China's Economy on a Roller Coaster, Shaking and Sliding Downward (Graphic by People News)
[People News] The Chinese economy, under the governance of the Chinese Communist Party (CCP), is currently experiencing its worst phase since the reform and opening up. The official narrative continues to emphasize 'high-quality development' and showcases the ambitious blueprint of the '14th Five-Year Plan' to maintain an optimistic economic outlook. On October 6, Liu Mengjun, a researcher at the Institute of Economic Research of the Chung-Hua Institution for Economic Research in Taiwan, directly confronted the CCP authorities during a speech. He pointedly noted that the likelihood of China's economy transitioning towards 'Soviet-style Japanization' from the 14th Five-Year Plan to the CCP's 21st National Congress is significantly higher than that of 'rebalancing on a medium-speed growth trajectory.' The former suggests a persistent prioritization of security that compresses market functions, leading to long-term stagnation characterized by 'high control and low efficiency'; the latter necessitates the release of market mechanisms, strengthening property rights protection, and increasing the share of household consumption. Current indicators suggest that the former is becoming the prevailing path.
The term 'Japanization' refers to a scenario akin to Japan's 'lost decades' following the collapse of its real estate bubble in the 1990s, resulting in prolonged low growth, deflation, and the presence of zombie companies. Conversely, 'Sovietization' refers to a systematic alignment of the economic operational mechanism with a planned economy, where resources are overly concentrated on national strategies and military technology, leading to a continuous decline in efficiency and ultimately resulting in a comprehensive economic collapse due to both internal and external pressures.
The current state of the Chinese economy is not simply one type, but rather a blend of two: it exhibits the aftereffects of a Japanese-style asset bubble and an ageing population, while also incorporating elements of Soviet-style security prioritization, increased state intervention, and stifled innovation. At its core, this situation reflects the structural and institutional flaws inherent in the CCP system, which are driving the economy towards decline. Xu Chenggang (许成钢), a senior researcher at Stanford University's Center for Chinese Economy and Institutions, argues that the fundamental institutional characteristics of China are rooted in the Soviet model. He contends that the reform and opening-up was merely a temporary measure to preserve the regime, rather than a genuine transformation of the system. Consequently, the current regression and crisis are fundamentally the inevitable outcomes of the internal logic of a totalitarian regime.
Institutionalizing Safety First: From Risk Awareness to Comprehensive Constraints
The "Overall National Security Concept" introduced by Xi Jinping upon taking office has been fully institutionalized following the 20th National Congress of the Communist Party of China. Security has transitioned from mere rhetoric to a formal system embedded in laws, personnel decisions, and planning, even competing with economic priorities for influence. During this time, the Xi Jinping administration has consistently enacted laws and regulations, including the Anti-Espionage Law and the National Secrets Protection Law. The Ministry of National Security has taken a prominent role in managing the economy and has actively intervened in the financial sector to apprehend spies. Furthermore, the 14th Five-Year Plan has identified "strengthening the national security barrier" as a key objective. Consequently, all social resources are heavily concentrated in the area of political security, while economic innovation faces systematic suppression.
Liu Mengjun highlighted that China is proficient in '1 to 100' diffusion-style, large-scale innovation, exemplified by electric vehicles, photovoltaics, and lithium batteries. However, these sectors are currently grappling with severe overcapacity. Genuine '0 to 1' disruptive innovation is proving difficult to achieve. The cultivation of talent tends to emphasize strict adherence to established norms, and local governments are compelled to align with national strategies to demonstrate performance, leading to imitation and mass replication becoming the safer options. The ambiguity surrounding property rights further diminishes the long-term investment willingness of private enterprises. The lines between government and private enterprises have become blurred, with government officials' initiative constrained by what is deemed the correct performance metrics. Moreover, innovative technical talents face restrictions on their personal freedoms. For example, the recent exit and entry management regulations introduced by the Communist Party not only limit the ability of AI company executives to travel abroad but also impose restrictions on the free movement of their family members through collective penalties, thereby creating institutional barriers to mobility.
Xu Chenggang emphasized that China's system is a communist totalitarian regime that has been comprehensively adopted from the Soviet Union, with the central tenet being 'the Party leads everything.' Across the east, south, west, north, and center, the Party oversees all aspects, including politics, military, civilian affairs, and education. Even after three to four decades of reform and opening up, this fundamental institutional characteristic remains unchanged: a fully state-owned land system, an almost entirely state-owned banking system, and control over 'strategic' industries. While the reform and opening up introduced private enterprises and market elements, this was essentially a local decentralization experiment conducted under the condition of maintaining totalitarian rule, which can be classified as 'regionally managed totalitarianism.' The previous high growth rates were largely unintended consequences of competition among local governments and the development of private enterprises, rather than outcomes of deliberate planning by the Chinese Communist Party (CCP). When the private economy and social diversification pose a threat to regime security, such as during the so-called 'color revolutions' or 'peaceful evolution,' the CCP will not hesitate to retract freedoms, suppress private enterprises, and reinforce state control. The prioritization of security is a tangible reflection of this logic: everything is focused on preserving the regime, with the economy serving merely as a subordinate tool.
