“Workshop of the World” – China’s Economic Transformation: The Limits of the Export Model and the Rocky Road to a Domestic Economy – Image: Xpert.Digital
China's economic miracle is coming to an end: Why the world's workshop is no longer functioning
Structural change of an economic power – From the factory floor 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 tried-and-tested model of the "workshop of the world" is reaching its natural limits. The structural challenges facing the People's Republic are multifaceted and profound. While China has already achieved impressive successes in certain future-oriented industries, the fundamental transformation to a consumption-driven economy remains a complex and protracted undertaking.
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The structural limits of the export model
China has systematically expanded its position as a global manufacturing hub over decades, undergoing impressive industrialization. Export orientation was the central pillar of this growth model, enabling the country to become the world's second-largest economy. However, this strategy is now showing clear signs of fatigue.
China's dependence on external markets is dramatically high today. In 2024, exports alone contributed 1.5 percentage points to total economic growth, meaning that roughly 30 percent of growth was generated by external demand. China last experienced such a high level of export dependence in the 1990s. This development makes the country extremely vulnerable to international trade conflicts and economic fluctuations in its importing countries.
Global markets have largely reached their absorption capacity for many product categories. As a major economy, China depends on other countries being willing and able to import Chinese goods. However, this willingness is dwindling. International tariffs and protectionist measures threaten key sales markets. The Trump administration has already announced plans to increase import tariffs on Chinese goods to an average of 40 percent, which could cost China around one percent of its economic growth in 2025.
At the same time, China's cost advantages have drastically diminished. Increasing labor shortages and demographic changes have driven wages up significantly. The former cost advantages that made China an attractive production location are steadily dwindling. Young, well-educated workers are demanding higher wages and better working conditions, which is undermining competitiveness in labor-intensive industries.
Massive overcapacities as a structural problem
One of the most serious challenges is the enormous overcapacity in state-supported future industries. The figures are almost unimaginable in their scale: China's production capacity for electric cars is projected to rise to 36 million vehicles by 2025, while sales are only forecast at 14 million. This equates to a surplus of 20 million units – more than the entire annual car production of Europe.
These overcapacities are not the result of market mechanisms, but of state-planned economics. Every province wanted to have at least one of its own electric car brands, leading to a veritable explosion in the number of manufacturers. Currently, there are approximately 100 to 150 Chinese brands that actually produce cars, while a total of around 300 brands are registered, most of which exist only on paper.
The consequences of this overproduction are devastating. A brutal price war has erupted, pushing even established manufacturers to the brink of ruin. Chinese automakers pay their suppliers on average after 182 days, while Western manufacturers typically pay after one to one and a half months. These payment delays serve as a form of hidden financing and reveal 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 gasoline-powered cars per year – roughly twice as many as the Chinese population wants to buy. Dozens of factories producing gasoline-powered vehicles are barely operating or have already been shut down. The South Korean company Hyundai had to sell its Chongqing complex, which only opened in 2017, for a fraction of the original $1.1 billion investment.
Weak domestic demand as the Achilles' heel
Weak domestic consumption is proving to be a key weakness of the Chinese economy. Despite rising incomes and growing prosperity, Chinese households are consuming cautiously and prefer saving. This propensity to save is not only the result of cultural traditions but also reflects deep uncertainties about the economic future.
Household savings reached a record high of approximately 147 trillion yuan (about 18.6 trillion euros) in June 2024. In the first half of the year, Chinese households deposited an additional 9.3 trillion yuan (1.17 trillion euros) into their savings accounts. However, this money is not being spent on consumption but is being hoarded or used for the early repayment of loans.
Consumption accounts for only 54 to 56 percent of economic output in China, compared to significantly higher shares in developed economies. This structural weakness is particularly problematic because it perpetuates dependence on exports and investments. While other major economies can stabilize their growth through domestic consumption, China lacks this crucial buffer.
Retail sales are growing only minimally. In June 2024, they rose by just two percent compared to the previous year – the slowest growth in a year and a half. Luxury goods manufacturers such as Hugo Boss, Burberry, Richemont, and Swatch reported dramatic sales declines in China, highlighting the weakness of consumer demand in higher income segments.
