By Nout Wellink
Introduction
The recommendations of the Central Committee of the Communist Party for the formulation of the 15th Five-Year Plan (2026 – 2030) are ambitious and cover a wide area. Their ultimate relevance will depend on implementation rather than on formulated objectives, many of which – such as a future-proof modern economy, a harmonious society, a healthy environment, upholding the rule of law and security in the areas of food, energy, and raw materials – are widely shared internationally. But as the saying goes, there are many roads leading to Rome. The key question is therefore not so much about the goals themselves, but the chosen route and its internal and external implications.
China’s economy combines a huge overall size with a relatively low per capita income. Although China is the second largest economy in the world, it ranks around 70th globally in terms of per capita income (based on purchasing power parity). For China, the priority is to raise living standards and build a moderately prosperous society; for the rest of the world, the focus is on the geopolitical and economic consequences of China’s continued expansion. It goes without saying that the legitimate drive to catch up on per capita income will affect the size of the economy, and with it China’s relationship with other countries. These other countries — especially the United States, but also Europe — will have to learn to live with China’s growing economic and political weight. In turn, China will have to act with caution during this process of economic and geopolitical transformation.
Unbalanced growth
In April 2024, I wrote in the International Monetary Review that, despite geopolitical headwinds, a qualitatively healthy economic growth of around 5 percent seemed feasible for the coming years, not least because the Chinese authorities have proven to respond in a timely manner to unexpected developments. This estimate has indeed come true for 2024 and 2025.
The question that now arises is whether the growth ambition of about 5 percent should be adjusted downwards in the light of recent developments, and whether maintaining this ambition does not require urgent policy adjustments. The latter is clearly the case. External conditions have worsened due to increased geopolitical uncertainty and erratic, increasingly restrictive US trade policies. Moreover, long-standing domestic challenges – in particular in the real estate sector and in the area of local finances – have only been partially resolved, also due to the insufficient use of insolvency frameworks.
A relatively new problem is the growing gap between domestic supply and demand in certain sectors. Since the beginning of 2023, producer prices have been falling steadily. In retrospect, one may wonder whether sufficient attention has been paid to this decrease. Falling producer prices can be the result of productivity gains, overcapacity, or a combination of both. It is not always easy to determine which factor predominates. While the declines were initially consistent with productivity gains, their protracted nature increasingly pointed to structural overcapacity in various sectors. This has forced Chinese companies to tap into new markets, a strategy in which they have proven to be very successful. While some emerging countries – notably in Asia and parts of Latin America – benefit from this, in countries with an already highly developed industrial base and relatively high costs, such as Europe, this is seen as a form of dumping and a threat to domestic industry. In these countries, as well as in countries pressured by the US to impose import tariffs on Chinese products, (such as Mexico), this has led – or is likely to lead – to further trade-restrictive measures
The almost inevitable conclusion is that economic growth of around 5 percent – especially in 2025 – has been achieved in an unsustainable way. However, caution is advised when interpreting the figures for 2025. The trade tariffs imposed by the United States, as well as those that have been repeatedly announced, amended or postponed, may have provoked behaviour that has distorted the statistics – not just for China, by the way.
China in a global context
It makes sense to place the development of the Chinese economy in a somewhat broader perspective. The table below covers the years 2020–2025, an exceptional period marked by the COVID-19 crisis and rising trade tensions. The figures are largely taken from the IMF’s World Economic Outlook of October 2025 and are still provisional for 2025. Although the table contains only a limited number of macroeconomic indicators, it nevertheless allows for some interesting conclusions. In a nutshell, the table shows that all major economic blocs – the United States, the eurozone and China – which together account for almost 60 percent of global GDP – face significant challenges, albeit of different kinds. China is therefore not the only country facing major economic challenges.
The United States is highly dependent on consumption-driven growth, supported by expansionary fiscal policy. This has led to persistently large current account deficits and (especially since 2020) rapidly rising public debt. Americans consume goods from abroad to an excessive extent without being punished by a strong, structural depreciation of the dollar, thanks to its status as the world reserve currency. Through import-restricting measures, the US is trying to reduce the current account deficit and bring production back to its own country. Problems that arise in our own country are thus passed on to other countries.
The euro area, on the other hand, faces severe supply-side constraints, including weak innovation, an underdeveloped internal market and limited investment dynamics, in addition to weak consumption (partly as a result of the coronavirus crisis and the war in Ukraine). Fiscal policy was less expansionary than in the United States, reflecting concerns about public debt sustainability. Although the aggregate debt-to-GDP ratio of the euro area is significantly lower than that of the US, existing divergences between countries within the monetary union can cause serious tensions, as has been shown during and around 2012. The Draghi report, prepared at the request of the European Commission, outlines what policies Europe should pursue to increase growth potential and make the eurozone more resilient to international competition.
China has surpassed the United States and, to an even greater extent, the euro area in real GDP growth over the period 2020-2025. Negative assessments of China’s economic performance in recent years are therefore exaggerated. If the growth gap continues, the Chinese economy will increasingly grow in size towards that of the United States. However, recent growth has been overly dependent on external demand, leading to significant current account deficits and a marked upward trend in public debt.
