Two Narratives on the Chinese Economy

The latest regulatory developments on economic security & geoeconomics

By Paul Nadeau, Visiting Research Fellow, Institute of Geoeconomics (IOG)

WTO MC14 Ends in Stalemate: The World Trade Organization’s (WTO) 14^th ministerial conference in Yaoundé, Cameroon from March 26 to March 29 ended in stalemate after countries failed to reach a compromise on an extension of the e-commerce moratorium which prevents countries from imposing tariffs on digital products like streaming, movies, music, and data. The United States pushed for a permanent moratorium and then offered a 10-year moratorium on e-commerce tariffs, while Brazil rejected any moratorium.

U.S. Treasury Department Sanctions Hezbollah Network: On March 20, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced it had sanctioned a network of 16 individuals and entities led by Alaa Hassan Hamieh, a Hezbollah financier and former public investment official that had funneled Hezbollah over $100 million through entities in Lebanon, Syria, Poland, Slovenia, Qatar, and Canada.

Canada Expands Sanctions Related to Russia, Iran: On March 26, Global Affairs Canada announced it would add 100 more vessels from the Russian shadow fleet to its sanctions list under the Special Economic Measures (Russia) Regulations, bringing the total of sanctioned vessels to more than 600.

In a separate announcement on March 26, Global Affairs Canada announced it would sanction five individuals and four entities that are directly involved in procurement networks that produce and supply sophisticated technology supporting weapons production by Iran’s Islamic Revolutionary Guard Corps (IRGC).

United Kingdom Sanctions Target Scam Centers: On March 27, the United Kingdom’s Foreign Office imposed sanctions on 10 individuals and entities associated with Southeast Asian scam centers, including an illicit cryptocurrency marketplace, to dismantle networks responsible for fraud and human rights abuses against trafficked workers.

Argentina Designates IRGC as a Terrorist Organization: On March 31, Argentina designated Iran’s Islamic Revolutionary Guard Corps (IRGC) as a terrorist organization due to the IRCG’s support for Hezbollah, which Argentina holds responsible for a 1994 bombing of a Jewish center in Buenos Ares that killed 85 people and was the largest terrorist attack in Argentina’s history.

U.S. Removes Sanctions on Venezuela’s Interim President: On April 1, the U.S. Treasury Department removed sanctions on Delcy Rodriguez, who has served as Venezuela’s interim president following the removal of Nicolas Maduro from power in January. The announcement come amidst continued moves towards normalization between the United States and Venezuela, including restored Venezuelan control over the boards of ‌state ⁠oil firm PDVSA’s U.S. subsidiaries and the reopening of Venezuela’s embassies and consulates in the United States.

Analysis: Two Narratives on the Chinese Economy

By Andrew Capistrano, Visiting Research Fellow, Institute of Geoeconomics (IOG)

China’s “Two Sessions”, the annual high-level plenary meetings of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC), concluded on 12 March with the approval of the 15th Five-Year Plan (FYP). As the FYP sets the direction of China’s economic development over the critical years 2026 to 2030, it has attracted close attention from overseas observers—and in doing so, has been cited as evidence for two seemingly contradictory narratives about the Chinese economy.

On the one hand, a “bullish” narrative emphasizes China’s successful pivot toward a more advanced, innovation-driven economy. The FYP elevates technological upgrading as the central driver of growth, supported by supply-side measures like R&D spending, industrial policy, and state coordination that enable rapid scalability. Significant progress is visible in sectors such as electric vehicles, batteries, renewable energy equipment, AI, robotics, and segments of semiconductor production, where domestic capabilities have expanded. Meanwhile, exports remain robust, and what is often described by China’s trading partners as “overcapacity” is viewed domestically as evidence of competitive strength and scale. From this perspective, the more modest 4.5%-5% growth target reflects a deliberate shift toward higher-quality expansion, and the renewed focus on “dual circulation” signals a long-term recalibration of growth toward domestic consumption alongside continued export strength.

On the other hand, a more “bearish” narrative highlights persistent demand-side fragility, particularly in weak household consumption. According to this view, China’s growth model has deep structural weaknesses, including a relatively low consumption share of GDP compared to other major economies. And despite repeated attempts across past FYPs to promote “dual circulation”, efforts to boost domestic demand have been uneven: weak income expectations, labor market uncertainty, and the lingering effects of the property downturn continue to weigh on household confidence. Thus the economy remains heavily reliant on credit-supported investment. But as debt levels have risen substantially, returns on investment have declined, and in some sectors, excess capacity and “involution” have eroded profitability without generating corresponding productivity gains. From this perspective, the FYP’s focus on technological innovation is unlikely to make Chinese growth more sustainable over the long term.

The tension between these narratives ultimately stems from the FYP’s emphasis on objectives that appear difficult to reconcile. Yet they are not mutually exclusive, and actually reflect two sides of the same coin—or two expressions of China’s underlying growth model—now operating in a more contested geoeconomic environment.

To understand why both narratives can be valid, it is necessary to examine how China’s growth model operates in practice, particularly the financial mechanisms that sustain it. At its core, the model suppresses household consumption relative to production, channeling resources toward investment, “new quality productive forces”, and industrial upgrading. This generates clear gains in manufacturing capability and strategic sectors, while simultaneously constraining domestic demand and contributing to debt accumulation.

