Yao Yang, Wang Boming & Lan Xiaohuan on the trade war, structural transition, and employment challenges

Three top opinion leaders: China’s supply chains remain resilient. Its services and welfare system are less so.

On September 13, Yao Yang, the new head of the Dishui Lake Advanced Finance Institute at Shanghai University of Finance and Economics (SUFE), celebrated the first anniversary of his Chinese-language short video channel 姚洋说 “Yao Yang Talk” by joining a roundtable discussion with Wang Boming, President of China’s Stock Exchange Executive Council (SEEC), and Lan Xiaohuan, Professor of Economics at China Europe International Business School.

The substantial part of informed public discussions in China has become increasingly centered around and driven by a small number of high-profile individuals, such as the trio mentioned here.

Yao Yang may be better known to an international audience. Wang Boming was one of the early architects of China’s stock market, and Lan Xiaohuan in recent years shot to fame in China with his best seller How China Works.

The discussion started off on a highly confident note, that tariffs alone will not dislodge China from global supply chains. Chinese products, the three economists argued, remain irreplaceable, and relocation to Vietnam, Mexico, or even the United States has proved costly and ineffective. The foreign investment downturn, though real, tells more about the shrinking competitiveness of foreign firms in China than about China’s decline as a manufacturing base.

Where the conversation became sharper was on the question of industrial structure. The notion of “low-end” industries, the trio agreed, is misguided: sneakers and semiconductors, logistics and robotics, all belong to a single network. If China were to abandon the so-called low end, it would risk undermining the higher tiers as well. At the same time, manufacturing no longer absorbs much labour, and the service sector must take on a larger role in employment and growth.

That is where the picture turns darker. Graduates face thinning opportunities, not only in factories but also in services increasingly reshaped by AI. A stronger social safety net, they argued, will be essential to carry young workers through this transition while China preserves industrial breadth and shifts more weight toward household consumption.

Lan Xiaohuan also made a crucial observation: in many of the most critical service sectors, such as education and healthcare, China still relies heavily on public institutions rather than full marketisation. This touches on a core issue in GDP statistics: can prices really capture value and genuine social wealth? GDP calculations rest on market prices, yet precisely education and healthcare in China are not market-driven.

—Yuxuan Jia

The transcript is available on Guancha, a Chinese domestic news platform. Yao Yang and Guancha have agreed to The East is Read publishing this roundtable transcript in English.

王波明、姚洋、兰小欢圆桌对话：关税战会不会加速产业链外移，就业值不值得担忧？

Roundtable with Wang Boming, Yao Yang, and Lan Xiaohuan: Will the Tariff War Accelerate Industrial Relocation, and Is Employment at Risk?

Despite tariff wars, Chinese products are irreplaceable

Wang Boming:

Let’s start with tariffs. In April, President Trump took the first step, and China responded in kind—100% added on one side, 100% on the other. Since then, both sides have moved to manage tensions, holding negotiations in Geneva, London, and the U.S.. Although the previously imposed tariffs remain in effect, at least the most emotionally charged, high tariffs have been dialled back. Over the past two months, especially in the latter half of the year, the impact has become clear: China’s exports to the U.S. fell sharply, down 33.1% in August alone. Professor Yao, what are your thoughts on the impact tariffs have already had and the potential effects they may have in the future?

Yao Yang:

Trump 2.0 tariffs target not only China but the global economy. Shortly after the so-called “Liberation Day Tariff” was announced on 2 April, which imposed a 34% duty on Chinese goods, China responded on 5 April with a matching 34% tariff on U.S. products. When Trump saw that no country had dared to stand up to him like that and China actually stepped out, he thought, “I must punish China.”

At first, China’s countermeasures drew intense domestic and international attention and left many people worried for China. As the saying goes, “the nail that sticks out gets hammered.” While other countries stayed quiet, China stepped up and matched every tariff with one of its own. Unexpectedly, Trump backed down and agreed to talks. At the Geneva negotiations on 10–11 May, the U.S. made significant concessions: it cancelled all tariffs above 34% and postponed collection of 24 percentage points of the 34% tariff for 90 days. I figured at the time that Trump had also agreed to suspend the fentanyl tariffs.

