Current Accounts: The Hinrich Foundation Trade Podcast
What global markets should expect from China’s slowdown
Published 01 April 2025
In this special edition of Current Accounts, the Hinrich Foundation’s podcast on global trade, the US Association of Foreign Press Correspondents sits down with Senior Research Fellow Stewart Paterson to unpack why China has struggled to rebalance its economy toward the consumption-led growth it desperately needs.
Tune in to this special episode hosted by the US Association of Foreign Press Correspondents:
China’s economic slowdown is sending shockwaves across global markets, raising concerns about the future of the world’s second-largest economy. Once a key driver of global growth, the country now faces a range of challenges, from a sluggish property sector and mounting local government debt to declining foreign investment and weakened consumer demand. These issues, coupled with the government’s cautious approach to stimulus and ongoing geopolitical tensions, has sparked debate about whether China can regain its economic momentum. As businesses and investors worldwide watch closely, the question remains: why it is almost impossible to reengineer China’s political economy?
Central to the issue is China’s investment-led growth model, which has driven massive infrastructure development, but it has also led to diminishing returns. The state-controlled, bank-dominated financial system has resulted in a surge of non-performing loans, highlighting inefficiencies in the country’s investment strategy. With capital accumulation now outpacing returns, China faces escalating financial risks, including the potential for a major crisis.
Furthermore, despite years of effort, China has struggled to shift toward a consumption-driven economy, where domestic demand could play a more significant role in growth. Structural barriers such as income inequality, high savings rates, and an undervalued currency make this transition difficult. The government’s reluctance to relinquish control over the economy, prioritizing trade surpluses and state-directed investments, further complicates the shift. To pivot towards a consumption-based model, China would need to implement sweeping reforms, including a more progressive tax system, improved social security, and higher wages. Without these changes, China risks prolonged stagnation and financial crises that could derail its long-term growth and geopolitical aspirations.
Tune into this podcast as Senior Research Fellow Stewart Paterson joins the Association of Foreign Press Correspondents-USA to break down the key factors behind China’s sluggish growth and what it means for global markets.
Here is an excerpt from their conversation:
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Alan Herrera: |
China has long acknowledged, right, the need for consumption-led growth, yet progress has certainly been very slow. So again, another thing that comes to mind here, I feel like you've touched on this a little bit just now, but what would you say are the biggest political and structural barriers to achieving this shift? |
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Stewart Paterson: |
Yeah, so politically, I think it's quite clear that the [Chinese Communist] Party are very reluctant to give up control of the commanding heights of the economy. They want to know where savings are being allocated. They want those savings allocated to achieving Party-driven goals, and to move to a more market orientated allocation of capital where people lent based on the prospect of immediate returns rather than of achieving national goals is not in the conversation as far as the Communist Party are concerned. And the other structural bar which goes with that is this obsession with running trade surpluses and therefore having an undervalued currency, and that immediately prices the Chinese consumer out of a lot of international goods. And so without a real exchange rate appreciation in China, it seems unlikely to me that it's ever going to balance its current account position, and therefore it will be running these savings surpluses, which are the flip side of suppressed consumption. |
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Alan Herrera: |
And do you think, Stewart, that Chinese leadership at the moment, do you feel that they fully understand the magnitude of reform that's required in order to address this? |
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Stewart Paterson: |
Yeah, so I think they fully understand what the arguments I've just articulated are. But for them, what we've seen in China over the last 10 years in particular since Xi Jinping assumed power is a downplaying of economic success as being the sole source of political legitimacy for the party. So the Party's narrative has changed from "We have a monopoly on political power, but the quid pro quo for that is that we will make you wealthy." It's now changed to, "We have a monopoly on political power and we will make China great again." So it's national rejuvenation, it's the "China Dream", which is as much about shaping a global order. It's about respect for China abroad. It's about making China central to the functioning of global systems. It's about technological leadership and pride in your country's achievements. It's as much about those things as it is actually delivering higher living standards to the man on the street. And so the risks they're taking is obviously that the man in the street is prepared to buy into that, or if he isn't that at least he can be controlled and coerced into not doing anything about it. And so it's no coincidence, I don't think, that as China's been faced with this pretty stark choices to either really undertake root and branch reform of the economy or give up on rapid growth, and they've chosen giving up on rapid growth, that the rise of the surveillance state, the clamping down on political dissent, et cetera, has also increased commensurate with that trend. |
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Stewart Paterson is a Senior Research Fellow at the Hinrich Foundation who spent 25 years in capital markets as an equity researcher, strategist and fund manager, working for Credit Suisse, CLSA and most recently, as a Partner and Portfolio Manager of Tiburon Partners LLP.
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