The following day, the State Council began translating that direction into more concrete measures. Its executive meeting called for faster implementation of major projects under the 15th Five-Year Plan and progress on the “six networks”; heard reports on the construction of new power and logistics networks; and approved four nuclear-power projects.

The renewed emphasis on investment reflects a widely shared diagnosis of China’s recent slowdown. Weak fixed-asset investment, together with slower-than-planned government bond issuance and fiscal spending, has been identified by many market economists as an important reason economic momentum weakened in the first half of the year and domestic demand remained subdued.

In March, Premier Li Qiang’s Government Work Report explicitly called on the government to “fully tap and unleash the potential of effective investment.” Yet the debate is not simply about how much China should invest or how quickly public funds should be spent. In recent years, disagreements over investment have increasingly centred on three more fundamental questions: What is the relationship between investment and consumption? How should the returns on investment be assessed? And how should the debt generated by investment be understood? Different answers to these questions can directly affect the willingness of both governments and businesses to invest.

Xu Gao, Chief Economist of Bank of China International (China) Co., Ltd., interprets the investment agenda set out in the 2026 Government Work Report, including increased central budget investment, ultra-long special treasury bonds for major national projects, larger local-government special bond quotas, and new policy-based financial instruments designed to draw in private capital.

The article appears as Chapter 7 of Understanding the Opening Year of the 15th Five-Year Plan: Chief Experts from Market Research Institutions Interpret the 2026 Government Work Report, published by China Yanshi Press in May 2026. It was published on Xu’s personal WeChat blog on 31 May.

促进有效投资需厘清三个问题

Three Questions That Need to Be Clarified to Promote Effective Investment

This article appears as Chapter 7 of Understanding the Opening Year of the 15th Five-Year Plan: Chief Experts from Market Research Institutions Interpret the 2026 Government Work Report, recently published by China Yanshi Press. The chapter focuses on the sections of the Government Work Report concerning investment. I am grateful to China Yanshi Press for inviting me to contribute.

The 2026 Government Work Report (hereinafter referred to as the “Report”) identifies “building a robust domestic market” as the first major task for the government this year. The world is undergoing profound changes unseen in a century. Unilateralism is on the rise, trade protectionism is becoming more prevalent, and geopolitical risks continue to emerge, creating greater uncertainty for China’s external demand. Against this backdrop, China must, as the Report requires, continue to regard the expansion of domestic demand as a strategic priority and expand internal circulation so that the economy is better able to withstand shocks affecting external circulation.

Enhancing effective investment is an important part of building a robust domestic market. The Report states, “Taking the expansion of domestic demand as our priority, we should make coordinated efforts to boost consumption and expand investment, tap into every potential for growth in domestic demand, and better leverage the strengths of our enormous market.” Investment and consumption are the two principal components of domestic demand and are equally important. The Report therefore explicitly calls for efforts to “fully tap and unleash the potential of effective investment.”

Unlocking that potential requires a clearer understanding of three questions concerning investment. Investment momentum depends to a large extent on the willingness of different entities to invest, and that willingness is shaped by how investment is understood.

In recent years, there has been extensive discussion and disagreement over three key questions: What is the relationship between investment and consumption? How should the returns on investment be assessed? And how should the debt generated by investment be understood?

An incomplete or unbalanced understanding of investment may weaken the willingness to invest and prevent the objectives set by the central authorities from being fully translated into action. This article therefore examines these three questions and sets out personal observations on how they should be understood.

I. What Is the Relationship Between Investment and Consumption?

Within domestic demand, consumption is the objective, while investment is a means to that end. As General Secretary Xi Jinping said, “the ultimate goal for advancing socioeconomic development is to meet people’s increasing needs for a better life.” These needs are expressed to a large extent in the desire to consume more and to enjoy higher-quality goods and services. In this sense, consumption is the objective, and boosting consumption reflects the people-centred orientation of China’s economic development. Policies aimed at expanding domestic demand should therefore give priority to boosting consumption.

Sustained growth in consumption cannot be achieved without investment. Although consumption is the objective, it cannot be sustained in the absence of the capital accumulation and economy-wide income growth generated by investment. New consumer demand must also be met by the new supply created through investment, while new supply can in turn generate additional consumer demand.

The outline of the 15th Five-Year Plan calls for China to “use new demand to guide new supply and new supply to create new demand; promote positive interaction between consumption and investment and between supply and demand; achieve a higher-level dynamic balance between supply and demand; and strengthen the endogenous drivers and resilience of internal circulation.” The Report also states that “we must…invest in both physical assets and people” and calls for government spending this year to be allocated “with priority given to boosting consumption, investing in people, and raising living standards.”

Taken together, these statements by the Party Central Committee underscore the mutually reinforcing relationship between consumption and investment and establish a clear requirement to use investment to boost consumption.

When consumption is insufficient, the investment rate will naturally tend to be higher. Weak consumption means that a larger volume of investment is needed to maintain stable economic activity. As a developing country, China still has considerable scope for investment. The country has a large population, making its economy enormous in aggregate terms. Many of its economic indicators rank among the highest in the world, and some rank first, though per capita levels remain relatively low.

For example, although China has for many years generated more electricity than any other country, its electricity generation per capita is still less than 60 per cent of that of the United States (Figure 1). As the development of artificial intelligence drives a substantial increase in electricity demand, China will need to make major investments in expanding its power supply.

Meanwhile, as uncertainty in the international economy increases and risks to global supply chains continue to grow, China also needs to invest in building more complete industrial chains at home and reducing its vulnerability to critical supply bottlenecks.

Even in the property sector, which has been relatively subdued in recent years, there remains substantial demand for better housing. Meeting that demand will require investment in the construction of more high-quality homes. Many such gaps still need to be filled through investment, creating extensive scope for further investment in China.

The Report’s call for China in 2026 to “make coordinated efforts to boost consumption and expand investment” means that economic development must proceed on both fronts and promote a more balanced relationship between the two. China’s consumption shortfall should be addressed progressively through the special initiatives to increase consumption, structural reforms. This adjustment should take place as the economy continues to expand, thereby achieving a healthy rebalancing. At the same time, China must also continue to promote effective investment and make full use of investment’s role in stabilising demand and economic growth.

II. How Should the Returns on Investment Be Assessed?

Investment decisions necessarily involve an assessment of returns. Yet assessing investment returns, particularly the returns on government investment, is far from straightforward. If the benefits of investment are not understood comprehensively, or if important benefits are omitted from the calculation, the contribution of investment may be underestimated, thereby weakening investment momentum.

1. The Three Ledgers of Investment Returns: Small, Medium and Big

Investment returns should be assessed through three different “ledgers”: the small ledger, the medium ledger, and the big ledger.

The “small ledger” records the project-level financial return on an investment: the direct cash return that a project generates for the investor. Every investment project produces a project-level return, whether high or low. When people discuss investment returns, this is usually what they have in mind.

The “medium ledger” records the broader social benefits that an investment project creates for the locality in which it is situated. Infrastructure investment falls into this category. Public infrastructure projects such as urban roads, metro systems, and parks create value for their cities and contribute to the improvement of the urban environment. These benefits must also be included when assessing the returns on investment.

The “big ledger” records the overall social benefits that an investment project creates for the country as a whole. At the national level, investment can generate higher-order returns by creating demand, stabilising growth and employment, strengthening national competitiveness, and even safeguarding national security.

Transport projects ranging from roads connecting individual villages to railways in Tibet play an important role in promoting rural revitalisation and more coordinated development among different regions. They therefore generate returns that should be recorded in the big ledger.

2. Government Investment Must Take Account of the Medium and Big Ledgers

Different investors should assess returns through different ledgers. Business entities operate according to market principles and will generally focus only on the small ledger. From their perspective, a project is a profitable and effective investment if its direct cash return exceeds its financing costs, and it should therefore proceed. Conversely, if the project’s cash return is lower than its financing costs, it is unprofitable and ineffective and should not proceed.

These market principles are clear and apply to most investment projects. This is why many people instinctively interpret “investment returns” solely as the financial returns recorded in the small ledger.

If every investor considered only the market-based small ledger, however, projects that create substantial social benefits would be undersupplied, and society would lose a significant share of the returns recorded in the medium and big ledgers.

The public services provided by infrastructure are indispensable to economic development. Yet because infrastructure projects serve public purposes, their direct project-level returns are often low, and the projects themselves may not be profitable. If investment were left entirely to the market, most infrastructure projects would struggle to obtain financing and might never begin.

This creates a paradox: an investment that appears ineffective to the market may still be effective for society. If the market is the sole decision-maker, the potential of such investments cannot be fully realised.

China’s remarkable achievements in infrastructure development are attributable in large part to its ability, under the socialist system, to take greater account of the medium and big ledgers when making infrastructure investments. Historically, China’s local-government model of land-based urban development has made an indispensable contribution in this regard. This is an objective fact and one of the institutional strengths behind China’s infrastructure investment.

The central problem with infrastructure investment is that a project may be highly valuable to society while generating little or no profit at the project level. As a result, business entities have little incentive to invest. China’s system of public land ownership is an important advantage in addressing this problem.

Under this system, local governments control urban construction land. Infrastructure investment improves the quality of a city and thereby raises the value of the land controlled by the local government. Through land-based fiscal revenues, local governments have therefore been able, to some extent, to monetise the social benefits created by infrastructure investment and convert some of the returns recorded in the medium ledger into fiscal revenue.

Consequently, although an infrastructure project may not be profitable at the micro level, local governments in many regions — particularly more developed regions — have been able to combine the project’s direct cash returns with land revenues and other medium-ledger benefits, allowing total investment returns to match financing costs.

This created a viable and sustainable operating model for local governments. The ability to use public land ownership to incorporate both the small and medium ledgers into local-government investment decisions is one important reason why China has been able to sustain much stronger infrastructure investment momentum than many other countries and rapidly improve the quality of its infrastructure.

The social benefits of investment arise not only at the regional level but also at the national level. The latter belong in the big ledger.

In some parts of central and western China, the returns on infrastructure investment may not cover financing costs even when land-based fiscal revenues are included. This does not mean that such regions should refrain from investing in infrastructure. The greater purpose of infrastructure investment in these areas is to support less-developed regions and promote more balanced regional development. Excessive disparities between regions would not only impede the achievement of common prosperity but could also weaken national cohesion and social stability.

These returns can be fully appreciated only from a national perspective. The Report calls for China to “narrow disparities between urban and rural areas and between regions.” Achieving this goal requires taking account of investment’s big-ledger returns.

When national consumption is insufficient, investment can also be used to create demand. By stabilising growth and reducing the risk of overproduction, it generates returns that belong in the big ledger. In the current environment of relatively weak consumption, investment needs to be maintained at a larger scale to stabilise economic growth. The demand it creates should be counted in the big ledger for its contribution to national economic stability.

When undertaking public investment, mainly in infrastructure, governments at all levels should take account of both the medium and big ledgers. Projects that are profitable on the small ledger will generally be taken up by the market and should be financed primarily by private investors, with the government playing a supporting and guiding role.

Beyond this, however, governments must participate actively in projects that the market cannot or will not undertake but that are valuable to society and the country. These are projects that may not be profitable according to the small ledger but generate substantial returns in the medium and big ledgers.

The regional and national social benefits created by these projects are needed by society, yet private investors may lack either the willingness or the capacity to provide them. Active government investment in these areas can enable public and private investment to complement and reinforce one another, creating an organic combination of an efficient market and an effective government.

3. A Correct Assessment of Investment Returns and the Expansion of Effective Investment

China currently faces a pronounced imbalance between strong supply and weak demand. Consumption is insufficient overall, and some sectors have experienced excessive investment. Nevertheless, China still needs to maintain a relatively high level of investment. In particular, the returns recorded in the medium and big ledgers remain substantial, leaving considerable scope for effective investment.

The Report emphasises the need to “expand effective investment” and to “fully tap and unleash the potential of effective investment.” This requires investment returns to be assessed from a broader macroeconomic perspective, with greater attention paid to the medium and big ledgers. Doing so will allow investment to play a larger role in stabilising growth in the short term and in strengthening China’s competitiveness and improving public wellbeing over the longer term.

III. How Should the Debt Generated by Investment Be Understood?

Debt is closely connected to investment. Investment has long accounted for a significantly larger share of GDP in China than the global average. Investment necessarily requires financing, and the use of debt financing increases the stock of debt.

China’s financing structure is dominated by debt. Bank lending and bond financing have together accounted for more than 90 per cent of aggregate financing to the real economy for many years. Given this financing structure, a high level of investment naturally results in a large debt stock, raising concerns about debt risk.

Some argue that China needs to reduce its debt stock to lower financial risk. Such views constrain the expansion of debt financing and therefore restrict the investment that this financing supports. It is consequently necessary to develop a clearer understanding of China’s debt risk and remove unnecessary constraints on effective investment.

For a country, debt risk cannot be assessed solely by the size of its debt. More importantly, it must be assessed in light of the supply-and-demand relationship between domestic savings and debt — that is, the balance of supply and demand in the country’s “savings–debt market.”

In this market, savings supply the funds that debt absorbs, while debt represents demand for those savings. If the supply of savings exceeds demand, the risk of default may remain relatively low even when the stock of debt is large. Put differently, when a country’s debt is supported by an even larger pool of savings, a large debt stock does not necessarily imply a high risk of default.

Conversely, if the supply of savings is insufficient relative to the demand for savings created by debt, default risk may be high even when the debt stock is relatively small. When a country’s savings are inadequate to support its debt, its debt risk will inevitably be elevated.

China is a high-saving economy. The domestic supply of savings exceeds demand, and its debt risk is therefore in fact low. According to estimates by the International Monetary Fund, China’s saving rate was 42 per cent in 2025, almost twice the average of 23 per cent for the rest of the world. (Figure 2)

China’s international investment position data also show that its net external assets — the overseas assets held by China minus its external liabilities — exceeded US$4 trillion in 2025. These assets represent Chinese savings invested overseas. Against this backdrop of excess savings, China’s relatively large debt stock does not in itself indicate a high level of debt risk.

Current concerns about local government debt arise partly from insufficient consideration of the medium and big ledgers of investment returns. As discussed above, infrastructure projects are generally unprofitable when assessed solely through the small ledger: their direct project-level cash returns often do not cover their financing costs.

On this basis, some conclude that local government borrowing for infrastructure investment is unsustainable and therefore creates substantial debt risk. A fuller understanding of the returns recorded in all three ledgers, however, produces a more comprehensive and accurate assessment of local government debt risk.

The principal problems with China’s local government debt lie in borrowing practices and liquidity. In the past, some local government borrowing was insufficiently regulated. Hidden debts were accumulated outside formal channels, making their scale opaque and their growth difficult to control, and thereby creating risks.

In recent years, the clean-up of hidden local government debt, together with lower land-sale revenue amid the property-sector adjustment, has put pressure on local government finances and increased debt-servicing burdens. But this is mainly a liquidity problem, and it is gradually being resolved by expanding local governments’ access to transparent and regulated borrowing channels.

The Report notes that in 2025, “We continued to implement a package of measures to address debt risks. As hidden local government debts were replaced in a well-ordered way and the number of financing platforms was further reduced, the structure of local government debts continued to improve.” It also states that in 2026, “quotas for local government special-purpose bonds earmarked for projects will be raised and placed under separate management.” These measures will support the expansion of effective investment.

IV. Making Full Use of Policy Tools to Promote Effective Investment

The Report sets out a range of policy tools for promoting effective investment. These tools must be used fully and effectively to unlock the potential of such investment.

The Report calls for investment to “focus on key areas such as new quality productive forces, new urbanisation, and well-rounded personal development,” identifying the directions for effective investment. It then calls for China to “boost the growth momentum of market-driven effective investment, and increase the share of government investment in public wellbeing initiatives,” indicating that effective investment should be promoted through a combination of market forces and government action.

For private investment, which is guided mainly by the small ledger, the Report calls for policies to reduce frictions in market operations to boost market-led effective investment. It states, “To invigorate private investment, we will implement relevant promotion policies and measures. We will refine the long-term mechanisms for facilitating the participation of private enterprises in major projects and encourage private investment in new arenas such as high technology and modern services.”

The key to such “long-term mechanisms” is to give private enterprises a clear and stable long-term outlook. This would enable them to assess future investment returns more clearly and encourage greater investment today. Government policy guidance can also strengthen private investors’ confidence in emerging sectors such as high-tech industries and modern services, helping to address market failures and lower barriers to entry for private capital.

For government investment in public wellbeing, which must take greater account of the medium and big ledgers, the Report provides governments at all levels with powerful policy tools.

At the central government level, the Report proposes that “A total of 755 billion yuan will be earmarked in this year’s central government budget for investment. We will also allocate 800 billion yuan raised from ultra-long special treasury bonds to implement major national strategies and enhance security capacity in key areas. Central government subsidies for investment will be raised on a per-category basis.”

At the local government level, the Report states, “Quotas for local government special-purpose bonds earmarked for projects will be raised and placed under separate management. We will continue to allocate more quotas to localities where investment projects are well prepared and funds are used effectively.”

These measures expand local governments’ access to formal financing channels and strengthen their capacity for investment in people’s livelihoods. Directing more financing towards localities with well-prepared projects and effective use of funds will also provide stronger incentives for governments across the country to undertake investment.

The Report further introduces policy-backed financing tools designed to leverage private capital. It states, “We will issue new types of policy-backed financial instruments with a total value of 800 billion yuan to stimulate greater private sector investment.”

When used effectively, policy-backed financial instruments can improve a project’s cost–return profile on the small ledger, enabling projects that could not previously get off the ground through the market alone to proceed with policy support. In this way, a relatively small amount of policy funding can leverage much larger amounts of private capital, channel more of it into effective investment, and further expand the scope for effective investment.

V. Conclusion

In the current macroeconomic environment of weak consumption, China still needs to maintain investment at a certain level to ensure stable economic growth.

A full accounting of the small, medium, and big ledgers provides a more comprehensive understanding of investment returns and helps ease constraints on the willingness to invest. A clearer grasp of the nature of debt risk can likewise prevent one-sided perceptions of debt from unduly constraining investment.

This will enable the policy tools set out in the Report to be used more effectively, generate stronger investment momentum, further strengthen the domestic market, and improve China’s ability to withstand external shocks.

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Pekingnology

Xu Gao on housing sector's centrality to China's economy and how to save it

I read current commentaries - both domestic and foreign - on China’s economy widely. The observation and advice of Xu Gao, Chief Economist and Assistant President of Bank of China International, a securities firm, and adjunct professor at the National School of Development at Peking University, stands out for a few reasons…

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2 years ago · 11 likes · Jiachen Niu, Yuxuan JIA, and Zichen Wang

Today’s July 30 readout, read as a whole, carries two major messages. On the economy, Beijing has made a clear but carefully calibrated turn toward greater macroeconomic support. Politically, it has decided to devote the Fifth Plenum of the 20th Central Committee in October to a formal category broader than anti-corruption, though anti-corruption remains central.

Before turning to either subject, however, it is important to establish what a Politburo readout can—and cannot—tell outside readers.

How to read a Chinese meeting communiqué

Under the conventions of Chinese official reporting, formulations such as “the meeting emphasized” and “the meeting pointed out” are generally understood to derive primarily from the remarks and judgments of the highest-ranking participant. They are then issued in the name of the meeting, turning those judgments into its collective consensus and institutional outcome.

A Politburo readout from the meeting chaired by Xi Jinping can therefore be understood as an authoritative, compressed account of the central messages in Xi’s remarks and the conclusions adopted by the Politburo. These are not minutes in which different participants’ positions are separately attributed.

But a communiqué is neither a transcript of the meeting nor the full text of the top leader’s speech. Other issues may have been discussed or elaborated upon without appearing in the published document. Outsiders do not know how much has been omitted, let alone what the undisclosed material contains. The published text must never be mistaken for the entirety of the meeting.

Comparison is consequently the most useful method of interpretation: placing the latest language beside that of an earlier, broadly comparable meeting. Yet comparison contains its own uncertainty. It assumes that successive communiqués present roughly comparable portions of the underlying discussions—something outsiders also cannot verify. A missing phrase may indicate a policy change, but it could sometimes reflect editorial selection.

These limitations make the conclusions probabilistic rather than definitive. They do not make the exercise futile. The communiqué remains the most authoritative public account available and must be treated accordingly.

“Highly” is not a throwaway word

The first economic signal is the instruction to “attach great importance”/“pay great attention”/”highly emphasize”— 高度重视 gaodu zhongshi—to the difficulties and challenges facing economic operations.

In official Chinese language, the addition of gaodu, or “highly,” is not merely rhetorical decoration. It raises the political weight assigned to a problem and tells officials that it requires closer attention. The April Politburo meeting acknowledged “some difficulties and challenges”; July instructed the Party-state to pay “great attention” to them. The tone has plainly changed.

So has the positive half of the diagnosis. In April, the Politburo said the economy had made a strong start, major indicators were better than expected, and economic performance demonstrated resilience and vitality. July instead emphasized that growth drivers were becoming newer and the structure was improving. It did not explicitly describe the overall economy as stable or steadily improving.

The omission is notable. Second-quarter GDP growth slowed from 5% to 4.3%. In the first half, fixed-asset investment fell 5.7% year on year, private investment declined 8.5%, and retail sales grew only 1.3%. Retail sales even contracted in May before returning to slight growth in June.

Meanwhile, a sharp equity sell-off beginning in mid-July erased roughly RMB10 trillion in market capitalization within two weeks, prompting purchases by state-owned institutions (the so-called “national team”)and consultations between regulators and market participants about stabilization. Stock markets had clearly become another source of unstable expectations.

The communiqué continued to recognize technological and structural progress. But “new” and “better” were no longer accompanied by an equally confident “stable.”

From “use fully” to “deliver with force”

The most important change comes in the instruction for macroeconomic policy.

April called on officials to “make good and full use of macro policies”— 用好用足 yong hao yong zu. That formulation emphasized implementation: the policy framework was already in place, and the immediate task was to extract its intended effect.

July says macro policies must “deliver with force and improve effectiveness”—发力提效 fali tixiao. It also calls for stronger countercyclical adjustment and intensified efforts to expand domestic demand. The shift is from exhausting the potential of existing policy to demanding a stronger policy effect.

The treatment of policy cycles reinforces the message. The Central Economic Work Conference in December 2025 called for strengthening both countercyclical and cross-cyclical adjustment. April referred to neither. July mentions only countercyclical policy. Countercyclical policy responds more directly to current weakness, while cross-cyclical policy places greater weight on balancing present support against longer-term considerations. Dropping the latter suggests greater near-term urgency.

But the wording does not establish how large the response will be. “Countercyclical” covers a wide range of possible intensities. July is more supportive than April, but it still seems far from the explicit September 2024 instructions to cut reserve requirements, implement substantial interest-rate reductions, reverse the property downturn, and boost equities.

The communiqué instead distinguishes between two stages. First, China should “fully unleash” 充分发挥 the effects of existing policies. Second, it should 及时谋划出台务实管用的增量政策 “promptly formulate and introduce pragmatic and effective incremental policies.”

That second sentence is a meaningful upgrade from Premier Li Qiang’s July 13 formulation, which called for making full use of existing policies while 预研储备 “studying and preparing” additional ones. Incremental policies have moved from preparation toward possible introduction.

Fiscal policy will move first

The most immediate support will be fiscal. The meeting ordered faster fiscal expenditure and quicker use of bond proceeds, alongside forceful implementation of the 两重 “Two Major” and 两新 “Two New” programs.

The “Two Major” funds projects serving major national strategies and security capacity. The “Two New” supports large-scale equipment renewal and consumer-goods trade-ins. The urgency is evident in the investment figures. Overall investment fell 5.7% in the first half, infrastructure investment declined 2.4%, and private investment dropped 8.5%. The window for reversing that weakness before the end of the year is narrowing. Top economists including Tsinghua University’s David Daokui Li and CF40’s Kai GUO, have underlined local governments’ spending squeeze due to debt pressure and falling income.

The readout includes a reference to the “six networks”—water, modern electricity grids, computing power, next-generation communications, urban underground pipelines and logistics. That’s where much of the accelerated investment may go.

The monetary-policy language is somewhat more supportive than earlier signals this month from the People’s Bank of China. The Politburo called for the 综合运用并适时调整货币政策工具 comprehensive use and timely adjustment of monetary-policy tools.

Because in China the central bank implements rather than independently determines the overall monetary-policy line, wording from the Politburo carries greater weight than the absence of clear easing signals in earlier PBOC communications. The probability of monetary easing in the second half has therefore increased considerably.

Consumption support remains supply-oriented

The consumption paragraph is revealingly concise. It calls for expanding quality supply to meet the needs of different groups and tapping the potential of services consumption.

This continues a predominantly supply-side approach. Instead of directly addressing insufficient purchasing power through large household transfers, the policy focuses on supplying more and better services that consumers may want but, as Beijing’s peculiar logic consistently assumes, cannot readily obtain. Elderly care, childcare, healthcare, tourism and cultural services are likely beneficiaries.

It also marks a gradual shift from stimulating goods consumption toward services. Consumer trade-in subsidies have been effective in producing immediate increases in purchases, but their effects weaken when subsidy intensity declines. They can also disrupt normal replacement cycles by bringing future demand forward. The fall in retail sales in May illustrated the difficulty of sustaining growth once the initial subsidy impulse faded. China’s car market is heading for worst year since 2021 as sales plunge 20% in the first half.

The “Two New” program means that trade-in support will continue. But the meeting announced no major expansion of subsidies, much less social security enhancements or household-income measures that pro-market economists broadly call for, or deregulation, which has vanished from China’s policy playbook.

Balanced trade reaches the Politburo level

One externally significant sentence deserves more attention than it may initially receive. The meeting called on China to 要拓展国际经贸互利合作空间 expand the space for mutually beneficial international economic and trade cooperation, and 促进贸易平衡发展 “promote balanced trade development.”

Balanced trade is not an entirely new concept in Chinese policy this year, as China’s trade surplus has risen significantly, causing panic in Europe. In his March government work report, Premier Li called for actively expanding imports and advancing more balanced trade. Chinese officials have recently advocated an “upward rebalancing” of China-EU trade—expanding imports and new areas of cooperation rather than reducing Chinese exports.

But its appearance in a Politburo economic communiqué gives the concept greater political weight. It is reasonable to read it partly as a response to mounting concern among China’s trading partners, especially in Europe, about the continuing expansion of China’s trade surplus.

The wording is nonetheless carefully constructed. It does not acknowledge wrongdoing, accept foreign claims about Chinese overcapacity (“So-called Excess Capacity Issue”, according to the Ministry of Commerce this week) or commit China to a numerical reduction in its surplus.

The likely message is narrower: the leadership recognizes that widening trade imbalances are becoming a strategic constraint on China’s external economic environment and wants to address the problem through a larger overall volume of mutually beneficial trade, more imports, services and two-way investment—not through suppressing competitive Chinese exports.

Property contains risk; technology creates growth

Property received only a brief instruction: 稳定房地产市场 “stabilize the real-estate market.” April had said “strive to stabilize” it.

Capital markets received somewhat stronger language: deepen investment and financing reforms and 提升资本市场韧性和信心 “enhance market resilience and confidence.” Compared with April’s call to 稳定和增强资本市场信心“stabilize and strengthen confidence,” the added “resilience” reads reactive and defensive, probably reflecting the July sell-off. But it remains well short of September 2024’s instruction to 努力提振资本市场 “strive to boost” the market.