But immediately after the Geneva talks, the U.S. went back on its word and insisted on keeping the 20% fentanyl tariffs. China then took serious action—it announced restrictions on rare earth exports. Rare earths are essential for high-tech industries like aerospace, defence, and electric vehicles, and Chinese enterprises dominate their mining, refining, and processing. The restrictions hit the U.S. hard, so both sides returned to the negotiating table in London. The outcome was an agreement to implement the framework deal reached in Geneva.

This time, China also made concessions by not mirroring the 20% fentanyl tariffs. As things stand, the U.S. is imposing an additional 30% tariff on top of the initial 20%, bringing the total to 50%. China has imposed a 30% tariff on U.S. imports—the original 20% from 2018 plus an additional 10%. It is not fully symmetrical in numerical terms, and China has demonstrated a degree of flexibility.

In the Stockholm talks, there wasn’t a big breakthrough, but both sides did agree to push the extra 24% tariffs back another 90 days, so the deadline moves from August to November. Starting from the 14th of this month, negotiations will resume in Madrid. This round of talks will put TikTok in the spotlight.

So, what makes TikTok a key point of discussion? TikTok is basically facing a binary choice—shut down or keep running. A sale isn’t on the table. The Ministry of Commerce said on 12 September that sensitive technologies require review, which is a clear signal to Washington: TikTok can’t be sold to a U.S. buyer. That leaves Trump with one option: a ban.

However, banning TikTok would come at a great cost to Trump. The platform has over 100 million monthly active users in the U.S., and he simply cannot afford to offend such a large number of people without justification, especially with the mid-term elections coming up next year.

Wang Boming:

I’m seeing a clear gap between the Trump team’s public messaging and what’s actually happening at the table. After each round in London or Geneva, the Chinese side describes the talks as “in-depth” and “constructive.” Yet Washington has lately floated punitive tariffs of 50%–100% in coordination with the EU and citing China’s Russian oil purchases. That’s a hard line to square with the tone of the negotiations. How do you interpret this?

Yao Yang:

On China’s purchases of crude from Russia and Iran, my view is that Trump is raising the issue to gain negotiating leverage. China isn’t the largest buyer of Russian oil—India is. And India even resells some of those volumes, which is why Trump imposed a 50% tariff on India.

From China’s perspective, there’s no scenario in which it would stop importing oil from Russia or Iran. Tehran is urging faster implementation of the 25-year Iran–China agreement, which is highly favourable to China. So why walk away from that? Trump may try to use this as pressure, but the practical fix is straightforward: increase purchases of U.S. crude, import more American LNG, and buy more energy from them overall. If China does that, he is likely to feel satisfied. I don’t see this becoming a major problem.

The immediate risk is that Europe may use this as a pretext to levy high tariffs on Chinese goods. My sense is that many in Europe now recognise how strongly Chinese firms are outperforming them technologically, and that is unsettling. Chinese companies are so competitive and increasingly dominant, and Europe is the first to feel the impact.

So what does Europe do? It looks for ways to slow Chinese products at the border. But Europeans are arrogant; they always look for a moral high ground to justify new taxes on China. Take electric vehicles: Brussels cites Chinese industrial subsidies to justify duties on China-made EVs, even though Europe also subsidises its own industries. Therefore, that case is hardly watertight. The U.S. takes a similar tack, arguing that China’s purchases of Russian oil amount to indirect support for Moscow and therefore warrant extra tariffs.

I think what’s more challenging than negotiating with the U.S. is figuring out how to respond to Europe’s newly proposed tariffs. They haven’t set a figure yet, and that uncertainty may turn out to be an even bigger problem.

Wang Boming:

Professor Lan, do you have anything to add? What’s your view on the tariff issue?

Lan Xiaohuan:

The core problem now is that U.S. policy can change at any moment, and at this point, China is effectively the only party still negotiating with Trump. Others, like the EU, have largely stepped back. After several trips to the U.S., President von der Leyen ended up with a pretty ugly deal: tariffs on European goods were cut to 15%, but in exchange, the EU has to buy about $750 billion of U.S. LNG and nuclear fuel over the next three years. So, in effect, China is the only side still at the table.

What’s the fundamental problem? I’ve spoken with many suppliers: if they stop using your products, do they have alternatives? The answer is no. The trouble is, all the suppliers are from China.