The real estate crisis as a destroyer of wealth
A key factor contributing to the reluctance to spend is the ongoing decline in real estate prices. House prices have been falling continuously for over two years. In May 2025, prices for new builds in the 70 largest cities saw a decrease of 0.2 percent compared to the previous month. This marked the 24th consecutive month of falling prices.
Since roughly 70 percent of private wealth in China is tied up in real estate, this price decline has had a dramatic impact on household disposable income. According to calculations by Credit Suisse, disposable income has fallen by 6.5 percent since 2022, a trend that continued in the following months.
The housing crisis has its roots in government intervention. In August 2020, the government took draconian measures against the debt burden of weaker property developers. What was intended as a preventative measure against systemic risks developed into a conflagration that engulfed the entire industry. Desperate government stimulus measures, including liquidity injections, interest rate cuts, and relaxed mortgage guidelines, have so far failed to produce a lasting effect.
Year-on-year, the price decline for new construction has now reached 4.1 percent. Even in the four top-tier metropolises – Beijing, Shanghai, Shenzhen, and Guangzhou – the downward trend is unstoppable. The government has launched a 300 billion yuan (approximately US$42 billion) purchase program to encourage local governments to acquire unsold properties, but the financial markets have reacted mutedly.
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From export world champion to domestic market: China's radical economic transformation under Xi Jinping
Risk of deflation and economic stagnation
China is the only major economy in the world struggling with deflation. Consumer prices have fallen over the past four months, marking the longest period of deflation since 2009. In January 2024, consumer prices fell by 0.8 percent year-on-year – the sharpest decline in 15 years.
This deflation is not merely a statistical phenomenon, but rather an expression of a deep structural crisis. Overcapacity in industry and the recession in the real estate sector are the main drivers of this deflationary trend. The GDP deflator was minus 0.5 percent in 2023, indicating that the deflation is widespread.
The psychological effects of deflation are particularly devastating. As Professor Minxin Pei of Claremont McKenna College explains: “The deflation in China is a deflation of hope, a deflation of optimism. It is a psychological crisis.” When consumers expect prices to fall further, they postpone purchasing decisions, which further weakens demand and sets in motion a self-reinforcing downward spiral.
Falling producer prices, stagnant consumer prices, and high youth unemployment of 18.8 percent are exacerbating these deflationary tendencies. Deflation is putting pressure on household incomes, corporate profits, and government tax revenues, thus limiting the scope for economic policy measures.
Highly indebted regional governments as a risk factor
Another structural problem is the high level of debt held by regional governments. The central government estimates the debt of cities and provinces at the equivalent of US$2.3 trillion. Some provinces, such as Guizhou, have debt ratios of up to 150 percent of their regional GDP – a figure comparable to that of Greece during the European debt crisis.
China's total debt has increased dramatically. While it stood at 60 percent of GDP in 2019, it rose to 77 percent by 2022. A debt-to-GDP ratio of approximately 88.3 percent is projected for 2024, and a further increase to around 96.3 percent is expected for 2025. By 2027, government debt is likely to exceed 100 percent of GDP.
This high level of debt is particularly problematic because it limits the ability of local governments to implement economic stimulus measures. Yet this very level is responsible for implementing the consumption promotion program announced by the central government. The financial strain on regional governments could significantly limit the effectiveness of state interventions.
Catastrophic youth unemployment
The labor market situation for young people in China is dire. Youth unemployment reached 18.8 percent in August 2024 among 16- to 24-year-olds – the highest level since the beginning of the year. For 25- to 29-year-olds, the unemployment rate was 6.9 percent. These figures are particularly alarming given that around twelve million students graduated this summer – a record number.
The difficult situation on the job market forces even graduates from top universities to accept positions in remote rural areas. University graduates don't necessarily need good grades to land one of the few jobs available; what's crucial is good connections within the Party and in companies. Those who study abroad try to stay there as long as possible, as the prospects on the domestic Chinese job market are bleak.
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 raise doubts about the leadership's economic competence. President Xi Jinping declared combating youth unemployment an "absolute priority" in May 2024, but so far the measures taken have not shown any significant effect.
