China’s development strategy is based on a division of labor between an authoritarian government and competitive private companies. The old idea that a Communist party protects workers from their capitalist exploiters seems quaint. The capitalists and the Party are now partners in exploiting workers without permanent residence permits.
China’s government identifies areas of the economy that it thinks will drive economic growth. Since 2015, those areas have been new or emerging technologies the government decides will drive economic growth and technological dominance in the global economy. The government backs its objectives with massive investment in infrastructure, education, and new companies in targeted industries.
China begins by building infrastructure, concentrating on transportation. The latest is a new high-speed rail network linking cities and ports in the Pearl River megapolis. It also directs resources and personnel into research and early development of the favored technologies. Colleges and incoming students are directed into programs that will support the future development of these technologies.
When it is time to turn research and inventions into innovations, the levels of government begin to compete for new companies. They offer the companies free or cheap land, subsidies, and tax breaks. Companies then compete on the basis of reaching scale, lowering unit costs, and continuously innovating.
In earlier stages of development in the past, China imported foreign technology by joint ventures with foreign companies, buying or stealing the technology, and then trying to improve on it. Now, more and more, China originates the technology and then rapidly develops it. Many of the new technologies are interrelated and can be applied to other products and markets. After rapid development because of fierce competition at home, the surviving companies have high market share at home and may become major exporters.
The outstanding example is electric vehicles. China is the world’s largest producer of electric vehicles (EVs). It is also the world’s largest market as EVs are rapidly replacing gas-powered cars. China also has a large program testing robotaxis in 50 cities.
Chinese companies are beginning to export electric vehicles. Effectively banned in the U.S. and somewhat restricted in Europe, Chinese companies are concentrating on markets in Southeast Asia and Latin America.
One weakness in China’s development strategy is the government’s reluctance to close companies and reduce overcapacity. In older industries, state-owned companies account for much of the production. This policy becomes a barrier to progress when an existing technology is replaced by a new technology, as is the case of automobiles. Similar problems might arise when fossil fuel companies, especially coal, are replaced by renewable energy companies. The national government is politically sensitive to the social and political instability caused by causing unemployment. Plus, local governments fight to keep open unprofitable companies and coal mines.
China’s manufacturing output is higher than the next four countries combined. If the United States does not radically change its domestic policies, China’s dominance of the interconnected group of high-tech products will make China even more the dominant technology and manufacturing country in the world. China will dominate the global economy by exporting its high-growth products at falling prices and developing joint production in many countries. Because some of these products are effectively banned in the United States or subject to high tariffs, and President Trump favors fossil fuels and thinks global warming and climate change are a “con job,” “scam,” and “hoax,” America could become a high-cost, high-price economy.
This includes renewable energy. China is the world’s largest and lowest-cost producer of most renewable energy technology, especially solar panels and batteries. Chinese companies are selling cheap, stand-alone solar panels in less-developed countries.
China is making a huge investment in next-generation nuclear power plants.
These strategies have geopolitical aspects. China fears that the U.S. can cut off oil imports coming from the Middle East through the Strait of Malacca. China cannot count on always receiving discounted oil from Russia, Iran, and Venezuela.
If current American energy policies favoring fossil fuels continue and China follows through in its promise to greatly reduce coal production, within ten years America will replace China as the largest emitter of greenhouse gases.
China is the world’s largest user of industrial robotics; domestic production is increasing rapidly. New manufacturing plants are highly automated; older plants are being modernized. This is also a possible solution to the future decrease in the size of China’s labor force.
Combined with China’s surge in exports to the world outside of the United States, as a reaction to American tariffs and bans on Chinese exports, much of the world’s advanced technology will be based on Chinese technology.
There is an important exception. AI development. The chain of ASML, TSMC, and Nvidia dominate the design and production of the world’s most advanced chips. Both countries are building new data centers but American data centers and foreign centers using Nvidia chips will contain the most advanced chips and supporting technology. China’s current strategy is a “work-around;” use massive amounts of less-powerful chips and concentrate on AI applications.
Because of America’s punitive tariffs on Chinese imports, the American market now accounts for only 10% of China’s total global trade. The decrease in exports to the U.S. has been made up with increased exports to the rest of the world. Combined with China’s surge in exports to the world outside of the United States, as a reaction to American tariffs and bans on Chinese exports, most of the world’s advanced technology will be based on Chinese technology.
China will have to deal with internal, domestic problems. The long-term problem will be the large decline in population, especially the shrinking of the working age cohort. China is not adequately supporting its large and growing older population. Pensions are low and health care facilities outside of Beijing and Shanghai are inferior. One possible type of improvement is a massive use of telemedicine, taking advantage of China’s huge telecom companies and possibly incorporating AI chatbots. Chinese pharmaceutical companies have become a major source of new drug discovery.
The main point of all this is that development of new technology is the key strategy for domestic economic growth and increasing exports. They see global competition with the United States as much as a geoeconomic and technological struggle as a geopolitical competition.
This essay is based on data and analysis in the following essays:
The theme of the following four sections of the blog is that innovation, not price competition, is the basis for understanding economic growth, competition, and analysis.
Basic Concepts and Theory
Market Behavior and StructureMarket
Dynamics and Information: How Markets Work
Economic Theory and Markets
Corporate Strategies
There is beginning a historic change in future populations and their demographics. This will interact with other variables and have a serious, maybe profound, effect on future economic growth.
Demographics and Economics
China
Geopolitics and the Global Economy
American Economic History
Management
The world seems to be in the midst of radical political and social change. Where are we going? Can studying past periods and countries facing disrupting change help us navigate our times? Maybe.
History
American History
World War I: The Beginning of the 20th Century
The Roman Republic and America – Differences and Some Possible Parallels
Economic and Fiscal Policy
Financial Markets and Investment Strategies
Foreign Exchange Markets The United States American Foreign Policy and International Relations Geopolitics and the Global Economy Geopolitics of Oil and Natural Gas
Visionaries
Humor, Satire, WhimsyI Heard the News Today Higher Education
Examples of Bilateral Oligopoly MARKET DYNAMICS AND INFORMATION: HOW MARKETS WORK This group of posts emphasize the dynamics of economic growth and development, They highlight the role of information in the functioning of modern markets.
