China’s Development Strategy

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New Chinese Nuclear Power Plant

 

Development and application of new technology is the key strategy for domestic economic growth and increasing exports. China leads the world in the production of EVs and robotaxis, batteries, solar panels and wind turbines, other renewable energy technologies, rare earth metals processing, robotics and automated production,

and many other areas. They see global competition with the United States as much as a geoeconomic and technological competition as a military and geopolitical struggle.

 

While exports continue to be a key part of China's development and growth strategy, two other past strategies are less important now. Domestic investment in housing and construction was an important driver of growth in the past. Housing construction has fallen, down 17% in 2025. Now, digital services generates more revenue. Another past driver, foreign investment in China, has probably turned negative. In addition, exports to the United States has fallen from 22% of total exports in 2017 to 10% in 2025.  Chinese exports to the rest of the world have risen dramatically to make up for the decrease in exports to the United States. In 2025, China had a record $1.2 trillion trade surplus in goods, $200 billion more than in 2024 even as exports to the United States fell by 30%.


China’s government identifies areas of the economy that it thinks will drive economic growth. Since 2015, those areas have been new or emerging technologies the government decides will drive economic growth and technological dominance in the global economy. The government backs its objectives with massive investment in infrastructure, education, and subsidies for new companies in targeted industries. 

  

China began by building infrastructure, concentrating on transportation. China has the world's largest high-speed rail network. The latest expansion is a new high-speed rail network linking all cities and ports in the Pearl River megapolis of 72 million people. This is part of a plan to link all of China's 132 large cities (population over one million) with high-speed rail. China has also had massive construction programs in airports, ports, roads, and bridges.


Using its experience building high-speed railroads at home, Chinese companies are building high-speed railroads in other countries, including Pakistan, Ethiopia, Kenya, Nigeria, and across South America.


China also directs resources and personnel into research and early development of the favored technologies. Colleges and incoming students are directed into programs that will support the future development of these technologies. This includes future researches and engineers. A recent best-seller (Dan Wang, Breadneck:  China's Quest to Engineer the Future) calls China "an engineering society."


This is an example of China's general development strategy. Build up a large new sector with incentives and subsidies to private

companies. Let them compete on the basis of price, continuous innovation, and reduction in unit cost through economies of scale. The few survivors then become exporters. They often offer other countries superior technology at a lower cost. 


China’s development strategy is based on a division of labor between an authoritarian government and a private sector of competitive private companies.

 

When it is time to turn research and inventions into innovations, the different levels of government compete for new companies. They offer companies free or cheap land, subsidies, and tax breaks. Companies then compete on the basis of reaching scale, lowering unit costs, and continuously innovating.

 

In earlier stages of development in the past, China imported foreign technology by joint ventures with foreign companies, buying or stealing the technology, and then trying to improve on it. No longer. Foreign direct investment (FDI) has turned negative. Now, more and more, China originates the technology and then rapidly develops it. Many of the new technologies are interrelated and can be applied to other products and markets. After rapid development because of fierce competition at home, the surviving companies have high market share at home and may become major exporters.

 

The outstanding example is electric vehicles. Before EVs, China had the largest internal combustion car industry in the world. BYD began as a battery company, part of the largest battery industry in the world. BYD is now the largest EV company in China; two other large firms are switching from producing gas-powered cars. China is now the world’s largest producer of electric vehicles (EVs). It is also the world’s largest market as EVs are rapidly replacing gas-powered cars. Chinese EVs also contain the

latest "infotainment" technology because of links with China's huge ICT (information and communications) companies.


All of this is the foundation for producing robotaxis. Robotaxis are based on EV manufacturing and China's dominance in producing lidar and other sensor technology. China also has a large program testing robotaxis in 50 cities, based on the desire of state and city governments to get in early on this technology.

 

Chinese companies are beginning to export electric vehicles. Effectively banned in the U.S. and somewhat restricted in Europe by high tariffs, Chinese companies are concentrating on markets in Southeast Asia and Latin America. For example, Chinese EV companies have built three assembly plants in Brazil, two of which are former Mercedes and Ford plants, and one in Thailand. In 2026, Chinese EV companies intend to build plants in Hungary, Turkey, and Indonesia. Exports are increasingly the driver of growth for Chinese EV firms.

 

One weakness in China’s development strategy is the government’s reluctance to close companies and reduce overcapacity. In older industries, state-owned companies account for much of the production. This policy becomes a barrier to progress when an existing technology is replaced by a new technology, as is the case of automobiles. Similar problems might arise when fossil fuel companies, especially coal, are replaced by renewable energy companies. The national government is politically sensitive to the social and political instability caused by unemployment. Plus, local governments fight to keep open unprofitable companies and coal mines.   

 

China’s manufacturing output is higher than the next four countries combined. If the United States does not radically change its domestic policies, China's dominance of the interconnected group of high-tech products will make China even more the dominant technology and manufacturing country in the world. China will dominate the global economy by exporting its high-growth products at falling prices and developing joint production in many countries. Because some of these products are effectively banned in the United States or subject to high tariffs, and President Trump favors fossil fuels and thinks global warming and climate change are a "con job," "scam," and "hoax," America could become a high-cost, high-price economy.

