China cannot continue to rely on exports to drive its growth, but what are the alternatives?
Introduction
China ran a $1.2 trillion trade surplus last year, and despite admonitions from the IMF to rely less on exports as the driver of growth, alternative policies have proven elusive. This lack of a sustainable growth model is not only detrimental to China, but it also places a large burden on the rest of world. China has the ability to undertake fundamental reforms that can help it to overcome some of its economic challenges, but recognizing the necessity of searching for a revised approach to generating growth and prosperity is a pre-condition for policy change.
What’s the problem?
Some China-watchers have opined that China is in need of a new growth model,1 while others have come to the opposite conclusion that “China has every incentive to maintain the largest possible trade surplus for as long as it can,”2 as the easiest way to maintain economic expansion. While the latter observation may well be true in the near term, it can be argued that China will need to revise its approach to economic growth sooner or later. The timeline for this re-adjustment will have significant implications for Chinese industry and society; however, equally importantly it will affect the global economy. To summarize the problem in a nutshell it is that growth is still led by exports inasmuch as consumption demand is low and unlikely to rise given demographic trends without major policy shifts, and investment is hugely inefficient as seen in both the real estate sector as well as the quality of capital spending.3
Looking at options from China’s perspective, the transition from labor-intensive industries to robotic and AI-intensive activities is happening at a pace that will leave tens of millions without employment. The number of displaced workers now working in the gig economy with reduced and uncertain wages has mushroomed. This simply adds to the existing problem of youth unemployment, now officially reported at 15 percent, but rumored to be higher. It can reasonably be argued that the rapid shift to labor-replacing technologies will further shift income to capital at the expense of wage-earners, while some observers have mused that inequality may now be a larger issue in China than in the US. The old aphorism that the “Chinese hoped to get rich before they got old” remains a preoccupation even as the population begins to decline due to very low fertility.4
Dissecting the problem
An easy way to start examining the future of economic growth in China is by looking at the components of demand. The Chinese authorities have made some half-hearted efforts at promoting demand, such as the equivalent of “cash for clunkers” program to promote the purchase of new consumer durables. However, this policy has fallen flat due to demographics; namely, China has an aging and declining population. Moreover, the bulk of Chinese household assets are in the form of real estate, a sector that has undergone dramatic decline.5 The authorities are loathe to provide large transfers to boost consumption, so we cannot expect an increase in demand until the government relents and considers serious social transfers or even something akin to a universal basic income or its equivalent.
The second component is investment, which has a mixed record as was noted. The major push to compete effectively in AI and new drugs as well as the push on robotics can produce productivity gains and inroads into new industries. But what about China’s dominance in many labor-intensive industries where aggressive insertion of robotics has displaced many jobs? And what about its over-production of products, such as solar panels, that are flooding global markets? China has officially decried excessive competition under the code word of “involution,” where producers undercut one another in pricing due to oversupply. This domestic problem is then transferred to the global economy via dumping and other aggressive pricing policies that China has refused to acknowledge.6
The search for solutions
Where to start. As outside observers have noted, there need for a serious reassessment of SOEs and other loss-making firms, and a process of triage and closures. The challenge, very similar to the issues faced in the hollowed-out sectors of the US economy, is to manage unemployment, something China has little experience handling due to decades of rapid growth and employment via the hukou system of internal migration. This flow out of rural areas for jobs is now seeing reversals, creating new pockets of relative poverty. Again, the issue is a fiscal one, since the government would need to allocate funds for the inevitable industrial transition. China has the revenue capacity to manage this; however, it can be helped by a more pragmatic approach to the private sector, where a freer approach might raise needed corporate taxes, and a more forward-looking social policy.
The final area for review is controversial, namely, exports. Even as China is flexing its muscles on rare earths and critical metals, and competing vigorously on AI and its related technologies, it continues rely on more traditional exports and EVs to maintain its growth rate. Examining China’s mega trade surplus shows that it runs large positive balances with many parts of the developed world. And yet, China is still pursuing an import-substitution strategy as seen in its management of bilateral trade with South Korea, where it has systematically reduced its import dependence on intermediates, much in keeping with its “Made in China 2025” strategy.7
Elements of a new growth model
So where are left in the search for a new growth model for China?
- First, much like other economies, lifting the weight of the bloated real estate sector would be desirable, admittedly costly, but necessary in light of future demographics.
- Second, allowing the private sector to flourish can help propel economic growth and help provide the fiscal resources needed to deal with labor transitions.
- Third, putting provinces on sustainable financial footings can help with future challenges inasmuch as lot of capital expenditures is being wasted and those resources are needed for social support of those retiring, either voluntarily or involuntarily from the workforce.
- Fourth, some program of guaranteed basic income is likely needed since the safety net for those displaced but living another 20 years needs bolstering.
- Fifth, finding gainful employment for the youth who are NEET is necessary or else outward emigration will be incentivized, and few countries will be willing to accept Chinese workers, similar to the prospects for excess production of goods.
Final thoughts
The rapid shift away from labor-intensive production to robotics will continue to shrink the wages of the existing cohort of workers, many who have been displaced by rapid technological shifts. The fact that future factories will need considerably fewer workers can be seen a boost in productivity; however, this is occurring at a speed that exceeds future population declines, leaving a host of economic and social problems in the coming two decades.
The good news is that China has both the fiscal capacity to deal with many issues and the technological prowess to reap large gains from new investments. The key is to release resources from unproductive uses and to improve materially the incomes of the existing population. These problems, including hollowing out of industry and depressed areas, are no different from those encountered in Western economies, especially with respect to demographics, labor transitions and employment. The difference is that China does not have to deal with divisive internal political economy issues to the extent that others do.
The new growth model needs to one built on income-sharing, an approach more akin to social democracies,8 but matched with hard-nosed investment decisions, policy-driven revenue sharing with provinces, smart approaches to the Chinese private sector, and a realization that exports cannot be the sole growth engine of the future. The longer China resists necessary reforms, the costlier will be the ultimate adjustment for both China and the global economy.
About the Author
Danny Leipziger is Professor of International Business at George Washington University and Managing Director of the Growth Dialogue. A former World Bank Vice President and Vice Chair of the Spence Commission on Growth and Development, he is an expert in development economics and finance, author of several books, and frequent Financial Times contributor.
References:
- [1] See Eswar Prasad, “China Needs a New Growth Model,” Financial Times (July 28, 2026)
- [2] See Michael Pettis, “Who Will Bear the Cost of a Global Trade Adjustment,” Foreign Affairs, Aug. 28, 2026
- [3] The IMF estimates the current ICOR, one measure of the efficiency of investment, at an all-time high above 9 which is double what it was during China’s earlier growth experience.
- [4] China’s population peaked in 2022, and current fertility rates are reported just below 1.0 according to the United Nations Population Office.
- [5] The real estate sector has suffered multiple bankruptcies yet is still supported by the PBOC with a number of policies. The reality is that there are at least 2 million unoccupied housing units, most in undesirable locations, and many bolstered by local governments unwilling or unable to accept losses.
- [6] The latest evidence of this was China’s reported opposition to G-20 Communique language on “non-market pricing policies.”
- [7] See MERICS assessment of the China 2025 Report issued in 2016
- [8] See Leipziger in the FT (Letters, June 30, 2026), who argued that China may need to re-embrace some more egalitarian economic policies if it doesn’t want to see greater inequality in society. Having successfully dealt with absolute poverty, the authorities now face considerable problems of relative poverty.