John von Neumann, Alan Turing, and Claude Shannon (creator of information theory) knew each other, knew of each other’s work, and discussed their ideas with each other. John von Neumann Sees the Future
(2010)GEOPOLITICS OF OIL AND NATURAL GASThe geopolitics of oil will continue to remain important until the switch to substitute renewable resources and EVs. Energy and Geopolitics I: The United States(2015)
Surprisingly, some of the comments in the following essay may be somewhat relevant to the United States, more dependent on fracked oil and lagging in innovating substitutes that drive future economic growth and development.
China’s dominance of the interconnected group of high-tech products will make China the dominant manufacturing country in the world. China will also dominate the global economy, exporting its high-growth products at falling prices and developing joint production in many countries.
This includes renewable energy. China is the world’s largest and lowest-cost producer of most renewable energy technology, especially solar panels and batteries. China is also developing and installing many new technology nuclear reactors.
Combined with China’s surge in exports to the world outside of the United States, as a reaction to American tariffs and bans on Chinese exports, most of the world’s advanced technology will be based on Chinese technology.
China will have to deal with internal, domestic problems. The long-term problem will be the large decline in population, especially the shrinking of the working age cohort. this is one reason that China is concentrating on the development and deployment of industrial robots and AI applications.
INTRODUCTION
According to the World Bank, China’s Gross Domestic Product (GDP) was $18.7 trillion in 2024, compared to $29.2 trillion for the United States. China’s economy was 64% the size of the American economy; a generation ago, in 2000, China’s GDP was only 12% of America’s.
China has been a spectacular economic success story. China has increased its share of global manufacturing from 6% in 2000 to 32% in 2024. Manufacturing makes up 28 percent of China’s economy, compared with 11 percent in the United States.
China sees it dominance of interrelated advanced technologies as key to its geopolitical global dominance of the United States.
THE BEGINNING OF CHINA’S ECONOMIC RISE
After the death of Mao in 1976, a more pragmatic group of Communist leaders seized power and began to change China. Their model was Singapore, whose population was mostly Chinese. Singapore’s economic growth model was that the dominant political party would direct economic growth. It invested in infrastructure, including condos for most of its population. It directed investment. It invited foreign companies to invest in the country. It became part of the global economy.
China did much of the same but since it is much larger, it had to go further. It liberalized agriculture, going from huge communes to allowing individual farmers to rent land. That doubled food production. Then it concentrated on manufacturing, with subsidies and favorable tax laws. They established Special Economic Zones for foreign companies (little Singapores). Foreign companies were welcomed but they had to partner with a Chinese company, which accelerated China’s absorption of foreign technology and management techniques. By combining low labor costs and modern infrastructure with the production and assembly technology of foreign corporations, China became the world’s largest industrial producer and exporter. But, unlike Japan at the same stage in the 1980s, China went further. The Chinese government’s strategic plan was to make Chinese companies the leading developers, innovators and producers of “cutting-edge” products. This included becoming the world’s largest producer of solar panels, lithium-ion batteries, wind turbines, automated factories, robotics, rare earth minerals, drones, robotaxis, and electric vehicles (EVs).
SUMMARY OF CHINA’S CURRENT ECONOMY
China mines about 90 percent of the world’s rare earth minerals and it does the chemical processing for over 90 percent of the world’s total. The country also makes more than 80 percent of the world’s batteries, more than 70 percent of its electric cars, and about half of the world’s steel, iron and aluminum, according to data from the International Energy Commission.
China has the second largest economy in the world. According to official statistics, it has the fastest growth rate of any industrialized country. But economic growth has slowed down, from highs of 10% per year to the current reported growth rate of 5%. Probably closer to 3% – see
CHINA’S ECONOMIC STATISTICS
Because of China’s immense population, 1.4 billion people, per capita income is in the “middle-income” range. China is still a low-consumption country; consumption expenditures as a percent of total output is a little more than half that of the United States, about 40% compared to about 70% in the United States. Chinese have a very high savings rate, partly because of small social welfare and retirement programs.This creates and frees up a huge amount of investment capital for expanding production and exports.
China’s spending on research and development increased from $70 billion (in constant dollars) in 2000 to $470 billion in 2023 (Economist estimate). State-controlled banks have lent $1.9 trillion over the last four years to build new factories and upgrade existing factories with robots and automation. This is probably an attempt to deal with the beginning of a decline in the size of its work force and a substitute for the decline in housing construction.
China’s BYD (BYDDY) sells more electric vehicles in the world than any other company, including Tesla. Although banned in the United States, BYD’s global sales continue to rise quickly while Tesla’s global sales are falling. In early 2025, BYD’s sales in Europe passed Tesla’s sales.
Chinese companies, plus foreign companies in China like VW, produce more EVs than the total auto production in the U.S., Mexico and Canada combined.China is the world’s largest market for EVs; over half of the cars sold in China are electric vehicles (EVs) compared to 20% in Europe and about 10% in the United States. In 2024, EV sales in China were about nine times greater than in the United States.
In 2023, 2024, and 2025, China installed more industrial robots than the rest of the world combined.
China produces, installs and exports most of the world’s solar panels, about 80%. To avoid high U.S. tariffs, many are assembled or trans-shipped through other Asian countries. Biden and Trump have placed high tariffs on solar panels shipped from China and these countries. Combined with new American domestic policies unfavorable to solar energy, these policies will probably slow down installation of solar panels in the U.S., unless reversed at a later time.
China has surprised the world with its rapid advances in developing AI models, including DeepSeek. New Deep Seek models might rival ChatGPT’s most advanced models.
Huawei, a giant Chinese telecomm company, accelerated its development of semiconductor chips after the company’s chips and telecomm equipment were banned in the U.S. The CEO of Nvidia, exports of whose high-end chips to China were banned until recently by U.S. policies, has stated the ban has been a failed policy, only accelerating development of similar chips by Huawei and other Chinese companies. The ban has been partially lifted.
China’s AI models are open-source (free) and are used by a number of American and European companies.
CHINA’S ECONOMY
China’s economic strength is based on turning inventions into innovations, the mass production of commercial products. This has been achieved through a combination of massive government support of research and development, followed by subsidies to private corporations to produce and improve the new technology.
China has a manufacturing sector that is larger than those of the United States, Germany, Japan, South Korea, and Britain combined. It produces some of the world’s most advanced technology in the interrelated “cutting edge” industries.
