proposal

Medium- to Long-Term Prospects of the Chinese Economy The Outlook for Relations with the United States and the World

1. Introduction

The theme of this research workshop is whether a Pax Sinica—an era in which China, as a hegemonic power, provides international public goods and supports global stability—will come. To answer this question, it is necessary not only to forecast China's future but also to consider whether the current hegemon, the United States, will retreat and relinquish its position to China. On this point, the author feels that the future of the United States is, in fact, more uncertain than that of China. However, since it is not the purpose of this paper to focus on that subject, this analysis will concentrate on China's future, particularly on the future of the Chinese economy, which constitutes the fundamental basis of China's national power. Finally, I will briefly touch upon the prospects for the success or failure of a Pax Sinica.

2. Changes in the "Chinese Model"

The so-called "Chinese model"—a combination of Communist Party dictatorship and the utilization of market economy—enabled China's dramatic economic growth over the past quarter-century. Yet, its content changed significantly between the first stage (the 2000s) and the second stage (2010s onward).

Following its WTO accession, China successfully adopted a strategy of importing the capital and technology it lacked from abroad, thereby becoming the "world's factory." More than 100 million workers moved from inland areas to the coastal regions. Infrastructure such as highways and ports, which had been scarce, was built at high speed, financed by rapidly increasing government revenue. The combined input of capital and labor, together with improved productivity, created the golden era of Chinese economic growth when all three factors necessary for growth aligned.

However, in the 2010s, the growth pattern shifted. The turning point was the launch of the "4 trillion yuan investment" program after the 2009 Lehman Shock. Whereas local governments had competed to attract foreign investment in the 2000s, they began to compete through debt-financed investment thereafter. This path was supported by abundant savings, generated by economic growth and demographic changes (notably, a rising working-age ratio despite declining births).

As investment accumulated, its efficiency declined, and debt repayment became more protracted. Usually, this would slow the pace of investment; however, in China—where, as discussed later, the government exerts greater power over the economy than market mechanisms—the scale of investment did not diminish easily. From 2010 to 2024, cumulative fixed-asset investment reached 747 trillion yuan (about USD 105 trillion). As older, inefficient debts took longer to repay and new debts piled on each year, China's debt-to-GDP ratio surged from 147% at the start of 2009 to 286% by the end of 2024.

3. The Costs of Debt- and Investment-Dependent Growth

As a result of sustained reliance on excessive debt and inefficient investment throughout the 2010s, large volumes of poor-quality assets and hard-to-repay liabilities accumulated in the Chinese economy. In recent years, the penalties of this deterioration have begun to surface in the form of a collapsing real estate bubble and a crisis in local government finances.

Collapse of the Real Estate Bubble

The first-order symptoms of a real estate bubble burst—such as falling asset values and bankrupt developers—have been muted by government intervention. However, second-order symptoms are clearly visible: housing sales and new construction starts have fallen to less than half their pre-COVID-19 2019 levels, while households, feeling the decline in the value of their homes, have shifted to "defensive, frugal consumption" (an adverse wealth effect). Overall, it is undeniable that China has entered a period of real estate bubble collapse.

"Over-indebted" Local Government Finances

Local governments are suffering severe fiscal distress. In addition to the heavy debt repayment burden from excessive infrastructure investment, they are experiencing sharp declines in land-related revenue due to the property slump. Consequences include significant cuts in civil servant salaries, unreasonable measures to increase non-tax revenues, frequent defaults in local-government financing vehicles, and delays in fulfilling contractual payment obligations—all abnormal conditions. Without a fundamental restructuring of local government finances, local authorities may become unable to fulfill their responsibilities for livelihoods and economic management fully.

Government Pushes Back on the Clean-up of the Bubble

So far, government countermeasures have pushed back the problems rather than solved them. For real estate, policies include instructing state-owned banks to provide unsecured additional loans to developers running short of funds, allowing them to complete unfinished projects (baojiaolou), and having local governments purchase unsold housing to convert it into public housing. However, the former effectively shifts property-sector losses onto banks, while the latter risks either further straining local finances (if purchase prices are set too high) or pushing developers into immediate liquidation (if set too low).

For local finances, policies include requiring financial institutions to extend maturities or reduce interest rates on local debts (huajie), and converting hidden short-term, high-interest local debts into long-term, lower-interest local government bonds. Yet, the former again shifts the deterioration of the books onto banks, while the latter, though easing repayment burdens, does not reduce the debt stock; instead, it undermines bank profitability by forcing them to exchange high-interest loan assets for lower-yield long-term bonds.

