October 23, 2026 | Discourse on China’s New Economic Growth Model (Part II) | Economics
In this series, scholars and industry practitioners discuss the challenges faced by the Chinese economy, both internal and external, as it seeks to transition toward a new growth model that emphasizes sustainable, high-quality development. They also offer theoretical and policy recommendations on the way forward.
In this article, Mr. George Yang, renowned macroeconomist and visiting professor at the Hong Kong Institute of Financial Management, offers recommendations for adjusting China’s export strategy, so as to better adapt to the new international economic and trade landscape, help enterprises increase profits, reduce external headwinds, and explore a new path for the high-quality development of China’s exports.
The framework of China’s long-standing export strategy took shape in the late 1980s (when the Central Government established the strategic guideline of “putting both ends of the production process on the world market, importing and exporting en masse” in 1988). At that time, the Chinese economy was facing a series of challenges and opportunities.
Domestically, China’s foreign exchange reserves in 1988 stood at only about USD$3.372 billion, while the trade deficit for that year was approximately USD$3.1 billion. Foreign exchange was in extremely short supply, and the total foreign exchange reserves were barely sufficient to cover that year’s trade deficit. Inflation (the overall level of retail commodity prices) that year was approximately 18.5%. Supply shortage was a major problem, and enterprises lacked raw materials for production. The rural labor supply surplus was around 100 million to 150 million people, which amounted to about one-third to 40% of the total rural labor force.
The core contradiction that the economy faced at the time was this: the desire to import technology and equipment was hampered by a lack of foreign exchange reserves, and the desire to expand exports was hindered by a shortage of raw materials.
Internationally, this was an era of accelerating globalization and rapid growth in global trade. According to statistics from the General Agreement on Tariffs and Trade (GATT, the predecessor to the World Trade Organization), the real growth rate of global merchandise trade reached a relatively high level of approximately 8.5% to 9%, while the growth rate of total global trade even reached around 14%. The prevailing trend in regulatory changes was primarily tariff concessions under the GATT framework. Then-U.S. President Ronald Reagan and then-British Prime Minister Margaret Thatcher promoted privatization and liberalization, with developed countries outsourcing labor-intensive processes and the assembly of electronic and mechanical components on a massive scale, shifting low-end industries to developing countries. Tensions between the Eastern and Western blocs eased, and China-U.S. relations improved, providing a stable window of opportunity for the implementation of the strategy of “putting both ends of the production process on the world market, importing and exporting en masse.”
Just as China was facing internal development bottlenecks, external opportunities emerged. Favorable external conditions—including improved geopolitical relations, accelerated global trade, and the large-scale transfer of industries from developed to developing countries—combined with China’s abundant, high-quality labor force, laid the foundation for the China’s rapid foreign trade expansion. Subsequently, China was in the fast lane for foreign trade development. Although there were some policy adjustments along the way—such as changes to subsidy and tax rebate policies—the overall framework has remained largely intact to this day. Although the Central Government proposed in 2020 the establishment of a dual circulation model with a primary focus on the “domestic economic cycle,” this new strategy has not yet been effectively implemented due to relatively weak domestic demand.
Compared to the 1980s, both China’s domestic and international environments have undergone significant (even 180-degree) changes, making it necessary to adjust the long-standing export strategy with more concrete policy measures.
The current domestic environment is as follows. As of September of this year, China’s foreign exchange reserves stood at approximately USD$3.4 trillion, and its trade surplus for 2025 was about USD$1.2 trillion—making China the first country in human history to record a trade surplus exceeding $1 trillion. It can be said that China possesses extremely abundant foreign exchange reserves. On the other hand, in recent years, the economy, as measured by CPI, has frequently hovered close to the deflation range, with supply exceeding demand a relatively pronounced phenomenon and ample provision of various raw materials. Population growth has slowed significantly, and the total labor supply has stabilized, shifting China’s competitive advantage from a quantitative one to a qualitative one. The value-for-money of Chinese goods has improved significantly, enough to overwhelm the vast majority of foreign competitors. Simply put, China’s labor cost advantage is no longer as before, but the value-for-money advantage of its commodities is prominent.
The current external environment is as follows. Globalization has significantly regressed. With the U.S. spearheading anti-globalization efforts in recent years, global trade has entered a phase of slow growth (global merchandise trade grew by approximately 2.4% last year). Geopolitical risks have risen significantly. Global markets are evolving toward fragmentation and regionalization, with tariff and non-tariff barriers increasing significantly. Due to U.S. pressure, some Chinese industries have been forced to relocate to other developing countries.