China builds industrial capacity anticipating high future growth rates. As a consequence, there is excess capacity in many industries, including EVs and solar panels. Also in construction industries like steel and cement. China produces more steel than the rest of the world combined; the industry is currently in a recession because of less housing construction. Construction in housing is being replaced by new construction of factories with new machinery and robots, and construction of overseas infrastructure projects under the Belt and Road program.
China is installing more renewable energy technology than any other country; the increase in the amount of electricity produced by solar in 2024 was greater than the total amount ever produced in the United States. But China is also the world’s largest producer of coal. Chinese cities have some of the worse air quality in the world; China’s interim strategy is to shut down old factories near cities, especially Beijing.
Coal production is not going down because of expanding demand for energy. China needs both, especially with large internal investments in new data centers. But by 2030, China hopes to start reducing coal production and replacing coal with renewable energy technologies.
China also relies on imported oil and natural gas, especially from Russia and Iran. The country buys oil at a discount from world prices.
China is the world’s largest producer, and consumer, of cars. China is rapidly replacing gasoline-powered cars and other vehicles with EVs. China’s strategy is to replace imported oil for gas-powered cars with domestically produced EVs built with Chinese batteries and in the long run, have electricity for EVs generated by domestic renewable sources.
China is rapidly expanding its EV robotaxi fleet. China is also starting to increase exports of EVs everywhere except in the United States, where Chinese EVs are effectively banned. China will probably become the dominant seller of EVs in most of the rest of the world.
China’s economic development has been spectacular but growth is slowing down. The development strategy in the past was massive construction, both public and private, joint ventures with foreign companies, exports, and limiting domestic consumption. Internal construction relying on housing is less important because of the huge amount of housing already in place that is either unsold or empty.
There will be little if any growth in housing construction in the future because of low family formation due to a very low birth rates and the large inventory of unsold apartments. (See the section below – China’s Housing Crisis – for details.)
China’s economy can continue to grow because of high levels of investment, overcapacity in new technology, and a large number of unemployed young people and college grads with technical degrees. The current strategy is to invest heavily in innovative new technologies such as advanced computer chips, AI, robotics, automated factories, new drugs, EVs, batteries, hydrogen energy, nuclear power, and solar panels. Investment in these industries will come mostly from domestic sources.
In addition to being the world’s largest producer of solar panels and wind turbines, China is investing heavily in “green” hydrogen as a renewable resource. This is produced using electrolysers to split water molecules into hydrogen and oxygen. China already produces about 40% of the of the world’s electrolysers. The country is building pipelines from production centers to industrial centers such as Shenzhen, which already has a fleet of buses powered by hydrogen.
China is catching up in areas of chip production. The country has rapidly improved its chip technology; it can now produce all but the most advanced chips in the world. U.S. bans on selling advanced chips to China is less effective than it would have been in the past. There is in addition a thriving global black market in Nvidia’s advanced chips.
China has employed its advanced chips to develop AI models such as DeepSeek, which are already almost as good as the most advanced American AI models.
The Chinese government has just approved a new $137 billion venture capital fund to accelerate development of robotics and AI.
China already has some of the most automated plants in the world, especially in electric vehicle production.
RARE EARTH METALS AND ELECTRIC MAGNETS
China controls the entire supply chain of rare earth metals, from mining to processing to producing electric magnets. China produces over 90% of the rare earth minerals and almost all of the processing equipment and processing.
Electric magnets are inputs into producing a wide range of modern weapons and automobiles, both gas-combustion and electric. A single gasoline-powered car can have more than 40 different rare earth magnets inside electric motors that power the brakes, seats, steering, power windows and other systems. Electric cars have even more rare earth magnets.
Thousands of companies world-wide use Chinese rare earth magnets. China has announced widespread export controls on the magnets and products that use the magnets. This seems to be an attempt to pressure Europe to relax tariffs on imported Chinese electric vehicles, at a time when Europe wants to step up armaments production to aid Ukraine.
China produces more than 200,000 tons of rare earth magnets a year. Most are used domestically. Much of the production is sold to CATL and BYD, the world’s largest producers of batteries. BYD is the world’s largest producer of electric vehicles (EV). About 40,000 tons are exported to the United States and Europe. The only other large producer is Japan, which makes about 40,000 tons of magnets a year, most for car companies in Japan and South Korea. The United States and the rest of the world are trying to increase production but the current total is negligible. Production is difficult because of tight quality control and a long learning curve for employees.
China’s domination of the entire supply chain from rare earth minerals mining to final products like EVs and drones is the result of decades of investment in research and development. A majority of undergraduates in China major in math, science, engineering or agriculture, according to the Education Ministry. And three-quarters of China’s doctoral students do so. By comparison, only a fifth of American undergraduates and half of doctoral students are in these categories. Over half of the graduate students are foreign.
China has close to 50 graduate programs that focus on either battery chemistry or the closely related subject of battery metallurgy. Only a handful of professors in the United States are working on batteries.
Much of the research and development is done at Central South University in Changsha, a city in south-central China. Central South University has nearly 60,000 undergraduate and graduate students with extensive, modern labs.
Chinese companies have been buying up mineral producers in other countries. China’s largest battery producer, CATL, which produces 40% of the global production of batteries, wants to produce in the United States for the American market. Building and equipping an electric-car battery factory in the United States costs six times as much as in China, said Robin Zeng, the chairman and founder of CATL. The work is also slow — “three times longer,” he said in an interview.
This is mostly a summary of an excellent series of articles by Keith Bradsher of the New York Times.
Update (11/25). In a recent trade agreement with the U.S., China has promised to remove its embargo of rare earth minerals and electric magnets for one year. This will probably slow down America’s drive to find and develop alternative sources of supply. In exchange, China has agreed to buy an undisclosed amount of American soybeans.
DRONES
China is the world’s largest producer of drones. DJI, based on Shenzhen, produces about 70% of all commercial drones sold in the world. They are used for hobby and industrial applications, including aerial photography, package delivery, and weather research. Versions of the DJI drones cost between $300 and $5,000.
China produces millions of drones a year. The U.S produces about 100,000 drones a year.
