“China’s over-reliance on investment and exports to power its $19 trillion economy appears to have reached a limit.” – Reuters, 31 October 2025.
China’s leaders are making pledges to increase their country’s inadequate domestic consumption. We still downplay the implications of the vast majority of SA’s households being poor or financially impaired.
Household expenditures account for about 63% of our GDP versus less than 40% for China. But China has much lower unemployment as it sustains sharply higher growth through its being the world’s largest goods exporter. ANC localisation policies rely on household incomes to drive growth, yet our per capita income has stagnated since 2010.
Last year government expenditures accounted for about 20% of our GDP and net exports 2%. China’s net exports last year were also 2% of its GDP and government expenditures were about 17%.
The stark difference between the composition of China’s expenditures and ours is that China’s fixed investments account for over 40% of its GDP versus 15% of ours. Decades of over-investing in housing has created a huge glut – notwithstanding China’s rapidly declining population. Aggressively investing in infrastructure supported high growth in manufactured exports which are now slowing. While many of China’s infrastructure projects are extremely impressive and raise living standards, others are vanity projects or simply can’t cover their high costs.
China needed to begin rebalancing its economy over a decade ago by increasing domestic consumption. Instead, its leaders have increasingly relied on aggressive trade policies and practices. In 2015 the country launched its “Made in China” initiative that seeks to dominate key growth industries such as EVs and solar panels.
The state subsidises many domestic companies to drive competitors from other countries out of business. The country’s obsessive competitiveness is termed “involution”. As Europe has been particularly vulnerable and slow to react, its solar panel production has plunged and its auto companies are now struggling as they lose market share.
Skirt trade rules
Unfair trading practices, such as subsidising local production, is exactly what trade agreements and organisations like the WTO are designed to prevent. But China found that its determination to skirt trade rules could, rather easily, exceed efforts by Europe or the US to enforce them. China’s successes compounded prior to geopolitics pivoting after Russia’s 2022 invasion of Ukraine woke Western countries from their complacency. Today’s tariff turmoil is largely a response to China’s efforts to dominate key industries.
Free trade benefits everyone by providing pathways for households in low-income countries to sustain high growth rates – so long as the large goods exporters don’t aggressively use dumping-type tactics. Low-income countries have a competitive advantage in that their wages are lower. Leveraging this advantage is not easy but dozens of countries have combined it with broadly pro-business policies to sustain high growth by carving out niches in global supply chains. This has been a primary driver of global economic growth. As hundreds of millions of lower-income households graduated to middle class, they fuelled ever higher levels of consumption.
That is, achieving high competitiveness is not sufficient to steadily broaden a country’s prosperity. China’s leaders over invested in infrastructure and housing at the expense of household consumption whereas ANC leaders favour localisation thus rejecting the productivity and growth benefits of integration into global supply chains.
A debate has recently emerged about subsidising the energy costs of an industrial sector to save jobs. But can this be beneficial if it means SA’s many struggling households must pay more for electricity?
When economists use the terms “virtuous cycles” or “vicious cycles” they aren’t making moral assessments. Fixed investment of about 25% would probably be about right for China and SA. Yet increases or decreases in fixed investments should reflect a coordinated set of policies and practices that can sustain steadily rising productivity and upliftment.
Domestic purchasing power
Two hundred years ago there were about a billion people and global GDP was about a trillion of today’s inflation-adjusted dollars. Today there are over eight billion people and the global economy exceeds a hundred trillion dollars. Industrialisation’s primary role has been increasing productivity.
But as China’s current lack of adequate domestic purchasing power shows, high productivity isn’t sufficient to spur broad upliftment. Virtuous cycles must be created whereby the mix of consumption and saving is finely balanced and investing mustn’t unduly expand productive capacity at the expense of household spending power.
Productivity gains are largely propelled by young adults doing new things or old things more efficiently. SA’s ultra-elevated youth unemployment pummels our prospects for sustaining adequate productivity gains.
Practical policy reforms could improve our GDP growth trajectory through mobilising investments in energy, logistics, mining and farming to sharply increase commodity exports. But we need to prioritise high-volume creation of skill-building jobs and poverty alleviation and this requires sweeping policy reforms.
Robust cross-border trading has displaced largely localised industrialisation as the primary driver of economic development. Globalisation encourages specialisation and rapid diffusion of new ideas and this amplifies the benefits of innovation far more than is generally appreciated. Harnessing such upliftment potential requires things as diverse as a flexible labour market and foreign policies that advance commercial prospects.
Highly formidable
China’s economy is highly formidable in many ways. Yet, as its households lack sufficient purchasing power to sustain healthy economic growth, the country must either have an export strategy and foreign policies which importing countries will accept, or it must pivot its policies to prioritise growth in its domestic household spending. This statement is no less applicable to SA.
While it is true that our rate of fixed investment should be higher and China’s should be lower, such shifts shouldn’t be seen as solutions per se. Rather, they should come about in response to policies and practices which can sustain high growth in productivity and household incomes.
[Image: Freeman Zhou on Unsplash]
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
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