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China's approaches to strengthening the domestic market
In light of these structural challenges, the Chinese government has recognized the urgent need for a realignment. For the first time since Xi Jinping took office, consumption has been declared the top priority of economic policy. In March 2025, Premier Li Qiang presented a comprehensive government work plan focused on increasing household spending.
The new “Special Action Plan” to boost domestic consumption includes a wide range of measures. These include increasing pensions and improving medical services, subsidized childcare, and higher social security benefits. Farmers' incomes are to be increased through housing reforms. In addition, the authorities are to examine and implement a system of childcare subsidies.
The government is also trying to bolster the confidence of private businesses and stabilize the stock and real estate markets. A top priority is how to stimulate Chinese consumer demand, and measures such as subsidized childcare and increased social security benefits have been announced.
To finance these measures, the government is prepared to accept higher levels of debt and implement monetary policy measures such as lowering interest rates and bank reserve requirements. The government has already taken various economic stimulus measures, such as subsidizing the replacement of old vehicles with new electric cars or old household electronics, but these have so far had only a limited effect.
A major uncertainty is whether the world will remain willing to absorb Chinese overproduction. While Nigeria, for example, welcomes Chinese electric cars, industrialized nations with their own automotive industries are resorting to massive import tariffs or outright import bans.
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China's economic transformation: From export giant to technological power with structural hurdles
Ambitious goals in future technologies
Despite its structural problems, China continues to pursue ambitious goals to achieve global leadership in key technologies. In the long term, this strategy could help reduce its dependence on the traditional export model and create higher-value jobs.
Dominance in electric vehicles
China has already achieved impressive success in the automotive sector. BYD has become the world leader in electric vehicles, overtaking Tesla as the world's largest electric car manufacturer. In the fourth quarter of 2023, BYD sold 526,409 vehicles, while Tesla delivered 484,507. This success was made possible by massive government support and the exploitation of economies of scale in the domestic market.
China now dominates over half of the global electric vehicle market, selling more than 11 million electric cars annually. The transformation from a "nobody" to the world's leading electric vehicle manufacturer in just ten years is considered an "industrial policy masterpiece." Chinese manufacturers have made significant progress not only in sales figures but also in technical aspects such as energy consumption, charging speed, and range.
Leadership position in renewable energies
China has achieved a dominant position in renewable energies that seems almost impossible to overtake. The country possesses 64 percent of the world's solar and wind power capacity currently under construction. Installed capacity is projected to reach approximately 3.3 terawatts by 2030.
China is currently installing twice as much wind and solar capacity as the rest of the world combined. The 339 gigawatts of wind and solar energy projects under construction represent a third of all planned projects and exceed the capacity of any other country. Between March 2023 and March 2024 alone, China installed more solar power than in the three previous years combined.
The figures are impressive: In China, newly installed photovoltaic capacity reached a total of 21.05 gigawatts in July 2024 alone. In the first seven months, from January to July 2024, solar power plants with a total capacity of 123.5 gigawatts were installed. By comparison, Germany's cumulative solar power capacity currently stands at approximately 92 gigawatts, built up over 30 years.
As of July 2024, solar power plants with a capacity of approximately 740 gigawatts had been installed in China, representing an increase of 49.8 percent compared to the previous year. Experts anticipate an annual increase of between 240 and 260 gigawatts of photovoltaic capacity for the entire year of 2024.
Ambitions in Artificial Intelligence and Robotics
China has set itself the ambitious goal of becoming a global leader in AI technologies by 2030. As early as 2017, the government published a development plan aimed at establishing China as a global innovation hub for AI by 2030. This strategy is supported by massive government investment in research and development.
The progress is impressive: By 2023, China had risen to become the leading AI research nation, boasting nine of the world's ten most productive research institutions. China has also far surpassed the rest of the world in AI patents. In 2023, it accounted for approximately 70 percent of all global AI patents, while the US share fell from 43 percent in 2015 to 14.2 percent.
According to Morgan Stanley, China's AI industry could reach a value of $1.4 trillion by 2030. A key advantage lies in China's access to enormous amounts of data. Over 1.4 billion people, more than 1.1 billion of whom are active online, provide the daily data foundation for training modern AI systems.
