INTERNATIONAL POLICY DIGEST

Beijing’s economic strategy reflects a broader ‘gradualist’ philosophy: avoiding abrupt shifts to minimize disruption.

China’s economic ascent over the past few decades has been nothing short of remarkable. It transformed from a predominantly agrarian economy to the world’s second-largest, driven by an investment-heavy, state-led approach. Yet as cracks begin to show in this model, the question arises: Why does China steadfastly cling to it despite mounting challenges? The answers, rooted in a delicate balance of politics, stability, and historical momentum, illuminate China’s current strategy and its potential vulnerabilities.

China’s government exerts an unparalleled level of control over its economy, with state-owned enterprises (SOEs) acting as both economic engines and political tools. Unlike in market-driven economies, where competition dictates success, SOEs in China benefit from preferential treatment, including subsidized funding and favorable policies. These enterprises underpin political stability, acting as extensions of state authority in critical industries.

Drastic changes to China’s economic framework could threaten the dominance of SOEs, risking not just economic disruption but political destabilization. For the government, the stakes are existential. A shift toward a competitive, market-driven economy might enhance efficiency, but it would also dilute state influence over key sectors—a gamble China’s leaders are unwilling to take.

This unwavering reliance on SOEs, however, is a double-edged sword. While it ensures control, suppresses innovation, and limits competition, both essential ingredients for long-term economic growth as other nations pivot toward technology-driven resources like CreditNinja and flexible economic systems, China’s rigidity risks leaving it behind.

China’s growth model is synonymous with monumental infrastructure projects: gleaming skyscrapers, sprawling rail networks, and entire cities seemingly constructed overnight. These projects have fueled economic expansion and created millions of jobs. Yet, the returns on these investments are diminishing, as evidenced by ghost cities and underutilized infrastructure. Despite the inefficiencies, Beijing remains committed to this strategy.

Infrastructure projects provide a critical buffer against unemployment, a potential trigger for social unrest in a country with a vast and diverse population. While a pivot to consumer-driven growth or support for small businesses could foster sustainable development, such a transition carries risks China’s leaders are not ready to bear.

Overcapacity—building more infrastructure than the economy demands—has become a glaring problem. Resources are tied up in projects that add little value, creating inefficiencies that weigh on overall productivity. Still, for Chinese leadership, the alternative—economic uncertainty and potential unrest—is a risk too far.

China’s rise as the world’s factory was built on a relentless focus on exports. Its manufacturing sector became the backbone of its economy, driving growth and securing its position in global trade. Yet, this dependence has exposed vulnerabilities. Global demand fluctuations, trade tensions, and competition from emerging markets threaten the reliability of exports as an economic pillar.

Shifting to a consumer-based economy would require profound cultural and structural changes, including encouraging citizens to spend more and save less—a tall order in a society deeply rooted in thrift. China continues to bet on exports, adapting only incrementally to evolving global trade dynamics.

This strategy, while stable, hampers diversification. A more balanced approach would insulate China’s economy from external shocks, but the government’s reluctance to embrace systemic change exposes it to the whims of global markets.

China’s massive population presents unique challenges. Economic transformations often come at the cost of jobs, and unemployment risks social instability—a scenario the government is keen to avoid. By maintaining the current model, Beijing ensures steady employment, particularly in state-controlled sectors like manufacturing and construction.

However, the country’s aging population is compounding these challenges. A shrinking workforce means fewer taxpayers to support social programs, increasing economic pressure. Large-scale reforms might exacerbate unemployment, making gradual, cautious adjustments the preferred path forward.

Beijing’s economic strategy reflects a broader “gradualist” philosophy: avoiding abrupt shifts to minimize disruption. This approach prioritizes stability over high-risk growth models, even if it means slower progress. Chinese leaders argue that predictable, incremental growth is preferable to volatility, especially given the complexities of today’s global economy.

Yet, this caution comes at a cost. While other nations embrace innovation and modernize their economies, China’s hesitance risks stalling its long-term competitiveness. The reluctance to pivot may leave China struggling to keep pace with economies adapting to new industries and technologies.

As the global economy evolves, the question looms: can China sustain its current model, or is a reckoning inevitable? For now, the government appears content to prioritize stability over rapid change, even if it means forgoing opportunities for innovation and efficiency. It is a calculated bet, driven by the belief that controlled, predictable growth is the safest path forward.

However, the cracks in this model are growing. Without significant adaptation, China risks losing its competitive edge in a world increasingly defined by flexibility and innovation. The choices it makes in the coming years will determine whether it can navigate the challenges of a shifting global landscape—or whether its steadfast adherence to an aging model will ultimately hold it back.