China’s Tech Obsession and the Productivity Paradox

Introduction

China presents a striking economic contradiction: despite massive investments in cutting-edge technology over the past decade, these expenditures have failed to generate the expected economic growth and productivity improvements.

Instead, the country faces structural vulnerabilities that threaten its long-term development trajectory.

The Scale of Tech Investment

China’s commitment to technological dominance is unprecedented in modern economic history.

The government spends approximately 5% of GDP annually on industrial policy and subsidies—roughly $900 billion per year, according to recent estimates—with the most considerable sums directed toward manufacturing sectors, including steel, battery production, semiconductors, and electric vehicles.

For instance, China’s national industrial policies have allocated specific funds: over $200 billion toward the semiconductor industry alone and around $150 billion to boost electric vehicle infrastructure through subsidies for charging stations and purchase incentives.

This represents over twice the level of support provided by South Korea, the second-largest industrial policy spender, and more than twelve times the United States’ relative investment.

China’s venture capital ecosystem shows a similar pattern.

Between 2016 and 2017, Chinese equity funding for AI startups jumped from 11% to 48% of global investment, with notable increases in government-backed funding programs aimed at fostering AI innovation, including the National AI Development Plan launched in 2017.

In 2024, China’s AI chip market reached approximately $8.17 billion in revenue, with a projected 30.69% annual growth through 2030, driven by investments from both private firms and state-backed entities such as Huawei and Alibaba.

Across clean technologies, 76% of global factory investment in 2024 went to mainland China for manufacturing solar panels, batteries, and wind turbines, supported by strategies like the New Energy Vehicle Industry Development Plan, which aims to produce 25% of the world’s electric vehicles by 2030.

The Disconnection from Economic Growth

Yet this technological prowess has not translated into broader economic dynamism. China’s real GDP growth, when adjusted for actual rather than official statistics—accounting for shadow banking and local government debt—was approximately 2.4% to 2.8% in 2024, far below the official claim of nearly 5%.

More critically, China’s total factor productivity (TFP)—the most critical measure of economic efficiency and innovation—has stalled dramatically.

The IMF found that productivity growth “sharply fell from 3.7 percent in the 2000s to 1.9% from 2010-19,” with certain estimates suggesting even lower figures when considering regional disparities.

Multiple independent estimates suggest that productivity growth has been slower in China than in the United States or Japan since Xi Jinping became leader in 2012, despite China’s substantially increased investment in R&D, which now accounts for about 2.5% of GDP compared to roughly 1.5% in the U.S.

According to the Penn World Tables, productivity may have actually declined in recent years, even under alternative methodologies for measuring GDP growth.

This represents a fundamental paradox: while China has become a leader in advanced technologies—AI, semiconductors, electric vehicles, solar panels—its economy has simultaneously slowed more than expected.

The point when productivity growth began to deteriorate coincided almost precisely with the pivot toward prioritizing technological leadership after the 2008 global financial crisis.

Why Investment Has Failed to Drive Productivity

Several interconnected factors explain why China’s massive tech spending has not generated proportional economic returns.

Subsidies and Misallocation

Industrial subsidies, rather than improving efficiency, actually decrease average productivity in supported sectors by encouraging firms to use excessive inputs and sell output at artificially low prices.

Research shows that subsidies cause firms to allocate resources inefficiently, leading to disproportionate input use per unit of revenue and often subsidizing unprofitable or inefficient firms.

Misallocation driven by industrial policies reduces aggregate TFP by approximately 1.2%, translating into a GDP reduction of up to 2% after accounting for declining capital accumulation.

Overcapacity and “Involution”

China’s state-backed industrial policy has produced massive global overcapacities, particularly in green technologies.

In the solar sector, China’s battery manufacturing capacity exceeds domestic demand by a factor of two and surpasses global demand by 20%.

Solar panel utilization rates fell to just 23% in early 2024, with the six largest Chinese solar manufacturers’ combined losses reaching $2.8 billion in the first half of 2025 alone.

Similarly, the EV sector has seen average losses of around $11,500 per vehicle sold in specific segments, reflecting unsustainable overinvestment.

