The Taiwanese economy has two parts: one that is focused on domestic progress and the other on imports. The structure is purpose because its currency, the RMB, is not fully foldable and its market is not readily available.
Exports help exposure sources for the development of dual-use Chinese tech. However, if exports and their derived profit decline, the overall layout may experience a significant loss. It’s a race against time. If Chinese technology outpaces American technology, Beijing’s strategy does succeed while the US appears uncertain about its path ahead.
China has two markets that operate in horizontal. They influence each different, yet they live about independent life. One is the local market, which is currently suffering from sagging demand and debt. The other has a formidable import industry, and it is flourishing and booming.
The two have a special relationship with one another, as Michael Pettis , lately pointed out. Regional development is stalling, driven by facilities investments with declining profits and reliability, while the development is led by online exports, which” contributed 30.3 % to GDP growth in 2024, their highest share since 1997″.
The effect is one of the fastest-rising debt-to-GDP ratio in world history. In 2025, it could be over 300 % of GDP, with a total budget deficit of 14 %, producing a mere 5 % growth.
Pettis underlines:” If China’s trade surplus were to deal in 2025, it means that a larger share of China’s 2025 GDP growth has come from non-productive investment and, with that, China’s debt ratios may increase more fast”.
From this analysis come many questions. The issue has been around for a long time. Rudi Dornbusch, Francesco Giavazzi, and I discussed it in 1999 in Beijing. The idea that China had to make up for its debt-laden infrastructure build-up and export-driven growth was expressed in a 2007 essay and many subsequent discussions in Beijing and at conferences in those years.
To do that, it had to boost private consumption. Yet the Chinese saved more than 50 % of their income because they had no social security, they paid directly for their health care, children’s education, retirement and unemployment. Consequently, they had little real disposable income.
Purchasing a home represented a future investment. The government needed to create a welfare state to free up available income quickly in order to encourage private spending.
However, to do so, it had to increase personal taxes. No one enjoys paying taxes, but when personal taxes rise, people will demand that the state clearly explains how their money is spent. It’s the old principle of” no taxation without representation”.
The slide toward democracy seemed inevitable, and I anticipated a crisis would arise around 2022 without a tax-driven welfare state. By then, the return on investment in developing infrastructure would have already decreased because the majority of the country’s most populated areas ‘ railways, metro systems, and roads had already been constructed.
Additionally, real estate-driven growth would cease because there would be no people without homes, whether in the cities or the countryside, and the trade surplus would grow too large to be sustainable globally.
Moreover, around 2020, based on projections from those years, China’s GDP could have been almost as large as that of the United States, which could trigger a significant rivalry if left unmanaged.
In 2022, China held a crucial party congress at which time the previous constitution only allowed two terms for Chinese President Xi Jinping to be confirmed for a third term. Historically, under such circumstances, a political crisis can occur. Xi pre-empted this threat by changing the constitution.
There were far too many risks for everything to go right. Something indeed went wrong besides Covid-19, which broke out in 2020.
China could help in urbanizing half of the population who is still residing in the countryside and further increase domestic demand by reversing the decline in real estate development and domestic demand. A plan calling for hundreds of new cities, which the central government supported, would allow residents of these cities to leave their agricultural land behind.
In the past 20 years, “migrant workers” have been a source of economic growth in China. They came to the cities for jobs and then moved back to the countryside if they were laid off.
The modest agricultural income served as a sort of social cushion. The state had access to a low social welfare system while the private sector had access to a free labor market. The shortcomings were low agricultural yields, low agricultural mechanization, and food safety concerns ( too many producers with too few checks ).
Increased urbanization would increase food production and safety, but it would also require a better safety net for farmers who permanently relocate to cities. The 2008 financial crisis and its consequences disrupted these plans and trajectories.
China suffered a significant psychological blow as a result of the financial crisis. It demonstrated to pragmatic Chinese leaders that China would benefit from continuing to pursue its development path if the American economic system were flawed. This, in turn, altered all Chinese priorities and choices in the following years.
Tech drive
Financing China’s technological advancement of American industrial technology was a crucial component. In 2009, the United States and China failed to agree on what China saw as strategic—transferring new technology, with potential dual-use capabilities, to China. A deal between the United States and China regarding green technology, which would have opened the door to technology transfer, was not reached.
In 2010, the United States made the announcement to launch its” Pivot to Asia,” which sounded ominous to China, causing Beijing to enter a technology race to eventually empower its army in the face of American military conflict.
To advance in this race, China needed better tech exports. To produce the best quality-price ratio on the market, it required a sizable trade surplus that would allow for homegrown research and development.
Consequently, it could not afford to fund a welfare state that might boost domestic demand. However, it would raise production costs and erode China’s export competitiveness, thereby reducing its surplus to be used to finance technological advancements.
Since 2010, the race has become increasingly strategic. Beijing has pushed for an expansion of trade surpluses and a technological lead rather than a balanced economic growth.
