization

The development paths of the Chinese economy in the coming years can be outlined in several scenarios, which are based on different assumptions about willingness to reform and external factors.

In the optimistic reform scenario, China achieves a gradual transition to a consumption-driven growth model. The government implements substantial consumption stimuli: direct transfer payments to households, expansion of the pension system, improved healthcare, and tax relief for middle-income earners. The real estate crisis is stabilized through massive state intervention: the purchase of unfinished projects, the recapitalization of struggling developers, and the conversion of vacant housing into social housing. Local government debt is reduced through debt restructuring programs and tax reforms. Overcapacity is systematically reduced through cartel formation, production restrictions, and mergers. Trade conflicts with the West are defused through negotiations. In this scenario, growth stabilizes at four to 4.5 percent annually until 2030, the consumption rate gradually rises to 50 percent of GDP, deflationary risks are averted, and youth unemployment falls. However, this scenario requires the political will for far-reaching reforms, which Beijing has not yet demonstrated.

In the pessimistic stagnation scenario, China remains trapped between insufficient stimulus and a lack of structural reforms. Consumption stimulus remains half-hearted, the structural problems of the real estate sector remain unresolved, deflationary tendencies intensify, and debt continues to rise without addressing sustainability issues. Growth slows to three to 3.5 percent annually, deflation becomes chronic, youth unemployment remains high, and social tensions increase. China is going through a phase similar to Japan's lost decades: low growth, deflation, demographic change, and high public debt. This scenario currently seems quite plausible, given Beijing's inadequate responses to date. The IMF explicitly warns that China is on the verge of a debt-deflation trap. The risk of Japanification is real.

In the crisis scenario, problems escalate uncontrollably. A possible trigger could be the collapse of further large real estate developers with contagion effects on the financial system, default by local governments or LGFVs, an escalating trade war with massive US tariffs and Chinese countermeasures, and social unrest due to high unemployment and wealth losses. In this scenario, China slips into a recession, the financial system comes under stress, capital flight begins, and the yuan depreciates sharply. The political leadership reacts with authoritarian measures and even stronger state intervention, exacerbating the economic problems. This scenario is less likely than the stagnation scenario, but cannot be ruled out. China's high foreign exchange reserves of over three trillion dollars, capital controls, and state control over the banking system give the government room to maneuver in containing the crisis. However, these instruments could be overwhelmed in the event of uncontrollable escalation.

The most likely scenario lies between stagnation and reform: China gradually implements stronger stimulus measures but avoids sweeping structural reforms. Growth stabilizes at 3.5 to 4 percent annually—below ambitious targets, but positive. Deflationary risks are contained but not entirely eliminated. Structural problems persist and hinder long-term growth. Youth unemployment remains elevated, and the consumption rate rises only slowly. China undergoes a transition from rapid to moderate growth, similar to other East Asian countries before it. This scenario means: China remains an important engine of global economic growth, but no longer the dominant one; social stability is maintained, but frustration persists; geopolitical tensions continue to simmer without escalation or resolution.

Several factors will determine the actual development. First, US trade policy: How far will the trade war escalate? Will tariffs actually be imposed on Chinese goods, or will more moderate measures be implemented? Second, the Chinese leadership's willingness to reform: Will Xi Jinping succeed in overcoming special interests and implementing structural reforms? The Fourth Plenum of the Central Committee in October 2025 and the adoption of the 15th Five-Year Plan in 2026 will be crucial. Third, the development of the real estate sector: Will it stabilize in 2025 as hoped, or will the crisis deepen? Fourth, demographic trends: China is aging rapidly, and the working-age population is shrinking, which structurally limits growth potential. Fifth, technological breakthroughs: Will China succeed in achieving technological leadership in future fields such as AI, which could generate new growth?

Potential disruption could come from outside: A global recession would severely impact China's exports. An escalation in the Taiwan conflict would lead to sanctions and economic isolation. A collapse of global trade due to deglobalizing protectionism would hit export-oriented economies like China hard. Conversely, de-escalation with the US and successful diversification into new export markets—Africa, Southeast Asia, Latin America—could stabilize China's position.

