By Juliana Leo
While the world is waking up to the implications of China's growing technological power, now is the time for a reality check. Reorientation toward an innovation-driven, security-focused development model has not yet succeededFWell, at least not financially.
Fresh analysis of official data by Rhodium Group, a research firm, takes a detailed look at the current growth trajectory, revealing something worrying but not entirely surprising. 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 – are not pulling their weight. Their contribution to economic activity has been dwarfed years after the decline of traditional engines such as property and infrastructure investment.
Looking at data released by the National Bureau of Statistics in November that shows how industries interact with each other and the larger economy, researchers found that declines in activity in old industries are six times greater than gains from new forces from 2023 to 2025.
Specifically, the combined contribution of the three legacy sectors – property, infrastructure and internal combustion cars – as a percentage of GDP fell six percentage points over that period.
At the same time, growth in economic activity from the six new growth drivers was less than one percentage point.
This is a worrying trend, as China plans to officially consolidate its high tech-driven growth tally through its next five-year plan in March. The new strategy was never just about prosperity. It was always equally about security: ensuring that Beijing could defend itself in competition with the US.
Because the stand against President Donald Trump's bullying trade tactics was based almost entirely on Beijing's industrial strength and dominance in rare earths, there is widespread acceptance of this development blueprint. However, this does little to ease the pain from job insecurity and consumption malaise – exacerbated in the long run by Big Tech's inability to replace the once powerful property sector.
The electric vehicle industry is a prime example of this. Two decades after policymakers decided to overtake Western car giants by betting on electrification, China is the undisputed world leader. Of the 24 million passenger vehicles sold in the country last year, more than half were EVs. Due to the price war that has been going on for years, most EVs are cheaper than their gasoline counterparts. This is not the norm in other countries, where they are generally more expensive.
According to Rhodium's calculations, even though the EV industry has expanded significantly over the past two years, total economic output from gasoline vehicles was still 232 billion yuan ($33 billion) higher because their costs were actually higher. The hyper-competitive and saturated nature of the automotive sector has caused the government to bring back the “cash-for-clunkers” trade-in program for cars and other consumer goods for the third consecutive year.
Presented as a consumer subsidy, the scheme actually provides support to industrial giants vital to 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 The agreement this week to set up a mechanism for companies to offer voluntary limits on car shipments from China is welcome news. Although it is still early days, any deal swapping hefty tariffs with minimum pricing commitments would be a boon for automakers.
Even though the contribution of high-tech industries appears to be limited at the moment, this may not always be the case. For one thing, the auto sector still needs to go through a period of consolidation. In theory, the survivors should eventually be able to gain control of premium prices and truly move up the value chain.
But unless this process is replicated across different industries, they may struggle to meet economic output expectations. The solution is not to step back from Chinese leadership, but to make a concrete commitment to increase consumption. At a minimum, they should subsidize a broader range of goods and services to lure hesitant buyers. It will take time for China's industrial giants to reach the point where they can really drive growth. Policy makers should accept this and give their consentFProviding leisure to citizens.
bloomberg opinion