Meanwhile, even before Covid-19, the Chinese economy faced a slowdown due to the real estate crisis and diminishing returns on infrastructure projects. It has now turned into a race against time to create cutting-edge technology before the nation’s economy collapses.
For social and strategic reasons, welfare or democracy have become a risky. This account accounts for 40 % of China’s disposable income, compared to 80 % in developed nations. Increased direct or indirect payments would in fact increase domestic consumption, but they would also undermine the trade surplus and, consequently, China’s technological rivalry with the US.
Therefore, granting absolute legal protection to private property could enhance entrepreneurship and consumption but would, in effect, undermine the pervasive party control.
Tom Orlik, in a recent article, makes some interesting points. According to Zhongnanhai, he says, the Chinese economy is geared not on simple numbers but on tech and export goals. Export has its own life of its own. Not blazing new trails, but rather catching up is what it is about.
Olrik writes:
Development is more motivated by acquiring more of the same technologies as it is to create new ones. At China’s current level of development, a no-frills financial system can do the job of channeling funds to priority projects… Even as the slow-motion collapse in real estate dents short-term growth, and market sentiment remains near rock bottom, there are signs that Beijing’s strategy is starting to pay off… ,
The balance of China’s economy is shifting rapidly. In 2020 … property accounted for 24 % of GDP and high-tech sectors for 11 %. In 2024, property had fallen to 19 % while high-tech had grown to 15 %. By 2026, China’s economy will very likely be fueled more by silicon than cement— an important step forward.
The Wall Street Journal reported , that “it isn’t just artificial intelligence—Chinese biotechs are now developing drugs faster and cheaper than their U. S. counterparts”, what about secretive military tech?
The complex pay-off is:” China has perfected the Japanese , kaizen , model of incremental, marginal improvements to existing technologies”. Therefore, the race is on. It will be important to see if Chinese high-tech exports can quickly cover the rising domestic debt this year and next.
A war of plans
It is an issue of technology and politics. Will Trump’s tariffs undercut Chinese direct exports without opening new markets for Chinese goods in third nations affected by new US affirmative actions, and will the Chinese surplus manage to not irritate too many people?
Many people in Beijing may bet on Trump’s ability to burn numerous American bridges and quicken the US crisis, allowing China to adjust, survive, and ultimately emerge victor.
Beijing may be correct, but Washington is mistaken. According to the Financial Times, “experts in Beijing said talks may have stalled because Trump was requesting American buyers for the short video platform TikTok or pressing Russia into action over its invasion of Ukraine.”
Russia and Iran are both linked to China’s support. Only Iran has room to step back and make concessions, as seen in the truce in Gaza, where Hamas ( Iran’s proxies ) caved, possibly because of Tehran’s pressure after many setbacks.
Putin has perhaps less space to maneuver, he’s under much more pressure.
Still, if everything fails, Beijing may already have a plan B. It could shut the economy, blame foreign envy and aggression, and veer toward a” North Korea” option. It would be painful and risky, but it’s an option.
According to John Sullivan, a seasoned US expert on Chinese strategy,” Military struggle is not just a battle of military forces between adversaries but also a battle of comprehensive national power ( CNP),” according to the ,” Science of Military Strategy” ( 2020 ). Therefore, CNP serves as the objective material foundation for formulating and implementing strategies”.
The idea derives from ancient Chinese classics, which state the ability to sustain a military-non-military conflict as well as the possibility of fielding soldiers in battle. The US, according to the Chinese, also employs a similar strategy with the Office of Net Assessment at the Pentagon.
So, what is the West thinking? Ten years ago, Michael Pillsbury, in his ,” The Hundred-Year Marathon”, rang the alarm about China’s long-term plan to challenge the US and urged a wide array of long-term reforms to deal with it.
To deal with the influx of millions of Chinese graduates, one suggestion was a radical education reform in America. This is not happening. It’s not clear whether the wave of ongoing US deregulation will impact some of America’s basic weaknesses.
Something in America may not be working. In the first Trump administration ( 2016-2020 ), the US announced a decoupling policy but backed away, thinking it was too costly and ineffective.
The following Biden administration ( 2020-2024 ) ushered in a delinking policy, forbidding US high-tech exports to China. However, America appears to be hesitant on it because it thinks it is ineffective and criticizes Chinese ingenuity.
With Covid-19, China was quick to market its vaccines, which eventually proved less effective than those marketed later by Western companies. Is the same happening with these latest Chinese technologies?
Perhaps it’s only a propaganda gimmick. China might believe that confusing technology presented quickly may be sown. But American tech could be the same—a game of smoke and mirrors.
One thing is still unanswered: China appears to have a clear strategy for dealing with China, but it’s not clear whether there is a plan A or B.
With kind permission, this article originally appeared on Appia Institute. Read the original here.