News & Insights

China’s Empty GDP Growth

At first glance, China’s gross domestic product growth looks impressive. Several leading institutions recently raised their 2025 estimates to around 5%, projecting strong growth well above 4% for the next two years. However, a deeper dive into their economic data reveals a system with deep and persistent problems.

After years of aggressively building out manufacturing capacity, many of China’s industries are now producing far more than global customers can absorb. This has resulted in a phenomenon known as “involution,” a cycle of overinvestment in production that leads to diminishing returns and companies continuing to operate at a loss to maintain cash flow and market share.

Facing strained U.S. trade relations and weak domestic demand, China has been rerouting goods through intermediaries like Vietnam and Mexico or pushing products into lower-income markets like Southeast Asia and Africa. This has resulted in intense competition that drives down prices and shrinks margins. The damage is quantifiable, illustrated by a 9% decline in industrial profits over the last four years and a surge in business failures in 2025. While headlines highlight China’s record trade surplus, this has come at the expense of pricing power, destroying the profitability of Chinese companies. The collapse in pricing power can also be seen in the producer price index, which has fallen for 40 consecutive months.

The imbalance of supply and demand will continue, with Goldman Sachs estimating that most industrial sectors in China have 30-50% excess capacity (compare this to approximately 15% in the U.S.), which guarantees suppressed margins going forward. This high level of overproduction will continue to prop up growth in GDP but at the expense of profitability and cash flow.

China shows signs of weakness on the domestic front, with a double-digit year-over-year decline in fixed-asset investment, oversupply in the housing market driving down values, and feeble consumer sentiment that never recovered after the pandemic. The government’s efforts to spur economic activity — such as subsidies for electric vehicles and appliances — have generated only short-term gains.

No developed country in the modern era has sustained 5% GDP growth while experiencing 10 consecutive quarters of deflation. The Chinese Communist Party has effectively admitted that the economy is being sustained by top-down policies. China has implemented no serious solution to the involution problem because it would require GDP and employment to contract, a proposal that is off the table for Chinese leadership. The reported economic benefits of the record trade surplus are exaggerated, posting a $1.2 trillion dollar surplus while reporting foreign currency deposits that are a small fraction of that, around $200 billion. While the trade surplus figures are verifiable through cross-referencing importing countries' data, the disparity with reported foreign currency deposits likely reflects business owners refusing to repatriate their money and finding alternate ways to store their wealth.

Sourcing reliable data on business bankruptcies is difficult. Nonperforming loan stats from banks are manipulated. A survey from Coface, a global trade credit insurer, finds that 52% of companies are experiencing serious financial stress. The government no longer reports business deregistrations or net creations. Collaborative evidence paints a dismal picture. Estimates from legal firms find the number of active businesses collapsed in 2025 and office vacancies have risen significantly in major cities.

However, while China struggles with its historic manufacturing base, it has invested heavily to participate in AI and technology advancements. The country maintains leadership or a competitive edge in several advanced industries such as batteries, electric vehicles, robotics, AI, renewable energy and medical devices. From an investment perspective, opportunities should be approached with selectivity and precision but also caution. For those able to navigate China’s high-risk landscape, its most successful players can still make a meaningful contribution to diversified portfolios.

Fixed Investment Continues to Weaken

Source: CEIC, Data compiled by Goldman Sachs Global Investment Research

China Retains Competitive Edge in Advanced Tech Sectors*

*These seven industries are batteries, electric vehicles, robotics, AI, renewable energy, aerospace and medical devices.
Source: Oxford Economics

Office Vacancy Rates Show Weak Business Growth

Data Sources: Compiled from historical reports by major real estate consultancies including Savills, CBRE, JLL, and Knight Frank.
Note: Exact percentages can vary slightly by agency methodology.

Net Increase in Chinese Business Creation

Source: State Administration for Market Regulation (SAMR) (2020–2024); 2025 figure is an estimate based on the impact of the Mandatory Deregistration Policy (Oct 2025).

China Corporate Payment Stress (% of Firms with Unpaid Debts and Duration of Payment Delay)

Source: Coface

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