A nation’s growth depends on the direction of a few major economic indicators which include its net exports and domestic consumption with its subset, household consumption. China’s net exports are only 4% of its GDP, when we deduct the less-talked-about 16% import figure from the exports that constitute 20% of GDP. Domestic consumption is about 56% of GDP. The remaining 40% of GDP is investment and capital formation. The huge spending on infrastructure, real estate, machinery and factories comes from this 40%; this is also roughly its savings rate, one of the highest in the world, the global average being 20%. Household savings alone represent 23% of GDP; these savings represent around 40% of household disposable income. For comparison, the figure for the US is around 4.5%, for Canada 7% and for India around 19%.

It is easy to conclude that the Americans are profligate consumerists, while the Chinese are restrained in their consumption and their savings contribute to investment and infrastructure. The obverse of this positive situation is that high household savings result in low domestic consumption. This thrift is not exactly voluntary but is the result of uncertainty and anxiety about the future that results in a deep-seated precautionary behaviour. The social safety net, a strength of the West and the driver of their profligacy, is conspicuous by its absence in China, compelling the Chinese to feel compelled to self-insure against the future.

Low household consumption has a deleterious impact on the income-consumption cycle; higher consumption leads to higher production which leads to higher employment and an upward push to wages. The reverse is true for low household consumption and that partly explains the stagnant and even falling employment and wages in China. Low employment and low wages add to the anxiety about the future and create increasing propensity to save, a vicious cycle creating a downward spiral. The high household savings are usually deposited in the banks from where these are borrowed, a large share by the government sector including the provincial and local governments, whose debt is about 125% of GDP. If we add the private sector borrowings too, it becomes 300% of GDP.

Borrowings are good for the economy if these are invested for creating productive assets. In China, a considerable portion of the borrowings have been going into creating real estate, which has lost its value, and in infrastructure like the high-speed rail network (HSR); these have high occupancy rates on busy inter-urban connections but very low rates on long-distance rural routes. A report in the Asia Times of 17 June 2025, “China’s fast-growing high-speed railway network faces reality” said that most of the Chinese migrants in cities travel during their holidays to their homes in far-off rural areas but they are “unwilling to spend one to two days’ salary on a comfortable seat and a shorter annual journey home.” They travel by the cheaper but slower and overcrowded “green-skinned trains”. The article quoted Chinese commentators saying that China’s National Audit office found that HSR had lost 100 billion yuan in the nine months ending 31 December, 2024. The state-owned company that operates HSR carries a $1 trillion debt, with most of the lines, except the intercity connections, declaring losses year after year.

Faced by a Covid-scarred economy becoming increasingly export dependent, Xi Jinping had, on 14 May 2020, at a meeting of the Politburo Standing Committee enunciated the strategy of dual circulation, where the domestic production-consumption cycle (internal circulation) would play an increasing role in the economy, mitigating the dependence on foreign trade and investment (external circulation). Later, dual circulation was made part of the 14th five-year plan (2021-2025) and Chinese economists repeatedly talked of deglobalisation and self-reliance.

Partly due to natural disasters in the last three years, capped by multiple dam-failures, typhoons and fires in July this year, the domestic consumption has failed to take off and reliance on exports has actually increased. If the economy, going even by official figures, is growing by barely 5% and exports increased by about 7% while imports remained almost flat, increasing the trade surplus in 2025 to $1.19 trillion, it indicates that domestic consumption is not keeping pace with GDP growth. This is particularly important because investment too has fallen below the historical average of 40% due to the 17.2% drop in real estate and high-tech investment could not fully compensate for it.

Due to the restrictive policies adopted by Xi Jinping, some of which expose foreign executives to the threat of arrest even for collecting economic data for normal business decisions, foreign investment in China has been falling. China’s weaponisation of supply-chains has spurred diversification globally, further denting the need for investment in China, resulting in a 9.5% drop in foreign investment in 2025. With fewer opportunities at home, because of tariffs and bans on transfer of high-tech, Chinese investment abroad has been growing, having increased by 7.1% in 2025. All this coupled with the global emphasis on derisking and decoupling from China and onshoring and friendshoring of production heretofore in China, would ultimately lead to a fall in Chinese exports too in a few years’ time. The world is working hard to set up mining and refining of lithium and rare earths. 25% of batteries are being made outside China though there is considerable dependence even now on China for some of the battery components. 20% of solar panels are being produced outside China with India emerging as the second largest producer. These figures are slowly increasing from year to year since the 2020 supply-chain crisis.

China’s shrinking population due to the plummeting marriage and birth rates, loss of family wealth in the real estate crisis, falling employment, shrinking global competitive edge in traditional manufacturing and natural disasters are ensuring that, in spite of repeated stimulus packages, consumer confidence is not looking up. In spite of the stated goal of becoming less dependent on exports under the dual circulation policy of Xi Jinping, the export dependence of the economy has been rapidly increasing. Stagnant or falling domestic demand in various sectors of the economy means that imports into China are not increasing. The resultant ballooning of the trade surplus is obviously not to the liking of other countries and they are looking for ways to reduce imports from China.

The US has seen particular success in this endeavour, with imports from China seeing a whopping 29.7% reduction in 2025, bringing the trade deficit down to its lowest level in two decades. China could more than make up for this drop in 2025 by increasing exports to the EU and its Belt and Road Initiative (BRI) partners in Asia, Africa and Latin America. Trump’s doctrine of hegemony in the Americas, often called the Donroe Doctrine, has succeeded in many countries; with the recent switch to right-wing governments in Venezuela, Peru, Costa Rica, Bolivia and Columbia. This shows that there is a clear reduction in the number of China-friendly governments on that continent.  Many BRI partners in Asia and Africa have suffered the consequences of Chinese investments. The economies of some of these countries are in a bad shape, prominent examples being Pakistan and Iran. The huge investment in Pakistan’s CPEC is facing persistent and severe friction and the Iranian regime does not have money to buy much except materials related to war. Thus, the prospects of a sustained increase in Chinese exports in the coming years are rather bleak. If exports also fall and domestic consumption remains weak, a contraction in the economy will be the natural outcome.

Whether the Chinese economy shrinks or remains stagnant in the coming years, it remains certain that dual circulation is a deflating bubble. This strategic pronouncement may have added to the influence of Xi Jinping in the Party but, for the country’s economy, this has proved to be an ephemeral bubble. / DAILY WORLD /

( R N prasher is a former IAS officer. The views expressed are his personal.)