A broken model: China is unwilling to implement the reforms needed

China's growth model has lasted longer than expected but is now losing momentum, as the government runs out of fiscal space to sustain investment-driven expansion

When Chinese Premier Li Qiang revealed his draft “Government Work Report” last week, as the 14th National People’s Congress (NPC) gathered for its annual legislative session, it set a sobering tone. The growth target for the economy was reduced from “around 5 per cent”, the figure set since 2023, to a range of 4.5-5 per cent. This is the lowest since 1991. It accompanies a more pragmatic approach to managing the country’s economy, one which recognises that Beijing’s ability to stimulate growth is reaching its limits. Finance Minister Lan Fo’an admitted at a press conference that “China’s government does not have unlimited funds”. Even in the face of geopolitical uncertainties, the government has thus pared back its fiscal stimulus. A rapid buildup in debt since the pandemic has severely limited the fiscal headroom available to the government. China’s non-financial debt-to-gross domestic product ratio is now over 300 per cent, and the same ratio for government debt is touching 90 per cent. Mr Lan further promised to severely cut “inefficient expenditure”, reflecting President Xi Jinping’s increasingly firm directives against wasteful projects, particularly by local governments.

 

China’s model of growth has lasted far longer than it could have been expected, but it is finally running out of steam — or, alternatively, it ran out of steam some time ago, and the government is finally running out of the money needed to keep it going nonetheless. The basic model — financial repression of households raising capital, which the government then directs to investment and the creation of capacity, leading to exports of goods — is unsustainable in a world in which demand is not infinite and trade barriers are increasing. Besides, in China, productive capacity has grown too fast. Fixed-asset investment dropped in 2025, for the first time since 1989. Meanwhile, households are hesitant to increase spending at a time when real-estate prices are falling, and most mainlanders hold a large part of their wealth in immovable properties.

 

The long-term fix is well known, and has even become economic orthodoxy in Beijing — a rebalancing away from investment and exports to domestic demand. But this sits uneasily with the political mandate to keep growth high, and to increase self-sufficiency in the face of increased competition with the United States (US). And, regardless of US President Donald Trump’s tariffs taking hold, Chinese export markets elsewhere continue to grow. Thus, while the narrative of a shift towards consumption has officially taken hold, policies are yet to fully support it. In effect, technological self-sufficiency takes priority over rebalancing. Mr Xi’s own statements on the sidelines of the NPC, at a function where he reviewed the “Work Report”, reiterated the importance of high-tech competitiveness — what he called investment in “new quality productive forces”. Chinese provincial governments will no doubt be deeply perplexed by these confusing signals from the top leader: To invest heavily in technological self-sufficiency while avoiding possibly wasteful spending. Who can tell, at the tech frontier, what will be wasteful and what will not? The fundamental problem in China’s economy is not just that its model is broken but that its leaders are unwilling to fully commit themselves to the reforms that they know they must implement.