Can China lead the global south without changing its economic model?

Despite pessimism around China’s growth, researchers Jackson Huang and Dianyi Yang argue for optimism. They see strengthening ties with the global south and transitioning to a consumption-led economy as crucial steps for sustainable growth.

People shopping at a supermarket in Zaozhuang, in eastern China’s Shandong province on 10 April 2025. (Stringer/AFP)

For much of the past few decades, China’s engagement with the global south has been defined as importing raw materials and financing large-scale infrastructure abroad. Through the Belt and Road Initiative (BRI), China signed around 340 BRI-related deals across 149 countries, totalling US$121.8 billion in investments and contracts, funding railways, highways, ports and energy projects across Asia, Africa and Latin America.

However, recent developments suggest that China’s relationship with the global south might be at a turning point. As the real risk of US-China decoupling increases and trade tensions escalate, this relationship has taken on renewed strategic importance. Yet with policymakers hesitant to roll out strong measures to stimulate domestic demand despite official recognition of the need to do so, Chinese producers have turned to neijuan (internal competition) and overseas expansion as survival strategies.

However, the surge of Chinese exports —both intermediate and final goods — into developing markets has raised concerns about the displacement of local industries and risked eroding trust and generating economic tensions.

Now, it is time for China to rethink its approach. If the domestic impact of a sluggish recovery has not swayed policymakers into implementing stronger stimulus measures, the potential to strain relationships with developing countries, especially amid escalating US-China trade tensions, should. At the very least, China can do more at home to ensure that industrial overcapacity does not undermine local economies elsewhere.

No bold action

In the past week, the world has been astonished by the rapid escalation of President Trump’s global trade war. One week after the 2 April announcement, the US has singled out China, imposing tariffs of up to 145% on Chinese goods. In response, China has imposed retaliatory tariffs of up to 125% on US imports — effectively triggering a major decoupling between the two economies.

For China, the escalation comes as policymakers grapple with weak consumption and persistent deflationary signals. While it continues to maintain a growth rate of 5% and has made impressive advancements in AI and high-end manufacturing, domestic consumption has shown signs of weakening.

The GDP deflator, a broad measure of price changes, fell to -0.8% in the last quarter of 2024, down from -0.5% in the previous quarter, indicating continued deflationary pressures. Meanwhile, China’s value-added industrial output grew by 5.8% year-on-year in 2024, an increase from 4.6% in 2023. This divergence between production growth and subdued consumer demand suggests challenges related to overcapacity, where supply outpaces domestic market absorption.

Li Daokui argued that the central government has ample fiscal space to issue debt and fund such initiatives. Yet the common conclusion is that the barrier is not capability, but a lack of willingness to pursue bold action.

Workers operate sewing machines at a garment workshop at Tangbudong village at night in Guangzhou, Guangdong province, China, on 7 April 2025. (Qilai Shen/Bloomberg)

There is no shortage of proposals on how China could boost domestic demand. Leading economists and former policymakers — including Li Daokui, Liu Shijin, Liu Yuanchun, and Jin Keyu — have all emphasised the need for a bolder approach. Proposed measures include billion-dollar direct cash transfers to households, substantial expansion of social welfare programmes, or a large-scale bailout of the local government debt sector.

At the 2025 China Development Forum on 23 March, Li Daokui argued that the central government has ample fiscal space to issue debt and fund such initiatives. Yet the common conclusion is that the barrier is not capability, but a lack of willingness to pursue bold action. Instead, policymakers have remained highly cautious and conservative, opting for a gradual, “toothpaste-squeezing” strategy, forcing the Chinese businesses to expand into overseas markets out of necessity rather than opportunity.

Pressure mounts on local businesses

While the strategy of expanding into overseas markets provides new growth opportunities for firms facing a saturated domestic market and rising competition, it is triggering protectionist responses. Since 2023, Chinese exports to ASEAN have surged — outpacing those to the US and EU — and grew another 12% in 2024, even as ASEAN exports to China fell 3% from 2022, widening trade imbalances. As China seeks to diversify its export destinations amid escalating trade tensions with the US, it is expected that more Chinese products are expected to flow into global south markets.

While China has traditionally exported intermediate goods to support regional industries, a rising share now targets consumer markets, intensifying pressure on local industries and fuelling local concerns. In response, Thailand, Vietnam and Indonesia have introduced measures to curb low-cost Chinese imports.