At the micro level, a 50% tariff would certainly hurt Chinese firms, though some might still think it’s manageable. That’s why there’s also an internal game at play; it isn’t only about costs. Different companies, depending on their size and strategy, will respond in different ways. In normal times, Chinese suppliers are the obvious choice, but tariffs raise expenses. Even so, relocating production isn’t a real fix: shifting factories to Mexico, Vietnam, or even the U.S. isn’t cost-effective.

What’s more, Trump’s latest round of tariffs blunts even the “move to Mexico or Vietnam” workaround, because the measures apply across countries. The 2018 playbook—re-routing production to dodge tariffs—no longer works. Building in the U.S. still carries high costs. As a result, most firms are adopting a wait-and-see stance.

This round of tariffs has created even more uncertainty than the previous one. Trump’s goal is clear: to eliminate the trade deficit. Even if Vietnam negotiates lower tariffs with the U.S. today, an increase in exports would probably prompt Washington to impose new duties tomorrow. As for setting up factories in the U.S. or Europe, the business case simply doesn’t stack up.

So, the result is that most players are in a wait-and-see mode. For U.S. importers, if there’s no viable substitute for Chinese suppliers, tariff exemptions are an option. And American firms will look for workarounds. For example, companies in Apple’s supply chain have largely sidestepped the full brunt of tariffs by constantly tweaking their sourcing and securing exemptions from the Trump administration.

That’s it. I think it’s a trend worth keeping an eye on.

Yao Yang:

Let me add one point. Trump is now levying tariffs on the whole world—and he’s chasing enforcement. As Professor Lan mentioned, he’s chasing Chinese firms with tariffs. For example, if a Chinese company sets up a plant in Vietnam, the U.S. tariffs follow it there. If regulators find that a factory’s products make extensive use of Chinese components, they tack on another 40% duty. By the companies’ own maths, that additional 40% basically wipes out any tariff advantage from moving production out of China. In short, it feels like there’s nowhere to hide.

However, Chinese companies first have a cost advantage, and second, they have various ways to circumvent Trump’s "whack-a-mole" tariffs. For example, if Trump caps the share of Chinese components in a product, companies can manage that ratio. By current calculations, keeping the value of imported Chinese parts below about 80% broadly meets the present rules. Of course, if the Trump administration catches on, it may rewrite the rules. So uncertainty remains

Then there’s the issue of small packages. The Trump administration keeps floating small parcel tariffs—first suggesting they be value-based, and when realising that wouldn’t work, proposing a per-package fee of $50 or $80. How can cross-border e-commerce firms in China respond? They simply set up warehouses in the U.S. and ship by container to sidestep those per-parcel charges.

The end result, as Professor Lan said, is irreplaceability. Trump’s back-and-forth trade war with China has driven home a simple point: many of the products Americans rely on are still made in China, and other countries can’t produce them. That’s become a major dilemma for the United States.

Tariff war: unlikely to trigger large-scale supply chain relocation

Wang Boming:

China became the “world factory” largely thanks to the policy dividends of reform and opening up—the country’s huge, low-cost labour force. I still remember when I first came back to China in the 1990s: a monthly salary of 200 yuan, or 2,400 yuan a year, was considered high. Land was cheap as well. Fast forward more than forty years, and the workforce is no longer young, society is ageing, land prices have soared, and labour costs have risen sharply.

For example, in Vietnam, a worker earns about 2,000 yuan a month, while in China, paying 4,000 yuan is now seen as inexpensive. Add U.S. tariffs on top, and the cost of manufacturing in China and exporting abroad has risen even further. As a result, over the past several years, not only Chinese companies but also foreign firms have been shifting parts of their supply chains overseas. Against this backdrop, how will the supply chains of multinational companies adjust? And if the November talks either leave things as they are or result in additional tariffs of 30% or 40%, how might these supply chains be reshaped?

Yao Yang:

Professor Lan is very familiar with the corporate side, so I’m keen to hear more from him. Let me start with my take. My first assessment is that, in the end, the lowest additional tariff China is likely to secure would be around 10%.

Wang Boming:

Then the 20% fentanyl tariffs would be cancelled?

Yao Yang:

I believe China will definitely demand the removal of this tariff. The U.S. imposition of fentanyl tariffs on China is utterly baseless—branding China a “drug exporter” is absurd. China’s drug controls are THE strictest in the world; this is a pretext, plain and simple. In the end, the U.S. is more likely to settle on a 30% or slightly higher tariff on Chinese goods, with China responding in kind at 30%. At those levels, I don’t expect a large-scale relocation of industry triggered by this round of tariffs. In fact, sectors that previously moved offshore mainly for tariff reasons could even return to China.

