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Free Vikings – Our Take on China

By M.W. Tyler – October 23 2025

Overview

China is navigating its most challenging transition in decades. Three intertwined pressures dominate the picture:

1. Domestic property crisis – the sector that once supplied roughly a quarter of GDP is collapsing.
2. Deflationary dynamics – weak demand is pushing consumer‑price inflation to zero and producer prices into negative territory.
3. External squeeze – strategic competition with the United States, the EU and other partners is reshaping China’s export‑oriented model.

The old, debt‑fuelled growth engine is fading; a new model centered on high‑tech manufacturing and exports is taking shape, but the shift is uneven and fraught with friction.

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1. The Domestic Economy – From Property to Production

Issue	What’s happening	Implications
Property anchor gone	Pre‑sales of unfinished homes have collapsed; developers such as Evergrande and Country Garden are in lengthy restructurings.	Massive unfinished projects erode consumer confidence and create a negative wealth effect.
Deflationary spiral	CPI is flat (≈0 %) and producer‑price indices have been negative for over a year.	Signals under‑utilised capacity, raises real debt burdens, and discourages spending.
“New Engine” – Manufacturing overdrive	Beijing is doubling down on EVs, lithium‑ion batteries and renewable‑energy equipment. China now dominates global EV and solar‑panel output, creating sizable overcapacity.	Overproduction forces China to export excess, depressing global prices and heightening trade tensions.

Takeaway: The state‑driven push into high‑tech manufacturing is necessary but currently lopsided. It does not generate enough domestic jobs or consumer confidence to replace the lost property sector, leaving China vulnerable to both internal stagnation and external backlash.

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2. The External Environment – “Peak China” and Geopolitical Squeeze

• End of “Chimerica” – The United States and EU are no longer reliable, open‑ended markets. Tariffs, the Inflation Reduction Act, and EU anti‑subsidy probes target Chinese EVs and other high‑tech exports.
• Friend‑shoring & de‑risking – Companies are relocating supply‑chain elements to Vietnam, India, Mexico, etc., reducing reliance on China.
• “Peak China” narrative – IMF’s 2025 growth forecast for China sits at 4.4 % (still strong by developed‑world standards but far below the double‑digit rates of the past).

Takeaway: Beijing’s assertive foreign policy (“Wolf‑Warrior” diplomacy) has accelerated the very containment it seeks to avoid. Restrictions on advanced semiconductors and other strategic technologies have created a tangible vulnerability.

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3. Global Impact – Economic Statecraft in Action

• Exporting deflation & overcapacity – Surplus production of cars, batteries and chemicals floods overseas markets, pressuring prices and hurting manufacturers in Europe, North America and emerging Asia.
• The Global South as a battleground – China deepens ties through a scaled‑down Belt‑and‑Road Initiative and BRICS cooperation, gaining alternative markets but also saddling partners with debt risks.

Takeaway: China leverages its manufacturing heft as a tool of statecraft. While it can still innovate and compete at scale, the resulting backlash threatens a bifurcated global tech‑trade ecosystem.

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Bottom Line – A Nation at a Crossroads

• Bull case: Successful deleveraging of the property sector, a boost to domestic consumption, and a moderated foreign policy allow China to settle into slower, technology‑driven growth.
• Bear case: Deepening property distress triggers a broader financial crisis; the West successfully walls off key markets, leading to prolonged stagnation reminiscent of Japan’s “lost decade.”

Most likely outcome: A messy middle. China will likely avoid a full‑blown collapse but will struggle to reignite robust, balanced growth. It will remain an indispensable yet disruptive global player, with trade and geopolitical tensions shaping the next decade.

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Tyler’s Additional Analysis

1. Structural Imbalance and the “Growth‑Consumption Gap”

China’s historic growth model relied heavily on investment‑led expansion, especially in real‑estate and infrastructure. The current transition attempts to re‑balance toward consumption‑led growth, but the policy mix remains skewed:

• Fiscal stimulus – Recent measures (e.g., a ¥10 trillion local‑debt refinancing package) have helped shore up liquidity but raise fiscal deficits to historic highs (~4 % of GDP).
• Monetary easing – The People’s Bank of China cut rates in September 2025, yet credit growth remains modest because banks are wary of further exposure to distressed developers.

Without a significant uplift in household disposable income, the consumption component will stay muted, prolonging the “growth‑consumption gap.”

2. Demographic Headwinds

China’s fertility rate has slipped to ≈1.01 births per woman, the lowest on record. By 2035 the working‑age population could shrink by ≈150 million, eroding the labor pool that underpins both manufacturing output and tax revenues. Even aggressive automation cannot fully offset the loss of human capital, especially in service‑oriented sectors that drive domestic demand.

3. Technology Self‑Reliance – A Double‑Edged Sword

The “Made in China 2025 2.0” agenda pushes for semiconductor, AI and quantum breakthroughs. Success would:

• Reduce vulnerability to export controls.
• Potentially catapult China into a position of strategic technological leadership.

However, the R&D intensity required (≈3–4 % of GDP) competes with already strained fiscal resources. Moreover, talent acquisition is hampered by tighter immigration rules and a brain‑drain of top engineers seeking more open ecosystems abroad.

4. Geopolitical Risk Premium

Western allies are increasingly coordinating policy tools (tariffs, investment screening, export bans). This creates a risk premium on Chinese‑origin assets that could:

• Dampen foreign direct investment inflows.
• Increase borrowing costs for Chinese firms that rely on offshore financing.

Even if China’s sovereign credit remains strong (large FX reserves, low external debt), private‑sector financing may become more expensive, feeding back into the domestic slowdown.

5. Scenario Outlook (2026‑2030)

Scenario	Key Drivers	Likely GDP Path (2026‑30)
Optimistic Rebalancing	Effective stimulus, modest consumption recovery, partial tech self‑sufficiency	4.5 %–5.0 % avg.
Stalled Transition	Persistent deflation, demographic drag, continued external pressure	3.5 %–4.0 % avg.
Severe Financial Shock	Property defaults spiral, banking sector stress, sharp capital outflows	≤3.0 % avg., risk of “Japan‑style” stagnation

Given current data, the “Stalled Transition” appears most probable: growth will hover around 4–4.5 %, with periodic bouts of volatility tied to policy adjustments and external shocks.

6. Strategic Takeaways for Stakeholders

1. Investors – Diversify exposure away from sectors overly dependent on Chinese domestic demand (e.g., real‑estate, consumer durables). Focus on export‑oriented high‑tech firms that benefit from global market share.
2. Policymakers (outside China) – Continue coordinated technology‑access controls while offering market incentives for alternative supply‑chains, mitigating over‑reliance on China without triggering a full decoupling.
3. Chinese decision‑makers – Accelerate social‑welfare reforms (pensions, healthcare) to boost household confidence, and prioritize skill‑development programs to counter demographic decline.

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Final Thought
China stands at a pivotal juncture: its ability to navigate the domestic property fallout, tame deflation, and manage geopolitical friction will determine whether it settles into a stable, mid‑range growth regime or slides into a prolonged stagnation trap. The coming years will be a litmus test for the resilience of its state‑guided economic model in an increasingly multipolar world.