China’s growth dilemma risks fuelling tensions with the West

CHINA

China’s Communist Party-led model is driving overcapacity and reliance on exports. As Beijing turns to robots and AI to offset a shrinking workforce, the West is bracing for a deluge of cheap goods.

CHINA’S latest economic plan reveals a dilemma: it wants its consumers to spend more, while keeping the Communist Party-led model that has fuelled overcapacity and reliance on exports – a mix likely to keep tensions with the West high.

That tension sits at the heart of this month’s “Two Sessions” – the annual political gathering where China’s leadership sets its direction for the year ahead. Alongside it, Beijing also outlined its latest Five-Year Plan, covering the period to 2030.

Together, they offer a clear message: China knows its economic model needs adjusting, but it is not prepared to overhaul it.

That approach is already visible in practice, with rapid deployment of robotics and automation across industry, including X-Humanoid’s new robots unveiled this week at the Beijing Innovation Center of Humanoid Robotics.

The headline figure tells its own story.

China has set a growth target of between 4.5 and 5 per cent for 2026 – the lowest in decades .

That reflects a more difficult environment, both at home and abroad. The property market is struggling, the population is ageing, and trade relations with the US and Europe are increasingly strained. But the lower target is also a signal. Beijing is no longer chasing rapid growth at any cost. Instead, it is trying to move towards a steadier model, even if that means accepting slower expansion in the short term.

A key part of that shift is getting Chinese households to spend more.

For years, the economy has relied heavily on exports and investment, with domestic consumption playing a smaller role than in most major economies.

That has become harder to sustain as global demand weakens and trade frictions intensify.

The challenge is that changing this behaviour is not straightforward.

Chinese households tend to save a large share of their income, reflecting uncertainty around jobs, pensions and the housing market.

With property prices under pressure, many are holding back rather than increasing spending.

So far, Beijing’s response has been cautious.

Rather than launching a large stimulus programme, the government is relying on targeted measures – subsidies for services such as elderly care, support for families, and schemes encouraging people to trade in old cars or electronics for new ones .

These may boost activity in specific sectors, but they are unlikely to drive a broad-based increase in demand.

Yet Chinese policymakers do not necessarily see this as a contradiction.

Instead, they appear to view it as a balancing act between short-term stability and long-term transformation.

As Aedan Mordecai, lead Asia Pacific analyst at Sibylline, puts it: “It’s partly ideological. And the balance is partly growth now and growth later.”

In this view, stronger manufacturing, job creation and lower costs will eventually feed through into higher consumer spending.

“The consumption problem only will solve itself,” Mordecai says, arguing that industrial expansion can generate the conditions for households to spend more over time.

That logic also underpins China’s push into automation and advanced manufacturing, which policymakers see as a way to offset demographic pressures from a shrinking workforce.

Whether that approach will succeed remains uncertain.

It would be unprecedented for an economy of China’s size to rebalance in this way, particularly while maintaining such a strong role for the state. But the model has its advantages.

China’s centralised system allows policymakers to direct resources at scale, shaping entire regions around specific industries and accelerating the rollout of new technologies.

That same approach, however, has also contributed to persistent overproduction in key sectors.

Industries such as electric vehicles, batteries and solar panels have expanded rapidly, supported by state policy, leading to intense competition and falling prices.

Beijing now appears ready to intervene more directly, with measures expected to limit output and stabilise markets .

Even so, the underlying dynamic is unlikely to disappear.

As Mordecai notes, once a sector is identified as strategic, local governments and firms move quickly to align with central priorities.

“They take the signals from the top,” he says, often resulting in large amounts of capital being channelled into the same industries.

This has clear implications beyond China’s borders.

Western governments have already raised concerns about Chinese exports flooding global markets with artificially low prices.

The European Union and the United States have imposed tariffs in response, particularly on electric vehicles.

If overproduction continues, further trade measures are likely. In other words, China’s domestic economic choices are feeding directly into geopolitical tensions.

Technology is another area where Beijing is doubling down. Artificial intelligence is seen not just as a driver of growth, but as a chance to move ahead of competitors in emerging industries.

Here, China may have a different advantage.

“There’s a big focus on application,” Mordecai says, noting that adoption of AI across government and industry is often faster and faces fewer barriers than in Western economies.

At the same time, foreign firms are likely to face stricter conditions.

Access to the Chinese market increasingly comes with requirements around data, technology and compliance with state priorities.

“Everything comes with conditions,” Mordecai says, reflecting a system in which openness is selective rather than universal.

Taken together, the direction is clear.

China is attempting to manage a complex transition – sustaining growth, adapting to demographic change and strengthening its technological base – while maintaining tight political and economic control. That may allow it to avoid a sharp slowdown at home.

But it also means the tensions shaping its relationship with the rest of the world are unlikely to fade.

As Mordecai puts it: “China may ultimately be a prisoner of its own policies.”

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