Wang Boming:

If the 20% punitive tariff on fentanyl were lifted through negotiation and only an additional 10% imposed, many companies could largely absorb the impact. If that scenario materialises, it would indeed be a genuinely positive outcome.

Yao Yang:

In fact, some firms are shifting part of their capacity back to China. Today’s “going global” by mainland companies looks different from the earlier Hong Kong, Macao and Taiwan playbook. Back then, entire factories were often moved abroad; now, mainland firms tend to follow a “China plus one” model—building overseas while keeping some production at home. I haven’t seen any company fully pull out of China.

A highly adaptable pattern is emerging in China—what I’d call a “flexible global value chain.” If the U.S. raises tariffs on Chinese goods, companies can quickly ramp up output in Vietnam, Laos, or Cambodia to blunt the impact. If tariffs rise there, they can switch back and activate capacity at home. Some firms are even placing parts of their supply chain in Africa and other regions. In short, Chinese enterprises keep finding ways to route around tariff barriers.

For example, African exports to Europe enjoy full tariff exemptions. If Chinese companies are willing to invest and manufacture there, they can effectively bypass high tariffs. That’s why I believe it will be extremely difficult, if not impossible, for Trump to block Chinese goods from entering the U.S. with this “whack-a-mole” strategy.

The withdrawal or closure of foreign businesses is fundamentally due to their declining competitiveness in the Chinese market.

Wang Boming:

Professor Lan, since you work closely with the business community, I’d like to hear your perspective on supply chain relocation. Not all of these moves—by Chinese or foreign firms—are directly tied to Trump’s tariffs. Some simply reflect the rising costs in China. From your observation, do you expect this relocation trend to continue? Could it accelerate? And how would you assess the overall picture?

Lan Xiaohuan:

As Professor Yao noted, the post-2018 logic of relocating purely to “avoid tariffs” has largely faded.

Mr Wang’s question actually touches on two cases: foreign firms withdrawing and Chinese companies “going global.” The latter trend will continue, as China cultivates its own multinational corporation, and they are naturally positioning to operate worldwide.

The global market is far larger than it used to be. After the Second World War, the world’s population was about 2.5 billion; today it’s around 8.2 billion and will reach 9 billion by 2050. China’s future position will hinge entirely on whether it can seize opportunities among the 6-plus billion people now industrialising—how many become its customers or plug into its supply chains; put simply, how much global market share China can win. And to unlock that potential, selling products isn’t enough; it is essential to help build infrastructure and support their industrial development.

So today, the larger the company, the more it focuses on a holistic strategy. For instance, Haier went to Vietnam to build a local brand and entered Indonesia not to supply the U.S. but to target developing markets—that’s the first scenario.

As for foreign firms exiting China, the core reason is straightforward: their products have lost competitiveness in the Chinese market. Samsung is the most striking example, having shifted its entire production to Vietnam and Southeast Asia. Why? In China, it faces formidable rivals across both consumer and enterprise segments—from smartphones and TVs to memory chips.

As for Apple’s so-called “relocation” to India, the country still lacks a fully developed industrial ecosystem and social foundations. In my view, Indian manufacturing has not truly upscaled over the past three decades—it still accounts for only around 15% of GDP—and society is not yet ready for large-scale industrialisation.

Take machinery as another example. Firms like Komatsu and Caterpillar have withdrawn certain product lines in China because domestic players like Sany and Zoomlion have expanded so rapidly, captured market share, and left them unable to sustain their positions.

From what I’ve seen, when foreign firms shut plants or pull capital at scale, the root cause is failure to compete in the Chinese market—not the so-called “China+1.” “China+1” is primarily a diversification tactic, but its biggest flaw is that overseas backup chains often don’t perform as advertised.

Many are gradually realising that these “backup” supply chains can’t carry the load when disruption hits. A plant in Mexico or Vietnam still relies heavily on global inputs—mainly from mainland China—so it’s a backup in name only. How meaningful is that? Disruptions aren’t unique to China: the Red Sea crisis, the Russia–Ukraine conflict, and potential flashpoints in Venezuela can all fracture supply lines.

