Why does China's economic growth matter? Why is its economic growth rate so critically important? This is a genuine question that remains unresolved. For a long time, the country maintained double-digit economic growth, yet it was accompanied by numerous problems. Later, when the growth rate declined, the issues became even more severe, with contradictions becoming particularly prominent and pressures mounting immensely in the fiscal and debt sectors. By contrast, a number of Western countries would be happy to see an economic growth rate of just 2%, and reaching or approaching a 4% growth rate would be considered a spectacular piece of rare good news, enough for their politicians to boast about for the next four years. Compared to this, even though China's economic growth rate is far higher than that of Western nations, sometimes double or even multiple times higher, the accompanying problems and contradictions seem no fewer, and at times even more pronounced. What exactly is going on here?
Such is the fog surrounding China's economic growth. To see through this mist, one must have the capacity to break through the paradigms of academic economics and engage directly with reality. Only by connecting with practical realities can the situation be viewed with greater clarity, and only then can a true understanding of the essential issues underlying China's economic growth be achieved.
Behind China's economic growth rate lies far more than just the performance of investment, consumption, and exports. There are things that are far beyond conventional, surface-level statistics. The reason why China's economy is so highly dependent on its growth rate, to the point where even a slight dip triggers a massive shock and impact, actually stems from the operational mechanisms of China's meso-level industries and micro-level enterprises. It is precisely because this particular mode of industrial operation has become the prevailing norm that it has forged such a colossal connection with the macroeconomic growth rate, ultimately resulting in this distorted dependence on economic growth figures.
For decades, China has consistently been a manufacturing powerhouse and a production giant, earning its reputation as the "world's factory". Although its production and manufacturing sectors boast complete categories, extensive industrial scope, and well-integrated supply chains, production remains production. Any production sector or manufacturing industry is inherently vulnerable to the influence of production factors such as economic cycles, international trade, labor costs, and the level of technological development. The direct consequence of these overlapping factors is often hyper-intense cost competition. Throughout the progression of China's manufacturing sector, because the level of technology has actually remained relatively modest most of the time and across most product categories, and because the rise in labor costs has been quite obvious, the substitutability of manufactured goods has persisted. On the consumer side, if the price is high, buyers will simply look elsewhere. Likewise, if the products from China are rejected, other places can readily supply it. Therefore, under price pressure, "Made in China" has effectively had no choice but to labor relentlessly on direct and relative costs, continuously driving down prices. Only through this strategy has it managed to earn relatively slim profit margins to sustain its survival and development.
Therefore, from a structural perspective, China's industrial model is essentially a volume-driven one, relying primarily on incremental growth to sustain survival and development. This means that if profits were calculated normally on a per-unit basis, China's manufacturing sector would not be able to sustain its existence. In the midst of fierce cost competition, for a 5% profit margin, in China, this can be just 2%. As profit margins shrink or even turn negative, there is a race to undercut prices, with the sole objective being selling more products. If profit were measured on a per-unit basis, businesses would have gone bankrupt long ago. However, under a volume-driven model, relying on incremental expansion allows them to stay afloat. The underlying principle of this manufacturing volume model lies in high-turnover sales. Even below the per-unit break-even point, companies still dare to sell. The secret is that as long as an influx of incremental top-line revenue keeps cash inflows higher than outflows, the industrial machinery can keep turning, and the enterprise can survive. The rest becomes a mere matter of accounting adjustments. This explains why Western enterprises cannot compete with the products of Chinese companies, and why any product Chinese companies begin to sell immediately drops to rock-bottom commodity pricing.