Drones have become an important weapon in the war in Ukraine. Ukrainian forces beat back the Russian invasion by innovating deadly modifications to drones bought from DJI. Russians cannot use tanks to support infantry because of the threat from Ukrainian drones. Russian drones are used in indiscriminate bombing of Ukrainian cities. Drones and other AI-controlled weapons are rapidly changing warfare.
When U.S. drone manufacturer Skydio was sanctioned by Beijing in October 2024 over arms sales to Taiwan, that quickly cut off the company’s supply of batteries, according to the Financial Times. China produces more drones in one week than Skydio produces in a year.
American drones that carry Predator and Reaper missiles cost between $3 million and $5 million.
A few months ago, the U.S. army carried out a four-day exercise testing drones produced by U.S. startups. They were failures. The only one that partly performed was a drone an American company bought from Ukraine and modified.
CHINA’S AUTOMOBILE INDUSTRY AND GLOBAL DOMINATION OF THE ELECTRIC VEHICLE (EV) MARKET
China today has enough capacity to manufacture half of the world’s 80 million cars in annual sales, or 40 million vehicles. Current production is about 28 million and rising. (Total U.S. production is around 9 million, although American car companies assemble cars in Canada and Mexico.) Over half of Chinese production is now EVs. China’s electric vehicle companies continue to build new capacity. By 2030, China’s capacity could climb to 75% of the world’s volume, most of it to produce EVs.
The total production capacity figure above is misleading. There is massive over-capacity of gas-powered car manufacturing. Production of gas-powered cars has fallen by over 10 million units since reaching a peak of 28 million in 2017 with little reduction in production capacity. Thus, China’s EV industry can double sales just by replacing gas-powered cars.
American car companies in China, producing mostly gas-powered cars, have falling sales and are losing money. In the past, General Motors and VW were the largest car producers in China. Now they are not even in the top 20 because of Chinese EV sales. General Motors just took a $5 billion write-off of their investment in China. Michael Dunne, an observer of the Chinese auto industry, believes that the position of foreign auto producers can only get worse and some, including General Motors, will eventually leave China.
Hyundai has closed a modern production plant in China; many foreign plants are operating far below capacity. Ford has announced they have lost money over the last five years from their Chinese operations.
When Volkswagen opened a huge electric car assembly plant last year in Hefei, China, it ordered just one robot imported from Germany (for display). The company bought the other 1,074 robotsfrom a factory in Shanghai. VW intends to source all of its parts in China.
Volkswagen has also moved its R&D from Germany to China, hiring 3,000 Chinese engineers. The China factory will be the source of VW EVs sold in Europe. At the same time, VW announced a massive cost-cutting program in Germany and the rest of Europe.
Total EV production in 2024 was 12.4 million cars, close to half of all car production. Forecasts for 2025 are uncertain because of major reductions in government incentives and subsidies after September 30 of 2025.
To increase production of electric autos quickly, China is stepping up exports. Exports of all EV exports in 2024 was around 1.25 million. EV exports may be around 2 million in 2025.
Besides autos with Chinese nameplates, foreign automakers are using China as the manufacturing base for exports under their own names. Foreign companies originally build large plants in China with Chinese joint venture companies to produce gas-powered cars for the Chinese market; at least one has been closed (Hyundai) and others are operating at a low percent of capacity. They are forced to stay open by local authorities, who are afraid of local unemployment.
Tesla shipped 344,000 China-built EVs to Canada, Europe and other markets in 2023. Volkswagen, Renault and BMW export made-in-China EVs to Europe. GM’s best-selling Chevrolets in Mexico are produced in China. Hyundai and Kia expect to sell 200,000 cars made in China back to South Korea and into global markets. Ford is exporting about 100,000 trucks and SUVs to Asia, Africa and the Middle East.
BYD, China’s largest EV producer, will produce more EVs than Tesla globally this year. Tesla sales on falling in China. In Europe, Chinese nameplate EVs are gaining market share as Tesla sales fall. For leading companies like BYD, export sales are increasingly important.
Chinese EV buyers are younger than those in the U.S. and Europe. They are more interested in a car’s software and entertainment systems.
Chinese EVs companies are teaming up with China’s large electronics corporations to install “wizzy” electronics and “infotainment” systems in their vehicles. Some see EVs as “smartphones on wheels.” This has created an opportunity for China’s huge tech firms. Huawei, Chinese huge producer of smart phones and other electronics, has teamed up with Chery to become a major EV producer. Xiaomi, sometimes called “China’s Apple,” produces popular high-end cars that compete with Porsche’s Taycan SUV but sells at half the price.
Baidu is a leader in the development of autonomous-driving software for robotaxis. China is testing robotaxis in 50 cities and has more robotaxis than any other country.
With improving engineering and attractive operations, some Chinese EV companies are trying to compete at the top end of the market. These companies intend to compete with top-end cars in the global market.
There is massive overcapacity in gas-powered car production and probably overcapacity in the EV sector. About 100 companies are producing EVs, many of which started production in the last few years.
Collectively, EV companies offer a wide range of models and options. Because of the industrial overcapacity and economies of scale in production, a price war to gain market share has broken out. EV prices start at around $23,000; BYD says they are coming out with an even cheaper model. Profits of the industry leaders are falling. The industry as a whole is probably losing money.
With lower government tax exemption and other subsidies, EV companies are planning on reducing wholesale prices to dealers in 2026. Growth will probably be lower than in the past few years and total financial losses will probably be greater.
China dominates the global supply chain to produce EVs, from mining to mineral processing of rare earth mineral to the production of electric magnets to the production of battery cells.
For reasons discussed below in the sections on demographics and housing, China’s EV industry may not grow, or grow slowly, after it replaces domestic gas-powered car production. Further growth will depend on foreign demand.
Domestic demand growth may be low because:
Extremely low birth rate (far below replacement),
shrinking numbers of labor force age group,
high youth unemployment,
large number of temporary or marginal “gig” workers,
low family formation; wedding are down,
loss of family wealth because of housing market collapse.
China’s electric and hybrid manufacturers have set up, or are in the process of setting up, factories in Hungary, Indonesia, Russia, Thailand, and Turkey. Also, three assembly plants in Brazil. One is in a plant closed by Mercedes and another in a plant closed by Ford.
SOLAR PANELS
Gigantic new solar panel field
China has built the world’s largest solar panel installation on a 10,000 foot high plateau in western China. The area, 162 square miles, is seven times the size of Manhattan. In addition, the country has built a huge wind turbine farm and five dams for hydropower at this location.
