“Workbench of the World” - China's economic transformation: The limits of the export model and the stony path to the inland economy - Image: Xpert.digital
China's economic miracle before the end: Why the workbench of the world no longer works
Structural change in an economic power - from the workbench to the consumer market: China's difficult transformation process
The Chinese economy is at a historic turning point. After decades of export -oriented growth, the proven model of the “workbench of the world” reaches its natural limits. The structural challenges with which the People's Republic is faced with are complex and profound. While China can already show impressive successes in individual future industries, the basic transformation towards a consumer -driven economy remains a complex and lengthy undertaking.
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The structural limits of the export model
China has systematically expanded its position as a global production location for decades and has carried out impressive industrialization. Export orientation was the central pillar of this growth model and enabled the country to develop into the second largest economy in the world. But this strategy now shows significant signs of fatigue.
The dependence on external markets is dramatically high today. In 2024, export alone contributed 1.5 percentage points to the entire economic growth, which means that about 30 percent of growth was generated by external demand. China last experienced such a high export dependency in the 1990s. This development makes the country extremely vulnerable to international trade conflicts and economic fluctuations in the customer countries.
The global markets have largely reached their absorption capacity for many product categories. As a large economy, China rely on other countries ready and able to import Chinese goods. But this willingness disappears. International tariffs and protectionist measures threaten important sales markets. The Trump administration has already announced that the import tariffs to Chinese goods to an average of 40 percent, which could cost China 2025 around one percent economic growth.
At the same time, the cost -like advantages of China have reduced themselves drastically. The increasing scarcity of workers and demographic change have increased wages significantly. The former cost advantages that China made an attractive production location disappear continuously. Young, well -trained workers demand higher wages and better working conditions, which undermines competitiveness in labor -intensive industries.
Massive overcapacity as a structural problem
One of the most serious challenges is the enormous overcapacity in state -funded future industries. The figures are hardly imaginable in their dimension: China's production capacity for electric cars should increase to 36 million vehicles by 2025, while only 14 million sales are forecast. This corresponds to an excess of 20 million units - more than the entire annual car production in Europe.
These overcapacity are not the result of market mechanisms, but state planned economy. Each province wanted to have at least its own electric car brand, which led to a real explosion of the manufacturer's number. There are currently around 100 to 150 Chinese brands that actually produce cars, while a total of around 300 brands are registered, most of which only exist on paper.
The consequences of this overproduction are devastating. A brutal price war has been used that drives even established manufacturers to the edge of the ruin. Chinese car manufacturers pay their suppliers on average after 182 days, while western manufacturers usually pay after one to one and a half months. These payment delays serve as hidden financing and show the precarious financial situation of many companies.
The situation is also dramatic in the area of traditional combustion engines. China has more than 100 factories with a production capacity of almost 40 million petrol cars per year-about twice as many as people want to buy in China. Dozens of factories for petrol -powered vehicles hardly run or have already been closed. The South Korean company Hyundai had to sell its complex in Chongqing, which was only opened in 2017, for a fraction of the $ 1.1 billion originally invested.
Weak domestic demand as Achilles heel
The weak internal consumption proves to be a central weak point in the Chinese economy. Despite increasing income and growing prosperity, Chinese households consume cautiously and prefer saving. This tendency to save is not only the result of cultural traditions, but also reflects deep uncertainties about the economic future.
In June 2024, the private household deposits achieved a record of around 147 trillion Yuan (around 18.6 trillion euros). In the first half of the year, Chinese households also paid 9.3 trillion yuan (EUR 1.17 trillion) to their savings accounts. However, this money does not flow into consumption, but is obtained or used for premature repayment of loans.
Consumption in China accounts for only 54 to 56 percent of economic output compared to significantly higher proportions in developed economies. This structural weakness is particularly problematic because it perpetuates the dependence on exports and investments. While other large economies can stabilize their economy through internal consumption, this important buffer is missing.
The retail sales only grow minimally. In June 2024, they rose by only two percent compared to the previous year - the slowest growth for one and a half years. Luxury goods manufacturers such as Hugo Boss, Burberry, Richemont and Swatch reported dramatic drops in sales in China, which illustrates the weakness of consumption demand in higher income segments.
