China began the year with a familiar show of confidence. In January, the National Bureau of Statistics reported that GDP grew 5% in 2025, bringing the economy to roughly $20 trillion.

The figure, neatly aligned with Beijing’s target, projects steady expansion in the world’s second-largest economy. Yet it also raises a more uncomfortable question: how closely does it reflect underlying conditions?

Speaking at a March 17 event hosted by the Tokyo Foundation, titled “Decoding ‘China Risk’ Through Policy, Markets, and Geopolitics,” economist Long Ke offered a more granular reading. China’s growth model, he argued, is “running up against its limits,” with recent trends pointing to a widening gap between ambition and reality.

Cracks in the System

China’s economy has long depended on investment as its primary engine of growth. Yet that engine is faltering. Fixed-asset investment is estimated to have shrunk by 3.8% year-on-year, Long said, while investment in the once-dominant real estate sector has dropped by a striking 17.2%. 

Price data further illustrates the weakness. China’s producer price index, which reflects prices received by producers, stood at –2.6% in 2025 and has remained in negative territory for years. 

Persistent producer price deflation, Long assessed, “is a clear sign that the economy is under significant strain.”

Independent estimates reinforce that view. Projections by Rhodium Group, a US-based research firm, placed the country’s likely growth closer to 2-3%, roughly half of Beijing’s official figure. 

The Rhodium figure is more consistent with broader indicators, including weak domestic demand, a prolonged property downturn, and subdued private-sector confidence, the Tokyo-based economist said.

Engineering Expansion

The deeper structural problem lies in how China manages growth. Targets are set first, and policy follows. Long describes an approach in which local governments and state-owned companies “engineer outcomes to fit the number.” 

When those targets exceed the economy’s capacity, they encourage excessive investment — often reinforced by state subsidies — pushing firms to expand beyond sustainable levels. The result is a familiar cycle of overcapacity, diminishing returns, and mounting financial strain.

The consequences have become more visible in the post-pandemic period, Long said, where the East Asian powerhouse has yet to recover fully from the aftershocks of its stringent COVID-19 controls. 

Prolonged lockdowns weakened the service sector, drove many small- and medium-sized enterprises into bankruptcy, and contributed to a sharp rise in youth unemployment. As younger workers struggle to find jobs, “household incomes and consumption remain under pressure,” Long said, limiting the scope for a demand-led recovery.

External pressures have only compounded these domestic weaknesses. Tariffs imposed under the Trump administration continue to weigh on exports, even as geopolitical tensions encourage multinational firms to diversify supply chains away from China.

Rethinking the Taiwan Issue

For years, China’s political economy under President Xi Jinping rested on an implicit bargain: sustained growth in exchange for a tighter political grip. But as growth slows, that balance may be shifting.

Signs of strain are becoming more visible within the system, reflected in an intensified anti-corruption campaign and a series of high-level purges, particularly within the military.

In recent months, Beijing has expanded its anti-graft drive within the People’s Liberation Army, removing senior officials and reshuffling key posts. Such purges are not new, but their scale has raised questions about the PLA’s operational readiness.

Analysts have argued that stripping away senior military leadership could leave Xi more prone to risk-taking. Long, however, pushed back against alarmist readings. The latest removals, he argued, have sidelined commanders with meaningful combat experience.

Of the seven members of the Central Military Commission, only two — excluding Xi — remain in place, both in non-operational roles. That, he said, reduces the likelihood of any serious military move, including an imminent crisis over Taiwan, for the foreseeable future. 

Long pointed to tentative signs to support his view. At a Taiwan Affairs Work Conference in Beijing in February, the official communiqué adopted a more measured tone than in past statements.

The usual formulation that China “does not renounce the use of force” to achieve unification with Taiwan was omitted, while the language appeared more restrained — even conciliatory.

Japan’s China Dilemma

So what does this all mean for Japan?

For the Tokyo-based economist, Beijing’s caution extends, to some degree, to its relations with Japan. Despite China’s economic retaliation following Japanese Prime Minister Sanae Takaichi’s remarks on a Taiwan contingency last November, “bilateral ties have not deteriorated as sharply,” he said. 

While overall arrivals of Chinese tourists to Japan may have fallen, lower per-capita spending and a shift from group tours to independent travel have largely muted their economic impact, Long said.

At the same time, Long said it was a positive sign that China has not seen a surge in high-profile detentions of Japanese professionals under its draconian anti-espionage laws, with little sign of the large-scale anti-Japan protests or boycotts seen in the past.

Still, beneath this apparent calm lie structural vulnerabilities that are harder to ignore. Chief among them is China’s dominance in rare earths, accounting for roughly 60% of global output and nearly 90% of processing, materials critical to advanced manufacturing and defense technologies.

Even if alternative producers such as Malaysia or Indonesia expand output for Japan, “their role will remain supplementary,” Long said. 

China’s advantage rests not only on scale but also on cost — and on what he describes as a greater “tolerance for environmental damage,” a trade-off countries like Japan and the United States are far less willing to accept.

Taken together, Long said, this leaves Japan with three urgent priorities, including diversifying supply chains away from China, sustaining quality and efficiency, and securing the high-skilled workforce needed to remain competitive.

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Author: Kenji Yoshida