The massive amount of new electricity is planned to power new AI data centers and manufacturing. The government plans to build 50% more solar panels here in the next three years. The current capacity of the three sources of renewable energy can generate about 30,000 megawatts. This could provide enough electricity to power 15 million to 30 homes, or enough power for 60-120 million people. When increased by 50%, enough power for 90-180 million people. (By coincidence, this is the amount of energy that OpenAI says it will need to power data centers to develop and commercialize its AI platforms and applications.)
This is part of a national strategy to reduce coal consumption. China, with solar, wind, nuclear, hydrogen, hydropower, batteries and EVs, is also the world’s largest producer of renewable energy and related technologies.
There is a geopolitical consideration. China imports large amounts of oil and natural gas. Much of it comes from the Middle East and passes through the Strait of Malacca, which is controlled by the United States navy.
Keith Bradsher, New York Times,”Why China
Built 162 Square Miles of Solar Panels on the
World’s Highest Plateau,“ October 10, 2026.
Besides massive renewable energy projects at home, Chinese companies are selling low-cost rooftop solar panels abroad. Solar panels and complete kits are produced by private companies. Chinese companies dominate exports to poorer countries. For example, in Pakistan, Chinese solar panel prices have fallen 70% between 2022 and 2024, and unit sales have gone up fives times. Electricity from the national power grid is unreliable, with frequent power outages; also, prices have gone up 50% in the last two years.
Energy now generated from solar panels is greater than energy generated from the unreliable national electricity grid.
Many less-developed countries including Nigeria face a similar situation as Pakistan and are markets for Chinese solar panels and batteries. These relatively cheap, small-scale solar panel systems are also available in Europe.
There will be serious geopolitical consequences for the United States if Chinese technology dominates renewable energy production in countries outside the United States.
In summary, solar panel production meets five goals of the Chinese government:
Reduce dependency on imported oil and natural gas. Reduce domestic coal output.
Develop a new source of economic growth.
Develop a bundle of new technologies, including the critical technology of batteries.
Exports help increase volume of production, drive down unit cost, and increase demand for follow-on sale of batteries.
Sale of solar panels and batteries to other countries is part of China’s geopolitical rivalry with the United States. Both countries recognize that technological competition is a key part of global geopolitical competition.
China continues to make huge investments in all forms of renewable energy. The goal is to greatly reduce reliance on domestic coal and fossil fuel imports. America, under Trump, is pushing for more domestic production of fossil fuels and eliminating subsidies for renewable energy. Off-shore wind turbine projects have been shut down. Through subsidies, volume production and price competition, China is the world’s low-cost producer of solar panels and batteries.
Nuclear Power Plants
China began a plan in 2020 to build 150 reactors by 2035. China is currently building half of the world’s reactors under construction.
China is rapidly expanding its nuclear power, with reports from late 2025 indicating around 27 to 35 reactors under construction, more than any other country, as part of a massive buildout to meet energy demands and climate goals. The government consistently approves new units, aiming for 6-8 new plants annually, positioning itself to become the world’s second-largest nuclear power producer soon. Google AI
Using advanced technology, China’s basic reactor design is based on Westinghouse technology. Westinghouse is owned by Toshiba.
CHINA’S CONTROL OF GLOBAL SUPPLY CHAINS
Besides these advanced final products, China is developing and controlling their entire supply chain, using its superb transportation and distribution infrastructure. China intends to dominate global markets and the supply chain of advanced foreign producers. Some multinational American and European companies have relocated part of their R&D to China.
China also controls part of the physical transportation global supply chain. China is the world’s larges producer of merchant ships and Chinese companies own or manage about 90 ports around the world, including Piraeus and two containers ports on either side of the Panama Canal.
EXTERNAL FACTORS
Exports are rising but are facing higher tariffs and quotas from trading partners, especially the United States. Export growth will probably come from countries in East Asia, South America and Mexico, and Africa if the proposed very high tariffs are implemented. Chinese companies are targeting these regions for new assembly plants, distribution networks, and joint ventures.
Net Foreign Direct Investment (FDI) is probably negative – foreign firms are taking more money out of China than new investment going into China. Also, wealthy Chinese are smuggling large amounts of their wealth out of China.
Like almost all other countries, China runs a yearly fiscal deficit. The amount is opaque because much of it is incurred by city and
provincial governments promoting new factories. Local finances are in deep trouble since revenue is tied to land sales to housing developers and contractors. Total government debt/GDP is estimated to be around 120%, higher than the United States.
POLITICAL CONTROL
Foreign companies don’t vote and Chinese companies are expected to follow Party directives. The government owns or controls much of the financial sector, so it can direct loans to favored companies and favored industries. Local governments often provided land and buildings for new plants. The different levels of government and state-owned banks are the sources of funds and subsidies for startups and expansion in favored industries.
But huge social media and e-commerce companies are not like manufacturing companies; their owners and managers started to act too independently for the Party’s taste. In addition, the Party feared, with some justification, that social media could become an uncontrolled outlet for independent thinking and writing. Even worse, social media could become the outlet for criticism of the government.
In the 2010s, the Party under Xi began to crack down. The most successful and famous entrepreneurs were reigned in. Communist Party cadres were installed in all large companies, with veto power. The government closely monitors the Internet and closes down sites that annoy them. Any dissent or criticism of the government is quickly repressed.
Overriding any economic discussion is that China is a totalitarian state and its political elite will not tolerate any independent source of power or wealth. The Party sees them as an actual or potential threat. All individuals and their behavior are monitored and rated by a social credit system; a low score can have bad consequences.
A member of Communist Party is planted in every large corporation, and many smaller corporations, to watch owners and managers. As a result, many entrepreneurs are scared to make decisions. Many wealthy people want to leave China. Again, a huge amount of wealth is being smuggled out of China.
CHINA’S HOUSING CRISIS
In the past, investment in housing has accounted for about 20% to 30% of China’s spectacular growth.
Housing construction will be a less important source of economic growth, partly because of the massive investment over the last 40 years and the huge number of unsold and empty apartments.
A large part of foreign investment in housing was from Southeast Asians speculating in apartment condos. There are empty apartments held for price appreciation. Many Chinese families own two or more units as a form of savings; China has a small social safety net, especially for retired citizens. The latest estimate (November, 2024) is that the number empty apartments is around 49 million.
