China’s latest Five-Year Plan: Its effort to shift its economic model has run into a debt dilemma

China’s growth model: The country’s growth has long relied on investment, industrial production and exports. That model delivered extraordinary gains, but is now under strain. Household consumption is low as a share of GDP, reflecting high precautionary savings driven by uncertainty over pensions, healthcare, education and housing.

A prolonged property downturn has weakened household balance sheets and confidence. Local governments, once buoyed by land sales, are struggling under rising debt and shrinking revenues.

At the same time, China’s trade surplus is widening and reliance on overcapacity as well as exports is becoming an increasingly fragile growth engine. The policy prescription is well known: shift income towards households, strengthen social safety and reorient fiscal policy towards consumption.

China’s chosen strategy: The 15th Five-Year Plan takes a different approach. Its overarching objective is innovation-based “high-quality development.” The emphasis is on production, technology and industrial capability to drive growth through productivity gains and industrial upgradation.

One reason for this caution is China’s strained fiscal position and a parallel vulnerability from overcapacity in housing and industry. Recent signals suggest that policymakers are operating under what officials describe to be a “tight balance.”

Tax revenues are weakening, land-sale income has collapsed and a growing share of borrowing is being used to stabilize the financial system, indicating that liabilities from local governments and the property sector are weighing on the broader financial system.

Meanwhile, excess capacity in real estate and industry is reinforcing the problem. Overconstruction of housing and continued industrial expansion have created both financial and real-economy imbalances, linking debt pressures with weak demand.

The restructuring dilemma: Moving decisively in favour of a consumption-led growth model requires China to confront that legacy head-on. It must restructure debt in local government financing vehicles, its property sector and its state-owned enterprise system, while reallocating capital away from unproductive sectors. Such a process would inevitably involve financial write-offs and job losses in construction, real estate and state-linked industries.

China’s current caution is self-defeating. By delaying restructuring, it risks prolonging the very imbalances it seeks to resolve. Weak consumption suppresses growth, slower growth makes debt harder to manage and rising debt concerns then justify continued caution.

From stimulus to restraint: China’s fiscal stance is shifting. Headline spending is large, but much of the increase is a result of debt swaps and financial stabilization efforts rather than new demand. The net fiscal impulse is modest (and could even be contractionary), acting as a drag on growth.

China’s missing consumer has global consequences: The gap is most evident in the treatment of consumers, who get very little budgetary support. Small subsidy programmes are expected to promote private demand, but without stronger income growth or social protection, their impact will be limited. The absence of a clear consumption target reinforces the sense that this objective is not yet a binding priority.

The consequence is that China continues to rely on exports and industrial output to sustain growth. This widens its trade surpluses, magnifies global imbalances and intensifies tensions with trade partners already concerned about China’s excess capacity.

This external reliance is mirrored by China’s global posture. As geopolitical tensions rise—including the recent Iran conflict—Beijing is seeking to project itself as a stabilizing multilateral actor, calling for dialogue and positioning itself as an alternative to Western intervention. Yet, its cautious approach reflects domestic constraints: just as China is reluctant to absorb losses at home, it is unwilling to assume the full costs of global leadership.

Innovation alone won’t suffice: China’s focus on technological upgradation is understandable. In a fragmented global economy, leadership in advanced technologies is critical for competitiveness and national security. But productivity gains alone will not lift consumption without stronger household income and financial security. Without that, higher productivity may translate to more exports and additional industrial capacity—exacerbating imbalances rather than resolving them.

The risk of a prolonged adjustment: China is effectively trying to manage a structural transition through caution. But weak consumption slows growth. Slower growth makes debt harder to manage. And the longer an inevitable restructuring is delayed, the harder it gets. China has chosen a gradual path, hoping to avoid disruption. But economies rarely rebalance through restraint alone. Its challenge is no longer just debt management—it is to ensure that debt does not block reform.

The author is a distinguished fellow at the Centre for Social and Economic Progress (CSEP) and a former member of the 15th Finance Commission.