Both property and capital markets appear in the section on building a “security barrier,” alongside local debt and small financial institutions. They are being treated mainly as risks to contain and as instruments for stabilizing expectations—not as the preferred engines of expansion.

The contrast with technology and industry is stark. Although domestic demand appears first in the formal ordering of tasks, the industrial paragraph uses far more concrete and forceful language: accelerate construction of a modern industrial system, provide stable long-term support for basic research, achieve frontier-technology breakthroughs, develop future industries, create new pillar industries, expand “AI Plus,” and upgrade traditional industries.

The meeting also ordered continued action against “involution-style” competition and called for a national unified-market regulation. This is not a retreat from industrial policy. It is an effort to control price wars, redundant local investment, protectionism and unpaid corporate bills while preserving the larger strategy of technological and industrial upgrading.

The Fifth Plenum will put Party discipline—meaning anti-corruption—at center stage

The economy was only one of the meeting’s two principal subjects. The first paragraph of the readout, as its summary, announced that the Fifth Plenum of the 20th Central Committee would convene in Beijing in October. Its main agenda will include a report from the Politburo to the Central Committee and the examination of “several major issues concerning the unremitting advancement of full and rigorous Party self-governance.”

This is not a minor item added after the economic discussion; it appears in the opening summary and is then elaborated in two full paragraphs before the communiqué turns to the economy.

Those paragraphs say that full and rigorous Party self-governance has produced major achievements since the 18th Party Congress, when Xi became China’s top leader, but now faces “many new circumstances and new problems.” The Party must address prominent problems in its own development and consolidate what the communiqué describes as a favorable political environment produced through strict governance.

Formally, full and rigorous Party self-governance is broader than anti-corruption. It encompasses political discipline, ideological conformity, organizational control, cadre conduct, implementation of central directives and the relationship between the Party and the public.

In practical political terms, however, anti-corruption is at its core. References to preserving the Party’s “purity,” rectifying prominent problems, maintaining an unwaveringly strict approach and improving the mechanisms of internal supervision all point toward the continued investigation and punishment of corruption and disciplinary violations.

The timing provides an important possible background. According to the Central Commission for Discipline Inspection (CCDI) and National Commission of Supervision, the Party’s and state’s watchdog, it opened cases against 50 officials at the provincial or ministerial level and above during the first half of 2026. They imposed Party or administrative punishments on 74 officials at those ranks. The two figures measure different stages of the disciplinary process and should not be added together, but represent record first-half highs since 2020.

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Inside China

Reading the July Politburo Meeting (with transcript)

The July Politburo meeting just wrapped up, below is the transcript with some of my highlights…

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3 days ago · 3 likes · Fred Gao

Photogenic reporters are encouraged to spend more time on camera. Foreign-language speakers are expected to showcase their fluency. Veteran journalists are asked to turn their expertise into commentary-driven accounts. Media organizations hope that recognizable faces and more conversational voices can recover some of the attention their institutional accounts, proprietary apps and conventional news products have lost.

The essay translated below offers a decidedly harsh assessment of this strategy. It argues that institutional media want the authenticity, intimacy and traffic associated with individual creators while retaining the editorial controls, risk aversion and employment arrangements of traditional newsrooms. Reporters are expected to display personality without becoming unpredictable, build audiences without acquiring secure claims over the value they create, and assume an entire production workload without the resources needed to sustain it.

Part of the force of this critique comes from a premise running through the essay: that an account centered on a full-time media employee remains subject to essentially the same editorial standards—and perhaps the same multilayered approval procedures—as the organization’s official output. Under that assumption, the author’s conclusion is difficult to dispute. If every sentence must still pass through the equivalent of “three reviews and three proofreads,” the account is scarcely personal in any meaningful editorial sense. Its presentation may be livelier, but institutionally it remains an official account with a human face attached.

Actual practices are likely to vary considerably. Some employers may apply virtually identical standards and approval procedures to employee-centered and official accounts. Others may allow far greater latitude over subject selection, tone, judgment and presentation. The label “personal account” therefore tells us little about how much editorial autonomy its operator actually possesses.

This qualification does not necessarily weaken the essay’s central argument. An institutional media organization may succeed in cultivating a genuine individual creator only by partially ceasing to operate institutionally in relation to that account. If a full-time employee is granted substantial freedom to choose subjects, express personal judgments and take bounded risks, then within that sphere of content production the employee has become a relatively independent editorial unit. The organization has not so much reconciled institutional control with individual creation as carved out an exception to its own institutional logic. It must ultimately choose between retaining control and producing little more than an institutional presenter, or loosening control and accepting that a genuine creator cannot remain entirely an institutional asset.

The essay also identifies problems that editorial freedom alone cannot solve. A reporter may still have to identify topics, write scripts, appear on camera, edit footage, add subtitles, design thumbnails and promote the finished product—often without a production team and while continuing to perform their original job. If the account fails, the employee bears the workload and poor performance metrics. If it succeeds, conflicts quickly emerge over ownership, compensation, commercial value and what happens when the journalist leaves.

The original Chinese essay was published on July 23, 2026, by a WeChat blog called Mulan Sees the World (“Mulan看世界”). I do not know the identity of the person—or people—behind the account. I simply found the essay interesting and thought it worth translating in full. —— Zichen Wang

机构媒体打造个人IP，会是一场瞎折腾吗？

Is Building Personal Brands a Fool’s Errand for Media Organisations?

After spending two weeks bouncing around southern China on business, I heard that a major media group was once again embarking on a grand “star-making” drive.

A friend’s department had received a non-negotiable directive from senior management: build personal brands, and do it at full speed. Within a few months, his department alone had launched five personality-led video accounts covering AI and technology, new energy, Chinese companies going global, and other subjects.

The photogenic reporters were told to spend more time on camera. Those who spoke good English could show off their fluency. Veteran journalists like my friend, meanwhile, had little left to showcase but their knowledge and analysis.

The initiative was presented as an organisation-wide effort. In practice, however, there was no way every account could be assigned a dedicated production team. Reporters were largely expected to research, write, film, and edit everything themselves.

My friend, once a traditional print reporter, has effectively been forced to reinvent himself as a one-man short-video studio. After rushing to file his articles each day, he still has to point a camera at his face and record a video. A single segment may take three or five attempts. Late at night, he edits the footage, adds subtitles, and designs the cover image — all on his own.

“Isn’t it exhausting, going through all this every day?” I asked.

“It’s not too bad.” He gave a rueful smile. “These days, if you don’t do this kind of work,it’s not that easy to find another job elsewhere either.”

The whole scene immediately reminded me of my former employer. Back then, everyone — from the boss and the HR department to editors and advertising staff — was “encouraged” to open a personal account. Reposts, comments, and engagement figures were tallied every day.

When turning institutional media into creator-driven media becomes an unquestionable orthodoxy, the obvious question is: does it offer traditional news organisations a genuine lifeline, or does it merely create a self-congratulatory illusion of prosperity?

01 You Can’t Manufacture a Persona Through Three Rounds of Review and Proofreading

The value of a personal brand lies in the personality behind it.

A truly distinctive media persona inevitably comes with strong opinions, emotional force, and at least a trace of irreverence.

But what do institutional media organisations want? They want editorial safety, balance, authority, and a measured tone.

That creates an inherently awkward production model. Reporters are employed by institutional newsrooms but expected to behave like independent creators. They are told to show more personality and compete for attention, while every sentence remains tightly shackled by the “three reviews and three proofreads” system.

Even in organisations with relatively flexible internal procedures and open-minded managers, the room for error that once made media star-making possible has all but disappeared.

Around 2016, Nanfang Media Group launched a programme to cultivate star individual journalists, encouraging more down-to-earth and internet-savvy forms of expression. Short video had yet to take off. With its early appetite for reform and the advantage of entering a relatively uncrowded market, the group did manage to incubate several influential programmes, including Here Comes Wu Song, as well as a number of journalists who became online celebrities in their own right.

The environment today is entirely different.

Public-opinion risk controls now kick in before anything else. Everything a journalist says or does under a personal account is tied to the credibility of the organisation behind them. Sharp industry commentary and serious investigative work must pass through ever-longer chains of approval. The conditions that once allowed star journalists to flourish have largely disappeared.

Call it path dependence among media executives. Call it a lack of better ideas for transforming traditional media. Either way, for frontline reporters and editors, the result is the same: today’s media pack mules must keep persuading themselves that all this extra work will eventually pay off while quietly swallowing the frustration of the present.

Those selected to build these personal brands are each an entire production line unto themselves. They find topics, write scripts, appear on camera, edit footage, and design thumbnails. One person carries the entire workflow.

After grinding through every stage of production, they finally upload the video, only to attract a few hundred views.

When the numbers are disappointing, they are even expected to spend their own money promoting the account. Under the performance systems, sustained low traffic can leave them at the bottom of the rankings and facing elimination.

A system this conflicted is never going to produce vivid, unpredictable personalities with a genuine human touch. What it produces instead is an endless stream of exhausted “on-camera NPCs”, trudging forward under the weight of their KPIs.

02 Three Conflicts That Make Genuine Personal Brands Impossible to Retain

Let us be as generous as possible.

Suppose a media organisation gets lucky and invests enough resources to build an account with a million followers. At that point, the project immediately enters a delicate and potentially irresolvable phase.

A personal brand is inseparable from the individual who embodies it. Followers are there for that particular face and soul, not for the official stamp of the media organisation operating behind the scenes. In the age of algorithms, the traditional logic of trust has been completely reversed.

More than a decade ago, becoming a star journalist was closely connected to advancement within the institutional system. High performers could be promoted to department director, appointed to an editorial board, or even move into government.

At the same time, the independent creator economy had yet to develop its current range of monetisation opportunities, and companies had not begun recruiting media personalities on anything like today’s scale. The first generation of star journalists therefore had a visible path upwards within their organisations and good reason to stay.

Today, the opportunities outside institutional media have multiplied exponentially. Journalists who have built established personal brands in finance, industry, or public-interest reporting can leave at almost any time. In the private sector, they may earn several times their institutional salary.

Huang Jianxiang, Liu Jianhong, and Duan Xuan, once among CCTV’s most star sports commentators, all left the broadcaster in succession. Another example is Da Peng, whose web series Diors Man, released on Sohu, became a cultural phenomenon. But the structure of a traditional internet portal — and the strategic priorities of Charles Zhang, founder of Sohu — could not accommodate his ambitions. The two sides eventually parted ways, with reports emerging this year that his departure may not have been voluntary after all.

The logic of a large media platform is straightforward: you are an institutional asset. Your professional status, access to the camera, and public voice are granted by the organisation. The tone of your content, the boundaries of your commentary, and any commercial activity must all comply with institutional rules.

The logic of a personal brand is equally straightforward: I am the asset. My name, reputation, and relationship with my followers belong primarily to me, not to a particular channel or platform.

The two models can coexist for a while. But once the personal brand becomes valuable enough, the contradiction surfaces immediately. The organisation wants to retain the individual on a relatively modest salary while restricting outside commercial work. The individual, meanwhile, believes that the financial premium generated by their influence is not being fairly recognised.

There is a conflict of identity, a conflict of interests, and a conflict over control.

That is why I have never been particularly optimistic about institutional media organisations trying to incubate personal brands. Both sides inevitably feel wronged: The organisation believes it has invested time and resources only to train talent for the wider market. The individual believes that years of overtime and extra work have brought no meaningful long-term reward.

After all that labour, who was it really for?

Eventually, the two sides go their separate ways, leaving behind little more than a mess.

03 The Trap of Media Transformation

Media executives are not stupid. If everyone understands that these projects may ultimately amount to pouring effort into something the organisation cannot retain, why do media groups keep throwing themselves into one star-making campaign after another?

Because traditional media may genuinely have been pushed to the brink.

First, the algorithms have changed.

Today’s platforms naturally favour personality-driven content. A faceless institutional account publishing conventional news cannot compete with an engaging human presence, and the resulting traffic are often painfully low.

Second, the logic of news consumption has reversed.

In the past, audiences might have thought: “This comes from an official media outlet, so I trust it.” Now they are more likely to think: “This person understands the issue, explains it clearly, and sounds like a real human being, so I will watch.”

The institutional logo behind the speaker matters less and less. And, of course, much of the collapse in trust surrounding traditional media has been self-inflicted.

Finally, and most brutally, the industry’s traditional foundations have crumbled.

Print circulation has fallen off a cliff. Television has been reduced to little more than a device for screen mirroring. The proprietary apps and websites on which media organisations have spent vast sums attract so few daily active users that they are barely worth maintaining.

With traffic growth across the digital ecosystem approaching its ceiling, personal brands have come to look like the cheapest available tool for attracting new audiences and holding on to existing ones.

Media organisations hope that journalists can use their faces and personalities to attract attention on public platforms and within professional circles, reclaiming some of the influence their institutions have lost.

More naively, they imagine that audiences gathered on public platforms can then be funnelled into their own closed ecosystems, allowing them to pull off a last-minute transformation and reverse years of decline.

This frantic embrace of personal branding — forcing reporters into creator roles whether they are suited to them or not — is, at heart, a desperate, low-cost struggle by traditional media organisations facing the possibility that the world is simply moving on without them.

What it produces is a perfect piece of performative transformation.

Senior executives feel reassured. Middle managers have measurable targets and projects to present in their performance reviews. Frontline reporters and editors are worked to the point of questioning their life choices.

And, in the end, the exercise makes virtually no substantive contribution to the transformation of the media itself.

Against this backdrop, 外交评论 Foreign Affairs Review, a journal published by China Foreign Affairs University under the supervision of China’s Ministry of Foreign Affairs, recently invited four leading Chinese international-relations scholars to reflect on the subject. The essay below, by Yan Xuetong, Honorary Dean of Tsinghua University’s Institute of International Relations, is the final installment in the four-part symposium in the 3rd issue of the bimonthly in 2026—and it reads rather differently from the others.

Yan argues that discussions in China have placed too much emphasis on “independence” while paying insufficient attention to the concept’s other two elements: “knowledge” and “system.” Independence, he writes, provides an intellectual and political orientation, but the foundation of any independent knowledge system must be the creation of specific and original knowledge capable of explaining concrete, verifiable problems.

He also argues that Chinese IR theories too often develop in isolation from one another, with limited mutual citation and critique. A coherent knowledge system, in his view, cannot simply be designed from the top down; it must emerge through sustained scholarly debate. That requires both academic capacity—specialized expertise, methodological competence and independent thinking—and the freedom to decide what and how to study.

More provocatively, Yan contends that structuralist and geopolitical theories are often unable to explain rapid changes in international affairs, including sharp shifts in US foreign policy from one president to another. He therefore urges Chinese scholars to pay greater attention to decision-makers and human agency—and to move the discussion of an independent knowledge system away from broad declarations of principle and toward the actual production of new knowledge.

Yan has kindly reviewed and revised the translation.

— Yuxuan Jia

知识创造与国际关系自主体系建设

Knowledge Creation and the Construction of an Independent IR Knowledge System

The concept of an “independent knowledge system” comprises three core elements: “independence,” “knowledge,” and “system.” While constructing such a system has been set as a major objective for Chinese scholars, most discussions on the topic have heavily focused on the notion of “independence” rather than on the substance of “knowledge” or the “knowledge system.”

According to Baidu Baike [Chinese equivalent of Wikipedia], “A Chinese independent knowledge system is rooted in China’s fine traditional culture, grounded in Chinese practice, and constitutes an integrated whole in which knowledge is systematically organized and suitable for guiding Chinese modernization.” This definition imposes numerous stringent criteria for knowledge production, making it exceedingly difficult for scholars to generate knowledge that satisfies all conditions simultaneously. For instance, Chinese academia has produced substantial scholarship on nuclear weapons, artificial intelligence, foreign languages, and the histories of Europe, Africa, and the Americas. Crucially, none of these bodies of knowledge meet the holistic criteria set by Baidu Baike.

This essay argues that knowledge creation constitutes the fundamental baseline for constructing any independent knowledge system. To substantiate this claim, the following sections analyze the structural relationship among the three defining elements: independence, knowledge, and system.

I. Specific Knowledge

Although “independence” outlines the political and ideological orientation of academic development, the primary engine remains substantive knowledge creation, which serves as the bedrock of any independent system. Absent the generation of novel empirical and theoretical insights, the realization of an independent knowledge system remains impossible.

Independent systems vary widely in complexity. While certain personal frameworks—such as individualized entertainment, study, or physical exercise regimes—are easily constructed, establishing a national independent knowledge system within science, technology, or theory of social science is an exponentially more difficult endeavor. This disparity arises because the former requires only limited, subjective coordination, whereas the latter relies on a vast, verified reservoir of epistemic wealth. Consequently, the accumulation of specific and rigorous knowledge is the essential prerequisite for constructing a national independent knowledge system.

Furthermore, international relations (IR) scholars cannot generate genuine knowledge when their research, publications, and speeches fail to address specific, verifiable questions or social problems. Despite the proliferation of academic IR conferences and literature dedicated to the issue of “constructing an independent knowledge system,” few have engaged with concrete academic inquiries or pressing societal issues. Instead, mainstream discourse offers lengthy exegeses on the necessity, political significance, and general principles of this mandate. Because scholarly attention has been co-opted by the rhetoric of independence while actual IR knowledge production is marginalized, these symposia and texts have yielded minimal substantive scholarly IR output.

In the context of IR studies, new knowledge stems from rigorous empirical research into concrete historical or contemporary phenomena—particularly those anomalies that defy existing IR theory or conventional wisdom. For example, the globalized post-Cold War order has rapidly devolved into counter-globalization over the past decade. While a vast descriptive literature has mapped this historical shift, enhancing our awareness of the treats of the global order, few studies offer a convincing causal mechanism explaining this historical reversal. Disclosing this underlying causal mechanism would constitute a genuine advancement in knowledge. At present, mainstream analyses favor popular geopolitical concepts; however, these frameworks fail to identify any structural factor that drives the changes in global order. Such theories cannot even explain why the Trump administration’s foreign policy diverged so drastically from the Biden administration’s when the underlying international geopolitical landscape remained constant.

From a historical perspective, the contemporary ascendance of populism and the concomitant decline of liberalism represent just one iteration of a recurring historical cycle. Modern history has witnessed successive waves of ideological dominance: imperialism prior to World War I, fascism leading up to World War II, communism in the post-war era, nationalism during the mid-Cold War, and liberalism in the post-Cold War epoch. The current rise of populism constitutes the latest manifestation of ideological fluctuation in modern international history. Crucially, IR theories anchored in structuralist paradigms are structurally unequipped to explain these macro-ideological shifts. Without addressing these concrete international transformations, constructing an independent IR knowledge system in an era of counter-globalization remains unfeasible.

To achieve meaningful theoretical breakthroughs, Chinese scholars must remain cognizant of the constraining influence of Western geopolitical thought. Although these geopolitical frameworks originated in European academia, they have acquired immense influence within Chinese scholarly and public discourse. Numerous textbooks, journals, and university curricula introduce these ideas uncritically, leading many international relations commentators to routinely employ geopolitical logic without recognizing its inherent internal contradictions.

For instance, shifts in national leadership frequently cause dramatic transformations—either rapid improvements or severe deteriorations—in bilateral relations. This phenomenon has recurred throughout diplomatic history. Following Donald Trump’s inauguration, relations between the United States and its traditional allies deteriorated sharply, to the point where the White House openly talked about withdrawing from NATO. No static geopolitical factor can account for this variation. Conversely, a decision-making paradigm focused on leadership agency can effectively analyze these sudden shifts. In this regard, the decision-making paradigm poses a fundamental challenge to traditional geopolitical theory, mirroring the way heliocentrism historically upended geocentric models.

Captivated by geopolitical thinking, American IR scholars constructed highly influential structuralist theories. However, these structural models suffer from the same explanatory failures when confronted with American foreign policy behavior under the Trump administration. By definition, “structure” denotes a durable, stable, and slowly evolving framework; it is therefore inherently unequipped to explain abrupt changes or short-term volatility in international relations. When analyzing international affairs within a given timeframe, structure acts as a constant—and a constant cannot account for variance. If Chinese IR scholars can break free from the constraints of both classical geopolitical thinking and the American structuralist paradigm, they will possess a unique opportunity to achieve critical theoretical breakthroughs and generate authentic and independent IR knowledge.

II. Knowledge Systems

A system is conventionally defined as “a whole formed through the interconnection of a number of related things or forms of consciousness.” However, scholars maintain divergent epistemological standards regarding what specific criteria qualify a body of knowledge to constitute such a unified whole.

If a “knowledge system” is conceptualized as a logically self-consistent body of thought, its constituent elements must be mutually reinforcing and entirely free of internal contradictions. Classical physics, chemistry, formal logic, and mathematics serve as paradigmatic examples of independent knowledge systems under this stringent definition.

Conversely, if a knowledge system is understood more broadly as a repository of competing ideas, its formation does not necessitate internal logical consistency. For instance, Chinese and Western philosophies are routinely treated as distinct independent knowledge systems, despite the fact that both encompass fiercely competing intellectual schools. Within each philosophical system, long-term debates persist regarding polarized foundational assumptions—such as idealism versus materialism, or competing views on whether human nature is inherently good or evil. Concurrently, substantial epistemological overlaps exist between these two overarching traditions. During the Axial Age, for example, ancient Greek and Chinese philosophers independently developed strikingly convergent concepts and insights, despite a complete absence of direct cross-cultural communication.

Scholars likewise contest whether IR theory in its entirety should be categorized as a single independent knowledge system. In the 1970s, Stanley Hoffmann famously characterized modern IR theory as “an American social science.” This assertion implies that he regarded the collective body of IR theoretical literature as a singular, cohesive knowledge system. To accept Hoffmann’s premise is to concede that a knowledge system can encompass epistemological frameworks that conflict fundamentally in their core assumptions, inner logic, and thematic conclusions. In fact, by the 1970s, IR theory had diversified into multiple adversarial schools, most notably realism, liberalism, and neo-Marxism. In the contemporary era, many IR scholars argue that subsequent developments—such as the English School, the Copenhagen School, and the recent Chinese School—operate entirely outside the trajectory of American social science. This modern perspective rejects the notion regarding IR theory as an independent knowledge system, treating them instead as a broader domain composed of several distinct, independent systems of knowledge.

These divergent understandings of what constitutes an epistemic system are also mirrored in the ongoing debates surrounding the Chinese IR School. Some scholars contend that any IR theory rooted in traditional Chinese culture should automatically be classified as an integral component of the Chinese School. Others counter that an intellectual school must be defined by shared core theoretical assumptions rather than a shared cultural or geographic lineage.

In short, contemporary academia lacks a universal criterion for defining an independent knowledge system. Achieving an epistemic consensus on these definitions will require time, and will likely only crystallize as we observe how newly generated and interrelated bodies of thoughts are naturally connected.

Nevertheless, defining a knowledge system by a set of shared, foundational assumptions remains highly analytically rigorous. In this view, each individual theory within a same school may present divergent arguments, yet their variations build upon identical assumptions. For example, classical realism, structural realism, offensive realism, neoclassical realism, and moral realism utilize vastly different independent variables; nonetheless, they share a suite of axiomatic assumptions. These include the premises that the international system is structurally anarchic, that state foreign policy is driven by rational self-interest, that national interests are defined in terms of power, and that the nature of state survival is of self-help. These shared ontological commitments provide a valid justification for treating these disparate realist theories as branches of a single knowledge system.

Constructivism, by contrast, radically rejects realism’s foundational axioms. If realism and constructivism are combined into the exact same knowledge system, the analytical boundaries between different systems become infinitely elastic. This boundary dissolution introduces a logical paradox: an independent knowledge system can only exist if there is an exterior body of knowledge left outside its parameters. When a knowledge system becomes so hyper-inclusive that it absorbs completely contradictory paradigms and leaves nothing beyond its borders, it becomes conceptually impossible to determine whether these conflicting ideas belong to the same epistemic system at all.

Ultimately, the formation of a knowledge system is a natural process driven by the spontaneous interaction of related ideas. Scholars generally conduct research to address the immediate empirical or theoretical needs of their specific projects, rather than with the explicit, self-conscious aim of building an independent knowledge system. The insightful knowledge generated by various researchers eventually form systemic interconnections without the need for top-down intellectual intervention. While Chinese scholars have achieved notable advancements in IR theory, their respective theories unfortunately lack strong internal connections between them. A systematic review of citation patterns in major academic journals reveals that Chinese scholars do not cite or critique each other’s work with the same frequency or rigor as American scholars do. Instead, their scholarship engages more extensively with foreign academic literature than with the domestic one.

To enhance the interconnectedness of newly generated knowledge by Chinese scholars, Chinese academia needs to give more attention to domestic scholarly achievements and engage in rigorous mutual critique. Constructive peer-to-peer criticism plays an indispensable role in both generating novel knowledge and fostering a cohesive academic system. By interrogating the validity of peer assumptions, theoretical logic, empirical datasets, and selected case studies, scholars can deepen their collective insights across multiple intellectual layers. Through mutual critiques and sustained debates, separate threads of research will form a cohesive knowledge system.

III. Independent Research

Independent research constitutes the primary vehicle for knowledge production. To successfully generate original insights, a scholar must possess several foundational competencies: specialized disciplinary knowledge, mastery over appropriate research methods, keen empirical observation, and critical independent thinking. Among these prerequisites, independent thinking is unequivocally the decisive factor. Scholars deficient in this cognitive capacity face severe constraints in their ability to create new knowledge in their academic field.

In regards to IR theoretical studies, the generation of novel insights requires scholars to exercise analytical autonomy across three dimensions: ontology, epistemology, and methodology. Independent knowledge production is based on both the scholarly capacity and the institutional right to make autonomous academic choices. Here, independent capacity denotes possessing the requisite specialized expertise to innovate, whereas independent right refers to autonomy for determine the objective, inquiries, and research methods. Both of the two factors exert influence on the viability of original knowledge production.

At the ontological level, the agent-structure debate remains a long-standing issue of IR theoretical discourse. A core component of this debate addresses whether the primary actors within the international system are institutional states or individual decision-makers. Theoretical architects must explicitly designate which entity serves as the primary unit of analysis.

While individual decision-makers are human beings, states are institutional organizations. This distinction does not only concern the levels of analysis, but it fundamentally concerns whether an international actor is conceptualized as a sentient or non-sentient entity. Human beings are living agents endowed with independent consciousness, whereas states are non-living bodies lacking an autonomous mind. IR paradigms that prioritize individual decision-makers naturally account for the role of human agency, cognitive processing, and purposeful intent in international politics. Conversely, paradigms that treat states as international actors inevitably view state behavior as a mechanical and passive response to the constraints of the material or social environment.

Historically, ancient political thinkers across China, India, and Europe consistently identified rulers and chancellors, rather than institutional states, as interstate actors. Modern IR works also present a significant portion of analysis attributing international phenomena at macro-level to individual policymakers. For instance, causal analyses of World War II invariably center on Adolf Hitler; the institutional architecture of the United Nations system is largely viewed as the product of Franklin Roosevelt’s strategic vision; the onset of the Cold War is traditionally demarcated by Winston Churchill’s “Iron Curtain” speech; and evaluations of the Cold War’s resolution must account for Mikhail Gorbachev’s reform policy. Similarly, any serious analysis of the current counter-globalization trend must address the policy adopted Donald Trump.

