## CHINA’S EMERGING ECONOMIC ENGINE

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### Overview
- Traditional, investment-driven engines—property and infrastructure—are weakening, leaving aggregate demand, real estate, and consumer confidence soft.
- A new technology-led economy—centered on “three new” economies (evolving industries, business formats, and business models)—has seen combined value added surge by about 10 percent a year between 2016 and 2024.
- The new economy’s strengthening industrial competitiveness is emerging as the main engine of growth, but the old engine is weakening faster than the new one can yet support the whole economy.

### Demand-side scale and market dynamics
- China’s household consumption rose from about 49 percent of GDP to roughly 57 percent by 2025 after surplus farm labor was largely absorbed by factories around 2010.
- Large domestic market and rapid adoption enable fast testing and commercialization:
  - In 2025, electric vehicles accounted for nearly half of new car sales.
  - In 2025, generative AI attracted more than 600 million users of all ages.

### Supply-side scale, industrial depth, and innovation capacity
- Dense industrial clusters reduce coordination costs and shorten design-to-production loops (example: Yangtze River Delta EV component sourcing within a four-hour drive).
- R&D investment and workforce:
  - R&D spending rose from RMB 2.4 trillion in 2020 to RMB 3.9 trillion in 2025, up about 10 percent a year on average.
  - China is No. 2 globally in R&D spending and has been No. 1 for 13 consecutive years in full-time-equivalent R&D workforce.
- These conditions allow firms to spread research costs and turn technologies into commercial products quickly.

### Competition, subsidies, and industry selection
- Public support in early stages of technologies with positive externalities (e.g., EVs) was used to scale markets; subsidies were structured as consumer payments tied to vehicle sales regardless of brand.
- Examples of market selection:
  - Tesla’s Shanghai “gigafactory” was among largest recipients of these subsidies from 2016 to 2022.
  - Of 487 EV makers in 2018, only about 1 in 10 was still selling passenger cars by 2023.
- Outcome: intense competition selected survivors through economies of scale and rapid technological iteration rather than government protection alone.

### Internal drivers: green and AI transitions
- Green transition:
  - Renewable-based technologies (solar panels, wind turbines, batteries, EVs) are manufactured goods that benefit strongly from economies of scale—expanded production lowers unit costs and encourages innovation.
- AI transition:
  - Wider deployment of models generates data, feedback, and engineering experience that improve applications and lower adoption costs.
  - Talent metrics: 38 percent of researchers publishing at leading AI conferences received their undergraduate education in China, compared with 24 percent in the United States (MacroPolo Archive).
  - Stanford University’s 2026 AI Index Report found the gap between leading US and Chinese models had narrowed to 2.7 percent by March 2026.
- Combined effect: green and AI transitions amplify China’s advantages in market size, industrial depth, and rapid deployment opportunities.

### Geopolitical fragmentation and trade shifts
- China has shifted toward a more self-reliant growth model and diversified export destinations:
  - US share of China’s trade fell from 12.6 percent in 2020 to 8.8 percent in 2025.
  - Trade shares of Southeast Asia, Africa, and Latin America rose (exact figures not provided in source text).
- High-tech trade contribution:
  - In 2025, China’s imports and exports of high-tech products grew by 11.4 percent and contributed nearly 60 percent of overall trade growth.
- EU trade example (2025):
  - EU imports from China reached €558.8 billion, 54 percent above 2019.
  - EU exports to China fell to €199.5 billion, 14 percent below their 2022 peak.
  - China’s share of EU imports rose from 18.7 percent in 2019 to 22.3 percent in 2025.
  - Electric vehicles, batteries, solar products, and chemicals accounted for about 70 percent of that increase.
- Recycling surplus into productive overseas investment:
  - Examples in 2025: Alibaba Cloud opened a third data center in Malaysia; BYD advanced with its first European passenger car plant in Hungary; Haier-owned GE Appliances announced a $3 billion expansion of its US manufacturing footprint.

### Rebalancing at home: challenges and key statistics
- Revenue versus GDP value added:
  - In 2025, China’s automobile industry generated more than RMB 11 trillion—exceeding property sales, which fell to about RMB 8 trillion from RMB 18 trillion in 2021.
  - Automobile manufacturing contributed only about 1.6 percent of GDP, far less than real estate’s 6 percent.
- Household consumption and inequality:
  - Household consumption rose from about 35 percent of GDP in 2010 to 40 percent in 2024, still well below the 53 percent average for middle-income countries.
  - The digital transition and AI risk deepening income inequality and labor displacement if productivity gains do not translate into stronger household incomes and consumption.
- Property downturn effects: weaker local finances, negative wealth effects, and lower employment weighed on domestic demand since mid-2021.

### Policy recommendations and macroeconomic priorities
- Strengthen social protection and public services to support the shift to services-led consumption and avoid a more K-shaped economy:
  - Higher spending on pensions, health care, childcare, education, and unemployment insurance would reduce precautionary saving and promote consumption.
- Repair balance sheets and restore credit availability:
  - Debt restructuring, especially at the level of local governments and firms across the property value chain, would help reduce the debt overhang and translate lower interest rates into new borrowing and spending.
- Continue productive foreign investment to recycle surplus savings into factories and infrastructure that create jobs, strengthen local supply chains, and support industrial upgrading.
- Deeper reform is required to match industrial upgrading with domestic rebalancing so that China’s transition is sustainable and provides broader global benefits (a more durable Chinese economy and a more reliable supply of affordable technologies).

*Source: SEPTEMBER 2026 F&D article by Yanliang Miao*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2026/09/miao.pdf_