China stands firm on industrial policy despite Western pressure

CHINA – China has reaffirmed that it will not change its economic strategy centred on developing high-tech industries, despite mounting pressure from Western countries to place greater emphasis on domestic consumption.

As reported by Reuters, the stance reflects Beijing's growing confidence ahead of trade negotiations with the United States and the European Union.

Chinese President Xi Jinping is scheduled to meet US President Donald Trump again later this year.

Meanwhile, the European Union has given Beijing until October to resolve a series of trade disputes amid concerns over China's trade surplus, which has exceeded USD 1 trillion.

Western countries argue that China's economic model is mercantilist and inconsistent with the principles of global trade.

They contend that policies favouring producers over households have allowed inexpensive Chinese goods to flood global markets, undermining the competitiveness of industries in other countries.

However, the outcome of last week's meeting of Chinese Communist Party leaders signalled no shift in policy direction.

The government continues to favour targeted support for the industrial sector rather than rolling out large-scale stimulus for household consumption or implementing the structural reforms long sought by its trading partners.

A few days earlier, China's Ministry of Commerce published a document rejecting allegations of industrial overcapacity.

Beijing said such claims were based on "flawed logic" and driven by "hidden motives", while accusing Western countries of pursuing protectionist policies against Chinese companies.

Qiushi, the Chinese Communist Party's theoretical journal, also defended weak domestic consumption, describing it as a historical consequence of a development strategy driven by investment.

Xu Tianchen, an economist at Economist Intelligence Unit (EIU), said Beijing's message did not rule out future changes but instead clarified China's position ahead of negotiations.

"The first message is to help the other side understand the rationale behind China's policies, making negotiations smoother. The second is to show that there are red lines that cannot be crossed," he said.

According to Xu, the Commerce Ministry's document also underlined that China would not accept discriminatory treatment of its companies or products.

At the same time, Beijing is attempting to reverse the "China Shock 2.0" narrative that has gained traction in the West. Premier Li Qiang has instead described it as "China Opportunity 2.0", arguing that China's technological advances and investment can benefit the global economy.

However, several economists believe that argument is unlikely to convince countries whose industries have come under pressure from the surge in Chinese exports.

Eswar Prasad, professor of trade policy at Cornell University, said China's reliance on exports continues to grow because domestic demand remains weak. That makes it increasingly difficult for Beijing to persuade the world that its export boom benefits global consumers.

Meanwhile, US efforts to pressure China through import tariffs of more than 100% last year have been seen as less effective after Beijing leveraged its dominance in rare earth production to strengthen its bargaining position.

The European Union has also begun tightening its industrial policies. The bloc recorded an average trade deficit with China of USD 1 billion a day throughout last year.

German Chancellor Friedrich Merz has also criticised Beijing for allegedly keeping the yuan artificially weak to support the competitiveness of its exports.

Alicia Garcia-Herrero, Chief Economist for Asia-Pacific at Natixis, said China has become increasingly confident in dealing with trade pressure without making major concessions.

"The experience of dealing with US tariffs appears to have become the model Beijing is now applying to Europe—managing negotiations while buying time," she said.

Nevertheless, Beijing has started slowing investment this year through tighter oversight of local government spending.

The government has also acknowledged an imbalance between supply and demand and pledged to curb the price wars that have squeezed manufacturers' profits.

Although it remains committed to boosting domestic consumption, the government has yet to present meaningful structural reform plans.

Several international institutions have also warned that China's economic model could pose risks to both the domestic and global economy.

The Organisation for Economic Co-operation and Development (OECD) estimates that nearly 60% of the increase in Chinese companies' market share has been driven by government subsidies.

Meanwhile, a study by the Bank of Italy found that around 75% of China's export growth stems from domestic factors, including weak consumption and excess production capacity.

A report by the McKinsey Global Institute also showed that China adds productive assets each year at nearly three times the combined pace of the United States and Europe, despite generating returns on capital that are around 40% lower.

Analysts said Beijing's increasingly robust defence of its economic model reflects mounting international pressure over China's industrial policies.

At the same time, it suggests the government has no intention of changing the development strategy it has pursued for many years. (DK/ZH)