China’s Biggest Economic Enemy Is Its Own Government | Digging into China

Hi, I'm Dongshuang. Welcome to Digging into China, where we take a deep dive into what's really happening in China and share some unique insights. What if China's economic crisis is not entirely an accident? What if, alongside external pressures and structural economic problems, the Chinese government is also making deliberate choices that allow the domestic economy to remain weak because those choices serve the interests of the ruling elite? At first, this sounds absurd. Why would any government deliberately damage its own economy? Why would a country willingly undermine its own prosperity? But when we examine China's economic structure, particularly the relationship between its export industry, domestic consumption, currency policy, and enormous debt burden, A rather disturbing picture begins to emerge. China's economic crisis is not simply a story of an economy struggling against unfavorable external conditions. It is also a story of a government that increasingly prioritizes its own financial and political interests over the economic well-being of its people. Let's start with something that might seem unrelated. The recent appreciation of the Chinese yuan. There are two important reasons behind the yuan's strength. The first is the immediate influence of exports. According to China's official statistics, exports increased by 16.4% in the first three quarters of 2026. Export activity has been particularly strong in the third quarter, partly driven by international demand for industrial products and equipment related to artificial intelligence infrastructure. When Chinese exporters receive payments from overseas customers, they accumulate foreign currencies, especially U.S. dollars. They eventually need to exchange those dollars for yuan to pay their workers, suppliers, and domestic expenses. As more exporters sell foreign currencies and purchase yuan, demand for Chinese currency increases. This naturally creates upward pressure on its exchange rate. But there is a second, more important factor. China's economic structure has increasingly separated production from consumption. To understand this, we need to look at the two economic indicators, the producer price index or PPI and the consumer price index or CPI. PPI measures changes in the prices manufacturers receive for their products. CPI measures changes in the prices consumers pay for goods and services. In a healthy economy, these two indicators generally move in a reasonably balanced direction. When domestic consumption increases, business receives more orders, production expands, and companies have greater opportunities to raise prices and earn profits. China's situation is very different. For years, domestic consumer demand has remained weak. Households are worried about employment declining property values, stagnant incomes, and their financial future. People are reluctant to spend money because they are uncertain about what tomorrow will bring. Yet, China's industrial production can experience periods of strong growth. Why? Because Chinese manufacturers are increasingly producing goods for foreign consumers rather than domestic households. Think about it. A factory producing electronic components, batteries, machinery, or industrial equipment does not necessarily depend on Chinese consumers buying its products. Its customers may be American or European companies. When international demand increases, the factory receives more orders. Its production prices rise and its business expands. But none of this necessarily improves the purchasing power of ordinary Chinese people. We saw this phenomenon in 2021, when the global economy recovered from the pandemic. Governments around the world injected enormous amounts of money into their economies. Consumer spending rebounded, and international orders surged. Chinese manufacturers benefited from that recovery. We are seeing a similar development in 2026, as major economies invest heavily in artificial intelligence infrastructure, creating demand for electronic equipment and industrial products. The result is that China increasingly operates like two separate economies. One is an export-oriented production economy serving foreign consumers, the other is a domestic consumption economy where households and small business continue struggling. The factories may be busy, but the people at home are not necessarily getting richer. This is the fundamental contradiction of China's economic model. The country can produce more and export more while its own consumers become increasingly unable to afford what those factories manufacture. This economic imbalance became increasingly pronounced after the US-China trade war began during Donald Trump's first administration. Foreign companies reconsidered their dependence on Chinese manufacturing, investment confidence deteriorated, and the domestic private sector faced growing uncertainty. Instead of fundamentally addressing these problems, however, the Chinese government increasingly adapted to this distorted economic structure. And here is where the argument becomes particularly interesting. A weak domestic economy combined with an externally stronger yuan can actually benefit the Chinese government's debt management strategy. China has enormous debt obligations. These include central and local government debt, financing vehicles, corporate liabilities, and various forms of hidden debt. The property crisis has made the situation even more difficult. The government desperately needs to reduce the cost of servicing these debt. One way to do that is through lower domestic interest rates. When interest rates decline, governments and companies can borrow and refinance debt at lower costs. Meanwhile, the declining purchasing power of the yuan can reduce the real burden of domestic debt over time. This is what we can describe as the yuan depreciating internally. But the external value of the yuan presents another opportunity. When the yuan appreciates against foreign currencies, Chinese institutions with foreign currency debt may find it easier to repay those obligations. Suppose a Chinese institution owes 1 billion US dollars. At an exchange rate of 7 yuan per dollar, it needs 