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Yet equally persuasive are signs of structural weaknesses: rising debt, an aging population, a collapsed real estate market, and rising youth unemployment. China’s economy, some say, has peaked. “Involution,” or wasted production, is not only the word of the year in China but for some is another sign of an inescapable downward growth spiral. If this trajectory continues, China will find it impossible to escape the middle-income trap. If China’s economy slows down or stagnates, nearly 1 billion people could be stuck in low-income livelihoods.

Observers often favor one or the other of these diametrically opposed images. Some argue that China’s innovation prowess is overstated, while others say the debt and demographic challenges are more manageable than some people assume.

Our own view, based on extensive fieldwork in urban and rural China that yielded large amounts of qualitative and quantitative data, is that there is truth in both and that the key challenge is to integrate them into a single, unified vision of the country’s economy. The split screen of techno-wizardry on one side and empty apartment complexes and struggling villages on the other conveys valuable yet only partially accurate pictures of a complex country.

One of us previously described China as a “fat tech dragon,” generating tech breakthroughs but wasting vast quantities of resources that were never properly metabolized in the Chinese economy. Almost a decade later, China now looks more like a “slow tech dragon,” one weighed down by its own heavy tail defined by a misallocation of resources, low income growth, and neglect.

In many cases, both the upward signs and the worrying ones may seem unconnected but are really two sides of the same coin. A seemingly bifurcated picture is still one country, and the roots of both the optimism and the pessimism are the same.

Employees work in an electronics factory in Chongqing, in southwestern China, on Sept. 13.AFP via Getty Images

In 2017, China’s scientists for the first time published more papers than their U.S. counterparts. By 2022, their papers also were being cited more often by other scholars. China has long led the world in the number of filed patents but since 2019 has led with the most filings of globally recognized “PCT” patents, an objective sign of quality.

In 2015, China launched the infamous “Made in China 2025” plan to accelerate its indigenous capabilities and market share in a wide range of high-tech sectors. Analyses by Bloomberg, the Information Technology & Innovation Foundation, the U.S. Chamber of Commerce and Rhodium Group, the Wire China, and others show that the risky initiative largely paid off, with substantial advances in domestic technical capabilities, value added, and market share in most of the targeted industries.

The focus on innovation has contributed to growth by dint of expanding inputs (extensive growth) and improving the productivity of those inputs, particularly technological upgrading and the strengthening of human capital in urban China. China’s factory labor used to be “cheap”—now it is becoming higher-skilled. Factory workers now do much more than simple, repetitive tasks; they have to act with precision, interact with advanced machinery and processes, and make judgments about quality. Investments in national logistics, electricity, IT infrastructure, and regional tech hubs have provided a foundation and an environment for firms to develop new products and improve their manufacturing processes. Equally important, industrial policy has facilitated spillovers across related industries, allowing progress in one sector to contribute to advances in others.

China has made some smart bets, but the political signals from planners have resulted in massive overinvestment in several technologies. China has more than 100 EV makers; there used to be even more. The number of companies investing in humanoid robots has exploded. While officials have many ways to attract new entrants, they have much more difficulty pushing out bad firms and consolidating sectors. Through easy access to funding (often through local governments) and a weak bankruptcy law, both state-owned and private firms still have soft budget constraints, allowing them to stay afloat long beyond what the market would bear.

Although both Chinese and Western media often report on China’s tech successes, industry and product failures are common, costly, and rarely discussed. China’s sweet spot is moderately difficult technologies that can be tweaked and improved incrementally and then sold in massive amounts at low margins. China has had more difficulty in the most complex, advanced technologies where economies of scale are less valuable.

Despite hundreds of billions of dollars in investment over several decades, China is still a minor leaguer in commercial aviation, even as domestic air travel has boomed. The regional C909 (formerly the ARJ21) and narrow-body C919 depend almost entirely on Western components. Efforts over the past decade to design a homegrown aircraft engine have yet to bear fruit. China has made some progress in semiconductors, particularly with legacy chips, packaging, and testing, but it is still heavily dependent on the West for advanced chips, chip design software, and manufacturing equipment. China continues to lag others for similar reasons in complex fine chemicals, quantum computing, and high-end precision machining.

Of course, the most infamous area where good money has gone after bad is in real estate, which in the past has accounted for as much as 30 percent of the economy. Local governments, starved for cash, leased their land to developers, who went on building binge unprecedented in human history. Historian Vaclav Smil has documented, for example, how China used more cement in three years than the United States used in the entire 20th century.