Delaying Loss Recognition Worsens Economic Decay

Whether in real estate or wasteful infrastructure, debt borrowed for investments of little value should be written down to match net worth. If this is done, households and firms alike will be forced into painful austerity and, in some cases, bankruptcy. At the macro level, both consumption and investment would drastically decline for 5–10 years ("a balance-sheet recession").

Yet, deferring loss recognition invites even worse outcomes. For years in China, when state-owned enterprises (and private firms, which are significant and essential to the local economy) could not repay debts, governments intervened to arrange debt rollovers—effectively providing "implicit government guarantees." However, allowing such "zombie enterprises" to continue rolling over debts and paying interest without generating real earnings is akin to a company continuing to pay high salaries to idle employees: fundamentally abnormal.

The interest paid on loans that should have been written off is essentially "financial unearned income." The author estimates that this abnormal transfer of wealth has grown to approximately 4 trillion yuan annually (≈equivalent to approximately USD 560 billion, or about 3% of China's GDP see Figure 1). This burden crowds out income that should go to regular economic activities, functioning like a heavy tax. Moreover, since the gains accrue to cash-rich state-owned enterprises and the wealthy via financial institutions, income inequality is further exacerbated.

4. Problems from Government-Skewed Wealth Distribution

From the 2010s onward, as local governments competed in debt- and investment-driven growth, wealth distribution shifted toward the broader "government sector," including state-owned enterprises (see Figure 2).

The leading cause was the subdivision of state-owned urban land-use rights. Over the past quarter-century of real estate boom, residential land prices multiplied many times over, generating huge capital gains for local governments. In addition, since the "4 trillion-yuan investment" stimulus launched in 2009, state-owned enterprises have also taken advantage of the bank lending system with privileges to carry out massive public works, causing their balance sheets to balloon (see Figure 3). Moreover, the most profitable prime contractor jobs for those projects were awarded to state-owned enterprises, further concentrating benefits.

In terms of flows, the private economy dominates—accounting for 50% of tax revenue, 60% of GDP, 70% of R&D spending, 80% of employment, and 90% of the number of enterprises. However, in terms of stock, i.e., wealth ownership, the "government" sector—encompassing central and local governments, as well as state-owned enterprises—overwhelmingly dominates. This asymmetry means that, alongside the vast political power of the authoritarian system, the state's control over the economy is much stronger than in any other country. As government dominance has expanded, the role of market mechanisms has receded.

Seen from another angle, government-skewed wealth distribution means that private enterprises and households are left with too little wealth. Recently, authorities have been calling for "stimulating consumption." Still, without reforming this distributional imbalance, achieving consumption-led growth will remain difficult.

5. The Chinese Economy Slipping into Deflation

In the wake of the bursting bubble, China has fallen into a balance sheet recession, characterized by declining consumption and private investment. Reflecting weak domestic demand, consumer prices have hovered close to zero since the spring of 2023, while producer prices have been stuck between -2% and -4% since the autumn of 2022. The government proclaims that it will "promote a reasonable rise in prices through a moderately accommodative monetary policy" (Monetary Policy Implementation Report, Q2 2025). Yet, with price indices showing year-on-year declines, real interest rates remain elevated.

What is troubling is that despite the evident shortage of demand, the government continues to stress strengthening the supply side under the banner of "new quality productive forces." Moreover, the absence of the much-anticipated "revenge recovery" in consumption after the end of the COVID-19 pandemic in the spring of 2023 has quickly deepened public pessimism about the future.

When one witnesses the postponement of bubble clean-up, the balance sheet recession, and the public's pessimistic outlook together, it is hard to shake the impression that China is following the same path Japan did 30 years ago. Within such an atmosphere, there are growing concerns that a "deflationary mindset" — the belief that "prices will not rise" — is taking hold among the public. As Japan's experience has shown, once such a mindset takes hold, it is difficult to escape from it.

Meanwhile, amid sluggish demand, China's cheap exports — ranging from high-tech products to steel — have become an international issue. If such a massive economy were to turn into a deflation-exporting country, the rest of the world would not be spared its impact.

6. Still Room to Postpone the Adjustment

As described above, the circumstances surrounding the Chinese economy are severe. Yet, there is one saving grace: the outstanding balance of public bonds remains relatively low. In particular, the central government's outstanding national debt stands at only the mid-20% range of GDP, an exceptionally sound position as compared with other major countries. Moreover, China is now the world's third-largest net creditor nation after Germany and Japan. This means that even if the government issues more national bonds, they can be sufficiently absorbed by domestic savings. As Japan's precedent shows, such a country will not suddenly be forced into fiscal collapse; even if China continues to postpone dealing with the bubble, its economy is unlikely to face bankruptcy in the near term.

