China’s increasingly bizarre economy

China’s increasingly bizarre economy

For years,
the Chinese economy seemed unstoppable. Now people are spending less. The all important housing
sector is in a downturn. China then that is booming. According to its latest economic figures. Okay, it’s official. China’s
economy is getting weirder and weirder. On the one hand, it is showing
all the signs of a Japan style slowdown. It is plagued by deflation. Youth unemployment remains stubbornly
high, and the government is introducing more and more stimulus measures
to try to get people to spend more. And yet, at the same time, China’s
economy seems to be experiencing a second economic miracle of some sorts. Last year, it was again the second fastest
growing major economy in the world, and in just a few years
time, it has come to dominate advanced industries
such as petroleum cars, electric vehicles, clean tech and even AI. So what’s really going on with China’s
economy? Is it failing? Is it booming
or is it somewhere in between? In a normal economy, these two stories cannot be true at the same time. After all, if consumers are not spending,
then firms have no revenue and thus they cannot be investing
and producing on such a large scale. But if there’s one thing
that my years of studying economies around the world has shown me,
China is no normal economy. So if we cannot use the normal economics
to understand what’s going on with China, then what the heck is going on
with China’s economy? To find out,
I started with the most obvious potential explanation
China is lying about their GDP numbers. Yes, it may sound strange
that this is the most obvious explanation. But as I covered two years ago,
there are serious signs that Chinese provinces overstate their GDP growth
every year to hit their growth targets. However, today,
according to recent research by a US Federal Reserve researchers, China appears
to be honest about their GDP numbers. These researchers
use all sorts of alternative metrics, such as retail sales
and industrial production indices, and conclude that no,
there are no red flags right now when it comes to China’s
impressive GDP growth numbers. So that left me no choice. To find out
what’s actually going on in China, I had to dive into both the crises and boom stories in much more detail. My starting point was the crisis story that I talked
about a lot on this channel previously. This story is about China’s
Japanification. Now the core of the Japanification
story was essentially that China’s economy
would surely follow the path of Japan, which stagnated after a gigantic property
bubble burst in the early 1990s. That is just like Japan did in the 1960s
and 70s. China went through extraordinary economic
growth in the 1990s and early 2000, because it used banks to invest
in the country on a colossal scale. This allowed Japan and later
China, to rapidly catch up to the west by building infrastructure, houses, factories
and a world class education system. To obtain for a knowhow and currency,
both Japan and China used various measures to keep both wages
and their currencies low. This allowed both countries to quickly
become manufacturing powerhouses. And this is often considered
a crucial first step in a country’s economic development
because manufacturing is special. It allows a country to sustainably earn
enough foreign currency to pay for crucial imports
that keep the economy running. Crucial imports like, for example, oil. However, according to economists
like Peking University professor Michael Pettis, such investments heavy economic
miracles can only get a country so far. After all, at some point there are enough
bridges, roads, houses and factories. At this point,
almost all economists, including, I have to say, those of the Chinese Communist Party,
recognize that a developing economy needs to switch to a consumption
based model where wage and currency suppression are abandoned to allow people
to have more disposable income. This could lead to a more balanced economy
where all sorts of businesses emerge in response
to the needs of the people. These types of businesses
are often service sector businesses, such as, for example,
theme parks and cafes. Developing a thriving service
sector is really important for any modern economy,
because the service sector can employ way more people than advanced
manufacturing does. So essentially, the idea
is that any economy starts out agrarian, then rapidly industrializing,
and then finishes its development by developing a thriving service sector
which employs most people. For example, in the UK, a whopping
95% of workers work in the service sector, even though it only accounts
for about 78% of its economy. Now, to achieve these transformations
rapidly, a government tends to give certain privileges
like tax exemptions or subsidies to the sector
that it wants to develop next. However, this also means
that for the next stage of the economic transition, privileges need to be taken
away from the previously dominant sector. This is why transformations
between development stages are easier said than done. Often,
the owners of the preferred last sector have a lot of political capital now,
meaning that they resist the transition. For example, Argentinian farmer oligarchs
have long resisted the transition to industrialize. Similarly,
now China’s powerful industrialists, whom many of our high ranking members
of the Chinese Communist Party are resisting the transition
to a consumption based economy because it would reduce their
relative power. But what if there is a simpler option, one that can just make everyone richer? One that will allow people to spend more
and to keep the economy growing without taking wealth away
from government and manufacturing elites that have profited from the previous
investment led growth model, believe it or not. But in macroeconomics,
that option actually exists and it is called blowing a housing bubble. Here’s how you can get one started. The first
step is to get rid of conservative regulations that prevent
the housing market from taking off. Second, you make it easier and easier for
banks to supply mortgages to households. And then it’s easy just sit back and relax
as the following positive feedback loop starts
making everybody in your nation feel rich. As more and more households borrow
from the banks to speculate on the housing market,
house prices will inevitably be pushed up. This will make homeowners feel richer, encouraging them to borrow and speculate
even more. Of course,
banks will be happy to help them out, as they have lent
against the collateral of these houses. So if one borrower was not trustworthy,
the bank can just take the house. After all,
it only keeps going up in value. Crucially for the economy,
rising home prices made both the Japanese
and Chinese consumers feel richer, allowing them to spend more freely
just as they might have in their countries if they had chosen to switch
to a consumption based development model. Therefore, the housing bubble years
helped sustain high economic growth well after most productive investments
were already done, both in Japan in the 1980s
and in China in the 20 tens. Sadly,
while these mortgages helped push GDP up, they made debt go up way faster, causing debt to GDP to rise rapidly, almost doubling from about 130% of GDP
in 2008, in China to roughly 260% in 2019. This was a huge sign
that this all was not sustainable. Then, when house prices
inevitably started dropping, the virtuous cycle that we saw before
became a doom loop. Banks started demanding their money back. Consumers
could not fully repay their loans and therefore they stopped
spending their money in the economy. In Japan, reduced
spending meant that its industries then started getting fewer
and fewer orders. On top of that, reduced home values
and more and more bad borrowers meant that the banks stopped
lending to anyone, including industry. Therefore, industrial firms
stopped investing and lost their edge. To keep the doors open,
they also had to lower their prices, making it harder
for them to repay their debts as well. Therefore, the Bank of Japan eventually
stepped in to support banks, consumers and firms with low interest rates
in the hope to get Japanese consumers to start spending again
and banks to start lending again. This is the story that many economists, including me, said
we’d likely see in China as well. But now, just a couple of years later,
I can say that it was only half the case. Yes, we’ve seen the property
slump stick around for many years. Yes, Chinese consumers don’t spend this much anymore
causing deflation and youth unemployment. And yes, just like in Japan,
we are seeing the central bank stepping in with stimulus in a big way. However, we are not seeing this translate
into a recession in Chinese manufacturing despite Chinese
consumers suffering. We are seeing Chinese factories produce
more and more and more and more, even expanding into risky new sectors
such as green technologies and electric vehicles. In all of my years of studying economies
around the world, I can truly say that I have never,
ever seen anything like this before. This is why I think it’s fair to call this China’s second economic miracle. So how did China do it? I think this graph
from National University of Singapore Professor Bert Hofman, shows it best. As you can see here, as Chinese banks
stepped back from the real estate market
when the bubble popped, they started absolutely pumping
massive amounts of money into industry. This is the key difference with Japan. In Japan. Private banks did not do this
because it was far too risky. Similarly, in Western economies, Bank
absolutely did not go on a lending spree to industry. After the housing crisis of 2007. But China is no normal economy because its state is so much more powerful
than in Japan or in the West. So after the housing bubble burst,
the government essentially stepped in and ordered its state owned banks to pivot
hard and turned on the lending taps to industries that it considered essential
for its further economic development. Of course, Chinese
consumers are still in trouble, so factories could not sell
all of this new stuff at home. Meaning that we are seeing deflation
in China. However, with so much state support,
Chinese manufacturers now had a significant edge
over foreign firms, meaning that China’s export growth
absolutely exploded. So why is China’s economy
still growing so fast? Why is its industry taking over the world
even though Chinese consumers are suffering? It’s quite simple. It is an unprecedented lending boom
from Chinese banks that are following the orders of the Chinese government,
in all likelihood. So in conclusion, both stories
about China’s economy are correct. China is not faking its economic numbers. Its consumers and property
markets are actually struggling similarly
to how it happened in Japan in the 1990s. However, unlike Japan, China’s
industries are thriving thanks to massive support by the state. On the one hand, this is truly impressive. The other hand,
it is a really risky bet for two reasons. The first is that Chinese economic growth
is now even more dependent on foreigners
wanting more and more Chinese products. The US is already closing off its markets. Yes, so far China has managed
to actually reroute its exports to other markets,
but it is increasingly facing a backlash. All over the world. As countries like Brazil, Indonesia
and India are fearing the demise of their own industries who cannot compete with heavily subsidized Chinese firms. The second reason China’s new economic
model is not sustainable is that China’s debt to GDP
ratio is once again, rapidly rising. This cannot continue indefinitely. When taking into account households,
corporate and government debt. China is now even more indebted
than the United States. That being said, though, China’s total
private sector and government debt is still quite a bit lower
than that of Japan. So me saying that this is not sustainable
does not mean that China’s economy
will collapse in the coming five years. How far they can take this new model? I do not know, but I do think
that this was the wrong choice. As I argued in my previous video,
for more stable economic growth, China should switch to a consumption
based economic model. And that’s not just me saying that,
the Chinese Communist Party itself essentially agrees with me. At least that’s what they write. It’s not what they do,
but it’s what they write. They are saying, look,
we need to prioritize high quality growth. That is growth
that does not increase debt to GDP. But whether or not they can do it,
I don’t know. Especially not given
that their working age population is now projected to start
declining rapidly in the coming decades. So yeah, what do you think? Let me know in the comments below.