Consequently, IR scholars face an inescapable ontological choice: determining whether changes at international system level are driven by state institutions or by decision-makers. Theoretical development is impossible without an explicit commitment to one of these positions. Even analysis of the current war against Iran has to answer the question it was initiated by the United States, a nation state, or by Trump, an individual policy maker? Historical evidence indicates that throughout the post-Cold War era, the Clinton, George W. Bush, Obama, and Biden administrations uniformly pursued diplomatic negotiations in dealing with the Iranian nuclear issue. Trump stood out as the sole American national leader choosing war against Iran.

At the epistemological level, IR scholars must choose among monist, dualist, or multivariate approach of explanation. Monism attributes international transformations to a single independent variable, such as ideas vs material forces, subjective vs objective factors, internal vs external causes, or decision-makers vs the environment they face with. Dualism integrates two primary variables, arguing that they operate interactively and none of them plays decisive role unconditionally. Multivariate approach posits that international phenomena including systemic changes result from interaction between several variables. This approach regards each factor as a necessary condition, while their alignment brings about the sufficient condition for international continuity or change.

Given that all international phenomena are produced by a multitude of variables, univariate approaches inevitably sacrifice empirical accuracy. Although multivariate explanations are close to the objective reality, they suffer from analytical diffusion and are unable to identify the primary driver of international changes. Therefore, dualist explanations strike a pragmatic balance between these two approaches, sacrificing a degree of descriptive authenticity for a deeper, parsimonious conceptual clarity. Because each approach offers distinct epistemic advantages, it requires both the intellectual competence and academic freedom for scholars to decide which of three approaches should be used in their specific research.

At the methodological level, a diverse array of analytical tools is available, such as induction vs deduction, formal vs dialectical logic, and positivist vs speculative methods. Research methods are essentially instruments, and a researcher often deploy different tools to address distinct sub-questions within his research project. In most cases, researchers have the right to choose their methods, yet they may lack the knowledge required to use scientific methods effectively. Scholars unable to operate scientific methods have less chances to produce new knowledge than those who master sophisticated methods of research.

From the perspective of methodology, the efforts of constructing an independent IR knowledge system should focus on improving scholars’ mastery over advanced research methods. For example, if we agree that Chinese experts have successfully established an independent knowledge system of nuclear weapons technology, we have to admitted that that achievement rests entirely on the sophisticate scientific methods mastered by the scientists, engineers, and technicians involved in that program. By extension, Chinese IR scholars must attain a comparable mastery over specialized research methods if they want to successfully construct an independent IR knowledge system.

IV. Conclusion

Since “independent knowledge system” is composed of “independence,” “knowledge” and “systems,” this essay has analyzed the structural relationships among the three components. The core argument advanced here is that “independence” represents merely an aspirational orientation for scholarly effort, whereas the production of specific knowledge is the substance of an independent knowledge system. Therefore, if Chinese scholars decide to realize this objective, they need to focus their attention on substantive knowledge creation. In regarding the goal of developing an independent Chinese IR academic system, IR scholars should strategically consider pivoting toward the decision-maker paradigm from the structuralist paradigm.

The arguments presented in this essay are fully open to peer critique and empirical verification. Beyond clarifying the conceptual boundaries of academic independence, the author hopes to revitalize enthusiasm within the Chinese IR community for genuine, high-quality theoretical innovation. Should these arguments fail to get immediate consensus, this essay will be still helpful to the construction of independent IR knowledge systems if it provides a different view from AI-style arguments on this issue.

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Henry Huiyao Wang: To prosper, China must become a magnet for international students

China must seize the opportunity to become a global education hub. Reform of its universities should begin now

Last month, 12.9 million students in China sat for the National Higher Education Entrance Examination, or gaokao, the number sliding for a second year, and down from 13.3 million last year. Given that births have fallen below 8 million annually to a record low, in 18 years, the country’s more than 3,100 universities will find themselves fighting over an even smaller cohort.

This will coincide with a growing global competition for talent. In a knowledge-driven economy, the countries that prosper will increasingly be those capable of attracting researchers, entrepreneurs and skilled workers. Yet demographic trends are changing: declining fertility is no longer confined to the wealthy, ageing societies in Europe and East Asia.

The global fertility rate has fallen from 2.9 births per woman in 1994 to 2.2 in 2024, and more than half of all countries and territories are now below the replacement level of 2.1. Even where fertility remains comparatively high, the direction is unmistakable: around one-third of all countries and territories had fertility rates of four or higher in 1994 but this had dropped to just 13 per cent in 2024.

This transition is reaching countries once regarded as bastions of demographic growth. Take Bangladesh for example. Its fertility rate fell from 6.7 births per woman in 1960 to 2.2 in 2013 and has hovered around the replacement level since. As a region, South Asia’s fertility rate stood at 2.0 in 2024. Even sub-Saharan Africa, the world’s youngest and fastest-growing region, has experienced a sustained decline.

While the world will not suddenly run out of young people, the distribution of talent will become increasingly important. Countries that can educate and offer opportunities to talented individuals will be better positioned to shape the future.

International students will become a critical component of the global talent competition. For decades, the United States and Europe benefited as major destinations for talent. Their universities attracted generations of students who later became researchers, entrepreneurs, skilled professionals and bridges between societies. Students entering the classroom today are not just participants of academic exchange, they are building the talent networks that shape tomorrow’s economy.

Nowhere is the advantage of talent attraction clearer than in America’s leadership in artificial intelligence. Its AI lead has been strengthened not only by domestic innovation but also by its ability to attract researchers from around the world. According to Macropolo’s Global AI Talent Tracker, the United States employs 59 per cent of the world’s elite AI researchers.

To remain competitive, China must become a major destination in this global competition. China has traditionally been a source of international students but with the rapid expansion of its higher education system and role in global innovation, China must seize the opportunity to become a global education hub itself, creating an environment where international students choose China not only as a place to study, but as a place to build their futures.

Even those who simply come for a world-class education and then leave can become a valuable bridge between China and the wider world.

Chinese should begin reform of its tertiary education now. First among these reforms, Chinese universities will need the autonomy and flexibility to attract foreign students. Universities should be encouraged to act on their own to attract students and should also design programmes and develop partnerships that reflect their strengths.

Second, if universities outside China’s most elite institutions are to attract foreign talent, they will need to be able to make final decisions on their tuition, fee structures, financial incentives and student aid. That is not to say that educational institutions should act like profit-focused businesses; they should be granted the flexibility to make changes where they deem fit.

Third, China should focus on more deeply integrating international and local students. The greatest value of an international education lies in being able to interact with people with different backgrounds and experiences. International students should not exist in a parallel system separated from their Chinese peers. Greater opportunities for shared classes, research projects, student organisations and campus life would strengthen mutual understanding and create the networks that define successful universities.

Fourth, we must acknowledge that Chinese is not yet the lingua franca of international education and, in lieu of that, Chinese institutions need a more internationally oriented curriculum, specifically courses offered in multiple languages, as well as hosting more international faculty and returning scholars with overseas experience.

Finally, China should strengthen the connection between education and professional opportunity. For many international students, the decision of where to study depends not just on academic quality but also on whether that education can lead to meaningful career development. China has an opportunity to build a more attractive pathway by providing clearer and more flexible opportunities for internships, employment and entrepreneurship after graduation.

A global talent ecosystem includes those who return home. International graduates, whether those who come only for an education or those who stay on and work in China for decades, have an understanding of China and can maintain connections that act as valuable bridges between China and the wider world as China goes global and pursues outbound investment.

The competition for talent will be a defining feature of the coming decades. China already has a world-class education system and world-class research institutions; let’s not let them go to waste.

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On June 15, Bloomberg reported that Xiaohongshu was preparing to file confidentially in Hong Kong by month-end. It had hired Goldman Sachs and CICC and could list in the second half of 2026, Reuters reported a day later. China’s Instagram, as it’s often referred to, could be worth $70bn, according to the Wall Street Journal. Mainland regulatory clearance was still needed.

Then came Chen Hao, a former employee who had been battling the social networking giant for several years for alleged wrongful termination and insufficient compensation. Mr Chen said he joined Xiaohongshu in 2022. His employment contract was with a mainland entity, while 30,000 options—roughly a third of his promised annual package—were granted by an offshore entity of Xiaohongshu. He said the mainland employer dismissed him for alleged incompetence (which he disputes) in December 2023, five months before his first options were due to vest.

Mr Chen sued. One ruling found the dismissal unlawful and awarded him about 190,000 yuan ($26,500) in compensation and other pay, according to Mr. Chen’s account that was widely cited by Chinese media outlets. In a separate options case, a court of first instance awarded him 730,500 yuan. The company appealed; the parties then settled under court mediation for 661,545 yuan, plus a revised termination certificate that made no mention of incompetence. Had he not been fired, the options would have been worth much more.

Although the appeal ended in a settlement, leaving no final appellate ruling on the point, the first-instance decision showed that a mainland court may treat an offshore option grant as part of the employment bargain tied to the mainland entity, particularly when it is presented as compensation and tied to continued service.

The more consequential part of his complaint concerns Xiaohongshu’s variable-interest-entity, or VIE, structure. Since Sina’s Nasdaq debut in 2000, Chinese internet firms have used VIEs to raise foreign capital while navigating restrictions on foreign ownership. Investors buy shares in an offshore holding company. Its Chinese subsidiary signs contracts with a domestically owned operating company, securing economic benefits and effective control without owning its shares. This permits consolidation in the offshore group’s accounts. It also creates legal risk: as America’s securities regulator explains, contractual control is not equity ownership.

Hong Kong permits such arrangements case by case and requires extensive disclosure. China’s securities regulator has likewise said that compliant VIE listings can be registered. The structure is a response to China’s regulatory reality, not evidence of wrongdoing.

Mr Chen said, citing Xiaohongshu’s appeal, that the mainland entity argued that they were not parties to his option agreement, had no relevant relationship with its offshore grantor and should not answer for the options in a mainland court. Mr Chen argues that this sits uneasily with the control Xiaohongshu must demonstrate when it places domestic operations beneath an offshore listing vehicle: no connection when an employee claims, close connection when investors pay.

On June 29th, Mr Chen said he sent the rulings, pleadings, and testimony from other former staff to Hong Kong Exchanges and Clearing and the Securities and Futures Commission (SFC). On July 7th, he complained to the China Securities Regulatory Commission. The SFC told BBC Chinese only that complaints are handled under established procedures; receipt is not a judgment on the merits. Mr Chen alleged that nearly 50 other former employees contacted him with similar stories of dismissal around vesting dates. That is a serious claim, but so far it is his claim; the underlying cases have not been independently established.

The charge is embarrassing, but not yet conclusive. Separate legal personality and the absence of direct shareholding are features of a VIE, not defects. A Shanghai lawyer said that liability under an employment contract and control under a VIE are different legal questions and do not necessarily conflict. The decisive facts are which entities signed which VIE agreements, how the option grantor fits into the chain and what Xiaohongshu has told—or will tell—regulators. No public prospectus is available against which the pleading can be tested.

Nor is there public evidence that the complaint has halted the IPO. The reported timetable was provisional and, if the company proceeded confidentially as reported, hard for outsiders to observe. Claims in mainland media that the absence of a public hearing date proves “stagnation”, or that a 2027 delay is already “market consensus”, appear to trace back to outside commentators taking Mr Chen’s side rather than regulators, bankers or Xiaohongshu. A complaint may prompt questions for the company, its sponsors and lawyers. If the alleged pattern of option-related dismissals is substantiated, it could require fuller disclosure and an estimate of liabilities. One resolved dispute worth 850,000 yuan, however, is unlikely by itself to sink a company valued in the tens of billions of dollars.

Xiaohongshu itself has issued no public, on-record response despite extensive discussion at home. Its only seemingly authoritative answer came through an unnamed person “close to Xiaohongshu”, who told Sina Tech that Mr Chen’s litigation had concluded, was an ordinary labour dispute and had nothing to do with the listing. That is not a company statement.

This sustained silence is presumably a considered choice. It may display corporate sangfroid: lawyers and bankers may regard a settled personnel dispute as too minor to dignify. Managers may also be frustrated by the poor quality of much of the online Chinese discussion. It’s an open secret in the mainland that many Chinese influencers and outlets want to make money off IPOs by injecting themselves into disputes on the eve of an IPO. Many of the reports reviewed for this article rely principally on Mr Chen and the documents he supplied, with little substantive analysis; several then leap, without citing named sources or other evidence, to the conclusion that the IPO has already been delayed. Xiaohongshu may believe that responding would merely lend credence to an inflated story.

Yet the story has traveled from mainland media to Singapore’s Lianhe Zaobao, influential among Chinese elites, and BBC Chinese. No original account could be found in the large international outlets that covered Xiaohongshu’s IPO plans and its TikTok moment. The controversy has crossed borders, if not yet the language barrier.

That makes continued silence increasingly peculiar. Xiaohongshu is a platform built to host public discussion, and its success rests heavily on a reputation for authentic sharing. Investors need not accept the most lurid Chinese headlines. But they may ask whether offshore options are genuine compensation, whether dismissal close to vesting is a pattern, and whether the group’s entities become one company only when convenient. Mr Chen has not proved that the listing is in peril. He has raised a red flag. Xiaohongshu would be wiser to explain why it is small than to pretend it is invisible. (Enditem)

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The East is Read

I am your Chinese spy. Show me your cat.

Just yesterday, I woke up as an ordinary Xiaohongshu (RedNote) user—an innocent scroll through the app to catch up on China and the broader Chinese-speaking world. What I didn't expect was the sudden flood of "TikTok refugees," with their posts saying "Nihao," making their way to the shores of this…

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2 years ago · 73 likes · Yuxuan JIA

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Jianghua reported that it had met the target. A separate paper trail told a different story. Rice subsidies are based on the area farmers report having planted. In 2024, only about 238,000 mu appeared in Jianghua’s records for the rice subsidy—roughly 150,000 mu less than the county’s reported rice acreage.

China Central Television’s Focus Report recently followed that discrepancy into the fields. Its drones found rice planted beside roads, where it could be seen during official inspections, while monk fruit, tobacco, taro and vegetables grew farther inside. The rice existed in reports submitted upwards, but not in the fields or subsidy claims.

The false statistics deserved scrutiny. Yet the programme’s conclusion—that local officials had failed to take food security seriously—prompted criticism online. The critics did not deny that the figures had been fabricated. They argued that Focus Report had exposed the deception while leaving the conditions that produced it beyond discussion.

Chinese farmers are not entirely unsupported. Rice producers may benefit from minimum purchase prices, target-price payments, seed subsidies, farmland-fertility payments and other programmes. Focus Report said the combined support available in Jianghua could reach 400-500 yuan per mu ($56-$70 per 1/6 of an acre).

But Jianghua suggests that the support was still insufficient to make rice attractive. Even after subsidies, farmers chose crops that offered better returns. Their decisions provide evidence of their own: if rice provided an adequate livelihood, Jianghua would not need roadside demonstration fields, invented acreage and two sets of records.

That left local officials with an awkward choice. They could force farmers to abandon more profitable crops and accept lower incomes. Or they could respect farmers’ choices and fail an assessment, such as the one performed by CCTV. They chose to leave the crops in the ground while reporting the rice acreage their superiors expected.

The episode therefore reveals more than weak enforcement. It exposes a contradiction within the promise to balance food security with farmers’ interests. Policy documents demand more grain, while also calling for respect for farmers’ wishes, local conditions and gradual implementation. In practice, these principles do not carry equal weight. Grain acreage is a hard target; farmers’ wishes are a soft consideration. Flexibility survives only until someone checks compliance. In Jianghua, the arrival of the state broadcaster showed where the hierarchy lay.

Focus Report interpreted the false ledger as evidence that lower-level officials had failed the policy. Another interpretation is that the ledger showed what happened when the policy’s harder requirements collided with its softer qualifications. The programme condemned an attempt to reconcile incompatible demands without asking whether they could be reconciled at all.

That unanswered question leads beyond Jianghua to the premises of China’s food-security policy. Food security is a legitimate concern for a country of China’s size. Climate change, wars, export restrictions and shipping disruptions justify domestic production capacity, strategic reserves and contingency plans. Memories of famine also give the subject a particular emotional and political force, making dependence on foreign food appear potentially dangerous.

But accepting the importance of food security should open a debate about degree, not close it. How much self-sufficiency is enough? How much additional protection comes from the last marginal mu of rice? How much income and alternative production should be sacrificed to preserve it? These remain economic and empirical questions even when the objective is national security.

Nor can food security be reduced to the acreage devoted to staple crops. It also depends on yields, seed technology, water, storage, logistics, reserves, diversified import sources and the ability of international markets to respond to higher prices. China is already the world’s largest producer of rice and wheat. Its more serious agricultural vulnerabilities may lie in soybeans, feed grains, water scarcity and the long-term productivity of its farmland.

Chinese agricultural economists have argued that past increases in grain production came mainly from higher yields, rather than the expansion of cultivated acreage. Higher-value agriculture, meanwhile, has been crucial to raising rural incomes. Moving land from high-value crops back to low-return staples may improve one indicator of security while weakening rural prosperity, agricultural productivity or other parts of the food system.

Beijing’s emphasis on acreage reflects an especially cautious view of international trade: that overseas supplies could disappear precisely when China needed them most. Such a scenario cannot be ruled out during a severe geopolitical crisis. But organising everyday agricultural production around the worst imaginable contingency carries costs. Contingency planning can protect development; it can also begin to dictate it.

The same logic underpins China’s cultivated-land “red line”. The 1.8bn-mu threshold entered national planning in 2006. Official explanations say it reflected calculations involving population, consumption, yields, multiple cropping and the desired level of self-sufficiency. Yet the rule has endured for two decades while China’s population, diets, technology, environmental constraints and position in global agricultural trade have all changed.

A new calculation might produce a similar number. The problem is that the assumptions and trade-offs are seldom examined publicly. Mainstream coverage generally invokes the red line as the starting point of discussion, rather than asking whether the reasoning behind it remains convincing. A planning benchmark has gradually acquired the character of an axiom.

Land is both a security asset and a factor of production. Preventing it from moving into higher-value agriculture—or, where appropriate, housing, infrastructure and industry—carries an opportunity cost. Treating each such trade-off as a matter of national security risks over-securitising land policy and pushing ordinary economic reasoning out of the discussion.

The burden is also distributed unevenly. Cheap grain benefits consumers and supports price stability. But requiring farmers to grow low-return staples transfers part of the cost to rural households through forgone income. This sits uneasily beside “common prosperity”, one of China’s most prominent political and economic slogans in recent years. National food security should not be financed disproportionately by asking some of the country’s poorer citizens to accept lower earnings.

If maintaining a fixed amount of staple production is strategically necessary, the state should pay its full cost. That could mean higher guaranteed prices, more effective subsidies, crop insurance, irrigation, mechanisation and greater investment in yields. It should also mean stronger income protection for rural households.

More generous rural pensions could form part of that broader bargain. Many elderly farmers receive a pension of about 246 yuan ($34.52) a month. Despite repeated calls for a substantial increase, it is due to rise by just 20 yuan in 2026. It is not an income on which people can retire.

A stronger rural pension would not replace incentives tied directly to grain production. But it would place more of the cost of supporting rural China on the public budget, instead of leaving older farmers dependent on continued labour, their children and the returns from a few mu of land. The modest pension and the limited appeal of rice subsidies point to the same imbalance: positive support remains weak.

To put it diplomatically, there is something regrettable about the limits revealed by Focus Report. The programme can still investigate a county, a township and a village, at least sometimes. What it apparently cannot do is follow the question much farther—not necessarily to accuse anyone upstream, but simply to examine how the targets were calculated, whether their assumptions remain persuasive, how they interact with other national goals and who should bear their cost. It is supervision with a low ceiling: exacting about compliance at the bottom, but unable to examine the premises above. Such is also the state of public policymaking.

Rice grown on paper cannot fill a granary, and false reporting should not be defended. But punishment directed only at the bottom will encourage better-hidden paperwork, not more realistic policy. CCTV documented the distance between what farmers found economically rational and what local officials were required to report. The deeper problem was that paper had become the only place where food security, farmers’ incomes and bureaucratic compliance could all be achieved at once. (Enditem)

The East is Read

Beijing's food security concerns "overstated," Huang Jikun says, urging yield over acreage, farmers benefit over security obsession

China’s food security challenge is more limited than the government believes, and policy should encourage increasing yields with technology rather than expanding acreage, Professor Huang Jikun of Peking University recently says in a speech…

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3 years ago · 7 likes · 1 comment · Yuxuan JIA, Peiyu Li, Shangjun Yang, and Zichen Wang

Cai Fang, Academician and former Vice President — meaning Vice Minister — of the Chinese Academy of Social Sciences (CASS), made the case in an article published on the front page of Study Times on 19 June 2026. Study Times is published by the Party School of the Communist Party of China Central Committee, the country’s leading institution for training senior Party and government officials.

Cai calls for a substantial expansion of both lifelong training and social protection. Alongside formal education, training should account for a much larger share of China’s human-capital development system and become a principal channel for lifelong learning. Labour market institutions, meanwhile, must gain the technological capacity to scrutinise algorithms and protect workers beyond conventional employment relationships. Social security should become markedly more universal, with lower eligibility thresholds and wider coverage, drawing on universal basic income to strengthen the minimum living allowance system, moving from minimum wages towards living wages, and developing the pension scheme for urban and rural residents into a non-contributory basic pension covering all older people equally and unconditionally.

积极应对人工智能对就业的冲击

Responding Proactively to AI’s Impact on Employment

During the 2026 annual two sessions — the annual meetings of China’s top legislature and political advisory body — General Secretary Xi Jinping, while participating in deliberations with the Jiangsu delegation, stressed the need to “accurately grasp the people’s new aspirations for a better life and the new characteristics concerning the work on people’s well-being under the new circumstances, take proactive actions to address issues such as how to ensure high-quality and sufficient employment, how to increase the income of urban and rural residents, and how to further raise the standards of basic public services and social security, and to explore effective pathways to advance common prosperity for all.”

The impact of artificial intelligence on employment is a new challenge arising in the course of China’s modernisation. It lies at the heart of many of the emerging issues affecting people’s well-being.

The development and application of AI are a powerful driving force behind the new round of technological revolution and industrial transformation. They offer an important means of overcoming constraints arising from resource endowments and inefficient resource allocation, and represent a strategic technological high ground that China must secure.

At the same time, AI is a double-edged sword. It can substantially raise labour productivity, but it can also disrupt employment. The direction that AI ultimately takes depends, in the final analysis, on the values, objectives, and priorities guiding its research and development.

To address the risk that AI may exacerbate structural employment imbalances, policymakers should proactively guide its development in line with clearly defined standards, making continuous adjustments in light of its social and economic effects.

This will require an upgraded generation of active employment policies, stronger labour market institutions to protect workers’ rights and interests, and a social security system that more fully performs its foundational, inclusive and safety-net functions. Successfully addressing these challenges concerning people’s well-being will, in turn, provide an essential foundation for the sustained and healthy development of AI, ensuring that technological progress serves the public good and benefits people’s livelihoods.

AI Is Intensifying Structural Employment Imbalances

Large language models are proliferating and improving at remarkable speed. In many white-collar tasks, they have already reached roughly the average level of human performance. This has begun to displace workers with weaker skill endowments, particularly young people possessing only entry-level skills and older workers who find themselves on the wrong side of the digital and AI divide.

As AI continues to advance, its impact on employment will grow. This is likely to take two principal forms.

First, as AI models progress along their current trajectory towards artificial general intelligence, their capabilities will extend into a wider range of industries and occupations that rely on cognitive skills. The scope of displacement will gradually move from work requiring average skills to work requiring the highest levels of expertise. The resulting disruption to white-collar employment will be broad-based.

Second, the integration of AI with robots and intelligent agents is the next unstoppable major wave of technological breakthroughs. The large-scale displacement of operational and manual work — and therefore of many blue-collar jobs — will increasingly become a major trend.

At the heart of job displacement is AI’s skill advantage over human workers. As its capabilities deepen and broaden, skills traditionally possessed by workers gradually lose their competitive value.

This is a continuous process in which older skills decline in value while new skills rise in importance. The employment shock caused by AI therefore remains, in essence, a manifestation of structural employment imbalances: the balance between the supply of and demand for particular skills and forms of human capital is repeatedly disrupted and then re-established through adjustment.

Because AI’s impact on employment primarily takes the form of intensified structural imbalances, policies designed to respond to AI and those intended to address structural employment problems will have much in common. They will require similar policy directions and can be expected to produce mutually reinforcing results.

The heightened structural employment imbalances created by AI are likely to persist and even prove irreversible. The policy response must therefore be guided by a more ambitious vision, firmly grounded in a people-centred approach to development. The corresponding policy instruments must also be upgraded.

At present, AI’s impact on employment may not appear to have fully materialised. In reality, however, it is already unfolding quietly and may become suddenly and visibly apparent at a certain point.

Unless an upgraded generation of active employment policies is introduced quickly and effectively, and unless an employment-friendly model of development suited to the AI era is established, the exponential progress and diffusion of AI could produce an exponentially widening digital and AI divide. A growing mismatch would then emerge between disruptive technologies changing at exponential speed and relatively stable policy frameworks and institutional arrangements.

Align AI with an Employment-Friendly Model of Development

Efforts to prevent and address AI-driven employment disruption should begin at the technological source. The direction of research and development should be actively guided, with policies and standards continually revised in light of the effects produced.

AI has an extraordinarily powerful and rapidly growing capacity to augment human activity. This also means that it can be deployed in different directions and generate markedly different social and economic outcomes.

The field of AI has long discussed the concept of “alignment”: the idea that technological development and application should be constrained and guided by laws, social norms, public intentions, and the principle of AI for good. From the perspective of China’s problem-oriented and goal-oriented approach to economic and social development, the relevant objective should be aligning AI with an employment-friendly model of development.

Such alignment is both a necessary choice and an integral part of building an employment-friendly model of development.

The employment-first strategy should be taken a step further. An employment-friendly model of development requires the technological revolution represented by AI to be guided towards maximising the creation of new jobs. AI should also be used to strengthen the formulation and implementation of employment-promoting policies.

The intended result should be clear: AI models should be developed and applied more to augment workers’ capabilities than to replace their jobs.

One promising technological path is the combination of augmented reality and embodied AI, which is particularly consistent with creating employment. Augmented reality can extend people’s sensory capabilities, while intelligent agents, including robots, can augment workers’ perceptual and physical abilities. Such technologies can compensate for gaps in particular skills and enable relatively disadvantaged workers to perform a wider range of jobs and tasks.

By making intelligent tools more capable and more clearly oriented towards specific objectives, embodied AI can also strengthen complementarity and coordination between technology and human labour. This could create jobs across a wide range of fields and help maintain overall employment stability.

Active employment policies suited to the AI era should improve and upgrade the quality of existing public employment services. They should focus more precisely on the constraints workers and employers face in practice, while improving the efficiency with which labour is allocated and workers are matched with jobs.

At the same time, the remit of public employment services must be broadened in accordance with the requirements of an employment-friendly model of development.

The most indispensable and urgent part of this expanded remit is to use the authority of law, regulation, and industrial policy — as well as appropriate incentives and penalties — to align AI development and application with active employment policies. The latest technologies must be incorporated into an employment-friendly model of development.

Through regulation, incentives, and policy guidance, the job-creating effects of AI should, as far as possible, be made greater than its destructive effects on existing employment.