Thailand implemented a 7% VAT on low-value goods and launched a task force to review trade policy, while Indonesia banned platforms like Temu, citing unfair competition and regulatory gaps. Similar trends are also emerging in other parts of the global south, Latin America, South Asia and Central Asia.

The growing economic friction with developing economies risks undermining China’s efforts to position itself as a champion of the global south, potentially complicating its broader geopolitical and economic objectives.

Trucks at a Shein logistics center in Zhaoqing, Guangdong province, China, on 8 April 2025. (Qilai Shen/Bloomberg)

This shift is particularly concerning for China at a time when it has placed south-south cooperation, global south diplomacy and shared development at the forefront of its diplomatic strategy in response to Trump’s trade war. The growing economic friction with developing economies risks undermining China’s efforts to position itself as a champion of the global south, potentially complicating its broader geopolitical and economic objectives.

Balancing trade and sovereignty

Translating such concerns for a Chinese audience is challenging. Many tend to view the issue purely through an economic lens: if local products are of lower quality, higher price and less efficient, then being replaced is simply market logic. Moreover, they ask — if other export-oriented economies such as the US, European countries or the Four Asian Tigers, Japan and South Korea can expand globally without criticism, why is China singled out when it does the same?

Indeed, historically, mercantilist policies that promote exports and discourage imports have been a common strategy for rising industrial powers. The UK, Europe, Japan and the US all followed similar paths during their periods of rapid industrialisation. In the 19th century, Britain forcibly opened Chinese ports through treaties like the Treaty of Nanjing in 1842 and ensured its manufactured goods flooded Chinese markets.

The developing world, once treated as captive markets, now comprises sovereign nations with their own developmental ambitions.

However, the global context in which this occurred was vastly different. The developing world, once treated as captive markets, now comprises sovereign nations with their own developmental ambitions. The issue is not solely one of economic efficiency; it is about safeguarding the global south’s aspirations for industrialisation and balanced growth. Foreign trade must be managed in a way that complements — not compromises — domestic growth strategies.

More importantly, China differs from other Asian Tiger economies, which have relied heavily on international trade for growth. China is an economy with a 1.4 billion population and diverse regional development levels, which has effectively built a full-spectrum industrial supply chain. By value, China now accounts for 34% of global manufacturing output and is a global leader in key industries, including electric vehicles, artificial intelligence and biomedical sciences, and platform economy with companies such as Shein, Taobao and TikTok. In contrast, the combined population of the Asian Tigers is only around 80 million, a fraction of China’s size.

Customers shop for gloves at the Wankelai store in Beijing, China, on 27 February 27 2025. (Tingshu Wang/Reuters)

This means that, unlike the Asian Tigers, whose exports the world could absorb even if they did not consume domestically, China’s sheer scale makes it much harder for global markets to accommodate its industrial output if domestic demand remains weak.

The key issue is not whether China can afford to boost consumption or the challenges involved, but rather the consequences of inaction.

China’s global south challenge

While narratives such as China collapsing (中国崩溃论) and China has peaked (中国见顶论) paint a pessimistic outlook, we take a more optimistic view and believe that China still holds much potential for further growth. However, China’s cautious economic strategies, especially regarding the transition towards a consumption-led economy, are not doing itself a favour.

If domestic factors are not enough to drive Chinese policymakers towards large-scale stimulus and a consumption-driven economy, maintaining ties with the global south should be the crucial catalyst.

Yes, China is very unique from the US and other developed economies. As a socialist country with a distinct economic model, China’s uniqueness is also leading to challenges in its economy and external relations. The key issue is not whether China can afford to boost consumption or the challenges involved, but rather the consequences of inaction.

At a time when strengthening ties with the global south is more important than ever, China’s continued reliance on export-driven growth, particularly in these developing markets, risks generating economic friction and undermining diplomatic relationships.

In plain terms, China cannot base its economic recovery and the need for diversification solely on the global south markets. Nor can it expect to become a global economic leader by selling to the world — it must also create space for developing countries to grow, including by increasing imports and purchasing their goods. If the domestic consequences of a sluggish recovery have not yet prompted stronger stimulus, the potential fallout in China’s external relationships should be a compelling reason for policy change.