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Further reading from the Economist:
1. https://www.economist.com/science-and-technology/2024/06/12/china-has-become-a-scientific-superpower
2. https://www.economist.com/china/2025/07/03/chinas-growth-targets-cause-headaches-even-when-met
3. https://www.economist.com/finance-and-economics/2025/06/30/xi-jinping-wages-war-on-price-wars

Get access to global coverage at an exclusive 20% discount at https://economist.com/moneymacro
Further reading mentioned in the video:
China has become a scientific superpower: https://www.economist.com/science-and-technology/2024/06/12/china-has-become-a-scientific-superpower
China’s growth targets cause headaches—even when met: https://www.economist.com/china/2025/07/03/chinas-growth-targets-cause-headaches-even-when-met
Xi Jinping wages war on price wars: https://www.economist.com/finance-and-economics/2025/06/30/xi-jinping-wages-war-on-price-wars

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SOURCES:
I’ve linked my sources in the blog that goes along with this video. Links are in the text: https://www.moneymacro.rocks/2025-07-14-china-weird/

Timestamps:
00:00 Intro
01:36 What is going with China’s economy?
02:46 China’s Japanification
06:39 Blowing a housing bubble?
10:21 China’s second economic miracle
12:02 Conclusion
14:21 Sponsor

Attribution:
Music by Epidemic Sound: http://nebula.tv/epidemic
Thank you to AP Archive for access to their archival footage.
Stock footage and others clips by Getty

Narrated and produced by Dr. Joeri Schasfoort