Investing.com -- China’s sweeping industrial policy has produced globally competitive firms such as BYD (SZ: 002594 ) and DeepSeek, but it has not delivered the productivity gains that President Xi Jinping has set as a key goal.
Despite record investment in innovation, overall productivity growth has slowed, particularly in manufacturing, casting doubt on the strategy’s broader effectiveness.
Since the global financial crisis, China has pivoted aggressively toward state-led innovation. Policies have funneled subsidies, tax breaks, cheap loans, and public procurement into sectors designated as “strategic,” including electric vehicles and artificial intelligence.
Xi has emphasized that the ultimate measure of success is a “substantial increase in total factor productivity.” However, data compiled by Capital Economics show the opposite.
Productivity growth fell from 3.7% in the 2000s to 1.9% in the 2010s, according to IMF estimates. Some models suggest productivity may have declined entirely.
Despite massive public investment, the pace of convergence with global productivity leaders has slowed, and China now risks falling further behind.
Manufacturing, the sector central to China’s innovation ambitions, has also seen productivity stall since 2012, according to firm-level analysis by the IMF.
While BYD has benefited from industrial policy, China’s EV sector received deep subsidies throughout the 2010s, most firms in the space have failed to turn a profit.
In 2017, a license plate in Shanghai cost more than the subsidized price of the best-selling EV.
Still, more than half of China’s 169 automakers now hold less than 0.1% market share. The success of BYD has come with high fiscal costs and international backlash.
DeepSeek, by contrast, succeeded outside the state support system. Although AI has been a strategic priority since 2016, DeepSeek, a spinout from a hedge fund, received little government help and still outperformed major state-backed firms.
Analysts at Capital Economics argue this underscores that China’s innovation potential thrives when state involvement is limited.
Multiple studies reviewed by the National Bureau of Economic Research have found that Chinese subsidies often go to politically connected or less productive firms.
These subsidies fail to boost profits or innovation quality and instead distort incentives. Gains are concentrated among supported firms, while non-recipients lose out, lowering productivity overall.
The shipbuilding sector highlights the risks. After being designated a “pillar industry” in 2003, it received ¥550bn in subsidies over eight years. Though China now builds half the world’s ships, researchers estimate the subsidies cost five times more than the total profits the sector will generate this century.
Capital Economics notes that China began prioritizing innovation at a much earlier development stage than peers like South Korea.
That shift appears driven by strategic concerns more than economic conditions, and has coincided with rising state intervention in the broader economy, further weakening business dynamism.
China’s industrial policy has enabled pockets of innovation, but productivity growth remains weak.
Without market-based discipline and a sharper focus on economic efficiency, the broader strategy is unlikely to meet its stated aims.