Understanding the Dual Realities of China: What the U.S. Must Grasp

In American perceptions, China exists in two contrasting forms: one as a technological and manufacturing superpower ready to lead the world, and the other as an economy teetering on the edge of collapse.

Both portrayals capture genuine facets of China’s complex reality.

The hopeful China is represented by innovative companies such as AI startup DeepSeek, electric vehicle leader BYD, and tech giant Huawei—all forefront players in global innovation.

Jensen Huang, CEO of Silicon Valley chipmaker Nvidia, has stated that China is "not behind" the United States in artificial intelligence development. Many experts foresee China dominating the 21st century.

However, the darker side of China tells a different story: sluggish consumer spending, rising unemployment, a persistent housing crisis, and a business community bracing for the fallout from ongoing trade tensions.

As the U.S. negotiates attempts to resolve the trade war, it is crucial to consider both realities of its chief geopolitical rival.

Understanding China has never been more important. It is insufficient to either fear its successes or dismiss its economic struggles. A comprehensive view recognizes how these two Chinas coexist.

Dong Jielin, a former Silicon Valley executive who spent 14 years in China researching science and technology policies, remarked that Americans hold many misconceptions about China. He noted that while some hope to solve U.S. problems with Chinese methods, these solutions often come with significant hardships.

China, like the United States, is vast and diverse: coastal regions versus interior provinces, north versus south, urban versus rural, wealthy versus poor, state versus private sectors, and generational divides. Even the ruling Communist Party embodies contradictions—proclaiming socialism while resisting establishing a robust social safety net.

The Chinese population contends with these contradictions daily.

Despite the trade war, recent conversations with Chinese tech entrepreneurs and investors revealed a level of optimism not seen in the past three years. This renewed hope began with DeepSeek’s breakthrough in January. Two venture capitalists shared plans to end their investment hibernation initiated after Beijing’s 2021 crackdown on the tech sector, expressing interest in Chinese AI and robotics applications.

However, their optimism does not extend to the broader economy—the darker China.

Ten executives, investors, and economists interviewed agreed that technological progress alone will not rescue China from its economic decline. Advanced manufacturing accounts for just 6 percent of China’s output, far less than the real estate sector, which contributes around 17 percent of GDP despite a significant slowdown.

When asked if China could win the trade war against the U.S., none responded affirmatively. Yet all acknowledged that China’s tolerance for economic pain is considerably greater.

It is understandable that many Americans feel anxious about their country’s struggles with manufacturing and production. China has constructed more high-speed rail lines than the rest of the world combined, deployed more industrial robots per 10,000 manufacturing workers than any country except South Korea and Singapore, and leads globally in electric vehicles, solar panels, drones, and various other advanced industries.

Many of China’s most successful companies have become resilient through economic downturns and are better prepared for upcoming challenges. Eric Wong, founder of New York hedge fund Stillpoint, visiting China quarterly, noted that Chinese firms have long practiced cost-cutting measures similar to the U.S. government’s Department of Government Efficiency efforts, whereas the U.S. has been living in excess.

Yet, amid admiration for China’s supposed miracles, one must question the cost—not only financially but also in human terms.

China’s vertical innovation model, heavily reliant on government subsidies and investments, has proven inefficient and wasteful. Similar to the overbuilding in the real estate sector that triggered a crisis and wiped out much household wealth, industrial overcapacity has worsened economic imbalances and cast doubt on the model’s sustainability, especially if overall conditions deteriorate.

The electric vehicle industry exemplifies China’s dual realities. In 2018, nearly 500 EV manufacturers existed; by 2024, only about 70 remained. Among the failures was Singulato Motors, a startup that raised $2.3 billion from investors including three provincial governments but failed to deliver a single car in eight years before declaring bankruptcy in 2023.

While the Chinese government tolerates investment waste in favored initiatives, contributing to overcapacity, it is reluctant to make meaningful investments in rural pensions and health insurance that could boost consumption.

Robin Xing, chief China economist at Morgan Stanley, warned that technological innovation alone cannot resolve China’s structural economic imbalances or cyclical deflationary pressures. In fact, recent technological advances may embolden policymakers to continue current strategies, increasing the risk of misallocating resources and capital.

China’s leadership obsession with technological self-sufficiency and industrial capacity fails to address its most pressing challenges: unemployment, weak consumer demand, export dependency, and the housing crisis.

Official urban unemployment rates stand at 5 percent, excluding unemployed migrant workers; youth unemployment reaches 17 percent. Actual figures are believed to be significantly higher. This summer alone, more than 12 million new university graduates will enter the job market.

Claims that factories are closing and jobs are lost in China are not unfounded.

In 2020, then-Premier Li Keqiang estimated that the foreign trade sector, directly or indirectly, employed 180 million Chinese workers. He cautioned that a decline in foreign trade would almost certainly have severe labor market impacts, with tariffs potentially causing even greater damage.

While Beijing downplays the trade war’s effects, its impact was evident during recent U.S.-China negotiations. In April, Chinese factories experienced their sharpest monthly slowdown in over a year, and shipments to the U.S. plunged 21 percent compared to the previous year.

These economic repercussions affect individuals like Chen, a former university librarian from a major southern Chinese city, who requested anonymity to protect his identity.

Chen lives in the darker China. He stopped using the highly praised high-speed trains because tickets cost five times more than buses, and flying is often cheaper.

He lost his job last year due to budget deficits at his university, one of the country’s top institutions. Many state agencies have laid off staff as even affluent local governments carry heavy debt burdens.

At nearly 40 years old, Chen is considered too old for most jobs. He and his wife abandoned plans to buy a home. With the trade war ongoing, he fears further economic weakening and bleak employment prospects.

"I’ve become even more cautious about spending," he said. "I count every penny."