Upgrade Public Employment Services

In the face of the severe employment challenges created by AI, China should build on its existing policy framework for addressing structural employment imbalances while further strengthening active employment policies. Measures should become more targeted, and the concepts and mechanisms of anticipatory governance should be developed.

AI systems and intelligent agents are acquiring increasingly powerful learning capabilities and becoming more adept at mastering skills previously possessed by workers. Improving human capital is therefore essential to respond effectively to the impact of AI.

Yet new skills are becoming obsolete with increasing speed, and workers must continually renew their capabilities as jobs change. Skills training cannot be treated as a one-off intervention capable of solving the problem once and for all.

Public employment services must adapt to changes in the nature of human capital and in the way skills are developed in the AI era. The scale and intensity of training should be substantially increased. In particular, training programmes should last longer, no arbitrary ceiling should be placed on how frequently workers may receive training, and training content should be continually expanded and updated to reflect technological change.

Within the human capital development system, training will account for a much larger share alongside formal education. It will become an increasingly important channel for lifelong learning.

To address the unprecedented challenges posed by AI, new principles and measures should be developed in several areas.

First, China should improve its model of human capital development. Whether the service concerned is formal education or lifelong training, the government should bear the primary funding responsibility. Education and training should be treated as essential public services available to the entire population throughout the life course.

Second, skills training should cover more than just the immediate acquisition of the knowledge needed to use and manage AI, or transition training intended to help displaced workers find new jobs as quickly as possible.

Training programmes should pay particular attention to the complementary relationship between human intelligence and artificial intelligence. They should help workers make full use of the comparative advantages of human capital and, as far as possible, stay ahead as they interact and compete with AI.

Finally, mechanisms for matching the supply of and demand for human resources should be improved. In the AI era, labour market institutions and the public employment service system should work together to continually raise matching efficiency.

Reforms should promote greater integration in public administration, strengthen consistency among different agencies in pursuing employment-friendly objectives, coordinate the use of funds and reallocate resources more effectively. These steps will help continuously address structural employment imbalances.

Public employment services should themselves become more adept at using AI. Data, models, algorithms, and other technological tools can be used to turn the same technology that displaces some jobs into an instrument for creating opportunities and matching workers with them.

In theory, AI’s capacity to create employment can be just as powerful as its capacity to replace workers. Over the longer term, job creation could entirely outpace job destruction.

The difficulty lies in the structure of incentives. Replacing workers can produce immediate market returns, whereas creating employment often generates social returns only over the longer term. This helps explain why the employment-displacement effect of AI so often exceeds its job-creation effect.

Resolving this incentive mismatch requires public policy to share the long-term social returns in advance and encourage technological and institutional innovations designed to create employment.

Strengthen Labour Market Institutions and Social Security

Labour is a unique factor of production because it is embodied in human beings themselves. In the process of economic activity and social wealth creation, market mechanisms are needed to allocate human resources, but institutions are also required to protect workers’ rights and interests.

In this sense, labour markets are inherently subject to market failure.

The more disruptive a technological revolution or industrial transformation becomes, and the more intense the accompanying process of creative destruction, the less capable market mechanisms alone are of protecting workers. The necessity and urgency of strong labour market institutions therefore become increasingly apparent.

The revolutionary nature of AI is also being manifested in this area, raising new questions for the design and operation of relevant institutions.

One distinctive change that should not be overlooked, both in the employment effects of artificial intelligence that have already emerged and in those yet to come, concerns the way labour market institutions operate.

Traditionally, institutions such as employment and social security legislation and enforcement, minimum-wage systems, collective bargaining, labour contracts, and labour dispute arbitration have treated employers as the objects of regulation and supervision. Operating in a relatively stable environment and based on relatively stable expectations, these institutions have sought to mitigate the adverse consequences of labour market failures.

Today, however, they must contend with actors possessing technological capabilities of almost unlimited reach. They must be able to challenge algorithms and models that do not conform to social norms. Employment and entrepreneurship are also increasingly taking place outside the boundaries of traditional employer-employee relationships.

Relevant institutions must therefore acquire more hard-core technological capabilities of their own. More importantly, they must develop the ability to anticipate changes in technology, the economy, and society.

At a particular stage of development, maintaining the long-term sustainability of the social security system may require an emphasis on a degree of equivalence between contributions and benefits. This, in turn, requires relatively strict mechanisms for identifying eligible beneficiaries.

As AI penetrates a growing range of industries, however, both the necessity and the practical feasibility of identifying beneficiary groups are being called into question. It is becoming increasingly difficult to say how many years of education a person needs, which subject a student should choose at a vocational school, university, or graduate institution, or which particular set of skills would be sufficient to protect a person’s job from disruption.

Correspondingly, it will become increasingly difficult to use highly targeted mechanisms to determine whether a particular group should receive a particular form of social security benefit.

Within appropriate limits and at a measured, gradual pace, the social security system should therefore become more inclusive. Eligibility thresholds should be significantly lowered so that a wider range of people can be covered.

As AI spreads across more industries, its capacity to raise labour productivity is becoming increasingly certain. Countries around the world have discussed and explored new forms of labour market institutions and more inclusive social welfare arrangements. These proposals are intended both to enable society to share productivity gains more broadly and to respond to employment disruption.

Some widely discussed arrangements have counterparts in China’s existing labour market institutions and social security programmes. They can therefore serve as useful reference points for the evolution of China’s own systems.

For example, the concept of universal basic income could inform efforts to expand the coverage and raise the benefit levels of China’s minimum living allowance system; to progressively bring the minimum-wage system closer to a living-wage system; to develop the basic pension insurance scheme for urban and rural residents into a non-contributory basic pension system that covers all older people equally and unconditionally; and, in the “third distribution” — including philanthropy, charitable giving, and other voluntary contributions to society — to give substantive effect to the principle of AI for good and create incentives for companies to assume new forms of social responsibility, etc.

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Sang, an outspoken Professor of Economics and Dean of the Institute of International Economy, the University of International Business and Economics, acknowledges the scale of the decline, the deterioration in returns experienced by some foreign businesses, and the continued existence of operational barriers in areas including government procurement, data transfers, standard-setting and regulatory implementation. But he rejects the argument that falling investment primarily reflects Beijing’s loss of interest in foreign capital. Instead, he assigns greater weight to the property downturn and the weakness in domestic demand that followed it, the disruptive effects of digital and intelligent transformation, and, most fundamentally, the increasingly restrictive international investment environment.

Just as importantly, Sang argues that China’s own rationale for attracting foreign investment has changed. Foreign capital is no longer needed principally to fill shortages of domestic capital or foreign exchange, and China is no longer seeking every conceivable form of investment. Foreign investment is now expected to contribute to technological progress, industrial upgrading, institutional reform and supply-chain stability. The relationship has therefore become more selective—and, in Sang’s words, increasingly dependent on “structural compatibility.”

His recommendations focus on three areas: better coordination between opening-up policies and sector-specific regulations in services; clearer and more predictable rules for the cross-border movement of scientific and technological data; and stronger support for foreign investment in high-tech manufacturing amid expanding Western investment-screening regimes.

The article was published on 30 June 2026 on his personal WeChat blog, Sang Baichuan’s Perspective on Opening Up (桑百川的开放观).

中国与外资还能双向奔赴吗？

Can China and Foreign Investors Continue to Choose Each Other?

As China seeks to stabilise existing foreign investment, attract new inflows, and improve investment quality, can the country and foreign investors sustain a mutually beneficial relationship?

I. The Changing Rationale for Attracting Foreign Investment

China’s actual use of foreign capital reached a record US$189.1 billion in 2022. After declining for three consecutive years, however, it fell to US$104.66 billion in 2025—a cumulative drop of 45 per cent, steeper than the decline in global FDI over the same period. Some existing foreign investment has also been withdrawn, while foreign investors have shown a clear preference for asset-light business models.

Yet several important strengths remain. China continues to rank among the world’s leading destinations, attracting more than US$100 billion in new FDI each year. New foreign investment still substantially exceeds divestment, meaning that the overall stock of foreign investment continues to grow. The composition of FDI has also improved, with a steadily rising share flowing into high-technology industries. Meanwhile, China’s vast domestic market and comprehensive industrial system remain highly attractive to international investors, as reflected in the marked increase in the number of newly established foreign-invested enterprises.

Behind these changes in the growth, scale, and composition of foreign investment lies a shift in the rationale for attracting FDI. Foreign investment is no longer sought as a means of addressing the traditional “two gaps” in domestic capital and foreign exchange. Instead, it is expected to promote technological progress and economic restructuring, raise the level of industrial development, spur reforms of economic and administrative institutions, stabilise industrial and supply chains, support the smooth functioning of the economy, and reinforce the interaction between domestic and international economic flows.

Continuing to attract and utilise foreign investment therefore remains essential to China’s integration into the global economy, the development of an open economy, and its strategy of promoting growth through greater openness.

As a result, China no longer welcomes every form of foreign investment indiscriminately. Energy-intensive, highly polluting, and technologically unsophisticated projects are no longer sought after; the emphasis is increasingly on high-quality investment.

China’s accelerating economic transformation has also enabled a large number of domestic companies to emerge as innovative and competitive players, with some gaining an edge over foreign-invested enterprises. Foreign companies with weaker technological capabilities and limited competitiveness have consequently seen their returns decline. Some no longer regard China as an easy place to grab high profits, while others have been forced to leave the market.

The relationship between China and foreign investors has thus become increasingly conditional on structural compatibility.

II. Why Have New FDI Inflows Declined and Some Existing Investments Been Withdrawn?

Is the Decline Simply a Correction from a Record High?

There is no general rule that foreign investment must decline after reaching a high level.

Since 1992, China’s FDI inflows have generally followed an upward trajectory, repeatedly reaching record highs. Apart from modest declines in 1999 following the Asian financial crisis and in 2009 during the global financial crisis, China had never experienced two consecutive years of falling FDI.

It is therefore unconvincing to attribute the recent decline simply to the high base of previous foreign investment.

Has China Become Less Committed to Foreign Investment?

The evidence does not support this explanation either.

Some foreign-invested enterprises have complained that more frequent compliance inspections have raised operating costs. Others have questioned the continuity of foreign investment policies or expressed concern that China’s business environment has changed. Nevertheless, China has continued to attach considerable importance to attracting and utilising foreign investment.

China has implemented the Foreign Investment Law, introduced a negative-list system for foreign investment access, expanded the range of sectors open to foreign investors, and removed all remaining foreign investment access restrictions in manufacturing. Pilot programs for opening the service sector have also been expanded.

The Central Economic Work Conference identified “greater efforts to attract and utilise foreign investment” as a key task for 2023. In 2024, the State Council issued the Action Plan for Advancing High-Standard Opening-Up and Attracting and Utilising Foreign Investment with Greater Efforts. This was followed in 2025 by the Action Plan for Stabilising Foreign Investment.

China’s door has opened wider. It is therefore difficult to argue that China no longer attaches importance to foreign investment.

Market Access Without Permission to Operate?

China’s expansion of market access has not eliminated every problem in the business environment. In some sectors, foreign investors may be formally granted market access but still face barriers to operating in practice. Foreign-invested enterprises continue to raise concerns about intellectual property protection, government procurement, cross-border data flows, participation in standard-setting, regulatory transparency, and fair competition.

These problems, however, are longstanding rather than recent. Nor have they become more severe in the past few years, but have improved noticeably. They therefore offer only a limited explanation for the recent changes in foreign investment.

The Property Downturn Has Been the Most Immediate Cause

Foreign investors naturally prefer markets with faster growth, more business opportunities, and higher expected returns. The economic disruption of the three-year pandemic period punctured China’s property bubble, pushing more than 20 real estate-related industries into varying degrees of contraction.

The property-driven model of rapid economic growth came to an abrupt halt. Large numbers of workers in the property sector and related industries lost their jobs or saw their incomes decline, weakening consumer demand and further aggravating overcapacity in other sectors.

Investment returns fell, capital turnover slowed, banks faced rising non-performing loans, and arrears accumulated among governments and businesses. Mounting debt further weakened the willingness of companies and households to invest and consume.

Against strong supply and weak demand, foreign-invested enterprises have seen their profitability decline, prompting some to scale back investment or exit the market.

Digital and Intelligent Transformation Has Indirectly Reshaped FDI Structure

Embracing the latest industrial revolution, identifying new drivers of growth, and promoting development through economic restructuring and upgrading have become essential to China’s economic renewal. Yet digitalisation and intelligent technologies are also reshaping the distribution of economic opportunities and returns in China.

The rapid growth of online shopping has weakened brick-and-mortar retail and reduced transaction volumes in physical stores. The development of digital banking and online financial platforms has diminished demand for traditional bank branches and other conventional financial institutions. The large-scale use of industrial robots has replaced workers in some industries, contributing to rising unemployment. The widespread adoption of virtual meetings and online business negotiations has reduced expenditure on transportation, hotels, accommodation, and business travel. E-commerce platforms and livestream shopping have also intensified price competition, sharply compressing profit margins and fuelling a damaging race to the bottom.

In this environment, some foreign-invested enterprises have become less competitive, indirectly eroding their profitability and prompting them to scale back investment or adjust their investment portfolios.

Changes in the External Environment Are the Fundamental Cause

The global economy is undergoing profound changes. Unilateralism and protectionism in trade and investment are on the rise, national security is being applied ever more broadly, and global industrial and supply chains are being restructured at an accelerating pace. International direct investment has consequently contracted.

China has become a focal point of the intensifying contest between external containment and efforts to counter it. As the United States and other Western countries increasingly use administrative measures to restrict outbound investment and abuse economic sanctions, multinational corporations have been forced to prioritise security over efficiency by pre-emptively ring-fencing their operations and favouring asset-light investment models. Such arrangements allow them to adjust, separate, or divest business operations rapidly in the event of a severe deterioration in political relations.

This cautious approach has deepened the decline in China’s FDI inflows.

III. Priority Areas and Persistent Obstacles in Attracting Foreign Investment

The service sector is the main focus of China’s efforts to attract more foreign investment. The digital economy offers substantial investment potential in the latest industrial revolution, while high-technology industries are a key arena in the global competition for FDI and a major driver of economic upgrading.

Market Access Without Permission to Operate in the Service Sector

Since 2013, the service sector has accounted for the largest share of China’s actual use of FDI, reaching 72.9 per cent in 2025.

The continued opening of the service sector and the relaxation of foreign investment access restrictions have created new opportunities for overseas investors. The potential for further investment growth is particularly substantial in modern services.

Nevertheless, foreign investment in the service sector continues to face numerous obstacles. In some fields, foreign companies are formally granted market access but still face barriers to operating in practice.

Government departments have yet to form a fully coordinated approach. Policy objectives are inconsistent, specific measures are not aligned, and an effective mechanism for legislative coordination remains absent.

As a result, opening-up policies are not matched by timely revisions to sector-specific laws and regulations. Amendments to subordinate rules lag far behind broader policy decisions, resulting in inefficient implementation and sometimes even contradictory application.

In priority service sectors being opened up—such as culture, education, healthcare, and finance—departmental regulations restricting the operations of foreign-invested enterprises remain in force. These rules are inconsistent with broader decisions to ease foreign investment access, causing the two sets of policies to work at cross-purposes and hindering the implementation of foreign-invested projects.

The Investment Environment for the Digital Economy Needs Further Improvement

The latest industrial revolution is gathering momentum, and the digital economy is expanding rapidly. Increasing marginal returns are replacing diminishing marginal returns, making openness and cooperation increasingly important for realising economies of scale.

Although international investors have generally become more cautious, investment in digital industries has continued to grow. Capital has been concentrated in artificial intelligence infrastructure, data centres, financial technology platforms, e-commerce logistics, and professional software services.

Between 2020 and 2025, the share of Fortune Global 500 companies’ investment in next-generation information technologies—including AI, the Internet of Things, and cloud computing—going to the United States rose from 29 per cent to 45 per cent, while the corresponding share going to Asia (excluding China) increased from 10 per cent to 24 per cent.

China is already among the world’s leading digital economies. With continued openness, cooperation, and innovation, the digital economy could become a major new destination for foreign investment.

However, a global economic governance framework suited to the digital and intelligent era has yet to take shape.

Amid competition over the latest industrial revolution, both advanced economies and emerging markets have introduced new industrial policies to support digital innovation, artificial intelligence, semiconductors, chips, and other emerging and strategically important industries.

At the same time, governments have increasingly linked digital and AI technologies to national security. This has intensified the contest between technological containment and countermeasures, aggravated geopolitical tensions, encouraged unilateralism and protectionism, and accelerated the restructuring of global industrial and supply chains. These developments have posed challenges to international investment and cooperation in the digital economy.

Against this backdrop, cross-border data flows and data security have emerged as important new considerations for multinational investment in the digital economy. Multinational companies now place greater emphasis on the secure and efficient transfer of data across borders.

In China, however, neither national nor local authorities have provided sufficiently clear definitions of “core data” and “important data.” Identification standards are ambiguous, and companies often find it difficult to obtain definitive guidance from sectoral regulators. As a result, enterprises engaged in cross-border data transfers and transactions often incur additional costs to minimise regulatory risk.

Companies seeking to transfer data through the data-export security assessment process face further uncertainty. Existing regulatory documents do not clearly set out the assessment procedures or evaluation criteria, leaving businesses uncertain about what additional data-export security measures they need to adopt or strengthen.

China’s Personal Information Protection Law and Data Security Law distinguish between cross-border data transfers for business purposes and those serving law-enforcement or judicial purposes. Scientific research data, however, often lies on the uncertain boundary between these two categories. A nationally coordinated and unified framework governing the management and cross-border transfer of scientific research data has yet to be established.

Foreign Investment in High-Tech Manufacturing Faces Western Investment-Screening Restrictions

Amid intensifying competition among major powers, high-technology manufacturing has become a major focus of global investment. In 2025, high-technology industries accounted for 32.3 per cent of China’s actual use of foreign capital.

On the one hand, geopolitical tensions and uncertainty over tariffs have prompted some multinational corporations to redirect investment in sectors such as semiconductors and new energy to the United States and its allies to reduce supply-chain risks.

On the other hand, U.S. industrial support has reinforced this trend. Following the passage of the One Big Beautiful Bill Act, the investment tax credit available to semiconductor manufacturers was increased from 25 per cent to 35 per cent. Combined with semiconductor tariffs, these incentives have substantially reduced the costs and risks associated with investing in semiconductor production in the United States, encouraging companies to accelerate the construction of manufacturing facilities there.

To preserve its international competitive advantage in strategically important manufacturing, the United States had already established, during the Biden administration, an integrated regulatory framework combining inbound investment screening, outbound investment controls, and export restrictions. The Trump administration has continued this approach. On 21 February, 2025, it issued the America First Investment Policy memorandum, incorporating economic security into national security and laying the policy foundation for the weaponisation of investment screening in high-technology manufacturing.

The United States is also seeking to build an alliance of investment-screening regimes. It has encouraged the European Union, the United Kingdom, Japan, and other partners to adopt corresponding investment-review measures towards China, align themselves with U.S. technological restrictions, and help exclude China from global innovation chains.

U.S. investment-screening policies have directly affected China’s ability to attract foreign investment in high-technology manufacturing. They have also coerced third-country investors to redirect investment elsewhere.

These restrictions are likely to impede U.S. investment in ten major Chinese high-technology fields, including artificial intelligence, semiconductors and microelectronics, quantum computing, and aerospace. They have also created a chilling effect across industries and countries, discouraging investment in other sectors.

The United States is also expected to adjust and expand the range of key technologies subject to investment screening over time. Other high-technology industries included on the U.S. Critical and Emerging Technologies List, even if not currently subject to explicit restrictions, may become major targets in future rounds of expansion.

The European Commission’s European Economic Security Package, released on 24 January, 2024, contains proposals to reduce the risk of sensitive technologies leaking through investment. These measures echo the U.S. investment-screening approach and may further constrain multinational investment in China’s high-technology industries.

IV. Policy Priorities for Stabilising the Scale and Improving the Quality of Foreign Investment

The Ministry of Commerce, the National Development and Reform Commission, and the Ministry of Finance recently issued the Action Plan for Consolidating, Stabilising, and Improving Foreign Investment.

The plan sets out 15 policy measures in five areas: expanding market access, improving investment facilitation, strengthening investment promotion, enhancing services and safeguards for foreign-invested enterprises, and improving the administration of foreign investment.

It responds directly to the concerns of foreign-invested enterprises and aims to create a more favourable business environment. Its implementation provides a useful framework for examining how to remove the main obstacles and address the practical difficulties facing foreign investment in priority sectors.

First, Strengthen Coordination in the Institutional Opening up of the Service Sector

Government departments should ensure that their respective policies towards foreign investment are consistent. Departmental rules that conflict with measures intended to expand foreign access to the service sector should be systematically reviewed and repealed.

Major opening-up initiatives should be accompanied by detailed implementation rules. The objectives and tasks in the continued expansion of institutional opening-up should be clearly identified.

For each sector, the government should draw up a list of problems requiring targeted reform, clearly assign powers and responsibilities, and make reform tasks and implementation progress transparent and trackable. This would help remove the systemic institutional obstacles that continue to impede institutional opening up.

Second, Accelerate the Development of a Cross-Border Framework for Scientific and Technological Data to Promote Foreign Investment in the Digital Economy

The experience of cross-border data pilot programmes in Shanghai, Tianjin, and Hainan should be reviewed promptly. On that basis, China should improve its rules for cross-border data flows, refine provisions relating to data sovereignty and security protection, and design negative lists with caution. The aim should be to ensure that regulatory oversight of cross-border flows of scientific and technological data is standardised and consistent.

International data exchanges and trading centres should also be used to provide foreign-invested enterprises with efficient data-circulation and transaction services. This would help make cross-border scientific and technological data flows more standardised and internationally compatible.

Third, Provide Stronger Support for Foreign Investment in High-Tech Manufacturing

First, China should improve investment facilitation in high-technology industries. Where necessary, China could consider offering foreign investors in high-technology sectors preferential treatment beyond national treatment. Such measures could help offset the loss of investor confidence caused by U.S. investment-screening policies and respond to the concerns of multinational technology companies.

Second, China should build on the implementation of the WTO Agreement on Investment Facilitation for Development by continuing to improve a market-based, internationally-oriented business environment underpinned by the rule of law.

It should expand international scientific and technological cooperation and attract more international and private capital to research and development, thereby supporting innovation and helping to counter technological restrictions imposed by the United States and other Western countries.

Finally, China should increase research and development support in sectors most likely to be affected by external screening restrictions. The role of government investment in supporting innovation in hard-technology industries should be fully leveraged. Fiscal, taxation, and financial policies supporting research and innovation should apply equally to state-owned enterprises, private companies, and foreign-invested enterprises to foster the growth of emerging industries and industries of the future.

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In recent years, he was admired in particular for his candid assessments of weak economic conditions and inadequate policy responses, as well as for the unusually direct advice he offered to markets and to young people. Many in China are mourning his death.

We are republishing an article he kindly authorized us to publish from 2024, first available in The East is Read, Pekingnology’s sister newsletter. —— Zichen

Gao Shanwen, Chief Economist at SDIC Securities Co., Ltd. (formerly Anxin Securities), delivered the following speech at the seminar “Understanding and Resolving the Issue of Overcapacity,” organized by the China Finance 40 Forum (CF40), a Beijing-based think tank focused on macroeconomics and financial policies. The original Chinese text is available on CF40’s official WeChat blog.

Gao and CF40 have graciously given us permission to translate and publish the speech.

“产能过剩”问题观察： 历史规律、现实背景与应对策略

Observations on the Issue of Overcapacity: Historical Patterns, Current Context, and Response Strategies

I. Overcapacity is an Unavoidable Phase in the Development of Emerging Industries.

In the development of any large-scale emerging industry with foreseeable future demands, severe overcapacity is almost inevitable due to market dynamics. This is because nobody can predict the level of demand the industry will eventually settle on, hence perpetual trial and error.

The trial-and-error phase will never result in continuous insufficient capacity, as price hikes and profit expansions from undercapacity make this state unsustainable. Conversely, severe overcapacity often leads to a belief that the surplus is temporary and future demand growth will absorb the excess. The market will not realize the true level of stable demand until anticipated demand growth repeatedly fails to materialize, by which time the industry is already entrenched in overcapacity.

Thus, emerging industries must endure a painful but inevitable phase of overcapacity and subsequent capacity reduction. Only after this phase can the industry mature, stabilize, and enable companies to achieve profitability and provide sustainable dividends to shareholders.

Even in the United States, which claims minimal government intervention and full reliance on market forces, industries such as railroads, automobiles, telecommunications, and computers have faced similar overcapacity issues, demonstrating the universality of this phenomenon.

II. Historical Evidence Shows that the Chinese Government Does Not Favor Overcapacity.

Some critics argue that overcapacity in China is a result of the country’s industrial policies and government subsidies, but this perspective is a misunderstanding.

In the late 1990s, following rapid expansion throughout the 1980s, China’s textile industry experienced severe overcapacity. Market mechanisms for natural selection and exit were not functioning smoothly, forcing the government to implement large-scale administrative measures to reduce excess capacity, known as the “spindle reduction campaign.” Since the 21st century, China’s textile industry has not faced severe overcapacity again and has become relatively stable and globally competitive with limited growth.

In 2016, China launched the policy to “三去一降一补 cut overcapacity, reduce excess inventory, deleverage, lower costs, and strengthen areas of weakness.” The “overcapacity” component targeted excess capacity in industries like steel, cement, and coal. Between 2017 and 2019, despite limited overall economic growth, the prices and profitability of these industries significantly recovered. These examples indicate that the Chinese government does not favor overcapacity but is compelled to resort to strong administrative measures to reduce it due to inefficient market competition and exit mechanisms.

Other sectors, such as home appliances and baijiu (Chinese liquor), have also experienced significant overcapacity and transitioned to market-driven clearance, which cannot be attributed to government subsidies.

As mentioned earlier, severe overcapacity followed by long-term market-driven survival of the fittest is a natural development model for emerging industries. However, the role of local government incentives in exacerbating overcapacity remains contentious.

From a micro perspective, the issue is clear: local governments swarming to provide cheap land, credit support, and various subsidies to relevant enterprises naturally leads to more new capacity and worsening overcapacity.

From a macro perspective, however, the situation is more complex. In an open economy, the increased competitiveness to an industry, driven by local government subsidies, would result in more exports, leading to stronger pressure for RMB appreciation. Currency appreciation would counteract the effects of government subsidies, discriminating against industries that did not receive subsidies and weakening their competitiveness. Thus, competitive advantages in some industries develop simultaneously with disadvantages in others.

While fiscal subsidies might increase the competitiveness of specific industries at a micro level, whether they can systematically enhance a country’s overall competitiveness at a macro level remains doubtful. Theoretically, the competitiveness boost and surplus expansion from subsidies would be offset by currency appreciation. This means trade surpluses might not change in equilibrium, and overall, competitiveness in other countries might not be harmed.

From the perspective of trade partners, although their competitiveness in subsidized industries might weaken, their competitiveness in non-subsidized industries might strengthen, resulting in no overall loss. Therefore, the macro effects of government subsidies are not clear-cut under a floating exchange rate system.

III. From the American Perspective, the Root Cause of the Current Overcapacity Dispute Lies in the Impact of Chinese Export Competition on U.S. Income Distribution.

