China’s “can do” approach to global dominance induces piquant responses. Even the US barely conceals its respect, if not fear. China called America’s bluff in the sorry saga last year of reciprocal tariffs—and America backed off. From where does China derive its iron will?
In an insightful article for The Economist, written in his personal standing as an eminent economist, India’s Chief Economic Advisor V Anantha Nageswaran, along with his collaborator PS Srinivas, posit three pillars of the Chinese model of economic invincibility.
First, undisputed political dominance of the Communist Party of China (CPC), which is only partly derived from the institutionalised exclusion of alternative political forces and the subservience of citizen needs to State demands.
Second, the CPC works for the people but only within the overarching goal of advancing national interest.
Third, a combative stance where overwhelming force is the only certain path to success. Obsessive self-reliance on outcome.
But it is expensive in the short run. So, from where did China get this patient capital?
The Domestic Savings Powering China’s Rise
China relied primarily on domestic savings of the average citizen—the highest as a share of GDP in its income category. Financial repression keeps interest rates on domestic savings low via state-owned banks and exchange controls dissuade capital flight.
Cheap domestic capital is routed to investments into manufacturing and infrastructure. With high savings and low domestic demand, export markets are the obvious source for demand. Boosting exports is a primary aim.
China joined the World Trade Organization in 2001. It offered opportunities to foreign capital to invest in China not just for domestic sales, but to export at a profit to the world.
Lucrative corporate profits came from tax concessions on machinery and input imports, on product exports and from the low wages rates. Add perfect alignment forced or real—between labour demands, domestic entrepreneur goals, and the all-powerful State—and investors walked into a Giant Mall of industrial convenience: land, utilities, safety, logistics, and cheap labour all ensured by the State.
It worked. China has never had a merchandise trade deficit post 2003 and its merchandise trade surplus in 2025 was $750 billion versus a merchandise trade deficit of $1.3 trillion in the US.
Are exports from China gamed by keeping the yuan cheap to reduce the cost to customers? Nageswaran and Srinivas point to curious asymmetries. Weak currencies result from weak GDP growth and export deficits. Such economies need to buy foreign exchange to finance their merchandise imports.
Is the Yuan Really the Problem?
So why did China’s extraordinary export performance not force the yuan to appreciate and automatically constrain the competitiveness of its exports, giving other exporting countries a fair chance?
The answer is twofold. China cleverly uses its export surplus earnings to stock up on foreign reserves. This sanitises the excess export earnings from appreciating the yuan, builds its global credit ranking, and insures against export embargoes on political grounds. It also intervenes in the market—most countries do—to keep their currency from fluctuating wildly. America does not have to worry about this because the dollar is the favourite reserve currency, so print, baby, print.
America and Europe worry about global imbalances in export market share where China is the clear winner. Solutions are being considered in world capitals to address the problem—China exports too much, America too little. One is to persuade China to depreciate its currency, thereby undercutting its competitiveness.
Parallels exist with the Plaza Accord in 1985 when the G5 persuaded the US to depreciate its currency—appreciated by high interest rates to beat domestic inflations. American business weighed in behind the demand to regain export competitiveness, and it was agreed.
Gita Gopinath, previously the chief economist at the International Monetary Fund (IMF), and her collaborators Pierre-Olivier Gourinchas and Hélène Rey rubbish this option. The G7 are not allies of China, unlike the G5 were of the US. China resents external fiddling with its economic policies. So, the proposal is a non-starter.
They propose an alternative. Persuade China to alter the fundamentals which give rise to a weak yuan. Enhance social benefits: China is ageing, boost domestic consumption and demand which will reduce savings and investment, and in turn, reduce excess manufacturing capacity. Chinese business might welcome relief from hyper competition at home.
The result? The flood of exports recedes letting other economies breathe. The yuan automatically appreciates. Global trade balances settle.
Why China Won’t Give Up a Winning Model
Nageswaran and Srinivas disagree. They question why China would wish to lose on a winning wicket? They argue that a weak yuan is not merely an unforeseen policy outcome, an error to be corrected. It is the lynchpin around which China voluntarily rejects profligate domestic social support policies, which, it believes, lead to laziness, as in the liberal world.
The unsaid bottom line is that looking beyond a weak yuan to highlight why it is good for China to enhance consumption and normalise savings and investment will get nowhere.
Why would China wish to dilute its directed growth policy or its choice of who should pay for development? Why jeopardise its planned transition to global dominance, that too without a grand bargain on offer?
(The author is distinguished fellow Chintan Research Foundation and was previously in the IAS and the World Bank. This is an opinion piece and the views expressed are the author's own. The Quint does not endorse or is responsible for them.)