In the wake of major global crises like the 1997 Asian Financial Crisis and the 2008 Global Financial Crisis, China faced an unprecedented challenge: its long-successful export-led growth engine began to sputter. Faced with this slowdown, the Chinese government turned to aggressive fiscal and monetary policies to stabilize growth. Massive infrastructure investments and state-directed projects followed. In the short term, these policies maintained GDP figures and preserved employment. But over time, they also initiated a deep structural shift—one that quietly served the long-term strategic interests of the United States.
The result of this shift was a phenomenon widely recognized today as “guo jin min tui” (国进民退): the state advances while the private sector retreats. As government and state-owned enterprises (SOEs) took a larger share of economic activity, the space for private enterprise, innovation, and entrepreneurship shrank. Financial resources became increasingly concentrated in SOEs and local government projects. Efficiency declined, overcapacity worsened, and the dynamism of China’s private sector dimmed.
From a geopolitical standpoint, the unintended consequence of this path may be even more significant. While the U.S. appeared to act aggressively—through financial dominance, dollar-based liquidity cycles, and more recently through tariffs and tech restrictions—the deeper result has been to nudge China further into state-led economic management. Ironically, this shift may have served American strategic interests better than any trade war could.
In recent years, signs of innovation in China—such as breakthroughs in drone technology, EVs, and high-speed rail—have reinvigorated praise for China’s so-called “whole-nation system.” But such victories can be misleading. Innovation that arises from national coordination is often project-specific and hard to replicate broadly. Sustainable innovation ecosystems thrive on autonomy, competition, and diversity of ideas—all of which flourish more naturally in market-driven environments.
Now, as decoupling with the West accelerates and geopolitical tensions rise, some voices in China are once again advocating for stimulus-driven growth through urbanization, infrastructure, and increased government spending. But these calls risk repeating the structural mistakes of the past. Further centralization of resources, continued debt expansion, and sidelining of the private sector will only exacerbate overcapacity and erode long-term competitiveness.
The true irony is this: If China’s private sector were unleashed—if legal protections, financing channels, and policy space were tilted in favor of private enterprises—China’s development potential could exceed current projections by a wide margin. A more balanced and liberalized economic structure would not only support sustainable growth but also shield the nation from being strategically steered into inefficiency by external shocks.
For decades, the U.S. has benefited not only from China’s integration into global supply chains but also, paradoxically, from China’s gradual structural turn toward state dominance. If China wants to break free from this dynamic and realize its full potential, the answer is not more control—but more freedom within a rule-based market system. That, perhaps, is the boldest and most strategic choice China can make.