Recent U.S. think-tank studies suggest that major disruptions to global supply chains occur on average every 2.7 years. How could any company truly avoid that? And who are these “backups” really for? In the end, the East Asia–Northeast Asia network, anchored by China, remains the most stable and reliable supply chain in the world.

With FDI falling and supply chains relocating, is employment a worry?

Wang Boming:

Seen from numbers, China’s FDI peak was over $140 billion annually. Now, it has fallen to around the 2010 level, dropping by just over $100 billion. What’s happening?

Lan Xiaohuan:

Manufacturing FDI is indeed declining, but outward direct investment (ODI) is rising. As China’s global role has evolved, so have its industrial and technological capabilities. Increasingly, it’s Chinese firms investing overseas. China’s ODI now exceeds inbound FDI, especially along Belt and Road routes.

Right now, foreign investors building capacity in China have very limited space to compete with local manufacturers. In the areas China most needs—chips, for example—they can’t readily supply what’s required. And in the remaining sectors, domestic competition is already so intense that new investments can hardly turn a profit.

Wang Boming:

Regardless of tariff changes, supply chains are steadily moving outward and globalising—they’re no longer concentrated in China. And FDI has been trending down year by year…

Lan Xiaohuan:

Portfolio inflows are still rising, though. There’s more U.S.-dollar capital coming into China.

Wang Boming:

Financial inflows are a separate matter. My concern is jobs. China’s outbound investment is increasing, supply chains are shifting abroad, and FDI is edging lower. Some investors view China’s market as less cost-competitive, and the domestic market, such as household consumption, has clearly softened. Won’t all this put pressure on employment? That is a core question.

Lan Xiaohuan:

This actually mirrors the U.S. development path. Over lunch, we noted that manufacturing by itself doesn’t create that many jobs. When American manufacturers became multinationals—Nike is a familiar example—they created substantial employment at home through design, marketing, and other services tailored to overseas markets.

Something similar is happening in China. It’s often no longer cost-effective to make certain products domestically, so China is importing goods from its own overseas factories—say, producing in Vietnam and selling back into the Chinese market. That import activity generates lots of jobs, actually. The difference is that exports tend to create factory roles, while imports spawn service-side employment, like in warehousing and logistics.

So industrial relocation is definitely not a zero-sum game; China doesn’t automatically lose when production moves out. As a matter of fact, industrial relocation enlarges the pie. It lifts global demand for Chinese products, technology, standards, and industries. And when Chinese firms shift parts of their supply chains abroad, it often strengthens China’s own domestic supply networks.

I’ve got friends who are a case in point. They used to make home appliances for the consumer market and tried to go global on their own, but it proved too costly, mainly because they lacked established channels—big players like Midea and Haier have the money to build overseas networks. My friends began as their competitors but ultimately stepped back and became suppliers to Midea and Haier instead. The logic is simple: as your market expands, my factory stays in China and supplies you. Many firms are making that shift, and, overall, demand for China-made products within global supply chains is actually rising.

Honestly, hiring is tough for factories in China these days. Even with decent wages on offer, many young people don’t want factory jobs. They’d rather deliver food for similar pay—even if the earnings can be lower—because they don’t want to be tied to an eight- or nine-hour shift on the line. With food delivery, you’re busy at lunch and dinner, but you can game or watch shows online in between. That flexibility matters a lot to the younger generation.

When it comes to boosting employment, manufacturing and the service sector are equally important.

Wang Boming:

People have long been talking about industrial upgrading, from provincial to central levels, and I’m more convinced than ever that it’s the right direction. Look at the U.S. during its wave of globalisation: it pushed developing countries to produce low-end goods like sneakers and clothing, selling them to the U.S. at cheap prices. Meanwhile, the U.S. shifted away from low-end manufacturing and concentrated on high-tech products like aircraft and iPhones.

But after two or three decades, the U.S. suddenly realised something had gone wrong: its manufacturing base had been hollowed out. Middle-class wages had barely moved in decades, and what was once an olive-shaped income structure turned into a pyramid. The wealthiest top 5% working in high tech or taking companies public came to control 70–80% of society’s wealth. Ordinary people and blue-collar workers were left at the bottom, while the middle class shrank into the lower rungs of the pyramid.

If China follows that path, I think one idea is crucial: we cannot afford to lose low-end manufacturing. Basic necessities like sneakers and clothing—industries that may be low-tech but are essential—need to stay. What’s your view on this?

