China’s Pain Puts Tech Over People

For years now, China has vowed to implement policies that would motivate its 1.4 billion people to spend more, and, for years, it has failed to live up to that promise. This month, as the world’s second-largest economy unveiled a new economic plan for the remainder of the decade, the consumption promise seems poised to lose out once again. And this time, to an intensifying push for self-sufficiency in essential technologies.

Recommendations from Chinese policymakers for the country’s five year plan for 2026 to 2030 paint a clear picture of Beijing’s larger ambitions: self-sufficiency in science and technology with a repeated focus on driving innovation and breakthroughs in technologies like cyberspace, big data, artificial intelligence, nuclear energy, outer space, deep sea, polar exploration, low-altitude aviation, quantum technology, biomanufacturing, brain-computer interfaces and 6G mobile communications.

Those goals are, no doubt, a direct result of the geopolitics of the past few years. Namely, the West’s larger approach of imposing high tariffs on China’s tech exports like solar panels and electric vehicles, and a coordinated effort to stymie China’s access to advanced chips and the development of AI. Chinese President Xi Jinping’s resulting calls for self-sufficiency are clearly now the driver of Beijing’s economic policy.

That resolve has also only become more concrete now as US President Donald Trump wages a tariff war against Beijing with recurring threats of massive levies on Chinese imports. A communique published following the policy meeting last week said the country needed to “brave high winds, choppy waters, and even dangerous storms” by “opening up new horizons for Chinese modernisation”.

And yet, as many analysts have fervently pointed out for at least a year, China faces a far bigger challenge, one that is more internal than external: a population with a tight wallet and an entrenched reluctance to spend. To be sure, the consumption issue is not new for China. For years, the share of consumption expenditure in China’s GDP has steadily declined. Over the past decade, it has remained at levels of 54-55%. That’s starkly below the global average of 75% — meaning consumer spending remains the key driver of GDP growth for much of the world.

But the problem has turned into a deeper crisis for China in the aftermath of the COVID-19 pandemic. Strict lockdowns at the time decimated consumer confidence, and an eventual implosion of the property sector in 2021 wiped out household wealth for millions of Chinese who had viewed real estate as a safe and primary form of investment for decades. The result has been a record level of savings as consumers hold on to significant chunks of their incomes for education, healthcare, and retirement.

Those problems are further exacerbated by stagnant income growth and a persistent lack of jobs. This year, youth joblessness hit record levels, leaving many young graduates out of jobs and reliant on their parents and grandparents or welfare schemes. The level of disillusionment is such that when Beijing announced plans to introduce a new K-visa to lure in tech talent, it faced wide backlash from its jobless, a rare occurrence in the authoritarian country.

Those issues, combined with competition-induced price wars and a global backlash against Chinese exports, have pushed China’s inflation rate below zero for each of the past eight months — a situation last seen, according to Chatham House, in the immediate aftermath of the 2008 global financial crisis.

The policies outlined by China this month are unlikely to help.

First, they indicate that manufacturing will continue to be central to China’s economic policy. That means the state will continue to funnel huge amounts of money into key industries to drive their growth and finance their efforts to innovate. An outsized focus on investment (averaging between 42 and 43% of the GDP) has historically been China’s single biggest impediment to boosting consumer spending. Last year, the US-based Carnegie Endowment for International Peace described how a low consumption share has been fundamental to China’s rise as the factory floor of the world.

The think-tank described how, since the early 1990s, China prioritised subsidising investment in manufacturing, infrastructure, and the property sector rather than prioritising social benefits or mandating wage increases. In many ways, high and rising savings were actually critical to China’s manufacturing ambitions because those could be channelled “by government-controlled banks into investments in sectors targeted by Beijing”.

