Abstract

This article addresses China’s ongoing transition from an economy driven by cheap mass production and large-scale investments to one based on high-tech development and innovation. Despite high-tech advances, China’s traditional economic growth drivers continue to have a profound influence on the economy at large, as well as new growth drivers. Lagging demand combined with government incentives creates industrial overcapacity, which presents serious challenges to China’s economic ambitions. To finalize its economic transition, China must sufficiently address troubles in traditional sectors and stimulate demand through increasing consumer confidence, notably by strengthening social welfare.

Introduction

China appears to be facing two starkly different economic realities. In the Report on the Work of Government delivered by Chinese Premier Li Qiang during the annual Two Sessions in March 2025, the government celebrates stable industrial performance, “advanced technological transformation and upgrading” in manufacturing, “rapid growth in emerging industries” and robust growth of the digital sector. On the other hand, the government argues that “the foundation for China’s sustained economic recovery and growth is not strong enough”, citing weak demand and consumption, various difficulties for enterprises, pressures in the job market, corruption and “fiscal difficulties” in some local governments (Li, 2025).

This mismatch between the “new economy”—high-tech development and innovation, and “new productive forces”—and the “old economy,” with sectors such as traditional industry, infrastructure investment, and real estate, is also well reflected in outside observations of China. While some analysts highlight fundamental woes within China’s economy and express deep doubts about its potential for a comprehensive recovery (Chang, 2025; Sternberg, 2025), others are wary of China’s growing global dominance in technology, which, they argue, could become the equivalent of Britain’s technological advantage in the eighteenth and nineteenth centuries (Matthews, 2025).

This article seeks to shed some light on China’s “old-new” economic paradox, arguing that while China’s transition to a high-tech economy carries great potential, the “old” economy will continue to strongly influence the success of the “new” one in the short term, and the transition requires demand to catch up with supply, which can only be done through bolstering consumer confidence.

China’s High-tech Advances

China has been reorienting its economy towards high-technology products and services for at least a decade. In 2015, Beijing launched the ambitious Made in China 2025 initiative, seeking to transform the country from “a low-cost manufacturing base into a high-tech superpower” (Brooks & Fang, 2025). The plan identified ten advanced sectors in which China would aim to become a global leader, such as “new advanced information technology” (including semiconductors, 5G and AI), industrial automation, EVs, biopharmaceutics and aerospace, maritime and rail transport technology (Kennedy, 2015; Weisenthal & Alloway, 2024). 

During the last few years, investment in several high-tech industries in China has reached double-digit growth and the country has become a global leader in the development, manufacturing, and export of numerous high-tech products. These include drones, graphene, high-speed rail, and the “new export trio” of electric vehicles, lithium-ion batteries, and solar panels (“What Has China’s “New Trio” Brought,” 2024; “US Efforts to Contain,” 2024; DiPippo, 2025). It is a top competitor in several other crucial fields such as pharmaceuticals, robots, and semiconductors (Atkinson, 2024). In early 2025, the release of a new AI model by the Chinese start-up DeepSeek sent shockwaves through the US stock market, causing chip giant Nvidia to lose nearly $600 billion of its market value, a record in US trading history (Sillars, 2025). These realities prompt some analysts to warn against “conflating an economically slowing China with an industrially and technologically weaker China” and to focus on the “new,” rather than the “old” economy (DiPippo, 2025).

The Challenges Resulting from Overcapacity

However, China’s drastic economic reorientation has its consequences. Some sectors within the “new economy” now experience overcapacity, a problem acknowledged by China’s government in its 2024 Work Report (Li, 2024). Government subsidies may be one important driver of this overcapacity—already in 2019, they accounted for 1.7% of China’s GDP, a number three to four times greater than in other major economies. When Chinese authorities limited social interaction during the COVID-19 pandemic, they rolled out more measures to stimulate production and exports to compensate for reduced domestic spending. In 2020–2021, this strategy was successful, since a world in lockdown absorbed the resulting excess production capacity, leading to China’s outstanding export performance. However, little was done to support domestic household consumption, and when China emerged from the lockdown, consumption failed to pick up and foreign demand declined, leading to significant industrial overcapacity (Tan, 2025). 

A key sector struggling with overcapacity in China is the automotive sector. Around 140 companies are competing with each other in the industry, whereas only some of them are expected to be profitable, with a third experiencing capacity utilization rates of less than 20% (Dittli, 2024). To prevent local job losses, regional governments nevertheless help even struggling suppliers to stay afloat through subsidies and other kinds of support. Market consolidation has therefore slowed, price wars have emerged, and producers are pressured to increase exports to more profitable markets (Gunter et al., 2025). Meanwhile, the era of easily accessible export markets is fading. The US banned nearly all Chinese vehicle imports due to national security concerns already under the Biden administration (Shepardson, 2025), and the EU imposed tariffs on Chinese EVs last year. However, emerging countries are also wary of excessive Chinese imports and have erected trade barriers (Tan, 2025). Even Russia, China’s close geopolitical ally, drastically increased the one-time recycling fee on foreign cars sold in the country—a de facto tariff—in response to a heavy influx of Chinese vehicles (Sebastian, 2024). The outlook for China’s exports worsened dramatically in April 2025 when the US, China’s largest export market by far, imposed sweeping tariffs on Chinese goods, leading US markets to be “frozen” for Chinese companies (Zhang & Krolicki, 2025). It thus appears that despite extensive government support for new industries, Chinese companies are increasingly stuck between a rock and a hard place—overcapacity and lagging domestic demand on one hand, and restricted export markets on the other.

