China’s unique industrial policy: Purposes, prospects and pushback
Why China’s overcapacity and export surge is a greater threat to the global economy than Trump’s tariffs
The Investigator | No. 17/2025
Beijing pursues a unique industrial policy for commercial reasons, but also domestic, economic and geopolitical ones. It supports an unusually wide swathe of industries and firms at a huge and unprecedented cost in order to dominate new technologies, support economic growth and increase the People’s Republic of China’s (PRC) footprint in the so-called ‘Global South’ through exports and technology.
Like other nations, it wants to insulate itself from strategic vulnerability, and become self-reliant in key sectors. Like few others, it seeks to capitalise on its mercantilist interests. Yet, this misses the broader context. The PRC’s industrial policy is a state-backed effort to knock the United States (US) off the perch of global technological leadership, by dominating what Xi Jinping, General Secretary of the Chinese Communist Party (CCP), refers to as the ‘fourth industrial revolution’, involving new technologies in Artificial Intelligence (AI), big data, quantum computing and biotechnology. Unlike other nations, which used industrial policy to catch up to rivals, the PRC wants to leapfrog them.
Beijing’s industrial and commercial successes in, for example, electric vehicles (EVs) and batteries, and climate change mitigation manufacturing, are often put down to industrial policy programmes, but top-down industrial policy only started in the mid-2000s. The seeds of private sector industrial success were sown much earlier, when market reforms, entrepreneurship and the private sector were all encouraged under the ‘Reform and Opening Up’ campaign.
From roughly 2006 to 2015, the CCP picked sectors, and defined strategic emerging industries to be new drivers of economic growth under the slogan ‘indigenous innovation’. From about 2016, Beijing set out to control the evolving technological revolution, incorporating communications, data and AI under the banner of the ‘Innovation-Driven Development Strategy’. It also became more explicit about wanting to take on the leadership of the US, and emphasised a new campaign known as ‘Made in China 2025’, with a ten-year goal of making the PRC a manufacturing superpower.
Since 2020, self-sufficiency has been a national goal. Scientific and technological self-reliance were incorporated into the 14th Five-Year Plan (2021-2025), with the goal of cutting the PRC’s reliance on foreign technology and dependence on imported resources as quickly as possible.
The price tag for the PRC’s industrial policy is eye-popping, even though it is difficult to estimate many of the more opaque forms of industrial assistance and funding, and impossible to quantify the cost of other factors.
A recent report from the International Monetary Fund (IMF) suggested the cost at 4.5% of Gross Domestic Product (GDP) – already a substantial multiple of what the largest Organisation for Economic Cooperation and Development (OECD) economies spend. Yet, the IMF was not able to estimate local government subsidies, government venture capital funds, below-market borrowing, energy costs, implicit financial guarantees and a host of other ways in which the party-state supports industries.
The full range of industrial policy initiatives and funding is most likely at least 5%, more likely 7-8%, and possibly an even higher proportion of the PRC’s US$20 trillion (£15 trillion) GDP.
We know a lot about the PRC’s industrial leadership, for example, in high-speed rail, EVs, nuclear reactors, green energy, sophisticated electronics and, to a degree, aerospace. A lot of attention has been drawn to the successful EV manufacturer BYD, but in EVs, we find some revealing contrasts.
BYD, which has a roughly 30% market share in the PRC, is one of few very successful EV manufacturers to have emerged from a 15-year-old strategy. At its peak, CCP largesse attracted about 500 firms into the sector, but the number is now down to between 150 and 200, and still too high. BYD remains a large recipient of subsidies. It and nine other firms have a 65% market share, with the rest unprofitable and scrapping over minuscule shares of the market.
The EV sector shines a bright light on the handful of successful firms, but a dark shadow over endemic problems such as waste, corruption, loss making, overcapacity and deflation, with far-reaching consequences both at home and for the world economy. Nor has industrial policy succeeded in pulling the PRC out of a productivity funk, and it may actually be contributing to it as a result of the survival of loss-making firms, the abuse of political connections to get access to assistance and, generally, the triumph of rigid centralisation and conformity over competition and market incentives.