The late 1970s and early 1980s saw neoliberalism dominate U.S. economic policy, emphasizing laissez-faire, free trade, and deregulation. With the end of the Cold War and China’s reform and opening up, this neoliberal wave accelerated global economic integration, leading to unprecedented economic prosperity.

However, the 2008 global financial crisis and subsequent geopolitical and economic changes, including China’s rise, resulted in the decline of neoliberalism. Issues neglected by neoliberalism, such as income distribution, security concerns, and social equity, have become key policy topics. This context is essential for understanding current debates on overcapacity.

Neoliberal economic policies theoretically aim for Pareto optimality. Proponents like Milton Friedman and Friedrich Hayek rarely addressed income distribution, believing laissez-faire policies would naturally achieve Pareto efficiency.

This assumption rests on one or more of the following:

• Income distribution issues are unimportant.

• The government can address the needs of those disadvantaged by economic growth through redistribution policies, thereby achieving a Pareto optimal distribution of economic gains from laissez-faire policies.

• A free-market economy, through the unrestricted movement of labor, capital, and land, can reallocate resources efficiently, quickly mitigating pressures on disadvantaged groups.

In reality, these assumptions may not hold. If China were a small economy like Singapore, the impact on the U.S. would be minor, affecting only a few thousand workers’ jobs or income levels, which the large U.S. economy could easily absorb without significant political repercussions.

However, China is a massive economy, and its enormous export competition has created strong political opposition from affected U.S. groups. Meanwhile, beneficiaries of China’s rise, such as Wall Street, multinational corporations, and ordinary consumers, are either too dispersed or politically marginalized to counterbalance this opposition. This dynamic is an important backdrop to the U.S.-China trade disputes.

Some American scholars argue that China’s accession to the WTO caused the first “China shock,” leading to the collapse of many Rust Belt communities and immense social distress. While the rapid decline of the Rust Belt cannot be solely attributable to the China shock, it remains the most politically exploitable cause.

Currently, after years of dormancy and effort, Chinese industries such as new energy vehicles have gained significant competitive advantages over the U.S. and other major Western countries. The U.S. political and business sectors fear this may constitute a second China shock, much more severe in scale and intensity than the first.

Moreover, even if the government manages the resultant unemployment, the U.S. cannot accept the disappearance of its major auto companies in Detroit due to the significant impact on patriotic sentiment.

IV. The Adjustment of China’s Real Estate Market and the Lingering Effect of the Pandemic Have Led to a Significant Expansion of Trade Surpluses, Forming the Cyclical Context for the Current Overcapacity Dispute.

Analyzing the aggregate data on the Chinese economy reveals two key conclusions:

First, when excluding the impact of price factors, China’s current manufacturing trade surplus as a percentage of GDP has surpassed the levels seen in 2007-2008, reaching a historical high.

Second, this significant trade surplus is primarily due to major adjustments in China’s real estate market, which created a gap in domestic demand. To fill this gap, China turned to international markets, resulting in a substantial expansion of its trade surplus. Additionally, the lingering effects of the pandemic have weakened domestic demand further, increasing reliance on foreign markets.

This significant adjustment in China’s trade surplus has exerted competitive pressure on the manufacturing sectors of other countries, forming the cyclical context for the current overcapacity dispute.

V. Recommendations for Response Strategies

It is important to recognize that the continuation of protectionist policies implemented by the United States such as tariffs will not result in a robust domestic manufacturing sector. Instead, these policies will protect inefficient industries and increase the burden on consumers, making the situation unsustainable in the long term.

In reality, apart from the aim of decoupling the U.S. economy from China, U.S. protectionist policies like tariffs are primarily intended to buy time for the adjustment and catch-up of key domestic industries such as the automobile sector. For the U.S., this remains a process fraught with uncertainty and significant challenges.

Regarding China’s strategies to address overcapacity disputes:

First, strategically, China should unwaveringly shift towards expanding domestic demand, with a particular focus on increasing domestic consumption to drive economic growth.

Second, efforts should be made to maintain stable aggregate demand, smooth out economic fluctuations, maintain exchange rate flexibility, and ensure international coordination and communication of macroeconomic policies.

Third, when emerging industries achieve competitive advantages, China should promptly phase out related supportive industrial policies. This includes guiding the internationalization of industry supply chains, production, and sales systems to enhance resilience against trade frictions and promoting the timely market-based elimination of inefficient capacity.

Finally, China should strive to uphold a rules-based international trade system centered around the WTO, continue to advocate for and promote free trade, maintain restraint and rationality, and address trade disputes through agreed-upon dispute resolution mechanisms.

The East is Read

Chinese government and overcapacity: historical patterns, current context, and response strategies

Gao Shanwen, Chief Economist at SDIC Securities Co., Ltd. (formerly Anxin Securities), delivered the following speech at the seminar "Understanding and Resolving the Issue of Overcapacity," organized by the China Finance 40 Forum (CF40), a Beijing-based think tank focused on macroeconomics and financial policies. The original Chinese text is…

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2 years ago · 11 likes · Yuxuan JIA

But it just came to my attention that the House Select Committee on China — perhaps the loudest and most influential institutional China critic in the U.S. Congress — recently cited a Pekingnology exclusive, and, more importantly, independently corroborated its central technical judgment.

The story began in late February, when a Hangzhou-based company called MizarVision 觅熵科技, or Mi Entropy Technology Co., Ltd., began posting high-resolution satellite imagery of U.S. military assets across the Middle East. The images, widely circulated on Chinese and international social media, showed U.S. aircraft and facilities at bases in countries allied with Washington, when the U.S. and Israel attacked Iran.

MizarVision’s posts quickly attracted attention outside China. Israeli media reported on the images. Military analysts discussed them online. The South China Morning Post captured the obvious question in its headline: “Is China flexing its intelligence muscle by tracking US military moves near Iran?”

That was a fair question. MizarVision did not disclose the source of the underlying satellite images. The company does not operate its own satellites. If it did not take the images itself, it must have obtained them from elsewhere. Were they Chinese? Were they Western? Were they commercial? Were they government-linked? And if they were Chinese, was Beijing deliberately allowing such images to circulate as a demonstration of intelligence capability?

Some observers leaned toward the more dramatic interpretation. Dennis Wilder, a former senior U.S. intelligence official and now a professor at Georgetown University, asked publicly what Beijing’s purpose might be in allowing the images to be published. Some Chinese commentators, with PLA credentials, also suggested that MizarVision’s work demonstrated China’s growing intelligence capabilities.

But on February 27, 2026, Pekingnology published a more boring explanation.

Hu Bo, Director of the South China Sea Strategic Situation Probing Initiative and Research Professor and Director of the Center for Maritime Strategy Studies at Peking University, told Pekingnology exclusively that he was “100% sure” the recent MizarVision images of U.S.-Iran military posture did not originate from Chinese satellites. According to Hu, the images came from U.S. and European satellites.

Hu’s reasoning was technical rather than political. Satellite images contain clues: the timestamp, the ground geometry, the viewing angle, and the resolution. With publicly available orbital information, or satellite ephemeris data, analysts can often reconstruct which satellites were in a position to capture a given image. Resolution is another tell. The details visible in the MizarVision images were, in Hu’s view, consistent with U.S. or European commercial satellite imagery.

The point of the Pekingnology post was simple: the fact that a Chinese company annotated and published satellite imagery does not by itself mean the original imagery came from Chinese satellites. In the world of commercial remote sensing and open-source intelligence, the data supply chain is global. A Chinese firm can buy, license, scrape, resell, analyze, or repackage images originally captured by non-Chinese satellites.

Now comes the interesting part.

On April 13, about 45 days after Pekingnology’s post, Representative John Moolenaar, Chairman of the House Select Committee, wrote to Pete Hegseth regarding Airbus Space and Defense Systems.

The letter sought assurance that Airbus Space had stopped providing satellite imagery “in ways that could further endanger American troops and assets in the Middle East involved in Operation Epic Fury.” It said a “recent analysis” indicated a high likelihood that Airbus Space had provided imagery of U.S. military assets in the Middle East to MizarVision.

The Committee said it had worked with a Ph.D. researcher and satellite-systems expert to run a simulation on whether Airbus satellites could have taken the MizarVision images. The letter noted that MizarVision is a Hangzhou-based company that makes AI software for analyzing satellite photos, and that it does not identify which company provided each individual image.

Then the letter cited Pekingnology.

Hu Bo, Director of the South China Sea Probing Initiative at Peking University, and one of China’s foremost satellite imagery analysts, stated publicly that he is “100% sure” the MizarVision imagery of U.S. military assets did not originate from Chinese satellites.1 Given the information available about the optics on Chinese satellites, it is unlikely that they are capable of generating imagery with the resolution that was present in the image published by MizarVision.2 According to Planet Labs, MizarVision is not a client and the images posted by the firm during the Iran conflict were not sourced from its satellites. The further narrowing of imagery providers, based on technical analysis in consultation with a satellite imagery expert, leads to Airbus Space.

In other words, the House Select Committee did not merely quote Pekingnology and accepted the core analytical point — that the images were not from Chinese satellites — and then built its own further case about a likely European provider.

The letter’s political framing is still unmistakably that of the Select Committee on China. It argues that commercial satellite imagery may have been “exploited by China” and urges voluntary limitations to prevent Chinese entities from obtaining imagery that could put U.S. forces at risk.

But the technical finding is still significant — and, frankly, refreshing.

For China hawks, the easy story would have been: Chinese company publishes images, therefore Chinese satellite capability, therefore Beijing is flexing its intelligence muscle. For Chinese nationalis commentators, the tempting story would have been similar, only with a different emotional valence: Chinese company publishes images, therefore China’s intelligence capabilities are impressive, therefore national strength is on display.

Both narratives are more exciting than the likely reality. Yet the fact that the reality is less dramatic does not mean MizarVision was merely an innocent bystander in the confusion. Quite the opposite: the company’s own opacity helped create the very mystery from which those narratives grew.

The company has refused to disclose the sources of its imagery. Even when pressed by the South China Morning Post, it would say only that its sources were diverse and included both Western and Chinese commercial entities, while declining to identify the providers for specific images.

That ambiguity was not incidental. It was part of what made the posts viral.

MizarVision was essentially repackaging someone else’s satellite imagery while allowing audiences to imagine that it possessed extraordinary intelligence-collection capabilities of its own. That may be clever marketing for a start-up trying to raise its profile. But it also invited unnecessary suspicion, especially in the United States, that Beijing might be signaling intelligence capabilities or playing some larger strategic game.

Chinese companies have every right to develop geospatial-intelligence businesses and to analyze legally acquired commercial satellite imagery. But when a company publishes sensitive, near-real-time images of military assets at a time of war while refusing to say where the underlying data came from, it should not be surprised if foreign governments and analysts draw darker conclusions. Playing up mystery may help a company gain attention. It may also make the broader environment for Chinese technology firms even more suspicious and hostile.

At the same time, outside observers should also be careful not to assume that every Chinese company’s publicity stunt reflects a grand strategy by Beijing. Sometimes it is just a company hustling.

But credit where it is due: in this case, one of Washington’s fiercest China critics followed the evidence to a conclusion that complicates the simplest anti-China narrative.

And that conclusion began with a point first made in Pekingnology: the viral MizarVision images were not taken by Chinese satellites.

The subject is ordinary. For two decades, Missouri State University ran MBA and EMBA programmes enrolling Chinese officials, state-enterprise managers and university-affiliated cohorts. Some graduates later entered state-owned enterprises, including firms now considered sensitive. Administrators met foreign counterparts. Fees were paid. Degrees awarded. Revenue earned.

From this, the report constructs something darker: a Chinese state pipeline embedded in an American public university, allegedly financed by American taxpayers and directed toward strengthening China’s defence-industrial ecosystem. The distance between description and interpretation is not a gap in the argument. It is the argument.

The most conspicuous claim—“American taxpayer money”—is the report’s method in miniature. It appears in the subtitle as though it were established. Yet the estimate rests, by the report’s own admission, on “a single recruiting account.” Other materials “describe the funding differently”; “no public U.S. record confirms that taxpayer money was paid”; “no total can be confirmed.” These qualifications go to the core of the charge.

The source is a 2014 sales material connected to China Agricultural University’s promotion of the programme, to make the programme appear attractive and subsidised. Yet this fragile material undergoes a remarkable transformation. A recruiter-facing claim about affordability becomes an estimate of U.S. taxpayer exposure; that estimate is scaled across more than 1,500 participants; the possible tens-of-millions figure is elevated into the subtitle. A caveated possibility becomes a headline claim and then moral atmosphere. The body whispers uncertainty. The title shouts taxpayer money.

The same technique appears in the treatment of misconduct. The report acknowledges that “standard markers of wrongdoing are absent in this case. No intellectual property appears to have been stolen. Strategy Risks found no evidence of false affiliations, espionage, or complaints of Chinese students harassing others on campus.”

In an older analytical tradition, this would narrow suspicion. Here it expands it. If nothing was stolen, perhaps the problem lies in what was learned; if no secrets were transferred, perhaps education itself is the transfer.

At that point, the MBA ceases to be a degree and becomes a metaphor. Accounting, logistics, organisational behaviour and strategy are reclassified as latent instruments of state power. The category “education” quietly disappears.

The report’s own evidence is thinner than its language suggests. Its opening “Key Facts” section relies on a small number of selected alumni cases, repeated until they appear to form a pattern. The programme is said to have trained more than 1,500 Chinese officials, state-enterprise managers and related personnel by 2018. But the report does not show that the handful of named defence-linked alumni are statistically representative of that universe. It offers no full alumni list, no denominator for defence-linked participants and no evidence that the programme as a whole was, meaningfully, a defence-industrial training pipeline.

Instead, a few individuals are named; their later employers are described in the most strategically charged terms available, to stand in for the whole programme. A small number of cases become “China’s defence executives.” A management degree becomes a pipeline. Association becomes function.

The slippage is clearest in the treatment of AVIC. AVIC is indeed a major Chinese aviation and defence conglomerate. It is also a vast industrial, commercial and financial system with civilian operations, leasing arms, logistics functions, finance units and commercial aerospace activities. To treat any AVIC affiliation as weapons work is to collapse a complex corporate structure into a single military identity.

One of the report’s own details should have encouraged caution: 107 finance personnel from AVIC system entities had completed the MSU programme. Finance personnel. That points naturally to corporate financial management, budgeting, accounting and administration. Yet the report repeatedly places such personnel near the “J-20 stealth fighter, Y-20 military transport, H-6 bomber, attack helicopters and military drones.” The proximity is rhetorical, not evidentiary. The report provides no evidence that the individuals it identifies were involved in the design, production, deployment or operational development of those systems. It places them inside large institutions that also contain such programmes, then lets the institution do the work of proof.

This is category drift. The report slides from individual to employer, from employer to conglomerate, from conglomerate to weapons platform, from weapons platform to national-security threat. The chapter title “China’s Weapons Makers in Springfield” captures the move. What is documented are people with varying roles in large state-owned enterprises passing through a business programme. The report supplies the weapons. The evidence supplies the office workers.

Even this transformation rests on a more basic omission: what kind of educational programme this actually was. Participants who had not reached TOEFL 79 or IELTS 6.0 could still take part. GMAT was not required. Standard graduate admissions procedures were bypassed in favour of cohort-based selection. These are not signs of an elite training pipeline. They are signs of a programme designed for participation rather than academic competition.

Anyone who has experienced graduate instruction in a second language understands the difference between exposure and mastery. If participants did not meet normal language thresholds, how much subtle strategic knowledge were they supposed to extract from a one-year management curriculum in Missouri? The report treats this gap as irrelevant. It is central to what the programme could plausibly do—and what it could not.

Business education has its uses. For an economy moving from central planning towards markets, exposure to Western accounting, corporate finance, marketing, logistics and management theory was not trivial. Chinese officials, state-enterprise managers and university administrators wanted a vocabulary of modern business that China did not yet fully possess. But it is a long way from that to the claim that a one-year management course in Springfield materially strengthened China’s defence-industrial base.

The more plausible description is less theatrical. This was an experiential programme: a year in America, a foreign degree, some business administration, and the prestige of touching a world that early twenty-first-century China still regarded as richer and more modern. For many participants, the value was probably American campuses, English, a foreign credential and institutional gloss.

There is something melancholy in that history. China was still looking outward with hunger, insecurity and admiration. Its officials and state-enterprise managers were sent abroad not because China had mastered the world, but because it had not. An American MBA, from Missouri State, carried an aura. To many Chinese organisations, it was less a weapon than a talisman.

That talisman now returns in American discourse as evidence of threat. What was once a poorer country’s attempt to learn from the United States is retrospectively recast as an operation against it. The old asymmetry is forgotten. The aspiration is criminalised. A Chinese manager who went to Missouri to acquire the vocabulary of American business now reappears as proof that America trained its adversary.

This is not simply wrong. It is sad. The United States once believed, perhaps too confidently, that exposure to American institutions would change China; China once believed, perhaps too earnestly, that learning from America was part of becoming modern. Both beliefs now lie in ruins. But to rummage through those ruins and declare every exchange a security failure is retrospective bitterness, not wisdom.

The report gestures at this history, acknowledging that the programme began in an earlier phase of U.S.–China engagement, when universities and policymakers encouraged such exchanges. Yet it repeatedly smuggles later anxieties back into earlier moments. A 2012 Chinese Government Friendship Award given to an MSU official is discussed through policy frameworks that did not yet exist or had not yet been articulated in their later form. References to the Belt and Road Initiative and Made in China 2025 are placed near the 2012 award, creating suggestive continuity across discontinuous periods. The report need not say the official’s work was connected to later policies. It merely places later policies near earlier actions, allowing chronology to soften into insinuation.

This is not historical analysis. It is temporal blending: distinct policy eras are allowed to bleed into one another until the past appears to anticipate the present.

The same problem appears in its treatment of Chinese public-sector selection. China is a party-state. Its state-owned enterprises, universities and local governments sponsor and screen personnel. To present this as revelation is to mistake bureaucracy for conspiracy.

Nor was this a secret file pulled from a vault. The Chinese-side material came from open notices, public university pages and recruitment materials. If the programme “evaded scrutiny,” it did so because, at the time, few people considered such a programme a national-security object. That is not concealment. It is a change in American perception.

The report is less interested in reconstructing what these programmes were than in showing what they can look like under contemporary security assumptions. A revenue-seeking international programme becomes a national-security node. A language-light MBA cohort becomes a training pipeline. A few named cases become representative of an unexplored population.

Seen in that light, Heartland for Hire is not a discovery of hidden structures. It is a document of interpretive transformation: what happens when an MBA programme, a university partnership and an educational exchange are passed through a security grammar that permits no non-strategic meanings to survive.

The tragedy is not that everything turns out to have been strategic. It is that so little is allowed to remain ordinary. (Enditem)

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Ms Xie, one of China’s best-known television hosts, was due to hold the Beijing stop of her concert tour on July 11th. Tickets were priced from 380 yuan to 1,180 yuan. They sold quickly. That does not prove artistic merit. It does prove demand. Thousands of people were willing to spend their own money, arrange their own time and attend a show that promised music, nostalgia, celebrity and spectacle. They were not conscripts. They were consumers.

Yet after the tickets were sold, the concert became something else. On June 19th Zhejiang Publicity, an account run by the Zhejiang provincial party committee’s publicity department, published an essay on the controversy. It asked why a host with few widely known songs should be able to hold a national concert tour. It worried about nostalgia being monetised, traffic replacing talent and cross-over performers lowering the standards of the concert industry.

Five days later People’s Daily’s online commentary platform published a broader essay about the “disenchantment of traffic”. It did not name Ms Xie, but it did not have to. A few days later, the Beijing concert was cancelled.

Perhaps no official order was issued. That is almost beside the point. Power often works without paperwork. A signal from an authoritative outlet can be enough. A venue becomes cautious. A platform recalculates. A sponsor goes quiet. A local department, even after granting approval, discovers that approval is not the same as safety. No one needs to declare a ban. Everyone understands the risk of proceeding.

This is why the episode matters. It is not about whether Ms Xie deserves a stage. It is about whether rules mean what they appear to mean. The very idea that a pop concert must pass layers of official approval would already seem intrusive. Safety rules are normal. Fire checks are normal. Crowd-control plans are normal. Content rules narrowly aimed at incitement or illegality are at least understandable. But requiring advance permission for an ordinary commercial performance is already a heavy burden on cultural life. If, after all that, an approved and ticketed concert can still be undone because official opinion turns sour, then permission is not protection. It is only the first round of uncertainty.

That is a poor basis for business. Markets depend not only on demand, capital and talent, but also on a certain modesty from power. Officials and official media must know where their authority ends. They may criticise. They may warn against fraud. They may expose abuse. They should not casually convert their aesthetic dislike into commercial risk for others. A commentary published from within the orbit of power is not just another opinion. It changes incentives. It affects venues, companies, local governments and investors. It can make lawful activity suddenly look unsafe.

The Zhejiang essay began with a reasonable sentence: concerts are market activities and should be allowed if they are legal and compliant. It then drained that sentence of force. Legal compliance, it argued, does not equal public recognition. That is true. But it is also a dangerous half-truth. Legal compliance does not require applause. It does require restraint from the state. A government need not admire every legal business. It should, however, avoid making lawful commerce contingent on later approval by commentators, mobs or officials with refined tastes.

The most troubling phrase in the Zhejiang essay was its call for “cultural standards” in approval. The phrase sounds responsible. It is not. Who sets such standards? A bureau? A party newspaper? A committee of experts? A trending hashtag? How many famous songs must a person have before she may sell a ticket? May a host sing? May an actor dance? May a comedian stage a musical performance? May a celebrity sell nostalgia if adults freely choose to buy it? Once “taste” enters the licensing logic, no one knows where the boundary lies.

That uncertainty is itself a cost. It is paid not only by famous performers. Around every concert is a small economy: organisers, ticketing platforms, stage designers, lighting engineers, security guards, drivers, hotels, restaurants, merchandise sellers and temporary workers. A cancellation after approval does not merely embarrass a celebrity. It disrupts schedules, wastes sunk costs and threatens livelihoods. Thousands of consumers also lose. They may have arranged travel, accommodation, annual leave and family plans. To speak grandly of cultural standards while ignoring these ordinary losses is not high-minded. It is careless.

Official commentary should therefore be humble. It should remember that most of the people it lectures are taking risks it does not take. Many state-funded media institutions enjoy security, hierarchy and access to power. Their staff do not usually have to raise capital, rent venues, manage contractors, sell tickets or absorb losses when a show is cancelled. Yet they often speak as if they alone understand what society should value. They tell performers to cultivate real skill, platforms to reject traffic, fans to spend rationally and businesses to serve culture rather than profit. Some of this advice may be sensible. But when it comes from institutions protected by public money and political authority, the tone matters. A scolding can become a sanction.

The same attitude appears far beyond entertainment. Private entrepreneurs are often told to be confident, innovative and socially responsible. They are also expected to read signals, avoid invisible lines and accept that formal rules may be supplemented at any moment by campaigns, public anger or official displeasure. That is not a healthy business environment. It teaches firms that obeying the rules is not enough. They must also guess the mood of those who can redefine the rules after the fact.

Earlier this year, another high-profile concert showed the same problem in a different form. Hua Chenyu, a popular singer, saw a planned performance near Fuxian Lake in Yunnan abruptly cancelled or postponed shortly before it was to take place. Public discussion focused on ecological concerns. Such concerns can be legitimate. But legitimacy is not the only question. If a venue is unsuitable because of environmental protection, that should be determined before approvals are granted, tickets are sold and large sums are spent. When the state or the system around it changes its mind late, the private actor pays for public indecision.

This is what makes the Xie Na case larger than show business. China says it wants domestic demand. It wants households to consume, services to grow, cities to attract visitors and private firms to create jobs. Concerts are exactly the sort of activity that should serve that goal. They fill trains, hotels and restaurants. They bring young people into cities. They turn affection, memory and fandom into spending. Local governments know this, which is why the “concert economy” has become a fashionable phrase.

But consumption requires tolerance. People do not spend only on what officials consider noble. They spend on hobbies, idols, snacks, games, gossip, travel, fashion, sentimentality and sometimes nonsense. That is what a consumer society is. If every purchase must be justified by cultural elevation, there will be less consumption, not better consumption. If every private event must survive official moral instruction, there will be fewer events.

A tolerant official opinion environment is therefore not a luxury. It is part of the infrastructure of a market economy. Roads and venues matter. So do contracts, expectations and the confidence that legal approval will not be casually undermined. A businessperson must be able to believe that, after following the rules, signing contracts and selling tickets, he will not be ruined because someone with a platform and political backing decides that the product lacks taste.

The public, too, deserves more respect. “Public opinion” is often invoked as if it were a single voice asking to be protected from vulgarity. But the public is plural. Some mocked Ms Xie. Some bought tickets. Some may have thought the concert silly but harmless. Some may have wanted to go precisely because it was not a serious musical event. In a diverse society, taste differs. The task of governance is not to eliminate such differences. It is to make room for them.

The alternative is paternalism dressed as culture. It assumes that commentators close to power can tell consumers what is worth buying, tell performers what they are qualified to perform, and tell businesses when profit becomes morally suspect. That attitude may appeal to those who dislike celebrity excess. But it is a poor guide to public policy.

The rule of law is tested not only in grand political cases. It is tested in ordinary commercial life. It is tested when an approved concert becomes unpopular online. It is tested when officials dislike what consumers like. It is tested when the temptation to intervene is strong but the legal basis is weak. A system committed to rules must sometimes permit things that its guardians find vulgar.

A poor concert should end in poor reviews. An overpriced one should end in weaker demand. A cynical one should damage the performer’s reputation. Those are market punishments, and they are often severe. What should not happen is that official opinion becomes a second licence, issued after the first licence has already been granted.

China does not need more people telling consumers what they should admire. It needs more confidence that lawful activity will be protected, even when it is tacky, profitable or unpopular with commentators. The question raised by Ms Xie’s cancelled concert is not whether she can sing. It is whether a market can breathe when taste itself becomes a matter of state. (Enditem)

The East is Read

Hu Xijin calls for tolerance and freedom under China's constitution

Hu Xijin is a former editor-in-chief of the Global Times, a Chinese newspaper under the official newspaper of the Central Committee of the Communist Party of China (CPC), the People’s Daily. He writes and posts videos regularly on X, Weibo (the Chinese equivalent of X), and his personal WeChat blog…

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10 months ago · 9 likes · 2 comments · Yirui LI and Yuxuan JIA

China does not usually signal through the familiar Western route of unnamed officials briefing mainstream outlets, which then turn those hints into “exclusive” stories. Signals like this are instead often embedded in domestic-facing commentary written for China’s own media ecosystem. That makes them easy for outside readers to overlook or misread — but also worth unpacking.

The timing is central to the message. On June 29, Chinese Commerce Minister Wang Wentao is expected to meet EU Trade Commissioner Maroš Šefčovič in Brussels. The meeting comes as European frustration over China’s trade surplus has become a major political issue. China’s goods trade surplus with the EU reached €360.6 billion in 2025, up 15 percent from 2024, and expanded by another 10 percent in the first four months of 2026. Europe has also been discussing a possible “China Shock 2.0,” including a widely cited estimate that Germany is losing roughly 10,000 manufacturing jobs a month amid intensifying industrial competition with China and other structural pressures. The June European Council conclusions did not name China, but under “competitiveness and global economic challenges,” EU leaders discussed strategic autonomy, economic security, industrial renewal, and reducing dependencies — language widely understood to include China. The Commission is also considering new tools, including supply-chain diversification requirements and tougher trade defenses. Dialogue has not stopped: Chinese and EU trade officials also met on June 9 and June 23.