The Soviet economy saw growth in the post-war era, but by the Brezhnev period, it had gradually shifted towards a model characterized by high control and low efficiency, prioritizing resources for military and heavy industries while allowing the civilian sector to lag significantly. After implementing reforms and opening up, China initially moved towards 'de-Sovietization'. However, under Xi Jinping's leadership, rising security pressures and a resurgence of ideological influences have led the Communist Party of China to reassert state control, indicating a trend towards 're-Sovietization', and even a political shift towards a North Korean model. Japan's 'lost thirty years' also grappled with issues such as zombie companies and an aging population, yet its market economy foundation, property rights protections, and legal framework remain robust, enabling gradual adjustments. Unlike China, Japan does not suffer from the economic burden of state-owned enterprises or the systemic issues associated with public ownership, making recovery merely a matter of time. In contrast, China's current per capita GDP and household income are significantly lower than the levels seen when Japan's economic bubble burst, with an even weaker capacity to absorb a real estate bubble. The re-emergence of Soviet-style state intervention cannot simply be addressed by trading time for space; it fundamentally raises the question of how quickly the situation deteriorates.
Structural Imbalances: Weak Demand Amid Strong Supply, and the Triple Crisis of Debt and Demographics
A recent Nikkei survey forecast that China’s GDP growth in the third quarter of 2026 will be 4.4%, marking the second consecutive quarter in which growth has fallen below the lower end of the annual target range of 4.5% to 5.0%. Domestic demand has slowed more than expected, with total retail sales of consumer goods increasing by only 0.4% in August, as the effects of the trade-in program for household appliances begin to fade. The property market remains depressed: in the first eight months, sales of newly built residential properties by floor area fell 13% year on year, prices have yet to stop declining, and investment plunged. The government has hastily introduced mortgage-interest subsidies and once again emphasized policies such as requiring buildings of four or more floors to install elevators, in an attempt to placate the market, but the effects have been minimal.
The fiscal side is equally alarmingly tight. Bloomberg estimates that broad-budget government spending fell 6.7% year on year in August, with the decline widening, while government-managed fund budget expenditures fell 17% year on year in the first eight months. Although the fiscal deficit has narrowed, the contraction in spending is in turn exacerbating weak domestic demand. The authorities have attempted to use policy-oriented financial instruments and special-purpose bonds to defend their growth target, but the divergence between “strong supply and weak demand” is clearly the result of structural problems that have accumulated over a long period and cannot be reversed overnight.
The contraction and fracture of household balance sheets have made it increasingly clear that weak domestic demand is an internal economic injury. According to the China Household Finance Survey conducted by Southwestern University of Finance and Economics, the median household savings nationwide are only RMB 87,000, with more than 74% of households holding less than RMB 100,000 in savings, and more than half unable to come up with RMB 50,000. This directly contradicts the central bank’s claim that per-capita deposits exceed RMB 120,000. Data from China Merchants Bank show that household wealth is highly concentrated: approximately 2.65% of high-net-worth clients hold more than 87% of the bank’s retail assets. Ordinary people have much of their money tied up in property, while mortgages, consumer loans, and youth unemployment have combined to undermine the main force of consumption. The employment problem facing more than ten million university graduates each year is particularly acute. AI has not only failed to create new jobs; it has instead left young people losing out in competition with machines. As a result, efforts to stimulate consumption remain confined to official policy documents.
On the debt front, the problems have already become deeply entrenched and difficult to resolve. China’s macro leverage ratio remains high, while leverage in the non-financial corporate sector is among the highest of the world’s major economies. Local government financing vehicles carry enormous debts, and the collapse of the land-finance model has placed immense pressure on local government finances. Xi Jinping wants local governments to achieve zero local-government debt next year, but wiping out hundreds of trillions of yuan in debt overnight can only mean “statistical cleansing”; in reality, the banking system will print money, with ordinary residents ultimately paying the price through the long-term dilution of their wealth. The Chinese Communist Party’s persistently low birth rate is an increasingly irreversible hard constraint: the working-age population has already passed its peak, ageing is accelerating, and the fertility rate is far below the replacement level. As the demographic dividend disappears, the traditional growth model is becoming increasingly unsustainable. Japan once buffered the negative effects through higher per-capita income and a relatively comprehensive social-security system, whereas the Chinese Communist Party faces debt, deflationary pressures, and demographic reversal simultaneously at a much lower level of development.
