China’s Economic Rebalancing: From Factory Floor To Living Room – OpEd

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As global demand shifts and trade tensions rise, China is quietly building a consumption-driven economy.

At the border crossing between the Vietnamese city of Lào Cai and the Chinese city of Hekou in Yunnan province, one can observe a steady stream of Vietnamese traders carrying large parcels of goods from China into Vietnam. These goods are then distributed to wholesalers throughout the country.

Border Trade Reveals China’s Manufacturing Advantage

What stood out to me was the surprisingly low price of shoes in China compared to Vietnam. Given China’s higher labor costs, one would expect production of low-cost, labor-intensive goods—like shoes—to have shifted to countries such as Vietnam, Bangladesh and similar countries further down the value chain. However, a Chinese economist provided insight: Chinese shoe factories are highly automated, which significantly reduces labor costs.

Additionally, their larger scale allows them to benefit from economies of scale. These factories are also supported by an efficient local ecosystem—leather tanneries, glue and lace manufacturers, and other suppliers are located nearby, themselves benefiting from economies of scale. As a result, production costs remain lower in China than in many other developing countries.

BRICS Countries to Make Shoes, China to Build the Factories

Nevertheless, the expert noted that China’s shoe industry has passed its peak. Government industrial planners are now advocating shifting shoe and clothing production to the BRICS countries, from which China would import these goods. In return, China would export high-end equipment and turnkey factories to its partners. This strategy not only promotes growth in the partner countries, but also helps restore the trade balance.

Price poster for sandals in both Chinese and Vietnamese in Hekou: a pair of sandals costs 10 yuan, or about $1.40. (Photo: Felix Abt)

Industrial Policy: Phasing Out Old Industries, Investing in the Future

So-called “old” industries no longer receive loans. China’s largest banks, which are state-owned, primarily finance “future-oriented” sectors in line with national industrial policy. This policy shift has helped China emerge as a global leader in solar energy, electric vehicles, robotics, and other advanced technologies.

Redirecting Credit: From Real Estate to High-Tech Sectors

Chinese banks peaked in real estate lending in 2018, but such lending has been reduced dramatically since then. According to official policy, insolvent real estate firms must either go bankrupt or be restructured under market principles—no more bailouts. Instead, lending has shifted toward productive and forward-looking sectors. Over the past four years, this has redirected China’s economy away from a bloated real estate sector and toward sustainable growth industries.

China’s growing trade surplus—now exceeding $1 trillion, or about 4% of global trade—has major global implications. While the surplus strengthens China economically, it also raises concerns about long-term sustainability and global trade imbalances.

The Shock of Trump’s First Presidency: Beginning of U.S.–China Decoupling

China began recalibrating its trade dependence in 2018, following the Trump administration’s imposition of punitive tariffs and sanctions—including the highly publicized arrest of Huawei’s chief financial officer during a stopover in Canada for allegedly violating unilateral U.S. sanctions on Iran (which Canada had not adopted). This marked the beginning of a slow but deliberate decoupling from the United States. In 2017, 21.6% of China’s exports were destined for the U.S.; by 2024, that share had declined to 13.4%—a 38% drop. Yet during the same period, China’s total exports grew by 58.4%, underscoring a successful diversification away from U.S. markets.

In addition, according to current figures, the Chinese economy is expected to grow by around 5% this year. This growth is equivalent to the combined economic size of Vietnam and Cambodia.

China’s export reliance on the U.S. has dropped sharply—from 1.8% of domestic GDP in 2008 to less than 0.8% in 2024. Meanwhile, Chinese consumers and those in other emerging markets are increasingly buying Chinese-made goods. In contrast, the U.S. continues to rely on Chinese imports to keep inflation and production costs down.

Short-Term Fix, Long-Term Risk: The Flaws in Rebranding Chinese Exports

Though U.S. tariffs incentivize re-routing Chinese exports through countries like Vietnam and Indonesia, logistical limitations prevent this from becoming a widespread workaround. Seven of the world’s ten largest ports are in China, and infrastructure in smaller countries simply cannot match the scale needed. Moreover, Chinese exporters aren’t suffering much from the tariffs: Bloomberg reports that Chinese ports handled 6.7 million containers in a single week through April 22—a 7% year-on-year increase.

A Strategic Pivot: Growing China’s Domestic Market

China’s overall strategy is to reduce its dependence on exports and focus on growing the domestic consumer market. However, local governments continue to prioritize industrial production over social services that would stimulate consumption. The central government wants to change this. And although most Chinese companies are competitive and operate under market conditions, some emerging sectors are beginning to struggle with overcapacity.

Experimental Reforms Are Encouraging Consumption and Birth Rates

China is now moving to boost private consumption and reduce its dependence on exports and infrastructure investment. Cities such as Tianjin have launched pilot reforms to stimulate domestic consumption, for example by providing access to better schools for new homeowners: an important incentive for Chinese parents, for whom their children’s education is a high priority. In the capital of Inner Mongolia, generous childcare subsidies are intended to support larger families in order to boost both the birth rate and consumption.

A sausage stand in Hekou with a price tag in Chinese and Vietnamese: one sausage costs 5,000 Vietnamese dong (US$0.20), with a buy-two-get-one-free offer. (Photo: Felix Abt)

Rural Revitalization: Unlocking Consumption Potential Outside the Cities

The “village rejuvenation” policy is another key initiative. It should provide significantly more incentives than before for business start-ups, job creation (especially for migrant workers), improving living standards, and increasing consumption in rural areas. As of 2023, about 477 million people—roughly a third of China’s population—lived in rural areas. Yet their average disposable income was just 23,119 yuan in 2024, compared to 54,188 yuan in urban areas. While this rural-urban gap has narrowed over time (from 3.14x in 2007 to 2.34x in 2024), it remains substantial. Rural reform thus represents a significant engine for future growth.

India and China: A Complementary Partnership for Regional Growth

Looking ahead, China’s greatest growth potential may lie in improved economic relations with India. The two economies are complementary: China offers affordable capital goods; India provides a vast, low-cost labor force. If Chinese factories begin relocating to India, the resulting synergy could unlock vast regional growth.

Felix Abt

Felix Abt is a Vietnam-based entrepreneur, author (felixabt.substack.com) and travel blogger (youtube.com/@lixplore)

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