China's Economic Splashdown: A Year-End Reflection
From Takeoff to Landing
(13-minute read)
The Holidays have arrived—beyond family and celebrations, a time for reflection about the past, and planning for the future. I am happy to share my thoughts about China’s economy with our subscribers as 2025 comes to a close.
This article was adapted from my keynote address at the 8th Annual Conference on the Chinese Economy presented by the Bank of Canada and the University of Toronto, on November 14, 2025. This version benefits from the comments of the economists who attended, who raised many useful points and challenged some of my assumptions. My deep thanks to Loren Brandt, the Noranda Chair Professor of Economics at the University of Toronto, specializing in the Chinese economy, who chaired the event.
Introduction
What appears as a slowdown is better understood as controlled deceleration—an intentional reversal of the engines that once drove China’s integration with the global economy.
When David Hale and I wrote China Takes Off for Foreign Affairs, the country’s economic reforms and global integration seemed unstoppable.1 More than two decades later, as China continues its descent toward sea level, we must fasten our seat belts for a controlled, if turbulent re-entry, into an atmosphere obscured by debt, demographic decline, and distrust.
This keynote traces the five stages of China’s steep climb out of seclusion and into the jet stream of the global economy: Ignition, Acceleration, Orbit, Deceleration, and Splashdown. It explores what this landing could mean for the global economy, for technology and resource security, and for the nations caught between emerging rival systems, as a new space race unfolds between the United States and China.
China’s economic trajectory has shifted from rapid ascent to structural discontinuity. Headline data appear resilient. Official GDP growth reached 5.3% in the first half of 2025,2 but underlying constraints are tightening and 4th quarter data was concerning. Rising debt, exceeding 96% of GDP, labor issues, and persistently weak household consumption are eroding momentum beneath the surface.3
Since Xi Jinping came to power, China’s policy orientation has moved decisively away from decentralization and experimentation toward control and recentralization. This shift is not merely domestic. It carries material implications for global trade, technology supply chains, capital flows, and security alignments. As China enters a period better described as an economic descent rather than cyclical slowdown, middle powers, and the global system as a whole, must adapt. Hopefully, splashdown will be successful.
Economic Flight Path
I am not an academic, but I have worked with American companies in China since the 1980’s. My perspective is shaped less by theory than by direct experience across multiple phases of China’s opening, since my first visit in 1979. Here is how I see the unfolding of what is certainly one of the world’s greatest natural economic experiments:
→ Beginning with the Ignition phase (1978–2001) China embraced reform and opening. Foreign capital was welcomed, experimentation encouraged, and local initiative tolerated.4 The United States effectively provided China with something resembling a Marshall Plan—one Beijing never formally requested—by opening access to capital markets, technology, and managerial expertise. This privileged access proved catalytic, accelerating China’s ascent.
→ During the Acceleration (1993-2000) and Orbital phases (2001–2012), growth surged following WTO accession and foreign investment was embraced. 5 China took off—just as we described. Export-led manufacturing expanded rapidly, and technology inflows deepened integration into global markets. Innovation was taking place on factory floors. At the same time, the US implemented a wave of new regulations, which some analysts view as an “own goal” that increased costs for American industry and may have inadvertently boosted China’s competitive advantage. 6 7
→ The Deceleration phase (2013–2019) marked a turn. Under Xi Jinping, policymaking recentralized. Markets became subordinate to ideology and party control. America bet on convergence—hoping China would liberalize and adopt market norms. China bet on state power and strategic control. In the end, both countries achieved their immediate goals: the US gained access to cheap goods and new markets, while China leveraged state-driven growth to become a global powerhouse.
→ The Splashdown phase (2020–present) is defined by debt, demographics, and distrust. National security has eclipsed growth as the organizing principle of economic policy, in both the US and China. Under President Trump, the US has reacted to China’s continued export dependency with a series of tariffs and restrictions on dual-use technologies.
China’s miracle was built on decentralization. China’s slowdown is the consequence of recentralization, and is better understood as a controlled deceleration. It is an intentional reversal of the engines that once drove integration with the global economy.