However, simply continuing large-scale government bond issuance without taking other measures could siphon off money, tighten financial markets, and lead to rising interest rates. To prevent this, one option would be to emulate Japan's "Kuroda-nomics" by having the central bank purchase vast amounts of outstanding national bonds from the market. Even if the People's Bank of China does not directly buy them, it can supply funds to the six major state-owned banks and have them purchase the bonds instead. In fact, over the past two years, three rounds of special government bond issuance, totaling approximately 2.3 trillion yuan, have been conducted. On each occasion, the central bank supplied liquidity through operations such as bond buy-backs. This gives the impression that a kind of "modified Kuroda-nomics" has already begun.

7. The Era of "China's Strength Lies in Science and Technology"

Although gloomy headlines overshadow the Chinese economy, there are also bright spots at the microeconomic level. One of them is that the era of "China's strength lies in science and technology" has arrived. In January 2025, the news of DeepSeek's success in AI development not only boosted the high-tech stock prices but also had such an impact that it lifted the overall mood of the Chinese economy, with many proclaiming that "China has broken through the U.S. technology blockade."

China has long been at the forefront of the IoT and the digital economy, and its electric vehicles (EVs) have evolved far beyond Western expectations, now posing a threat to the automobile industries of advanced economies. In addition, humanoid robots powered by AI — priced at around USD twenty thousand (per unit) — have appeared on the market, potentially triggering the next wave after EVs.

In the semiconductor industry, China has been dealt a significant blow by U.S. export restrictions. Still, it has turned this setback into a valuable lesson and is pushing hard to increase domestic production. Before long, China will likely capture a significant portion of the global low-end (volume) semiconductor market.

China is also strengthening its presence in cutting-edge basic research fields, including quantum computing and communications, life sciences, and maritime and space exploration. It has now become, both in name and in reality, the world's second-largest scientific and technological power.

Why China's Manufacturing Is the Strongest in the World

There are five reasons why China's manufacturing is considered the strongest globally: 1, an overwhelming abundance of science and engineering talent; 2, the world's most comprehensive supply chain; 3, a vast domestic market that enables economies of scale; 4, fierce domestic competition; and 5, the involvement of local governments.

Among these, the first factor is particularly significant. As shown in Figure 4, China's superiority in the number of science, technology, and engineering (STEM) students is evident, even when compared with the United States, and a considerable share of U.S. students are, in fact, Chinese studying abroad. The flourishing of China's manufacturing industry is the result of the government's tireless efforts since the 1980s to promote science and technology.

Local Governments Distorting High-Tech Industries

At the same time, one cannot ignore the negative impact of government involvement. Today, in five industries — solar panels, lithium batteries, EVs, and air conditioners — China's production capacity already exceeds total global demand (see Figure 5). In solar panels, capacity has swelled to twice the level of global demand. No sensible company or executive would usually enter an industry so severely plagued by overcapacity. Yet such extreme over-investment has occurred because of forces behind the scenes: local governments.

The reason lies in the mechanism of local public finances. Under China's tax system, half of the value-added tax paid by local enterprises goes to local governments (30–40% to municipalities). To increase their tax revenues, local governments have been providing massive subsidies to local firms (see Figure 6 for the cases of BYD in EVs and CATL in batteries). They select industries to nurture in line with central government industrial policies, resulting in concentrated and heavy investment in specific sectors. Recently, central authorities have been calling for the development of "new quality productive forces," and local governments have been enticing emerging firms by pledging investment from "industrial investment funds" that they have set up themselves. Without such backing, companies would not have engaged in reckless capital investment.

In recent years, suicidal price-cutting competition has spread, prompting the government to launch an "anti-involution" campaign to restrain excessive price cuts and investment races. However, the hidden culprit behind this cutthroat competition is local governments. Given today's unprecedented fiscal difficulties, it is easy to imagine local governments pressuring local enterprises for certain annual sales and tax targets. Firms, unable to refuse such desperate demands from local governments that have long supported them, resort to suicidal price cuts to meet those targets, and it is happening everywhere in China.