Domestic and international investors in empty apartments are now losing money as apartment prices fall. There are about 30 million unsold homes on the market as sales prices fall. Home sales in yuan are the lowest since 2013.
Housing prices continue to fall. This means that the main source of savings of Chinese families is going down in value. This is a contributing factor in the lack of growth in consumer spending.
About 20 million families put down payments of up to 50% on housing that has not been built or is unfinished. Some of these units may never be built. And yes, it was a Ponzi scheme. Many Chinese developers have gone bankrupt. The Chinese government has some small programs in place to limit the damage, worried that the anger may be directed at the government.
AMERICA’S TRADE WAR WITH CHINA
In the first 11 months of 2025, China has set a record $1 trillion trade surplus in goods, despite a large decrease in exports to the United States. Overall exports are up from 2024. Exports to Africa and Southeast Asian countries are up substantially.
How much China has improved its chip technology will be seen by the new operating systems. Huawei is unveiling on its new smart phones. Huawei intends to challenge the operating systems of Google (Android) and Apple (iOS), which are used on almost all Chinese smart phones. Huawei’s new phones are based on advanced chips made in China. As part of the Chinese government’s strategy to become self-sufficient, it is beginning to ban the buying of foreign phones (read Apple) by government agencies. If the trade war intensifies, there will probably be more internal bans on the usage of American chips and smart phones.
This is part of a concerted effort of China to increase its Research and Development. For example, Huawei has completed a new research center for 35,000 engineers. It is ten times larger than Google’s R&D center in Silicon Valley.
Besides domestic companies, responding to Xi Jinping’s exhortation for “high-quality growth,” many foreign companies have increased their R&D in China. They include VW, Bosch, Bayer, AstraZeneca, HSBC, and global pharmaceutical companies. Total corporate R&D spending is now equal to that of Europe. On the other hand, some foreign companies, including Microsoft, are closing their R&D operations in China in anticipation that the trade war between China and the United States will become worse.
The American Treasury Department has circulated a draft “that would ban American firms from investing in AI, semiconductors, microelectronic and quantum computing in China.” (The Economist, “Research developments: China is the West corporate R&D lab. Can it remain so?”, July 20, 2024, 49-50.) Both countries see that future economic growth will depend critically on developing new technology.
For the last few decades, China has sold about $3 worth of goods to the United States for every $1 worth of goods that it buys. That imbalance partly reflects Beijing’s many tariffs and informal limits on imports, as well as an enormous government effort during three decades to replace imported manufactured goods with domestic production.
Sino-American trade has grown rapidly in the past. So the lopsided ratio has translated into a large American trade deficit. But the growth in U.S. deficit from trade with China has slowed down. The deficit has been in the range of $300 billion – $350 billion in the last four years. What has changed is that China’s trade surplus with the rest of the world has gone from near $0 in 2018 to about $450 billion in 2023. Both Asian countries as a whole and the European Union countries now import more Chinese goods than the United States.
The U.S. response is the Inflation Reduction Act to subsidize investments in EVs and battery plants. Supply chain plants are being built in Georgia, Michigan and North Carolina. Construction of Hyundai’s Georgia plant has been suspended as American deportation cops seized and deported 300 South Korean workers. Seeing Koreans being led away in chains has not endeared America in South Korea. Europe, like the United States, is considering higher tariffs on Chinese auto imports. German auto companies are fighting this because many of the EVs they intend to sell in Europe will be produced in China
It is not obvious how higher U.S. tariffs will affect China. In the past, domestic U.S. producers of substitutes for Chinese imports like solar panels have gone bankrupt or not been able to produce enough to hurt Chinese imports. Also, it will be difficult to find substitute sources for many industrial products in other countries. China has a deep, integrated supply network and a superb transportation infrastructure. China could also give subsidies to companies hurt by high American tariffs. Currently (2025), U.S. production of batteries, EVs, robotaxis, and drones is substantially more costly than similar products in China.
The net result might be some increase in U.S. manufacturing, a lower trade deficit with China, and higher prices for many goods in America. But the U.S. will still be very dependent on imports for industrial inputs, solar panels, batteries, and many consumer goods. As discussed above, Chinese companies continue to improve their EVs, batteries and computer chips.
In light of threatened American tariffs on Chinese exports to the U.S., Chinese companies have set up subsidiaries in many other countries, especially in Asia. While this may reduce America’s trade deficit with China, depending on how China retaliates, America’s overall trade deficit will probably not go down very much, if at all.
I doubt if China will accept any trade deal with the United States that they consider unfair. Chinese are aware of Chinese history when China succumbed to foreign pressure and gave up part of its sovereignty. Trump’s bullying tactics might have been more effective in 2017 than now. The Chinese economy is about twice as large, less dependent on importing foreign hi-tech inputs and products, and exports to America are a
smaller percent of total exports, only about 10% in 2025. America’s protectionist trade policies open up opportunities for China increasing trade with other countries.
DEMOGRAPHICS
Demographics Update (August 8, 2025)
China’s slowly decreasing total population masks rapid and large changes in its age distribution.
Between 2021 and 2024, the number of pre-school children (3 to 6 year olds) fell from 48 million to 36 million. The number is expected to fall another 14 million in the next five years as the birth rate of 1.0 is one of the lowest in the world. In contrast, over the same period, the number of people aged 65 and over is projected to rise from 211 million to 256 million, according to UN projections.
China’s population has been shrinking since 2022. This means more deaths than births. This should continue as births remain low and deaths from an aging population should increase.
China’s most serious long-term problem is not U.S. trade policy and tariffs. It is the projection of a huge decline in total population, particularly in labor force age groups.
The latest long-run population projections indicate that China’s current population of 1.4 billion people has peaked and will fall to about 750 million in 2100! China will account for most of the global decline in population for the rest of the century.
China will probably experience a 200 million person decrease in its working-age population by 2050. China is dealing with the large, future decrease in the number of workers through a better educated and trained work force for an advanced hi-tech economy. Two-thirds of people turning 18 now enroll in a university or college. China’s universities graduate about 350,000 mechanical and industrial engineers per year, as well as electricians, welders and other trained technicians. This is eight times the number of mechanical engineers graduated each year in the United States.
