The turning point has long since passed – Why 3 percent growth for China means the end of an era
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Published on: December 12, 2025 / Updated on: December 12, 2025 – Author: Konrad Wolfenstein
The turning point has long since passed – Why 3 percent growth for China means the end of an era – Image: Xpert.Digital
Trapped in its own system: Why Xi Jinping's plan for "new productive forces" cannot succeed
The illusion of perpetual economic boom is crumbling.
No children, no consumers: The demographic time bomb threatening China's dreams of global dominance
The global assumption that China could sustain double-digit economic growth indefinitely was based on a tragic miscalculation. For decades, the Middle Kingdom followed a simple but highly effective recipe: cheap labor, massive borrowing, excessive investment in infrastructure and real estate, and a self-reinforcing export dynamic. This model worked brilliantly as long as there was an unlimited working-age population, unlimited demand for housing, and unlimited external markets for Chinese manufactured goods.
But these very conditions are eroding at an accelerating pace. Between 2000 and 2014, China's gross domestic product increased 48-fold, and labor productivity rose ninefold. But this unprecedented period of catch-up is over. The transition to moderate growth rates in the range of three to four percent is no longer a matter of speculative forecasts, but increasingly a reality. The question that Beijing will soon be unable to avoid is not: Will China grow more slowly? The question is: How will China cope with the fact that its economic model of sustained high-speed growth no longer works?
Official Chinese statistics predict GDP growth of 5.0 percent in 2024—just shy of the targeted 5 percent. But these figures miss the fundamental problem. Prominent Chinese economists like Gao Shanwen of SDIC Securities have publicly questioned the accuracy of this data, speculating that real growth since the pandemic may have been as low as 2 to 3 percent, despite the official figures consistently reporting 5 percent. Independent research organizations like the Rhodium Group estimate China's true growth in 2024 at only 2.4 to 2.8 percent and expect growth of between 3 and 4.5 percent in 2025. If these estimates are accurate—and the underlying analytical methods are transparent and documented—then China is already in the scenario it is trying to avoid: structurally slowed growth.
The economic forecasts for the coming years are unanimously bleak. The German Economic Institute (IW) predicts average growth of 4.4 percent for 2025 and only 4.1 percent for 2026. DZ Bank expects 4.5 percent for 2025 and just 3.4 percent for 2026. Even the most optimistic forecasts don't rule out the possibility that the 5 percent mark will be exceeded again in the foreseeable future. A decade ago, this would have been considered a catastrophe. Today, it's the new "normal" that everyone must prepare for.
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The real estate monster in the house – A crisis without an exit strategy
The Chinese real estate system is not simply a large market; it is the central distribution system for economic dynamism and government revenue. Over the past decade and a half, the real estate sector has become the primary driver of economic growth, at times accounting for up to 30 percent of total growth. The sector has generated millions of jobs, directly and indirectly, accelerated urbanization, and provided local governments with the revenue they desperately needed to finance their policy objectives.
The expansion was debt-financed on a scale that surprised even hardened pessimists. Household mortgage debt soared from about 5 trillion yuan in the first quarter of 2008 to over 50 trillion yuan according to the latest data. Real estate developers like Evergrande, once the paradigm of Chinese success, amassed trillions of yuan in debt. Evergrande alone owed 2.4 trillion yuan—about US$300 billion—by mid-2023 before it ran into trouble.
The trap snapped shut when demand collapsed. Land sales by local governments—one of the country's most important sources of revenue—plummeted. While over 8.7 trillion yuan worth of land was sold in 2021, that figure plummeted to just 2.5 trillion yuan in the first ten months of 2024. Over ten percent of the land on offer failed to find buyers. Prices fell, projects stalled, and consumer confidence collapsed, as over 60 percent of Chinese household wealth is tied up in real estate.
The Chinese leadership recognized the problem and attempted a proactive approach in May 2024 with massive market support. The plan was clear: local governments were to purchase turnkey homes from property developers to alleviate their liquidity problems and stimulate demand. But therein lies the deeper dilemma: if these purchases were made below book value, the developers would suffer massive losses. If they were made above book value, the local governments would be subsidizing the companies. Neither party can afford further financial burdens.
The hidden debt burden is astronomical. While official statistics show a moderate debt-to-GDP ratio for local governments, true estimates are more than double that. Many local governments use off-balance-sheet financing instruments that don't appear in the official figures. Total social financing officially stood at 303 percent of GDP at the end of 2024 – around €40 trillion. Taking hidden liabilities into account, the actual debt-to-GDP ratio is between 330 and 360 percent.
