Central bank advisers warn AI or exacerbates "strong supply and weak demand", China's growth model again hits domestic demand bottleneck

Artificial intelligence is adding new productivity and export momentum to China's manufacturing industry, but it may also deepen the long-standing "strong supply and weak demand" contradiction in China's economy.On September 19, Huang Zhiping, a member of the People's Bank of China's monetary policy committee, said at an economic forum in Beijing that as AI accelerates deployment and innovation, the imbalance between strong supply and weak demand may further deteriorate and last longer.

The warning came against the backdrop of China’s industrial production still supported by technology, resident consumption and real estate consumption continued to weaken.This week’s Reuters data analysis showed that industrial output grew by 5.2 percent in August, lithium batteries, industrial robots and other industries performed stronger, but social consumer goods retail sales grew by only 0.4 percent and real estate investment fell by 19.9 percent.

AI can increase output but can’t automatically create consumption

The most direct economic effect of AI and automation is to increase enterprise productivity, reduce part manufacturing and service costs.If enterprises can produce more goods with less labor, supply capacity will continue to rise; but if residents' wages, employment security and disposable income do not increase simultaneously, new goods will be difficult to fully absorb by the domestic market.

Huang Zhiping pointed out that the global boom of AI this year has helped support China's exports, providing growth buffers while domestic demand is still weak, but he also stressed that resolving structural imbalances still needs to increase the share of residents' income in national income, promote market reforms, and let consumption play a bigger role in the economy.

This is also the core contradiction facing China’s growth model in the AI era: technological upgrading itself can create new industrial competitiveness, but if income distribution, social security and real estate wealth effects do not improve, higher productivity may first manifest as more output and exports, rather than stronger domestic consumption.

The International Monetary Fund’s annual China assessment this year also pointed out that China’s private domestic demand continued to weaken, real estate adjustments and local government debt dragged consumption, and growth increasingly relied on external demand.

Local governments and corporate balance sheets remain a barrier to domestic demand

He also pointed the issue to the balance sheet of local governments, financial institutions and enterprises. He suggested that the central government increase its lending capacity to repair the financial situation of local governments and other economic actors. His judgment is that if these actors do not regain their ability to engage in new economic activities, the effect will be limited even if they continue to introduce stimulus policies.

China’s real estate adjustment has been ongoing for years.In the past, local governments have relied heavily on land lease income, and low real estate losses have not only weakened the sense of family wealth, but also compressed local financial space.Businesses face price competition and declining profit rates, and some industries still see domestic price pressure even though production and exports continue to grow.

If local governments, households and are fixing the balance sheet, the simple reduction of interest rates or the increase of capacity will not automatically translate into new consumption and investment.

The IMF’s policy analysis this year also puts a similar conclusion: when residents, local governments and real estate-related companies leverage at the same time, low interest rates can hardly directly lead to additional borrowing and spending, and stronger social security, fiscal support and debt restructuring can reduce preventive savings and boost consumer will.

From “world factories” to AI factories, external friction may rise with supply capacity

China’s manufacturing upgrades are changing export structures.In addition to past clothing, household appliances and low-end processing products, electric vehicles, batteries, solar energy, robots and AI-related equipment are becoming new growth points.The problem is that when domestic demand cannot synchronize with these new capacity increases, greater export pressure is shifted to overseas markets.

In recent years, the United States and Europe have repeatedly placed China’s overcapacity in some industries, national industrial support and low-cost exports as the focus of trade friction. The EU has imposed anti-subsidy duties on Chinese electric vehicles, while the United States continues to restrict multiple Chinese high-tech products into the market. Huang Xiaoping did not attribute these disputes to AI itself, but his “strong supply, weak demand” judgment explains why technological progress could expand external imbalances in the case of underconsumption at home.

This does not mean that every investment in China’s advanced manufacturing industry comes from excess capacity.AI, robotics and green industries have indeed created real technological advances and productivity gains.The key is whether these gains can return to the residential sector through wages, employment, public services and social security to form enough domestic demand.

Real re-balance is still unavoidable from income distribution

The increase in the proportion of residents' income is actually a long-standing issue in China's economic structure.The proportion of Chinese household consumption to GDP is still significantly lower than in many equal-income economies.The decline in real estate, uncertainty in retirement and medical expenditure, employment pressure and insufficient social security are all driving families to maintain higher savings.

If AI boosts enterprise output, but labor income growth lags behind productivity, the share of consumption may fall further.The IMF’s recent study on China’s new growth pattern also points out that digital transformation may exacerbate income inequality and job replacement; if productivity gains cannot be converted into resident income, a greater proportion of new output will only be absorbed by overseas markets.

Therefore, the macroeconomic question of China’s AI strategy has gone beyond “can we catch up with the United States?” and what really determines whether this technological upgrade can form sustainable growth is whether residents can get enough income and a sense of security from technological progress and are willing to spend their money in the domestic market.

While real estate, local debt and residents’ confidence are not fully restored, AI can make Chinese factories produce faster, but can not replace income distribution and social security reforms.