In a unified front at their latest summit, the Group of Seven (G7) finance ministers and central bank governors have pledged to address what they described as “economic imbalances and harmful practices” in the global trade system. Although their final communiqué stopped short of naming China directly, the context and subtext leave little doubt that the world’s second-largest economy is the implicit target.
The agreement signals growing concern among Western powers about China’s state-led economic model, overcapacity in strategic industries, intellectual property practices, and increasing use of what critics label “economic coercion.” As Beijing finds itself under renewed scrutiny, it may face a raft of economic challenges — both structural and externally imposed — that could reshape the next phase of its growth story.
1. Rising Global Pushback Against Overcapacity
China’s policy of fostering massive production capacity in key sectors such as steel, electric vehicles (EVs), solar panels, and batteries has generated increasing backlash abroad. Western governments argue that China’s subsidies and industrial policy distort global markets by flooding them with artificially cheap goods.
This overcapacity, previously focused on domestic infrastructure, is now increasingly export-oriented. For example, Chinese EV manufacturers like BYD and NIO are expanding aggressively into Europe and Southeast Asia, often undercutting local prices. This has triggered investigations by the European Union into alleged unfair state subsidies.
Should tariffs or other restrictions be imposed in response, China may find itself losing access to lucrative foreign markets just as domestic demand stagnates — a dangerous combination.
2. Weak Domestic Consumption
Despite China’s rapid growth over recent decades, domestic consumption remains persistently low as a share of GDP — about 38% compared to over 60% in the United States. The reasons are deep-rooted: low household income relative to GDP, an underdeveloped social safety net, and a high household savings rate due to uncertainty about healthcare, pensions, and education costs.
As Western countries turn inward and reduce reliance on Chinese imports, Beijing will need to pivot toward consumption-driven growth. But stimulating domestic demand has proven difficult, especially amid high youth unemployment and a declining property market.
3. Property Sector Crisis and Local Government Debt
China’s once-booming property sector — a key pillar of its economy — has been in turmoil since the collapse of Evergrande and other major developers. The ripple effects have stifled investment, hurt consumer confidence, and created massive liabilities for local governments, which have long relied on land sales to fund budgets.
Many local authorities now face debt levels that limit their ability to support economic activity or deliver public services, and efforts to roll over or restructure these debts could take years. This impedes Beijing’s ability to launch stimulus packages on the scale seen in the past.
4. Demographic Decline
One of China’s most daunting long-term economic challenges is its rapidly aging population. The country recorded its first population decline in decades in 2022, and fertility rates remain well below replacement level. An aging workforce threatens productivity, increases the burden on healthcare and pension systems, and shrinks the consumer base.
Efforts to raise the retirement age or incentivize childbirth have so far had limited success. Unlike earlier industrial powers that aged after becoming rich, China is aging while still developing — a potential recipe for a prolonged economic slowdown.
5. Technological Restrictions and Supply Chain Realignments
The U.S. and its allies have moved to restrict China’s access to advanced technologies, particularly semiconductors and AI chips. Export controls and investment restrictions are aimed at curbing China’s ability to dominate future tech sectors that also have strategic military applications.
At the same time, many multinationals are pursuing “China+1” strategies, seeking to diversify supply chains toward Vietnam, India, and Mexico. Although China remains deeply embedded in global manufacturing, these shifts could gradually erode its centrality in global trade.
6. Currency Pressures and Capital Flight
Efforts to maintain a stable yuan while supporting economic growth have left the People’s Bank of China walking a monetary tightrope. Interest rate differentials with the U.S. have led to capital outflows and put downward pressure on the yuan. If outflows persist, Beijing may be forced to choose between tightening capital controls — risking investor confidence — or letting the yuan depreciate — which could trigger financial instability.
Conclusion: A Test of China’s Economic Resilience
China is no stranger to external pressure, and its centralized economic model gives it tools to respond quickly to crises. However, the convergence of internal vulnerabilities and external pushback presents a multifaceted challenge.
The G7’s implicit consensus to coordinate against “unfair trade practices” reflects a new era of economic competition where geopolitical and ideological differences increasingly shape policy. For Beijing, the next decade may demand not just strategic adaptation, but an evolution in the very foundations of its growth model.
As the world’s economic centers pivot and realign, China’s response to these challenges will be closely watched — not only by its rivals but by developing nations charting their own path through an uncertain global order.
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