In economies with hard budget constraints, inefficient investments are more quickly recognized through losses, restructuring, or exit. But in China’s case, soft budget constraints—particularly among local governments, state-owned enterprises, and policy-directed sectors—allow losses to be deferred and activity to be sustained through continued credit expansion. This means investment that would be written down in other economies can remain capitalized at cost, and measured output continues to reflect spending flows even when underlying returns weaken. Growth thus becomes closely tied to “credit creation” rather than underlying economic “value creation”, which helps explain the coexistence of technological advances alongside domestic imbalances between production and consumption. In this system, expansion can be maintained even as efficiency declines, because financing remains available and losses are not fully recognized.

A key consequence is the continued expansion of capacity beyond what can be absorbed domestically. Excess output must therefore be directed either toward constrained domestic demand or toward external markets that are increasingly resistant. In short, “overcapacity” is not simply a policy outcome, but the structural result of a system that prioritizes production, scale, and technological capability over immediate profitability or increased consumption.

Sustaining this dynamic is the interaction between domestic financial structures and the external trade environment, which together allow imbalances to persist rather than adjust. Capital controls insulate the Chinese financial system from cross-border volatility, allowing credit expansion and debt rollover to proceed with limited external discipline, while persistent trade surpluses generate foreign exchange inflows that support overall system stability. In more open economies, similar imbalances might trigger balance-of-payments pressures or currency crises; in China, however, they are sustained internally and externalized through exports. What might otherwise constitute a source of vulnerability thereby becomes a more durable equilibrium—albeit one that is increasingly resource intensive.

This is where the focus of analysis needs to shift: the financial structure that enables China’s growth model also provides the foundation for its geoeconomic strategy. What appears as a macroeconomic distortion is now better understood as a source of “strategic insulation”, limiting the transmission of external financial pressures and enabling investment levels that might otherwise be constrained by market discipline. In fact, it may be insufficient to continue assessing China’s growth model in purely macroeconomic terms, and instead to see it as a system increasingly organized around geoeconomic competition. The same mechanisms that generate overcapacity and weak consumption also underpin China’s ability to sustain strategic industries, absorb external shocks, and maintain autonomy in the face of US pressure.

The same financial structure that has long underwritten China’s growth model now underpins the FYP’s turn toward strategic insulation. As China faces foreign-imposed export controls, investment restrictions, and trade barriers, the goals of technological self-reliance and supply chain control have been elevated from developmental objectives to core elements of national security. The FYP institutionalizes this shift, framing advances in semiconductors, AI, and other dual-use technologies as essential for strategic resilience, not just growth. Although the FYP emphasizes domestic demand, the policy instruments remain heavily weighted toward supply-side measures such as industrial upgrading and technological autonomy. The renewed focus on “dual circulation” can therefore be interpreted less as a transition toward real consumption-led growth than as a reconfiguration of the existing model around security priorities: a kind of “national security-first” growth, where domestic demand is needed to support innovation and absorption, while production remains centered on strategically important sectors.

Whether such strategic insulation ultimately delays necessary adjustment or instead amplifies vulnerabilities under sustained external pressure remains an open question—and it is precisely this geoeconomic orientation that introduces new constraints. Importantly, the same features that give China’s model resilience also impose limits on its long-term viability. The system’s distinctly geoeconomic character emerges in the interaction between internal structure and external response: overcapacity in strategic industries leads to export expansion, which in turn triggers trade restrictions, industrial policy responses, and security-driven “de-risking” among major trading partners. These reactions reinforce domestic incentives to pursue technological autonomy and sustain investment in the same sectors. In this way, internal imbalances and external pressures become mutually reinforcing rather than corrective, as what might once have been resolved through market adjustment is instead redirected into a cycle of strategic competition in which production capacity, technological capability, and supply-chain position are prioritized over conventional measures of efficiency or balance.

The trajectory of China’s economy will therefore depend on how these tradeoffs are managed. The current model offers resilience and strategic capacity, but at the cost of persistent imbalances and rising debt. A shift toward more consumption-driven growth would require changes in income distribution, fiscal policy, and the role of the state—all of which are politically and institutionally difficult. At the same time, such changes may become strategically necessary, as continued reliance on external demand is likely to encounter increasing resistance as geoeconomic competition intensifies, raising the possibility that adjustment will be driven less by internal reform than by external constraint.

For overseas observers, the key point is not to choose between “bullish” and “bearish” narratives, but to recognize that both describe outcomes of the same system. The more important question is not whether the Chinese economy is strong or weak, but how its underlying model is evolving under geoeconomic pressure, and whether the tradeoffs this evolution entails can be sustained.

This points to a more useful set of narratives. Within the framework of the FYP, China’s model may continue to generate geoeconomic strength, technological advancement, and industrial scale despite external pressure. However, the same external constraints may ultimately force a rebalancing over which Beijing has less control, particularly if access to foreign markets becomes more restricted.

In this context, domestic consumption takes on a different and more strategic significance: it is not only central to internal rebalancing, but may also shape the extent to which China can sustain its geoeconomic strategy over the next five years. China’s economy is neither about to collapse nor embark on an unbounded path of expansion—it is a system in which strength and vulnerability are closely intertwined and increasingly conditioned by the interaction between domestic policy choices and a shifting geoeconomic environment.

(Photo: Shutterstock)

Disclaimer: The views expressed in this IOG Economic Intelligence Report do not necessarily reflect
those of the API, the Institute of Geoeconomics (IOG) or any other organizations to which the author belongs.

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