In summary, it can be said that the main economic blocs – albeit for different reasons – are characterised by widening balance of payments deficits, high debt ratios and divergent real GDP growth paths. These developments lead to tensions between these blocs. Given the interconnectedness of the problems, it is short-sighted to focus only on China.
Restoring balance
Restoring balance to the Chinese economy requires addressing disruptions on both the supply and demand sides. On the supply side, cutthroat price competition reflects persistent overcapacity in several sectors (e.g. electric vehicles and steel). The success that has been achieved in production and technological development therefore also has a downside: the expansion has been too fast compared to the developments in the domestic market. The Chinese authorities recognise this problem and have explicitly stated that ‘involution’ (excessive competition) will be addressed. However, this is easier said than done and should not come at the expense of efforts to improve productivity and cost efficiency.
Current policy measures focus mainly on stricter enforcement of existing regulations, reduction of unnecessary subsidies and influencing behaviour by calling on businesses, industry associations and banks to avoid disorderly competition. While these measures may have some effect, they threaten to increase bureaucracy and, in my opinion, do not sufficiently address the underlying problem of structural overcapacity. A truly effective approach should also include bankruptcy and exit mechanisms. Admittedly, such measures are politically and socially sensitive.
On the demand side, strengthening private consumption is essential to develop a robust domestic market and to exploit its enormous potential. Although there is broad consensus on this, the scope for large-scale fiscal and/or monetary stimulus is limited. Debt – particularly when taking into account all contingent liabilities that may eventually pass on to central government – is already showing strong upward momentum. Fiscal space should therefore be created by reallocating existing resources, removing inefficient subsidies and stimulating private investment – which is already under pressure – instead of relying on fiscal stimulus. Further monetary easing is not out of the question, but it must be done with caution to prevent over-indebted “zombie companies” from being artificially kept alive.
The weak contribution of consumption to GDP growth in recent years partly reflects confidence effects related to COVID-19 and the ongoing real estate crisis. In addition, deeper-rooted, structural factors also play a role. Exceptionally high precautionary savings continue to limit consumption growth. Many measures have been taken to reduce uncertainty in employment, pensions, healthcare, social security and family expenditure, but more needs to be done in all these areas.
Accelerating the modernisation of agriculture and rural areas is one of the government’s top priorities. China already has a vast but, in my opinion, overly fragmented system of regional redistribution and development. Given the large regional income disparities, a more coherent and integrated regional redistribution framework could further support consumption growth, especially since the marginal consumption ratio is relatively high in poor areas. Increased transparency and coordination, possibly through a nationally integrated cohesion mechanism, would increase the effectiveness of regional policy.
China’s current account balance of payments has undergone remarkable development in recent decades. After peaking at around 10 percent of GDP in 2007-2008, the surplus fell to around 1.5 percent in 2020. During the COVID-19 crisis, this temporarily increased again, mainly due to exports of medical products, but it then returned to a level that led the IMF to conclude in its External Sector Report 2024 (ESA, July 2024) that China’s external position and the RMB exchange rate in the period 2018-2023 were largely consistent with long-term stability. Just one year later, this assessment has changed significantly. According to the IMF’s latest ESR (July 2025), the RMB was undervalued by around 8.5 per cent in 2024, with estimates for 2025 likely to be much higher given the rising current account surplus. Although such rather ‘mechanical’ estimates are subject to considerable uncertainty – especially in the case of China due to limitations in the available data – it is nevertheless clear that a gradual appreciation of the renminbi should be part of the policy mix. That is also what the financial markets expect.
In its final statement following the Article IV consultations of 10 December 2025, the IMF urged the Chinese authorities to swiftly and decisively address the important imbalances in the economy, including the exchange rate. The latter would contribute to reducing external imbalances by moderating export growth and supporting domestic absorption.
Conclusion
China faces the need for accelerated structural transformation if it is to maintain high-quality real growth of around 5% (4.5 to 5%), a pace needed to bring per capita income to the level of a middle-class developed country by the mid-2030s. It will not be easy to achieve such a goal, but it is not impossible either. The necessary transformation process cannot be seen in isolation from adjustments that need to take place in other countries. These countries will also have to adapt to new geopolitical realities, changing market conditions, technological and demographic developments and climate change. In a multipolar world, dialogue is preferable to confrontation.
Confrontation and self-reliance – especially the race for technological superiority – have become increasingly dominant policy principles in the three major economic blocs, with strategic and commercial considerations almost inextricably intertwined. Yet confrontation and excessive self-reliance are in no one’s interest, as this is at the expense of the welfare gains that result from international trade.
The common goal should be to achieve a situation where no party benefits from a unilateral change in strategy: sufficient autonomy to avoid vulnerability, combined with sufficient interdependence to make escalation too costly. To achieve this equilibrium situation, a clear understanding of the mutual dependencies and of the real red lines that must not be crossed. Effective communication, but also trust and the recognition that we will continue to need each other – whether it concerns energy, food security or climate policy – are crucial in this regard.
Nout Wellink, member of the Advisory Board of the International Monetary Institute, former President of the Dutch Central Bank.
This article is based on the global guidance for the new five-year plan published at the end of October 2025 and published in China in early January. It was previously published in the International Monetary Review.
