pull down to refresh

China’s rise is often portrayed as unstoppable. It dominates global supply chains, pours money into research and development (R&D), and boasts some of the world’s largest tech companies. But scratch beneath the surface of this economic juggernaut, and a picture of structural inefficiencies, inflated innovation claims, and deep technological dependencies emerges. For all its ambition, China is caught in a trap: it is trying to act like a high-tech superpower while stuck with the productivity levels and export profile of a middle-income country.
The reality is this: China’s economic stature is overrated. Despite heavy investments in technology, its economy suffers from a persistent productivity problem. Its exports are still centered around low- to mid-value goods, and its much-hyped artificial intelligence (AI) sector is more about state direction than spontaneous innovation. Follow, as we explore how China’s economic strengths are vastly exaggerated by examining three areas: productivity performance, the composition of its exports, and the realities behind its AI development.
Total factor productivity (TFP) is a key measure of how efficiently an economy uses its inputs such as labor and capital to produce output. It reflects the true contribution of innovation, technology, and efficiency to economic growth. In China’s case, TFP has been sluggish or even declining, despite years of rising R&D spending, more university graduates, and an explosion in scientific papers and patents.
This is what economists Alexander Hammer and Shahid Yusuf have called a “high-tech, low-productivity trap.” In their analysis for the US International Trade Commission, they note that while China has invested heavily in building technological capacity through initiatives like “Made in China 2025,” these efforts have failed to deliver significant productivity gains. China’s economic growth is slowing, and the returns on its investment-heavy strategy are diminishing. …
Basic research—the kind that lays the groundwork for transformative technologies—is underfunded in China. It made up only about 6 percent of total R&D spending in 2020, compared to more than 20 percent in many developed economies. Without basic science, it’s difficult to produce the kinds of groundbreaking discoveries that shift the technological frontier.
The political and regulatory environment further hampers innovation. As Alicia García-Herrero and Robin Schindowski explain in a recent assessment, China’s institutional reforms have slowed, and the regulatory landscape has become more complex. Centralized agencies, like the Cyberspace Administration of China, exercise sweeping authority over tech firms, creating uncertainty, and discouraging risk-taking. At the local level, firms often rely on personal ties to government officials, limiting opportunities for newcomers to compete on equal terms. …
China has achieved remarkable economic progress over the past few decades. But its claim to technological supremacy and innovation leadership remains far from realized. Productivity growth is weak, its exports still rely on foreign inputs, and its AI sector is driven more by policy than by independent discovery.
For all the patents, R&D spending, and strategic plans, China has yet to crack the core challenge of becoming a truly innovative economy. Without structural reforms to encourage competition, invest in basic research, and allow bottom-up innovation to thrive, China risks stagnating just below the technology frontier.
The global conversation about China’s rise needs to catch up with this more nuanced reality. The country is large and ambitious, but its economic power is not as deep or advanced as it may appear. Recognizing this isn’t about underestimating China—it’s about seeing the real constraints it faces in becoming a world-class innovator.
Imagine that!! China is more of a paper tiger then even we thought. Anyone looking at China’s situation through the eyes of an economist should be able to see the obvious: China is not really a huge economic threat. The one factor that brought it to my attention was the ghost cities, a massive malinvestment in real estate that will never be used and that is being destroyed as we read this. If there is such malinvestment going on there is little stability in the economy and we know that from our own economy and the malinvestments here from the experts trying to run the economy. It is one of those problems where the tighter you grasp the economy, the more it slips between your fingers. The big problem is that the experts, politicians and tyrants are even trying to grasp the economy in their greedy hands.
I don't know why "we" keep being surprised by this. First the Soviets, then Japan, and now China, America is not going to be overtaken by a more centrally planned economy.
reply
Nope, NEVER!!! A centralized economy, even the EU, will never be able to even keep up with an economy where each and every individual is allowed to do the best for himself and what he sees as others’ desires. There are too many incentives, and if we are careful with what we let the state do, fewer controls on innovation by entrepreneurs. Many minds working on many problems rather than the experts assigning people to work on something they may not want to work on. Free enterprise always beats controlled economies!
reply
I'm not sure it's such a hard lesson for people to get. I suppose it's because they're fundamentally authoritarians.
