President Xi Jinping’s pivot to prioritizing national security has steered China into a complex economic paradox, where surging technological and military might coexists with a deepening property crisis and the weakest consumer confidence in decades.
China’s strategic shift away from purely economic growth toward national self-sufficiency is exacting a heavy price, with new estimates from the International Monetary Fund suggesting state distortions are now costing the economy as much as 2 percent of its gross domestic product. The move doubles down on a state-led model that prioritizes strategic sectors, a reality likely to be on full display when President Trump travels to Beijing to meet Xi.
"Even though reasserting party control over the economy is costly, this is a price he considers worth paying if not doing so would risk the erosion of the party’s power,” said Minxin Pei, a Chinese politics scholar at Claremont McKenna College.
The trade-off is stark: while military spending has more than doubled under Xi to a projected $335.5 billion in 2025, and R&D investment has surpassed the U.S. at $859 billion, the property sector’s contribution to GDP has collapsed to 11% from 16% in just the last year. This has left manufacturing hubs like Foshan, which saw just 0.2% growth last year, struggling with vacant factories and a bleak job market.
The strategy forces a greater reliance on exports to absorb the overcapacity in strategic sectors like EVs and robotics, heightening trade tensions with the West. With China’s per capita GDP still less than one-third of the U.S. level, Beijing is betting that technological dominance can offset a painful domestic deleveraging and secure its status as a global power.
The pain of this transition is acute in once-booming manufacturing hubs. In Foshan, a city near Hong Kong famed for its furniture and appliance factories, a sense of crisis has taken hold. The local economy grew by only 0.2% last year as its fortunes, tied to the slogan “Where there is a home, there are products made in Foshan,” crumbled alongside the nation’s property market.
Today, for-rent signs hang on vacant factory facades. At Monalisa Group, a producer of ceramic tiles, sales plunged by a quarter between 2022 and 2024, with its headcount shrinking by nearly 20 percent over the same period. Workers who once earned up to $1,500 a month in the furniture industry now find themselves willing to work for half that, as factories opt for temporary staff over full-time employees.
Xi’s pivot marks a fundamental break from the growth-at-all-costs model that defined China’s rise. The government is steering hundreds of billions of dollars into what it deems strategic sectors—AI, semiconductors, and electric vehicles—while holding back on the broad-based consumer stimulus and market reforms that economists say are needed.
This security-first doctrine is visible in budget allocations. In Xi'an, spending on science and technology jumped 80% last year while funding for road maintenance and schools was cut. Nationally, per-student education spending rose just over 1 percent in 2024, a fraction of the 7 percent increase in the defense budget. While this has helped China narrow the power gap with the U.S., according to Australia's Lowy Institute, it has come at the cost of domestic prosperity and rising debt, forcing a generation to dial back its economic expectations.
This article is for informational purposes only and does not constitute investment advice.