The broader backdrop is the impasse since the July 2025 EU-China summit. Ursula von der Leyen said in Beijing that EU-China trade ties had reached a “clear inflection point,” citing trade imbalances and market access. Xi Jinping’s message was different: Europe’s challenges do not stem from China, and the EU should keep its trade and investment markets open and refrain from using restrictive trade measures.

Yuyuantantian says China came to the recent talks with two substantive concerns. First, Beijing wanted to continue work on a price-undertaking solution to the EU’s anti-subsidy case against Chinese electric vehicles. Second, China wanted Europe to address what Beijing sees as obstacles to expanding European exports to China, especially high-tech export controls. The article says European negotiators, by contrast, repeatedly asked China to respond to European concerns over rare earths supply. It then adds the harder message: China can withstand further deterioration in economic and trade ties, even a freeze.

The EV issue is where Beijing sees prior progress being neglected. In October 2024, the Commission finalized countervailing duties on Chinese-made battery EVs, ranging from 7.8 percent to 35.3 percent on top of the EU’s standard car tariff. The two sides later explored price undertakings — minimum-price arrangements that could offer an alternative to tariffs — and Brussels issued guidance in January 2026 on how Chinese exporters could individually submit such offers. That is probably what the commentary means by saying technical-level talks had “basically” reached a framework. More precisely, both sides had made procedural progress toward a possible negotiated solution: Beijing can present it as a near-consensus, while Brussels can still say the technical track remains unresolved.

China’s second ask — easing high-tech export controls — is larger. The EU’s export-control system is tied to non-proliferation, security, and human-rights considerations, and member states can add controls on public-security or human-rights grounds.

According to Yuyuantantian, Brussels showed little interest in addressing Beijing’s demands, and may have concluded from the EV case that it has found a working formula: create a trade-defense case, put pressure on China, and gain leverage.

The key Chinese observation is that the EU’s trade-policy toolkit is shifting from relatively predictable WTO-embedded remedies — mainly anti-dumping and anti-subsidy cases — toward broader, more discretionary instruments outside or beyond the WTO framework. In this telling, Brussels is not only developing new tools, such as a possible U.S. Section 301-style “overcapacity” instrument, but also using them as bargaining chips even before formal adoption.

The state-broadcaster commentary then questions whether the EU has the power to repeat this strategy, citing weak manufacturing competitiveness, high energy costs, insufficient innovation, and the difficulty of coordinating 27 member states. Its language is polemical, but the underlying issue is real. The 2024 Draghi competitiveness report, referred to by Yuyuantantian, warned that Europe needs a more coordinated industrial policy, faster decision-making, and €750-800 billion in additional annual investment to keep pace with the United States and China. The Chinese reading is that Europe’s industrial difficulties should make it more open to cooperation with Chinese companies, not more protectionist.

The article’s anecdotes point in the same direction. It cites a French regional official welcoming Chinese industrial investment and a Polish local-government representative studying Chinese smart-vehicle technology. These examples should not be dismissed automatically. They reflect a real gap between local actors seeking factories, jobs, batteries, and Chinese manufacturing know-how, and EU-level institutions prioritizing economic security, dependency reduction, and enforceability. But anecdote is not policy.

This is also where Beijing’s member-state diplomacy matters. Recent visits by European leaders and ministers give Beijing diplomatic material, though it is difficult to know whether they have emboldened China’s judgment that member-state needs create leverage over Brussels. Turning such interests into EU-level trade movement remains structurally and institutionally demanding.

Another reason the article sounds confident is that it does not present Europe as indispensable. Yuyuantantian says many Chinese firms no longer see any single country or region as a necessary market. Southeast Asia, the Middle East, and Latin America are portrayed as lower-cost, easier-entry alternatives. China’s own trade data partly explain why this argument has become more plausible. China’s exports to ASEAN reached about $665 billion, larger than exports to the EU at about $560 billion; its surplus with ASEAN was about $276 billion, not far below its roughly $292 billion surplus with the EU. Exports to Latin America were about $297 billion, around half the EU level. In clean technology, the pattern is also broadening: Chinese EV exports reached $69.6 billion in 2025, spanning more than 150 markets, with the Middle East posting a 92 percent increase and Africa 189 percent.

While many would like to believe the European market matters significantly to Beijing, as it remains a high-income, standards-setting market and one of the largest sources of China’s goods surplus, the Chinese state broadcaster’s account appears to say that marginal allocation of Chinese corporate attention, capital, and supply-chain planning is more flexible than before. From Beijing’s perspective, that weakens Europe’s ability to assume that China will accept any conditions for the sake of market access - or at least that’s the bargaining message here.

The most interesting signal concerns Chinese investment in Europe. Many observers see Chinese investment in EVs, batteries, and manufacturing as partly compensatory: factories in Europe can create jobs, local value added, and political reassurance. Yuyuantantian frames it differently. It presents Chinese investment less as a concession to Europe than as a form of leverage: if barriers keep rising, Chinese projects that European regions want may slow down.

Yet the leverage is uneven. Some European governments and regions want Chinese factories. Others worry that Chinese investment in strategic sectors may create dependence, lead to limited technology transfer and few jobs, or primarily preserve Chinese market access. For them, less Chinese investment may not be a loss; it may look like de-risking.

The larger obstacle, which receives little attention in the state-broadcaster message and in China’s trade-focused official readouts, is political. Beijing tends to argue that EVs, rare earths, export controls, and investment should be handled on their own economic merits between China and Europe. Brussels finds that harder. At the 2025 summit, the EU explicitly tied the broader relationship with China to Russia’s war against Ukraine and called on Beijing to distance itself from Moscow.

There is also an American factor that the Yuyuantantian article does not spell out but may sit behind Beijing’s confidence. From Beijing’s perspective, Trump has reduced U.S. support for Ukraine, weakened transatlantic cohesion, and adopted a more transactional approach toward China. It is possible that Beijing reads this as creating more room to press Europe: if Washington can be pragmatic with China, why should Europe, facing its own industrial and growth pressures, insist on a harder line?

High-tech export controls illustrate the difficulty. In Beijing’s view, European exports are constrained not only by Brussels or national capitals but also by American extraterritorial pressure. The latest example came from a Bloomberg scoop that the U.S. Commerce Secretary had raised concerns with ASML executives that one of the company’s high-end chipmaking tools might have reached China in violation of U.S.-led export restrictions. ASML denied ever shipping the machines or related components to China. For China, such episodes reinforce the argument that Europe should not let Washington define the limits of China-Europe trade. For Europe, however, the issue is not only American pressure; it is also its own security judgment about technology, dependency, and Russia’s war in Ukraine.

That is the tension the Yuyuantantian article leaves unresolved. Beijing appears to believe that Europe’s industrial needs, member-state interests, Chinese market alternatives, and transatlantic strain give China more room to resist pressure than Brussels assumes. Brussels, meanwhile, is operating in a political environment where trade, security, Ukraine, and dependency can no longer be neatly separated. The article is therefore less a prediction of where EU-China trade talks will go than a revealing statement of Beijing’s working assumption: Europe may have more tools, but China believes Europe has fewer easy choices. (Enditem)

Yuzhe He

A Critique of the OECD MAGIC Database of Industrial Subsidies and Related Reports: Fan CUI

On June 1, 2026, the Organization for Economic Co-operation and Development (OECD) released a report on its MAGIC (Manufacturing Groups and Industrial Corporations) database of industrial subsidies. One of the key takeaways is that China-based industrial firms appear to receive subsidies on a scale not matched by their competitors in any other economy, …

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a month ago · 16 likes · 1 comment · Yuzhe HE

The East is Read

Brussels Blames China. The Data Point Elsewhere

One of the most convenient stories in Brussels today is that Europe is facing a second “China Shock”: a flood of cheap Chinese goods, pushed abroad by overcapacity, subsidies, and weak demand at home…

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2 months ago · 34 likes · 3 comments

That interpretation is much ado about very little.

This does not mean the concern comes from nowhere. In Chinese political memory, “joint state-private ownership” is not an innocent phrase. It refers to a historical process through which private industrial and commercial enterprises were gradually transformed into socialist public ownership. For entrepreneurs, investors, and observers who have watched years of regulatory campaigns against internet platforms, private tutoring, finance, property, and other sectors, the phrase can understandably sound politically loaded.

But there is a difference between understanding why a reaction happens and accepting the reaction as a sound reading of the text.

The first and most important point is context. The Xinhua article was not a standalone policy essay suddenly inserted into the news cycle to announce a new direction for the private sector. It was one installment in Xinhua’s broader “Great Journey” series, which has been revisiting major episodes in the history of the CPC and the People’s Republic. Other pieces in the series have covered subjects such as the Zunyi Conference, the War of Resistance against Japanese Aggression, the Eighth Party Congress, diplomacy, national defense, and science and technology. In that setting, a piece on the Three Great Transformations is not surprising. It is part of a chronological and thematic narration of Party history.

Second, the article does not depart in any meaningful way from the standard official historical account of the Three Great Transformations. The CPC has long described the completion of socialist transformation by 1956 as the establishment of China’s basic socialist system. Official Party-history materials have also long stated that the transformation of capitalist industry and commerce proceeded through various forms of state capitalism, including processing orders, planned purchases, distribution arrangements, joint state-private ownership, and finally sector-wide joint state-private ownership. This is not new doctrine. It is not a newly invented political formula. It is a familiar part of the CPC’s historical self-understanding.

This is also how the CPC generally handles its own history, especially the decades before reform and opening up. For political and ideological reasons, the Party rarely treats major episodes in that period as something to be repudiated in full. Even when later policy practice has clearly moved in a different direction, official language tends to frame earlier experience as exploration, experimentation, or a historically conditioned search for China’s own path. The emphasis is usually not on reopening old verdicts, but on preserving continuity while moving forward.

This habit of historical narration is often misunderstood outside China. A positive description of a past policy does not necessarily mean that the same policy is being revived as a future agenda. It often means that, when the Party must discuss a major chapter of its own history, it will do so in a way that maintains the legitimacy and continuity of the overall historical narrative. The official account may say that a particular episode provided “experience,” “institutional foundations,” or “historical conditions” for later development, without implying that China should mechanically repeat that episode today.

That is especially true for the pre-reform period. The official story is not that China should return to the 1950s, but that the 1950s, the reform era, and the current stage of Chinese modernization all belong to one continuous national and Party-led journey. One may critique this framework. But it is a framework of historical legitimation, not necessarily a policy roadmap. To read every affirmative sentence about socialist transformation as a signal of renewed socialist transformation is therefore to misunderstand the genre.

The reaction evokes the memories of another episode several years ago: 李光满 Li Guangman’s 2021 essay, “Everyone Can Feel That a Profound Transformation Is Underway.” （每个人都能感受到，一场深刻的变革正在进行！）That essay, originally from a nationalist commentator, was republished by a number of major Chinese official media outlets and immediately caused alarm. At the time, many readers connected it with Beijing’s regulatory actions against internet platforms, private tutoring, entertainment culture, and capital expansion. Some concluded that China was entering a new political campaign against private capital, or even a “second Cultural Revolution.”

The resemblance lies less in the content than in the reception. In both cases, a piece of political language was placed against a background of already fragile expectations. In 2021, real regulatory campaigns were underway, so Li’s rhetoric seemed to many like an ideological explanation for what was already happening. In 2026, the Xinhua article appears at a time when confidence in the private sector remains uneven, and therefore a historical essay on socialist transformation is quickly read as a clue to future policy. In both cases, the public reaction says as much about the atmosphere as about the text.

That atmosphere should not be dismissed. China’s private economy has indeed faced pressure in recent years. The extraordinary vitality of private entrepreneurship that defined much of the reform era has not disappeared, but it has become more constrained. The platform economy went through a major regulatory reset. Private tutoring was transformed almost overnight. Property developers, many of them private, have struggled through a prolonged downturn. Local enforcement practices, delayed payments, arbitrary fees, and financing difficulties have all been recognized by Chinese policymakers themselves as problems facing private firms. More broadly, Beijing now places much greater emphasis on national strategy, technological self-reliance, security, and industrial upgrading.

In that environment, it is not irrational for private entrepreneurs and outside observers to ask how far official support for private business goes, and under what conditions. The question is legitimate. But legitimate questions should not be answered by overreading a single Party-history article.

The more direct and current policy signals point in a different direction. Xi Jinping has repeatedly stated that private entrepreneurs are “our own people.” （自己人） In February 2025, he convened a high-profile symposium with private entrepreneurs, including Jack Ma, and said that the Party and the state’s basic policies toward the private economy “cannot and will not change.” The message was not that private capital should withdraw from the historical stage. It was that private firms should regain confidence, pursue high-quality development, comply with law and regulation, and contribute to Chinese modernization.

China has also taken institutional steps to support the private economy. The creation of a dedicated private economy bureau under the powerful National Development and Reform Commission, and the passage of the Private Economy Promotion Law in 2025, were not symbolic moves toward abolition. They were efforts, at least on paper, to improve the business environment, protect equal access to production factors, address financing and payment problems, and stabilize expectations.

Of course, these policies do not remove all concerns. In China’s political economy, support for the private sector is not the same as a Western liberal commitment to the autonomy of private capital. The Party supports private enterprise within the framework of China’s basic socialist economic system, under Party leadership, and in alignment with national development priorities. Private firms are encouraged, protected, and relied upon, but they are also expected to serve broader social and national goals. This is not new, but it is often missed when outside observers try to fit Chinese debates into a binary choice between “pro-market reform” and “state takeover.”

It is also worth noting where the current overinterpretation has mostly taken place. The most alarmed readings have so far circulated mainly outside the Chinese mainland, particularly among overseas Chinese-language accounts on X and some opposition-leaning media platforms. Some commentators may simply have reacted to a sensitive phrase without carefully placing the article in its series, genre, and historical context. Others are more structurally predisposed to read almost every official Chinese text as evidence of impending economic failure, political radicalization, or a coming assault on private property. That does not make every concern invalid. But it does mean the interpretive environment is not neutral.

English-language discussion is now beginning to pick up some of these anxieties, often through translations, summaries, or social-media amplification. That is precisely why context matters. Without it, a routine Party-history article can be converted into a supposed policy signal; an old historical term can be mistaken for a new economic agenda; and a retrospective narrative can be treated as a forward-looking blueprint.

A more balanced reading would say this: the Xinhua article reflects the CPC’s established historical view of the Three Great Transformations. It does not announce, imply, or even hint at a return to 1950s-style joint state-private ownership for today’s private enterprises. At the same time, the fact that such an interpretation spread so quickly reveals a real vulnerability in China’s communication environment. When confidence is strong, historical language stays historical. When confidence is weak, history sounds like warning.

That is perhaps the real lesson. Beijing does not need to abandon its own Party-history narrative to reassure private entrepreneurs. But it should understand that certain historical terms carry powerful contemporary echoes. In a period when China is actively trying to stabilize expectations and restore confidence in the private economy, communication matters. A phrase that is routine in Party history can still be unsettling in market psychology.

The latest controversy, therefore, is best understood not as evidence of a coming campaign against private enterprise, but as a reminder of how sensitive the subject has become. The private economy remains central to China’s growth, innovation, employment, and global competitiveness. Official policy continues to say so. The Xinhua article has been overread. But the speed with which it was overread tells us something important: confidence, once shaken, makes even history sound like prophecy. (Enditem)

The following translation is based on the op-ed on Tuesday, June 23, 2026, in FT Chinese, the Chinese-language service of Financial Times.

Zeng approved this translation and publication.

Before moving to Hong Kong, Zeng spent 13 years in the UK, where he was one of the youngest full professors in Britain and served as Professor of China and International Studies at Lancaster University and Director of Lancaster’s Confucius Institute.

Zeng is also the author of multiple books including Slogan Politics Understanding Chinese Foreign Policy Concepts and Memoirs of a Confucius Institute Director, a planned three-volume memoir. Its first volume, Challenges, Controversies, and Realities, was published in English by Palgrave Macmillan in 2025.

Political Turmoil Again Casts Its Shadow over London: China Should Rebuild Its UK Policy around Transactional Pragmatism

Keir Starmer’s announcement that he will step down as prime minister means Britain is now set to have its seventh prime minister in less than a decade. From David Cameron to Theresa May, Boris Johnson, Liz Truss, Rishi Sunak, and then Starmer, the speed with which Britain has changed leaders is unusual among major developed economies. This persistent political volatility has not only weakened the predictability of British policymaking, but also made long-term strategic planning and policy continuity increasingly difficult.

For China, this is not merely a matter of British domestic politics. It has become a major external variable shaping the stable development of China-UK relations. Over the past decade or so, the ups and downs in bilateral ties have often had less to do with shifts in Chinese policy than with repeated political upheavals in Britain. Whenever London enters a period of turbulence, Beijing is forced to reassess, adjust, and at times even rebuild the frameworks for cooperation that had previously been put in place.

The most obvious example is the so-called “golden era” of China-UK relations launched in 2015. That year, the Cameron government worked with China to push bilateral relations to an unprecedented high. China showed strong enthusiasm for the British market, infrastructure, financial services, and higher education. Then Chancellor George Osborne was one of the chief architects and promoters of this “golden era”. Yet this political window lasted barely a year.

After the Brexit referendum in 2016, Cameron was forced to resign. Theresa May entered Downing Street, Osborne left government, and the two most important political champions of the “golden era” disappeared from the stage at the same time. Once that political backing was gone, China-UK relations quickly began to change direction. In the following years, the British government was consumed by Brexit negotiations, the shock of the pandemic, and geopolitical frictions with China. China itself gradually shifted from being a subject of cooperation to becoming a tool in Britain’s domestic political competition.

This was especially clear during the Conservative leadership contest after Boris Johnson’s resignation, when taking a tough line on China became almost a political requirement for candidates. In an effort to shake off the perception that he was “too close to China”, Sunak declared during the Conservative leadership campaign that “China and the Chinese Communist Party represent the largest threat to Britain and the world’s security and prosperity this century”, and pledged to close all 30 Confucius Institutes in the UK. It was also the first time he had publicly set out such a position on the Confucius Institutes.

That statement reflected the logic of British domestic political competition more than any carefully considered long-term China strategy. In fact, his main rival, Liz Truss, had supported the establishment of several Confucius Institutes when she served as education secretary, and had publicly recognised their contribution to Chinese-language education in Britain. Sunak’s stance on the Confucius Institutes was essentially an attempt to undercut Truss’s credibility as a China hawk.

The irony is that Truss, widely seen as a hardliner on China, ended up serving as prime minister for only 45 days — so briefly that the British press joked she had a shorter shelf life than a lettuce. Sunak, who eventually took office, dropped the pledge to close the Confucius Institutes, but he also made clear that the “golden era” was over.

After Labour won a landslide victory in the 2024 general election, China-UK relations briefly entered a relatively stable phase. The Starmer government resumed high-level engagement, visited China earlier this year, and eventually approved the long-delayed project for China’s new embassy in London, drawing a line under an issue that had remained unresolved for years.

Yet only a few months later, the Starmer government again found itself in political trouble. Whether or not he ultimately leaves office early, a more fundamental question now confronts Chinese policymakers: does the British political system still have the capacity to sustain a coherent long-term China strategy?

For China, the past decade has already offered more than enough lessons.

First, China must treat changes in British leadership as the norm, not the exception. In the past, China’s UK policy was, to some extent, built on expectations of particular political figures, particular governments, and particular political promises. Reality has shown, however, that the political life expectancy of British prime ministers is becoming shorter and shorter. A promise made today may lose force tomorrow because of a cabinet reshuffle, a leadership contest, or even an early general election. Beijing therefore needs a more systematic scenario-planning mechanism, one that continuously assesses how different political forces might adjust policy after entering office, rather than assuming that the current course will endure.

Second, China should gradually approach its relations with Britain through a more pragmatic, transactional lens. This does not mean abandoning cooperation. It means reducing dependence on long-term political trust. The highly fluid nature of British politics makes it difficult for any prime minister to offer strategic commitments that can survive multiple political cycles. Under such circumstances, China need not become overly optimistic because of friendly remarks by a British leader, nor should it overreact to tough rhetoric during an election campaign.

If the British government is willing to advance concrete cooperation projects, the two sides can move those projects forward. If the British government wants to strengthen economic and trade ties, the two sides can discuss economic and trade cooperation. If the British government imposes restrictions, China can respond according to its own interests. In other words, Beijing should no longer place its hopes in grand political narratives, but should focus on specific interests, specific issues, and specific outcomes.

In fact, both the “golden era” and the later wave of China hawkishness show that British politicians’ statements on China are often driven by the domestic political environment. Many campaign statements are never fully implemented, and many political promises are unlikely to last.

In that sense, China should neither invest excessive expectations in the friendly gestures of a new British leader nor become overly anxious about tough remarks made during a leadership campaign. In today’s British political system, the greatest certainty is precisely its uncertainty.

Third, China needs to pay much closer attention to departmental politics inside the British government, rather than focusing only on the personal stance of the prime minister. As prime ministers change frequently and the authority of political leadership weakens, it is becoming increasingly difficult for the British government to form a stable and coherent top-level China strategy. For any prime minister, political survival often takes precedence over long-term strategic planning. China policy is therefore more easily shaped by the competing interests and policy preferences of different departments within government.

As I have argued elsewhere, recent practice suggests that Britain’s China policy is largely the product of continuous bargaining among different parts of government. The Treasury, the Department for Education, and departments responsible for trade and investment tend to focus more on the Chinese market, investment, educational exchanges, and opportunities for economic growth, and are therefore more inclined towards pragmatic cooperation. By contrast, the foreign affairs, defence, intelligence, and home affairs systems tend to view China through the lenses of national security, strategic competition, technology security, and alliance coordination. Their policy positions are often more cautious and even hardline.

In periods of political stability, the prime minister and their core team can usually coordinate among different departments and produce a relatively unified China policy framework. But when political leadership weakens and the prime minister’s authority comes under pressure, departmental disagreements tend to become more pronounced. China policy then becomes more prone to swings and fragmentation.

For China, therefore, simply watching the public statements of the British prime minister or the governing party is no longer enough to judge where Britain’s China policy is heading. It is increasingly necessary to look more closely at the interests, power shifts, and policy competition inside different parts of the British government, because these factors are more and more likely to determine the actual direction of Britain’s China policy.

China-UK relations will, of course, remain important. Britain is still a major European economy, a permanent member of the United Nations Security Council, a global financial centre, and a strong player in science and technology. But for Beijing, the more important task may no longer be to judge whether the next British prime minister is pro-China or anti-China. It is to recognise a more practical reality: prime ministers will keep changing, while national interests remain.

Faced with a Britain whose political cycles are becoming ever shorter, China does not need more trust so much as more mature risk management. It should avoid making long-term bets on any single leader and instead build interest-based arrangements that can survive repeated changes of government. That may be the most important lesson Beijing should draw from the past decade of China-UK relations. Under Donald Trump, China at least knows who it will be dealing with in Washington for the next four years. In today’s Britain, it is becoming harder and harder to know who will occupy 10 Downing Street even two years from now.

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The report enters an already charged debate. In Europe, the U.S., and other advanced economies, China’s industrial rise is often explained less by efficiency than by state support: subsidies and cheap credit, the argument goes, have allowed less productive Chinese firms to undercut more innovative competitors on price.

But a new study by Zhu He and Guo Kai of the China Finance 40 Forum (CF40) challenges that premise. Based on annual reports from more than 5,300 non-financial A-share listed companies between 2018 and 2025, it finds that China’s emerging industries are not especially debt-dependent, do not rely mainly on long-term bank credit, and receive only a minority share of government subsidies. Much of the new borrowing, instead, has flowed to old-economy sectors such as construction, utilities, and transport.

With the authors’ authorisation, we are pleased to present the report in full below.

ZHU He, Research Fellow at the CF40. With over ten years of experience in macroeconomic research, Zhu He specializes in tracking domestic and international macroeconomic trends and capital market dynamics. He provides unique insights into economic policy and asset allocation strategies and is a key contributor to CF40’s Macroeconomic Policy Quarterly Report, which has gained significant attention from the market and policymakers. He holds a PhD in Economics from the Chinese Academy of Social Sciences and a postdoctoral degree from Peking University.

GUO Kai, Executive President and Senior Fellow of the CF40. Before joining the CF40, he was an economist at the International Monetary Fund in Washington DC and then worked at the People’s Bank of China in various capacities, including leading positions in the Monetary Policy Department and the International Department. His main research areas include the Chinese economy and its macroeconomic policies as well as international finance. He is the author of three popular Chinese economics books and multiple academic papers in various English and Chinese journals. He holds a PhD degree in economics from Harvard University.

Founded in 2008, China Finance 40 Forum (CF40) is a leading independent think tank focused on policy research in macroeconomics and finance. Its core membership consists of 40 leading experts from government, financial institutions and academia around the age of 40. In 2021, the CF40 Institute was established to strengthen CF40’s research capacity. In 2024, the CF40 Institute introduced an original research product, CF40 Research, aimed at providing independent insights into China’s macroeconomy, policy trends, financial market dynamics, and global affairs. CF40 Research currently features English product series, including Policy Brief, Commentary, and Podcast.

Why the OECD’s Subsidy-Centric Narrative of China’s Emerging Industries Is Increasingly Flawed and Outdated

ZHU He, GUO Kai

^{CF40 Institute}

Abstract: In a recent report, the OECD contends that the rise of China’s emerging industries has rested largely on government subsidies—with lending from the state-owned banking system as a principal channel—and that these subsidies, more than any other factor, account for the international competitiveness of Chinese firms. We examine this contention using the 2018–2025 annual reports of more than 5,300 non-financial companies listed on China’s A-share market. Classifying firms by R&D intensity and profitability, we divide the sample into a “new economy” and an “old economy”; the former corresponds closely to what the OECD designates as China’s emerging industries, namely electric vehicles, batteries and solar, together with computing, semiconductors and related sectors.

We then assess each channel through which a subsidy-driven account would be expected to manifest: the industries to which new interest-bearing debt flows, the maturity structure of that debt, the extent to which internal funds cover firms’ capital expenditure, the balance between equity and debt in external financing, and the distribution of government subsidies. On each dimension, the evidence indicates that the proposition that China’s emerging industries depend on subsidies is both outdated and misguided. Relative to the old economy, the new economy carries less interest-bearing debt and of shorter maturity, generates more internal funds, and finances itself primarily through equity rather than borrowing—a profile inconsistent with reliance on subsidized credit. Government subsidies, for their part, peaked in 2022 and have declined since, and roughly two-thirds accrue to the old economy. While certain emerging-industry firms did rely substantially on subsidies in their early years, most exhibit only limited dependence on either subsidies or credit; notably, it was precisely during the period of most rapid expansion that subsidies contracted and their bearing on the new economy diminished. A separate analysis of 57 representative listed firms in the sector yields consistent results.

These findings imply that neither credit subsidies nor cash subsidies can account for the rapid expansion of China’s new economy in recent years. Three broader implications follow. First, that a conclusion so consequential should be drawn from so limited a sample is a practice that could materially undermine the credibility of a multilateral institution. Second, even the complete withdrawal of subsidies would leave the prospects and global competitiveness of China’s new economy little affected, since subsidies, to the most part, did not bring these industries into being. Third, global imbalances are a genuine and serious concern; on this question China retains considerable scope to expand domestic demand and to improve the efficiency of its domestic resource allocation.