7 billion yuan to repay that debt. If the exchange rate strengthens to 6 yuan per dollar, it needs only 6 billion yuan. The dollar debt remains exactly the same, but the amount of domestic currency required to repay it declines. Of course, this benefits borrowers with foreign currency liabilities, not every Chinese company. Exporters can actually suffer when their foreign earnings translate into fewer yuan. Nevertheless, for a heavily indebted government and institutions with substantial foreign currency obligations, a stronger external yuan can provide meaningful relief. Now put these two developments together. The yuan loses purchasing power domestically while maintaining or increasing its value internationally. This arrangement can help reduce domestic borrowing costs while lowering the yuan denominated burden of foreign debt. From the government's perspective, it is an attractive arrangement. But maintaining it creates another problem. If domestic consumption suddenly recovers strongly, household incomes rise, private business expand, and economic activity accelerates, the existing financial arrangements could become more difficult to maintain. Interest rates could face upward pressure, credit demand could increase, and the government might have to confront financial weaknesses that have been postponed rather than resolved. This brings us to a fundamental contradiction in Beijing's economic policy. Officially, the government constantly talks about expanding domestic consumption. It announces ambitious targets and promises to increase household spending. But how can you stimulate consumption without increasing people's incomes? You cannot simply tell people to spend more money when they are worried about losing their jobs, when their property values are falling, and when their businesses are struggling. To stimulate consumption, the government must allow more wealth to remain in the hands of ordinary people. That means giving households a larger share of national income, protecting private property, creating a more predictable business environment, and allowing private enterprises greater economic freedom. Ultimately, it requires the government to give up some of its control over economic resources. And that is precisely what the Chinese Communist Party is reluctant to do. Instead of decentralizing power, Beijing is strengthening central control. Instead of giving the private sector greater freedom, the state is expanding its influence over businesses. Instead of allowing market forces to determine the allocation of resources, the government increasingly emphasizes state planning and political priorities. So we have a government that publicly promises to stimulate consumption while pursuing policies that undermine the confidence and financial independence necessary for consumption to recover. The question is whether this contradiction is simply the result of poor economic management, or whether the existing arrangement also serves the government's interests. The same logic applies to China's foreign exchange controls. China maintains strict restrictions on cross-border capital movements. Ordinary citizens cannot freely convert unlimited amounts of yuan into foreign currencies and transfer their money overseas. These restrictions help the government control the supply and demand of yuan in the foreign exchange market. On one side, exporters bring foreign currencies into China and exchange them for yuan. On the other, ordinary citizens face restrictions when they want to sell yuan and purchase foreign currencies. This helps maintain demand for the yuan while limiting the ability of domestic capital to flow abroad. Combined with government support for export-oriented industries, this arrangement can help sustain the yuan's external value. In other words, the government has strong incentives to preserve an economic structure that keeps domestic consumption weak, supports exports, maintains low borrowing costs, and restricts capital outflows. But who actually benefits from this arrangement? Certainly not ordinary Chinese people. Even the export industry, which appears to be China's economic success story, is not necessarily generating substantial profits for private business. China's export competitiveness depends heavily on price competition. Companies undercut one another to win orders. Factories reduce prices, squeeze suppliers, and push workers harder. The result is a race to the bottom. A manufacturer may receive more orders than ever before, but that does not mean it earns more money. The cost of raw materials, electricity, transportation, and labor does not automatically decline just because the company reduces its It's a selling price. Businesses end up operating on increasingly thin profit margins. Workers face heavier workloads without necessarily receiving better compensation. So even the export economy, despite its impressive statistics, may not generate enough wealth to improve the living standards of ordinary people. Where then does the wealth go? Increasingly, the Chinese government is concentrating economic resources in its own hands through several methods. The first is taxation and government revenue. According to China's Ministry of Finance, general public budget revenue reached approximately 17.25 trillion yuan in the first three quarters of of 2026, an increase of 5% year-on-year. The second method is expansion of state ownership and influence over private business. Under the banner of mixed ownership reform and state capital investment, private enterprises can face pressure to accept government participation and a greater state influence over their operations. There is nothing inherently wrong with state-owned enterprises participating in the market economy. The problem arises when political power replaces commercial judgment and private property becomes increasingly insecure. The third method is more direct, using law enforcement against private entrepreneurs. In recent years, the phenomenon known as cross-provincial law enforcement has attracted considerable attention. There have been allegations that some local authorities use police investigations and criminal procedures to pursue entrepreneurs outside their jurisdiction, sometimes with the objective of