Why China Chose Exports Over Consumption

When China's property market collapsed in 2021, Beijing's leaders faced a crucial choice. With real estate construction—the engine that had powered decades of growth—no longer viable, they needed a new driver for the world's second-largest economy.

Economists had long pointed to the obvious answer: consumption. Chinese household spending accounts for just 40% of GDP, roughly 20 percentage points below the global average. Simply raising consumption to South Korea's level (48%) or Japan's (55%) could fuel growth for decades.

But China chose a different path—one that's reshaping global trade and creating new tensions worldwide.

The Welfare Expansion Beijing Won't Make

Rebalancing toward consumption requires wealth redistribution. Most countries do this through minimum wage increases, tax cuts, stimulus payments, or expanded social safety nets. China has taken some modest steps—the People's Bank of China slashed mortgage rates in 2023 and 2024, saving households about $43 billion annually in interest payments.

Yet Beijing has steadfastly refused the one move that might make the biggest difference: significantly expanding its social safety net.

The numbers tell a stark story. China's national social security fund will likely be depleted by 2035, threatening the retirement of tens of millions. While nearly all citizens have basic health insurance, low reimbursement rates mean medical costs can still bankrupt families. Most critically, 300 million rural migrants working in cities can't access subsidized public services because they're only registered in their hometowns.

The government promises to grant these internal migrants full urban residency rights, but won't fund the necessary infrastructure and services.

The 'Latin Americanization' Fear

Xi Jinping has been explicit about his reasoning. In a 2021 essay, he warned against "welfarism" and cited how "some Latin American countries engaged in populism," building Western-style welfare systems that led to fiscal indiscipline and trapped them in the middle-income trap.

This fear intensifies as China ages rapidly. The country's old-age dependency ratio will match the United States by 2035 and the EU by 2046. By 2080, China will have more retirees than workers—a demographic time bomb that makes leaders wary of expanding welfare commitments.

While Beijing readily borrows for infrastructure projects it views as investments, it sees social spending as recurring expenses and "endless burdens." As Xi put it: "Welfare benefits cannot be reduced once they have gone up."

The 'New Quality' Gamble

Instead of redistribution, China is betting on what it calls "new quality productive forces"—using innovation and industrial upgrading to create higher-value goods that can't be easily replicated by lower-cost competitors. The strategy spans everything from biotechnology to flying cars, with the hope that proprietary technology will generate higher profit margins and eventually boost consumption through wealth creation rather than redistribution.

It's an ambitious long-term vision. But there's a problem: this transformation takes time, and China needs growth now.

The Export Surge Solution

To bridge the gap between weak domestic demand and the eventual payoff from industrial upgrading, China is doing what it knows best: ramping up exports. Already the world's largest exporter, China is pushing even harder into global markets, flooding them with everything from electric vehicles to solar panels.

This creates a vicious cycle. The more China relies on exports to compensate for weak domestic consumption, the more it delays the very rebalancing that would reduce its dependence on external demand. Meanwhile, other countries find themselves competing against a manufacturing juggernaut that's essentially subsidizing its way into their markets.

Tesla and General Motors face intensifying competition from Chinese EV makers. European solar companies struggle against heavily subsidized Chinese panels. Even in high-tech sectors, companies like Intel and NVIDIA worry about China's semiconductor ambitions backed by massive state investment.

The Global Reckoning

China's choice reverberates far beyond its borders. By prioritizing exports over consumption, Beijing isn't just delaying its own economic rebalancing—it's exporting deflationary pressure worldwide. Countries that might have benefited from Chinese consumers buying their goods instead face Chinese competitors undercutting their domestic industries.

The strategy might work if China successfully moves up the value chain and eventually develops the domestic consumption it needs. But it's a high-risk gamble that assumes other countries will continue accepting China's export surge without retaliation.