China has reiterated its determination to continue its economic model based on advanced industry and investment, despite pressure from Western countries to increase domestic consumption. Messages from Beijing ahead of new trade talks with the EU and US indicate that the country will not make fundamental changes to its policies.
Defending the economic model
The West argues that China's economic policies prioritize producers over households, causing low-cost exports to flood global markets and putting pressure on industries in rival economies. However, the Politburo of the Chinese Communist Party confirmed at its latest meeting that the current economic approach will be maintained and called for targeted support for the economy instead of broad stimulus packages.
According to Reuters, China's Commerce Ministry also recently rejected Western accusations of industrial overcapacity in a review report, claiming they contained "logical fallacies" and "hidden motives." Meanwhile, the party's flagship journal Qiushi argued that low domestic consumption is a natural consequence of a development path based on investment and industrialization.
Messages ahead of negotiations
Xu Tianchen, chief economist at the Economist Intelligence Unit, said Beijing is sending two clear messages ahead of the upcoming trade negotiations, though it hasn't explicitly refused to change its policies. The first aims to facilitate talks by asking Western partners to understand the background of China's economic model. The second draws "red lines" against practices it views as discriminatory toward Chinese companies and products.
China emphasizes that its economic model still reflects the needs of an economy that is catching up with developed countries, and that its investments in technology and scientific research yield benefits beyond national borders.
Overcapacity debate
Despite Beijing's defense of its policies, many experts believe weak domestic demand has made China's economy increasingly dependent on exports to support growth. Eswar Prasad, a trade policy expert at Cornell University and former IMF official, said that with China's large economy relying on external markets to compensate for weak domestic consumption, it is difficult to convince the world that Chinese exports are "a gift to consumers."
Europe has also started taking steps to protect its industries. With the average daily trade deficit with China reaching $1 billion last year, German Chancellor Friedrich Merz criticized the low valuation of the yuan for giving Chinese exports a competitive advantage.
Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis Bank, said Beijing has become more confident in managing its trade disputes with the West without making major concessions. Herrero noted that the previous experience with US tariffs offered China a model for handling trade conflicts and buying time.
Gradual reform steps
Despite maintaining its commitment to the current model, China has begun to take limited steps to address economic imbalances. These include stricter oversight of local government spending and curbing price competition that squeezes corporate profits.
Chinese officials acknowledge the supply-demand imbalance and stress the importance of boosting domestic consumption, but prefer to implement reforms gradually to avoid major economic upheavals.
International reports, however, indicate that structural challenges persist. The OECD estimates that about 60% of Chinese companies' market share gains stem from state support, while a study by the Bank of Italy found that domestic factors such as weak consumption and overproduction contribute to 75% of China's export growth.
According to a report by the McKinsey Global Institute, China is adding new production capacity three times faster than Europe and the US combined, but its return on capital is about 40% lower. Analysts cited by Reuters note that this keeps debates alive about the long-term sustainability of China's economic model.