Local governments are responding to their crisis with the only tool at their disposal: issuing bonds like never before. With over 10 trillion yuan in newly issued local bonds, a new annual record has already been set. The total outstanding amount of local government bonds has now reached 54 trillion yuan. Beijing has allowed local governments to restructure a total of 6 trillion yuan of hidden debt within three years. This means telling the market that nothing has actually changed – the debt is simply being structured over longer terms, with lower interest rates, but still existing in the same volume.
This strategy is a classic symptom of structural insolubility. The problem is postponed without being solved. It's the economic equivalent of driving ever faster on a poorly constructed bridge, hoping not to collapse. The efficiency of lending steadily declines: ever larger sums are needed to achieve comparable economic growth.
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The consumer mirage – Why households are spending less and less money
China's central structural problem is a statistical paradox: In one of the world's largest economies, private consumption is remarkably low. Consumption fell from over 63 percent of gross domestic product (GDP) in 2000 to just 53 percent in 2022. By comparison, private consumption in the US accounts for roughly 70 percent of GDP. This means that China is not driving its growth through domestic demand, but rather through government spending, investment, and exports.
The reason is profound psychological and financial uncertainty. A prominent feature of the Chinese economy is an extremely high savings rate—households are hoarding money instead of spending it. This savings rate will become even more pronounced during 2024 and 2025. Surveys by the Chinese central bank show that 64 percent of households want to save more, compared to only 45 percent before the COVID-19 pandemic. Households have become pessimistic about their employment prospects. The number of loss-making private companies has risen sharply in recent years due to overcapacity and cutthroat competition. These firms are unlikely to hire new employees.
The young urban population was long seen as the hope for a consumer boom. But even there, caution, rather than a desire to buy, prevails. Among well-educated young people, saving is common due to high unemployment (official statistics say 3.5 percent, but real estimates are 12 percent or higher), limited job prospects, and the overall bleak economic outlook. The one-child policy, long since ended, continues to leave cultural and financial scars. It solidified the "4-2-1" family structure, in which one young adult supports two parents and four grandparents. This necessitates financial conservatism.
The further decline in property prices exacerbates this through the wealth effect. When households see their largest asset losing value, they reduce their spending plans. Only nine percent of the households surveyed expect house prices to recover soon. Four out of five either expect prices to fall or are completely uncertain.
All short-term government stimulus measures – subsidies, consumer vouchers, incentives – encounter this wall of structural caution. The effect is visible in the short term (individual retail sales figures show an increase), but not sustainable. As soon as the measures end, the normal weak propensity to consume returns. Commerzbank summarizes this precisely: “Given the persistently weak consumer sentiment, we expect the macroeconomic situation to deteriorate again as soon as the temporary measures expire.”
The demographic time bomb – A population in dissolution
Perhaps the most intractable of all Chinese problems is demographics. China is the only major economic power whose population is not growing – it is shrinking. In 2022 and 2023, the absolute population declined. Despite the end of the one-child policy in 2015 and the subsequent introduction of the three-child policy, China has failed to boost its birth rate.
The figures are dramatic. The working-age population (15 to 59 years) is shrinking. In 2023, there were 857.98 million people in this age group – 77 million fewer than in 2013. This number is projected to decrease by approximately a quarter further by 2050. At the same time, the population is aging rapidly. Roughly 22 percent of the population (more than 310 million people) is already 60 years or older. By 2035, this figure could exceed 30 percent.
This is not simply a demographic phenomenon; it is an economic time bomb. A smaller working-age population means fewer taxpayers to support an ever-growing generation of retirees. The already weak social security systems are coming under enormous pressure. On the one hand, spending on pensions, healthcare, and long-term care is expected to skyrocket. On the other hand, the pool of contributors is shrinking.
Older people spend less than younger people. They invest more conservatively. They consume less. This fundamentally changes consumption patterns. An economy whose consumption pyramid is inverted is an economy whose internal dynamics are fundamentally shifting. Exports remain the sole anchor – but China is facing increasing pressure in this area.
Regional disparities are exacerbated by demographics. Wealthy coastal cities like Shanghai, Beijing, and Guangdong concentrate young workers. Central and western provinces such as Sichuan, Hunan, and Heilongjiang experience outmigration and declining birth rates. This intensifies regional inequality and complicates the coordination of reform measures. A unified social security system is hampered by federal gridlock—provinces with shrinking working-age populations cannot and will not pay the same contributions as growing regions.
