For decades, China’s unstoppable rise to global superpower has been a dominant narrative in international affairs. Its sustained economic growth, massive infrastructure investments, and remarkable technological advancements have all contributed to this perception. However, while China’s ascent has been undeniable, it now faces four key structural challenges that threaten its global leadership aspirations.
China’s economic ascent is a remarkable tale of transformation, tracing its roots back to 1978, when the nation first opened its doors to foreign businesses. China began to establish itself as “the world’s factory,” generating spectacular GDP growth a 9 percent compound annual growth rate over 40 years — and unprecedented population migration.
But the breakneck speed of Chinese urbanization led to an unsustainable boom in infrastructure, and the mounting debt that funded these projects is the first of four destructive forces now jeopardizing the country’s economic stability.
The post-COVID collapse of China’s housing market, for example, is leaving numerous large complexes unfinished or vacant, bankrupting or destroying the life savings of many homeowners and investors. Local governments are shouldering a substantial portion of the debt — $12.8 trillion in 2022, equivalent to 76 percent of China’s annual economic output — and they possess only a small fraction of the cash reserves needed to cover immediate debt obligations — 20 percent, according to the Rhodium Group.
China’s leaders are confronted with a dilemma. A failure to offer aid could lead to economic turmoil, but intervention might inadvertently foster more imprudent spending, exacerbating the problem.
Meanwhile, China is entering a period of demographic collapse. Its rise relied heavily on a vast blue-collar workforce, but its one-child policy has guaranteed a shortage. The Baby Boomers and Gen Xers who powered China’s manufacturing-driven economy are now in or nearing retirement, and the working-age population is projected to decline to around 700 million by mid-century. Providing for nearly 500 million senior citizens poses its own challenges, in addition to the effects this will have on the labor force and consumption patterns.
With a shrinking working-age population, China’s role as a low-cost manufacturing hub is being forced to evolve. Also, the once-massive Chinese consumer market may prove less extensive than previously thought. Similar challenges in Japan and Italy over the past two decades, marked by deflation and sluggish growth, serve as cautionary tales.
China’s position as the world’s manufacturing powerhouse faces a third challenge in the form of low-cost competitors and the rise of artificial intelligence and robotics. The aftermath of the COVID-19 pandemic saw international companies relocate their manufacturing operations from China to their home countries or to other nations, intensifying geopolitical tensions and industrial policy shifts.
These changes disrupted various sectors within China, resulting in structural economic shifts and rising unemployment. The relentless advance of AI and robotics also threatens China’s manufacturing dominance. Automated systems can execute tasks with greater efficiency than human labor, diminishing the advantage of low labor costs. China’s attempt to transition to a knowledge-intensive economy has also created an oversupply of university graduates relative to available “knowledge” work opportunities, leading to a record 21 percent youth unemployment rate — a rate so high that the government stopped publishing the data earlier this year.
Finally, China’s increasing reliance on food imports and vulnerability to supply disruptions present additional significant challenges. In 2000, China achieved a food self-sufficiency ratio of 94 percent, but this has dropped to just 60% due to changing dietary preferences among its burgeoning middle class. Limited arable land, water resource constraints, and climate change-induced risks further threaten food security. Dependence on imports for essential agricultural products necessitates smooth sea routes to eastern seaboard ports.
Moreover, China’s heavy reliance on oil imports from distant sources makes it uniquely vulnerable. As the largest crude oil importer, with over 70 percent sourced from far-flung regions, China’s sustenance relies on secure sea routes, particularly the Strait of Malacca. In a conflict with the U.S., disruption of these routes could leave China unable to sustain effective war efforts.
Contrary to the widespread narrative of China as an unstoppable force that will continue to consolidate power and influence, the country faces insurmountable challenges that will prevent it from achieving global supremacy.
The looming debt crisis, declining demographics, shifting market dynamics, and vulnerability in food and energy security are not just hurdles, but immovable barriers. China has hit a wall.
Jack Truong is a global c-suite executive with more than thirty years leading international corporate enterprises such as James Hardie, Electrolux, and 3M.