The new logic of the Chinese economy

UPSC Syllabus Topic: GS Paper 2 –International Relation

Introduction

China’s economy shows strong stability at a time when the global trade and economic system faces serious stress. In 2025, China’s GDP crossed 140 trillion yuan, nearly $20 trillion, with 5% annual growth. Its contribution to global growth is close to 30%. Behind this performance lies a structural shift in growth logic—towards domestic consumption, innovation-led exports, and new industrial drivers—along with evolving trade dynamics, especially with India.

Key Drivers of China’s Economic Growth

1. Growth performance:

• Overall growth: China’s GDP exceeded 140 trillion yuan in 2025, around $20 trillion. The economy recorded a year-on-year growth of 5%.
• Contribution to global growth: China’s share in global economic growth is expected to reach nearly 30%, showing its continued global importance.

2. Shift in growth structure:

• China’s economy is moving forward through consumption, exports, and investment together. The internal growth structure is undergoing a deep and positive change.
• Transition from old growth model: The economy is gradually shifting away from heavy reliance on investment and exports toward a more balanced structure.

3. Domestic consumption as main engine:

• Final consumption expenditure contributed 52% to China’s economic growth in 2025, making domestic demand the primary driver.
• High level of physical consumption: China ranks among the world’s top countries in total basic consumption based on international physical consumption standards.
• Digital consumption strength: Average mobile phone ownership reached 1.28 units per person, placing China among global leaders.
• Food and nutrition indicators: Average daily protein intake stood at 124.6 grams, higher than the United States and Japan.
• Agricultural consumption scale: Average annual vegetable consumption reached 109.8 kilograms per person, the highest in the world.

4. Role of exports and innovation:

• Exports of goods and services contributed 32.7% to economic growth in 2025, emerging as a key growth booster.
• High-tech export growth: High-tech product exports increased by 13.2% during the year, reflecting rising technological capability.
• Industrial chain advantage: A complete industrial system supports export competitiveness and production efficiency.
• Innovation-driven competitiveness: Continuous improvement in innovation capability strengthens China’s export performance.
• Market diversification: Stable export growth to ASEAN and the European Union helped offset slowdowns in other regions.

5. Investment transition and emerging growth engines:

• Reduced role of capital formation: Gross capital formation contributed only 15.3% to economic growth in 2025, showing a clear decline in investment-led expansion.
• Expansion of high-end manufacturing: Output of advanced products such as servers and industrial robots recorded rapid growth, reflecting industrial upgrading.
• Growth of green and clean energy sectors: Renewable electricity and clean energy industries expanded strongly, emerging as key pillars of future economic growth.
• Breakthroughs in frontier technologies: Advances have been achieved in artificial intelligence, quantum technology, and brain–computer interface research.

Debate on China’s Export Production Capacity

1. Claim of overcapacity questioned:

• China argues it is exporting high-quality production capacity, not excess supply. China’s above-designated-size industrial capacity utilisation rate stood at 74.4% in 2025, similar to levels in the United States and the European Union.
• Economist Jeffrey Sachs stated that labeling Chinese manufacturing as “overcapacity” reflects jealousy rather than economic reality.

2. Export strength driven by competitiveness: The global competitiveness of Chinese products comes from long-term R&D investment, strong domestic competition, and a complete industrial system.
3. Absence of dumping or subsidy dependence: China’s export performance is not based on dumping practices or excessive government subsidies but on efficiency and scale advantages.
4. Strong demand from global markets:

• The expansion of China’s production capacity is supported by real international demand rather than artificial supply creation.
• Support to developing economies:Many developing countries rely on Chinese equipment and technology to build infrastructure, promote energy transition, and advance industrialisation.

India–China Trade Relations and Trade Deficit Concerns

India–China Trade Relations

1. Record level bilateral trade: India–China trade reached an all-time high of $155.6 billion in 2025, showing strong economic linkages between the two economies.
2. Complementary trade structure: A large share of India’s imports from China consists of raw materials, intermediate goods, and components, which support domestic manufacturing.
3. Role in India’s industrial supply chains: Imports such as electronic parts, mobile components, machinery, auto parts, and active pharmaceutical ingredients are used for producing finished goods, many of which are exported.
4. Growth in India’s exports to China: India’s exports to China increased to $19.7 billion in 2025, recording a 9.7% year-on-year growth.
5. Recent export momentum: Export growth strengthened sharply in the last two months of 2025, rising by 90% and 67%, indicating improving market access.
6. China’s market opening measures: China maintains a relatively low average tariff level of 7.3%, continues to shorten its foreign investment negative list, and expands visa-free entry policies.
7. Future market opportunity: With a population of over 1.4 billion, including more than 400 million middle-income consumers, China offers large potential for high-quality Indian products.

India’s Trade Deficit and Structural Concerns

1. Rapid expansion of trade deficit:India’s trade deficit with China widened from $1.1 billion in 2003–04 to $99.2 billion in 2024–25.
2. Dominant share in India’s total deficit:China accounts for nearly 35% of India’s overall trade imbalance of $283 billion.
3. Structural nature of the imbalance:The deficit is structural because China dominates India’s import basket across almost all major industrial categories.
4. High product-level dependence: China supplies 97.7% of erythromycin, 96.8% of silicon wafers, 86% of flat panel displays, 82.7% of solar cells, and 75.2% of lithium-ion batteries.
5. Strategic vulnerability risks: Such concentration gives China potential leverage, turning supply chains into pressure points during political or economic tensions.
6. Declining export share: India’s share in bilateral trade has fallen to 11.2%, compared to 42.3% two decades ago, deepening the imbalance.
7. Economic impact of rising deficit: A large trade gap increases pressure on foreign exchange reserves, weakens domestic manufacturing, and can fuel inflation through import dependence.

Conclusion

China’s economic performance reflects a new growth logic driven mainly by domestic consumption, supported by innovation and resilient exports. High-end manufacturing and green industries are shaping future growth. While China’s export capacity is backed by real global demand and competitiveness, India–China trade presents both opportunity and structural risk. Balanced cooperation, wider market access, and stronger domestic manufacturing remain crucial to ensure stable and sustainable economic engagement.

Question for practice:

Examine how the new logic of the Chinese economy is shaped by domestic consumption, export competitiveness, and evolving India–China trade relations.

Source: The Hindu