Comparing the past and present, the fundamental conditions that existed when the strategy of “putting both ends of the production process on the world market, importing and exporting en masse”was implemented—globalization, industrial relocation, foreign exchange shortages, insufficient domestic raw material supply, and labor surpluses—have all changed. The situation China currently faces is as follows:
- Globalization → Deglobalization
- Industrial relocation (to China) → Relocation from China to other developing countries
- Foreign exchange shortage → Abundant foreign exchange
- Insufficient supply of raw materials → Ample supply of raw materials
- Labor surplus → Stable overall labor supply
Furthermore, amid the war between the U.S. and Iran, oil prices have surged. Western countries are facing significant inflationary pressures in general, and global tariff and non-tariff barriers are clearly on the rise. The situation bears some resemblance to the 1970s, when the Organization of the Petroleum Exporting Countries (OPEC) imposed an oil embargo on the West, plunging Western countries into stagflation and leading to a sharp increase in tariff and non-tariff barriers.
Simply put, the external environment that favored China to continue increasing its exports en masse has deteriorated significantly, and global trade has partially entered an era of competition of existing stock. Growth in volume faces increasing resistance—a fact clearly evident from recent attempts by some countries that varied from imposing additional tariffs on Chinese goods, advocating for the appreciation of the RMB, asking China to self-impose limits on its exports, to banning imports of Chinese goods through administrative measures. For China, in addition to voicing our opposition to unreasonable trade measures, it is essential that we also explore alternative paths, and shift from pursuing growth in volume to growth in price.
An analysis of the strengths and weaknesses of China’s exports reveals that currently, China’s greatest advantage is the exceptional value-for-money of its products, while the greatest weakness is the artificial barriers that Chinese exports face amid China-U.S. tensions. Since these tensions will likely persist for a long time, the artificial barriers that Chinese exports face will also persist, and are expected to intensify as China’s exports continue to grow.
The exceptional value-for-money of Chinese export products is synonymous with their relatively low prices compared to similar foreign products. The combination of relatively low prices of Chinese goods and rising resistance to increasing export volumes points to a new direction in export strategy: reduce further low-price expansion in the scale of export, and shift the focus to price increases, optimizing existing markets and generating more profits from these markets.
Low-price, disorderly competition has been a major issue Chinese exports face in recent years- the spillover of “involutionary competition” has led to a situation where there is revenue growth but no profit growth- meaning companies work hard all year long, but do not make money.
This phenomenon is clearly abnormal. Since Chinese products possess such a strong value-for-money advantage, why are their financial results so poor? The direct cause is, of course, excessive competition; companies are so focused on maintaining market share that they have no capacity left to tend to profitability. However, while low prices resulting from competition in the domestic market may have some positive implications for grassroots consumption, what positive impact do they have in export markets? Especially when the market share of a product is already 80-90%, why should we continue to export at low prices? What reason is there to hand over the benefits that Chinese people could have enjoyed to wealthier developed countries, only to be accused by them of “dumping”?
In 2025, China’s total export value was approximately 27 trillion yuan. Assuming a 10% reduction in total export volume and an average 20% increase in commodity prices, the resulting net profit would be nearly 3 trillion yuan—a sum that could significantly improve corporate profitability and people’s standard of living. If gradual price increases were normalized, China would reap enormous benefits. This approach is clearly more beneficial to China’s economic development than the alternatives, such as being subject to tariff hikes by other countries (where tariff revenues go to those countries, but Chinese exporters have to bear part of the increased costs), currency appreciation (which hurts exports, boosts imports, and exacerbates macroeconomic imbalances), or self-imposed limits on export volumes (which, if implemented without price increases, would reduce exporters’ profits).
China has in fact reduced export tax rebates for certain products in recent years, which effectively raises export prices, but these remain ad hoc cases. Guided by the Central Government’s principle of pursuing“high-quality development,” the path to high-quality development in exports requires breaking away from the old model that focused primarily on scale expansion and instead pursuing a new path of raising prices to increase profitability. Only in this way can we mitigate internal and external tensions, and generate greater benefits for the Chinese people.
George Yang is a renowned macroeconomist and a visiting professor of the Hong Kong Financial Services Institute. He has decades of management experience in the financial sector.
The views expressed in this article are the author’s own, and do not necessarily represent the institutional stance of the Hong Kong Reform Institute.
Translated with AI, with subsequent editing done manually.