China is fortifying its economy
China’s Xi is constructing an economic bastion in response to US pressures. China is accelerating its efforts to reduce dependence on foreign products and technology—a key aspect of a prolonged initiative by leader Xi Jinping aimed at enhancing self-sufficiency and resilience against Western influence amid escalating tensions with the United States. Beijing has invested hundreds of billions of dollars in preferred sectors, particularly in high-end manufacturing, while urging business leaders to align with the government’s strategic priorities. The initiative is, in numerous respects, proving effective.
China is increasingly shifting towards domestic production of robots and medical devices, reducing its dependence on foreign firms. Chinese-manufactured solar panels are supplanting a portion of the nation’s reliance on imported energy. The achievements of China’s electric-vehicle manufacturers and the rise of artificial-intelligence newcomer DeepSeek have sparked concerns that China could surpass the West in certain advanced industries. Despite the apparent successes, Xi’s industrial policy incurs substantial costs, consuming state resources at a time when government revenues are experiencing stagnation. According to an estimate from the Washington-based Center for Strategic and International Studies, China’s annual expenditure on industrial policy was approximately $250 billion in 2019.
A typical day in China might commence in the following manner: Awaken and peruse WeChat notifications on your Huawei device. Enter a BYD electric vehicle and proceed to the railway station, where a high-speed train, produced by a state-owned manufacturer, swiftly transports you to your intended location. Nuclear plants, solar farms, and wind turbines designed in China illuminate the city. The influx of capital into Chinese manufacturing is generating challenges for China on the international stage, as it results in vast amounts of Chinese products being introduced into foreign markets at significantly reduced prices, intensifying trade frictions. Western nations have taken steps to impede the transfer of advanced semiconductors to China, while the latter’s expanding manufacturing prowess in key high-value industries is poised to become a contentious issue in escalating trade tensions as President Trump intensifies his stance against Beijing.
China must urgently identify new growth drivers to counterbalance the economic slowdown stemming from a struggling real estate sector and a deteriorating global trade environment. A growing consensus among economists suggests that China ought to enhance its inadequate social safety net to stimulate a sustainable increase in consumer spending, rather than further investing in its already extensive industrial sector, which risks accumulating additional debt without assured future benefits. Beijing is convinced that directing substantial resources towards advanced manufacturing and technology will enhance national security by reducing the country’s vulnerability to Western influence. Chinese leaders appear to be indicating that the potential economic challenges and heightened tensions with the West are acceptable trade-offs.
According to Alfredo Montufar-Helu, head of the China Center at The Conference Board in Beijing, the expense associated with China’s initiatives has resulted in significant capital losses. “Will China be able to shoulder the financial burden?” The Chinese government perceives that they are compelled t o shoulder this burden. The State Council Information Office of China did not respond to a request for comment. “Self-reliance in science and technology underpins our national strength and prosperity, and is essential for our security,” remarked an anchor from China’s state broadcaster CCTV this month.
In 2015, Xi articulated his aspirations for enhancing the nation’s self-sufficiency through the introduction of the initiative known as “Made in China 2025.” A government document outlining the program’s objectives emphasized that the world stands on the brink of a new technological revolution, asserting that China’s success hinges on its investment in a more sophisticated manufacturing foundation. The initiative aimed to enhance Chinese manufacturing comprehensively, with a particular emphasis on ten sectors, including robotics, aerospace, and new-energy vehicles, identified as priorities. It also established clear objectives for increasing the domestic content of essential components and fundamental materials. A substantial influx of state subsidies and various forms of financial assistance would facilitate China’s attainment of its objectives.
U.S. officials expressed discontent with the program, which they argued was designed to exclude foreign firms, a divide that deepened following Trump’s inauguration in 2017. By 2019, responding to U.S. pressure, Beijing began to eliminate mentions of “Made in China 2025″ from official documents and indicated a shift towards a greater involvement of foreign firms in its supply chain. As relations with the U.S. continued to decline, China’s pursuit of self-sufficiency became increasingly pronounced. The government asserted in its most recent five-year economic plan, released in 2021, that the global landscape was becoming increasingly tumultuous, emphasizing the critical importance of “self-reliance” in science and technology.