This problem is not confined to China. Importing countries, in an effort to protect their own industries, are increasingly resorting to anti-dumping measures. In this way, China's overcapacity problem has become, along with the "Reciprocal Tariff" wars initiated by the Trump administration in the United States, a factor driving the global free trade system toward fragmentation.

8. The Global Impact of China's Economic Trends

Measured at market exchange rates, China's GDP amounts to only about 63% of that of the United States. But on a purchasing-power-parity (PPP) basis, it actually exceeds the U.S., reaching 133% (according to IMF estimates for 2025). With the Chinese economy having grown to such proportions, its trajectory inevitably has an ever greater influence on the world economy. Below, we take up several issues, focusing in particular on those related to the problem of "Pax Sinica."

1. Changes in China's Trade and Investment Structure Amid U.S.-China Confrontation

Over the past five years, geopolitical tensions between China and Western countries have intensified. Most notably, the strengthening of U.S. import barriers against China has profoundly affected the country's trade and investment structure. As a result of higher tariffs and other U.S. restrictions, Chinese assembly plants producing finished goods for export to the U.S. have relocated to ASEAN countries, Mexico, and Canada. Consequently, exports of finished goods to Western countries have declined.

At first glance, this appears to be "industrial hollowing-out." Yet, following these relocations, exports from China of parts, materials, and machinery to the relocated factories have surged. Thus, one can interpret this as "China's supply chain being extended overseas." In this way, the center of gravity of China's trade is shifting from "finished goods exports to advanced countries" to "intermediate goods exports to third countries where plants have relocated" (see Figure 7).

At the same time, Chinese companies are increasingly making foreign direct investments (FDI) in downstream operations such as finished goods assembly in ASEAN, Mexico, and Canada. Recent attention to Chinese EV makers' expansion into Southeast Asia reflects this broader trend of deepening and expanding entire China–ASEAN economic relations.

2. Recycling China's Huge Trade Surpluses

In 2024, China's sluggish domestic demand and weak imports resulted in a trade surplus of approximately one trillion U.S. dollars — roughly equivalent to 1% of global GDP (≈approximately $ 100 trillion). Such an occurrence is rare even in the past century. As shown in Figure 8, countries with massive trade surpluses in the past have recycled them through foreign direct investment. To prevent trade disputes from intensifying and financial crises in developing countries, China too must adopt appropriate strategies for recycling its surplus. As mentioned earlier, direct investments by Chinese firms － especially in EVs and auto parts －have been rapidly expanding in Southeast Asia and elsewhere. For Japanese automakers, this poses a threat; however, from a macroeconomic perspective of surplus recycling and the international circulation of capital, this development is both inevitable and necessary.

3. Can Overseas Investment Save the Chinese Economy?

Recently, some Chinese people changed their minds about Japan: Japan has long been seen as a country suffering from "lost decades" with stagnant GDP growth. But in fact, thanks to the massive FDI it accumulated over the years, Japan enjoys substantial investment revenue; viewed in terms of GNP (GNI), the country has not actually stagnated. The lesson many in China draw is that "China too should proactively pursue outward direct investment and transform itself into a country enriched by investment revenue, as Japan has done."

Indeed, in industries such as EVs and telecommunications, some Chinese firms are expected to grow into global brands, like Toyota in automobiles or Sony in its prime. However, challenges lie ahead. First, investments in "new quality productive forces" — such as solar panels, EVs, lithium batteries, and eventually some semiconductors — may face rejection in Western countries. Although Global South nations may welcome such investments, they are not yet the ultimate sources of demand.

Second, the Japan that China seeks to emulate took more than 30 years to build up its overseas investment assets. Along the way, it endured numerous painful failures and paid heavy tuition fees. Even successful investment projects take years to yield profits.

Currently, Japan's annual income from overseas investment is about 35 trillion yen, equivalent to 6% of its GDP. For China to generate profits equivalent to 6% of its GDP, it would need approximately 8 trillion yuan (≈$ 1.1 trillion) in investment income. In terms of sales, that would require three to five times as much — roughly 3 to 6 trillion USD. China's exports last year totaled approximately $ 3.58 trillion. Even if some exports are replaced by local production through FDI, if Chinese-branded products of that magnitude were also supplied via local production, one would need to consider whether global markets have sufficient consumption and absorptive capacity to accommodate both.

4. Excess Production Capacity and Its Major Impact on the World Economy

China accounts for about 18% of the world's total GDP (2024). If we isolate manufacturing, however, China's share is about 29% (2023)—exceeding the combined share of the top four countries (the U.S., Japan, Germany, and India)—showing how exceptionally manufacturing-heavy China's economy is.

