The world’s second-largest economy has been one of the great success stories of the past 50 years, growing at a staggering 10 percent per year and becoming a dominant player in global trade.
However, high youth unemployment, stubbornly low consumption, deflation and a persistent real estate crisis are challenging China’s businesses and government. Its annual GDP growth has fallen to around 5%. And that’s before considering the recent escalation of trade tensions with the United States, as tariffs in both countries have risen to unprecedented levels.
Against this turbulent backdrop, the Kellogg School convened an international roundtable of economists, policy experts, and journalists to discuss the state of the Chinese economy—from real estate, stock markets, industrial policy, and tariffs to science, technology, education, and labor.
Co-host Nancy Qian, James J. O’Connor Professor of Managerial Economics & Decision Sciences at Kellogg and co-director of the Poverty Research Lab, breaks down the highlights from this unique discussion.
China’s real estate concerns remain
When Chinese real estate giant Evergrande filed for bankruptcy in 2023, many observers predicted it would trigger the kind of financial crisis that hit Japan in the 1990s and the US in the 2000s.
But that hasn’t happened yet. While property values continued to sink outside China’s biggest cities, the damage did not spread to other economic sectors, as it did when the US crisis brought down giants such as Lehman Brothers and AIG.
“One thing that worries people is how the real estate crisis will lead to a banking crisis,” Qian says. “You can’t have a crisis if you don’t have banks, and you won’t have banks in China because everything is controlled by the state. But it’s not that the problem is going away, it’s just going to appear in a very different way.”
Indeed, concerns about a crisis remain because of the importance of real estate to the Chinese economy. China’s financial markets, including the domestic stock market, remain underdeveloped, leaving households with few alternative investment options. Provincial and city governments have also borrowed heavily against real estate to fund local initiatives.
“It intersects with these deeper fundamental issues where the financial market is not as developed and the state controls a lot of assets,” Qian says. “Some of these assets may be bad assets, and that means there are going to be problems. Everyone seems to agree on that, but we don’t know exactly how it’s going to play out, because we’ve never had a situation like this before, where there’s a huge economy with so much government control.”
The trade war is not just about trade
The start of the second Trump administration has brought a serious increase in tariffs against Chinese imports into the US – and retaliatory tariffs and controls on exports of rare earth minerals from China. However, this was only the latest chapter in a trade conflict that began with Trump’s first presidency and continued during the Biden administration.
As a result, trade between the two countries has shrunk dramatically from its peak in 2018. This decline may explain why higher tariffs have yet to translate into a large increase in US inflation or serious damage to any economy.
Instead, it’s more accurate to interpret last year’s trade threats as positioning for a new geopolitical order, Qian says.
“If you look at the way economists have discussed trade over the past 20 years, we’ve been discussing it in a policy-free vacuum,” says Qian, who is introducing a course on “geo-economics” at Kellogg this spring. “Now we’re forced to be a little more honest and say that actually a lot of economic transactions have always had geopolitical intent behind them.”
In this regard, the aggressive tactics of the US and China over the past year may be intended as messages to the rest of the world, not to each other. Qian sees a shift toward a world divided into three “spheres of influence”—the US, China and Russia. This realignment means less focus on multinational cooperation on trade and more displays of power on trade and political issues.
As a result, countries and businesses in the middle of this turmoil should watch for signs of geopolitical instability as well as changes in trade policy.
“While tariffs can go up or down, other things can happen to make people not want to trade,” Qian says. “China could expand its footprint in Southeast Asia in a way that is very destabilizing for business. Or the U.S. could keep talking about Greenland, reducing support for NATO. I see all of this as these countries testing the waters.”
Today’s technology race is upending the Cold War scenario
One way China has strengthened its position in this geopolitical landscape is by reducing its dependence on the US and other countries for phones, computer chips and other key technologies.
“Technological self-sufficiency” featured in the government’s last two five-year plans and is expected to feature again in its next plan. The country’s massive investment in education, manufacturing and innovation is starting to pay off, with China becoming a leader in emerging technologies such as artificial intelligence, robotics and electric vehicles.
It’s tempting to think of this high-tech race as an update on the US-Soviet Cold War rivalry over nuclear technology, space exploration, and other strategic areas. But Qian says that’s not the right framing.
“This is a very misleading comparison in the sense that, during the Cold War, yes, there were two sides, but the difference is that the American side had almost every developed country with them, while the Soviets were quite isolated,” he says. “That is not the case today. China is not actually isolating itself, and the current US strategy is isolating itself.”
If a comparison is to be made with the post-World War II superpowers, it is a reversal of historical roles, he says. Where the United States spent heavily on science and opened its doors to talent from around the world in the 20th century, it is now cutting research funding and restricting immigration at a time when China announced new visas for skilled workers.
“During the Cold War, the U.S. spent huge amounts on basic science … but that’s not what the U.S. government is doing now. The federal government’s spending on basic science research has not changed since the 1980s,” Qian says. “On the contrary, it is China that spends huge amounts of money on technology and R&D. So, if anything, China is adopting the American cold war and trying to implement the same strategies.”
Cracks are appearing in China’s education system
China’s hard-hitting push into technology has been aided by its centralized education system, including the Gaokao, the country’s National College Entrance Examination. Established after the Cultural Revolution in the 1970s, the universal examination allows the government to channel students into priority fields such as science and engineering by setting higher quotas in those fields.
Chinese citizens generally view the system as transparent and objective, an opportunity for social mobility that is free from corruption and political favoritism. But the prominence of the system also creates intense pressure for high exam scores, resulting in many households spending heavily on tutoring and education. Today, the tighter job market further raises the stakes and creates frustration with the Gaokao system.
“The ultimate problem is that there aren’t enough good-paying jobs, and because of that, there’s just a lot of competition,” Qian says. “This is similar to any other economy, except in China, the system is more rigid. There are very few paths to a good career outside of school.”
Even students who choose — or are exam-sorted into — more professional tracks face career uncertainty. The technological focus of the Chinese economy is also driving more manufacturers to automate, and many factory jobs now require college degrees as well.
“When this technology comes and makes work irrelevant, they will have a whole generation of people who can only do low-skill jobs that are no longer needed because they are now being done by robots,” Qian says. “It will be very difficult for the Chinese people and the government to deal with.”
