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Economic indicators released by Chinese authorities, media outlets, and researchers suggest a recent downturn in China’s economic fundamentals. Declining prices, decreasing exports and imports, rising unemployment, and an unfolding crisis in the real estate sector are key concerns highlighted by both international and domestic media. Leading international banks and rating institutions forecast that China’s growth rate may remain below 5% for the current year, with projections of 4.4% and 4.2% for 2025 and 2026, respectively. This trend is attributed to the real estate crisis, weak consumer demand, and the aging population in China. China’s share of global GDP, which stood at 18.3% in 2021, declined to 16.9% by 2023. This shift prompts reflection on whether this is the same Chinese economy that boasted the world’s fastest growth from 1978 to 2018, averaging 9.5% annually.

China’s Development Path

A review of China’s economic history reveals that from 1949 (the year of China’s independence from Japan) until 1976, under Mao Zedong’s leadership, China’s economy was largely state-controlled. Critics argue that Mao’s development model confined China to a primarily rural and underdeveloped economy. In 1978, facing demands for additional investment in strategic sectors, Deng Xiaoping, a prominent Chinese leader, initiated market reforms, opening the country’s economy to outside influences. Deng’s approach focused on transforming rural industries, fostering private businesses, and liberalizing foreign trade and investment. Post-1978, China prioritized investment and export-oriented manufacturing, earning the moniker “Factory of the World” due to factors such as low labor costs, favorable tax structures, robust infrastructure, and a weak currency (the Yuan).

In 1998, amid the Asian economic crisis, the Chinese government introduced housing reforms aimed at stimulating domestic demand and driving rapid economic growth. These reforms shifted from traditional, in-kind housing distribution to monetized housing allocation, selling houses at market prices. This initiative provided opportunities for developers to thrive, fostering a symbiotic relationship between the real estate sector, banks, local governments, and GDP growth. Banks extended substantial loans to the real estate sector, spurring growth in associated industries and generating jobs, thereby boosting consumption and government tax revenues. Today, the property sector contributes approximately 29% to China’s GDP, with nearly 70% of household wealth tied to real estate.

China’s Economic Challenges

While China has emerged as the “Factory of the World” and maintained a robust domestic economy over the past four decades, its growth has relied heavily on government and private sector investments rather than domestic consumption. This reliance on debt-fueled investments was sustainable as long as they yielded returns. However, starting around 2017, global trade dynamics shifted significantly. Factors such as US President Donald Trump’s “America First” policy, Brexit, and the US-China trade war fueled protectionism, raising production costs and necessitating increased borrowing at higher interest rates. Consequently, China’s already debt-laden economy reached a debt-to-GDP ratio of 287% by 2023.

Internally, China’s “one child policy” contributed to rising labor costs, while the government’s stringent COVID-19 contain-ment measures delayed economic recovery. The combined im-

pact of external and internal factors, coupled with overreliance on investment and export-driven growth, underscored the need for a transition to consumption-driven growth—a sentiment echoed by Chinese President Xi Jinping. However, by the time this realization dawned, China faced significant economic challenges. Sluggish growth and weak consumption demand prompted large companies to scale back operations, leading to reduced new home sales and difficulties in loan repayment for both developers and homebuyers. Local governments, grappling with dwindling tax revenues, resorted to increased borrowing to sustain economic activity. Consequently, China’s growth bubble began to deflate, offering valuable lessons to global economies, particularly India.

Implications for India

Over the past decade, India’s central government has pursued extensive borrowing from domestic and international sources, citing infrastructure development as a primary goal. This approach has seen substantial investments in roads, railways, ports, airports, and the power sector, propelling India’s GDP close to $4 trillion and elevating it to the world’s fifth-largest economy. However, amidst these achievements lies rampant unemployment, declining savings rates, increasing household debt, deepening rural distress, and government efforts to avert mass protests through food subsidies and employment guarantee schemes. Unlike China’s investment and export-driven model, India’s growth strategy remains caught between stimulating private investment and boosting consumption.

While the government aims to revive private investment through tax relief and corporate incentives, it simultaneously implements schemes to bolster consumption among marginalized groups and farmers. This approach, however, perpetuates a cycle where low consumption stems from inadequate employment and income, inhibiting private investment. Consequently, the government resorts to extensive borrowing to offset negative sentiment. Yet, without reviving consumption demand, investments in infrastructure will yield limited returns, primarily benefiting the affluent. Drawing lessons from China’s experience, India’s forthcoming government must engage policymakers to devise a comprehensive strategy for both short and long-term capital investment, aiming to stimulate genuine demand through job creation. Balancing investment-led and consumption-led growth is crucial for India’s sustainable economic development.

By learning from China’s economic trajectory and leveraging its own unique strengths, India can navigate the challenges of economic growth, fostering a more inclusive and resilient economy in the process.