When local governments ran out of money, China’s developers instead started taking deposits from owners even before shovels hit the ground. In the past several years, property prices have tumbled—despite government efforts to prop them up. By one measure, China has more than 60 million empty residential units. Despite the government’s desire to shift growth drivers from infrastructure to tech, the real estate crisis is still dragging down the rest of the economy.

A man uses a mobile phone near a construction site in Beijing on May 30, 2014.Wang Zhao/AFP via Getty Images

As capital has been drawn to priority sectors, investment in areas that might produce greater employment or income growth has been crowded out. For all of China’s prowess in manufacturing and e-commerce in cities, and forestry and mining in the hinterland, China lags far behind in many high-value-added service sectors. Among the most prominent are healthcare and education, labor-intensive sectors that would soak up urban employment and provide services that would strengthen human capital.

It is possible that new technologies, once diffused through the economy, could eventually help lift all boats. But standing in the way of this diffusion is the mismatch between the kind of work created by advances in frontier technology, which tends to require higher skill levels, and the skill levels of China’s labor force, which on average are very low.

In fact, China has one of the most poorly educated labor forces in the upper-middle-income world. The relatively late expansion of secondary education in China, which only really took off in the 2000s, means that some 60 percent of China’s labor force has not attended even one day of high school. While this will change over time, it will still take decades to achieve the levels that South Korea and Ireland had when they were middle income and striving to move up to high-income status. No country in the world has successfully moved from middle- to high-income status with the low levels of aggregate human capital that China has today.

Who are we discussing here? We are not talking about the 400 million reasonably well-educated people that constitute China’s middle class, who by themselves outnumber the population of the United States and dominate the modern media image of China. We are also not talking about those in dire poverty—this segment of the population is now only a small fraction of what it was 30 years ago. According to the calculations of China’s State Council, there is no one under the nation’s poverty line. Rather, we are talking about, as China’s former Premier Li Keqiang reminded, the 900 million people who are living on about $10 a day, often in the thousands and tens of thousands of small cities and rural townships and villages in China’s interior. They have poor levels of education and health and have little or no access to long-term job security, benefits, or savings.

They matter not just as people but as the heavy tail weighing down an economy that might otherwise soar. Uneven employment among this huge part of the labor force could, most simply, crowd out growth in high-tech sectors. In an advanced economy, a large part of the labor force needs to know math, science, how to use computers, and have language skills to find gainful employment and contribute to growth.

In the past, China’s labor force did not need to be highly educated because workers were engaged in labor-intensive manufacturing and construction. But as countries approach high-income status, not only does the share of labor in manufacturing and construction fall, but the demands on the labor force in all sectors rise sharply. White-collar jobs replace blue-collar ones, and it is imperative that the labor force is well educated, with the skills needed in a high-skill/high-wage economy, so that large shares of the once blue-collar workers can now begin to work in offices and contribute to keeping the economy from falling into the middle-income trap.

This is where the Chinese economy’s demand for a skilled labor force is almost certainly going to run into the reality of China’s massive poorly educated bloc of workers. In simplest terms, a large portion of China’s 600 million rural workers will not be able to upgrade into an expanding number of white-collar jobs. They are the part of the labor force that made it through junior high school—for the most part—and they simply will not be able to compete with their better-educated (and mostly urban) peers. A high-income China will still need a large number of blue-collar workers, but it will not need 300 million to 400 million of them.

Take the uneven spread of e-commerce businesses in China. Entrepreneurs leveraging e-commerce to sell goods or launch businesses abound in China’s big cities, where the educated classes are clustered. Many of these businesses fail, but some launch small entrepreneurs into bigger leagues. E-commerce platforms have been heralded as a means of linking rural goods with urban consumers, offering an economic lifeline for underemployed rural communities.

An instructor teaches students how to sell merchandise on TikTok at Mede Education Technology’s e-commerce school in Guangzhou, China, on April 7, 2024. Jade Gao/AFP via Getty Images

So, what will these people do? They are being squeezed out of manufacturing, and after the collapse of the real estate bubble, huge numbers of rural workers are no longer needed for construction. Most fundamentally, many in China’s labor force cannot compete in the skilled jobs of the future. Many have moved into the gig economy, driving rideshare or delivery vehicles, or have joined other informal sectors in such numbers that wages and working conditions may even be falling. Over the past 15 years, the share of China’s labor force in the informal economy has risen from some 40 to 60 percent.

