China's economy stimulation without achieving rebalancing

In the ever-evolving global economic landscape, China continues to grapple with its unique economic challenges. The country's growth model, predominantly relying on industrial capacity expansion and exporting, has come under scrutiny, with concerns about overcapacity and a decline in capacity utilization.

According to the latest data, producer and export prices have dropped in most months since the start of 2025. This trend is partly due to China's expanding production capacity outpacing domestic demand, leading to overcapacity. The United States and European Union have urged China to address this structural imbalance by shifting its economic focus towards domestic consumption.

China has taken steps to address this issue. The government has implemented fiscal and monetary stimulus, with a focus on infrastructure investment and local-government bond issuance. Special targeted measures to boost consumption, such as a subsidized consumer goods trade-in program, have been implemented, albeit on a smaller scale compared to infrastructure-driven spending.

The Chinese government has also launched an "Anti-Involution" campaign to reduce industrial overcapacity by targeting key sectors such as steel, coal, cement, glass, agriculture, solar glass, polysilicon production, and electric vehicles. However, these measures have only slightly improved profit margins and have not fully resolved underlying structural issues, leading to continued deflationary pressure and ongoing weak demand.

The potential of a consumption-driven strategy in China to alleviate trade tensions with the US and EU is a topic of discussion. While prioritizing consumption may conflict with China's focus on technological upgrading and innovation, stronger domestic demand would benefit technological development. Chinese exports, despite a decline in shipments to the US, grew by 6.1% year-on-year in the first seven months of 2025, demonstrating the resilience of China's export sector.

The Chinese government has increased the general budget deficit to 4% of GDP in 2025, with the issuance of ultra-long special treasury bonds. However, no significant near-term surge in global demand is expected resulting from increased Chinese consumption due to ongoing stimulus being directed mainly towards infrastructure.

The concern of higher inflation from consumption-driven stimulus in China is argued to be misplaced given its low inflation environment. The global rebalancing the US and the EU are expecting from China will not happen soon, underscoring the complexity of China's economic transition.

This article is part of the project Dealing with a resurgent China (DWARC), funded by the European Union's HORIZON Research and Innovation Actions. The authors, Alicia García Herrero and Jianwei Xu, are a Senior Fellow and a non-resident Fellow at our website, respectively, and hold prominent roles in the financial industry. Alicia García Herrero is the Chief Economist for Asia Pacific at French investment bank Natixis, and an independent Board Member of AGEAS insurance group. Jianwei Xu is a senior economist at Natixis, Asia Pacific. Their insights provide valuable perspectives on China's economic shift and the challenges it faces.