China’s Emerging Economic Engine

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Thesis: China is shifting from an old investment- and property-led growth model toward a technology-led model centered on new technology, green industries, and digitalization; aggregate demand and confidence remain soft because the old engine is weakening faster than the new one can support the whole economy.
The “three new” economies—evolving industries, business formats, and business models—had combined value added growth of about 10 percent a year between 2016 and 2024.
Example breakthroughs: DeepSeek’s low-cost artificial intelligence breakthrough in 2025; advances in electric vehicles, commercial aircraft, innovative drugs, and robotics.

Large domestic testing ground supports rapid adoption and commercialization.
Household consumption share rose from about 49 percent of GDP to roughly 57 percent by 2025 after rural-to-urban labor absorption around 2010.
Adoption examples:
- 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.

Dense industrial clusters shorten coordination and production loops (example: Yangtze River Delta sourcing within a four-hour drive).
R&D spending 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 its full-time-equivalent R&D workforce has been No. 1 for 13 consecutive years.

Public support in early stages targeted consumer subsidies tied to vehicle sales regardless of brand.
Market outcomes contradict a simple subsidy-driven success narrative:
- Tesla’s Shanghai gigafactory was among the largest recipients of subsidies from 2016 to 2022.
- Of 487 EV makers in 2018, only about 1 in 10 was still selling passenger cars by 2023.
Surviving firms relied on economies of scale, rapid technological iteration, and competitive engineering rather than continued protection.

Green transition:
- Renewable technologies (solar panels, wind turbines, batteries, EVs) benefit from economies of scale in manufacturing, amplifying China’s market-size and industrial-depth advantages.
AI transition:
- Wider deployment yields more data and learning, improving applications and lowering adoption costs.
- Talent share: 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.

Shift in trade shares (2020–2025):
- US share of China’s trade fell from 12.6 percent in 2020 to 8.8 percent in 2025.
- Shares of Southeast Asia, Africa, and Latin America rose (exact shares not provided).
High-tech trade and contributions:
- 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 for 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.
External pressures: export controls and technology restrictions accelerated domestic innovation and upgrading.

Sectoral revenue and value-added mismatch in 2025:
- 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.
- Real estate contributed about 6 percent of GDP.
Risks:
- The digital transition may deepen income inequality and labor displacement if productivity gains do not translate into jobs and wages.
- Without stronger household incomes and services consumption, excess output may have to be absorbed abroad, widening external surplus amid less accommodating trading partners.
- Property downturn since mid-2021 has weighed on domestic demand through weaker local finances, negative wealth effects, and lower employment.

Domestic rebalancing priorities:
- Strengthen household incomes and services-led consumption to avoid a more K-shaped economy.
- Increase spending on pensions, health care, childcare, education, and unemployment insurance to reduce precautionary saving and support consumption.
Financial and credit measures:
- Repair balance sheets to reduce the debt overhang; debt restructuring, especially for local governments and firms across the property value chain, to restore credit availability.
External surplus management:
- Recycle more surplus into productive investment abroad (examples in 2025: Alibaba Cloud opened a third data center in Malaysia; BYD advanced a European passenger car plant in Hungary; Haier-owned GE Appliances announced a $3 billion expansion of its US manufacturing footprint).
Deeper reform needed:
- Match industrial upgrading with domestic rebalancing—higher household incomes, better social protection, more services consumption, and more productive outbound investment—to sustain the transition and the surplus and provide a more durable Chinese economy and a more reliable supply of affordable technologies globally.

F&D Magazine — “China’s Emerging Economic Engine” by YANLIANG MIAO, September 2026

CHINA’S EMERGING ECONOMIC ENGINE
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