For years, international discussion of China’s economic rise has focused on how it has built a manufacturing and export powerhouse and used industrial policy to support such efforts at a continental scale. But there is another, darker side of China’s dominance: its outsize role in the illicit global economy. China purchases roughly 90 percent of Iran’s sanctioned oil exports, which often arrive relabeled as originating from Malaysia and are paid for with money routed through small banks and shell companies acting as intermediaries. Cryptocurrencybrokers in China and Hong Kong help North Korean hackers, such as the notorious Lazarus Group, convert stolen coins into usable cash. And China-based networks support money launderers working with Mexican cartels selling fentanyl, online scam centers in Southeast Asia, and the global wildlife trafficking trade.

Data from organizations and governments tracking illegal activity suggests that the Chinese illicit economy generates nearly $1 trillion in revenue annually, about the size of Switzerland’s GDP. Roughly two-thirds of counterfeit goods seized by customs authorities worldwide originate in China or move through Hong Kong, and the notorious scam compounds that have proliferated in Southeast Asia—many of which are operated by or linked to Chinese criminal networks—have trafficked more than 300,000 people from at least 66 countries into forced labor while generating roughly $40 billion in profits each year.

Beijing has tried to crack down on some of these activities. In the Philippines, China’s Ministry of Public Security canceled the passports of hundreds of Chinese nationals involved in offshore gambling operations there, turning them into fugitives who can be arrested and deported. Since 2023, joint operations between China and Myanmar have led to the arrest of more than 57,000 Chinese nationals suspected of telecom fraud, the closure of dozens of scam compounds along the China-Myanmar border, and the execution of several bosses running these compounds. The United States, too, wants to stop these activities: the Trump administration launched the Scam Center Strike Force to investigate fraud centers in Southeast Asia, and the president signed an executive order directing the government to prioritize cybercrime, including predatory schemes.

Yet none of these actions have significantly curtailed the illicit economy. If anything, it is growing larger. This is in part because these illegal activities are driven by many of the same forces that underpin China’s legal economy. Criminal groups have exploited the core financial and commercial infrastructure that developed in response to China’s strict capital controls and its industrial overcapacity. Beijing’s enforcement, although real, is selective and partial because elements of the illicit economy serve the country’s larger strategic goals, such as sustaining trade with Russia while maintaining distance from the war in Ukraine. What may appear to be a collection of unrelated crimes is intertwined with China’s imbalanced growth model and its foreign policy. As Washington struggles to compete with China, Beijing’s role in the global illicit economy is working against U.S. priorities around the world.

The central forces driving China’s illicit economy are the structural imbalances created by the country’s economic model. One of the most important is financial: strict capital controls have created enormous demand to move money out of China. China’s economic boom has produced fabulous wealth, including more than 800 billionaires. But Beijing restricts how this wealth can leave the country. China has a quota limiting individuals to purchasing $50,000 in foreign currency each year, and they cannot freely convert domestic currency to move wealth abroad. With deposits in China generating low returns and no access to more lucrative foreign assets to invest in, wealthy individuals and business owners have sought to find ways to funnel their money out of the country.

Starting in the 1990s, underground bankers set up shell companies and bank accounts in Hong Kong to circumvent mainland China’s capital controls. These companies and accounts, often........

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