It is unlikely that China will allow any substantial immigration in the near future. But China is rapidly increasing the number of industrial robots as part of a major program to automate manufacturing.
Keith Bradsher, The New York Times,
“Army of Robots Gives China Edge in Trade War, “April 24, 2025, Section A, Page 1.
(This article also told of 12 humanoid robots that entered a half-marathon in Beijing; 6 finished.)
China’s population is slowly falling; the yearly reduction will accelerate in the near future. It is also rapidly aging because of below replacement birth rates since the 1970s. Birth rates were below replacement (an average of 2.1 children per woman) during the “one child” period of the 1970s to 2015 was about 1.5. They are even lower now, about 1.1 children per woman. This is one of the lowest birth rates in the world.
The number of babies born each year has dropped by almost two-thirds since 1987.
The number of marriages keep falling. One reason is that the “bride-price” women are demanding is very high. The average “bride-price” has doubled since 2005. This is a function of supply and demand; there are 119 males for every 100 females in marriageable ages. There is a great deal of discussion on social media about what price women should ask for, so women have information when they negotiate with the groom’s family.
Women also demand a high dowry because China has a high divorce rate, higher than the U.S. Women keep most or all of the dowry if divorced.
China has had a relatively young average-age population but the average age is rising very rapidly because of the very low long-term birth rates and an average life expectancy equal to that of the United States. This year China’s median age (half above, half below) will pass that of the United States.
Although China’s total population is failing slowly at present, the age distribution is changing faster. The number of children is going down. China’s working-age population is already shrinking. By around 2050, the decrease in work force age groups since 2012 will be about the size of the current U.S. total labor force (170 million). Or about 25% fewer workers.
The number of Chinese over the age of 60 has been increasing rapidly. China’s over-60 population of over 300 million is already close to the total population of the United States. Projected over-60 population is expected to be around 400 million in 2035 and, by around 2050, the over-60 population is projected to be around 500 million, over 40% of China’s total population.
China has a special problem that could affect future demographics. Chinese youth, ages 19-24, have a very high unemployment rate, probably over 20% and possibly much higher. The government stopped publishing statistics and then came out with a new series with a lower unemployment rate. Colleges graduates in particular are finding it hard to get a decent position; many are unemployed, accepting menial jobs just to earn small amounts of income, or moving in with relatives. The government’s policy is to tell the unemployed youth to “eat bitterness.”
A high percent of its young, male work force are “gig” workers who work part-time or move from job to job. Many, probably most, have moved from rural to urban areas and are unable to get an urban hukou (residency permit). They are permanent second-class citizens, undocumented internal immigrants.
This large “floating” labor force of about 200 million is about 40% of the urban labor force.
In addition to construction workers and temporary manufacturing employees, about 84 million rely on platform-based forms of temporary employment, including ride-hailing drivers and food-delivery riders.
These gig workers may never marry and have children, worsening the aging of China’s population. The government sees them as a possible source of economic and political problems in the future, but has done very little to improve their legal status or provide educational and health services.
This is a clear example of exploitation of the proletariat.
A peculiarity of the Chinese labor market. In China, there is widespread discrimination again hiring anyone over the age of 35. If people cannot establish a career when they are young or are fired when they are 35 or over, they have little chance of getting a comparable or better job or have rising income until retirement. Many companies and government departments will not hire anyone over the age of 35. The number of people over the age of 35 is rising rapidly.
All of these trends will probably affect future demographics and economic growth – lower income for a larger part of the total population, fewer and later marriages, fewer children. This is in addition of a dearth of females because of the past “one child” policy that led to tens of millions of abortions of female embryos and female infanticide.
This will increase the problems associated with urbanization. China is already highly urbanized. Shanghai has four times as many people as New York City. Twelve cities in China have more people than New York City. Over 100 cities have populations of one million or more.
China’s first reaction to these trends has been to slowly raise their low retirement ages over the next 11 years. For men, the retirement age is being slowly raised from 60 to 63. For women, from 55 to 58 for white-collar workers and from 50 to 55 for blue-collar workers. A related reason is that the public pension costs are “squeezing” government budgets. Chinese economists believe that public pension funds will run dry over the next 10 years (sound familiar?). The long-run effect might be slowing down the fall in the size of the labor force as Chinese will have to work more years before retirement.
The Economist, “Sunset Delayed,” September 21, 2024, 38-40.
This policy will be unpopular. Traditionally, families were multi-generational and children (daughters and daughters-in-law) were expected to care for aging parents. But hundreds of millions of the working-age population have migrated from rural areas to cities, leaving their children in the care of grandparents. A rising percent of women in the cities are working. If retirement ages are raised and grandparents in both the cities and countryside have to work longer, there may be less baby-sitting. This might lower the birth rate even more. Again, China has strong age discrimination, so that the older population might have to wait longer between permanent employment and receiving a retirement pension.
A COMPLICATED STORY: CHINESE DEMOGRAPHICS AND HOUSING
Many women now demand a diamond engagement ring; China is the largest market for diamonds. In addition, there are expected male “dowries.” The families of prospective grooms are often expected to buy the married couple an apartment. Some relatively prosperous parents in the past planned ahead and bought apartments for sons at low prices. Since 2015, housing prices doubled and then fell about 20-30% from the top. Still, down payments are about 10 times the average urban wage. So, unfortunate sons cannot marry or they and their families must save for many years for a down payment.
Young men without permanent and high incomes are not desirable prospective husbands.
SUMMARY
Like Japan after their bubble economy collapsed in the 1990s, China is facing adverse demographic trends, the collapse of a real estate bubble, excess manufacturing capacity, and high and rising public debt.
While China’s future demographic path will like Japan’s, China is not like Japan in other respects. The big difference is that China continues to invest in a group of new, cutting-edge technologies which will drive future economic growth and exports. These technologies are related; combinations are leading to new applications like EV robotaxis.
China will continue to be an exporting powerhouse unless tariffs and quotas begin to bite. But there are ways around most restrictions – trans-shipments and building plants in other countries. Because so many of the inputs that the United States and Europe need come from China, tariffs and quotas will probably be selective. Maybe mostly limited to EVs, solar panels and high-end computer chips and software.
The future of China is a race to solve internal, domestic problems and continue to grow the economy through investments in import substitutes, new technology, and exports. In the longer run, the demographic decline plus an aging population present serious problems, although there are possible solutions.