Yao Yang:

Boming, that’s a big question—it’s really about how to interpret what has happened in the U.S. In economics, some scholars have tackled this using very complex “dynamic spatial general equilibrium” models. Several of these studies conclude that America’s so-called industrial hollowing-out has hurt ordinary people mainly through what we call “frictional unemployment.” In plain terms, many workers are unwilling to relocate.

For example, Ohio used to be a major industrial state. Much of its industry is now gone. If people there were willing to move to California or New York, they could find decently-paid work. But they don’t want to leave; they feel their roots are there. Take U.S. Vice President J.D. Vance’s hometown: after factories closed, the community was ravaged by drug abuse. With stable jobs gone, people survived on odd jobs.

So, how much has deindustrialisation actually contributed to U.S. inequality? I think it’s still an open question. If you read accounts of America, like Strangers in Their Own Land, you’ll see that many “rednecks” in Louisiana—staunch Trump supporters—are not jobless. Their discontent is more about a sense that traditional values are eroding. That’s the key point. Charlie Kirk, who was recently assassinated, also claimed his motive was to restore traditional values. Much of the anger is rooted in values, not just economics. J.D. Vance’s Hillbilly Elegy makes a similar point: his mother had a decent income, yet still fell into drug addiction. You can’t reduce that to economics alone.

On the Chinese side, the era of relying solely on manufacturing is over. We need a shift in mindset. Many regions are still focused on attracting investment into manufacturing, but if the goal is jobs—especially for young people, like many in this room—then simply expanding manufacturing won’t do. Manufacturing no longer absorbs much labour; it now accounts for less than 15% of total non-agricultural employment.

Wang Boming:

Moreover, with technological advances, finding jobs will probably become increasingly difficult. As more robots come in, factories don’t need as many people.

Yao Yang:

True. Manufacturing still makes up about 28%–30% of GDP. That tells you productivity and growth in industry are higher than in services, yet its capacity to create new jobs is weak. To lift employment, it is critical to strengthen and expand the service sector. Emphasising services from around 2012 was, I think, the right call. In recent years, there’s been a renewed push toward manufacturing and hard tech—which is sensible, especially given U.S. competition—but the country needs to walk on two legs. China can’t go all-in on the high end and neglect services. If so, jobs won’t recover.

Technology’s impact on employment: policies need to provide a safety net.

Wang Boming: There’s a saying these days: “graduate today, unemployed tomorrow.” It’s better not to end up in that situation. Professor Lan, the jobs question is tied to a country’s development path—how much it leans into manufacturing, services, or high tech.

I’ve noticed that as high-tech industries advance, they often offer fewer job opportunities. Some scholars argue that continual technological progress always brings new sectors, and with transition training, people can move into fresh roles, so replacement jobs will emerge. But in practice, that outcome is far from guaranteed: the new positions usually require fewer workers. What’s your view, Professor Lan?

Lan Xiaohuan:

Actually, the service sector no longer needs as many workers. This wave of AI disruption is hitting services especially hard, particularly fields once seen as “high end,” such as finance and law. Entry-level accounting roles in the United States have been largely automated. Not long ago, U.S. law schools saw roughly three graduates competing for each junior position; in the past two years, that’s jumped to about six, because much of the entry-level legal work has been automated.

For students of finance here in this room: economics graduates once flowed into analyst roles, but demand for junior analysts is shrinking. Many large fund houses are already deploying tools like DeepResearch. AI makes mistakes, of course, but so do human assistants, and AI is faster.

The substitution effect of AI on graduates entering traditional service roles is obvious, and a reversal looks unlikely. The real question is how to respond. I think the answer lies in building a stronger safety net. That may sound pessimistic, but this AI-driven employment shock is not uniquely Chinese; it is global. And no country has truly solved it so far. Macroeconomic policy also has limited traction against a structural shift of this sort; it is not designed to perform that function.

On employment safety nets for young people, China actually offers more opportunities than Europe or the United States. Consider this: China’s infrastructure is exceptionally strong—virtually everyone has access to the internet and to AI, which has fostered the rise of so-called “flexible employment.” Although often mocked in the media, this segment in fact contains many small and micro enterprises that generate very high individual value.

