China: One Country, Two Economies, Two Strategies

(MENAFN- Asia Times) The Chinese Economy is divided into two parts, one geared toward domestic growth and another for exports. The structure can function because its currency, the RMB, is not fully convertible and its market is not freely accessible.

Exports help access resources for the development of dual-use Chinese technology. But the entire architecture could face a severe setback if exports and their derived surplus decline. It's a race against time. If Chinese tech outpaces Western technology, Beijing's strategy may prevail while the US appears uncertain about its path forward.

China has two economies that work in parallel. They influence each other, yet they live almost separate lives. One is the domestic economy which is now plagued by debt and sagging demand. The other is thriving and booming – its unrivaled export machine.

The two have a special relationship with one another, as Michael Pettis recently pointed out . Domestic development is stalling, driven by infrastructure investments with declining returns and efficiency, while the growth is led by net exports , which“contributed 30.3% to GDP growth in 2024, their highest share since 1997.”

The result is one of the fastest-rising debt-to-GDP ratios in global 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 contract in 2025, it means that a larger share of China's 2025 GDP growth must come from non-productive investment and, with that, China's debt ratios should rise more quickly.”

From this analysis come many questions. The problem has existed for a long time. Rudi Dornbusch, Francesco Giavazzi, and I discussed it in 1999 in Beijing. In a 2007 essay and many subsequent discussions in Beijing and at conferences in those years, the feeling was that China had to offset its debt-laden infrastructure build-up and export-driven growth.

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.

Buying a house was a form of investment in the future. To push private spending, the government needed to create a welfare state to free up disposable income quickly.

However, to do so, it had to increase personal taxes. Nobody likes to pay taxes; when personal taxes rise, people will demand that the state clearly explains how it spends their money. 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 infrastructure development would begin to dwindle because most railways, metro systems and roads in the most populated areas would have already been built.

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.

Lastly, in 2022, China faced a crucial party congress where Chinese President Xi Jinping had to be confirmed for a third term when the previous constitution only allowed two terms. Historically, under such circumstances, a political crisis can occur. Xi pre-empted this threat by changing the constitution.

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