When US and Chinese negotiators sit down in Stockholm this week, China’s export-heavy economy will be front and centre. Washington wants Beijing to loosen its grip on global manufacturing, but as per AP, experts say that even a breakthrough trade deal won’t be enough to fix China’s long-running economic imbalance.
US Treasury Secretary Scott Bessent has flagged two major concerns: China’s reliance on exports and its energy imports from Russia and Iran, which undermine American sanctions. “We could also discuss the elephant in the room, which is this great rebalancing that the Chinese need to do,” Bessent told CNBC. With China accounting for nearly 30% of global manufacturing exports, he argued, “it can’t get any bigger, and it should probably shrink.”
US Treasury Secretary Scott Bessent has flagged two major concerns: China’s reliance on exports and its energy imports from Russia and Iran, which undermine American sanctions. “We could also discuss the elephant in the room, which is this great rebalancing that the Chinese need to do,” Bessent told CNBC. With China accounting for nearly 30% of global manufacturing exports, he argued, “it can’t get any bigger, and it should probably shrink.”
Washington’s goals are clear. First, it wants China to curb excess capacity in key industries, steel, solar, electric vehicles, where cheap exports are swamping global markets. Second, it’s pushing for more Chinese consumer spending to reduce dependence on trade surpluses and investment-led growth.
US allies in Europe are aligned. The EU recently imposed tariffs on Chinese electric vehicles, citing unfair subsidies. Bessent’s predecessor, Janet Yellen, made similar points on a visit to Beijing last year, blaming state subsidies for distorting global prices.
Truth is, Beijing is already trying to address some of these issues, though not necessarily to appease the US.
For years, Chinese leaders have spoken about weak domestic consumption and factory overcapacity as structural problems. Consumer spending makes up less than 40% of China’s GDP, compared to nearly 70% in the US and over half in Japan. Over the past two decades, Beijing has tried to pivot away from an economy powered by infrastructure and exports. But the shift has been slow and uneven.
Aggressive price wars have drawn fire even from Chinese state media, warning that companies are “racing to the bottom.” With government backing, firms have gone abroad to find better prices, prompting political blowback overseas.
Aggressive price wars have drawn fire even from Chinese state media, warning that companies are “racing to the bottom.” With government backing, firms have gone abroad to find better prices, prompting political blowback overseas.
The fallout is visible in China’s deflationary spiral. Fierce competition and falling prices are squeezing profits. That means less investment, job cuts and weaker wage growth, none of which help boost domestic spending.
To prop things up, Beijing is pouring billions into subsidies and rebates, encouraging people to replace old cars and appliances. But stopgap measures won’t cut it.
Economists say China needs deeper reform. That includes reining in industrial policy, stabilising rules for private firms, and strengthening the social safety net. The idea is to make people feel secure enough to spend, rather than hoarding cash for healthcare or retirement.
“Chinese people deserve a better life,” said Yan Se, an economist at Peking University’s Guanghua School of Management. He warned that deflation could become a long-term threat unless Beijing boosts welfare spending.
Can local governments change course?
At the same forum, Guanghua School dean Liu Qiao suggested shifting incentives for local officials, rewarding them for raising household incomes instead of GDP growth. He called for pilot projects in selected provinces to test this approach.
“That would send out a message that China needs a different approach,” he said.
To prop things up, Beijing is pouring billions into subsidies and rebates, encouraging people to replace old cars and appliances. But stopgap measures won’t cut it.
Economists say China needs deeper reform. That includes reining in industrial policy, stabilising rules for private firms, and strengthening the social safety net. The idea is to make people feel secure enough to spend, rather than hoarding cash for healthcare or retirement.
“Chinese people deserve a better life,” said Yan Se, an economist at Peking University’s Guanghua School of Management. He warned that deflation could become a long-term threat unless Beijing boosts welfare spending.
Can local governments change course?
At the same forum, Guanghua School dean Liu Qiao suggested shifting incentives for local officials, rewarding them for raising household incomes instead of GDP growth. He called for pilot projects in selected provinces to test this approach.
“That would send out a message that China needs a different approach,” he said.
Meanwhile, China’s ambitions to become a tech powerhouse are running into familiar problems. Output from high-tech factories is rising fast, but so is the risk of overcapacity, just as it did with solar panels and wind turbines.
Some EV manufacturers have pledged restraint. But local governments, keen to preserve jobs and revenue, continue to prop up struggling firms. Even as Beijing calls for better coordination, so every province doesn’t push the same industry, central policies still often back sectors that are already overbuilt.
The World Bank, in its latest report, summed it up bluntly: “A sustained improvement in household consumption will require greater reform ambition.”
Some EV manufacturers have pledged restraint. But local governments, keen to preserve jobs and revenue, continue to prop up struggling firms. Even as Beijing calls for better coordination, so every province doesn’t push the same industry, central policies still often back sectors that are already overbuilt.
The World Bank, in its latest report, summed it up bluntly: “A sustained improvement in household consumption will require greater reform ambition.”
