Given the general banality of Chinese Communist Party pronouncements, Beijing’s announcements this month on the economy amounted to a bombshell.
Not only were GDP growth estimates lowered, the target for new urban jobs was done away with altogether. No wonder. Of the 180 million rural migrants who were seeking work last year, mostly in cities, almost 50 million returned to their villages without jobs. Already anaemic retail sales declined in May. Fixed asset investment is down for the first five months of the year.
The main reason is the slow bursting of China’s property bubble and the resulting decline in infrastructure spending, even as consumers and local governments cut back.
For good or ill, China’s rise over the past 50 years has been the most compelling economic saga ever. Now, it is simultaneously battling a collapse in property prices and local government debt becoming unsupportable while seeking to dominate sunrise industries such as artificial intelligence (AI), electric vehicles (EVs), batteries and solar panels.
At the same time, China is, by hook but arguably mostly crook, retaining its mercantilist stranglehold on lower value-addition industries (think of mobile phones and sneakers) through an undervalued currency and efficient supply chains.
This is a high-wire act playing out against a backdrop that affects India as well; what former chief economic advisor Arvind Subramanian has described as the “third China Shock”: i.e. diminished manufacturing opportunities for much of the developing world.
On 17 July, President Xi Jinping told a conference in Shanghai that included many countries from the Global South, including Brazil, Indonesia and Russia, that “We must more precisely grasp the scale of oversight and governance, and more promptly refine measures to forestall loss of control.”
Xi was speaking of the challenge of managing the global transition to a world dominated by AI, but the statement was also unwittingly a mission statement of Chinese mercantilist trade.
Indonesia, for instance, has suffered the loss of almost a quarter of a million factory jobs since 2023, largely because cheap Chinese products have undermined local manufacturers in both their domestic and export markets. Sritex, Indonesia’s largest textile manufacturer, filed for bankruptcy last year.
The collateral damage of this mercantilist model has been in evidence worldwide as Beijing sought to boost its economy after its missteps of excessively harsh lockdowns during covid. As The Economist pointed out last month, predicting a trade war between the EU and China, Germany lost 143,000 industrial jobs in 2025.
The EU’s trade deficit in manufactured goods with China jumped to a staggering €1 billion a day in 2025, about double the pre-pandemic level. “In a reprise of the swing to the populist right in the US as Chinese imports hurt manufacturing there, not coincidentally, in France and Germany hard-right parties lead the polls,” the publication observed.
The damage inflicted on the US, Europe and Asia is thus both economic and political. A hollowing out of industry is followed by a hollowing out of good governance and common-sense economics.
A prominent leader of the major far-right party in Germany espouses anti-immigration policies even though her partner is a Sri Lankan-born Swiss citizen. Still, the Alternative for Democracy leads Chancellor Friedrich Merz’s ruling coalition in the polls.
As Subramanian recounts in a column for Project Syndicate, after Chinese imports damaged the US industrial base and its politics, “a second China shock is devastating the German auto sector, upon which the country’s broader industrial ecosystem of small and midsize firms—the Mittelstand—depends.”
The most serious shock in terms of job losses is the one currently playing out in developed economies. “Unlike the first two shocks, this one has been less visible. The impact shows up… in factories never built, export markets never entered, capabilities never accumulated. That is the real toll of the China squeeze,” notes Subramanian.
China deserves credit for its industrial prowess and management of supply chains, but its subsidies and undervalued currency are critical. An OECD study showed that Chinese firms got “three to eight times more subsidies between 2005 and 2024 than competitors in OECD countries.” All but a handful of its EV makers lose money and would not be ‘going concerns’ if subjected to conventional accounting standards.
The irony is that Beijing’s generous subsidies and hyperactive industrial policy are dragging down total factor productivity, according to the International Monetary Fund. Meanwhile, Beijing’s commitment to the AI and green economies may show more depth than what rich-world governments have shown, but mostly overlooks a crisis of local government debt; these governments were dependent on land sales that inflated China’s property bubble.
A decade-and-a half ago, the biggest story of my time as journalist in southern China was a serial land grab by one of one of its largest property developers in cahoots with a corrupt local government head. I would also frequent the tech hub marvel that is Shenzhen.
Now those two worlds dominate China’s economy. A week ago, Chinese AI startup Moonshot unveiled a model that could rival those developed by Anthropic. However, in the real economy, investment has shrunk. How these contradictions are resolved is the economic docudrama of our age.
The author is a former Financial Times foreign correspondent.