China's economy in crisis? Structural challenges of a growth nation
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Prefer Xpert.Digital on GoogleⓘPublished on: April 24, 2025 / Updated on: April 24, 2025 – Author: Konrad Wolfenstein
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Growth with question marks: China's economic figures reveal deep cracks
China's economy is struggling with serious problems: crisis, reforms and global consequences – real estate, deflation and debt
The Chinese economy, long the engine of global growth, is currently undergoing a period of profound challenges. What was initially interpreted as a cyclical slowdown is increasingly manifesting as a structural crisis with far-reaching implications for the global economy. Despite official growth figures confirming the achievement of government targets, signs of a fundamental economic transformation with an uncertain outcome are mounting. The once reliable guarantor of growth is grappling with deflation, a severe real estate crisis, weak domestic consumption, and geopolitical tensions – while at the same time, almost a quarter of Chinese companies are operating at a loss.
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Economic figures in context: Growth with question marks
The Chinese economy grew by 5.2 percent in 2023, narrowly missing the government's official target of "around five percent." At first glance, this figure appears solid, but a closer look reveals a more nuanced picture. Excluding the years of the COVID-19 pandemic, this represents China's weakest economic growth in decades. Economic output rose to approximately 126 trillion yuan (around 16 trillion euros), but experts view the official figures with skepticism.
“Once they’ve set a goal, they’ll achieve it, no matter what,” commented economist Xu Chenggang of Stanford University on the published data. He and other economists point out that “the statistics are usually somewhat embellished” and that independent reconstructions of Chinese GDP result in lower growth rates. Alicia Garcia Herrero, chief economist for Asia Pacific at the French investment bank Natixis, also assumes lower actual growth.
It is noteworthy that the raw growth figures are better than most Chinese people perceive. Thomas Gitzel, chief economist at VP Bank, observes: “There has been no significant improvement in the perceived economic situation.” This discrepancy between statistics and reality points to deeper structural problems.
The drivers of growth
The composition of this growth is particularly striking. Exports alone contributed 1.5 percent to Chinese growth, meaning that domestic demand grew by only 3.5 percent. This export dependence makes the Chinese economy vulnerable to external shocks, especially given the geopolitical tensions with the US.
Structural challenges: An economic model at a turning point
The limits of investment-driven growth
The Chinese economic miracle of recent decades was based on an investment-driven growth model with an exceptionally high investment rate of over 40 percent by international standards. However, this model is increasingly reaching its limits. As the capital stock grows, it is becoming ever more difficult to invest such large sums profitably. The declining returns on investments in public infrastructure and housing clearly demonstrate this trend.
China already boasts the most comprehensive high-speed rail network, countless bridges, and state-of-the-art highways reaching even the most remote corners of the country. Returns on capital are shrinking, and infrastructure needs are largely met in many areas. At the same time, total factor productivity (TFP) in China has been trending downward since at least 2014, indicating fundamental efficiency problems.
Unprofitable companies and overcapacities
It is also alarming that almost a quarter of listed companies in mainland China are currently operating at a loss. Significant overcapacities have built up in some sectors of the manufacturing industry, which are now being exported abroad, causing tensions there.
Guangdong province, the heart of China's manufacturing industry, recorded GDP growth of only 3.9 percent in the first half of 2024, lagging behind the national average of 4.7 percent. This development is particularly worrying given that Guangdong has a strong private sector and is less reliant on government support than other provinces.
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Crisis hotspots in the Chinese economy
The real estate crisis as the Achilles' heel
The real estate sector, which accounts for roughly a quarter of the Chinese economy, has been in deep crisis for over two years. Following the demolition of property developer Evergrande, Country Garden is now also threatened with liquidation. Falling property prices and weak demand are further exacerbating the situation.
The real estate crisis has its origins partly in systemic peculiarities: The communist constitution stipulates that private individuals may not own land, but can only acquire 70-year usage rights from local governments. These governments artificially inflated prices, thereby fueling the real estate bubble.
Despite a lack of alternatives, Chinese households have invested up to three-quarters of their savings in the housing market. According to a Harvard study, over 65 million apartments were already vacant in 2017 – a clear sign of the market overheating.
Deflation: A dangerous downward spiral
China has slipped into deflation. In February 2025, the consumer price index fell by 0.1 percent compared to the previous year, while the producer price index declined by 2.7 percent, continuing its downward trend that began in September 2022. This marks China's fifth deflationary period since the early 2000s.
Deflation poses significant economic risks. While consumers benefit in the short term from falling prices, the expectation of further price declines further stifles consumption. Moreover, deflation puts pressure on corporate profits, which can lead to wage cuts or layoffs – a vicious cycle that would further worsen the economic situation.
Weak domestic consumption and uncertain consumers
The Chinese economy is suffering from persistently weak domestic demand. Consumption has not fully recovered even long after the end of the "zero Covid" measures, and households remain highly uncertain. Rising unemployment, particularly among young people, is further exacerbating this situation.
