By: Khushbu Ahlawat, Consulting Editor, GSDN
Introduction
Standing apart from previous Chinese Communist Party (CCP) leaders such as Mao Zedong and Deng Xiaoping, China’s post-1978 economic transformation was rooted in pragmatism and openness. Deng’s sweeping reforms following the Cultural Revolution dismantled rigid central planning and introduced market-oriented mechanisms. Special Economic Zones, foreign investment inflows, export-led industrialization, and gradual liberalization propelled China into what Walt Rostow described as the “take-off stage” of growth.
From 1978 to 2020, China recorded extraordinary GDP expansion, frequently maintaining growth rates above 8–10 percent annually. The economy withstood shocks such as the 1997 Asian Financial Crisis and the 2008 Global Financial Crisis, emerging stronger each time. However, recent trends suggest a marked deceleration: growth fell from double digits to 13% in 2020 (post-pandemic rebound), declining to 4.8% in 2021, 4.6% in 2022, and 4.43% in 2023.
This slowdown has sparked intense scholarly debate. Is it structural or cyclical? Is it a temporary consequence of the pandemic, or does it reflect deeper systemic constraints? This article evaluates major scholarly arguments—particularly those of Adam Posen, Michael Pettis, and Richard Koo—and argues that China’s slowdown is neither purely structural nor merely pandemic-induced. Rather, it reflects a politically driven capital reallocation and strategic recalibration under Xi Jinping, reshaping China’s growth model domestically and internationally. The second half of this article assesses the implications of this slowdown for Southeast Asian economies, particularly within ASEAN.
Historical Foundations: The High Savings–High Investment Model
China’s growth trajectory since the 1980s has largely followed what Michael Pettis calls the “High Savings–High Investment” model. This model, historically associated with 19th-century America, Germany, and later Japan, prioritizes investment-led growth over consumption as the principal driver of economic expansion. Rather than stimulating demand through household spending, the state mobilizes national savings and directs them into infrastructure, manufacturing, and industrial capacity, expecting long-term productivity gains to sustain growth.
In China’s case, following decades of civil war, Japanese occupation, and Maoist economic isolation under Mao Zedong, the country was severely underinvested. Industrial infrastructure was outdated, urbanization levels were low, and capital accumulation had stagnated. When Deng Xiaoping initiated reforms in 1978, the priority was not consumption but rapid modernization. Deng’s policies encouraged foreign capital inflows, export-oriented manufacturing, agricultural decollectivization, and large-scale infrastructure expansion.
Over time, high domestic savings—largely mobilized through state-controlled banking systems—financed massive fixed asset investment, urban construction, heavy industry, and transport networks. Projects such as the Three Gorges Dam symbolized state-led capital mobilization on a historic scale. The expansion of high-speed rail created the world’s largest network, integrating inland provinces with coastal export hubs. State-owned banks like the Industrial and Commercial Bank of China channeled deposits into strategic sectors at controlled rates.
Local governments institutionalized this model through Local Government Financing Vehicles (LGFVs), borrowing against land values to fund industrial parks and transport corridors. While this accelerated modernization and employment growth, it entrenched debt-financed investment dependence and suppressed household consumption’s share of GDP.
The Real Estate Boom and the Structural Limits of China’s Investment-Led Model
China’s modern property market is relatively recent. Prior to the 1998 housing reform under Zhu Rongji, urban housing was largely allocated through work units (danwei) as part of the socialist welfare system. The commercialization of housing in the late 1990s transformed property into a tradable asset and a primary vehicle for household wealth accumulation. Rapid urbanization—over 300 million people moving to cities between 1990 and 2020—fueled demand and encouraged local governments to rely heavily on land sales for revenue.
Data from China’s National Bureau of Statistics shows a sustained rise in fixed asset investment from the 1990s through the mid-2010s, with real estate surging after 2003. Developers such as Evergrande Group and Country Garden expanded aggressively, often pre-selling apartments before completion to finance further projects. Entire districts—such as parts of Ordos in Inner Mongolia—became emblematic “ghost cities,” reflecting speculative overbuilding.
At its peak, real estate and related sectors accounted for nearly 25–30% of GDP. Land sales sometimes generated over one-third of local government revenue, reinforcing construction incentives and embedding investment within optimistic growth cycles. However, by 2006, according to Pettis, China had shifted from underinvestment to potential overinvestment, as marginal returns declined and leverage increased systemic fragility.