When I talk with entrepreneurs about AI, two mindsets tend to emerge. One worries about jobs being replaced; the other wonders if AI is able to let a one-person outfit scale to a billion-dollar business. China’s infrastructure provides loads of ways to boost productivity for everyone. Plenty of university students—including some from Fudan—and other young people plan to use social media platforms to create content and start earning right after graduation. Offer them a nine-to-five, and many will just pass.

Back to Mr Wang’s question: overall employment is one concern, but an even sharper problem is that with AI, highly capable individuals can become extraordinarily productive. Some graduates will struggle to find work, while others earn ten or even dozens of times more. That is a social conflict, and it calls for policy safeguards. It will be extremely difficult to rely on industrial transformation or technological upgrading alone to resolve this issue.

One more point: factories themselves do not create that many jobs—producer services do. I can’t agree more with Boming that there is no hard line between “low-end” and “high-end” industries; industries operate as a network. In the past, many assumed the U.S. and Japan were merely offshoring “low-end” industries. But once too many links are cut, the capillaries of the network fail; sever a few more, and the whole system can collapse. Even if many factories in China do not employ large numbers directly, the employment they generate around them—warehousing, logistics, trucking—is substantial. When factories move, those transport and service jobs go too.

So China really should heed the lessons of Europe and the United States: do not discriminate against so-called “low-end” industries in policy—there is no such thing as a low-end industry.

From investment-oriented to consumption-driven, the key lies in returning more income and time to households.

Wang Boming:

We’ve got a little time left, and I want to raise what I think is the most important issue: the blockages in China’s current economy. I have a basic observation, which you’ve probably all noticed: last year’s GDP growth was 5%, and this year’s target is around 5%. China is now facing a situation unseen in forty years; it seems that China’s economy has never truly recovered from the pandemic.

Why do I say that? The producer price index (PPI) has been negative for three years straight, dropping every single month. It’s been in negative territory since 2022, the final year of the pandemic. “Anti-involution” has long been a constant theme, and the central government has repeatedly emphasised it. But why is involution happening? The root cause lies in continuously falling prices and mounting pressure on corporate profits. On the other hand, why is consumption weak? The consumer price index (CPI) has been hovering around zero for over two years.

Three years of negative PPI and over two years of near-zero CPI—this kind of slump is something China hasn’t experienced in four decades. Add to that the real estate downturn since 2021, which has led to a contraction in household balance sheets and likely further suppressed consumption. So, how does China break out of this? Professor Yao, what’s your take on the current scenario?

Yao Yang:

I think it all started with the trade war the U.S. launched against China in 2018. That made China realise the risks of relying on American supply chains and the need to step up China’s own innovation. Overall, I support this direction. The problem is a growing tendency to set hard-tech innovation in opposition to consumption, finance and real estate—as if supporting consumption or property would undermine innovation and cause China to lose out to the United States. That mindset keeps being reinforced and eventually shows up in policy and practice.

The truth is, China’s technological level is already quite advanced. That’s a good thing, of course—strong tech capability is a good thing. But on the flip side, it also shows that domestic consumption is suppressed. The Chinese government plays a very strong role in China’s economy; once it sets a direction, the entire economy and social resources tilt toward it. I think this is a fundamental factor, and it’s more like an “invisible thread” that isn’t stated outright, which makes it harder to address.

Also, even when it comes to boosting consumption, China is still putting too much effort into measures like individual voucher schemes, such as national subsidy programs, without really addressing structural issues. For example, if real estate continues to slump, overall demand won’t pick up; if local governments lack fiscal revenue and don’t dare to spend or invest, demand will be hard to revive. If these core problems keep getting sidestepped and no genuinely forceful measures are introduced, China may remain stuck in this phase of negative price growth for a very long time.

Wang Boming:

Over the past forty years, China’s growth has brought us to where we are today. Take the three major drivers of the economy: consumption, investment and net exports. Some economists argue that once per capita GDP reaches about $13,000 to $14,000, exports lose much of their driving power and consumption should take the lead. In developed economies, this is the norm: most run trade deficits, because they have the income to consume more, while exports play a smaller role.

After decades of development, China’s per capita GDP has reached the $13,000–$14,000 range. By this point, most core infrastructure—highways, airports and the like—has already been built. This is precisely the stage when consumption should become the main growth engine, ideally contributing 70%–80% of overall growth. Yet consumption in China has not kept pace, particularly in recent years.