Others might have no option but to go back to the farmland owned by their families —even though most young rural workers (under 35 to 40 years old) have never farmed, do not know how to farm, and do not want to farm. Most importantly, considering the nation’s future development, in any of these scenarios their contributions to growth are minimal: They have low income, low or no benefits, and low job security. In short, many of those in the rural labor force may not be able to help themselves, are unlikely to consume much, and are poorly positioned to help China grasp “new quality productive forces,” in Chinese President Xi Jinping’s words.

The strength of an economy is typically measured in physical attributes, but the attitudes of households, workers, and consumers also matter. Interviews and survey data show that over the past several years, a deep sense of uncertainty and worry has come to grip many Chinese and foreigners who do business with the country. From top to bottom, among both Chinese and foreigners, there is a crisis of confidence about China’s trajectory.

For the past three years, multinationals and global institutional investors have debated the question “Is China investible?” Fears about China’s statist policy orientation, the economic slowdown, and hardening tensions with the United States have led many, though far from all, to answer in the negative. The domestic conversation in China does not use the same language, but the anxieties are not that different.

Pedestrians peruse small shops on a crowded street in Changsha, in China’s Hunan province, on Sept. 7, 2020.Hector Retamal/AFP via Getty Images

Multiple executives from China’s private companies have told us that they are holding back investment because they do not expect a strong recovery in domestic demand. All they need to do is cite China’s consumer confidence index, which nosedived in April 2022, when Shanghai went into lockdown as COVID-19 swept through the city, and has flatlined since.

Such pessimism reflects a historic shift. Recent research by Martin King Whyte, Michael Alisky, and one of us clearly shows that there has been a fundamental decline in the level of optimism about the economy across China’s population. A nationally representative survey in 2014 revealed that a large majority of people in China—including those who were below the median level of income—believed they were better off than they were five years earlier and that they would continue to be better off five years into the future.

In the 2014 survey, low-income respondents tended to blame their own shortcomings rather than any systemic problem with China’s economy. But in 2023, the same survey revealed the opposite: Sharply fewer respondents reported having improved prospects compared with the previous five years, and most poorer people blamed the economy rather than themselves for their low levels of income.

These conflicting elements are visible everywhere you look in China. Take the city of Changzhou, in the heart of the manufacturing powerhouse of Jiangsu and an hour northwest of Shanghai by high-speed rail. The city is home to a growing number of EV battery-makers, including Svolt, which has a stunningly modern manufacturing facility that is 95 percent automated. Svolt batteries have gradually increased in density and driving range, and the company provides them to several major automakers, including Great Wall, Leap, and Geely. Svolt has nine other facilities around the country and a factory in Thailand. Yang Hongxin, Svolt’s young CEO, gave one of us a data-rich presentation that revealed how far the company had come and the path it needs to follow to remain competitive.

But at the same time, when one of us visited the Svolt headquarters, worrying signs were easy to find. Svolt ranks fifth in China’s highly crowded battery market, and with supply far outpacing demand, the debt load to carry massive inventories is substantial. The company’s automated factories are impressive but create relatively few jobs. A nearby shopping mall had fancy-looking stores and displayed the latest models from Li Auto, but there were few shoppers. Across the road was a large residential compound with more than a dozen high-rise apartment buildings that, according to one contact, sat empty. This combination of strengths and weaknesses could describe hundreds of Chinese cities.

Equally, visits to EV giant BYD’s Shenzhen headquarters in May 2018 and July 2025 revealed huge advances in battery chemistry, density, and safety and the range and design of BYD cars. BYD boasts not only super inexpensive models but also luxury lines that are challenging Audi and BMW for market share. BYD has highly advanced labs to study acoustics and radiation and a crash test facility that has been certified by regulators around the world.

At the same time, Shenzhen, the iconic city of China’s manufacturing boom, reflects the economy’s strains. The slowdown in domestic demand and growing international tensions have forced many companies to fold and workers to lose their jobs. Even those doing relatively well are struggling in many respects. BYD now has almost 28 percent of China’s EV market and more than 22 percent of the global market—double that of Tesla!—but its debt levels have also risen dramatically. In 2025, shopping malls that one of us visited in the city were half-empty, with more lookers than buyers; restaurants suffered from lots of open tables. The only growing class of consumers are Hong Kongers who ride the high-speed rail up to Shenzhen on weekends looking for bargains.