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China's growth miracle is over: Why productivity is now more important than workforce
Productivity instead of labor – An arithmetic problem
Long-term economic growth is based on a fundamental trio: labor, capital, and productivity. In China, this trio is no longer functioning. The labor force is shrinking – that's inevitable. Capital in the form of debt is exploding – that's increasingly damaging. Productivity, the only remaining lever for growth, is stagnating or declining.
During China's boom period, with growth exceeding 10 percent, less than 2 percentage points of that came from labor force growth. The vast majority was productivity gains through technological catch-up and modernization. China was a fast-moving technology that simply imitated others and then did it better and cheaper. This model was incredibly efficient.
But this catch-up growth has largely run its course. China now produces at global frontier levels in many sectors – there is little left to imitate, only innovations to invent. Total Factor Productivity (TFP) – the measure of genuine productivity gains – has not increased in recent years. An economy financed with debt far beyond its historical capacity is an economy in which new loans generate less new real output. The so-called credit ratio – how much new GDP growth is generated for every trillion dollars of debt issued – has deteriorated dramatically.
Beijing is attempting to solve this problem through massive subsidies for high-tech industries – this is the core of the "New Quality Productive Forces" concept that Xi Jinping has been promoting since 2023. The plan is ambitious: state-led innovation in areas such as battery technology, electric vehicles, renewable energies, semiconductors, and artificial intelligence is intended to unlock new sources of growth, increase productivity, and replace outdated industries.
This is a cleverly conceived strategy—but it has a fundamental flaw. High-tech industries are capital-intensive, not labor-intensive. A new battery factory doesn't create 10,000 jobs like a textile factory—it might create 500 specialized jobs. These industries cannot compensate for the millions of jobs lost in the real estate and construction sectors. Barry Naughton, a leading China expert at the University of California, puts it this way: "The new industries and additional consumption cannot offset the losses in the real estate sector."
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The credibility crisis – When statistics are on trial
An often overlooked but central problem for China is the credibility crisis surrounding its economic data. Gao Shanwen openly stated in 2024 that the official GDP figures might be inaccurate: "We do not know the true figure for China's real growth." Yet there is systematic evidence that the figures are inflated.
One indicator is the inverse correlation between electricity consumption and GDP growth. In the first quarter of 2024, China reported 5.4 percent real growth, but nominal growth was only 4.6 percent. This is impossible in a normal economy—nominal growth should exceed real growth (growth plus inflation). The fact that the opposite is true in China means that China is in a deflationary state. Consumer prices are falling, and corporate profits are falling. This is a sign of overcapacity, not genuine dynamism.
Even more bizarre: Electricity consumption, the physical flow of electricity through the economy, did not rise at the same pace as reported GDP. After six quarters in which the real economy (measured by electricity consumption) was stronger than the statistics, the relationship reversed. GDP is ahead, electricity is lagging behind – a clear sign that the statistically reported value is not supported by physical economic activity.
This is not mere academic speculation. If the real growth figures are 2-3 percent instead of 5 percent – and this is the Rhodium Group hypothesis – then both Beijing and the global economy are playing with a simulation instead of reality.
The structural reform dilemma – caught between market and control
Theoretically, there is a solution to China's problem: genuine structural reforms. These would mean:
First, the privatization or at least the opening of markets to sectors that are still under state control. The financial sector, healthcare, education, telecommunications – many of these areas are still too heavily state-controlled.
Secondly, genuine social security reforms are needed to make the safety net universal and portable. People must feel confident enough to change jobs, take risks, and consume without fear of disaster – something that only works with genuine security. However, China's social security system is fragmented: each province has its own rules. A worker in Shanghai is better insured than one in Hubei. This ties people to their provinces, hinders labor mobility, and harms efficiency.
Thirdly, genuine education reforms are needed to reduce youth unemployment. The official rate is 3.5 percent; real estimates are at least three times higher.
Fourth, local fiscal reforms that reduce dependence on land sales. Local governments must have genuine taxing power, not artificial financing vehicles.
Fifthly, genuine market reforms in state-owned enterprises and their governance to increase efficiency.
But these very reforms are extremely difficult to implement politically under Xi Jinping. For years, his focus has been on ideological control, national security, and geopolitical positioning. Economic autonomy has been reduced. Tech companies have been regulated, fintech has been hampered, and foreign companies have faced increasing restrictions. In the third quarter of 2024, China recorded an outflow of foreign direct investment for the first time since 1998.