Professor Lan, how do you view this? Could you share your thoughts with us?

Lan Xiaohuan:

Consumption splits into consumption of goods and consumption of services. China has immense production capacity, as reflected in the technology side and PPI, so efficiency in making goods is world-class, and physical-goods prices generally trend down. The U.S. CPI basket is far more granular—dozens of categories more than China’s—but the logic is similar: goods tend to get cheaper; it’s the services that push CPI higher.

If the goal were simply to lift headline consumption and its share of GDP, that wouldn’t be hard—raise university tuition and the numbers jump overnight. In the United States, the heaviest consumer burdens come from a few services: costly healthcare, expensive college tuition, and high legal fees. To “pump up” consumption on paper, one could make a treatment that used to cost ¥2,000 suddenly cost ¥100,000—¥50,000, attributed to insurance and financial services, ¥50,000 to the doctor’s service. Then, faced with a huge bill, add ¥20,000 for legal advice. Do that, and the consumption figures soar.

But the real question is: is that the kind of society we want? In many of the most critical service sectors, such as education and healthcare, China still relies heavily on public institutions rather than full marketisation. This touches on a core issue in GDP statistics: can prices really capture value and genuine social wealth? GDP calculations rest on market prices, yet precisely education and healthcare in China are not market-driven.

Of course, the lack of marketisation brings its own problems. But pushing for full marketisation simply to inflate consumption figures—would that be the right path? That is a debate worth having.

In fact, China has already been shifting for nearly a decade from investment-led growth toward a greater reliance on consumption. At present, consumption makes up roughly 39%–40% of GDP. It is unlikely China will ever reach U.S. levels of 70%–80%, because that ratio embeds many intermediate costs that Chinese society is not willing to shoulder. A more realistic trajectory would be toward a healthier share of around 55%, closer to that in Germany.

Right now, investment and consumption each account for about 40% of China’s economy. On the surface, shifting emphasis from one to the other can look like moving money between columns. In practice, they are very different behaviours. Investment decisions are highly centralised, mainly in the hands of government and corporations, and ordinary households have no direct say. Consumption is decentralised and genuinely household-driven.

Redirecting resources from investment toward consumption, therefore, means directing more income and more time back to households, because spending requires both income and time. One notable shift in China’s consumer market in recent years is the push into third- and fourth-tier cities and counties: brands are rushing into these regions because people there have more leisure and social time. In mega-cities like Shanghai, arranging a catch-up with a university friend can take a year. After overtime, a commute, a shower and a quick scroll on Douyin, it may already be 9:30 p.m. In smaller cities, by contrast, average daily free time is roughly 1.5 hours higher thanks to shorter commutes, adding up to about an extra day of leisure each week. That’s why their willingness and ability to spend are so strong.

Current policy is essentially about giving more income and time back to households. Looking ahead, all Chinese companies will face three pressures: rising wages, mandatory social security contributions, and reduced overtime. Take social security: the Supreme People’s Court has made clear that employers can no longer ask staff to sign “voluntary social security waiver” agreements. Only firms with sufficiently high margins will withstand these pressures. That, too, is a way to counter involution.

But this will be a very slow process. At present, consumption accounts for about 40% of GDP. If GDP grows by 5% a year and the consumption share is to rise by 1 percentage point annually, consumption itself needs to grow by roughly 7% a year. Moving from a 40% to a 55% share, even at 1 percentage point per year, implies a transformation that could take about 15 years.

Many developed countries have gone through this stage—the U.S. also emphasised investment in the 19th and early 20th centuries. Every country inevitably goes through an investment-driven phase during industrialisation before improving labour relations, expanding leisure time, and introducing the five-day workweek. In the U.S., this era was known as the “Progressive Era,” and it spanned three to four decades.

China is now entering a comparable phase, one that implies deep social transformation. No policy can directly “ignite” consumption without raising household incomes or freeing up leisure time, and that inevitably requires a lengthy restructuring of social resources.

I see many policies moving in this direction, including household registration reform, adjustments to rural land rules, upgrades to the social security system, and raising the pooling level of social insurance schemes. The common aim is to enable a more efficient, nationwide allocation of labour.

But these efforts won’t show up immediately in macroeconomic data; they are part of foundational social restructuring. I believe this process is likely to take a decade or longer.

Lan Xiaohuan on China's Local Government Competition and Overcapacity