Youth unemployment is at a record high, although the statistics office has not published specific figures since August 2023. This development is further dampening consumer spending and increasing economic uncertainty.
The debt problem
China's municipalities and banks are massively indebted, threatening the country's financial stability. Experts estimate the debt of local governments at over ten trillion euros. For decades, these governments financed themselves primarily through land sales – a source of revenue that has increasingly dried up due to the real estate crisis.
Huang Yiping, a member of the monetary policy committee of the Chinese central bank, speaks in this context of “deep structural weaknesses” and calls on the political leadership to implement bold reforms. He thus cautiously but firmly contradicts the official line of President Xi Jinping, who merely characterizes the economic problems as a “cyclical slowdown.”.
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Reform pressure in China: Why the growth model is reaching its limits
Foreign trade: both a support and a risk factor
Export dependence in uncertain times
Foreign trade remains a key pillar of the Chinese economy. In the first quarter of 2024, Guangdong province's foreign trade volume reached 2.04 trillion yuan (approximately €259.2 billion), a 12 percent increase compared to the previous year. Exports rose by 9 percent, while imports increased by 17.6 percent.
However, this export dependence also carries significant risks. Weak global demand and increasing trade protectionism are putting pressure on the Chinese export sector. Furthermore, China is struggling with declining profit margins in its export business despite rising export volumes.
The Trump effect and geopolitical tensions
Geopolitical tensions, particularly with the US, pose a growing threat to the Chinese economy. Following Donald Trump's election victory in November 2024, an increase in US import tariffs on goods from China to an average of 40 percent could cost the country around one percent of economic growth in 2025.
Prior to his election, Trump had advocated tariffs of 60 percent on Chinese goods, and after his victory, he announced a flat 10 percent tariff in addition to existing tariffs. This development prompted the Swiss bank UBS to lower its forecast for Chinese economic growth in 2025 from 4.5 percent to approximately 4.0 percent.
Export controls and sanctions lists from the US and China also restrict the options available to export-oriented companies, further increasing economic uncertainty.
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From economic miracle to stagnation: A historic turning point
Reform and opening policies as the foundation for advancement
China's economic rise began with the reform and opening-up policy under Deng Xiaoping, which officially started in 1978 with the "Four Modernisations". Under Deng's leadership, the people's communes were dissolved and replaced by a system in which farmers could once again manage their own farms. Private companies were also allowed to be established in industry and trade, and special economic zones attracted foreign capital and expertise to the country.
According to the World Bank, China's real gross domestic product (GDP) increased 48-fold between 1978 and 2014. In 2010, China overtook Japan to become the world's second-largest economy. This unprecedented economic growth led to a significant rise in living standards, but also to growing inequality and environmental problems.
At the end of the growth model
Today, China faces the challenge of fundamentally transforming its growth model. The model, successful for decades and focused on investment and exports, has largely run its course. Economists like Michael Pettis of the Carnegie Endowment Center argue that this development was foreseeable a decade ago and is not primarily attributable to the policies of President Xi Jinping.
Analysts are increasingly answering the question of whether China could fall into a similar economic stagnation as Japan did in the 1990s. The structural similarities – real estate bubble, overinvestment, demographic change, and deflation – are undeniable.
Future prospects and need for reform
New strategies for sustainable growth
To overcome structural weaknesses in growth and productivity, the Chinese leadership, guided by the economic policy principle of “developing new productive forces,” is increasingly focusing on scientific and technological innovations. By promoting “self-reliance and self-improvement” in science and technology, the aim is to modernize industry and increase total factor productivity.
At the same time, the government is implementing various economic stimulus measures, such as subsidizing the replacement of old vehicles with new electric cars or replacing outdated household electronics. These measures aim to boost domestic consumption and stimulate the economy.
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The need for reform from an expert's perspective
Almost all experts agree that China needs to transform its growth model. EU Trade Commissioner Valdis Dombrovskis recommends that the Chinese government implement a stimulus package to boost consumption. In the long term, China must transition from purely investment- and export-driven growth to consumption-driven growth.
Huang Yiping calls for “comprehensive measures” to stabilize the housing market, emphasizing that merely treating the symptoms is insufficient – the system itself must be reformed. The International Monetary Fund (IMF) also advocates for short-term macroeconomic support and long-term reforms.
An economic power at a crossroads
China's economy is at a crucial turning point. Structural problems—a real estate crisis, deflation, weak domestic consumption, high debt, and declining productivity—demand profound reforms and a reorientation of the growth model. Geopolitical tensions, particularly with the US, further exacerbate these challenges.
The success of this transformation will be crucial not only for China, but for the entire global economy. As the world's second-largest economy and a major trading partner for many countries, China's economic development has global repercussions. The question is no longer whether China needs to change its growth model, but how quickly and effectively it can implement this change – and at what social and political cost.
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