Highlights

• China's core economic challenge in 2025 is demand-side weakness.
• Overproduction is leading to price wars, especially in electric vehicles (EVs).
• Margin collapse and a cycle of weak consumption persist despite massive industrial output.
• Beijing needs to shift from volume-driven growth to profitable production by:
  • Moving income toward households.
  • Forcing industrial consolidation.
  • Resolving property sector stress.
  • Reducing disruptive rare earth export control signaling.
• US-China economic contrast:
  • America struggles with supply-side capacity gaps and needs to rebuild industrial infrastructure.
  • China faces involution and must convert production strength into household-driven profitable growth.

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Yes, China can still produce. However, the Rare Earth Exchanges™ question: can the nation still grow profitably? China’s economy in late 2025 reads like a powerful engine running hot—with a misfiring transmission. Output is not the core problem. The problem is where demand comes from (overproduction), how profits are generated, and whether growth is becoming durable or merely manufactured.

Beijing’s latest National Development and Reform Commission (opens in a new tab) (NDRC) call to “firmly implement the strategy of expanding domestic demand” is an implicit acknowledgment that the old model is reaching its limits. An economy driven primarily by investment, exports, and industrial scale can still produce impressive volumes—but it struggles when households remain cautious, services lag, and property continues to weigh on confidence.

Stability on the Surface, Strain Beneath

Independent assessments of China’s economy in 2025 converge on a familiar set of pressures. Consumer confidence is uneven. The property sector remains a long-tail drag, particularly in lower-tier cities. External demand is no longer just cyclical but politically constrained. Consumption has improved with policy support, yet remains below its pre-pandemic contribution to growth, while property weakness continues to suppress household expectations.

Beijing’s domestic-demand push is rational. But domestic demand is not a slogan. It is wages, safety nets, and credible expectations about the future.

Overproduction Is the Signal, Not the Disease

China’s EV sector has become the most visible arena of overcapacity: price wars, compressed margins, and official concern about “excessive competition.” Regulators have openly warned that destructive pricing threatens financial health across the industry.

This is not just an EV story. It is a system signal. Local governments and firms continue to chase volume, market share, and industrial targets—even when incremental output erodes profitability. The result is growth that weakens balance sheets, suppresses income growth, and feeds back into weak consumption. The loop is self-reinforcing.

Rare Earths: Leverage With Consequences

Rare earths sit at the intersection of China’s strengths and its tensions. Beijing dominates processing and magnet manufacturing, making it indispensable. At the same time, rare earths have become a geopolitical valve. Export controls and licensing regimes have tightened, loosened, and tightened again—sending clear signals to global markets.

The immediate effect has been supply-chain stress and price volatility outside China. The longer-term effect is more consequential: accelerated friend-shoring, capital formation elsewhere, and a determined push by other economies to reduce exposure. Leverage is real—but it is not costless.

What China Must Do to Break the Cycle

If Beijing wants to move beyond the recurring pattern of stimulus, overbuild, and deflationary pressure, the next steps must be harder than infrastructure spending:

• Shift income toward households, not just firms and provinces, through stronger social safety nets and labor mobility reforms. Consumption must be enabled, not instructed.
• Force industrial consolidation where price wars are eroding the future. EVs are the warning label.
• Resolve property and local government finance stress cleanly, rather than allowing confidence to bleed away slowly.
• In rare earths, move up the value chain while reducing disruptive signaling. China’s advantage lies in separation, metals, and magnets. Predictability preserves dominance better than shock.

China’s leadership is right about one thing: domestic demand is national security. But the path forward is not more production. It is more profitable production, stronger household confidence, and less involution—especially where EVs and rare earth magnets meet the global marketplace.

United States vs. China: Core Economic Challenges (2025)

Dimension	United States	China
Primary Growth Constraint	Supply-side capacity gaps in strategic sectors (manufacturing, minerals, labor)	Demand-side weakness despite massive production capacity
Core Economic Tension	Can the U.S. rebuild industrial capacity fast enough without triggering inflation or fiscal stress?	Can China convert production strength into profitable, household-driven growth?
Consumption Dynamics	Strong consumer base, but uneven and debt-sensitive; services-heavy	Structurally weak household consumption; high savings due to uncertainty
Investment Pattern	Underinvestment for decades; now overcorrecting via subsidies and incentives	Overinvestment and duplication; capital often chases volume over returns
Industrial Policy Risk	Fragmentation, political cycles, permitting delays, debt.	Involution: price wars, excess capacity, margin collapse
Labor Market Stress	Tight labor, skills mismatch, immigration constraints	Youth unemployment, productivity stagnation in some sectors
Property Sector Impact	Cyclical, but not systemic	Structural drag; confidence and balance-sheet damage, especially in lower-tier cities
Fiscal Position	High deficits, rising debt, but strong reserve currency advantage	Hidden local government debt; constrained fiscal flexibility
Financial System Risk	Market volatility, but transparent stress transmission	Opacity, delayed loss recognition, reliance on administrative controls
Rare Earths Challenge	Strategic vulnerability; dependent on imports and processing abroad	Structural dominance in processing, metals, and magnets
Overproduction Risk	Low overall; selective bottlenecks	High in EVs, batteries, solar, some critical minerals
Geopolitical Exposure	Weaponized dependence (imports, chokepoints)	Weaponized dominance (export controls, licensing)
Policy Execution Risk	Inconsistency across administrations	Optics, trade retaliation, accelerating friend-shoring
Key Strategic Test	Can the U.S. industrialize without losing fiscal and political discipline?	Can China reduce involution and boost demand without sacrificing control?
Failure Mode	Inflation + political backlash stall reindustrialization	Deflationary pressure + overcapacity hollow out profitability
Success Path	Integrated, intelligent industrial policy + labor and permitting reform; Transcending political chasms	Household income growth + consolidation + higher-value production

Some Strategic Takeaways

The U.S. problem is capacity and..

It lacks enough factories, skilled labor, and processing infrastructure in the right places. Rapidly accumulating debt and political chasms may lead to more pervasive, enduring challenges.

China’s problem is the quality of growth.

It produces too much of the right things, too cheaply, with returns that no longer justify the scale. Rigidities of the CCP, demographic shifts, and controls on capital can lead to mounting frustration among elites and a desire for change.

Rare earths sit at the fault line.

The U.S. must build; China must consolidate.
One risks a shortage. The other risks involve.

The next decade will not be decided by who produces the most—but by who can produce profitably, sustainably, and with adaptive political resilience.

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