By Eric Vandenbroeck and co-workers

China’s Growth Model Is Still Broken

When China’s property market collapsed in 2021, its leaders scrambled to find a new driver of economic growth to replace housing construction. More investment in infrastructure, which had powered much of the country’s boom for decades, wasn’t an option: the population was peaking, and a collapse in land sales meant that local authorities lacked the funds to spend on new airports and eight-lane highways. Nor could Beijing rely on more exports. China was already the world’s biggest exporter, and with labor and land costs rising, the world’s factory no longer had as significant a cost advantage for cheap goods.

That left consumption. Economists have long noted that household consumption in China contributes relatively little to economic activity compared with other countries. In 2024, according to World Bank data, consumption was only 40 percent of China’s GDP, about 20 percentage points below the global average. A policy focused on lifting household spending to the level of South Korea (48 percent) or Japan (55 percent in 2022) could drive growth for decades.

In reality, however, China isn’t rebalancing its economy toward consumption. That’s not to say it doesn’t want more consumption. It does. Leaders in Beijing have publicly endorsed the need to raise consumption: in February 2025, for instance, Chinese Premier Li Qiang called for “boosting consumption to expand domestic demand, smooth the economic cycle, and drive economic growth.” But China’s leaders envision higher consumption coming at the end of China’s economic transition, not the beginning. Rather than redistributing wealth so people can spend more now, Beijing wants to focus on creating new wealth in the hope that it spurs greater consumption in the future.

In the long term, this approach may lead to a more balanced growth model. But in the face of weak domestic demand from the aftermath of the deflated property bubble, China is ramping up its exports even more in the short term. This not only delays China’s own pivot toward consumption; it also promises wealth destruction for other countries trying to compete with China or find their place in the global economy.

Driving at sunset in Beijing, China, January 2026

 

Farewell, Welfare

For consumption to lead China’s economy, the country’s famously frugal savers must set aside less of their income, or incomes must increase faster than the economy as a whole. Engineering that kind of transformation requires wealth redistribution.

When advanced industrial economies redistribute wealth, they typically do it by raising the minimum wage, cutting personal income tax rates, handing out stimulus checks, increasing welfare payments, or cutting mortgage rates. China has taken some of these steps. In 2023 and again in 2024, for instance, the People’s Bank of China forced banks to dramatically cut the interest rate on existing mortgages, reducing households’ annual interest payments by about $43 billion. Provincial governments raise the minimum wage every year. And, starting in 2023, regulators have pushed listed companies to pay dividends to shareholders, something they’ve traditionally been reluctant to do.

But Beijing has steadfastly refused to do the one thing that might make the biggest difference: significantly expand the social safety net. China’s system of social support is chronically underfunded. The national social security fund, which backstops the country’s pensions, is likely to be depleted by 2035, throwing into doubt the retirement of tens of millions of people. Although nearly all of China’s citizens have some basic health insurance, low reimbursement rates mean that out-of-pocket health-care costs can be debilitating, particularly for families supporting elderly parents. And many of the 300 million people who have migrated from the countryside to the cities to work cannot access subsidized public services because they’re only registered to access services in their hometowns, where quality is often much lower. The government says that it supports granting internal migrants the residency status they need to allow them the same access to affordable housing, public schooling, health care, and pensions as their urban neighbors, but it has been unwilling to fund it.

Observers often point to Chinese leader Xi Jinping’s stated aversion to “welfarism” - his reluctance to see “‘lazy people’ get something for nothing,” as he wrote in 2021 - as the reason for this lack of spending. But the bigger sticking point is party leaders’ insistence that social programs be “within the means” of the state to fund them.

As most countries do, China runs a budget deficit. In 2025, the government set the deficit target at four percent, the highest level in three decades. Any expansion of social supports, therefore, would have to be funded with debt. Chinese officials and academics, however, have long worried that debt-funded social programs could lead to what they call “Latin Americanization” - how the growth of vibrant Latin American economies such as Argentina and Brazil stalled in the 1970s and 1980s after populist governments in these countries tried to build Western-style welfare systems on the back of developing economies. In a 2021 essay in the party’s main theory journal, Xi explained that when “some Latin American countries engaged in populism,” the resulting lack of fiscal discipline condemned them to the middle-income trap and prevented them from catching up to advanced economies such as the United States and the European Union.

China’s rapidly aging population makes this fear even greater. China’s old-age dependency ratio - the number of retirees as a share of the working-age population - will match that of the United States in 2035, and the EU in 2046. By 2080, China will have more retirees than workers. This has major consequences for the economy: as a population ages, the burden on the state increases as pensions, health-care spending, and other costs rise. Meanwhile, as the size of the workforce shrinks, so does the pool of taxpayers, making it harder for the state to cover its rising expenses.

Beijing is not afraid to borrow; after all, it allowed the local government to rack up huge debts to fund infrastructure. The difference is that it sees infrastructure as an investment. Even if infrastructure doesn’t pay for itself, it can nonetheless create new wealth and value. By contrast, Beijing sees social spending as a recurring expense and an endless burden. In the words of Xi, “Welfare benefits cannot be reduced once they have gone up.” If China is going to boost social welfare, it will do it incrementally - not at the level that would meaningfully rebalance the economy toward consumption. Instead, if China’s leaders are going to borrow and spend, they want that money to address the most important challenge they are facing: moving up the economic value chain.

 

Quality Over Quantity

For decades, Beijing’s overriding economic preoccupation was the pace of growth. Economic growth is still important - Xi wants GDP per capita to double between 2020 and 2035 - but it’s no longer enough. Xi now speaks of the need for “high quality” growth, or growth that will help transform China’s economy so it can avoid the middle-income trap, mitigate the effects of a rapidly aging population, and deliver Xi’s promise of “common prosperity,” in which China is more affluent and equitable.

To manage this confluence of goals, Beijing needs an economy capable of producing higher-value goods that can’t be cheaply replicated by developing economies with lower labor costs. This will require China to innovate and improve its advanced manufacturing sectors. China also needs to boost tax revenue sufficiently to cover the expanding needs of retirees without overburdening the shrinking workforce. This means that incomes need to rise high enough that even with a heavier tax burden, working people are still better off. And to realize “common prosperity” without massive redistribution, China needs to find ways to produce enough wealth to enlarge the middle class and, eventually, boost consumption by dividing the new gains more fairly.

To achieve all of this, Beijing has embraced what it calls “new quality productive forces.” In this model, productivity gains are the core of growth, and Chinese leaders intend to use innovation and industrial upgrading to concentrate these gains in manufacturing. The hope is that by developing their own proprietary technology, Chinese firms will be able to lead emerging industries as varied as biotechnology and electric vertical takeoff and landing vehicles (better known as flying cars), which will, in turn, allow them to generate higher profit margins than when they were merely producing low-cost knockoffs of existing technologies.

 

 

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