Adam Posen and the “Economic Long Covid” Thesis
For much of the reform era—from the 1990s through the 2010s—China’s private sector operated under a relatively predictable bargain with the state: entrepreneurs could accumulate wealth and expand globally so long as they did not openly challenge Party authority. This environment enabled the rapid rise of technology giants such as Alibaba Group and Tencent, symbolizing the dynamism of China’s market reforms.
Adam Posen characterizes the recent slowdown as “Economic Long Covid,” highlighting weak household consumption, subdued business investment, rising debt, and heightened financial uncertainty. A defining moment was the suspension of the IPO of Ant Group after public criticism from its founder Jack Ma. Regulatory actions against Didi Global and other platform firms further signaled tighter state oversight.
These developments coincided with stringent Zero-Covid lockdowns, during which precautionary savings surged as mobility and income prospects became uncertain. Retail sales and private investment weakened despite monetary easing. While Posen persuasively links confidence shocks to policy intervention and pandemic restrictions, structural consumption imbalances and high savings rates predated Covid-19, suggesting deeper systemic roots beyond temporary health measures.
Structural Imbalances: Pettis and the Demand Deficiency Argument
The roots of China’s demand imbalance can be traced back to the early reform era. In the 1980s and 1990s, as market reforms deepened under Deng Xiaoping and his successors, the state gradually dismantled the Mao-era “iron rice bowl” system that had guaranteed lifetime employment, housing, healthcare, and pensions through state-owned enterprises. While these reforms improved efficiency and productivity, they shifted welfare responsibilities from the state to households. As job security weakened and public provision of social services became uneven, families increased precautionary savings to buffer against uncertainty.
Michael Pettis argues that China’s core challenge today is structural demand deficiency rooted in income distribution. Households typically consume a high proportion of their income, whereas corporations and governments save more. By channeling a significant share of national income toward state entities and investment projects, China suppressed household consumption, which fell below 40% of GDP—far lower than in most advanced economies.
Demographic trends further complicate rebalancing. The One-Child Policy, introduced in 1979 to control population growth, successfully reduced fertility but created long-term structural consequences. China’s working-age population peaked around 2012 and has since declined. According to projections by the United Nations, aging and rising dependency ratios will intensify fiscal pressures and constrain productivity growth. As a result, shifting toward a consumption-led model is not only economically necessary but historically constrained by institutional legacies and demographic realities.
Richard Koo and the Balance Sheet Recession
The concept of a “balance sheet recession” originates from Japan’s experience after the collapse of its asset bubble in the early 1990s. Following decades of rapid credit expansion and soaring land prices, Japan entered prolonged stagnation when property and equity markets crashed. Firms and households shifted from profit maximization to debt minimization, prioritizing balance sheet repair over new investment. Economist Richard Koo argues that a similar dynamic may be emerging in China as its property-driven growth model unwinds.
In China, the 2020 “Three Red Lines” policy imposed leverage caps on property developers to curb systemic risk. While intended to stabilize the sector, it accelerated liquidity stress in firms such as Evergrande Group, whose debt crisis shook domestic and international markets. As housing prices declined across many cities, household wealth—heavily concentrated in real estate—contracted.
This erosion of asset values prompted households and firms to repay debt rather than expand borrowing. Even as the People’s Bank of China lowered reserve requirements and eased credit conditions, loan demand remained subdued. Koo contends that in such circumstances, only sustained government borrowing can offset private sector deleveraging and prevent prolonged stagnation. However, elevated local government debt and reliance on land revenues constrain fiscal capacity, complicating stabilization efforts and raising concerns about long-term debt sustainability.
Policy Shifts under Xi Jinping: Capital Reallocation
To understand the policy shift under Xi Jinping, it is important to situate it within China’s earlier reform trajectory. Under Deng Xiaoping, economic policy prioritized rapid growth, foreign investment, and export competitiveness, often summarized by Deng’s pragmatic maxim that “development is the hard truth.” Successive leaders deepened integration into the global economy, culminating in China’s accession to the World Trade Organization in 2001. During this era, efficiency and GDP expansion were the overriding goals, even if that meant tolerating regional inequality and rising leverage.