The real estate crisis as a wealth destroyer
An important factor for consumption retention is the continued drop in price in the real estate sector. House prices have been continuously falling for over two years. In May 2025, prices for new buildings in the 70 largest cities recorded a decline of 0.2 percent compared to the previous month. This marked the 24th month in a row with falling prices.
Since around 70 percent of private wealth are bound in real estate in China, this drop in prices has dramatic effects on the available assets of households. According to calculations by Credit Suisse, the available assets have dropped by 6.5 percent since 2022, a development that continued in the following months.
The real estate crisis has its roots in government interventions. In August 2020, the government performed draconian measures against the debt of weaker real estate developers. What was intended as a preventive measure against systemic risks developed into a surface burn that covered the entire industry. Desperated stimulation measures of the government, including liquidity injections, interest rate cuts and loosened mortgage guidelines, have so far not been able to have any sustainable effect.
In the year comparison, the drop in prices for new buildings is now 4.1 percent. Even in the four metropolises of the first category - Beijing, Shanghai, Shenzhen and Guangzhou - the descent cannot be stopped. The government has launched a 300 billion Yuan (about $ 42 billion) difficulty program to encourage local governments to acquire unsalable properties, but the reactions of the financial markets remain.
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Deflation risk and economic stagnation
China is the only large economy in the world to fight with deflation. Consumer prices have dropped in the past four months, which has been the longest deflation phase since 2009. In January 2024, consumer prices fell 0.8 percent compared to the previous year - the strongest decline in 15 years.
This deflation is not just a statistical phenomenon, but an expression of a deep structural crisis. Overcapacity in industry and the recession in the real estate sector are the main drivers of deflationary development. The GDP deflator was 0.5 percent in 2023, which indicates that deflation is broad.
The psychological effects of deflation are particularly devastating. As Professor Minxin Pei from Claremont McKenna College explains: "Deflation in China is a deflation of hope, deflation of optimism. It is a psychological crisis". If consumers expect prices to fall further, they move buying decisions, which further weakens the demand and starts a self -reinforcing downward spiral.
Falling producer prices, stagnating consumer prices and high youth unemployment of 18.8 percent reinforce these deflationary tendencies. Deflation presses on the income of private households, corporate profits and state tax revenue, which limits the scope for action for economic policy measures.
Highly indebted regional governments as a risk factor
Another structural problem is the high debt of regional governments. The debts of cities and provinces puts the central government with equivalent $ 2.3 trillion. Some provinces such as Guizhou achieve debt rates of up to 150 percent of the regional GDP - a value that is comparable to the Greece during the European debt crisis.
China's overall debt has increased dramatically. While it was still 60 percent of GDP in 2019, it rose to 77 percent by 2022. A debt rate of around 88.3 percent of GDP is forecast for 2024, and for 2025 a further increase is expected to around 96.3 percent. By 2027, the government debt should exceed 100 percent of GDP.
This high debt is particularly problematic because it limits the ability of the local governments to implement economic measures. However, this level is responsible for the implementation of the consumer promotion program announced by the central government. The financial overwhelming of regional governments could significantly limit the effectiveness of state interventions.
Catastrophic youth unemployment
The labor market situation for young people in China is dramatic. In August 2024, youth unemployment achieved a value of 18.8 percent among 16- to 24-year-olds- the highest level since the beginning of the year. The unemployment rate for 25 to 29 year olds was 6.9 percent. These numbers are particularly alarming because around twelve million students have graduated this summer - a record value.
The difficult situation on the job market even forces graduates from top universities to accept positions in remote rural areas. University graduates do not necessarily need good grades to get one of the few jobs, but above all good contacts in the party and in the companies. Anyone who studies abroad tries to stay there as long as possible, since the prospects in the Chinese labor market at home are cloudy.
The high youth unemployment is not only an economic, but also a political problem. The Communist Party fears that an employment crisis among young people could grow doubts about the economic competence of leadership. President XI Jinping declared an “absolute priority” to combat youth unemployment in May 2024, but so far the measures taken has not shown any continuous effect.