The Reform Window That Closed
China experienced three decades of growth unmatched by any modern economy, not even the United States during its own industrialization. 8 Yet at its moment of maximum strength, China made a highly consequential choice. It did not build market institutions; it borrowed them without fully embedding the foundations that give them stability.
For a time, China enjoyed market outcomes without the institutional foundations that typically sustain them: freedom of expression, data transparency, independent courts, enforceable contracts, secure property rights, and autonomous local governance. 9 Rather than institutionalizing reform, Beijing reversed it.
The cost of that reversal is not merely slower growth; it risks sacrificing innovation itself. Innovation requires permission to question, room to experiment, and the ability to fail and try again. China now discourages all three. In this environment, who wants to be the next Jack Ma—brilliant, successful, and then silenced? 10 You cannot ask entrepreneurs to take risks while signaling that success may invite political danger or government interference.
Here, the mirror becomes uncomfortable for the United States. Now Washington is increasingly experimenting with industrial policy and golden shares rather than playing to its enduring strength: open markets that reward good ideas and discipline bad ones.
China squandered its reform window. We should not squander ours.
For now, there might be enough fuel in the engine for China to maintain its current technological altitude. But the closing of its doors to international collaboration, as well as US sensitivity to national security concerns, means that this once creative exchange will falter, as the US tightens visa requirements. Diminishing access to the world’s largest consumer market through tariffs or other means, will also have a dampening effect.
The erosion of market institutions did not only affect capital and contracts. It also reshaped incentives, talent, and risk-taking across an entire generation. The consequences are most visible not in balance sheets, but in human capital.
Human Capital: China’s Hidden Constraint
China produces degrees at scale, but it increasingly struggles to produce creators. Its education system excels at credentialing but constrains dissent, intellectual risk-taking, and independent thought.
You cannot innovate where dissent is unsafe. Creativity depends on the freedom to challenge assumptions and pursue ideas that may fail. In China, those behaviors now carry political risk.
The consequences are visible in the labor market. Youth unemployment has risen sharply, to levels significant enough that official reporting has been suspended and revised.11 This signals not just cyclical weakness, but a deep misalignment between education, opportunity, and demand.
Infrastructure can be built. Capital can be directed. But innovation cannot be commanded, in either country. It can only be facilitated, or impeded by government policy.
China is no longer picking winners so much as preventing losses.
Industrial Policy: From Competition to Command
China’s industrial policy once allowed experimentation. Local governments competed, firms failed, and successful models were scaled. That process—messy and uneven—was dynamic.
Today, that system has been replaced by command and control. Capital is allocated from the top down, initiative is punished, and private firms are increasingly treated as instruments of state power. China is no longer picking winners so much as preventing losses.
The two superpowers have begun to compete on economic terms. Diplomacy has been largely displaced by the latest term of art, economic statecraft.
Trade as Economic Statecraft
Trade flows no longer reflect efficiency alone. They now function as leverage. Supply chains once moved to minimize cost and maximize scale. Today, they move to minimize risk.
We have shifted from globalization to mobilization. Where efficiency once organized trade, security now does. States are reshaping supply chains not to optimize returns, but to reduce vulnerability, enforce alignment, and deny advantage to rivals.
This shift is not temporary. As trade becomes an instrument of economic statecraft, the logic of globalization is being dismantled—not by markets, but by strategy. As Amber Zhang writes in her 2026 China Equity Outlook:
The die has been cast. China and the US have both prioritized self-reliance over any other foreign or economic policy goal.
What Drove US Investment in China
This reordering of trade and capital flows was not driven by opportunity, or lower labor costs alone. The sequencing suggests that rising regulatory intensity in the United States acted as a push factor, accelerating outward investment decisions rather than merely responding to globalization already underway. In this sense, China’s export-led ascent was shaped not only by pull factors abroad, but by cost, compliance, and policy pressures at home.
