Another great transformation is underway in China. The world’s factory is fast becoming its first electro-state, with an economy increasingly built on clean energy, artificial intelligence (AI), advanced manufacturing, and control of key strategic materials. This new model is full of promise, but it faces major challenges.
China has established itself as the world’s undisputed leader in clean-tech manufacturing. It controls about 60 percent of all solar, wind and battery-equipment manufacturing capacity, and more than 80 percent of global solar-module output. The scale of these activities has contributed to a sharp decline in costs, with solar-module prices falling by about 80 percent in the past decade.
Reinforcing this dominance, China has gained a stranglehold on rare earths — vital to the manufacture of a wide range of high-tech products, such as electric vehicles, wind turbines and AI-enabled sensors. Today, China controls more than 40 to 50 percent of global rare earths reserves, and almost 70 percent of rare earths production and refinement.
Illustration: Tania Chou
China’s massive investments in strengthening its innovation capacity, particularly in AI, are paying off. China boasts more than half the world’s AI researchers and 70 percent of its AI patents, and has cracked the top 10 in global innovation indices, such as that produced by the World Intellectual Property Organization.
All of this amounts to an astonishing feat of long-term strategic positioning. Every element of the unfolding global economic transition — from the supply of key inputs to the manufacture of high-tech goods to the design and financing of new industrial and energy systems — depends significantly on China. Whether you are the US seeking access to rare earths, or a developing economy in need of clean-energy infrastructure, you turn to China.
At least, that is the plan. As powerful as China might seem as a leading exporter of critical minerals and technologies, its position perpetuates the dependence on external demand from which it has been trying to escape. At a time when rising protectionism and national-security concerns are reshaping global supply chains — often away from Chinese suppliers — this might turn out to be a serious vulnerability.
China’s looming demographic crisis compounds the risks. The working-age population is shrinking, the old-age dependency ratio is rising, and the fertility rate has fallen to well below replacement levels. With fewer workers, income and consumption growth might slow, undercutting the government’s efforts to shift the economy to a consumption-led growth model.
Housing-sector developments do not help matters. Real-estate prices have soared in China, owing to factors like rapid urbanization, local governments’ dependence on land sales for revenue, and robust growth expectations. Housing became the primary mechanism whereby Chinese households increased their wealth.
However, a combination of weak demand, overcapacity and high leverage has caused China’s real-estate sector to tumble, destroying household wealth and eroding consumer confidence. The decline in prices might have resulted in more than 3 trillion yuan (US$424 billion) in foregone household spending since 2021. Add to that slowing productivity growth and high youth unemployment (about 17.5 percent for people aged 16 to 24), and China’s middle class might struggle to serve as the consumer base and innovation engine the country needs.
China has reached an inflection point. It has built the machinery of an innovative, low-carbon industrial economy — one that could lead the global net zero transition and the unfolding AI revolution. If this electro-state is to be sustainable, China must make progress in three critical areas.
First, productivity must increase, not through more robots or factories, but through continued innovation, skills-building, effective management and service-sector upgrading. Research and development (R&D) intensity matters here: a 10 percent increase in R&D expenditure as a share of GDP could deliver a 7 percent boost to manufacturing productivity.
Second, China must find ways to accelerate the economy’s rebalancing toward domestic demand. To this end, efforts must be made to bolster household incomes and wealth, consumer confidence, and job creation, such as by fostering service industries — including care activities such as senior care and healthcare — and shifting labor from manufacturing and real estate into consumption-oriented sectors.
Lastly, China must manage external dependencies wisely. While greater self-reliance is essential, so are strategic partnerships, predictable trade relationships and transparent frameworks for cooperation.
Whatever happens next, the implications for the rest of the world are far-reaching. On the upside, China’s transformation is lowering the cost of renewables, expanding the supply of clean tech, and delivering new infrastructure investment across Asia and Africa. Already, China is playing a critical role in helping developing economies to leap-frog fossil fuel-based systems.
China’s “electro-state” strategy gives it considerable leverage over other countries, which, as its imposition of export restrictions on rare earths showed, it might weaponize. China’s techno-industrial advancement is always going to be viewed through a geostrategic lens. As the country tightens its grip on raw materials and high-tech manufacturing, others must decide whether to double down on cooperation with China, diversify their supply chains away from it, or risk being locked out altogether.
For Hong Kong and the wider Asia-Pacific region, the message is clear: the era of low-cost manufacturing arbitrage is ending, and AI, green infrastructure, and digital hardware are the new frontiers of economic growth and prosperity. With China positioning itself as a supplier, designer and powerhouse of this new economy, countries across Asia and beyond are going to need to adapt, engaging with China, hedging against bottlenecks and reworking their own industrial models.
Ludovic Subran is chief investment officer and chief economist at Allianz.
Copyright: Project Syndicate
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