Although overcapacity features strongly in real estate, the immediate concern now is in goods and services, including EVs and lithium batteries, photovoltaic cells and wind turbines, building materials, metals processing, digital finance, semiconductors, and standard medical devices and pharmaceuticals.
Earlier this year, Beijing’s leaders, from Xi downwards, urged companies and sectors to desist from destructive competition and price cutting. They have invoked the term ‘involution competition’ to emphasise concerns about excess production, anti-competitive business practices, diminishing returns, losses and aggravated deflationary pressures. Yet, it is doubtful that the CCP’s rhetoric will gain traction when it is the CCP which is channeling resources to and prioritising firms and industries, creating incentives to conform rather than compete, and setting unrealistically high growth targets for the economy, thus encouraging ever more investment and production.
The implications for global trade and the world economy are concerning.
Surging exports have become a poorly appreciated global problem. Even though trade news in 2025 has been dominated by the tariffs introduced by Donald Trump, President of the US, the larger threat to world trade and the world economy derives from the rising likelihood of a backlash against Beijing’s ‘dumping’ of its overcapacity via trade.
The PRC’s global footprint is already huge. It accounts for a third of global manufacturing. From a standing start a decade ago, the PRC’s share of global EV sales has surged to over 50%. It accounts for half of global shipping tonnage built annually, 60% of wind turbines manufactured and 80% of solar panels, and is the biggest exporter of steel in the world. It also has a chokehold, for now at least, on the processing of rare earth metals and magnets. The PRC’s trade surplus is running at about 5% of GDP, with the manufacturing surplus about twice as big. Chinese mercantilism resides strongly in the vigorous pursuit of export growth and stagnant imports.
While the US and European Union (EU) have both developed sophisticated governance infrastructures to police, contain or discourage Chinese exports and direct investment in sensitive areas, as well as control exports of sensitive goods, the eye-catching development has been the recourse to an array of trade defence measures by emerging and middle-income countries in the so-called ‘Global South’, and for which the PRC is their biggest or leading trade partner. These include Mexico, Turkey, Brazil, India, South Africa, Vietnam and Thailand, which harbour varying concerns about unfair competition, but also an angst about premature deindustrialisation if significant flows of low-priced Chinese exports continue to threaten local firms and industries.
In some important ways, the PRC’s economic status and industrial prowess are reminiscent of Japan in the 1980s and 1990s, when, despite having an industrial structure and slew of dynamic firms which were the envy and fear of the world, it nevertheless succumbed to a major macroeconomic shock, from which its leading industrial and financial firms could offer no protection.
Japan’s experience shows how two things can be true at the same time. An economy boasting world-class firms and striking accomplishments in innovation can also be one in which systemic imbalances, bubbles and overcapacity, political contradictions and institutional rigidities run too deep for the most impressive firms to deliver durable and stable growth. Great firms and strong top-down industrial policy do not protect an economy against bad macroeconomic policy outcomes.
Technological islands of excellence are no substitute for good macroeconomic governance and well-institutionalised technology ecosystems that diffuse benefits throughout the economy – neither of which constitute Beijing’s strong points. As global trade tensions and fragmentation continue to evolve in years to come, the international backlash against the PRC may well become a catalyst for increased instability.
With the 15th Five-Year Plan (2026-2030) expected to be approved by the CCP Central Committee in coming weeks, it is fair to assume that industrial policy will retain its central role in Chinese policymaking. This is likely to make Beijing’s domestic economic problems worse, and give rise to increasing pushback against the PRC’s export of large volumes of goods and its domestic overcapacity. For the world, this is far more threatening than Trump’s tariffs.
George Magnus is a member of the Advisory Council of the China Observatory at the Council on Geostrategy.
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