US Environmental Regulatory Intensity vs US FDI into China
EPA Notices of Proposed Rulemaking (NPRMs) crest in the early 1990s
U.S. foreign direct investment into China accelerates in the mid-to-late 1990s
A second rise in NPRMs occurs in the late 2000s
U.S. FDI into China peaks in the early-to-mid 2010s
Washington’s Shift: Economic Security Trumps Engagement
A parallel transformation is underway in the United States. The phrase “economic security is national security” has moved from strategy into ideology.
Ten years ago, young staffers built careers by engaging with China. Today, many avoid meetings altogether. Engagement itself has become a career risk, and rising young bureaucrats avoid contact with Chinese counterparts or even travel to China. The number of US students in China is now estimated to be approximately 500 compared to more than 40,000 in Italy.12 Where does this leave future scholars? At the same time, study abroad has become a negative checkmark for young Chinese officials.
Disengagement, not open disagreement is the greatest danger to productive dialogue. Beijing limits contact through control and suspicion; Washington through risk aversion and politicization.
US companies are pulling back. Surveys show that in 2025 the share of American firms planning new investment in China reached record lows, 13 reflecting strategic caution amid geopolitical tension and national-security-driven policy shifts.
Both Economies Are Quietly Setting Out on a Wartime Footing
Both China and the United States are now clearly prioritizing economic security over growth. The key features of a wartime economy are resilience, control, and readiness— not profitability.
In China, civil–military fusion continues to blur commercial and defense activity. Strategic minerals are stockpiled. Export controls on magnets, gallium, germanium, and graphite are used as strategic signals.14 But they could also simply be caused by supply issues that are inevitable in a weak economy.
The United States is moving to create self-sufficiency as well, through different instruments: the CHIPS Act, expanded use of the Defense Production Act, Indo-Pacific deterrence planning, and other high-priority efforts aimed at friend-shoring and reshoring.15
In both systems, globalization’s economic logic has given way to the forces of mobilization. The governments clearly support policies to enable their economies to withstand exogenous shocks and support key industries, not build international bridges. A key concern: if an issue emerges that requires global cooperation during this period, such as a financial crisis, a natural disaster, or another pandemic, have ties become so frayed since Covid that cooperation will be limited, to disastrous effect? I fear we have learned nothing from the latest global catastrophe.
The Kennan Question Revisited: Taiwan
In 1946, in what became known as the Long Telegram, George Kennan warned Washington that the Soviet Union’s apparent economic strength masked deeper structural weaknesses. 16
Much of the current debate about China assumes that size, industrial capacity, and state control translate automatically into durable power. But history suggests that centralized economies can appear strongest precisely when their underlying constraints are tightening, and inevitably, weakening.
This question of apparent strength, and the risks we have been discussing, converges sharply on Taiwan. Taiwan is not peripheral. It is the center of gravity in the tug of war between the US and China, and two radically different systems. TSMC is the spine of the global semiconductor ecosystem. 17
The danger is that China miscalculates if it assumes a takeover of Taiwan would be treated as a domestic political issue. The US has reaffirmed its support, Japan has described interference as a critical threat to its economy, and AUKUS binds Australia and the UK in terms of defense.
The mistake we might be making is believing we are dealing with business cycles, when in fact, we are entering a new post-globalization era. And we risk mistaking efforts at economic self-sufficiency for pre-war mobilization.
Analysis of this issue is highly complex. Leaving aside historical claims, today Taiwan itself seems divided. There are many open questions about relative military power, and the willingness of the US and its allies to confront China directly. And the most salient of all: why would China risk everything for Taiwan? Yet somehow, it seems that the era of strategic ambiguity that has persisted for half a century is now ending.
Middle Powers: Stabilizers in a Fragmented World
In this new era, middle powers become power brokers who can offer systemic resilience to both the US-Europe-Pacific allies and to the China-Russia coalition. For middle powers such as Canada, the challenge is to act as stabilizers—the precision “chopsticks” guiding the rocket toward a safe landing.
Canada also offers critical minerals, rule of law, and proximity. Australia absorbed Chinese coercion and pivoted without recession,18 and also offers access to critical resources. India combines demographics, democracy, and strategic autonomy. There is still room for strategic maneuverability, but if pre-conflict conditions ripen, everyone will be forced to choose sides. This means that middle powers are incentivized to maintain the status quo, and maximize optionality.