On June 1, 2026, the OECD released a report titled OECD MAGIC Database of Industrial Subsidies. Its central argument is that Chinese firms receive far larger industrial subsidies than those in other economies, concentrated in emerging strategic industries such as solar, semiconductors and wind power.

According to this view, it is subsidies—not efficiency—that have driven the global expansion of Chinese firms. Yet these subsidies have not boosted productivity or profitability; rather, akin to industrial doping, they allow less efficient firms to undercut more innovative competitors on price.

In short, the report contends that China’s emerging industries have grown primarily on the back of strong government subsidies, with credit support from the banking system serving as an important channel. At the same time, several economies have shown signs of using such findings to justify tariffs on, and restrictions of, Chinese products.

The OECD database covers some 525 manufacturing firms worldwide, of which 147 are Chinese—a small sample. Within the OECD’s framework, these subsidies are delivered mainly in three forms: government grants, tax preferences, and loans extended by state-owned or policy banks at below-market rates.

The OECD estimates that over 2005–2024, subsidies amounted to 2.4 percentage points of the revenue of its Chinese sample firms, of which 1.6 percentage points—two-thirds—came from so-called preferential loans. Absent these preferential loans, Chinese firms would have received no more subsidy than manufacturers in other countries.

The OECD’s estimate of these preferential loans rests on a clear conceptual error. Its approach treats the LPR as the most preferential rate, adds a risk premium and other adjustments to derive a theoretical lending rate, and then measures the credit subsidy as the gap between the actual and the theoretical rate.

The flaw is that the LPR cannot serve as the most preferential lending rate, because in practice it functions closer to an average or median rate. According to the China Monetary Policy Report for the first quarter of 2026, in March 2026 some 48.8% of loans were priced below the LPR, 9.3% at the LPR, and 41.9% above it. Indeed, if one insisted on treating the LPR as a benchmark and inferring large subsidies, one would reach an absurd conclusion: that since 2023 China has likewise been heavily subsidizing households, because personal mortgage rates have stayed below the 5-year LPR and the gap has kept widening. Clearly this has nothing to do with any subsidy—the main reason mortgage rates fell is weaker housing demand, and the rate is a genuine response to changing fundamentals.

For the OECD’s narrative to hold, two necessary conditions must be met simultaneously. First, structurally, subsidies—whether in credit or cash form— must flow disproportionately to the emerging industries. If the main recipients lie elsewhere, the claim that subsidies nurtured the emerging industries collapses. Second, in terms of scale, subsidies would need to be large enough to meaningfully support the expansion of emerging industries. If these industries rely little on subsidies, then even the subsidies they receive cannot justify the argument that their growth is subsidy-driven. Both conditions are indispensable; if either fails, the entire narrative becomes difficult to sustain.

In a recent CF40 Policy Brief, we sorted more than 5,000 Chinese listed companies into “new economy” and “old economy” using R&D intensity, profitability and related dimensions, and documented how the new economy has grown rapidly across many fields in recent years and gradually overtaken the old economy. As Figure 2 makes clear, one defining feature of the new- economy industries is markedly lower reliance on debt: they generate more profit with less debt. (See CF40 Policy Brief The New Economy Rises as the Old Economy Recedes – Evidence from China’s Listed Companies)

The year 2025 offers a particularly representative illustration. In 2025, firms in the new economy, light-asset group added just 0.4 billion yuan of interest- bearing debt yet generated 37.9 billion yuan in incremental net profit. By contrast, firms in the old economy, heavy-asset group added 897.3 billion yuan of interest-bearing debt while their net profit fell by 149.0 billion yuan.

In short, if the new-economy industries were truly the beneficiaries of financial subsidies, they should display the double-high pattern of more debt and more profit—not the asymmetric combination of debt increments concentrated in the old economy and profit increments coming from the new economy.

In the OECD report, the emerging industries are defined as the rapidly rising sectors led by solar and semiconductors—precisely the new economy we examine. This Brief therefore continues the earlier analytical framework. Using annual-report data for more than 5,300 non-financial A-share listed companies over 2018–2025, it characterizes the differences between the new and old economy in financing patterns and reliance on government subsidies—across the industry flow of interest-bearing debt, debt maturity, the coverage of internal funds, the equity-versus-debt mix of external financing, and government subsidies—to argue comprehensively why China’s emerging industries run on subsidies is a mistaken narrative.

I. Industries Receiving the Most Interest-Bearing Debt Are Not Concentrated in the New Economy

We begin with the industry flow of new interest-bearing debt over 2018–2025. As Figure 3 shows, the distribution across industries is highly uneven. Of all new interest-bearing debt at A-share firms in 2018–2025, Construction & Decoration accounted for a cumulative 2.8 trillion yuan, Utilities 2.1 trillion yuan, and Transportation 512 billion yuan—these three industries together contributed 51.1% of A-shares’ new debt, yet none belongs to the subsidized new economy of the overseas debate (the three dark-blue industries in Figure 3).

As typical representatives of the emerging industries, the five industries of Electronics, Electrical Equipment, Pharma & Biotech, Computing and Machinery & Equipment together took on about 2.37 trillion yuan of new interest-bearing debt—just 22.3% of A-shares’ new debt—even though these five industries account for roughly 44% of A-share firms (the five light-blue industries in Figure 3). In other words, at the industry level the new economy did not accumulate excessive interest-bearing debt, and therefore cannot be said to have received large credit subsidies.

So where did the added debt actually go? The answer is clear: a substantial share of new interest-bearing debt is tied to infrastructure and power investment. We further split the old economy into infrastructure-type industries and the rest. The infrastructure-type group comprises three industries—Construction & Decoration, Utilities and Transportation—and within it we single out 16 representative central state- owned enterprises (SOEs).

As Figure 4 shows, over 2018–2025 the infrastructure-type industries were consistently the main source of new interest-bearing debt, and the 16 central SOEs were the core of that core. In 2025 these 16 firms accounted for 47% of all new interest-bearing debt that year. Over the eight years they contributed a cumulative 3.9 trillion yuan in new debt—36.7% of the total for all 5,300-plus sample firms (10.63 trillion yuan) and 2.6 times the combined new interest- bearing debt of the more than 3,189 new economy firms over the same period.

Among the construction SOEs, for example, China Railway Construction, China Railway and China Communications Construction each added roughly 500 billion yuan of interest-bearing debt over 2018–2025. These heavy borrowers are classic traditional infrastructure SOEs, and their expansion has little direct impact on the global competitiveness of emerging industries under discussion internationally.

II. The New Economy Has Shorter Debt Maturities, Lower Financing Needs, and Relies Mainly on Equity

If banks were subsidizing the new economy through long-term, low-cost funds, long-term borrowing should dominate. However, data show the opposite. Looking at debt maturity across the four groups, in 2025 short-term debt made up 54.2% of interest-bearing debt for the new economy, light-asset group, 46.7% for the new economy, heavy-asset group, 44.2% for the old economy, light-asset group, and 37.4% for the old economy, heavy-asset group.

The share of short-term debt declines steadily as one moves from the new economy to the old economy, and from light-asset firms to heavy-asset firms. In the two new-economy groups, the short-term debt share is 10–17 percentage points higher than in the old economy, heavy-asset group.

This difference reflects not higher risk in the new economy, but rather the distinct financing needs associated with different business models. Heavy-asset traditional sectors—infrastructure, power, property, coal—have long project horizons and need matching long-term funds; New economy firms rely primarily on operating cash flow and equity, have minimal need for external debt, and generally use the small amount of debt they do carry for working capital purposes; as a result, short-term financing naturally dominates their capital structure.

A few representative new economy firms illustrate the point directly. Sungrow, a leader in solar inverters and energy storage, saw revenue grow from 10.4 billion yuan to 89.2 billion yuan over 2018–2025 (about 8.6x), yet its interest-bearing debt stayed in the low tens of billions, and government subsidies were just 0.18% of its cumulative eight-year revenue.

Mindray, a leader in medical devices, grew revenue about 2.4x with almost no reliance on interest-bearing debt (near zero for years), and subsidies were only about 2% of net profit.

BYD, a leader in electric vehicles, saw interest-bearing debt rise from 59.2 billion yuan in 2018 to 110.5 billion yuan in 2025—up 51.3 billion yuan over eight years—while revenue grew from 130.1 billion yuan to 804.0 billion yuan (about 6.2x), with cumulative government subsidies just 0.55% of revenue; as net profit grew rapidly, subsidies fell as a share of net profit year after year.

These fastest-growing, most globally competitive new-economy firms are precisely the ones that relied little on either loans or subsidies. This runs directly counter to the narrative that emerging industries can only grow with the help of bank credit and government subsidies.

The financing-need angle helps further explain these differences. When a firm needs to raise capital expenditure, the funds come from two sources, internal financing and external financing. Internal financing refers to using the company’s own earnings to fund new investment, while external financing refers to funds raised from outside the company—including both direct and indirect financing—to support new investment.

We proxy internal financing by recurring surplus after dividends and interest, and compare it with capital expenditure; the focus is whether each group’s internal funds can cover its own capital spending, with the gap interpreted as a theoretical financing shortfall.

Figure 6 presents our calculations for the four groups. The relationship between internal funds and capital spending differs sharply across firm types. The clearest case is the new economy, light-asset group: its internal funds exceed its capital expenditure overall, meaning that in theory this group needs no external funds at all to cover its capital spending.

By contrast, the gaps between internal funds and capital expenditure are far larger for the new economy & heavy-asset group, the old economy & light-asset group and the old economy & heavy-asset group. Moreover, the old economy’s capital expenditure is markedly higher—nearly 20 trillion yuan cumulatively over eight years, more than three times that of the new economy groups— directly reflecting the old economy’s greater reliance on investment and hence on external financing.

The above is only a theoretical shortfall and does not mean the new economy, light-asset group truly needs no external financing. But in practice, when internal funds fall short of capital spending and external financing is required, the new and old economy choose very different routes: the new economy relies mainly on equity, the old economy mainly on debt.

As Figures 7 and 8 show, over 2019–2025 the new economy, light-asset group raised 2.0 trillion yuan in equity against only 640.2 billion yuan in new interest- bearing debt while equity was three times debt, or 75% of external financing.

The new economy, heavy-asset group raised 1.7 trillion yuan in equity and 1.1 trillion yuan in new interest-bearing debt, with equity at 60% of external financing.

The old economy is the reverse: equity makes up 47% of external financing for the old economy, light-asset group; and just 41% for the old economy, heavy-asset group, with more than half of external funds coming from debt. By equity share of external financing, the four groups form a continuous spectrum: new economy, light-asset group 75%; new economy, heavy-asset group 60%; old economy, light-asset group 47%; old economy, heavy-asset group 41%.

This too accords with the common understanding of the new economy: equity financing is a market-based capital-structure choice. It needs not be repaid and its risk is shared by investors, matching the new economy’s “high up-front investment, high future return” growth profile. That is a fundamentally different arrangement from “targeted financial subsidies.”

III. Subsidies Are Not Concentrated in the New Economy, Nor is the New Economy Dependent on Them

Since 2022, both the overall scale and the intensity of government subsidies have declined. Over 2018–2025, total government subsidies received by listed companies traced an inverted U, rising then falling. They peaked in 2022 at 227.2 billion yuan and then declined year after year. By 2025 they had fallen from that peak to 175.8 billion yuan, a 22.6% drop over four years, roughly back to the 2019 level.

Meanwhile, government subsidies were less than 0.5% of listed companies’ total revenue and fluctuated between 6.8% and 8.3% of net profit; in 2025 they were just 0.3% of total revenue and 7.14% of net profit—below the 7.56% average of 2022–2024 and among the lower readings of the past eight years.

By structure, about one-third of government subsidies go to the new economy and about two-thirds to the old economy. Within the old economy, the light-asset group has the largest amount and share, as it includes many traditional automakers and home-appliance firms.

Measured as a share of each group’s own net profit, subsidies are indeed higher for the new economy than for the old economy—meaning that although the absolute subsidy is small for the new economy, its effect on net profit is not negligible (see Table 2).

One objective fact must be acknowledged: in earlier years, some new-economy industries and firms did rely on subsidies to a notable extent. Take the new economy, heavy-asset group: in 2018, subsidies were as high as 35.6% of its net profit. The trajectories of two leading firms are especially telling.

At SMIC, the semiconductor leader, the 2018 subsidy (1.1 billion yuan) was more than three times that year’s net profit (0.4 billion yuan) and nearly 5% of revenue. At BYD, the EV leader, the 2018 subsidy was 58% of net profit and about 1.6% of revenue. In years when profits were still unsteady, subsidies were once a non-trivial line on the income statement.

In recent years, however, this has changed markedly: as these firms’ own profitability has improved, the relative importance of subsidies to new-economy firms has fallen rapidly. From 2018 to 2025, subsidies as a share of net profit fell sharply for the new-economy sectors—from 13.2% to 6.5% for the new economy, light-asset group, and from 35.6% to 17.3% for the new economy, heavy-asset group. The old economy, by contrast, grew more dependent on subsidies, especially its heavy-asset group, where subsidies rose from 4.2% to 7.3% of net profit.

Consider the same two firms. At SMIC, subsidies fell from more than 300% of net profit in 2018 to 22% in 2025, and from nearly 5% of revenue to 2.3%. The change at BYD is even starker: its subsidies barely grew over the eight years, staying around 2–3 billion yuan, but as net profit rose from 3.6 billion yuan to 33.8 billion yuan and revenue topped 800 billion yuan, subsidies fell from 58% of net profit to about 7%, and from 1.6% of revenue to 0.3%.

In other words, these firms expanded not by collecting ever-larger subsidies but mainly through their own internal profitability. Hence, even though some industries were relatively dependent on subsidies in the early stage of the emerging industries, after several years of development the new economy’s reliance on subsidies has fallen substantially.

We can also run a simple counterfactual: how much would each group’s profit margin (net profit/revenue) change if all government subsidies were stripped out? Subtracting subsidies from both the numerator and the denominator yields a subsidy-free margin; the gap between this and the actual margin is the margin attributable to subsidies.

As Figure 12 shows, after removing government subsidies, the margins of the new and old economy still diverge clearly: the old economy’s margin keeps declining, while the new economy’s margin tracks the business cycle closely.

IV. A Sub-Sample Analysis of 57 Representative Emerging- Industry Listed Companies

Finally, we select four representative emerging industries from the new economy group – electric vehicles, lithium batteries, solar, and semiconductors – which are also explicitly listed as emerging industries in the OECD report. Together, these industries comprise 57 A-share listed companies, which we examine as a separate sample. These 57 cover the leading A-share firms in the four industries, including the largest and most representative by revenue, listed in Table 3.

First, these 57 representative firms depend far less on debt than the old-economy sector, and because the old economy’s debt dependence keeps rising, the gap is still widening. We gauge a firm’s reliance on debt issuance with two ratios—interest-bearing debt/revenue and interest-bearing debt/net profit; the higher the ratio, the more outstanding debt is needed per unit of new revenue or net profit.

As Figure 13 shows, the 57 representative emerging-industry firms’ revenue- based debt dependence is markedly lower than the old economy’s. On the net- profit measure, the 57 firms’ debt-to-net-profit ratio was not noticeably different from the old economy’s over 2018–2020, but thereafter it fell sharply and steadily until rising again in 2024.

Given that the solar industry suffered sector-wide losses in both 2024 and 2025, we also computed a 41-firm sample excluding solar; the result is clearer still. As Figure 14 shows, the 41 firms and the two old-economy groups differ significantly not only in levels but in a gap that has widened since 2021—mainly because the old economy’s debt dependence keeps rising, while the 41 firms’ debt dependence has trended gradually lower and stayed low.

Second, the emerging industries’ reliance on government subsidies has kept falling, and markedly so. As Figure 15 shows, since 2021 these 57 representative emerging-industry firms have grown rapidly, with net profit and R&D investment both expanding sharply.

Over the same period government subsidies did not rise meaningfully; they peaked in 2023 and then fell for two straight years, and their effect on net profit declined even more sharply. Note that the 57 firms’ net profit plunged in 2024 and 2025, chiefly because sector-wide losses in solar dragged down the sample’s aggregate profit.

Excluding the 16 solar-related firms, the remaining 41 representative emerging- industry firms display this feature even more strongly (Figure 16). After 2021, R&D investment and net profit expanded substantially while the role of government subsidies kept weakening sharply. In particular, since 2023 these firms’ annual R&D investment has consistently exceeded their net profit— returning to the pattern of 2018–2020 when the industries were first emerging, except that the subsidies received in 2023–2025 are far less important than they were then.

Even in the case of the solar PV industry, its performance is difficult to explain through a framework of subsidies driving growth or subsidies sustaining survival. As the figure shows, after sustained expansion over 2018–2023, solar posted negative net profit in both 2024 and 2025. Yet in both expansion and loss-making periods, government subsidies were a small share of net profit and R&D investment, and there was no marked increase in subsidies during the loss-making years.

In 2025 the 16 listed solar firms posted net profit of -35.5 billion yuan, a worse loss than in 2024 (-28.7 billion yuan), yet the subsidies they received fell from 6.7 billion yuan to 4.9 billion yuan. Moreover, while solar R&D investment did dip during the losses, it stayed at a high level—which we see as the main reason the industry can keep advancing technologically and securing market competitiveness.

V. Concluding Observations

Our analysis shows that for both credit and cash subsidies, the main recipients are traditional sectors carrying long-horizon investment, not the emerging industries. The new economy has shorter debt maturities, sizable internal funds and equity-led external financing; government subsidies are less than half a percent of its revenue, and its reliance on them keeps falling.

In the early stage of the emerging industries, some firms did rely on subsidies to some extent, but most new economy industries depend little on either subsidies or credit. More importantly, during the recent phase of rapid expansion in the new economy, the scale of subsidies has been declining and their effect on the new economy ever smaller. Neither credit subsidies nor government subsidies, therefore, can explain why China’s new economy has expanded so rapidly in recent years. The narrative that China’s emerging industries are built on subsidies cannot hold water.

This conclusion carries at least three implications.

First, the OECD’s drawing of such a consequential and questionable conclusion from a small sample represents a pattern of conduct that could materially undermine the credibility of multilateral institutions. Global imbalances are a major issue closely watched by all countries, and clarifying their roots matters greatly. As a multilateral institution, the OECD on the one hand made an elementary error about China’s benchmark- rate system and yet concluded that firms obtained below-market financing. And on the other hand, on the basis of a small sample of 525 global firms (147 of them Chinese), reached the sweeping conclusion that China’s emerging industries grew primarily on subsidies and thereby gained global competitiveness.

This is far from serious research and falls well short of the objectivity and professionalism expected of the OECD. Should such findings become the basis for some countries’ protective policies, the report would have opened a Pandora’s box—inflicting real damage on the credibility of the multilateral system and leaving an already embattled set of international rules even more exposed to challenge and doubt.

Second, even if China were to eliminate all subsidies, the new economy’s prospects and global competitiveness would not be undermined, because they were never created by subsidies in the first place. From 2018 to 2025, the new economy’s reliance on subsidies fell sharply—from 13.2% to 6.5% for the new economy & light-asset group and from 35.6% to 17.3% for the new economy & heavy-asset group. It was precisely during this rapid retreat of subsidy intensity that the new economy expanded fastest.

In the subsidy-free counterfactual, the margin divergence between the new and old economy remains clear. This shows that the new economy’s growth rests on scale expansion, genuine gains in profitability, ample internal accumulation and market-based equity financing—not on a continued infusion of subsidies—so the marginal withdrawal of subsidies would not shake the foundations of that growth.

Third, global imbalances are a genuine global problem that deserves serious attention, and China still has ample room to expand domestic demand and improve its domestic resource allocation. Our analysis does not deny the importance of global imbalances, nor that China has much room to expand domestic demand.

From a resource-allocation perspective in particular, the heavy concentration of new interest-bearing debt in a few infrastructure and power SOEs partly reflects legitimate factors—long project horizons and large funding needs—but may also reflect inefficient capital allocation. China’s biggest resource-allocation challenge may not be excessive support for the new economy, but rather the continued flow of resources into low-return sectors. This may also help explain why Chinese firms are highly competitive at the micro level, while aggregate productivity growth remains relatively subdued.

The implication, contrary to the OECD’s, is that if China’s resource allocation were more market-based and more efficient, the global competitiveness of its new economy would be stronger, not weaker.

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Pekingnology

China’s economy has finally turned the corner，say Guo Kai and Zhu He

China’s economy may be entering a mild but durable recovery, according to two economists at the China Finance 40 Forum (CF40), who argue that the long property-led downturn and industrial overcapacity are beginning to clear, allowing growth to stabilise even without a large-scale stimulus push…

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3 months ago · 31 likes · 3 comments · Yuxuan JIA and JINGYUAN JIANG

Pekingnology

China's Consumption Is Not Nearly as Low as It Appears: CF40 Policy Brief

There is a broad international consensus among economists, policy analysts, and multilateral institutions that China’s level of household consumption is significantly lower than what would be expected for a country of its economic size and development…

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a year ago · 47 likes · 8 comments · Zichen Wang

This is partly why I found the following speech unexpectedly moving.

At the 2026 Overseas Young Chinese Forum (OYCF) Annual Meeting, co-hosted by University of California Irvine’s Long U.S.–China Institute in Southern California on May 23, 2026, Susan Mai Easterbrook Cole — the great-granddaughter of General Joseph Stilwell — delivered remarks reflecting on her family’s multi-generational relationship with China and on the wartime legacy of the China-Burma-India Theater.

To Chinese readers, Stilwell is hardly an obscure historical figure. For many generations in China, especially those who grew up before the reform era fully transformed public historical memory, Stilwell/“史迪威” represented a particular image of America: direct, principled, personally connected to China, and respectful toward ordinary Chinese people during one of the country’s most difficult historical moments.

Of course, historians can debate Stilwell’s politics, military strategy, or complicated relationship with Chiang Kai-shek. But what struck me reading this speech was something less geopolitical and more human: the persistence of historical memory at the family level across nearly a century.

Today, when discussions about China and the United States are increasingly dominated by tariffs, semiconductors, export controls, military signaling, and ideological rivalry, there are fewer and fewer spaces for narratives centered on mutual respect, lived experience, and people-to-people ties. Yet those dimensions of the relationship have not disappeared completely. Sometimes they survive quietly — in family stories, educational exchanges, archival projects, museum collaborations, and conversations like this one.

Cole’s remarks are not important because they offer some naïve optimism about bilateral relations. They are important because they remind us that even during periods of profound strategic distrust, historical memory and human relationships continue to exist beneath the level of statecraft.

That, in itself, may be worth preserving.

Below is the speech delivered at the 2026 OYCF Annual Meeting, as provided by UC Irvine’s Long U.S.–China Institute.

Susan Cole: “The Stilwell Legacy: Friendship, Respect, and the Enduring Power of Exchange”

Good afternoon distinguished leaders, scholars, students, and friends.

It is my honor to stand before you today at this annual meeting of the Overseas Young Chinese Forum. OYCF’s mission, to provide a platform for overseas Chinese scholars, professionals, and those interested in China’s development to exchange ideas and cultivate aspirations, is one that deeply resonates with both my family’s history and my own personal beliefs.

I am especially honored to be here not only as an individual, but as a representative of my family, and as the great granddaughter of General Joseph Warren Stilwell – a man whose life became permanently intertwined with China, its people, its history, and its future.

General Stilwell was an American military officer, but to describe him only in that way would miss what defined him most. He served during World War II as Chief of Staff to Generalissimo Chiang Kai shek and as Commander of U.S. Forces in the China Burma India Theater. His responsibilities were immense – militarily, diplomatically, and personally.

Yet what distinguished him was not rank or authority, but character.

He believed deeply in honor, integrity, humility, and service. He studied China long before the war, becoming fluent in Mandarin, lived in Chinese communities, and formed friendships that shaped his worldview. China was not, to him, an abstract ally. It was a place of people he respected, trusted, and believed in.Throughout his diaries, letters, and speeches, one theme appears again and again: his profound respect and admiration for the Chinese people.

He once wrote:

“I have faith in Chinese soldiers and Chinese people: fundamentally great… honest, frugal, industrious, cheerful, independent, tolerant, friendly, and courteous.”

This was not flattery. It was conviction.

At a time when many underestimated China, General Stilwell did not. He saw strength where others saw hardship. He saw perseverance where others saw limitations. And he believed that with fair treatment and good equipment, training, and leadership, Chinese soldiers could be second to none.

During some of the darkest moments of the war, after the loss of Burma in 1942 and amid constant shortages, his faith in the Chinese people never wavered. At one point he wrote:

“If I was not convinced that the Chinese people deserved a break, I would have thrown in my hand long ago.”

That sentence alone reveals why he was respected by those who knew him and served with him.

One of the most enduring symbols of this shared struggle is what is often called the Stilwell Road. It was a monumental undertaking built through mountains, jungles, and with extraordinary human effort.

The road was not merely an engineering achievement. It was a testament to cooperation, constructed by Chinese laborers, engineers, and soldiers working alongside Allied forces under unimaginable conditions.

My daughter and I were honored to visit the Stilwell Road last September and it was profound to walk where my great grandfather walked because for our whole family, the road symbolizes something larger:

What becomes possible when trust replaces doubt and when shared purpose overcomes adversity.

Every time we visit China and walk parts of that history – whether in museums, memorials, or conversations with old and new friends – we are reminded that the legacy of the road belongs not to one nation, but to all who labored, suffered, and persevered together.

General Stilwell judged people not by rank, nationality, or background, but by actions and integrity.

He believed leadership was about taking care of people, not commanding from a distance. At Ramgarh in India, he focused not only on training Chinese troops for battle, but also on ensuring they were equipped, fed, paid, and treated with dignity. He later established programs so wounded Chinese soldiers could learn skills for life after the war because he believed deeply in their future beyond conflict.

This was not strategy alone. This was humanity.

My sister, father, aunt, uncle and cousins grew up with stories not of glory, but of principle.

We heard about a man who believed courtesy mattered.

A man who learned languages because he wanted to understand people, not control them.

A man who believed humility was strength, and that service was the highest form of leadership.

Although I never met him, I feel his presence profoundly… through his writings, through the respect shown to him across China, and through the friendships our family has been privileged to build with the Chinese people over generations.

Our family has tried, in small ways, to honor that legacy – through scholarships supporting Chinese students, cultural exchanges, museum partnerships, family trips, and most importantly, people to people relationships that continue across five generations within the Stilwell family.

If my great grandfather were alive today, I believe he would strongly support the work of this forum and would be honored to know his name was associated with the Stilwell Fellowship that OYCF sponsors.

It represents exactly what he believed in: knowledge exchange, mutual understanding, long term thinking, and respect across cultures.

He believed that progress, whether military, social, or economic, comes not from dominance, but from learning, cooperation, and trust.

In the early 1930s, he observed that with the right leadership and opportunity, the Chinese people’s capacity for innovation and industry would be world shaping. History has proven him correct.

For the young scholars and professionals here today, the Stilwell legacy offers lessons that remain deeply relevant: Understand people, don’t see stereotypes; build trust through actions; learn the facts of history without being bound by history; believe in the power of exchange.

The future will be shaped not only by governments, but by individuals… by scholars, innovators, bridge builders, and those willing to engage sincerely across borders.

