China’s economy stands out as a peculiar anomaly in the global landscape. While consumers in major economies like the United States, Japan, and the European Union typically contribute between 50% to 75% to the gross domestic product (GDP), Chinese household consumption hovers around a mere 40%. Instead, China’s economy leans heavily on investment in areas such as property, infrastructure, and factories, as well as on exports. This skewed economic structure has created a unique and troubling dynamic, not only hindering China’s growth but also posing significant challenges to the global economy. As Chinese companies struggle to sell their products domestically, they are forced to turn to international markets, resulting in an annual trade surplus of nearly $900 billion—approximately 0.8% of global GDP, according to The Wall Street Journal.

The Ripple Effect of Low Consumption

China’s minimal consumption and high investment rates have a ripple effect, impacting both its domestic economy and international trade relationships. In countries like the United States, the European Union, Japan, and other newly industrialized Asian nations, China’s growing trade surplus has increasingly become a source of conflict and tension. For instance, China’s trade balance with the U.S. has increased by $49 billion since 2019, while its surplus with the European Union has risen by $72 billion, and with Japan and other Asian economies by $74 billion. China’s trade surplus with the rest of the world has ballooned by about $240 billion, according to data compiled by Brad Setser of the Council on Foreign Relations.

Logan Wright, head of China research at the Rhodium Group, explains the problem clearly: “China accounts for just 13% of the world’s consumption but 28% of its investment.” Such an imbalance means that China’s economic model depends on “a more confrontational approach with the rest of the world.” To sustain its investment-heavy model, China must continually outcompete other countries, often making their own manufacturing investments unfeasible. This strategy not only threatens the economic stability of other nations but also leads to a zero-sum game where China’s gain is the rest of the world’s loss.

The issue is further exacerbated by the sheer scale of China’s economy. Rhodium estimates that if China’s consumption levels matched those of other major economies like the European Union or Japan, its annual household spending could reach $9 trillion instead of the current $6.7 trillion. This $2.3 trillion gap—the equivalent of Italy’s entire GDP—represents a 2% shortfall in global demand, leaving a gaping hole that impacts not just China but economies worldwide.

Deep-Rooted Causes of Underconsumption

China’s economic policy has prioritized expanding its international power through heavy investment in production to boost trade income, which it then uses to compete globally by subsidizing industries, often at the expense of fair trade practices. This approach also channels significant resources into building its military might. While China’s large-scale infrastructure investments have been impressive in scope, they have not necessarily translated into improved well-being for its citizens. In contrast, democratic societies, where elected officials are accountable to voters, are less likely to pursue such a single-minded focus on international rivalries at the cost of their people’s welfare, as they must address the needs and concerns of their electorate.

Unlike other nations that use progressive taxation and social welfare programs to address economic disparities, China’s tax system is regressive. It relies heavily on value-added taxes (VAT), which disproportionately affect lower-income families. Rhodium estimates that just 8% of China’s tax revenue comes from personal income taxes, compared to 38% from VAT. Moreover, China spends significantly less on essential services such as health and education than other major economies, forcing poor and middle-income families to allocate more of their limited income to these necessities, further depressing consumer spending.

The economic environment is also characterized by suppressed wages and artificially low-interest rates, which diminish household income while enhancing the profits of state-owned enterprises. This dynamic keeps household consumption low and corporate profits high, concentrating economic power in the hands of the state and state-owned entities. Furthermore, local governments, with limited authority to levy taxes, are forced to generate revenue by selling land and property for manufacturing and infrastructure projects, inflating investment further and creating an unsustainable economic bubble.

The Socialist State’s Grip Tightens

Despite occasional rhetoric about shifting towards a more consumer-driven economy, China’s leadership, under President Xi Jinping, has tightened its grip on the economy, steering it away from market-driven reforms. A decade ago, top Chinese policymakers echoed Western economists’ views, advocating for a rebalancing of the economy towards consumer-driven growth. In 2013, the ruling Communist Party declared that future growth would rely more on market forces and consumer activity. However, Xi has taken a different path, increasing state control over economic activities. He has replaced reform-oriented officials with loyalists who prioritize sector-specific targets over overall economic growth.

Xi’s administration has focused on self-reliance, rejecting the economic principle of comparative advantage, which suggests countries should specialize in what they do best and trade for the rest. Instead, Xi has promoted a vision where China produces as much as possible domestically and imports as little as possible. Officials in China boast about their country being the “only country to produce in every single one of the United Nations’ industrial product categories,” showcasing the extent of their ambition to be self-sufficient. This approach has stifled domestic consumer spending and limited the growth of the service sector, which typically drives consumption in more market-oriented economies.

This economic strategy, which prioritizes state control and heavy investment over household consumption, not only suppresses domestic consumer spending but also reduces opportunities for emerging markets to export their products to China. Countries that once viewed China as a significant customer now see it as a formidable competitor. As Andrew Batson of Gavekal Dragonomics points out, China’s reluctance to reduce its share in lower-value product markets while simultaneously targeting advanced products such as electric vehicles and semiconductors creates direct competition with other nations, often at their expense.

A Bleak Outlook for the Future

In conclusion, China’s economic model, marked by low household consumption and excessive state control, represents a flawed socialist approach that undermines both domestic well-being and global economic harmony. The ongoing imbalance between investment and consumption reflects a system that does not prioritize the needs of its people. This highlights the inherent limitations of a socialist economic framework that prioritizes state objectives over individual prosperity. As China continues to operate under this model, it risks isolating itself further from the global economy, perpetuating internal inefficiencies, and stoking international tensions.

The dark reality is that without significant reforms to boost household consumption and reduce state interference, China’s economy may continue on a path of unsustainable growth, characterized by internal contradictions and external conflicts. The world will need to brace itself for the consequences of an economic giant whose priorities lie not in fostering shared prosperity but in asserting state control and power.