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China's approaches to strengthen the internal market
In view of these structural challenges, the Chinese government has recognized the urgency of a realignment. For the first time since XI Jinping's taking office, consumption was declared the top priority of economic policy. In March 2025, Prime Minister Li Qiang presented a comprehensive government work schedule that focuses on increasing the expenses of private households.
The new “special action plan” for boosting internal consumption provides for a variety of measures. This includes increasing pensions and better medical services, subsidized childcare and higher social security benefits. The income from farmers should be increased by housing reforms. In addition, the authorities should check and introduce a system of childcare grants.
The government also tries to strengthen the trust of private economic operators and to stabilize the stock and real estate markets. The top topic is how Chinese demand for consumption could be boosted, and measures such as subsidized toddler care and increasing social security benefits were announced.
In order to finance these measures, the state is quite willing to accept a higher debt and to carry out monetary policy measures such as the reduction in interest and minimum reserves of the banks. The government has already taken various economic measures, such as the subsidized replacement of old motor vehicles through new electric cars or old household electronics, but these have so far only shown a limited effect.
A major uncertainty factor is whether the world remains willing to absorb the Chinese overproduction. For example, while Nigeria welcomes Chinese electric cars, industrialized countries with its own automotive industry rely on massive import duties or complete import bans.
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China's economic change: From the export giant to the technology night with structural hurdles
Ambitious goals in future technologies
Despite the structural problems, China continues to pursue ambitious goals in order to obtain world market leadership in key technologies. This strategy could help in the long term to reduce dependence on the traditional export model and create higher -quality workplaces.
Dominance for electric vehicles
China has already achieved impressive successes in the automotive sector. BYD has become the world market leader in electric cars and has replaced Tesla as the largest electric car manufacturer in the world. In the fourth quarter of 2023, BYD sold 526,409 vehicles, while Tesla delivered 484,507 cars. This success was made possible by massive state support and the use of scale effects on the domestic market.
China now dominates over half of the global electric car market with more than 11 million electric cars sold annually. The transformation from a “Nobody” to the world electric car market leader in just ten years is considered a “industrial policy masterpiece”. Chinese manufacturers have not only made significant progress in the sales figures, but also in the case of technical aspects such as energy consumption, charging speed and reach.
Leadership position in renewable energies
In renewable energies, China has reached a dominant position that hardly appears to be catchy. The country has 64 percent of the solar and wind energy capacities that are under construction worldwide. The installed performance is to reach about 3.3 terawatts by 2030.
China is currently building up twice as much wind and solar capacity as the rest of the world. The 339 gigawatts of wind and solar energy projects that are under construction represent a third of the planned projects and exceed the capacities of all other countries. Between March 2023 and March 2024 alone, China installed more solar energy than in the three previous years.
The numbers are impressive: in China, the newly installed photovoltaic performance achieved a total of 21.05 gigawatts in July 2024. In the first seven months from January to July 2024, solar systems with a total of 123.5 gigawatts were installed. For comparison: The cumulative solar performance in Germany is currently around 92 gigawatts that have been built for over 30 years.
As of July 2024, solar systems with an output of around 740 gigawatts were built in China, which corresponds to an increase of 49.8 percent compared to the previous year. For the year 2024, experts assume a year of age between 240 and 260 gigawatt photovoltaic performance.
Ambitions in artificial intelligence and robotics
China pursues the ambitious goal of becoming a leader in AI technologies worldwide by 2030. As early as 2017, the government published a development plan that is due to establish China as a global innovation center for AI by 2030. This strategy is supported by massive state investments in research and development.
The progress is impressive: China rose to the leading AI research nation by 2023, with nine of the ten most productive research institutions worldwide. China has left the rest of the world far behind in AI patents. In 2023, around 70 percent of all worldwide AI patents were granted here, while the United States share fell from 43 percent in 2015 to 14.2 percent.
According to Morgan Stanley, China's AI industry could achieve a value of $ 1.4 trillion by 2030. An important advantage lies in China's access to enormous amounts of data. Over 1.4 billion people, more than 1.1 billion online, provide the data basis for training modern AI systems every day.
