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.