By contrast, the post-2012 period marked a shift from quantity to quality of growth. Xi’s administration framed economic policy around resilience, security, and technological sovereignty amid intensifying geopolitical competition. The “Made in China 2025” initiative prioritized semiconductors, robotics, aerospace, and new-energy vehicles to reduce reliance on foreign technology.
Companies such as BYD Auto emerged as global leaders in electric vehicles, while LONGi Green Energy dominates photovoltaic supply chains. In 2023, China became the world’s largest EV exporter, signaling tangible industrial upgrading.
This reallocation reduced dependence on real estate and debt-driven infrastructure expansion but created transitional inefficiencies. Capital guided by strategic priorities rather than pure market signals generated short-term demand shortfalls and private sector caution. Nevertheless, the policy shift reflects a historically rooted evolution—from growth maximization to strategic recalibration—aimed at securing China’s long-term technological and geopolitical position.
International Dimensions: Trade Wars and Strategic Competition
Geopolitical tensions compounded domestic restructuring. The U.S.–China trade war began under Donald Trump and continued under Joe Biden through export controls on advanced technologies. Restrictions targeted firms such as Huawei Technologies, limiting access to high-end semiconductors. China’s assertiveness in the South China Sea and tensions surrounding Taiwan intensified strategic rivalry. Multinational corporations diversified production toward Vietnam, Indonesia, and India. Thus, external pressures reinforced internal economic recalibration.
The economic relationship between China and Southeast Asia did not emerge overnight. Since the normalization of relations in the late 1970s and 1980s, trade gradually expanded alongside China’s reform era. The turning point came with the establishment of the ASEAN-China Free Trade Area in 2010, which significantly reduced tariffs and institutionalized regional supply chains. Over the past two decades, China has become ASEAN’s largest trading partner, while ASEAN collectively has become one of China’s most important export markets.
Impact on Southeast Asia (ASEAN)
Trade between China and the Association of Southeast Asian Nations exceeded $722 billion in 2022. Frameworks such as the Regional Comprehensive Economic Partnership further deepened integration by harmonizing rules of origin and reducing non-tariff barriers.
Vietnam benefited from electronics supply chain relocation as multinational firms adopted “China+1” strategies, while Indonesia attracted investment in nickel processing to support electric vehicle battery production. However, slower Chinese construction activity reduced demand for commodities exported by Malaysia and Thailand. Infrastructure projects under the Belt and Road Initiative—including the Laos–China Railway—enhanced regional connectivity but also generated concerns about long-term debt sustainability.
Thus, ASEAN’s engagement with China reflects both historical integration and contemporary adjustment: deeper institutional ties cushion the slowdown, yet structural shifts in China’s economy transmit uneven, sector-specific impacts across the region.
Conclusion
China’s economic slowdown does not signify the collapse of its growth story; rather, it marks the end of one developmental phase and the contested emergence of another. The high savings–high investment model that propelled China’s rise under Deng Xiaoping successfully transformed a capital-scarce economy into a global industrial powerhouse. Yet, as investment returns diminished and real estate excesses accumulated, structural vulnerabilities became increasingly visible. The pandemic and the Zero-Covid policy may have intensified uncertainty, but they did not create the underlying imbalances.
Under Xi Jinping, China has consciously shifted toward strategic capital reallocation—prioritizing technological self-sufficiency, industrial upgrading, and national security over short-term growth maximization. This transition has generated aggregate demand shortfalls and private sector caution, yet it has also produced significant technological gains, particularly in electric vehicles and renewable energy.
For Southeast Asia, the implications are mixed: short-term trade volatility coexists with long-term supply chain diversification opportunities. Ultimately, China’s trajectory will depend not on whether growth returns to double digits, but on whether it can successfully rebalance toward consumption while sustaining innovation-led competitiveness. The slowdown, therefore, reflects strategic recalibration—not terminal decline.
About the Author
Khushbu Ahlawat is a research analyst with a strong academic background in International Relations and Political Science. She has undertaken research projects at Jawaharlal Nehru University, contributing to analytical work on international and regional security issues. Alongside her research experience, she has professional exposure to Human Resources, with involvement in talent acquisition and organizational operations. She holds a Master’s degree in International Relations from Christ University, Bangalore, and a Bachelor’s degree in Political Science from the University of Delhi.
