China’s aggressive industrial policy has led to the rise of global firms like EV giant BYD and AI innovator DeepSeek, but it has not delivered the productivity gains President Xi Jinping seeks. Despite heavy investment in innovation, overall productivity growth is slowing—particularly in manufacturing.
Following the global financial crisis, China pivoted toward state-led innovation, pouring subsidies, tax breaks, and cheap loans into strategic sectors such as electric vehicles and artificial intelligence. Xi has emphasized that success hinges on a “substantial increase in total factor productivity,” yet data from Capital Economics and the IMF shows a decline—from 3.7% growth in the 2000s to 1.9% in the 2010s. Some estimates suggest productivity has stagnated entirely.
China’s manufacturing sector, central to its innovation ambitions, has seen little productivity improvement since 2012. While BYD has thrived with deep subsidies, many Chinese EV firms remain unprofitable. In 2017, a Shanghai license plate cost more than the subsidized price of the top-selling EV. More than half of the country’s 169 automakers now hold less than 0.1% market share.
In contrast, AI company DeepSeek outperformed state-backed firms despite receiving little government support—highlighting how limited state involvement can foster stronger innovation.
Studies reviewed by the National Bureau of Economic Research indicate that subsidies often flow to politically connected or inefficient firms, undermining profitability and innovation quality. The shipbuilding sector is a cautionary tale: after receiving ¥550 billion in subsidies, the industry is projected to generate profits worth only one-fifth of the public investment.
Analysts argue that China’s early focus on innovation—driven more by strategic goals than economic readiness—has increased state interference and dampened market efficiency. While industrial policy has fueled isolated innovation successes, sustained productivity gains remain elusive without deeper market reforms.
