OPINION | Will China hollow out global industrial capacities in new technologies?

China’s technology trajectory will see a tussle between a few forward-looking sectors and their spillover effects

The headline figure coming out of China’s ‘Two Sessions’ is the 4.5-5% annual growth target for 2026 set by the National People’s Congress - restrained, the lowest since 1991, but still aligned with the goal of doubling the nation’s GDP by 2035 as compared to 2020. However, the real story lies in the technological ambitions embedded in China’s 15th Five-Year Plan (FYP) for 2026-2030. Here, Beijing is going all in.

Bet on “New Quality Productive Forces”

Two themes emerge.

First, the FYP sets a binding R&D growth target of 7%, a marginal decrease from 9.1% the previous year. Its definitive theme is “New Quality Productive Forces” (NQPFs), a narrow set of new-age and emerging sectors that the Communist Party of China under Xi Jinping is betting will catapult growth, while helping achieve technological self-reliance.

Importantly, Beijing seems to believe that climbing the value chain in these sectors - listed as quantum technology, biomanufacturing, hydrogen and nuclear fusion power, brain-computer interfaces, embodied AI and 6G mobile communications - need not come at the expense of dominance in traditional industries. The FYP seeks to maintain a “reasonable” share of manufacturing in the national economy, a number that is currently 25%, and lists steel, petrochemicals, and construction as sectors to enhance competitiveness in.

“Hunger-games capitalism” results in low profit margins

Second, the FYP explicitly points to the pathological problem of involution, widespread in the Chinese domestic market and endemic across sectors such as electric vehicles, semiconductors, batteries, humanoid robots and satellites.

This is structural to China’s investment-led export-oriented economic model. Ruinous competition, monikered “hunger-games capitalism,” characterised by massive state-directed capital, leads to price wars and overcapacity. The country’s manufacturing sector, for instance, had profit margins hovering around 4.5% last year, less than half the levels seen in the US.

Involution in traditional industries

A decade ago, when involution was a feature of steel, coal and other commoditised industries, their concentration within state-owned enterprises (SOEs) made market correction easier and change more responsive. Demand, led by a rising property and infrastructure market, was also on the upswing then. This time around, however, overcapacity and deflationary pressures are economy-wide and exist against the backdrop of tepid demand.

Internal inconsistency in China’s approach

This points to a tension and contradiction at the centre of China’s technology ambitions. By doubling down on NQPFs, the FYP deploys the very instruments that unleash and exacerbate the consequences the state is also trying to rein in.

As articulated by analyst Tai Ming Cheung, China’s model is unique in its ability to mobilise vast material, human and institutional resources required to support projects chosen through a centralised and top-down approach. Once the state outlines ambitious priorities at the central level, these initiatives cascade through China’s single-party cadre system, where Beijing’s directives translate into a flurry of bureaucratic and private-sector activity.

Flip side of scale

This trickling down of national policy to provincial and local government bureaucracies mobilises vast amounts of state capacity and capital toward a specific goal, but comes at the cost of waste, inefficiency, corruption, mismanagement, and structural overcapacity.

Take the EV industry, for instance, where fierce competition among ride-hailing companies led to the abandonment of thousands of early-model and subsidy-linked vehicles, while simultaneously establishing several global winners - BYD and CATL, among others. For the first time, this industry has been dropped from the FYP as a priority sector, with the government seeking to phase out all subsidies to the sector by 2027.

Too much AI?

This story is familiar and bound to repeat in other priority sectors. Artificial Intelligence, the most repeated theme in the FYP, emerges as a key candidate. The AI+ initiative, introduced in 2025, seeks to integrate AI across sectors of the economy, with several local governments already competing to develop AI economies in their jurisdictions.

This is because local officials, still bound by growth targets, now have fewer avenues to unlock that growth. The property sector is still struggling, and consumption remains lukewarm, leaving investment, in-line with China’s economic model, as an avenue to rely upon. The logic of NQPFs designates a few sectors as politically favourable and amenable to such investment and is likely to crowd-in capital.

A decline in China’s Fixed-Asset Investment by 3.8% in 2025, a first in three decades, is an early data point signalling restraint in this regard. However, whether this is only clever accounting on the part of local officials or simply a reflection of eleven quarters of deflation in the macroeconomy remains to be seen.

On paper, there’s a push to limit supply-side incentives

To curb the “irrational capacity expansion,” the FYP mandates limiting supply-side production incentives through capacity regulation, price governance, and state-led orchestration of market consolidation. The plan also stipulates a unified national market that would aid in mitigating market fragmentation, addressing preferential procurement practices of local governments, and improving nationwide supply and logistical chains. However, while creating diversified supply, this is unlikely to fix the problem of deficient demand or meaningfully dent the deflationary streak that is the macroeconomic problem arising from involution.

In the next five years, China’s technology trajectory will see this tussle between a few forward-looking sectors and their spillover effects in the economy play out. The central question is this: can a system that rewards scale, with innovation being a valuable byproduct, adapt to reward efficiency instead?

For the global economy, China’s inability to reconcile the two, risks exporting price wars which could drive out efficient competition elsewhere. This pattern, already playing out in solar panels, batteries and EVs, will systematically hollow out industrial capacities in select sectors worldwide.

(Shobhankita Reddy is a researcher in technology geopolitics at The Takshashila Institution, Bengaluru.)

Views are personal and do not represent the stand of this publication.