This is exactly where the secret lies. Others calculate profits and losses based on per-unit product costs, meaning they cannot engage in loss-making business, which keeps their product quotations consistently high. Chinese enterprises, however, calculate revenue based on volume and rely on incremental growth to survive, which is why they dare to take on seemingly "loss-making business". For a product with a cost of RMB 100 and a 5% profit margin, it must be sold for at least RMB 105, an absolute baseline price for most "normal enterprises". Yet, most Chinese enterprises operate outside this conventional norm; they dare to sell not just at RMB 100, but even below cost at a rock-bottom price of RMB 95. On the surface, this appears to be causing losses and cannot be sustained over the long term. However, Chinese enterprises rely on volume and incremental growth to offset everything. As long as cash inflows continue to increase, total volume keeps expanding, and new revenue streams can cover expenditures, the so-called "loss" is treated as non-existent, allowing them to sustain survival, development, and even prosper on paper. This is the secret behind why Western companies cannot compete with Chinese ones. The former calculate costs based on real profits and losses, whereas Chinese enterprises evaluate expenditures through the lens of incremental growth and cash volume. For a Chinese enterprise, as long as the incoming cash flow covers the outgoing cash flow, the formula works, and the business can survive and develop. The issue is that, as a self-evident fact, there are thousands upon thousands of enterprises in China that view the problem this way. Therefore, in China, this is an issue of the production and manufacturing model itself, rather than a simple accounting matter.
Unfortunately, it is evident that this production and manufacturing model depends on a necessary and sufficient prerequisite: product demand and market scale must expand continuously and uninterruptedly. The so-called "high-turnover", "volume", and "incremental growth" all rely on "revenue expansion" to cover expenditures. The moment revenue fails to achieve this expansion, and the economic growth rate no longer supports this amplification, the inherent trouble and problems of this model immediately surface. The situation abruptly reverts to its raw reality, and the struggle to break even instantly solidifies into a massive, undeniable crisis.
More than a decade ago, I assessed that the "real estate spiral" in China was fundamentally unsustainable, and the underlying principle here is exactly the same. The moment the possibility of growth disappears, and the incremental expansion of cash flow is lost, revenue can no longer cover expenditures, and the entire industry immediately implodes. The defaults, vacancies, and ruins frequently seen across the sector today make this glaringly obvious. As these big and small developers were unable to bridge the cash flow gap, they simply cannot survive or develop. More seriously, the inherent troubles accumulated by this model over decades are now erupting simultaneously, making them entirely impossible to suppress. Therefore, for the current real estate industry in the country, the core issue is not about "ensuring the delivery of housing projects", nor is it a matter of corporate renewal and restructuring. Rather, it is that the very model they have relied upon for their existence for so long carries deep-seated, systemic vulnerabilities and massive flaws.
The recent additive-soaked bayberry scandal in Fujian has become a focus of intense public debate.
The scandal stems from vendors along the industry chain soaking bulk quantities of freshly picked fruit in a chemical solution containing sodium dehydroacetate, which is a banned preservative, along with unregulated sweeteners. This process artificially extends the bayberries' market shelf life and deceptively enhances product quality. In essence, this is a practice of passing off substandard goods as premium products, with the obvious objective of lowering relative costs. Ultimately, the emergence of these "toxic bayberries" is a survival strategy driven by cost reduction, aiming to sustain business viability through high volume and increased turnover. Similar practices are, in fact, common occurrences in the Chinese market. In the past, there were scandals of milk adulterated with the chemical melamine, and this was an issue of the exact same nature.
Why do such problems persist in China despite repeated prohibitions? The reason is quite straightforward. These issues are not fundamentally a matter of morality or conscience, which is merely one facet of the problem. The true root cause lies in the production model itself. Without resorting to these methods, bayberry production would simply be unsustainable. Indeed, it can be argued that if China's food safety issues are to be truly resolved, actual costs must be accurately reflected, ensuring that price directly corresponds to quality on a one-to-one basis. However, if this approach were genuinely implemented, the result would be a massive surge in food prices across China, leading to severe inflation.
The manufacturing of new energy vehicles (NEVs) operates under the exact same logic.
China's NEVs are inexpensive and highly competitive in the global market. While many in China cheered about this, the celebration is premature. For China, this industry is equally unable to escape the consequences of relying on high sales volume, nor can it shake off its profound dependence on incremental growth. The low prices of Chinese-made NEVs are actually the result of a combination of factors, but it is certain that their quality standards and comprehensive manufacturing levels do not reach advanced international standards. Therefore, to a large extent, these low prices are also highly dependent on "volumes" and "incremental growth" to materialize. Consequently, the products in this industry carry very high debt, place demands heavily on economic growth, but their quality is inevitably relatively low, and the industry itself's survival and development must similarly be sustained by the coverage provided by the incremental portion of cash flow. It is therefore completely understandable that incidents of Chinese-made NEVs catching fire and causing fatalities are no longer a surprise to anyone, where fire safety authorities have even issued direct warnings.
