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

### Deflation, real estate crash, consumer collapse: Is Beijing's planned economy getting out of control? ### "Lost decades" for China? Why does Beijing now face the same fate as Japan? ### The second China shock is looming: How Beijing is exporting its economic crisis to Germany ### Growth engine sputtering, youth out of work: 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

In the fall of 2025, China's economy is sending deeply contradictory signals, 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: With expected growth of only 4.7 percent, gross domestic product is threatening to miss the official five percent target, retail is stagnating, and the real estate crisis is worsening.

This dramatic gap between booming foreign trade and collapsing domestic demand is no coincidence, but a symptom of a deep structural disease. China's economic model, based on exports, infrastructure investments, and an overheated real estate sector, is exhausted. The export boom is, in fact, a flight forward: 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 country's own population: Private consumption accounts for only around 40 percent of economic output—a figure that is far below the global average and makes the system unstable.

This creates a dangerous dilemma for the political leadership in Beijing. They are under massive pressure to act to achieve a more sustainable, consumption-driven model. But this would require far-reaching and politically risky reforms of the social system and a redistribution of wealth. Given persistent deflation, a ticking debt burden for local governments, and alarmingly high youth unemployment, China is threatened by a Japanese-style stagnation—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 state-planned economies

China's economy finds itself in a dilemma in the third quarter of 2025, revealing fundamental design flaws in its current growth model. According to surveys, gross domestic product is expected 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 recording record exports and has accumulated a trade surplus of $875 billion so far in 2025, domestic demand is collapsing. Retail trade grew by a mere three percent in September, industrial production expanded by only about five percent, and real estate investment continues to decline. This discrepancy between flourishing foreign trade and a stagnating domestic economy reveals the central structural problem: China's consumption currently accounts for only about 40 percent of gross domestic product, 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 coincidence, but the result of decades of economic policy decisions. China's growth model was traditionally based on three pillars: export-oriented industrialization, massive infrastructure investment, and real estate development. All three pillars are now simultaneously showing signs of fatigue. The export boom in 2025 masks fundamental weakness—it results primarily from the desperate attempt by Chinese companies to sell 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 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.

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

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From Mao to Xi: The economic 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 unprecedented economic growth. The opening policy and gradual market liberalization lifted hundreds of millions of people out of poverty and catapulted the country to the second-largest economy in the world. Adjusted for purchasing power, China's gross domestic product is now about 25 percent larger than that of the United States, although these figures are highly disputed, and China's actual economic output may be even higher.

The success was based on a specific development model: China relied on export-oriented industrialization with low labor costs, massive infrastructure investments, and technological catch-up through technology transfer and increasing domestic innovations. Membership in the World Trade Organization from 2001 onward gave this model an additional boost. However, this growth model harbored structural imbalances that were long masked by high growth rates. China's consumption rate remained systematically low, while the 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 investments and real estate development. This response stabilized the global economy in the short term but created enormous problems in the long term.

The debt-financed growth model of the past 15 years 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 circumvented formal debt limits and accumulated an estimated 60 trillion yuan of 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 economic output, 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 whose economic return is often questionable. Local government revenues were largely based on land sales to real estate developers—a system that collapsed with the bursting of the real estate bubble.

Second, the real estate bubble led to systemic risks. At times, the real estate sector accounted for over 20 percent of China's economic output. Real estate developers accumulated extreme debt burdens, sold apartments before they were completed, and used the money 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, new apartment prices fell by 0.31 percent, and second-hand properties by 0.55 percent per month. The crisis has now lasted for over four years, with no reversal in sight.

Third, the overemphasis on investment led to massive overcapacity in numerous industries. With the Made in China 2025 industrial policy initiative, 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, leading to ruinous overcapacity. This is particularly evident 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 absorption capacity of its own power grid and global markets. Similar overcapacity exists in electric vehicles, wind energy, the steel industry, and other sectors. This overcapacity leads to price wars that drive even Chinese manufacturers into losses.

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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, corresponding to annualized growth of approximately 4.4 percent – ​​below the five percent target. Analysts expect only 4.5 to 4.7 percent annual growth for the third quarter. The International Monetary Fund forecasts growth of 4.8 percent overall 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 highly politically sensitive.

The domestic economy is showing broad-based weakness. Retail sales grew by five percent in the first five months of 2025, but only three percent growth is forecast for September. Industrial production expanded by over seven percent in March 2025, but analysts expect growth of only about five percent for September. Investments are developing particularly alarmingly: Real estate investments 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, as China's growth has traditionally been strongly driven by investment.

