Editor-in-Chief Atul Singh and David Mahon, a Beijing-based investor and longtime China analyst who publishes China Watch, discuss whether China’s economy is a triumph in the making or a bubble about to burst. Mahon argues that Western debate often collapses a vast, uneven system into a single verdict — either inevitable dominance or certain collapse — when China’s reality is more regional, more adaptive and more politically constrained than either narrative captures.
Two stories of China’s economy
Singh opens by laying out the two competing narratives heard in Western capitals. One casts China as a rising “electrostate,” a manufacturing superpower, one of the two AI powerhouses, a state aggressively building clean tech capacity and securing commodities for its extraordinary industries. The other predicts a crash driven by a property bust, bad debts on the books of banks, weak consumption and high youth unemployment. Many frame these challenges as proof that China is a “paper tiger” — the nation looks ferocious, but this ferocity is illusory.
Mahon says the polarization reflects how Western audiences, especially in the US, view China primarily as a strategic competitor. That framing rewards a focus on negatives and flaws. This framing also seeks emotional comfort, whether it is optimism about China’s ascent or reassurance that Western primacy will reassert itself. Mahon’s view is more grounded: At the grassroots level, the forces released by the great Chinese leader Deng Xiaoping through his 1978 reforms — mass internal migration, continued urbanization and a long transition from low-productivity rural life to higher-productivity urban work — still propel China.
China’s decentralized economy
Singh is struck by Mahon’s insistence that China is politically centralized but economically highly decentralized. Mahon calls China “the most decentralized economy that matters in the world.” In fact, we should think of China as a patchwork or collection of interlocking regional economies. Mahon argues that local governments implement national policy through a patchwork of incentives, balance sheets and improvisation. That decentralized machinery helps explain why sweeping claims about employment, housing or industry often miss what is happening across provinces and tiers of cities.
On debt, Mahon traces today’s local-government burdens to overlapping shocks. Some liabilities date back to the ¥4 trillion (roughly $568 billion) stimulus during the Global Financial Crisis, which encouraged overinvestment in local projects and state-linked industry. Then, during the COVID-19 pandemic, Beijing ordered cities to fund strict quarantine enforcement and testing from their own coffers. The result is not simply waste in the abstract, but layered obligations imposed on local administrations that are struggling to bear the burden. Yet local officials are responsive to the local economy because they only move up in their careers if they deliver growth. So, they have a strong incentive to be responsive to the needs of the local economy.
Mahon also reframes the property downturn. Credit tightening for major developers began years before the crisis peaked, but the denial of easy financing to firms such as Evergrande and Country Garden triggered a broader collapse of confidence, with acute stress in 2023–2024. Speculative second and third apartments absorbed the biggest household losses, while many primary family homes carried manageable mortgages or were already largely paid down. As Mahon puts it, “even collapse is the wrong term,” especially in top-tier cities where price declines were often closer to 20–25% than total wipeouts.
The more serious damage sits in parts of central and western China where overbuilding was far more extreme — and where local governments had relied on land conversion from agricultural use to real estate as a primary way to finance development.
China’s role in the New World, clean energy and policy responsiveness
Singh presses Mahon on whether China still runs on the old export-led playbook. Mahon states that well before the pandemic, exports contributed relatively little to incremental GDP growth compared with domestic consumption and domestic investment aimed at retooling the economy. Trade still matters, but China has diversified: Exports to the US are a smaller share than in earlier decades, while exports across Africa, Latin America, Southeast Asia, Russia and Eastern Europe have grown.
Mahon describes a country balancing two Chinas at once, an advanced coastal economy alongside vast regions that still resemble a developing economy. That duality lowers costs in some sectors, sustains labor supply in others and complicates macro management. The Chinese economy, Mahon argues, is now large and complex enough for the country’s leadership to accept slower growth — around 4–5% per annum — as the price of stability.
The investor also flags a structural constraint: China’s financial system remains dominated by state-owned banks. Medium and large private firms can often access credit, but the country lacks the breadth of venture capital, angel investors and other nonstate funding mechanisms that help scale up innovation as in the US.
Singh asks Mahon whether China is winning the “electrostate” race — renewables, batteries, electric vehicles (EVs) and industrial dominance. Mahon highlights the rapid expansion of renewable generation and argues that Beijing’s strategic policy, unconstrained by electoral cycles, has accelerated deployment of new technologies. However, China’s competition can be wasteful. “The competition’s too loose,” he says, and such a race among firms and local governments can generate duplication and excess capacity even as it produces a few global champions.
Mahon sees a geopolitical logic in China’s clean-energy drive. Dependence on imported fossil fuels creates vulnerabilities, especially along maritime chokepoints such as the Strait of Malacca. Renewables are also a geopolitical derisking project for the country.
Renewables can also help improve the lives of China’s citizens, and the country’s leadership is responsive to their needs. Mahon offers air quality as a case study in how social pressure can force the system to move quickly. He recalls Beijing’s “air apocalypse” period, when PM2.5 levels — levels of fine inhalable air pollutants up to 2.5 micrometers in size — spiked to extreme readings around 2014, triggering widespread anger and a policy pivot. Within less than a decade, targets, enforcement and switching energy sources helped transform the city’s air.
The same pattern appeared during the 2022 protests against zero-COVID controls, when localized demonstrations preceded a rapid policy reversal. So far, China’s leadership is responsive to public opinion and has brought in policies to address citizen needs.
China’s EV push and demographic decline
Singh raises the West’s fear that China will lock in dominance in EVs, batteries and related supply chains. Mahon rejects a simplistic, zero-sum “trap” narrative. He believes that the current wave, especially AI-enabled engineering, creates space for competition because it relies less on cheap labor and more on applied intelligence and system design. Regardless, he remains skeptical that Western governments can match China’s coordination quickly without more sustained industrial planning. So far, such planning has been missing in Western countries.
Singh ends by asking whether China faces a Japan-style debt-demography trap. Mahon draws a sharp distinction between the two East Asian countries. Like Japan, China does not have a sovereign debt crisis. Like Japan, China has a domestic debt crisis. Since China’s liabilities are largely internal, the country can rely on a vast cohort — hundreds of millions — who remain relatively low-income but educated and ambitious. These millions are upwardly mobile and will sustain Chinese growth, mitigating the debt burden in the years ahead.
High youth unemployment, according to Mahon, reflects a mismatch common to many economies. Too many graduates trained for yesterday’s economy, and too many desirable opportunities are concentrated in top-tier cities. Many young people have trained to be lawyers and accountants, expecting to live in big cities, while large numbers of manufacturing jobs are emerging elsewhere and are unfilled. Local competition — housing grants, residency benefits and incentives — is part of a broader push to attract those with skills into second- and third-tier cities.
Finally, demography is a constraint that China is trying to manage early through automation. The country does not want to be deterministic about demography and allow it to trigger a collapse. In brief, the Chinese economy has many challenges, but it is complex, robust and dynamic. It is also highly decentralized, which makes lazy generalizations unwise and inaccurate.
[Lee Thompson-Kolar edited this piece.]
The views expressed in this article/video are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.
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