The problem, then, is that several industries possess production capacity that exceeds not only China's domestic demand but also global demand—the issue of "excess production capacity." In recent years, as domestic demand has weakened and low-priced exports have increased, many of China's trading partners have initiated trade remedy measures, claiming that their own industries have been harmed by China's low-priced exports (see Figure 9).

As discussed above, China is pursuing supply-side-heavy policies guided by the "new quality productive forces" agenda, further reinforced by China's tax system. Nor is there any prospect that China's weak domestic demand will be resolved quickly. Left unchecked, more countries will resort to trade-remedy measures. As more countries raise import barriers against particular Chinese products, goods left out will be diverted to those markets that remain open, intensifying industrial damage there; by its nature, this accelerates the spread of higher barriers. If China then retaliates, global trade will shrink further, making a "rerun of the 1930s collapse in trade" more than a theoretical risk. Thus, China's excess capacity problem, alongside U.S. reciprocal tariffs, threatens to shake the free-trade system itself.

An Idea: Voluntary Export Restraints by China

The author believes the above vicious cycle could be mitigated if China agreed to voluntary export restraints (VERs). The key is whether one can persuade China, and frame the case in terms of benefits for China as well: China can resolve disputes through the "negotiations" (谈判) that it prefers, rather than through unilateral measures by importing countries; Chinese firms could escape ruinous competition in which virtually no company makes a profit; and, where local governments ignore central directives for the sake of tax revenues, the central government could discipline exports through its powerful instrument of export licensing.

One should also stress that if China continues a relentless export offensive that eradicates industries in partner countries "in the name of competitiveness," it risks diplomatic isolation. For reference, I recently heard from a Chinese trade expert that, having listened to the EU insist it "must protect its auto industry," China began discussing a minimum export price arrangement for EVs with the EU counterpart, a positive sign for the future.

VERs are prohibited under Article 11.1(b) of the WTO Agreement on Safeguards. Still, the author considers this a "branches and leaves" issue. We should not, by insisting on that point, allow the entire "tree" of the free-trade system to wither outright.

5. The Outlook for U.S.–China Tariff Negotiations

At one point, Washington and Beijing both threatened tariffs in the triple digits, roiling the world's business. Since then, positions have softened: the U.S. side to 30% (including 20% tied to fentanyl-related sanctions) and the Chinese side to 10%, with deadlines repeatedly extended as talks continue. It is said that China's rare-earth export controls were highly effective in prompting significant U.S. concessions.

That said, more than rare earths, the decisive factor forcing the Trump administration to pull back its bluster may have been turbulence in U.S. financial markets: intensifying tariff warfare saw heavy selling of U.S. Treasuries and the dollar. Although U.S. equities subsequently reached record highs, markets still appear fragile, and this is likely to continue constraining the "China hawkish" stance of the Trump administration.

For China, with consumption and investment weak, a sharp decline in exports to its largest market—the United States—would be painful; it cannot simply "hold the line" indefinitely. Yet Beijing has few apparent concessions to offer: with weak domestic demand, a significant import expansion is unlikely. At the same time, it could increase direct investment in the U.S. Still, Washington's heightened security sensitivities limit how much it is willing to accept. An exchange rate adjustment, i.e., a negotiated yuan appreciation against the dollar, would be groundbreaking. However, given Beijing's conviction that "Japan fell into the Plaza Accord trap 40 years ago and suffered its ‘lost decades'," China is unlikely to accept exchange rate adjustments.

What, then, might the final deal look like? As of late August, it is hard to predict, but my base case is a "sensible adult solution" by both sides: China offers the utmost—but unglamorous—concessions while pressing to shave down as much as possible of the 20% tariff linked to fentanyl; Trump, seeking to embed U.S. commercial interests (including his own), trumpets China's unglamorous concessions with maximal rhetoric.

Within the administration, people say that there is tension between "Restrainers and China Hawks." Judging from the recent handling of tariff talks, export controls for chips to China, and the TikTok issue, Trump himself does not appear firmly aligned with the Hawks. Nor, given his desire to mediate in Ukraine (and court a Nobel Peace Prize) and to visit China to meet Xi Jinping, does he seem aligned with the Restrainers, who prefer avoiding foreign entanglements to focus on "America First." Ultimately, U.S.-China policy will likely follow the direction of Trump's own impulses.