Deflationary trends are intensifying. Consumer prices fell by 0.4 percent year-on-year in August 2025 – entering negative territory for the first time in three months. Analysts had only expected a decline of 0.2 percent. While consumer prices remained slightly positive in September, deflationary pressures are 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 de facto in a deflationary environment, which is inhibiting consumption as consumers postpone purchases in anticipation of further falling prices.

The labor market is showing considerable tensions, 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. In July, it had already reached 17.8 percent, down from 14.5 percent in June. These dramatic fluctuations and the high level reflect structural problems in the labor market. Graduates are struggling to find work as sectors such as technology, real estate, and education are under pressure. Small and medium-sized enterprises – important 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 stopped publishing youth unemployment figures in 2023 after they reached over 21 percent and later adjusted the methodology.

Despite signs of recovery, consumer confidence remains historically low. Although the Primary Consumer Sentiment Index was higher in October 2025 than in previous months, the consumer climate remains fragile. Several factors are systematically hampering private consumption: First, the real estate crisis is destroying wealth, as residential real estate accounts for the majority of Chinese families' household assets. Falling real estate prices are reducing perceived prosperity and increasing precautionary saving. Second, many households are paying off mortgages early instead of consuming to avoid over-indebtedness. Third, the social safety net is insufficiently developed, forcing precautionary saving. Pension insurance does not adequately cover 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 are creating fears about the future.

A recent reform of compulsory social security contributions has paradoxically exacerbated the situation. Starting in September 2025, all employers will be required to pay social security contributions for all permanent employees – a practice that has often been circumvented. This reform is intended to strengthen the social safety net and rehabilitate pension funds in the long term, but in the short term it places a burden on both employers and employees. Small businesses see their costs rise, and employees receive lower net wages. In a phase of economic weakness, this reform increases pressure on consumption and employment, even though the long-term intention—strengthening social security—is fundamentally correct.

Despite massive government interventions, the real estate sector shows no signs of stabilizing. The government announced measures in May 2024 and repeatedly thereafter: reducing equity requirements for first-time buyers from 20 to 15 percent, lifting lower mortgage interest rate limits, and launching a 300 billion yuan program to purchase unfinished properties for conversion into social housing. In November 2024, China nearly doubled the lending volume on the so-called white list for real estate projects and developers. Financing volumes for unfinished projects were massively increased. Nevertheless, prices continue to fall, and sales are collapsing. The rating agency Fitch describes the market recovery as fragile and dependent on the economy, 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 approach to structural economic problems sheds light on the Chinese situation. The cases of Japan, the United States, and Germany, which represent different development models and crisis responses, are particularly instructive.

After the bursting of its real estate and stock market bubble in 1990/91, Japan experienced three lost decades of low growth and deflation. The parallels to China are obvious: real estate bubble, high debt, demographic change, and deflationary risks. Japan responded with decades of low-interest rate policies, massive public infrastructure investments, and ultimately quantitative easing by the central bank. The government debt ratio exploded to over 250 percent of GDP. Nevertheless, a sustainable escape from the growth trap was not achieved. Only recently has Japan shown more solid growth again, driven by consumer demand and corporate 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. The Japanese experience teaches us that without structural reforms, monetary and fiscal stimulus fizzles out; the way out of deflation and stagnation takes decades; demographic change massively hampers consumption-driven growth.

The United States represents the opposite model: a highly consumption-driven economy in which private consumption expenditures account for approximately two-thirds of GDP. The American economy has shown remarkable resilience since the pandemic. GDP grew by 2.8 percent in the third quarter of 2024, driven primarily by private consumption expenditures. 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 comes at the cost of growth through high levels of debt: Americans' private debt reached a record high of $13.9 trillion at the end of June 2024, and mortgage lending, at $9.4 trillion, exceeded the pre-crisis level of 2008. The total debt-to-GDP ratio in the United States is 351 percent of GDP. US consumers, with their purchasing power, represent 17 percent of global economic output—more than China's entire GDP. This strong consumption supports the global economy, but is fragile in the long term due to high levels of debt. For China, the US model illustrates this: consumption-driven growth requires higher wages, better social security, and a functioning credit market—all areas in which 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, and the IMF expects only 0.2 percent growth for 2025 and 0.9 percent for 2026. Germany suffers from similar problems to China: weak domestic demand, structural problems in key industries (automotive), dependence on exports, and demographic change. The development in trade with China is particularly relevant: German exports to China collapsed 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 particularly dramatic, with exports to China down 36 percent. At the same time, Germany is importing Chinese products at falling prices, while 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 comparison case is emerging economies such as India and Brazil, which rely more heavily on domestic consumption. India is showing impressive growth of 6.6 percent in 2025 and 6.2 percent is forecast for 2026. This growth is based on younger demographics, rising incomes, industrialization, and infrastructure investments. India's development model is shifting from consumption-driven growth to investment-driven growth, while China would have to shift conversely 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 projected to grow significantly faster in 2025 at 4.2 percent, compared to developed countries at 1.6 percent. Rising consumption in emerging markets is a megatrend from which China could benefit as an exporter – if it resolves its overcapacity problems and avoids provoking trade barriers through dumping exports.

