Foreign Affairs: China Has Reached An Impasse

6.11.2026, 18:47
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Beijing is misinterpreting the causes of the economy's main problems.

The Chinese leadership has no intention of changing its economic course, despite weak domestic demand, rising unemployment, and prolonged deflation. Beijing believes that large-scale investments in industry and cutting-edge technologies will ultimately propel the country toward a new economic surge. However, this strategy could lead to a further decline in household incomes, intensified trade conflicts, and a slowdown in growth, according to analysts writing in the magazine Foreign Affairs.

Beijing understands the main problems facing its economy but interprets their causes quite differently. The Communist Party is banking on industrial development, believing that control over technology and industrial capacity will automatically lead to growth in productivity, wages, and consumption.

“The Party adheres to this course because the leadership believes it works,” the analysts write.

In practice, large-scale government investment does not ensure the necessary growth in household incomes. Chinese companies are producing more and more goods, but domestic demand cannot keep up with supply. Surplus goods must be sold abroad, often at discounted prices, which exacerbates trade tensions with other countries.
Deflation poses a particular danger. Falling prices weaken incentives for businesses to invest, reduce demand for credit, and undermine consumer confidence. At the same time, government subsidies prop up inefficient enterprises and prevent companies that are unable to compete from exiting the market.

According to Melton and Wright, unless Beijing changes its priorities, it risks falling into a vicious cycle. Weak consumption will increase dependence on exports, while new industrial investments will exacerbate the imbalances that the authorities are trying to eliminate.

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