China’s economic struggles have implications for its trading partners across the globe, notably in Europe. What can Beijing’s fight against ‘involution’ tell the world about its future trading prospects?

Chinese manufacturing has come a long way – and by some measures, it is stronger than ever. Whereas foreign-invested enterprises were the driving force behind China’s manufacturing exports 20 years ago, most of these firms are now leaving China, having lost their market share to domestic competitors. And these dominant Chinese companies are not limited to the low-value-added production of the past. They are global leaders in many high-tech industries, such as semiconductors and electric vehicles, where they hold an absolute price advantage.

China's leadership has acknowledged the need to prioritize consumption and foster entrepreneurship, but these goals require deeper systemic reforms and a bolder embrace of risk-taking to reignite growth and confidence in the economy.

China’s GDP growth slowed during the first three quarters of 2024, from 5.3% to 4.7% to 4.6%, raising fears that the country would not achieve its annual growth target of around 5%. But the latest data suggest that China’s economy is finally turning the corner.

The business model that underpinned Chinese economic growth for over two decades has collapsed in recent years, especially since the outbreak of the COVID-19 pandemic. Now, the combination of rising uncertainty and falling confidence is casting a dark shadow over the Chinese economy.

The Chinese stock market has rallied recently in anticipation of another round of government stimulus. This is understandable, as the authorities have rolled out multiple monetary and fiscal stimulus packages to stave off deflation and boost GDP growth. But with public debt already well above historical norms, there is limited room for further fiscal intervention without risking a future debt crisis.

With the country at a critical economic crossroads, the Chinese government’s carefully calibrated policy adjustments provide a solid foundation for future growth. The economy is expected to gain strength, as domestic development and global confidence are both addressed through clear-eyed assessments of deep-seated challenges.

China’s engineering prowess has been nothing short of extraordinary. From world-class infrastructure and eco-friendly cities to space systems and high-speed trains, China’s impressive accumulation of state-of-the-art physical capital has played a dominant role in driving its economy. But China’s physical engineering accomplishments on the supply side have not been transferable to social engineering efforts on the demand side, especially in stimulating consumer demand.

The timing of China’s new stimulus package is not coincidental. Arriving just before the 75th anniversary of the People’s Republic, the announcement was well-received by equity investors, leading to a surge of more than 15% in the country’s main stock indices.

In the wake of China’s exit from its zero-COVID strategy, the government has recognized the need to address the economic risks arising not only from suppl