There are, in fact, many more examples across various industries in the country, and the underlying situation remains identical. This is fundamentally a question of the production model, a systematic issue within the manufacturing sector. They collectively rely on traffic, depend on incremental growth, and lean heavily on the continuation and amplification of the Chinese economic growth rate. Once China enters an era of low economic growth, or should the growth rate decline, this coverage mechanism will become unsustainable. Consequently, the model will collapse, unleashing the deficits and black holes of accumulated costs that have built up over the past decades.
For professional analysts in policy analysis, such circumstances are hardly surprising. The definition of a "supply-side depression" already explains the complexity of China's current economic reality, which is far from being a mere issue of financial statement data. Indeed, the situation is actually much more intricate. The root problem of China's current fiscal situation is similarly linked to the existence of this "cost black hole". It is clear to everyone that local governments across China are generally facing tight fiscal conditions and immense, suffocating pressure. However, what the fiscal departments may not realize is that this is still, relatively speaking, their "golden age", as fiscal revenue levels remain at historical highs. The true "hard times" lie ahead. Currently, they are oblivious to corporations' urgent pursuit of cash flow, thus collecting taxes based on the bookkeeping "turnover" of corporate production and manufacturing. This implies that the actual revenue currently collected by China's fiscal departments has long since vastly exceeded the real operational performance of industries and enterprises. If taxes were levied based on true corporate profits and losses, the actual fiscal revenue collected would be a much smaller figure. This is because most enterprises are actually facing "losses far outweighing profits", a complete cost black hole masked by cash flow, and what we see is nothing other than prosperity on paper.
This situation is not unique to China. The extreme emphasis on cash flow is a relatively common phenomenon globally, including in the United States. For instance, Walmart, which consistently promotes its model of "low costs" and "passing savings on to consumers". While business schools frequently utilize Walmart as a textbook case of a healthy enterprise, its so-called "price concessions" in reality possess an unspeakable "limit". To sustain this limit, the company must rely on the balance of its information systems on one hand, and depend heavily on an expanding base of incremental consumers on the other. Therefore, "incremental growth" is likewise the Achilles' heel of the Walmart model. The reason Warren Buffett consistently emphasizes the concept of a corporate "moat" is precisely to evaluate the reliability of a business model. It was only in 2018 that Buffett fully recognized this issue with Walmart, and it was in that very year that he completely liquidated and divested his entire holdings of Walmart stock.
For China's economy, breaking through academic paradigms to deeply understand the reality on the ground allows for a more grounded comprehension of why economic growth is so vital. This is because China's economic growth rate is absolutely not just a "percentage figure". It is the fundamental cornerstone supporting China's existing economic production and manufacturing systems, which have been sustained for decades. Should this "percentage figure" unfortunately shrink, the entire Chinese production and manufacturing system would not only immediately lose the possibility of "covering expenditures with incremental growth", but the very foundation of its "survival and development" would also be shaken. The accumulated "cost black hole" of past decades would violently erupt, triggering an intractable "supply-side depression", along with the subsequent exposure of a debt crisis. Ultimately, enterprises would fall into distress one after another, finding themselves unable to break free, which would plunge supply-side production into chaos, destabilize taxation, cause a vast number of manufacturing firms to collapse, and turn employment into a massive problem.
Taking everything into account, the issue of China's economic growth rate involves a "supply-side depression" and encompasses challenges in production and operations, but it is ultimately related to market values. To effectively address this issue, China's production sector must implement policy incentives that shift current market values, genuinely encouraging and motivating enterprises to transition from pursuing and relying on "traffic" and "incremental growth" toward true value-based management. After all, genuine value alone is the true determinant of production and manufacturing. Everything else that merely maintains a nominal prosperity is inherently unsustainable and bound to be disrupted by economic cycles, technological advancements, and numerous other factors.
