China’s economy, once characterised by rapid, double-digit growth driven by exports and infrastructure development, now faces a pivotal moment. The recent GDP growth slowdown - evident in the 4.6% figure for the third quarter - reflects more than just a cyclical downturn; it signals deeper structural shifts that will shape the country’s economic future. The critical question is: Can China shift towards a more sustainable, consumption-led economy, or will it remain stuck in stagnation, weighed down by debt, demographic challenges, and a faltering property sector?
Property Market: The Real Drag on Growth
One of the most significant challenges China faces today is the collapse of its once-dominant property market. For years, real estate was not only a major driver of GDP but also a crucial source of household wealth. The middle class, buoyed by rising property prices, were encouraged to invest in housing, often viewing it as the safest and most profitable investment. However, the current slump in the property sector is more than a temporary setback; it reveals a deeper, systemic overextension.
China’s economic growth model has historically relied heavily on infrastructure investment, with the real estate sector at its heart. Between 2013 and 2021, the People's Republic of China (PRC) invested $679 billion in infrastructure projects. The property market, when accounting for related industries, made up nearly 30% of China’s GDP, making it a key pillar of the economy. Yet, the market’s current collapse -illustrated by the financial troubles of major developers like Evergrande - underscores the unsustainability of this growth model. Overreliance on real estate has led to a debt crisis affecting developers, local governments, and consumers alike.
This dependence on property for growth has created an economy where local governments, developers, and households are all heavily in debt. Evergrande’s near-collapse in 2021 revealed deeper issues: developers borrowed aggressively to build, but now, with unsold units and falling property prices, many face insolvency. Households, whose savings were tied up in real estate, are watching their wealth erode, weakening consumer confidence. Additionally, local governments, reliant on land sales for revenue, are experiencing fiscal shortfalls, limiting their ability to fund public services and infrastructure, which could further dampen growth.
Moving forward, China faces the challenge of managing a soft landing for the property sector without triggering a wider financial crisis. Policymakers will likely attempt to boost demand through expansionary measures such as interest rate cuts and buyer incentives. However, these are unlikely to reverse the sector’s long-term structural decline. A more likely scenario is prolonged stagnation, with prices remaining low and the property sector shrinking as a share of the overall economy.
Aging Population: An Unseen Crisis?
China’s demographic challenges are expected to intensify in the coming decades. The one-child policy, introduced in the late 1970s, has resulted in a rapidly aging population and fewer young workers entering the labour force each year. By 2050, China may lose over 200 million working-age individuals, further shrinking its labour pool.
This demographic shift will exert long-term pressure on productivity, government finances, and healthcare costs. While China still enjoys a large labour force today, its shrinking size will become an increasing burden. A smaller workforce will drive up wages, and without significant productivity gains, this could erode China’s competitive advantage in global markets.
This demographic shift is not a distant problem; its effects are already being felt. Fewer workers mean slower productivity growth, rising wages, and mounting pressure on social welfare systems. The dependency ratio - the proportion of working-age people to dependents (both children and the elderly) - is expected to rise sharply, placing tremendous strain on the economy to support its aging population. In 2000, the elderly dependency ratio was 9.9 with the most recent statistics showing a ratio of 20.8. This figure will only increase. Without a sufficiently productive younger generation to replace retirees, the burden on social services, especially healthcare and pensions, will grow, threatening fiscal sustainability.
Although the Chinese government has relaxed the one-child policy, allowing two and now three children per family, these changes have had little effect on birth rates. Younger generations, facing high living costs and career pressures, are reluctant to have larger families. Additionally, cultural and economic factors have entrenched smaller family norms, making a swift demographic recovery unlikely, even with favourable policies.
Global Geopolitical Headwinds: The New Economic Battlefield
China’s rise has been closely tied to its integration into the global economy, particularly through trade and investment. However, rising geopolitical tensions - especially with the United States - are reshaping the global landscape. The U.S./China trade war, restrictions on Chinese tech companies, and growing protectionism in Europe have made it more difficult for China to rely on exports as a key driver of growth.
While China has a large domestic market, it still depends on external demand for its high-value products, particularly in sectors like telecommunications and semiconductors. With the U.S. imposing restrictions on Chinese firms like Huawei and limiting the export of critical technologies, China’s ambitions to become a global tech superpower are being challenged. Moreover, Western companies are increasingly diversifying their supply chains away from China, driven by both economic considerations and geopolitical risks. This shift, accelerated by the COVID-19 pandemic and geopolitical tensions, has led countries like India and Vietnam to emerge as alternative manufacturing hubs.
In response, China has adopted a “dual circulation” strategy, which aims to boost domestic consumption while maintaining export capabilities. This shift marks a clear departure from the export-driven model of the past. However, the success of this strategy is uncertain, especially given weak domestic consumption and rising inequality. At the same time, global decoupling from Chinese supply chains, coupled with Western scepticism about Chinese technological dominance, could further isolate China from the essential components it needs for innovation and production.
Looking Ahead: A Slower, but More Sustainable Growth Path?
Looking ahead, China’s economic outlook will likely be defined by slower, but more sustainable, growth as the country adapts to the challenges of a cooling property market, demographic shifts, and geopolitical headwinds. The era of explosive, infrastructure-driven growth is over, but China’s economy still holds potential.
Although China faces a shrinking workforce, investing in productivity-enhancing technologies such as AI, robotics, and automation offers a potential path forward. Moreover, addressing social issues like income inequality, social security, and healthcare will be crucial for ensuring that domestic consumption replaces exports as a sustainable driver of growth.
Rising protectionism and the decoupling from Western supply chains will challenge China’s ability to innovate and grow in high-tech industries. However, the “dual circulation” strategy demonstrates China’s commitment to resilience by reducing dependence on external markets. While this strategy is a long-term play, its success will depend on significant structural reforms, technological innovation, and maintaining social stability.