 

This includes renewable energy. China is the world's largest and lowest-cost producer of most renewable energy technology, especially solar panels and batteries. China is making huge investments in solar energy and wind turbines. This will supply the large amounts of new electricity needed for data centers and substitutes for imported oil and domestic production of coal. Chinese companies have adapted their solar panel technology to sell cheap, stand-alone solar panels in less-developed countries. 

 

China is making a huge investment in next-generation nuclear power plants. China is also developing the technology for large-scale production of hydrogen-based energy. 

 

These strategies have geopolitical aspects. China fears that the U.S. could cut off oil imports coming from the Middle East through the Strait of Malacca. China cannot count on always receiving discounted oil from Russia, Iran, and Venezuela. The United States has cut off Venezuelan oil bound for China. Current political turmoil in Iran might threaten Iranian oil exports to China. 


China mines about 70% of the world's rare earth minerals and processes about 90%; many countries send their rare earth minerals to China to be processed. Rare earth minerals are key inputs in the manufacture of batteries. Given its supply chain and large scale, battery prices continue to come down. Batteries are about 40% of the cost of components in an EV. As battery prices come down, EV manufacturers can lower the price of EVs.


Chinese companies are major investors in mineral and raw material extraction and processing around the world. China has used the threat of a rare earth minerals embargo to the U.S. to get the U.S. to back down on some of its extreme tariffs and narrow its ban on Nvidia chip exports to China.

 

If current American energy policies favoring fossil fuels continue and China follows through in its promise to greatly reduce coal production, America will replace China as the largest emitter of greenhouse gases.

 

China is the world’s largest user of industrial robotics; domestic production is increasing rapidly. New manufacturing plants are highly automated; older plants are being modernized. This is also a possible solution to the future decrease in the size of China’s labor force.

 

Because of America’s punitive tariffs on Chinese imports, the American market now accounts for only 10% of China’s total global trade. The decrease in exports to the U.S. has been made up with increased exports to the rest of the world. Combined with China's surge in exports to the world outside of the United States, as a reaction to American tariffs and bans on Chinese exports, most of the world's advanced technology will be based on Chinese technology.


China has spent $168 billion in the last three years on foreign direct investments in large renewable energy projects around the world. Two examples are hydroelectric dams in Africa and solar panel farms, storage batteries and EV assembly in Saudi Arabia.


Chinese companies are building EV assembly plants around the world including three in Brazil. One was a former Mercedes plant and another a former Ford plant.


There is an important exception. AI development. The chain of ASML, TSMC, and Nvidia dominate the design and production of the world’s most advanced chips. Both countries are building new data centers but American data centers and foreign centers using Nvidia chips will contain the most advanced chips and supporting technology. China’s current strategy is a “work-around;” use massive amounts of less-powerful chips and concentrate on AI applications.


The Chinese EV example and the AI example illustrate that there is that an engineering and manufacturing base is necessary to develop new products and new information technology. This base, in turn, is the result of past and continuing technological knowledge and experience.

 

China will have to deal with internal, domestic problems. The housing crisis continues. Lower housing prices are destroying family savings, which in turn negatively impacts domestic demand. Residential construction, in the past a major driver of economic growth, was down 17% in 2025.


Youth unemployment is high. Even recent college graduates are finding it hard to obtain good jobs. Consequences are delayed marriages, fewer marriages as males cannot come up with dowries, and a continuing very low birth rate. 


The long-term problem will be the decline in population, especially the shrinking of the working age cohort. China is not adequately supporting its large and growing older population. Pensions are low and health care facilities outside of Beijing and Shanghai are inadequate. One possible solution is a massive use of telemedicine, taking advantage of China’s huge telecom companies and incorporating AI chatbots. Chinese pharmaceutical companies have become a major source of new drug discovery, another industry driven by a huge aging population.

 

 

This essay is based on data and analysis in the following essays:

 

The Strange Political Economics of the Chinese Auto Industry

 

China's Economy, Politics, and Demography

 

China's Economic Statistics

 

Robots:  The Future is Arriving

 

 

I highly recommend the book cited in this essay:


Dan Wang, Breakneck:  China's Quest to Engineer the Future, 2015. Besides documenting and discussion China's impressive economic development, he also cautions that China could self-destruct because of authoritarian "social engineering." He recounts the terrible story of China's one-child experiment. I wonder how China is going to handle the coming of population decline, with a shrinking work force and large older population.


A personal impression. I was in China in 2004. The amount of construction was astounding. Beijing's skyline was filled with building cranes. We landed in an airport that was so new they were still building the terminal. We were one of the last flights into the old airport in Guangzhou; they were opening a new one in a few days. The port of Hong Kong was many times bigger than any I had seen in the United States. I had been to the Hoover Dam but that didn't prepare me for the size of the Three Gorges Dam.

 

 

 

 

 

 


 

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