Only a sliver of its population is involved in the tech sectors that have the world so mesmerized.
Only a sliver of its population is involved in the tech sectors that have the world so mesmerized.
P resident Donald Trump greeted China’s President Xi Jinping last week with a flourish of extravagance that reflects Trump’s apparent belief that personal flattery and lavish treatment create goodwill and leverage with the Chinese leader. But Chinese leaders do not interpret obsequiousness the way Trump seems to think they do. They are more likely to interpret it as weakness — and as evidence that their strategy of bluff and bluster is working.
The Chinese Communist Party has been working overtime to present China as an unstoppable economic and technological power. Artificial intelligence has become particularly useful to this narrative. China’s advances in AI are real. So are its accomplishments in electric vehicles, batteries, robotics, drones, solar panels, and advanced manufacturing. But the Trump administration, along with other Western governments, much of the business world, and many economic and political analysts confuse the technologically sophisticated portions of the Chinese economy with the Chinese economy itself. China remains a mostly poor, mostly uneducated, aging society riven with internal inconsistencies. Only a sliver of its population is involved in the tech sectors that have the world so mesmerized.
The Chinese leader therefore sees Trump’s behavior as proof that Beijing’s strategy is working, making the world believe it is far more capable and powerful than it is. It is with some irony that Trump’s actions repeat the errors of which he accuses his predecessors: coddling China and allowing it to take advantage of the global trading system.
President Trump is not creating leverage; he is squandering it by making Beijing believe the U.S. is eager for accommodation and agreement. His trade policies are producing bizarre unintended consequences — his team is considering export bans on some products and removing import restrictions on others to adjust for the perverse impact of his tariffs. But none of Trump’s actions will forestall the reckoning that China’s economy faces from its own structural problems.
Xi’s visit to Washington made the contrasting perceptions by the two sides especially striking. Trump lavished praise and ceremony on the Chinese leader. Xi hardly reciprocated. When he was not speaking or participating in the diplomatic formalities, his demeanor appeared almost disdainful. Facial expressions are ambiguous, of course. Official Chinese-language statements are not. The CCP’s political messaging through its propaganda organs in the state media about the United States remains mostly hostile. The U.S. is portrayed as attempting to contain China’s rise, interfere in its internal affairs, and preserve American hegemony. Yet Trump continues to behave as though a personal relationship with Xi can somehow transcend this. The danger is more than embarrassing optics. It reflects a fundamental misunderstanding of the people sitting across the negotiating table. Beijing concludes that Washington wants agreements on trade, security issues, and other measures more than China does. And as the American president repeatedly validates Chinese narratives about China’s strength, Beijing has more reason to believe its propaganda is succeeding.
China has roughly 1.3 billion people. A tiny fraction work in the advanced technology industries that dominate Western discussion of China. What is happening to everybody else? Too many outside analysts accept official Chinese economic statistics with insufficient skepticism. That is risky with an authoritarian system in which the government and party control the statistical apparatus, information flows, and much of the economic narrative. In fact, contrary to the view at the heart of so much faulty U.S. analysis and policymaking, China continues to fall behind. In nominal U.S. dollar terms, IMF data show that China’s economy was roughly 77 percent the size of America’s in 2021. By 2025, it was close to 63 percent.
Each component of Chinese GDP is in trouble. In the U.S., annual growth in consumer spending drives much of the growth in U.S. (and global) GDP. Meanwhile, China’s household consumption remains weak. The Chinese real estate collapse has damaged household wealth and confidence. A poor social safety net encourages excess savings. An aging, declining population adds further uncertainty and leads to deflationary pressures (although the effects of the Iran war on the energy market are creating some inflationary pressure at the moment).
The investment picture, another component of GDP, is no better. Earlier Chinese government and foreign investment focused on infrastructure: roads, modern ports, power plants, telecom networks, and real estate for an urbanizing population. But each highway, industrial park, apartment tower, or high-speed rail line produces less incremental economic value than the previous one. The International Monetary Fund now identifies decreasing returns on investment and slower productivity growth as major constraints on China’s medium-term prospects. It has warned that decades of overinvestment have reduced returns to capital accumulation. China is in the classic middle-income trap, with sluggish GDP growth unable to generate the productivity needed to sustain it. Not even the excessive government stimulus programs can compensate for this. And that creates problems of its own. The public sector debt burden is enormous and growing, exacerbated by ongoing wasteful spending on more extravagant infrastructure projects. Local governments, where much of the spending that reaches ordinary Chinese people takes place, face serious fiscal constraints.
