驾驭颠覆：转型世界中的中国经济模式

Beijing an edge in the race for global economic leadership. However, the broaderimpact of China's transformation on its domestic economy and role in the global This Quarterly takes a closer look at these developments by examining China'sevolving position in the world economy, particularly in light of the latest geo- Economic and geopolitical headwinds China is undertaking a decisive pivot away from its long-standing export-driven,investment-heavy model toward one that focuses on domestic consumption and In line with Chinas "dual circulation" strategy, policymakers are focusing on domesticdemand as the growth engine, supported by selective engagement with the global China's rebalancing efforts, however, are facing stiff economic headwinds. Years ofstructural imbalances — masked by credit-fueled investment and export momentum Domestic consumption in China continues to be weighed down by the lingeringeffects of the weak real estate market - a primary result of the "three red lines"policy introduced to curb developer leverage. At its peak in 2021, real estate and As a result, growth in domestic demand is expected to remain subdued for theforeseeable future. With consumer wealth under pressure, household sentimentremains fragile - a trend that has been exacerbated since April 2022, when A glimmer of stabilization, however, can be seen in recent real estate data, suggestingthe housing market may have bottomed out, with a broader stabilization anticipated However, the Chinese consumer is not the only one under pressure. Mountingchallenges in the export sector have led to overcapacity issues in the country'sindustrial base. The Trump administration's renewed trade war has hurt Chineseexporters with tariffs of up to 145% on many Chinese imports. Beijing retaliated by The combined impact of these headwinds is becoming increasingly evident in China'sprice indicators: while headline consumer prices have slipped into mild deflation in Heading for a balance sheet recession Taken together, these trends suggest that China may be slipping into a balance sheet spending or investing, even when monetary policy is loose. First observed duringJapan's " lost decades" beginning in the 1990s, this concept describes a cycle in which As Beijing seeks to engineer a more sustainable growth model, the gap betweenpolicy ambition and economic reality becomes apparent. China's leadershiprecognizes these challenges. The policy shift, first unveiled in September 2024, gainedfurther momentum during the March 2025 Two Sessions, when Beijing outlined a more Beyond direct market intervention, Beijing's stimulus agenda focuses on broadereconomic and social development goals to revive domestic demand. Measures suchas trade-in subsidies for cars, home appliances, and consumer goods aim to Monetary easing has proven ineffectivein reviving household appetite for borrowing However, rather than boosting demand, recent stimulus measures have struggled tobreak the current cycle of caution characterizing consumers and businesses. Ratherthan unleashing a wave of consumer and corporate spending, the measures have Fiscal push against balance sheet recession To avoid a full-blown balance sheet recession, China can act decisively on multiplefronts. Fiscal policy will need to take the lead, with government supporting demandthrough targeted spending. During a balance sheet recession, the private sectorprioritizes paying off debt over borrowing, even when monetary policy is loose. If all However, direct fiscal transfers to households – such as tax cuts or stimulus checks- are largely ineffective during a balance sheet recession because households arenot constrained by a lack of income but rather by a damaged balance sheet. Their Given China's strained public finances, deeper structural reforms are necessary torebuild domestic momentum and shift toward consumption-driven growth.Compared to Japan, however, China still holds several trump cards. Beijing can drawlessons from Japan's missteps and avoid repeating the same policy errors. Moreover, The tech war ignites a "Cambrian explosion" Despite the significant macroeconomic challenges China is facing, the country hasperformed remarkably well in innovation, from AI to chips to human-shapedandroids. DeepSeek has even triggered a Sputnik moment for the Magnificent 7, Japan's experience serves as a cautionary tale of failed industrial transformation imposed strict limits on Japanese chip exports just as a wave of global innovationwas taking off. As a result, Japan's once-dominant consumer electronics and However, China is poised to avoid a similar fate. Although the "Made in China 2025"initiative encouraged significant localization in machinery, progress insemiconductors remained sluggish; expensive R&D and an abundance ofcomparatively cheap imported chips suppressed any real market-driven urgency toinnovate at home. This situation changed fundamentally in 2018, when the US A critical moment c