China’s Economic Squeeze

Beijing’s export drive is creating global imbalances it refuses to address.

For decades, China’s economic rise has been both a source of global growth and a cause of mounting friction. Its transformation into the world’s factory has undeniably helped lower the cost of manufactured goods while integrating supply chains and lifting millions out of poverty. But the same model has produced increasingly large trade surpluses, industrial overcapacity and a dependence on exports that has left trading partners complaining of an uneven playing field.

The concern is no longer confined to individual countries. The G20, the International Monetary Fund (IMF) and other multilateral institutions have spent years examining these imbalances and calling for reforms. Beijing, however, has shown little appetite for changing a model that has served it remarkably well.

Adverse Spillovers

The IMF’s latest warning is particularly significant. In its annual review of China’s economy, conducted under its Article IV consultation, the Fund urged Beijing to make the transition towards consumption-led growth its “overarching priority”. The recommendation amounts to a call for a fundamental reorientation of China’s economic strategy: away from an excessive dependence on exports and investment and towards stronger domestic consumption.

The IMF estimated China’s current-account surplus at 3.3 percent of GDP in 2025, more than twice the 1.5 percent it had projected in its 2024 annual report. The Fund regarded the surplus as excessively large, warning that it was generating adverse spillovers for trading partners. A country that consistently produces considerably more than it consumes must find external markets for the excess. When those exports are supported by subsidies, cheap credit or other forms of state assistance, the resulting pressure on competitors can be considerable.

China’s response has been to reinforce rather than abandon its manufacturing strength. It wants not simply to remain the world’s factory, but to make its industrial dominance harder to dislodge.

That strategy has benefited from the volatility of global investment. Capital is being redirected across advanced manufacturing, communications, education and other sectors as companies and governments reassess their exposure to geopolitical risks. China has used this period of flux to strengthen its own industrial capabilities, often combining market mechanisms with powerful state intervention.

Government industrial guidance funds have helped Chinese industries upgrade capacity and efficiency in sectors regarded as strategically important. Subsidies and other forms of state support have enabled companies to compete aggressively in international markets, while market reforms have helped improve productivity and scale.

This formidable export machine has now become a flashpoint in China’s relations with its trading partners. The disagreement at the recent G20 economic meeting in Asheville, North Carolina, starkly illustrated the problem. Discussions between Chinese and American officials reportedly became entangled over language concerning issues ranging from critical minerals to debt restructuring. The US Treasury Secretary publicly accused Chinese officials of blocking a joint communiqué after the two-day meeting.

The question is how long can the world absorb China’s growing export surplus?

China recorded a total trade surplus of about $1.2 trillion, according to the figures cited in the discussion, including a surplus of roughly $200 billion with the United States and more than $100 billion with India in 2025. Such numbers inevitably turn trade policy into geopolitics.

China’s subsidy regime has been a particular source of contention. Critics argue that Beijing has suppressed domestic demand while directing resources towards industrial production and exports. The US Treasury Secretary has claimed that around 4 percent of China’s GDP is channelled into industrial subsidies, citing the electric-vehicle maker BYD as an example of the consequences. Research by the Rhodium Group has also highlighted the scale of Chinese industrial support.

Distorted Competition

The criticism is not that China should cease being competitive. It is that competition becomes distorted when the state systematically subsidises capacity while domestic consumption remains comparatively weak. The consequence can be a stream of inexpensive Chinese goods entering foreign markets, putting pressure on industries elsewhere and encouraging defensive trade measures.

The G20 therefore sought to address the imbalance through lower trade barriers, greater economic rebalancing and a coordinated response to distorted trade practices. The underlying objective was not simply to constrain China, but to create incentives for Beijing to rely less heavily on exports and strengthen domestic demand. China, however, has refused to budge.

The US Trade Secretary said 19 G20 members had agreed on the need to address an “unsustainable equilibrium” created by a “stream of cheap exports”, while China was the sole dissenter over references to economic imbalances.

Beijing, predictably, turned the accusation around. Chinese officials accused G20 members of protectionism and argued that complaints from the US, Europe and others were merely pretexts for containing China’s economic rise.

There is an element of truth in China’s complaint: protectionism is a real danger, and governments have often used legitimate concerns about trade distortions to shelter inefficient domestic industries. But that does not make every criticism of China protectionist. Nor does invoking free trade settle the question when the world's largest manufacturing power uses extensive state intervention to sustain its industrial advantage.

China cannot simultaneously demand unrestricted access to foreign markets while dismissing the consequences of the policies that generate its enormous surpluses. Nor can it expect trading partners to absorb indefinitely the costs of excess capacity while being told that the problem lies entirely with their protectionist instincts.

The world is therefore likely to see more trade friction, not less, unless Beijing is prepared to rebalance its growth model. The next test will come with Xi Jinping’s anticipated visit to the United States. Whether it produces a serious conversation about rebalancing or merely another round of accusations will say much about the future of the global economy.

(The writer is a retired naval aviation officer and a defence and geopolitical analyst. Views personal.)