President Xi is doubling down on state-led growth
His model remains heavily reliant on government intervention, risking inefficiencies and fiscal strain
President Xi Jinping’s vision for China’s future development was embedded in the 15th Five-Year Plan approved by the National People’s Congress last month. It is based on the securitization of the economy.
High-tech development will be anchored in indigenous innovation, guaranteeing the nation’s independence from foreign pressures. Xi clearly sees that dominating the technologies of the future will bring both significant economic rewards and enhanced geopolitical influence.
Yet in pursuing this goal, the plan prioritizes state-led investment in frontier technologies while subordinating broader structural reform. For over two decades, China’s leaders have emphasized the need to shift away from overwhelming state investment, exports and debt.
That this has not happened highlights the difficulty of reforming the Chinese political economy. Xi’s plan replicates the old model but with a sharper focus on frontier science and technology.
Artificial intelligence
Investment in these sectors will be increased by around 10%. The priority will be to strengthen national power with a shift to “high-quality development” focused on the “real economy.”
Earlier emphasis on growth targets and reform will give way to a desire for self-sufficiency and security.
But this continues China’s state-dependent model of development, with massive resources for investment in favored sectors such as biotechnology, robotics, quantum computing, green energy and artificial intelligence or AI.
From Xi’s perspective this strategy, while expensive, appears to be delivering results.
Value-added production in China’s high-tech sectors is growing faster than overall manufacturing, with official statistics suggesting that the “new economy” comprises as much as 35% of GDP growth.
The government’s industrial policy is also being used to encourage more private sector participation in priority sectors. Breakthroughs by AI company DeepSeek seem to have influenced the leadership’s thinking on this issue.
Yet the model remains reliant on the state as the nation’s main economic actor.
This will not help rectify several familiar problems, including the misallocation of resources to less productive sectors, the potential duplication of projects and wasteful investments by local government guidance funds.
Insecure employment
It remains to be seen whether attempts to better direct local investment will bear fruit. China’s mobilization of resources also places a major burden on government finances, limiting its capacity to address other priorities.
Along with failing to rectify the misallocation of resources, the new plan does little to resolve inequality or accelerate the shift to consumption as a major driver of long-term growth.
The focus on high-tech industry, automation and robotics does nothing to help the more than one billion citizens who will be unable to participate in this economy. A substantial share of the urban workforce remains in insecure employment.
They include gig workers and migrants, who may not have full access to public services. In the run-up to the ‘Two Sessions,’ several analysts pushed for consumption to play a greater role in the economy. The leadership has taken on this rhetoric, but details are scant.
There are references to accelerating urbanization, strengthening the social safety net and liberalizing the service sector. The National Development and Reform Commission’s report was more direct, stating that consumption growth lacks momentum.
This shift is politically difficult as it would require redistributing income to households, which would leave fewer resources to invest in Xi’s strategic priorities. Such financial restructuring is not yet on the agenda.
As a result, the plan only includes incremental language about trying to rebalance to support consumption. But the clear priority is still supply-side actions rather than demand-side measures, with an emphasis on industrial upgrading, AI and technological breakthroughs.
Domestic technology
The creation of a consumer-driven economy remains a long-term, secondary objective. The focus is on investment in innovation to promote domestic science and technology, protecting China from possible external pressures.
The plan’s global consequences will be significant. China will retain a large trade surplus in goods, which will exacerbate frictions with other nation.
Although bottom-end manufacturing has been moving out of China, this does not mean that it has been abandoned by the leadership. Some has shifted inland, while places such as Vietnam are awash with Chinese companies producing low-cost goods for export.
Retaining capabilities at all levels of manufacturing will undermine developing countries looking to make low-end production a basis of their growth.
The plan makes it clear that China’s focus is not only to dominate the technologies of the future but to set the standards that govern them. Other nations will be obliged to follow and adopt these standards.
To support this, Premier Li Qiang’s 2026 Government Work Report stressed the need to strengthen not only trade in goods but especially trade in services. This includes finance, technology, consumer support and logistics.
This would particularly apply to advanced sectors such as biotechnology, robotics, green energy and artificial intelligence.
Economic gains
The result is an economy in which China exports not just goods, but integrated packages based on the state’s pursuit of innovation in an attempt to shut out Western technologies.
This is China’s play to translate industrial policy into a boost in economic gains, while greatly reinforcing its geopolitical influence throughout the globe.
Anthony Saich is the Daewoo Professor of International Relations and Director of the Rajawali Foundation Institute for Asia at the John F Kennedy School of Government at Harvard University.
This edited article is republished from East Asia Forum under a Creative Commons license. Read the original article here.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of China Factor.