The long-term implications for the global economy are significant. A stagnant China means weaker global growth, as its primary engine of growth falters. At the same time, other emerging economies—particularly India—could gain in importance. Global supply chains are diversifying away from China, creating inefficiencies but increasing resilience. The trade war is fragmenting the global economy into blocs, negating the welfare gains of free trade. For Europe and Germany, China's weakness means both declining exports and relief from competitive pressure caused by Chinese dumping exports.

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Strategic implications: Between the need for reform and political paralysis

The analysis of the Chinese economic crisis leads to several key findings with far-reaching implications for different actors.

For political decision-makers in China, the central insight is this: the existing growth model is exhausted, and a transition to consumption-driven growth is inevitable. The alternative is a gradual Japanification with lost decades of low growth rates. This transition requires far-reaching structural reforms that are painful in the short term but essential in the long term. Specifically, this means: a massive expansion of the social safety net, including universal pensions, healthcare, and unemployment benefits; tax reforms to finance social services and consolidate local government finances; redistribution of income and wealth to strengthen mass purchasing power; liberalization of the financial sector to improve capital allocation; reduction of overcapacity through controlled market consolidation; a reorientation of industrial policy from quantitative expansion to qualitative innovation; and de-escalation of the trade war through negotiations and the elimination of unfair trade practices. This reform agenda is well-known, but its implementation has so far been hampered by a lack of political will and vested interests.

For business leaders in China and internationally, the era of double-digit Chinese growth rates is over; moderate expansion of three to four percent is the new normal. Strategies must be adapted. For Chinese companies, this means focusing on the domestic market instead of export dependence, quality instead of quantity, innovation instead of imitation, and profitability instead of chasing market share. The ruinous price war in many sectors is unsustainable. For international companies, diversification away from dependence on China is essential. This applies to sales markets as well as supply chains. China remains important, but should no longer be the dominant pillar. The mantra "In China, for China" is gaining traction: Production for the Chinese market should increasingly take place locally, while other regions serve as production sites for global markets.

For investors, the valuation is ambivalent. Chinese stocks like Alibaba, JD.com, and PDD offer potentially attractive entry points at low valuations. If the hoped-for stimulus packages materialize, significant price increases could follow. However, uncertainty is high, and disappointing economic data and insufficient stimulus could lead to further losses. Long-term investors with a risk tolerance can invest selectively, while short-term investors should be cautious. Diversification into other emerging markets—particularly India—seems sensible. The consumer spending trend in emerging markets is a robust megatrend, but China is not the only, and perhaps no longer the most attractive, beneficiary.

European and German economic policy faces a dilemma. On the one hand, China is the most important trading partner, with enormous interconnections. On the other hand, Chinese overcapacity and dumping exports are destabilizing European industries. A robust trade policy is needed: enforcing fair competition, protecting critical industries through tariffs where necessary, but avoiding sweeping protectionism. At the same time, Europe should strengthen its own competitiveness through innovation, investment, and structural reforms. Dependence on China for critical technologies and raw materials must be reduced. Diversifying trade relations to other emerging economies is strategically essential.

Much is at stake for the global economic order. An escalating trade war between the US and China is fragmenting the world economy into blocs and reducing global prosperity. The WTO's multilateral trading system is already severely damaged, and further deglobalization is looming. At the same time, China's problems demonstrate that state-directed growth has its limits and leads to inefficiencies. The market economy with rules-based free trade remains superior, but requires further development to curb unfair practices.

The long-term significance of China's economic crisis extends beyond purely economic aspects. It raises the question of whether the Chinese model of authoritarian capitalism can be successful in the long run. The current crisis points to structural limitations of this model: misallocation of resources through state control, a lack of consumer rights and social security that stifles consumption, political priorities over economic rationality, and a lack of flexibility in adapting to changing conditions. Whether China can overcome these limitations through reform within the existing system, or whether more fundamental changes are necessary, is the crucial question for the coming years. The answer to this question will determine not only China's economic future, but also the geopolitical balance of power and the attractiveness of different economic and social models worldwide.

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