Troubles of the Old Economy

Meanwhile, President Xi has made it clear that he intends a new economy focused on “high-quality development” and “new quality productive forces” to be his legacy, and he has even distanced himself from China’s old economic growth model based on traditional industries, real estate, and infrastructure investment. Officials are thus not particularly incentivized to revive the “old” economy, since success would not significantly improve their standing, and failure could prove fatal to their careers (Ang, 2024). However, despite remarkable success in high-tech innovation and production in recent years, the majority of China’s economy is still “old.” For now, the size of the “new” economy is estimated to be less than a fifth of China’s GDP, and it has only contributed around 20% to the country’s GDP growth in recent years. Chinese households still invest most of their wealth into real estate and it is thus not surprising that a sharp drop in consumer confidence in 2022 coincided with falling housing prices (DiPippo, 2025). The meltdown in China’s real-estate sector has led to job losses and wiped out household wealth, resulting in reduced consumer spending and producers having to export unsold goods, which now comes with significant hurdles, as discussed above (Ang, 2024). 

While Xi’s ambition to shift China away from its old growth model towards a high-tech economy is understandable and common in other countries as well, it is clear that the “old” and “new” economies are still deeply linked, since problems within the “old” economy have significant ramifications for growth in the “new” economy (Ang, 2024). Of course, China’s central government knows this. To stress a gradual transition, it has promoted policy slogans such as “First establish, then dismantle” and “Developing new quality productive forces does not mean abandoning traditional industries.” President Xi has explicitly argued that these new productive forces will strengthen, rather than replace traditional industries and enhance their competitiveness, acknowledging that a period of transformation is required (Gunter et al., 2025). Accordingly, some analysts argue that China’s current economic problems show “growing pains” rather than stagnation—“inevitable hurdles on the path of transformation” from a manufacturing and investment-based economy to a high-tech and consumption-driven one (Jin, 2025).

The Issue of Consumer Confidence

Nevertheless, to fully achieve a transition towards a modern consumption-based economy, China must address key structural issues that remain. In order to meet GDP growth targets, local governments sacrifice social welfare spending, resulting in weak social protection systems and a significant shortfall in China’s consumption potential. The country’s rural population and migrant workers especially experience barriers to access healthcare, education, and affordable housing. Rural pensions are only a fraction of what is provided to urban residents and hundreds of millions of potential consumers are thus neglected, contributing to China’s demand problem (Jin, 2025). Meanwhile, due to economic uncertainties, intense competition on the job market, and high youth employment, China’s young adults are holding back on consuming as well (Wang et al., 2025). 

China’s household savings rate is very high, at 35% of household income (compared to an average of 7–13% in the OECD), partly driven by households’ precautionary savings due to low government spending in health and education (Song, 2024; Wright et al., 2024). Private consumption accounts for just around 40% of GDP in China, compared to 53% in Germany and Japan, and 68% in the U.S (CEIC, n.d.-a, n.d.-b, n.d.-c, n.d.-d). China accounts for 30 percent of production worldwide, but only for 14 percent of global consumption (Dittli, 2024). 

Going forward, China’s aging population will also continue to significantly hinder the move towards a high-tech consumption-driven economy. A shrinking workforce and an increasing elderly population mean less consumption and more pressure on workers to support the elderly, damaging their own ability to consume. An aging workforce will also stifle high-tech innovation and improvements in overall worker productivity (Master, 2024). While population aging is a concern in many industrialized countries, China’s situation is not helped by the fact that it is the second most expensive place in the world to raise a child, relative to GDP per capita (Loh, 2024).

These statistics show that China still has great potential to increase domestic consumption through various means, notably through bolstering consumer confidence and strengthening the social safety net. However, the central government’s efforts to alleviate poverty in the past decade have focused on infrastructure investments and supporting local companies, rather than direct financial aid and the provision of social insurance to poor households. In addition, Beijing has promoted pension payments to retirees more than benefits to workers, implying that people should put in hard work to enjoy a prosperous retirement. In recent years, President Xi has even explicitly condemned “welfarism” arguing that excessively high welfare benefits create “lazy people” and “serious economic and political problems.” Considering this ideological constraint, any direct assistance from Beijing to Chinese consumers in the future may therefore be limited (Wright et al., 2024).

Conclusion

Over the past decade, China’s economy has undergone a promising transformation from one focused on massive low-cost production towards one based on high-tech innovation and production. However, it is clear that this “old-new” economic shift is not yet complete, since troubles in traditional sectors such as real estate continue to put pressure on emerging high-tech sectors. These sectors have made impressive progress on the supply side, but demand appears to be lagging domestically, and the spillover from Chinese factories is being targeted by China’s export partners. To create long-term profitability in the “new” economy, China’s decision-makers have to face two important realities. First, the “old” economy, which Chinese consumers still heavily rely on, is struggling, and therefore cannot be ignored. Second, Chinese households will refrain from consuming as long as they have concerns about accessibility to basic services such as healthcare and education—above all, this can be remedied through an efficient social safety net. Only if these concerns are addressed can “the giant ship of China’s economy … continue to cleave the waves and sail steadily toward the future,” as predicted by Chinese Premier Li Qiang in his 2025 Report on the Work of Government (Li, 2025).