Xu Chenggang has pointed out in particular that China’s current deflation and insufficient domestic demand are closer to the predicament faced by the Soviet Union and Eastern European socialist countries than to Japan’s experience. Japan operates under a democratic constitutional system and a market-based economic system, whereas China is an authoritarian communist regime mixed with elements of a market economy. State-owned land, state-owned banks, and comprehensive Party control have produced a “soft budget constraint”: state-owned enterprises and local governments will not go bankrupt even when they are insolvent, encouraging them to borrow aggressively and expand, thereby accumulating enormous bad debts and inefficient investment. This is precisely the cancer of the Soviet-style planned economy. The private sector once contributed the bulk of China’s growth and employment, but the Chinese Communist Party has never genuinely accepted private property rights, tolerating them only temporarily when facing threats to the regime. Now, in order to prevent “peaceful evolution,” it is willing to suppress private enterprises and strengthen state-owned enterprises at the cost of economic performance. The result is high debt, depleted domestic demand, and declining efficiency. Land, finance, and key enterprises remain firmly controlled by the Party, while genuine private property rights have never been established. This determines why the structural imbalances cannot be resolved through policy fine-tuning alone.
The Cycle of History: From the US-Soviet Arms Race to Xi Jinping's AI Catch-up
The Chinese Communist Party is repeating the mistakes of the Soviet Union's arms race, but this time the focus has shifted from missiles and tanks to artificial intelligence and high technology. During the Cold War, the Soviet Union invested 12% to 15% or even more of its GDP into national defense, which squeezed the civilian economy, led to technological stagnation, and ultimately resulted in its disintegration due to resource misallocation and efficiency collapse. While the military burden was not the only factor, the rigidity of the planned economy and the suppression of innovation, compounded by various pressures, accelerated the decline.
In contrast, today’s China, confronted with the United States' lead in AI, is positioning AI as a central political indicator of national security and the survival of the Communist Party. As the United States imposes restrictions on the export of advanced chips, China is vigorously promoting self-sufficiency, pouring substantial resources into computing power, algorithms, and applications. This situation is reminiscent of the Soviet Union's frantic arms race driven by the fear of a 'missile gap' in the past. Both sides view the AI competition as 'whoever wins AI wins the future.' Under significant pressure and the dual pressures of state support, Chinese AI companies are responding to the Party's call to overtake on the curve, rapidly developing models of 'whoever steals AI wins the future,' leaving the Communist Party unperturbed.
Xu Chenggang has pointed out that the Soviet Union fell significantly behind during the third industrial revolution. According to statistics compiled by Kornai, nearly a hundred major non-military inventions originated neither from the Soviet Union nor Russia, but were all developed within market economies and by entrepreneurs. The increase in China's multifactor productivity today has mainly resulted from the introduction of market-oriented reforms and private enterprises, as well as imitation, rather than from original innovations. When the system becomes restrictive again, and the space for private enterprises is limited, the drive for innovation will inevitably diminish. The 'red second generation' elites of the Chinese Communist Party view themselves as the natural successors to power, and the foundation of the regime they uphold bears a striking resemblance to that of the collapsed Soviet Union. In Xu Chenggang's perspective, the current economic situation is nearing the conditions of Gorbachev's era in the Soviet Union or the mid-1970s—marked by high debt, low efficiency, insufficient domestic demand, and institutional rigidity. While the AI competition may yield some localized successes, it cannot mask the overarching structural issues: when resources are primarily directed towards competing with rivals, while neglecting institutional efficiency and the needs of the populace, short-term 'breakthroughs' often come at the expense of long-term comprehensive stagnation.
The Root of Institutional Defects: Politics Takes Precedence Over Economics
The central issue behind the economic decline of the Chinese Communist Party (CCP) is not a matter of 'insufficient effort' or 'external blockades,' but rather the institutional arrangements themselves. Once security priorities are embedded in laws and plans, a self-reinforcing closed loop emerges: officials engage in risk avoidance, enterprises conform to this trend, resources become concentrated, innovation is stifled, and both employment and consumption weaken, leading to further tightening of security controls. Insufficient protection of property rights, legal uncertainty, privileges granted to state-owned enterprises, political incentives for local governments, and the plundering of public wealth in the name of common prosperity collectively create a structural trap.
'Reforms initiated to save totalitarianism ultimately serve to preserve it.' The CCP has never genuinely designed a pathway for the development of private enterprises, nor has it abandoned the Four Cardinal Principles. The West's previous optimism regarding China's rapid growth mirrors early misjudgments about the Soviet Union, failing to recognize the fundamental nature of the system. Without judicial independence, genuine protection of private property rights, and constraints on power, sustained economic growth is unattainable.
In contrast to Japan, China lacks effective market correction mechanisms and political accountability. While Japan experienced profound suffering after its economic bubble, its democracy and rule of law allowed for gradual reforms. Compared to the Soviet Union, China possesses a stronger legacy of marketization and integration into the global supply chain; however, the ideological shift to the left and the strengthening of centralization are eroding these advantages. Political performance pressures compel officials to manipulate data, amplifying overly optimistic economic narratives and intensifying information blockages, which leads to information asymmetry and ultimately becomes a trap for misjudgment in high-level decision-making.
The Soviet Union ended in collapse, while Japan's outcome was a recovery through consultation. Currently, China's trajectory appears to be a path leading into darkness, with the only variable being concerns about Xi Jinping's health, which could potentially trigger the collapse of the CCP's political landscape. As for how this grand drama will unfold, let us observe and discuss it with a sense of humor.
(First published by People News)△
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