These dynamics create “involution”—the Chinese term for destructive, wasteful competition—where firms invest excessive resources mainly to maintain market share rather than innovate genuinely.

In emerging sectors like electric vehicles, subsidies have led to the proliferation of over 400 low-productivity firms that prioritize short-term survival over technological advancement, with many ceasing operations between 2018 and 2025.

Slowed Business Dynamism

Broad state intervention and bureaucratic control have dampened overall productivity growth, creating an inverse relationship between the size of the state sector and entrepreneurial activity.

While private innovators like DeepSeek thrive outside government influence, increasing regulation and policy constraints have stifled private sector dynamism.

China’s venture capital ecosystem experienced a sharp decline, with funding dropping nearly 50% year-over-year in early 2025, totaling just $4.7 billion in the second quarter—the lowest in a decade.

Sectoral and Regional Constraints

Investment in advanced technologies has mainly benefited China’s developed eastern coastal provinces, such as Jiangsu and Guangdong, with limited impact on central and western regions where infrastructure and labor quality lag.

Furthermore, IMF analysis indicates that productivity growth in manufacturing has lagged behind overall economic growth, despite receiving the highest levels of industrial policy support.

Structural Vulnerabilities Underlying the Crisis

Beyond the productivity paradox, China faces mounting structural challenges that inhibit growth regardless of technological spending.

Debt and Real Estate

China’s property sector has been in a four-year crisis since 2021, after the default of major developer Evergrande.

Real estate investment has declined sharply, historically fueling about one-third of economic growth and fixed asset investment.

While land sales provided local governments with key revenue streams, their reliance has led to mounting debt, constraining investments in other sectors and exacerbating financial risks.

Demographic Decline and Labor Supply

China’s population decline began in 2022, with its active workforce peaking in 2011.

Youth unemployment remains high at over 16%, with graduate unemployment at about 25%, indicating shrinking labor quality and diminishing returns on labor investment.

These demographic trends impose structural limits on growth that technological investment alone cannot overcome.

Domestic Demand Weakness

China produces far beyond domestic consumption capacity.

Foreign direct investment (FDI) fell nearly 13% in the first eight months of 2025, signaling reduced foreign confidence.

Consumer spending remains below 40% of GDP despite China’s level of development, while government expenditure has not fully offset declining housing and manufacturing investments.

Deflationary Pressures

Producer Price Index fell by -3.6% year-over-year in July 2025, marking 34 consecutive months of deflation.

Overcapacity and low profitability discourage private investment and wage growth, further suppressing domestic demand.

The Middle-Income Trap Risk

These converging issues threaten to trap China in a middle-income stagnation, where economic growth sharply slows after reaching middle-income levels.

Traditional growth drivers—capital accumulation and population size—are no longer sustainable, and despite increased innovation efforts, total factor productivity growth remains sluggish.

If these trends persist, China’s economy might stagnate around 2-3% annual growth, risking the income prospects of nearly 1 billion people and risking social stability.

China’s 15th Five-Year Plan (2026-2030) emphasizes “high-quality development” and “new-quality productive forces,” but whether government policies can succeed where market mechanisms have failed remains uncertain.

Conclusion

Why Technology Investment Alone Cannot Solve the Problem

The evidence suggests that no amount of technology spending can resolve China’s core economic challenge: the mismatch between its vast supply capacity and insufficient domestic demand.

Government attempts through industrial policy have often resulted in inefficiency and resource misallocation.

Recent analyses estimate that China’s AI investments of about $60 billion annually in 2025 will only contribute roughly 0.15 percentage points to GDP growth—less than 3% of the overall target of 5%.

The same investments in the U.S. contributed approximately 0.8 percentage points to GDP growth, highlighting the influence of structural factors over pure technological capability.

This paradox underscores a vital insight: technological prowess and economic vitality depend not only on spending levels but also on effective capital allocation, genuine market competition, demographic renewal, strong domestic demand, and productive labor deployment—conditions that China’s current economic model struggles to sustain.