China’s new growth strategy needs a reality check

By Juliana Lio

WHILE the world is rightly waking up to the implications of China’s rising technological prowess, it’s time for a reality check. Reorientation toward an innovation-driven, security-focused growth model has not yet paid off, at least not economically.

Fresh analysis of official data by the Rhodium Group, a research firm, offers a granular look at the current growth trajectory, revealing something alarming but not entirely surprising. The so-called “new quality productive forces” — a term popularized by President Xi Jinping to describe high-tech industries such as electric vehicles, artificial intelligence, and robotics — aren’t pulling their weight. Their contribution to economic activity is dwarfed by traditional engines such as property and infrastructure investment, years after they collapsed.

Delving into data released by the National Bureau of Statistics in November that show how industries interact with each other and the larger economy, the researchers found that the drop in activity from older industries has been six times larger than the gains from the new forces from 2023 to 2025.

Specifically, the combined contribution of three legacy sectors — property, infrastructure, and internal-combustion cars — as a percentage of gross domestic product fell by six percentage points over that period.

At the same time, the increase in economic activity from six newfangled growth drivers was less than one percentage point.

This is a concerning trend, given China plans to officially cement the elevation of tech-driven growth through the passage of its next five-year plan in March. The new strategy was never solely about prosperity. It was always equally about security: ensuring Beijing can fend for itself in rivalry with the US.

Because standing up to President Donald Trump’s bullying trade tactics was almost entirely based on Beijing’s industrial muscle and dominance in rare earths, there is widespread acceptance of this development blueprint. However, that does little to diminish the pain from job insecurity and consumption malaise — prolonged by Big Tech’s inability to replace the once-mighty property sector.

The electric vehicle industry is a prime example. Two decades after policymakers decided to overtake Western car giants by betting on electrification, China is undisputably the world leader. Of the 24 million passenger vehicles sold in the country last year, more than half were EVs. Because of a yearslong price war, most EVs are cheaper than their gasoline counterparts. This is not the norm in other countries, where they’re generally more expensive.

According to Rhodium’s calculations, even though the EV industry expanded significantly over the past two years, the total economic output from gasoline vehicles was still 232 billion yuan ($33 billion) higher because they actually cost more. The automotive sector’s hyper-competitive and saturated nature is why the government has had to bring back a “cash-for-clunkers” trade-in program for cars and other consumer goods for the third year in a row.   

Billed as a consumer subsidy, in reality this scheme offers support to the industrial giants so important for the country’s future. But for many, especially EV makers like BYD Co., the key to higher prices, margins, and profits lies overseas. That’s why the European Union’s  agreement this week to set up a mechanism for companies to offer voluntary limits on car shipments from China is such welcome news. Though it’s still early days, any deal to swap steep tariffs with minimum pricing commitments would be a boon for automakers.

Even though the contribution of the high-tech industries appears limited for now, it may not always be the case. The auto sector, for one, must still undergo a period of consolidation. In theory, the survivors should eventually be able to command premium prices and truly move up the value chain.

But until that process is repeated across the various industries, they may struggle to meet expectations for economic output. The solution is not for the Chinese leadership to backtrack but to make a solid commitment to increase consumption. At a minimum, they should be subsidizing a broader range of goods and services to woo hesitant shoppers. It will take time for China’s industrial giants to get to the point where they can truly propel growth. Policymakers should acknowledge that and give their long-suffering citizens a break.

BLOOMBERG OPINION