obtaining financial benefits. When business owners face arbitrary detention, asset seizures, or pressure to surrender their money, law enforcement begins to resemble a mechanism for extracting private wealth. An entrepreneur who cannot trust that his property is protected by law will eventually think twice about investing, expanding, or even remaining in China. This is where the government's wealth extraction strategy becomes self-destructive. The government may be able to seize existing wealth, but it cannot simply order new wealth into existence. A successful business represents years of investment, experience, innovation, and risk taking. When a government takes control of a company or drives its owner out of business, it may acquire existing assets, but it can also destroy the incentives and capabilities that created those assets. There is a fundamental difference between collecting wealth and And creating wealth. And the Chinese government's current approach is creating three serious problems. The first is the destruction of future wealth creation. As entrepreneurs leave, private investment disappears, and businesses close, China gradually loses its ability to generate new wealth. The second problem is the increasing cost of maintaining social stability. When businesses fail and unemployment rises, social tensions increase. People who lose their jobs still have mortgages, rent, medical expenses, and family responsibilities. As dissatisfaction grows, the government must devote more resources to policing, surveillance, and maintaining social These expenditures do not necessarily create a productive economic value. Worse, the more aggressively the government extracts wealth from society, the more money it may need to spend controlling the consequences. The third problem is the waste of public wealth through government investment and subsidies. When the government collects money, it must eventually spend or redistribute it. But in a system where political connections determine access to capital, government investment becomes an enormous opportunity for corruption. Officials, politically connected businesses, and government contractors can form networks of mutual interest through inflated contracts, unnecessary projects, preferential financing, and backroom arrangements. Public money can be transferred into private pockets. Government investment and subsidies are supposed to strengthen the economy. But when political interests dominate economic decisions, they can become instruments of wealth redistribution among insiders. Put these three problems together, the government has one major method of accumulating wealth, extracting it from But it has three ways of destroying that wealth. Undermining future production, increasing the cost of social control, and wasting public resources through publicly driven spending. Eventually, the wealth disappears faster than it can be accumulated. This creates a vicious cycle. The worst economy becomes, the more aggressively it extracts wealth, the weaker the private sector becomes, the fewer jobs are created, the lower household incomes become, and the weaker consumption becomes. The government then becomes even more dependent on exports, state investment, and administrative control. This is a downward spiral that becomes increasingly difficult to reverse. Another consequence is the gradual division of Chinese society into two very different economic worlds. At the top, politically connected officials and powerful individuals compete to capture government resources, contracts, subsidies, and valuable assets. At the bottom, ordinary people and small business owners look for ways to protect whatever wealth they still have. Some businesses move into underground economic activities. Others simply withdraw from the market because the risks of operating openly have become too high. One side is accumulating wealth through political privilege. The other is trying to survive outside the formal economic system. What is disappearing in the middle is the independent private sector, the entrepreneurs, investors, the businesses that normally form the backbone of a prosperous economy. And this is perhaps the greatest danger facing China. So let us return to the original question. Is China's economic crisis entirely the result of external circumstances? I don't believe so. The trade war, geopolitical competition, demographic challenges, and the property crisis have all contributed to China's economic difficulties. But the government has also made choices. It has chosen political control over economic freedom. It has chosen state dominance over private sector confidence. It has chosen to concentrate resources rather than allow society to retain a larger share of the wealth it produces. The Chinese government may believe it is buying time by maintaining this arrangement. It may be able to refinance debt, support exports, influence exchange rates, and extract more money from society. But, postponing a crisis is not the same as solving it. A country can have enormous factories, impressive export figures, and advanced technology while its people become increasingly poorer. A government can control more resources than ever before while the productive foundations of the economy are gradually disappearing. The biggest force undermining China's economic future may not be Washington, Brussels or Tokyo. It may be the Chinese government itself. Money can be printed. Debt can be refinanced. Exchange rates can be influenced. But once trust in the economic system is destroyed, rebuilding it can take decades. And that is why China's biggest economic danger is not simply a recession or a temporary slowdown. It is a political system that increasingly treats the country's wealth as something to be extracted and controlled for its own benefit. Even when doing so destroys the country's ability to create wealth in the future. The question is no longer simply how much wealth China can produce. It is how much wealth China will have left after its own government has finished extracting it. Thank you so much for watching. If this video was helpful, please like, subscribe, and if you are watching on your phone, click hype right below. 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