“China’s extremely competitive manufacturing… should not be thought of as separate from the country’s extraordinarily low domestic consumption. The former exists because of the latter, and one requires the other,” the think-tank explained. The only way for China to sustainably boost consumption will be to shift from funding manufacturing to driving higher consumer incomes by mandating higher wages for factory workers and creating stronger social security nets, like better pension outlays for an aging population. But therein lies the problem. For industries built on decades of state support, slower state investment and higher wage payouts will almost certainly lead to a decline in growth — a problem that would run contrary to the goals outlined by Beijing this month.

Second, an outsized focus on specialised technologies like quantum computing or brain-computer interfaces will also do little to generate the massive amounts of jobs that are needed by the country’s millions of jobless youth.

Still, the five-year plan agreed upon by Chinese policymakers calls for action to boost consumption. One of the recommendations from policymakers states: “Special initiatives should be advanced to boost consumption. To increase people’s spending power, we should make coordinated moves to boost employment, increase incomes, and keep expectations stable, and appropriately increase the share of fiscal expenditure that goes toward public services.”

But that directive includes few details on any definitive measures to make that happen. It is also no different from goals often repeated by policymakers with little to no progress to show for them. Capital Economics analyst Julian Evans-Pritchard noted that the communique from the policy meeting only reaffirmed the fact that “Beijing only pays "lip-service" to the idea of boosting consumption.”

Similarly, Tianchen Xu, a senior economist at the Economist Intelligence Unit, told Reuters that pledges to "invest in people" might mean increases in medical insurance and rural pensions. But "they may not have a clear idea on how to do that for now.”

​Meanwhile, some job growth may be supported by Xi’s resolve this month to support “traditional” manufacturers — industries facing decline in the face of growth in high-tech sectors. That resolution, however, will only compound the debt burden on local governments that will be tasked with preventing such manufacturers from failing. And that debt will only make these provinces less likely to offer greater social welfare backing to their citizens.

In The Wall Street Journal, its chief China correspondent, Lingling Wei, noted how the five-year plan’s language also indicates Beijing’s reluctance to take on new fiscal burdens. The promise of a stronger social safety net is qualified with the phrase “to the utmost of our abilities”, Wei noted.

All-in-all, it would appear that the Chinese consumer will continue to be an afterthought to Beijing’s greater goal of competing with the West. And, it seems, the Chinese leaders are well aware of that reality. As one government insider in Beijing told WSJ’s Wei: “The power centre in Beijing is sacrificing the public’s standard of living to go all-in on the technology race against the US.”

More pain for trading partners

The Chinese consumer, meanwhile, will not be the only loser as China chases its tech ambitions. As the Atlantic Council notes, the massive support for manufacturing “can only mean bad news for China’s trading partners, because they now will bear the impact of an increasing reliance on exports”.

With demand shrinking at home, Chinese manufacturers will continue to shore up their exports, and likely at lower costs to get rid of their inventories. The Council said last week that China’s global trade surplus was poised to hit a record $1.2 trillion by the end of the year despite a tariff-led slowdown in demand from the US.

But with greater trade barriers imposed by some of its biggest Western markets, Chinese exporters are likely to target lower-developed economies, a development that would be “devastating” to manufacturers in those countries.

​An increased dependence on exports could also potentially dial up the global heat against Chinese exports, and, in effect, create greater internal headwinds like job losses at home.

In the longer term, it would also mean “that Beijing will lose friends as fast as it gains market share”, analysts at Chatham House say.

• Early this week, Trump and Xi agreed to a simple trade deal which reduces US tariffs on China by 10%, in return for concessions on rare earths by Beijing.

• Dutch chipmaker Nexperia has suspended supplies of wafers to its Chinese assembly plant, a move that could hit the supply of chips to carmakers worldwide.

• Factory activity in China fell for a seventh month in October to a six-month low.
  

• Korea’s Samsung says it is talking to Nvidia about supplying its next-generation high-bandwidth memory chips, known as HBM4. HBM chips are a key building block of artificial intelligence chipsets.
  

• And the US has given India a six-month sanctions waiver to run the Iranian port of Chabahar.