One of the few levers left to Beijing to try to juice the economy is exports. Despite U.S. tariffs, China is finding other markets into which it can continue to dump its government-mandated overproduction: from bicycles to solar panels and EVs. China’s current account surplus grew by more than 3 percent last year, even as imports flagged given weak Chinese consumer demand. The net export surge is helped by the undervalued currency, driven in part by the deflationary decline in domestic consumption. While this is a vicious cycle in customary economic terms, it is exactly what the Chinese government is attempting to engineer. In some ways, the unintended consequences of Trump’s trade policies are playing a part. Tariffs have reduced Chinese penetration of the American market. But U.S. tariffs don’t eliminate Chinese exports; they redirect them, pushing excess production into Europe, Southeast Asia, and Latin America.
And yet, given the unreliability of official government statistics, GDP might not be the best measure of the failure of China’s economic model. The effects of excess debt, failed economic stimulus, export-led growth, declining productivity, and other structural weaknesses show up in the labor market. Simply put, China is fast becoming a gig economy.
A recent Reuters report noted about 44 percent of the Chinese workforce — at 320 million, nearly as large as the U.S. population — may now be engaged in “flexible employment”: rideshare drivers, delivery workers, livestreamers, domestic workers, other freelancers, and a vast array of people piecing together livelihoods outside of conventional full-time employment. While official government statistics put the number closer to 200 million, the point is that the informal economy has become the only way of life for many people who are shut out of the structured economy. Unemployment stats, already high, with some 20 percent of college-educated workers in the cities unemployed, are masked by the gig work.
The American president, in his inflated praise of his Chinese counterpart, is not alone in his confusion about or unawareness of these contradictions. On one side stands a technologically advanced China. It produces world-class electric vehicles. It is a formidable competitor in artificial intelligence. It dominates important portions of the battery and solar industries. Its manufacturing infrastructure is extraordinary. On the other side are hundreds of millions of Chinese workers whose economic reality looks very different. That this many people depend on the informal economy to survive is a more compelling concern than the latest Chinese AI model. The Chinese government’s long-term survival, and the country’s future, will be determined by whether the economy can create sustained productive employment, rising real wages, and economic security across a population four times larger than that of the U.S.
Xi knows he has a problem. One indicator is that the party is dismantling parts of the notorious hukou system of internal migration control. Hukou is the household-registration structure that allowed rural Chinese to work in cities but denied them the educational, health-care, housing, and welfare benefits enjoyed by registered urban residents. In July 2024, the State Council of China issued a five-year urbanization plan including the outright elimination of the restrictions for cities with fewer than 3 million people as well as changes to the point-based systems of restrictions in the larger cities. The reforms permit access to public services to be tied to the individual rather than to the person’s birthplace, unlocking social insurance, housing support, and education opportunities for more workers and their children. Access to social services in the cities can reduce savings and turn migrant workers into urban consumers. Chongqing, an important industrial city, is pursuing policies designed to absorb more than 300,000 additional migrant workers each year. This is an unusually enlightened economic policy for Beijing. Hukou reform improves labor mobility and productivity and, importantly, increases access to education; Chinese rural education indicators are among the lowest in the world. The CCP’s willingness to relax a system as politically entrenched as hukou suggests that it understands that its old labor and consumption model is unsustainable.
Which brings us back to Trump. Trump’s embarrassing praise of Xi as if he’s the leader of a peer great power is bad for the United States. In Beijing, Trump — and by extension the United States — loses face by looking weak and ignorant. And the president’s policies are causing demonstrable harm. They are hurting American farmers, manufacturers, and the broader American consumer. Moreover, by saying that the U.S. is “repressive also” when asked about Chinese oppression of the media and free speech during a press conference in Washington earlier this month, Trump creates a false moral equivalence that is dispiriting to freedom-loving people everywhere. An American president who believes that a warm personal relationship with the Chinese authoritarian communist leader creates strategic leverage for the U.S. is one who seriously misreads his adversary.
But these are American problems. U.S. policy cannot repair China’s property market, reverse its demographic deterioration, address its crushing public and private debt, or help ordinary Chinese people achieve a productive economic future. Flexible employment, hukou reforms, fiscal and export stimulus can buy time. But they don’t solve the underlying structural inconsistencies of communist central planning and economic models. Trump may give Xi diplomatic victories. He may make China’s external environment easier than it otherwise would have been. He may even convince himself that lavish praise has fundamentally changed the bilateral relationship. But ultimately China’s future will depend on whether an autocratic, opaque, centrally planned communist country at this late date can transform its economic model.
China has already waited too long. The die was cast probably when the one-child policy was put into place. There are not enough young people and too few high-school-educated people in China compared with more successful neighbors such as South Korea, Taiwan, and Singapore. The CCP is running out of levers to pull. Still, it has proven time and again, through repression and terror — Tiananmen, Hong Kong, Covid lockdowns, the horrors of the 40 million who died during the Great Leap Forward and the Cultural Revolution — that it will take any measure, however extreme, to stay in power. That Mao Zedong’s portrait continues to hover over Tiananmen Square should make that obvious to everyone.