China's leadership has correctly diagnosed weak domestic consumption as one of its gravest economic vulnerabilities, yet continues to double down on an investment- and export-led growth model, according to a report by Foreign Affairs. Critics warn this approach is deepening economic imbalances, raising the spectre of prolonged deflation and intensifying trade tensions with major global partners.

The Core Policy Contradiction

Despite slowing household income growth, anaemic consumer demand and mounting trade frictions, Beijing has chosen to channel resources into advanced manufacturing, technology and strategic industries. Authorities have largely resisted calls for large-scale stimulus to boost household spending, opting instead to direct credit toward industrial expansion and preferred sectors.

Chinese policymakers, the report notes, hold a long-standing belief that economic development is driven primarily by capital accumulation, technological advancement and state-guided investment — not by consumption-led growth. The expectation is that sustained industrial investment will eventually generate productivity gains, wage growth and higher consumer spending. Critics argue this sequencing has yet to materialise at the required scale.

Overproduction and Export Dependency

The report contends that China's economy is increasingly producing more than domestic consumers can absorb, forcing manufacturers into heavy reliance on exports. This structural imbalance is contributing to falling producer prices, weak corporate profitability and growing dependence on overseas demand — precisely at a moment when global trade scrutiny of Chinese goods is intensifying.

Notably, this dynamic echoes earlier episodes of investment-driven overbuilding in China's property and solar sectors, where excess capacity eventually translated into price collapses and systemic stress. The difference now is that the overproduction is concentrated in strategically sensitive industries such as electric vehicles, semiconductors and green technology — sectors where the geopolitical stakes are significantly higher.

The Deflation Warning

The report issues a pointed warning that persistent deflation poses a greater long-term threat than any sector-specific weakness. Falling prices can suppress investment incentives, reduce credit demand, weaken wages and further erode consumer confidence — creating a self-reinforcing downward spiral. This is the same mechanism that rendered Japan's 'lost decade' so difficult to escape.

Beijing has responded to these economic headwinds by increasing state support for strategic industries and expanding intervention in resource allocation, while offering only limited measures to directly strengthen household consumption.

Emerging Markets in the Crossfire

The report also flags the broader global consequences of China's trade-dependent model. According to the report, between 2022 and 2025, lower- and middle-income countries (LMICs) paid approximately $436.1 billion more in debt service than they received in new financing. However, the trend reportedly reversed in 2025, with long-term debt flows shifting from a net outflow of $118.4 billion in 2024 to a net inflow of $45.4 billion.

What Comes Next

The central question is whether Beijing will recalibrate its approach if export channels face further restriction through tariffs or trade barriers — particularly from the United States and the European Union. Without a meaningful shift toward domestic consumption, analysts warn, China risks entrenching the very imbalances its leadership has acknowledged. The world economy, increasingly intertwined with Chinese industrial output, would absorb the consequences.