Xi is aware that a certain level of economic growth is necessary for legitimacy, employment, and goals such as economic independence. However, his prioritization of security over economic freedom limits reform. The concept of “new productive forces” is an attempt to achieve growth through controlled innovation rather than market liberalization—through state-subsidized industries, not private entrepreneurial dynamism.
This leads to a kind of "war economy," as Barry Naughton calls it. Everything becomes a tool for national objectives. Market logic is disrupted. And in a modern, complex economy, this is precisely what is counterproductive. You can't force semiconductor excellence through regulation; you can't promote innovation through ideology.
The global shockwave effect – When China becomes permanently slow
What does a sustained slowdown in Chinese growth mean for the world? The effects are significant. Research by the International Monetary Fund and the Asian Development Bank shows that a permanent growth shock in China (one percentage point less growth) reduces global growth by about 0.23 percentage points. Growth from 10 to 3 percent translates to a reduction in global growth of about 1.6 percentage points. For a global economy already struggling with weak growth, this is substantial.
Raw material exporters and emerging economies are particularly affected. China has been the engine of global raw material demand – iron ore, copper, coal, oil. Slower growth in China means lower commodity prices and reduced revenues for resource-dependent countries. Asia is also suffering: South Korea, Taiwan, Vietnam, Thailand – all have complex supply chains with China. Weak Chinese growth means weak demand for their imports.
European luxury goods manufacturers and industrial goods producers will be hit hard. For decades, China's middle class was a growth engine for German cars, French cosmetics, and Italian fashion. A consumption scenario in which Chinese people save instead of buying will have a major impact on these industries.
Global trade is becoming more restrictive and politicized. Trump's tariff offensive against China, with rates exceeding 47.5 percent, is hitting an already weakened China. Chinese exports to the US fell by 29 percent in November 2024. This is a redirection of trade flows, not a genuine strengthening. China will try to shift its focus to other markets—Southeast Asia, India, and Belt and Road Initiative countries. This will lead to global trade imbalances and protectionist responses.
Scenarios for 2030 – The range of impossibilities
Experts agree on the general trend – slower growth – but the specific scenarios diverge. Bloomberg has revised its forecasts downwards: Instead of China overtaking the US as the largest economy in the 2030s, this will now happen in the mid-2040s – and then only briefly, before the United States overtakes it again because America is growing faster.
A more optimistic scenario sees China's growth stabilizing at 3.5 percent by 2030. This wouldn't be bad from a global perspective – 3.5 percent is still above the world average. China's sheer size means that even 3.5 percent growth would represent about a third of global growth. This would translate to an economy worth approximately USD 23.9 trillion by 2030, as Premier Li Qiang announced.
A medium scenario envisions stable growth of 3 percent – similar to Japan in its better times after the bubble implosion in 1990. An economy that grows, but not dynamically. A scenario in which new industries create jobs, but not in the quantity left vacant by the real estate sector.
A pessimistic scenario envisions growth below 2 percent if debt burdens escalate, if a banking crisis erupts, or if foreign capital completely withdraws. This would be a shock to global markets similar to the Asian financial crisis of 1997 – but worse, because China is larger.
All these scenarios share one central reality: The China of the 2020s will not be the China of the 2010s. The era of double-digit growth is over. The era of debt-driven investment sprees is over. The economic model on which hundreds of millions of careers, thousands of companies, and global supply chains were built no longer works.
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China's Way Out of the Trap – The Inconvenient Truth
The only realistic way for China to get out of this scenario is a detour that would have to be completed within a generation: a radical transition from an investment-driven to a consumption-driven economy; from state-directed to more market-oriented systems; from export-dependent to domestic-market-oriented; from debt financing to genuine savings value.
These would be genuine structural reforms, not superficial measures. Such a transformation in such a large and complex economy, under conditions of debt, demographics, and geopolitical tensions, is a challenge without historical precedent.
Xi Jinping deliberately chose not to pursue this route. Instead, he seeks to generate growth through controlled innovation investments, strategic sectors, and national champions. This is not an error in analysis, but a conscious prioritization decision: Xi has decided that national security, ideological control, and geopolitical standing are more important than maximum economic growth.
This means China will have to live with 3 percent growth. And a world that had calculated on 10 percent Chinese growth will have to adjust to 3 percent. This is not an economic downturn, but a turning point.
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