Each time I return to China, I am struck by two things.

First, the remarkable transformation—cities rising, technology advancing, ideas flourishing.

And second, something unchanged:
The warmth, kindness, and generosity of the Chinese people.

It is easy to see why my great grandfather admired the Chinese people so deeply. His respect was earned, and it has endured. He has left us an important legacy that has been passed down now through five generations.

It is my great honor to represent the Stilwell family here today.

But more than that, it is a responsibility to remember that legacy is not about the past alone. It is about what we choose to carry forward.

General Stilwell believed in dignity, courage, honesty, and friendship.
He believed in the Chinese people.
And he believed that cooperation, especially in the hardest times, was both possible and necessary.

May the work of OYCF continue to cultivate aspiration, wisdom, and understanding. And may the friendships formed here contribute, in lasting ways, to a more peaceful and connected world.

Thank you for allowing me to share this story—and for carrying forward the spirit of exchange that my great grandfather so deeply respected.

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Below is the Executive Summary and full report.

As China concluded the 14th Five-Year Plan period (2021-2025), comprehensively assessing human development progress, and how it can be sustained, is vital to informing future development priorities. As China transitions towards people-centered “high-quality development” as affirmed in the 15th Five Year Plan (2026-2030), the country faces multiple opportunities and challenges, including shifting growth drivers, demographic changes, regional imbalances, and growing environmental pressures.

To inform pathways towards sustainable development, this report applies a human development lens to assess progress. Within this broader framework, it uses the Human Development Index (HDI) and related indicators as practical tools for measurement and comparison.

Its value addition is twofold. First, it estimates HDI values not only at the national level, but also at the provincial, and prefectural levels for a more granular map of progress and challenges. Second, this report for the first time introduces estimates for the Planetary Pressures-adjusted Human Development Index (PHDI) at the provincial level, evaluating the balance between human development gains and environmental costs. Building on the country’s historical achievements, the report also examines key constraints and proposes policy recommendations for promoting sustainable human development.

China was one of the first countries to advance from low to high human development, and is rapidly approaching the threshold of very high human development. According to UNDP estimates, China’s HDI reached 0.797 in 2023, just shy of 0.800, the lower bound for very high human development.

Comparison of HDI three component indices for China and grouping averages (2023)

Economic growth and educational advancement have been the main drivers of China’s HDI growth over the past decade. Disposable income per capita also increased from RMB 12,500 to RMB 39,200, with real growth of about 1.4 times. This created the world’s largest middle-income group of over 400 million people. The average years of schooling for citizens aged 25 and above reached 8 years, and gross tertiary enrolment increased from 26.5 percent in 2010, to 60.2 percent. This marks a leap from higher education being accessible to a significant portion of the population, in the direction of universal access. Lats but not least, life expectancy rose steadily from 74.8 years in 2010, to 78.6 years in 2023, surpassing the average for upper-middle-income countries.

As a vast and populous developing country, China exhibits significant spatial disparities in human development levels. Building on the 2019 Special Edition of the China National Human Development Report, this report updates provincial and prefectural HDI estimates up to 2020, offering an updated detailed and granular picture of development outcomes. The findings indicate overall progress, with upward shifts in development categories and a trend towards narrowing disparities:

• At the provincial level, the vast majority of provinces have reached high levels of human development, and some municipalities, such as Beijing and Shanghai, have attained HDI levels comparable to those of developed countries.

Changes in provincial HDI groupings over time

• At the prefectural level, the number of cities reaching high or very high human development levels also increased significantly, showing a clear trend of diffusion from eastern to central and western regions, and from core cities to surrounding areas.

Prefectural-level HDI values across China, 2010 vs 2020

• Cities with very high human development now account for a population of 442 million, or 31.7 percent of the national total, while cities with high human development account for 916 million people, or 65.7 percent, reflecting a notable expansion in the inclusiveness of development outcomes.

• The Theil index of HDI among prefectures – used as a proxy measure of inequality, continues to decline, indicating a steady reduction in regional development gaps.

Amid the intertwined challenges of human development and environmental sustainability, this report also introduces the Planetary pressuresadjusted Human Development Index (PHDI) at the provincial level in China for the first time. The PHDI systematically quantifies the “deduction effect” of environmental costs on human development. By incorporating two key indicators—carbon emissions and material footprint per capita, the index adjusts HDI scores to reflect planetary pressures exerted by development. Key findings are as follows:

• Based on 2015 data, high material footprints are observed not only in developed coastal provinces, but also in western provinces, where infrastructure investment has grown rapidly.

• While regional policies have effectively improved development foundations, they have also led to rising pressures on resources and energy, with some regions incurring significant environmental costs.

• Unlike the east-west disparities highlighted by the HDI, the PHDI reveals a more evident north-south divide. Northern provinces have experienced faster growth in material footprint and carbon emissions, leading to widespread declines in their PHDI rankings. In some areas, the gap between HDI and PHDI rankings exceeds ten places.

• Global comparisons show that Beijing and Shanghai already outperform some high-income countries in resource efficiency, while northern provinces reliant on resource-intensive industries continue to incur a substantial “development discount.”

Following from the data analysis, the report identifies five structural challenges to sustainable human development in China:

• Slowing economic growth may constrain further improvements in human development. Tightened global conditions, weak domestic consumption, and mounting pressure to improve productivity all play a role generating a more subdued outlook than in the past.

• Educational attainment remains a key shortfall. Compared with developed countries, China still lags in average and expected years of schooling, as well as in public education spending.

• Regional disparities in human development remain relatively high. Absolute differences across regions persist, while intra-provincial gaps, especially within the western region, are also notable. Some eastern provinces are also showing increasing divergence across prefectures.

• Imbalances remain across different human development dimensions. Although significant progress has been made in health, education, and income, development across these areas is still uneven. In many cases, regional disparities are increasingly manifested as economic development gaps.

• Environmental pressures are structural, deeprooted, and long-term. Problems such as inefficient and extensive energy use, low resource efficiency, groundwater pollution and serious waste have yet to be fully resolved.

To address these challenges and accelerate advancement towards comprehensive very high human development, aligned with the Government’s vision of “high-quality” development and socio-economic and environment commitments, the report proposes five policy recommendations to advance sustainable human development:

• Anchor progress in healthy life expectancy and continue improving population-wide health outcomes. For example, by strengthening longterm care and health insurance systems.

• Expand years of schooling and enhance workers’ adaptive skills, such as promoting 12-years' compulsory education and universalizing higher education.

• Focus on improving income distribution and sustaining household income growth. For instance, by advancing direct taxation reforms and diversifying household income sources.

• Optimize regional development policies to reduce disparities in human development across regions, such as increasing transfer payments to areas depleted by outbound migration, along with resource-dependent regions.

• Foster a greener, more inclusive, and more sustainable environment. For example, by promoting the circular economy and strengthening ecological compensation, as well as carbon market mechanisms.

Access the full report on Google Drive

Monitoring China’s Human Development

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Acknowledgement

This report was a joint effort between the China Institute for Development Planning, the Institute for Circular Economy at Tsinghua University, and United Nations Development Programme (UNDP) China. We thank colleagues from both teams for their dedicated work. The expert group from Tsinghua University was led by Yongheng Yang, Director of the China Institute for Development Planning at Tsinghua University

and Bing Zhu, Director of the Institute for Circular Economy at Tsinghua University. Primary authors from the group include Pu Gong, Meng Jiang, and Siyao Zhu. The UNDP team includes Rong Shi, and Xinyi Qu, Kailai Zeng, Xiaomeng Kang, Daryl Lahm and Yichao Wen for research support.

The report has also benefitted from the valuable advice and suggestions of many experts and scholars. We would like to thank Yu Dong, Executive Vice Director of China Institute for Development Planning, Tsinghua University, and Professor Wenji Zhou of Renmin University of China, for their guidance on the report drafting. We also express our gratitude to Violante di Canossa (UNDP China), for her review and valuable feedback

as well as to colleagues in the UNDP Human Development Report Office, Yanchun Zhang and Som Kumar Shrestha and Philip Schellekens (UNDP RBAP). Lastly, we would like to thank Roddy Flagg and Grace Brown for their translation and editing work. This report also received support from the National Social Science Fund of China (23&ZD130, 24VRC043), the joint research project between the National Natural Science Foundation of China (NSFC) and the United Nations Environment Programme (UNEP) (4161101173), and the Tsinghua University Initiative Scientific Research Program (2023THZWYY01).

A newly published paper offers a more nuanced explanation. In “The Rise of China’s Electric Vehicle Industry: Strategic Alliances Between Local Governments and Private Capital,” published in the July issue of The China Journal in 2026, Fengming Lu and Xiao Ma argue that China’s EV boom was driven in large part by alliances between ambitious local governments and agile private firms, which repeatedly found ways around tight central regulations—a dynamic that produced both China’s spectacular EV successes and many of its costly failures.

Fengming Lu is a Lecturer (Assistant Professor) in the Department of Political and Social Change at the Coral Bell School of Asia Pacific Affairs, Australian National University. His research spans comparative politics and Chinese politics, with a particular focus on China’s political economy, industrial policy, local governance, and political selection.

Drawing on three decades of observation of China’s automotive sector, Fengming is currently working on a book project examining the rise of China’s EV industry. The project explores the interplay between central industrial policies, local governments’ developmental strategies, and global capital markets in shaping one of the most significant industrial transformations of the twenty-first century.

Xiao Ma is an associate professor of political science at the School of Government at Peking University. His research focuses on comparative political institutions, politics of development and Chinese politics. He is the author of Rethinking Political Meritocracy: An Attention-Based Approach (Cambridge University Press, 2026), and Localized Bargaining: The Political Economy of China’s High-Speed Railway Program (Oxford University Press, 2022). He received his Ph.D. in Political Science from the University of Washington.

With the authors’ permission, we are publishing a condensed excerpt from the paper below.

The Rise of China’s Electric Vehicle Industry: Strategic Alliances Between Local Governments and Private Capital (Excerpt)

Fengming Lu and Xiao Ma

ABSTRACT

This article challenges the prevailing view that China’s electric vehicle (EV) boom is primarily the result of top-down industrial policy. Drawing on the history of China’s automotive sector since the 1990s, it shows that stringent central regulations and entrenched state-owned enterprises (SOEs) excluded most localities from lucrative joint ventures. In response, local governments forged strategic alliances with private manufacturers, leveraging capital markets, policy loopholes, and post-2008 credit expansion to attract investment, upgrade industries, and diversify regional economies. These partnerships, initially in traditional automotive manufacturing, proved pivotal to China’s EV takeoff after 2015, enabling private firms to outcompete SOEs in innovation, responsiveness, and market expansion. Comparative cases in steel and pharmaceuticals illustrate the broader applicability of this dynamic. The study highlights the enduring adaptability of Chinese local governments and private capital in navigating central constraints, offering new insights into industrial policies, industrial upgrading, and local developmental states.

Since the mid-2010s, the Chinese automotive industry has undergone a profound transformation. Until then, the sector was dominated by joint ventures (JVs) formed between major foreign automakers and large Chinese state- owned enterprises (SOEs). Yet within a decade, China surprisingly emerged as the global leader in electric vehicles (EVs) and plug-in hybrid vehicles (PHEVs), collectively known as new energy vehicles (NEVs) in China, and rapidly closed the technological gap with the West in internal combustion engine vehicles (ICEVs), surpassing Japan to become the world’s largest exporter of passenger vehicles in 2023. This transformation ended SOE dominance in the sector. The leading NEV pioneers, NIO, XPeng, and Li Auto (known collectively as wei xiao li 蔚小理), are all private firms, alongside more established private automakers such as BYD and Geely, and new entrants such as Seres, Xiaomi, and Leapmotor. Among the 10 best-selling NEV marques in 2024, only three (SAIC-GM-Wuling, Chang’an, and GAC Aion) were SOEs or SOE-foreign JVs.1

The dynamics cannot be explained solely by central-level industrial policy or by the actions of local governments in isolation but rather by how local governments have responded to the central automotive industrial policy, particularly its stringent regulatory framework and bias toward SOEs, and collaborated with emerging private capital. The article argues that China’s EV boom, and the proliferation of both spectacular successes and costly failures, a phenomenon unmatched in the United States, Europe, or Japan, cannot be understood as top-down policy alone but as the unintended product of a triangular dynamic among central industrial constraints, local fiscal competition, and private capital’s agility. As we later demonstrate, this framework also illuminates patterns in China’s industrial development beyond automobiles, from traditional sectors such as steel and pharmaceuticals to cutting-edge industries such as AI.

THE 1990s: EMERGENCE OF ALLIANCES UNDER RESTRICTIVE INDUSTRIAL POLICIES AND FRAGMENTED PRODUCTION

The partnership between local governments and private automakers originated in the 1990s, well before China’s transition toward NEVs. Before China’s accession to the WTO in 2001, the country’s automotive sector was characterized by three defining features: high import tariffs on vehicles, an industrial policy favoring large SOEs, and a fragmented production landscape. The first two were embedded in the automobile industrial policies of 1987 and 1994.

Through the (in)famous “three big and three small” (sanda sanxiao 三大三小) policy [under which the state would support only three big and three small designated passenger-car producers], the central government strictly limited new entrants into the passenger vehicle market.2 Only models listed in the National Automobile Catalog, particularly its sedan subcatalog regulated by the Ministry of Machinery Industry and the National Economic and Trade Commission, could be legally sold nationwide.3 Meanwhile, passenger vehicle imports faced tariffs of 80–220 percent in the 1990s, shielding the designated SOEs from foreign competition. In line with broader SOE reforms, the state encouraged large automotive SOEs to form business groups (企业集团) and cultivate “national champions.” Additional preferential measures, including tax deductions, low-interest loans, and favorable access to foreign currency, were reserved for SOEs with annual production capacities exceeding 300,000 vehicles.4

Ironically, the industrial policy’s combination of limited domestic supply, given that many of the “three big and three small” were still struggling to ramp up production and raise domestic content, and high import tariffs spurred local governments to develop their own automotive industries. While most cities were formally excluded from large-scale passenger vehicle manufacturing, many already hosted small-scale producers, a legacy of Mao’s intentional economic fragmentation that accelerated through the early decades of the reform. Three waves of decentralization, the Great Leap Forward, the Cultural Revolution, and the fiscal decentralization of the 1980s, had encouraged provinces and prefectures to establish their own modest automotive works. Although often economically inefficient, these facilities alleviated chronic vehicle shortages under the planned economy, and many survived into the 1990s. In 1996, China had 130 automotive companies producing a total of just 1.48 million vehicles, with most firms manufacturing only a few thousand or fewer units per year. 5Industrial policy aimed to eliminate this lack of economy of scale by favoring large SOEs.

Although many local governments initially gained modest revenues from auto motive production, they were soon blocked by the central government from upgrading their industries. The industrial policy also maintained a prohibitively high entry threshold, 1.5 billion yuan in initial investment, for new carmakers until the 2010s. Localities without mass-production capacity therefore sought to attract licensed SOEs, but these efforts usually failed. SOEs resisted relocating core processes because of political ties with their home bases, the limited size of China’s auto market at the time, and structural asymmetries in central-local relations. Motivated by the promise of lucrative tax revenues from large-scale production in a protected market, local governments, especially at the prefecture level, turned to local state corporatism. Some established their own market-oriented automakers, while others partnered with township and village enterprises (TVEs).6 As privatization deepened in the late 1990s and early 2000s, this alliance advanced further: Many firms diversified their ownership structures, while latecomer cities allied with unlicensed private automakers to upgrade capacity. Together, these strategies laid the foundations for the enduring alliance between local governments and private capital in China’s auto industry.

THE PERIOD 2001–15: STRENGTHENED ALLIANCES UNDER THE DOMINANCE OF JOINT VENTURES

By the early 2000s, collaboration between local governments and private capital had already reshaped China’s fragmented automotive landscape. Yet the central industrial policy framework that constrained local ambitions in the 1990s remained largely intact. WTO accession in 2001 opened China’s market to foreign competition, but in practice the most lucrative opportunities still flowed to JVs set up between a handful of large SOEs and global automotive giants.

In this environment, emerging private automakers proved more willing partners for cities that had failed to secure successful JVs. BYD, which began automotive design and manufacturing only in the early 2000s, exemplified this trend. During its expansion, BYD partnered with numerous cities (many in central and western China), including Xi’an, Changsha, Fuzhou (Jiangxi), Hefei, Zhengzhou, Taiyuan, Dalian, Jinan, and Changzhou, offering substantial manufacturing investments in exchange for favorable local terms, including access to land, labor, and logistical support. To deepen ties, BYD established a dedicated division for urban rail transit, aligning with many cities’ infrastructure ambitions.7

Large SOEs remained far less flexible. BAIC, Beijing’s regional SOE, was China’s top EV producer between 2013 and 2019, even outselling Tesla globally in 2017. Yet BAIC’s strategy was narrowly aligned with Beijing’s priorities, focusing solely on EVs (to help the Beijing municipal government curb air pollution), totally giving up development of hybrid vehicles and producing mainly taxis and time-sharing vehicles, limiting its expansion elsewhere.8

Meanwhile, China’s integration into global capital markets, especially Hong Kong and New York, created new financing channels. One of the most notable cases was Geely’s 2010 acquisition of Volvo Cars from Ford for over US$1 billion, 10 times Geely’s 2009 annual profit. Denied financing by major policy banks—namely, the Export-Import Bank of China and China Development Bank, and the Bank of China—Geely secured only US $200 million from China Construction Bank’s Zhejiang branch, raising the rest through the global capital market and Chinese local governments. The Zhejiang-based automaker raised US$350 million from Goldman Sachs via Hong Kong, 6 billion yuan in loans from the governments of Chengdu and Zhangjiakou, and 4 billion yuan in equity from Daqing and Shanghai’s Jiading District. In return, Chengdu, Zhangjiakou, and Daqing, all seeking to upgrade into advanced manufacturing, secured Volvo vehicle or engine plants. Jiading, long known as “China’s Motor City,” diversified beyond Shanghai-Volkswagen to host Volvo Cars China.9

The Volvo acquisition illustrates how, even before the EV transition, the local government–private capital nexus enabled Chinese automakers to leapfrog in ICEV technologies. Through China Euro Vehicle Technology AB (CEVT), Volvo Cars transferred decades of know-how in design, engine and transmission systems, advanced driver assistance, and platform development to Geely. These developments laid the groundwork for the even deeper local government–private automaker partnerships that would define China’s EV boom in the late 2010s and 2020s.

AFTER 2015: NEW ENTRANTS PROLIFERATED THROUGH ALLIANCES

The proliferation of Chinese EV startups after 2015, driven by the technological shift toward electric and connected vehicles, further intensified the linkages between local governments and private automakers. Inspired by Tesla’s early success with the Model S, numerous Chinese entrepreneurs sought to replicate its achievements at home, leveraging the country’s rapidly advancing information and communications technology (ICT) sector and its increasingly sophisticated capital markets. 10In June 2015, the National Development and Reform Commission (NDRC) and the Ministry of Industry and Information Technology (MIIT) lowered entry barriers for EV manufacturers.11 The result was a wave of“internet-companies-turned-car-manufacturers” (互联网造车), in which hundreds of entrepreneurs, many with minimal automotive backgrounds, entered the sector, often backed by venture capital (VC) investors. This surge of new entrants shifted bargaining power toward local governments, enabling them to negotiate more favorable terms. As one official from an eastern city recalled, he received visits from dozens of EV startups in 2016 alone, including nearly all leading private EV manufacturers of the 2020s.12 Nanjing, long subordinate in its relationships with SAIC and Chang’an-Mazda, aggressively pursued EV opportunities and attracted five startups between 2016 and 2025.13

Yet key policy barriers remained. While it was easier to obtain approval from the provincial-level Development and Reform Commission, the most formidable was the requirement for “dual qualifications” (Shuang zizhi 双资质) from both the NDRC (for investment project approval) and the MIIT (for market entry). By 2019, only 15 carmakers had received NDRC approval, and just 12 had secured both qualifications, out of roughly 100 Chinese firms seeking to develop and manufacture EVs.14

An unintended loophole in the central-level industrial policy favored existing ICEV manufacturers: Any firm already licensed to produce ICEVs could obtain EV qualifications through a streamlined process. While designed to privilege large SOEs, this also elevated the value of regional auto manufacturers’ ICEV licenses, whether successful or struggling, and created new opportunities for local governments to connect them with private EV startups. One prominent case was NIO’s early collaboration with Hefei, in which the startup “borrowed” production qualifications from JAC, a struggling regional SOE. Although controversial, the practice was tacitly accepted after EV100, a think tank of former automotive regulators and SOE executives, persuaded the MIIT to relax enforcement.15 Subsequently, more EV startups followed this pathway to expedite their EV development and manufacturing.16 The collaboration across EV startups, regional carmakers, and local governments proved to be critical for the dramatic emergence of Chinese EV startups. This allowed NIO to become the first Chinese EV startup to mass-produce vehicles, delivering tens of thousands of units in 2018, well ahead of many domestic competitors and US peers such as Lucid and Rivian.

Before 2019, many private EV startups resisted taking equity investments from local governments, fearing interference in strategic decision-making. This changed dramatically in 2019–20. Sluggish post-trade-war sales in 2019 were compounded by the COVID-19 outbreak, which froze sales and financing for many startups. Stock market turmoil in March 2020 further depressed publicly listed EV firms’ stock prices. Local governments, flush with credit from the post-2008 credit expansion and eager to anchor EV production, stepped in.17 After missing a 10-billion-yuan deal with Beijing’s Yizhuang Economic and Technological Development Zone, NIO accepted a 7-billion-yuan equity investment from Hefei at a historic low in its stock price.18 The investment more than doubled in value within months, and Hefei’s success in securing NIO was celebrated by Chinese business media as the “Hefei Model” (hefei moshi 合肥模式). The precedent spurred a wave of high-profile local government investments through local government financing vehicles (LGFVs) in 2020–21, until the burst of the property bubble put an end to it. Prominent cases include Guangdong Province and Guangzhou City’s 2-billion-yuan stake in XPeng, as they were aiming to diversify their automotive industry from JVs dominated by Japanese firms.19 Ningbo City also made a 10-billion-yuan investment into Zeekr, the startup project under Geely Group, as the eastern coastal city missed other EV startups in the past decade.20

As discussed earlier, giant automotive SOEs were the early leaders in China’s EV sector. But for most cities, collaboration with these firms has proven unrealistic. As in previous decades, major SOEs have been reluctant to transfer core development and manufacturing capabilities. The political salience of EV production has only reinforced this tendency, as EV development is now a key performance metric for both SOEs and the local governments in their headquarters’ cities. This makes them even less willing to disperse research, development, and production beyond their home bases. SAIC, for example, doubled down on EV development and manufacturing after Xi Jinping’s 2014 visit to the company, during which he stressed that “developing new energy vehicles is essential for China to evolve from an automobile power to an automobile powerhouse.”21 Yet throughout the 2010s, SAIC built no EV development or manufacturing facilities outside Shanghai, except in Ningde, Fujian. Ningde was an exceptional case for three reasons: It is home to Contemporary Amperex Technologies (CATL), the world’s largest power battery producer since 2017; Xi Jinping served there as prefectural Party secretary from 1988 to 1990, earning key promotions from his tenure; and Fujian’s governor from 2018 to 2020, Tang Dengjie, was a long-time senior SAIC executive eager to connect his former company with the province.22

Cities lacking such advantages had less bargaining power with the large SOEs. Changzhou, unable to persuade Dongfeng to produce competitive models until 2018, turned instead to BAIC, another major EV-making SOE. Attracted by Changzhou’s large battery manufacturing base, BAIC began building a plant in the city’s Wujin District in 2015. When production began in 2016, however, the main output was a two-seat city car, marginal in BAIC’s product lineup.23 In 2023, with an annual manufacturing capacity of 300,000 vehicles but weak sales, the BAIC plant shut down. Wujin’s partnership with Li Auto proved more fruitful. Li Auto began constructing its manufacturing base there in 2016 and, despite its Beijing headquarters, produced all of its main models in Changzhou until 2023.24 The company also helped attract key members of its supply chain, including its electric vehicle control system and electric power train manufacturer Inovance and its seat unit supplier Forvia, into Changzhou. By the end of 2024, 32 of Li Auto’s 100-plus suppliers were based in Changzhou, making it Jiangsu’s second-largest automotive supply hub after Suzhou, which has hosted major international tier-one suppliers since the 1990s.25

CONCLUSION

A key driver of China’s rapid growth in both the traditional automotive and EV sectors has been the alliance between local governments and private capital. These partnerships first emerged in the 1990s, when local governments, eager to develop automotive manufacturing, found themselves shut out by restrictive central-level industrial policies. Long-standing structural issues, such as the disparity in bargaining power and misaligned incentives, limited their ability to collaborate with established SOEs. In the 2000s and 2010s, while certain policy restrictions eased, core barriers remained, including JV quotas, manufacturing qualifications, and entrenched SOE favoritism. At the same time, the maturation of China’s capital markets, the proliferation of diverse shareholding structures, the rise of EV startups, and post-2008 credit expansion deepened local governments’ ties with private firms, leading to the proliferation of competitive EV makers and the emergence of new “motor cities” across China.

However, the close local-private alignment has also contributed to structural problems, most notably chronic overcapacity and cutthroat competition. Local investment sprees have produced excess manufacturing capacity in both EVs and ICEVs.26 When automotive startups fail, their close financial and political ties to local governments exacerbate municipal debt problems and slow market exit. These risks are heightened when local governments make strategic investment decisions without adequate due diligence or sector-specific expertise. One notorious example was the partnership between Rugao County in Nantong and Sailin, an EV spin-off from the US sports car maker Saleen. Without thoroughly assessing the firm’s investors, capabilities, or technology, the county invested 6.6 billion yuan in a company that produced almost no cars.27 This is not unique to China: In the United States before the 1930s, hundreds of automakers emerged in a wave of investment fever and overcapacity, although they were geographically concentrated around Detroit and far less dependent on local government backing.28 In China, by contrast, local governments play a pivotal role. Each locality tends to view industrial investment primarily through its own fiscal lens, often prioritizing short-term revenue and regional growth over broader national or global market dynamics. Reflecting these concerns, central leaders in 2025 explicitly warned local governments against blindly launching new EV projects.29

It is worth noting that the technological shift in the automotive sector, particularly the rise of electric and connected vehicles, partly contributed to the alliances between local governments and private capital. These changes created crucial windows of opportunity for weaker actors and new entrants, such as the “internet carmakers,” to enter and compete.30 Similar patterns appeared in other industries. In the EV charger market, which was once dominated by state monopolies (State Grid and China Southern Power Grid), private firms like TELD in Qingdao and StarCharge in Changzhou leveraged mobile connectivity and local government support to become leaders. China’s AI sector shows a comparable dynamic: DeepSeek, spun off from a hedge fund in Hangzhou, thrived under municipal protection even as hedge funds were criticized by some central leaders as financial speculators.

As private capital expanded and China’s capital markets deepened, local governments adapted quickly, forging alliances that frequently outmaneuvered central regulatory constraints. This partnership between local authorities and private capital not only reframes our understanding of China’s industrial development but also offers a powerful lens for anticipating the evolution of high-value manufacturing sectors. In dialogue with the comparative literature on local developmental states,31 this study also provides theoretical and process-tracing accounts of how such alliances are cultivated by local developmental states and how, in turn, they reinforce local developmental capacities.

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