In the field of humanoid robots, China has opened the world's first heterogeneous training facility. The "Humanoid Robot Kylin Training Ground" in Shanghai can currently accommodate over 100 robots and is planned to expand to 1,000 units by 2027. The Chinese market for humanoid robots is projected to reach €11.35 billion by 2030.
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Realistic assessment of the chances of success
Assessments of the prospects for China's economic transformation are mixed. While the country has already become a world leader in certain technology sectors, the structural challenges of transitioning to a consumption-driven growth model remain considerable.
Positive factors
China possesses several advantages that could facilitate a successful transformation. The country has already demonstrated impressive success in implementing industrial transformations, as exemplified by electromobility and renewable energies. Its massive state control capacity and the availability of substantial financial resources enable it to consistently pursue strategic priorities.
China has already achieved global market leadership in several future-oriented industries. These successes demonstrate its ability to become internationally competitive in complex and technology-intensive sectors. The systematic promotion of research and development, along with the close integration of government planning, industrial cooperation, and technological progress, is creating a fertile innovation ecosystem.
Structural challenges
Nevertheless, experts warn of long-term structural problems. China's high export dependence makes it vulnerable to international trade conflicts and economic fluctuations in its customer countries. Overcapacities in key industries lead to destructive price wars and inefficiencies that undermine healthy market structures.
Weak domestic demand is proving to be a particularly persistent problem. Despite rising incomes and government support measures, Chinese consumers remain hesitant. The real estate crisis, high youth unemployment, and deflationary tendencies are further exacerbating this reluctance to spend.
The debt burden of regional governments significantly limits their scope for economic stimulus measures. Since this level is responsible for implementing programs that boost consumption, the financial strain on local governments could undermine the effectiveness of state interventions.
Timeframe and feasibility
The transformation will take time and be very costly. Structural reforms to strengthen domestic consumption require a fundamental expansion of the social safety net and the pension system, substantial income transfers, and a reduction in the traditionally high savings rate of households. These changes cannot be implemented overnight but require a long-term and consistent political approach.
Demographic challenges further exacerbate the situation. An aging society increases the pressure on social security systems and reduces the potential workforce. At the same time, the expectations of younger generations regarding living standards and working conditions are rising, requiring additional investment in education, healthcare, and infrastructure.
International implications
China's economic transformation has far-reaching implications for the global economy. Massive overproduction in various industries is leading to trade tensions with other countries that are resisting cheap Chinese competition. At the same time, developing countries are seeing new opportunities to benefit from inexpensive Chinese technologies.
The EU and the US are responding to Chinese industrial policy with protectionist measures. While China argues that global demand will reach many times its current levels in the coming years, other industrialized countries see state subsidies as a distortion of fair competition.
China has already begun to react to trade restrictions. In response to US tariffs, the People's Republic announced export restrictions on critical raw materials such as tungsten, tellurium, bismuth, indium, and molybdenum. Experts expect that these restrictions could evolve into export bans in the medium term, which would further exacerbate dependencies in global supply chains.
A lengthy transformation process
The analysis shows that China has indeed 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 a successful transformation is anything but guaranteed.
The prospects for success are mixed. While China has already established impressive market leadership positions in specific future-oriented sectors such as electromobility, renewable energies, and artificial intelligence, the structural problems associated with the transition to a consumption-driven growth model remain considerable. Weak domestic demand, the real estate crisis, high youth unemployment, deflationary tendencies, and the debt burden of regional governments form a complex web of problems that cannot be resolved quickly.
The realistic forecast is that China will further expand its global market leadership in selected technology sectors, while the fundamental economic shift towards a consumer-oriented model will remain a protracted process with an uncertain outcome. Success depends crucially on whether it is possible to regain consumer confidence, sustainably strengthen domestic consumption, and correct structural imbalances.
The Chinese government has recognized the challenges and launched corresponding reform programs. Whether these will be sufficient to solve the deep-seated structural problems remains to be seen. The coming years will show whether China can successfully manage the difficult transition from the "workshop of the world" to a balanced, consumer-oriented economy.
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