In the realm of electric vehicles, a sector highlighted in the “Made in China 2025” initiative, industrial support has experienced a remarkable increase, rising from $15 billion in 2019 to over $45 billion by 2023, as per estimates from CSIS. Over 100 brands have surged into the marketplace. With enhancements in quality, domestic vehicles have been outperforming foreign competitors in China and swiftly expanding their presence in international markets.
In the previous year, electric and plug-in hybrid vehicles represented 48% of passenger-car sales in China, an increase from 41% the prior year, translating to nearly 11 million units, according to data from the China Passenger Car Association. A significant proportion of the electric vehicles on the market are produced by Chinese manufacturers, including BYD and Geely. BYD has recently overtaken Volkswagen to claim the title of China’s leading car manufacturer. Meanwhile, American automakers like General Motors have noted a significant shift, asserting that they have facilitated the rise of Chinese companies into the preeminent position in global shipbuilding, now accounting for over half of worldwide production by merchant tonnage, a stark contrast to the mere 5% share held in 1999, as highlighted by Matthew Funaiole, a senior fellow at CSIS, last year.
Historically, China functioned as a net importer of chemicals, sourcing significant quantities from the Middle East, Europe, and the United States. This reliance stemmed from insufficient domestic production to meet the demands of its expanding economy for plastics, fibers, and various other chemicals. Since 2021, the situation has reversed from a deficit to a surplus, driven by an increase in domestic production that has outpaced imports. In 2024, China achieved an export surplus of $34 billion in chemicals, a notable shift from the $40 billion deficit recorded in 2020.
Nonetheless, Xi’s pursuit of self-sufficiency encounters significant obstacles. In the aerospace sector, China’s C919 jetliner commenced commercial operations in 2023, a milestone hailed by the government following numerous challenges over the years. However, the aircraft, produced by the state-owned manufacturer Comac in an effort to compete with the dominant passenger jets of Boeing and Airbus, is replete with foreign systems and components, featuring landing gear sourced from Germany and engines from both the United States and France. In addition to technological advancements, efforts to enhance China’s self-sufficiency in food production face significant limitations due to the scarcity of arable land and water resources. In 2024, China’s soybean imports reached 105 million tons, marking a 21% increase since 2019, with a significant share sourced from the United States. Concurrently, meat imports surged by 55% during the same timeframe.
In the realm of semiconductors, Western nations are diligently striving to prevent China from closing the technological gap, a move that has only strengthened Beijing’s resolve towards achieving self-sufficiency. A decade ago, policymakers articulated an ambition for domestic production to satisfy 70% of China’s chip demand by 2025. By the close of this year, domestic production is projected to meet merely 30% of China’s chip demand, an increase from approximately 20% in 2024, as per estimates from International Business Strategies, a consultancy. According to data from Chinese customs, chip imports in the previous year approached $400 billion.
China lacks indigenous technology for the production of cutting-edge chip-making equipment, which is predominantly manufactured by a select group of suppliers in the Netherlands, Japan, and the United States. Export control measures from the U.S. and other nations impede China’s access to these advanced tools. The absence of these components has rendered the fabrication of cutting-edge chips a formidable challenge for China. China lacks indigenous technology for the production of the most sophisticated chip-manufacturing equipment.
Nonetheless, Chinese players have achieved breakthroughs that have taken U.S. officials by surprise. In 2023, Huawei Technologies launched the Mate 60 smartphone, featuring an integrated circuit that approaches the technological sophistication of advanced chips found in Apple’s iPhones. However, industry experts have expressed concerns regarding the production yield of these chips and the company’s ability to achieve efficient mass production. Huawei has refrained from providing specifics regarding the chip. Huawei has successfully developed its own operating system following restrictions on its use of Google’s Android system.
The emergence of AI entrant DeepSeek serves as a notable counterpoint to China’s state-driven approach. DeepSeek did not originate from a government laboratory; instead, it was developed by a Chinese mathematician who previously established a hedge fund. A number of analysts contend that China might enhance its economic performance by relaxing restrictions on its private sector, thereby bolstering its position in competition with the United States, while avoiding many of the drawbacks associated with its state-driven approach.