The comparative analysis reveals China's predicament: The Japanese scenario of a lost decade threatens if structural reforms fail to materialize. The US model of consumption-driven growth requires profound social and economic transformation, which entails political risks. The German model shows that export orientation is reaching its limits in a fragmented global economy with rising trade barriers. At the same time, China is losing its relative attractiveness compared to other emerging markets 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 encompass several dimensions: economic risks, social disruptions, ecological costs, geopolitical implications, and the question of systemic reform capacity.

At the economic level, the current situation poses multiple dangers. The risk of a Japanese-style deflationary spiral is real. Falling prices hamper consumption and investment, reduce corporate profits, increase real debt burdens, and lead to layoffs – a self-reinforcing downward process. The 35-month period of producer price deflation demonstrates that this process is already well advanced. Second, risks to financial stability are looming due to the high indebtedness of local governments, real estate developers, and companies. The IMF warns that China is on the verge of a debt deflation trap. The indebtedness of LGFVs and local governments is reaching problematic levels. Third, overcapacity could lead to massive company closures, as is already foreseeable in the solar industry. If companies are systematically forced to sell at or below production costs, their very existence is threatened. Fourth, there is a risk of escalating trade conflicts due to China's aggressive export strategy. The West is increasingly responding to Chinese dumping exports with tariffs and trade barriers.

Socially, the crisis harbors considerable potential for conflict. High youth unemployment is creating a disillusioned generation. Almost one in five young people cannot find work, despite often excellent education. This phenomenon – highly qualified graduates without adequate employment – ​​is politically explosive. At the same time, social inequalities are rising. The housing crisis primarily affects the middle class, which has invested its wealth in real estate and is now suffering value losses or sitting on unfinished apartments. The new social security obligations primarily burden low-income earners and small businesses. The inadequate social safety net is forcing precautionary savings and inhibiting consumption. These social tensions could erupt in protests, which would put pressure on the political system.

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

Geopolitically, China's economic model is exacerbating international tensions. The enormous trade surplus of over $875 billion in 2025 so far is provoking trading partners. This surplus does not reflect strength, but rather catastrophic 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 place a massive burden on 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 exacerbating geopolitical tensions.

The key 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 the social safety net, reduce excess capacity, and transform its economic model. However, these reforms require political decisions that violate vested interests and result in short-term growth losses. Strengthening social security requires higher taxes or levies. Reducing excess capacity leads to corporate bankruptcies and job losses. Reducing export dependence reduces revenues for export-oriented industries and regions. Restoring local government finances requires tax reforms and centralization, which threatens regional interests.

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

A structural problem is the dominance of political over economic rationality. President Xi Jinping is placing greater emphasis on security aspects and national self-sufficiency. The Made in China 2025 strategy and the 14th Five-Year Plan emphasize technological self-sufficiency and a focus on the domestic market in the spirit of a dual circulation strategy. This strategy aims to make China less vulnerable to external shocks. However, it risks cementing inefficiencies and stifling innovation. The emphasis on state-directed industrial policy has led to the overcapacity described above. A reversal would require an ideological rethink.

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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 succeeds in 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 incomes. The real estate crisis is stabilized through massive government interventions: purchasing unfinished projects, recapitalizing struggling developers, and converting vacant housing into social housing. Local government debt is restructured through debt restructuring programs and tax reforms. Excess capacity is reduced in a controlled manner through the formation of cartels, 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 ratio gradually rises to 50 percent of GDP, deflation risks are averted, and youth unemployment falls. However, this scenario requires 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 a solution to sustainability issues. Growth slows to 3 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 government debt. This scenario currently appears not unlikely, as Beijing's responses so far have been inadequate. The IMF explicitly warns that China is on the verge of a debt-deflation trap. The risk of Japanization is real.