9. Conclusion: No "Pax Sinica"

As argued above, the author is pessimistic about China's medium- to long-term economic future. While a sudden collapse is unlikely, given Xi Jinping's policy framework and governance style, stagnation in future appears unavoidable, and the "great rejuvenation of the Chinese nation" he proclaims will prove a mirage. I have long said "China's GDP will not overtake America's," and I see no reason to change that view for now. The only scenario that could overturn it would be an American forfeit: deepening domestic division or a rapid diffusion of AI causing massive unemployment among the middle class and above, plunging the U.S. into social chaos.

If "Pax Sinica" means that China becomes a hegemon that provides international public goods and supports global stability, as the U.S. has done, then a China unlikely to surpass the U.S. even in GDP will have almost no chance of becoming such a hegemon.

America's ability to lead rule-making and provide international public goods—such as a free-trade system—rested not only on overwhelming military power but also on its willingness to offer the world a vast market in which others could prosper, and on the postwar rise of the U.S. dollar as the key currency.

Crucial here is how, after World War II, the dollar displaced the pound sterling. With war-ravaged Europe's industrial capacity diminished and the U.S. commanding immense productive power, America in that period was primarily a seller, running huge trade surpluses. The U.S. then implemented the "Marshall Plan"—granting aid to Western Europe on a scale exceeding its trade surplus at one time (see Figure 10). This both gave Europeans the means to purchase U.S. goods—creating an outlet for America's massive productive capacity—and popularized dollar settlement, thereby promoting the dollar to gain the key-currency status.

Once the U.S. gained that status, it acquired the privilege of expanding imports without worrying about its external balance of payment, effectively becoming the world's market, a country running massive trade deficits.

By contrast, although China proclaims that it "provides a vast market to the world," its $1 trillion trade surplus shows that it is, even more, a country to which the world provides a market. Far from "allowing others to prosper," China now faces accusations of "beggar-thy-neighbor" policies through low-price exports.

Could China reverse this by emulating the Marshall Plan and offering grants exceeding its $1 trillion surplus? Lavishing renminbi abroad would not only create outlets for excess capacity but also promote RMB use in international settlement, potentially paving the way to key-currency status.

Yet today's China has been unable even to forgive Belt and Road loans to poor countries, typically offering only maturity extensions—fearing domestic criticism for "throwing money down the drain." If Beijing were to "hand out renminbi that need never be repaid," it would face a domestic outcry: "If you have that money, spend it at home."

Thus, China is unlikely to become a hegemon that provides international public goods and supports global stability: not only is it unlikely to surpass the United States in GDP, but it also cannot dominate the global market, nor can it readily nurture the RMB into a key international currency.

A Prospect of Regional Hegemony

Upon entering his second term, President Trump revealed territorial ambitions toward Canada, Panama, and Greenland. Some refer to this as "territorial expansionism," but the author views it differently. In the early 21st century, the U.S. was an overwhelming hegemon capable of dominating the world; since then, its power has ebbed, and it now seems eager to assert that "the neighborhood is our turf." Interpreted this way, as the U.S. retreats from areas beyond its periphery, vacuums open up, and a scramble may ensue over who will dominate them.

For East Asia, Taiwan is definitely the focal point. Given the military dimension, Beijing's desired "cross-Strait unification" will not be easy to achieve. But if President Trump seeks a deal with Xi and appears ready to "sell out" Taiwan in exchange, the situation could become fluid.

More likely, however, is that Southeast Asia becomes "China's economic sphere of influence," reminiscent of the historical tributary system linking China and its neighbors. Will ASEAN drift into China's economic orbit?

As noted, the intensifying geopolitical confrontation with the U.S. has reshaped China's trade and investment structures, deepening and expanding economic ties between China and Southeast Asia—clearly supporting the "economic sphere" scenario. Yet ASEAN countries have a long history of navigating great-power rivalries with resilience; they are unlikely to submit meekly as vassals so easily.

Two variables will be decisive. The first is the depth of China's growth slowdown and stagnation. As both diplomatic aide and genuine economic benefits from the Chinese economy diminish, China's pull will fade. The second is how many like-minded partners—such as Japan, Europe, and others—can fill the vacuum left by the U.S., both militarily and economically. That said, if the relationship with China is framed solely as a geopolitical confrontation, the burden may exceed our capacity to handle. Alongside balancing strategies, efforts at cooperation and coordination with China are essential. In that sense, encouraging China to adopt voluntary export restraints to address excess capacity—and pursuing negotiated solutions—seems crucial to the author as noted in the above.

(Toshiya Tsugami, Director, Tsugami Toshiya's Works)

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