Through the Hale Strategic Resources Initiative (HSRI) in Chicago, we are working to help build and strengthen critical North American supply chains, and working with our allies in Australia and Japan, allow US companies the ability to survive any disruption to international trade.. 19
A Fearful Symmetry
China has limited transparency and engagement with the US in the name of control and centralization. The United States has sharply curtailed engagement with China in the name of national security. The ensuing narrowing of communication and ties between the world’s two largest economies may be more destabilizing than a slowing of economic growth.
For four decades, the question was: How do we make China grow?
Today the question is more unsettling: What will China do when growth is no longer possible—and what will the United States do when dialogue is no longer productive?
China took off because the world opened to it. China is slowing because it has closed its doors inward, while relying heavily upon exports for its economy. Because of the scarcity of data available to economists, it is hard to answer this question: what will splashdown look like? It is inevitable because no country can maintain double digit economic growth forever. Will we see a controlled descent, with limited impact on the global economy? Or will China’s landing spin out of control, creating shockwaves around the world?
The choice now facing policymakers is if China’s evolving status can be managed through dialogue, or if both sides drift quietly and incrementally toward something far more dangerous.
That distinction will define the next global era. I would enjoy hearing your comments!
Happy Holidays to All!
Lyric Hughes Hale
Lyric Hughes Hale serves as Editor-in-Chief of Econvue, which publishes a newsletter, econVue+. She hosts The Hale Report, a podcast series on global economics. She is Director of Research at Hale Strategic
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Footnotes
China Takes Off, David Hale and Lyric Hughes Hale, Foreign Affairs, Nov–Dec 2003.
Quarterly GDP Releases, National Bureau of Statistics of China, NBS, H1 2025.
Global Debt Database, International Debt Statistics, International Monetary Fund; World Bank, IMF / World Bank, 2023–2025.
China Overview: Reform and Opening, World Bank, World Bank, n.d.
China and the WTO, World Trade Organization, WTO, 2001–present.
Notices of Proposed Rulemaking (NPRMs), US Environmental Protection Agency, Federal Register, various years.
US Direct Investment Abroad: Country Detail, US Bureau of Economic Analysis, BEA, various years.
Historical GDP Growth Comparisons, Maddison Project Database, Maddison Project, 2020 ed.
China’s post-reform growth relied on partial market mechanisms operating in the absence of liberal political institutions, including independent courts, full property-rights protection, and transparent governance. See Yasheng Huang, Capitalism with Chinese Characteristics (Cambridge University Press, 2008); Minxin Pei, China’s Trapped Transition (Harvard University Press, 2006).
On the institutional prerequisites of sustainable market economies and China’s partial divergence from them, see World Bank, China 2030 (2012); OECD, Economic Surveys: China (various years).
China Regulators Halt Ant Group’s IPO, Reuters, Nov 2020.
China Stops Publishing Youth Unemployment Data, Reuters, Aug 2023.
Open Doors Report: US Students in China, Institute of International Education, IIE, 2024–2025.
Business Climate Survey 2025, American Chamber of Commerce in China, AmCham China, 2025.
China Imposes Export Controls on Gallium and Germanium, Reuters, Jul 2023.
CHIPS and Science Act of 2022; Defense Production Act Authorities, US Congress; US Department of Defense, US Gov., 2022–present.
The Long Telegram; The Sources of Soviet Conduct, George F. Kennan, Foreign Affairs, Jul 1947. US State Dept: Full Text Feb 1946; https://nsarchive2.gwu.edu/coldwar/documents/episode-1/kennan.htm
Annual Reports, Taiwan Semiconductor Manufacturing Company (TSMC), TSMC, various years.
Trade Diversification and Economic Resilience Publications, Australian Treasury; Reserve Bank of Australia, Australian Gov. / RBA, various years.
https://treasury.gov.au/publication
https://www.rba.gov.au/publications/