In a crisis scenario, problems escalate uncontrollably. Possible triggers include the collapse of other 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 asset losses. In this scenario, China slides into recession, the financial system comes under stress, capital flight sets in, and the yuan depreciates sharply. The political leadership responds with authoritarian measures and even stronger state control, which exacerbates 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 leeway to contain the crisis. However, if the crisis escalates uncontrollably, these instruments could be overwhelmed.

The most likely scenario lies between stagnation and reform: China gradually implements stronger stimulus but avoids far-reaching structural reforms. Growth stabilizes at 3.5 to 4 percent annually – below the ambitious targets, but still positive. Deflation risks are contained but not completely eliminated. Structural problems persist and slow long-term growth. Youth unemployment remains high, and the consumption rate increases only slowly. China is undergoing a phase of transition from rapid to moderate growth, similar to other East Asian countries before it. This scenario means that China remains an important growth engine of the global economy, but no longer the dominant one; social stability is maintained, but frustration remains; and geopolitical tensions continue to simmer without escalation or resolution.

Several factors will determine the actual development. First, US trade policy: How much will the trade war escalate? Will 100 percent tariffs actually be imposed on Chinese goods, or will more moderate measures be retained? Second, the Chinese leadership's willingness to reform: Will Xi Jinping succeed in overcoming vested 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 set the course. Third, the development of the real estate sector: Will it stabilize in 2025 as hoped, or will the crisis deepen? Fourth, demographic development: China is aging rapidly, and its workforce is shrinking, structurally limiting growth potential. Fifth, technological breakthroughs: Will China succeed in becoming a technological leader in future fields such as AI, which could generate new growth?

A 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 stagnating China means weaker global growth, as the current growth engine is no longer present. At the same time, other emerging markets—especially 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, on the one hand, declining exports, and, on the other, relief from competitive pressure from dumping Chinese exports.

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Strategic implications: Between reform pressure and political paralysis

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

The key insight for political decision-makers in China is this: the current growth model is exhausted, and a transition to consumption-driven growth is inevitable. The alternative is creeping Japanization, 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 pension insurance, healthcare, and unemployment benefits; tax reforms to finance social services and the restructuring of local government finances; redistribution of income and wealth to strengthen mass purchasing power; liberalization of the financial sector to improve capital allocation; reduction of excess capacity through controlled market consolidation; reorientation of industrial policy from quantitative expansion to qualitative innovation; 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 failed due to a lack of political will and vested interests.

For business leaders in China and internationally, the days of double-digit Chinese growth rates are over; moderate expansion of three to four percent is the new normal. Strategies must adapt. 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 wars in many industries are unsustainable. International companies need to diversify away from dependence on China. This applies to both sales markets and supply chains. China remains important, but should no longer be the dominant pillar. The mantra "In China, for China" is gaining ground: 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 such as Alibaba, JD.com, and PDD offer potentially attractive entry opportunities at low valuations. If the hoped-for economic 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 appetite can invest selectively, while short-term investors should proceed with caution. Diversification into other emerging markets—especially India—seems sensible. The consumption trend in emerging markets is a robust megatrend, but China is not the only one, and may no longer be the most attractive beneficiary.

This presents a dilemma for European and German economic policy. On the one hand, China is the most important trading partner with enormous interdependencies. On the other hand, Chinese overcapacities and dumping exports are destabilizing European industries. A robust trade policy is required: enforcing fair competition conditions, protecting critical industries through tariffs where necessary, but avoiding comprehensive 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 with other emerging markets is strategically imperative.

The stakes are high for the global economic order. An escalating trade war between the US and China is fragmenting the global economy into blocs and reducing global welfare. The WTO's multilateral trading system is already severely damaged, and further deglobalization threatens. At the same time, China's problems demonstrate that state-directed growth is reaching its limits and leading to inefficiencies. The market economy with rules-based free trade remains superior but needs further development to curb unfair practices.

The long-term significance of China's economic crisis goes beyond economic aspects. It concerns the question of whether the Chinese model of authoritarian capitalism can be successful in the long term. The current crisis points to the structural limits of this model: misallocation due to state control, a lack of consumer rights and social security that inhibits consumption, political priorities over economic rationality, and a lack of flexibility in adapting to changing conditions. Whether China can overcome these limits 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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