China has opened the first heterogeneous training facility worldwide in the area of the humanoid robot. The “Humanoid Robot Kylin Training Ground” in Shanghai can currently accommodate over 100 robots and is to be expanded to 1,000 units by 2027. For 2030, the Chinese market for humanoid robots will be forecast with 11.35 billion euros.
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Realistic evaluation of chances of success
The evaluation of the chances of success for China's economic transformation is mixed. While the country has already become the world market leader in individual technology areas, the structural challenges in the transition to a consumer -driven growth model remain significant.
Positive factors
China has several advantages that could favor a successful transformation. When implementing industrial transformations, the country has already shown impressive successes how the examples demonstrate electromobility and renewable energies. The massive state control and the availability of considerable financial resources make it possible to consistently pursue strategic priorities.
World market leader positions have already been reached in several future industries. These successes show that China is quite able to become internationally competitive in complex and technology -intensive areas. The systematic promotion of research and development as well as the close integration of state planning, industrial cooperation and technical progress creates a fruitful innovation ecosystem.
Structural challenges
Nevertheless, experts warn of long -term structural problems. The high export dependency makes China vulnerable to international trade conflicts and economic fluctuations in the customer countries. Overcapacity in key sectors lead to destructive price fights and inefficiencies that undermine healthy market structures.
The weak domestic demand proves to be a particularly persistent problem. Despite increasing income and state funding measures, the Chinese consumers remain reserved. The real estate crisis, high youth unemployment and deflationary tendencies additionally strengthen this consumption retention.
The debt of regional governments limits the scope for action for economic policy measures significantly. Since this level is responsible for the implementation of consumer -promoting programs, the financial overwhelming of local governments could undermine the effectiveness of state interventions.
Time frame and feasibility
The transformation will take time and be very expensive. Structural reforms to strengthen internal consumption require the fundamental expansion of the social network and the pension system, significant income transfer and a reduction in the traditionally high savings rate of households. These changes cannot be implemented overnight, but need a long -term and consistent political approach.
The demographic challenges additionally tighten the situation. The aging society increases the pressure on the social security systems and reduces the potential for workers. At the same time, the expectations of younger generations are increasing to living standards and working conditions, which requires additional investments in education, healthcare and infrastructure.
International implications
China's economic transformation has far -reaching effects on the global economy. The massive overproduction in different branches of industry leads to trade tensions with other countries that defend themselves against Chinese cheap competition. At the same time, new opportunities open up for developing countries to benefit from cheap Chinese technologies.
The EU and the United States react to Chinese industrial policy with protectionist measures. While China argues that global demand will reach a multiple of the current values in the coming years, other industrialized countries see a distortion of fair competition in state subsidy.
China has already started to react to trading policy restrictions. In response to US tariffs, the People's Republic announced export restrictions on critical raw materials such as Wolfram, Tellur, Wismuth, Indium and Molybdenum. Experts expect export bans from these restrictions in the medium term, which would further exacerbate dependencies in global supply chains.
A lengthy transformation process
The analysis shows that China actually reached the limits of its export -oriented growth model and that a strategic realignment has become necessary. However, the structural challenges are so profound that successful transformation is anything but guaranteed.
The chances of success are ambiguous. While China has already built impressive market leaders in specific future industries such as electromobility, renewable energies and artificial intelligence, the structural problems in the transition to a consumer -driven growth model remain significant. The weak domestic demand, the real estate crisis, high youth unemployment, deflationary tendencies and the debt of the regional governments form a complex problem network that cannot be resolved quickly.
The realistic forecast is that China will further expand its world market leadership in selected technology areas, while fundamental economic change will remain a lengthy process with an uncertain outcome for a consumer -oriented model. Success depends crucially on whether it is possible to regain the trust of consumers, to sustainably strengthen internal consumption and to correct the structural imbalances.
The Chinese government recognized the challenges and put on corresponding reform programs. However, it remains to be seen whether these are sufficient to solve the deep structural problems. The next few years will show whether China can successfully manage the difficult transition from the “workbench of the world” to a balanced, consumer -oriented economy.
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