I got it when I was a kid and thought the Cold War sounded completely stupid. It was obvious to me then that if capitalism is better, then there's no economic threat from the commies. We can just wait for them to fail on their own.
reply
Yes, when I was very young, my father explained the same thing to me over and over again until I thoroughly understood it. He was also an entrepreneur, running his own company. He never did explain where he got his ideas, though, and his library never contained any Austrian economists’ books, that i could tell. He made sure each and every one of us siblings knew this economic reality. Every one of us went on to owning our own businesses.
reply
Do you seriously contend that USA is wealthy solely because it is a capitalist economy? The current global hegemony of the US is surely due to many factors - not solely the nature of its economy. Its distance from Europe and ability to avoid entanglement in the wars that eroded European wealth and power, the vast largely undeveloped landmass and resources of the US, its fortunate position geographically all surely have played a major role in its current dominance. But USA is not a purely capitalist free market economy- any assertion that it is is easily refuted. The degree of cronyism in US politics and business today is obvious to any impartial observer, as is the importance of US military power. The USSR was never blessed with the geographic and historical advantages of the US and Japan was since WW2 effectively a military and monetary tribute state to the US- entirely reliant upon the US for protection and strongly influenced by US demands in terms of economic management. USA 'won' WW2 by staying out of it as long as possible and then once drawn into the conflict by a massive mobilisation directed by the government. Prior to WW2 the US had implemented substantial centrally directed economic reforms as had most western nations, adopting a mixed economy under Keynesian economic principles where the government drove major programs of economic development and stimulus. WW2 only increased the level of government involvement in the economy. China is qualitatively different- its economy today is a mixed one- with central government directing capital flows and overall strategy, mush as the US and western nations did until the neoliberal 'reforms' of the 1980s. Since those neoliberal reforms it can be said that capital allocation has shifted substantially from public driven initiative to private bankers. The building and maintenance of infrastructure in the US and west more generally has declined substantially and the US economy has become hugely dependent upon financialisation often involving debt leveraged speculation in non productive assets at the expense of infrastructure and productive assets. Chinas development is one based on mechcanical engineering- the construction of infrastructure and productive capacity, refining and manufacturing of raw materials and manufactured goods. The USA today has lost the physical manufacturing capacity required to sustain a military conflict or even a trade surplus. The USA today is a highly financialised highly debt burdened econoy with weak and declining infrastructure and massive inequality and political divisions. China is said to have a demographic problem but China is hugely in advance of the US in terms of robotics and the US also has an aging population and a significant lack of savings. China is raising the age of retirement for women from 50/55- to 55/60 and men from 55-60. The US does not have the same room to move. There has never been a successful empire without the careful and strategic involvement of government in directing capital and military capacity to build and sustain that empire. The contest between China and the US is real and not something to be easily dismissed with simplistic analysis- I would not like to have to pick the winner as the outcome is certainly not one that can be credibly called at this point. One thing is clear- the trends are mostly in Chinas favour at present. US decline is apparent across so many metrics while Chinas rise is equally clear across most metrics. It is folly to claim to know which side will triumph at this stage.
reply
You may not be worried about the Saudis joining mBridge and BRICS but Trump sure as hell is. Trump also understand US manufacturers are fucked without Chinese supply chains...in particular but not only rare earths. The USA is not a capitalist economy it is a crony capitalist economy that is reliant upon its legacy domination of international institutions and protocols. The US government is beholden to Jewish bankers and military contractors. Without the seigniorage and rent from the USDs global domination of trade payments the US empire is swiftly insolvent.
reply
0 sats \ 1 reply \ @Mishawaka 1h
They have excellent food. Might order from China Sea tonight
reply
Gotta watch out for the oil though!! You’ll never know the source of the oil.
reply
#999116 Andrei Jikh | The Bond Market Is Collapsing (JPMorgan’s Final Warning) Deluded US Exceptionalists cannot deal with reality!
reply
The USA is incapable of implementing a CBDC. Yet USA with its decades of decline in productivity and manufacturing is today almost entirely dependent upon its financial system hegemony. SWIFT is an antiquated analogue relic. Chinas CBDC is already operational as is mBridge and CIPS via which a rapidly growing portion of global trade is settled, outside of the control of US institutional reach, control and even measurement. The deluded US exceptionalists thought that financial services could sustain US wealth and power in the absence of the ability to produce any manufactured goods- but this delusion is now being exposed as the proxy war between the US and China unfolds. Chinese supply Russia with both trade payments outside of USD/SWIFT and the vast range of manufactured goods Russias war economy needs. At the same time China buys Russian oil and gas (as a nice discount) resulting in Russia now being a dependent upon China. Trump is hugely worried with very good reason- with China now supporting both Iran and Russia and with Iran and Russia both costing the US military and its associates increasing billions, if Saudi Arabia signs over to allegiance with China the US empire would swiftly be insolvent- the 'petrodollar' would collapse. The war in Ukraine has depleted US military stocks while Russia backed by Chinas much larger manufacturing capacity does not face such a problem. The USA is not the global leader in production of most essential materials required for war today- China is. USA is on the back foot- if Saudi Arabia sign up to mBridge its all over for Uncle Sam.
reply