Or consider villages in the south of Shaanxi province. Repeated field trips over the last three decades showed that between the early 1990s and the mid-2010s, the income of households went up, driven mostly by remittances from family members who had emigrated. Today, through interactions with the families that we have been in contact with for decades, we know that many young people do not make enough to maintain their own low-level standard of living.

Young rural workers are sharing jobs, living in small rooms with many other migrants, and jumping from job to job to job, all in the informal economy. Because of this, many older people are barely getting by. The average age of a male farmer in a rural village is more than 60 years old. At a time when urbanites are retiring, rural older people are still working, struggling to make ends meet, trying to save every penny because of the risk that is in their future. And this certainly means they are keeping consumption to as low a level as possible.

China’s tech success and macroeconomic malaise are linked. The system is tilted strongly in favor of industry and technology relative to households and consumers. While state-direct financial institutions have funneled trillions of dollars to priority projects and business, the country’s wages are low, the social safety net is underdeveloped, and household investment options are far and few between. Homes have ceased to be a store of value, and the stock market, while currently on an upswing, has been flat over the past decade and a half and has yet to prove itself as a pathway to greater wealth.

The tilted playing field, with all of the waste, means a monumental misallocation of resources. While Chinese firms can tout new tech breakthroughs, in study after study, both by scholars and international institutions, it can be shown that productivity growth has slowed and contributed much less to overall GDP growth than in the past.

Some, such as scholar Jean Oi and her co-authors, believe that the funneling of resources to industry and tech represents an essential “guns or butter” trade-off, that China has finite financial resources—with debt levels around 300 percent of GDP—and hence faces a zero-sum choice between pursuing technological preeminence and consumer-driven growth. There may be something to this, but it is just as likely that policymakers have decided to put their eggs in the tech basket and for a variety of reasons and are hesitant to take substantial steps to support workers and consumers.

This may be the product of a pro-tech materialist ideology and a belief that too much support for workers would make them lazy. It may also be motivated by worsening international tensions in which China’s traditional technology suppliers in the West have made it clear that they will not be reliable suppliers going forward. Regardless, this does appear to us as a question of policy choice and political will, not finite resource constraints.

Further weakening hukou (residency) restrictions—allowing rural people to move into cities of all levels to get access to higher-quality housing, schooling, health care, and social security—would almost certainly help low-income people upgrade over time. And leaning into several direct approaches to boosting human capital would pay dividends, including upscaling early childhood development programs, improving the quality of preschools and primary schools, and making academic high school (versus vocational high school) available to all who want to attend.

Of course, all of these initiatives are expensive, and China’s fiscal constraints are not entirely mythical. Residents of China’s big cities who have enjoyed preferential access to services and opportunity for decades may be reluctant to share. But we believe such efforts are absolutely necessary for the expansion of a healthy economy in the short, medium and long run. If done properly, they will pay for themselves in time as the investments grow China’s economic pie.

Employees work on an electric vehicle production line at a factory of the Chinese automaker NIO in Hefei, in China’s Anhui province, on Sept. 24.Jade Gao/AFP via Getty Images

If China continues to lean entirely in the direction of “new quality productive forces” and remains a slow tech dragon, it will continue to make real breakthroughs in tech, but the weaknesses of human capital and domestic demand will exacerbate existing imbalances at home and abroad. In turn, that will produce further polarization between the winners and losers in the domestic economy and between China and other countries whose technology-oriented sectors will come under greater threat from China’s exports. Under such circumstances, the pressures for others to de-risk or even decouple from China will only grow. And, of course, one can easily imagine China responding by using its own carrots and sticks—far beyond just rare earths—to attack foes and attract supporters.

No reform is costless. If China instead sought to address the structural weaknesses in its economy, this would require costly adjustments that would create new winners and losers domestically and painful tensions with them. China’s growth trajectory would be less directly threatening to the tech sectors of other countries, and consumers in China would be better able to absorb more imports—which may be a hard sell for a leadership so strongly focused on self-reliance. Yet, at the same time, an economically reformed China would also have an overall much stronger economy that would make it an even more formidable force on the international stage.