But in the near term, China is a facing a combination of slower growth; high youth unemployment and underemployment including that of recent college graduates; a loss of the total value of savings (wealth) because of the fall in the market value of housing; underfunding of pensions and health care for a rapidly growing number of retired population.
The current regime has rejected all but small increases in China’s pitifully low pensions, which
start at $20/month. The solutions will be more difficult if China continues to have an authoritarian regime for whom control is the main objective.
In the long run, China will have to continue to move away from labor-intensive manufacturing as a source of growth. The huge investment in robotics and factory automation is a step in this direction. This trend may intensify as the long-run demographic trend of fewer workers leads to higher wages. This implies more automation and movement to the information economy, including a large investment in AI and its applications. Also, Chinese companies may be able to move some of their operations to other, lower wage countries, which are the primary source of increased exports. But critically it means innovation; whether China can continue to do this in a regime of political control of entrepreneurs and information is an open question.
For a summary of statistics from many sources and an excellent discussion of China’ current problems, see John Mauldin, “Broken China,” mauldineconomics.com, October 26, 2024.
For excellent ongoing coverage of China, see The Economist at economist.com.
Official Chinese economic statistics have to be used with caution. For a look at the problems with their reported statistics, see
This is a case study of one country’s relationship with private companies in a major industry.
The central government has made the production of EVs a national priority with massive subsidies. The provincial, county, and local governments compete to attract an EV assembly plant. All levels of government entice new companies with a wide range of incentives and subsidies. The result is that in a short period of time about 100 new plants have been built; a few new ones are planned. The industry may have a total capacity of around 25-30 million cars.
Current production was 12.4 million cars in 2024; 2025 will probably be higher. Growth rates in the future will probably be lowered than in the past.
This is a common pattern for a new technology. In the United States, about 500 companies intended to produce cars. The difference with the current Chinese program is that most didn’t start production or produced very few cars. Only a few companies built a plant. Only two large companies survived (Chrysler came later). The rest disappeared, merged, or were marginal producers for a few decades. GM went bankrupt twice, stockholders and creditors took a financial bath. The company was only saved because the Du Pont family bought a controlling interest and created the modern industrial company.
Most commentary on the Chinese EV industry emphasizes the overcapacity and predicts that many companies will go bankrupt or at least merge. Competition is based on the assumption that a company will survive if it produces a minimum number of cars – at least 80% of rated capacity. In the past world of gas-powered cars, a minimum-sized plant of around 300,000 cars/year was necessary to achieve economies of scale and minimum unit cost. So this is a fight for market share. Or a fight to dominate a market niche.
The result is a drastic fall in retail prices. The government has stepped in and told the companies to stop lowering prices! The companies seem to be ignoring the government and finding ways around it (more options or better lease or financing terms, encouraging their dealers to sell new cars as cheaper “used” cars).
The cheapest EV is around $23,000 but BYD has announced a new model at a substantially lower price. (Americans get to pay $50,000-$70,000 for Tesla with fewer fun bells and whistles and lousy quality.)
Companies are also competing on introducing new features.
Chinese EV buyers are younger than those in the U.S. and Europe. They are more interested in a car’s software and entertainment systems. Chinese EVs companies are teaming up with China’s huge electronics corporations including Huawei, Xiaomi and Baidu to install “wizzy” electronics and “infotainment” systems in their vehicles. Some see EVs as “smartphones on wheels.” One high-end car dances; see it at BYD Yangwang U9 – Crazy JUMPING and DANCING Demonstration!on YouTube. Xiaomi started its own EV company in 2024; itproduces a luxury SUV that competes with Porsche’s Taycan but sells for half the price.
In the meantime, most companies are losing money; even the dominant firm (BYD) is experiencing falling profits.
But is there permanent overcapacity? In 2017, before EVs took off, the Chinese auto industry produced a record 28 million gas-powered cars. The domestic fall in gas-powered car sales has been about 10-12 million cars, about the same as the increase in EV sales. In other words, the total market is not expanding but EV sales are replacing gas-powered car sales. The change was accelerated by a government subsidy to consumers who traded in gas-powered cars for EVs. This subsidy has been terminated. The government is also reducing a tax credit.
With lower government tax exemption and subsidies to consumers, some EV companies are planning on reducing wholesale prices to dealers in 2026. Sales growth will probably be lower than in the past few years and total financial losses will probably be greater.
At the end point, when there are no longer gas-powered cars being produced, EV domestic sales could increase about 14-16 million more. In other words, the current total EV production capacity is about equal to maximum future sales.
When this “equilibrium” is reached is the critical question. How long can most producers lose money? When will the industry as a whole become profitable? Who will be the winners? Probably a combination of the lowest unit cost (biggest) producers, companies dominating large niches, and companies with deep-pockets partners or parents.
The other consideration is exports. Surprisingly (to me), most Chinese auto exports are gas-powered cars. Most EV exports now seem to be foreign companies like VW and Tesla. The long-run question is how large will the EV export market become? This partly depends on future geopolitics. Will the U.S. continue to ban Chinese EVs with very high tariffs and possibly quotas? Will the European Union continue to set high tariffs and de facto quotas on imported Chinese EVs? This is complicated because some European car companies, including VW, Europe’s largest car company, have shifted most of their EV production and development to China. Discrimination only on Chinese EV companies? Would China retaliate?
Beside ultimate domestic production of around 26-30 million, Chinese EV companies will have to develop more exports to grow further. Even with current restrictions. Their prime markets are probably middle-income countries like Brazil, Mexico, and southeast and southern Asian countries. But it is likely they will be forced to assemble their cars locally, possibly with local partners.
An implication of this essay is that after EVs replace gas-powered cars in China, most or maybe all further growth will come from exports. If some import controls in the US and EU are removed, exports and foreign assembly could be as large as domestic demand. Chinese companies will still control battery technology and production. Right now, batteries are about 40% of the unit cost of a Chinese EV.
Another consideration. BYD is a large battery producer; the company could see the EV industry as a vehicle to sell batteries.
The Red Queen’s Race
This is a Red Queen industry. Every company has to run faster to stay in the race.
But there is an interesting endgame. It is currently being played out in the gas-powered autos part of the industry. Collectively, the companies are probably producing at about 40% of capacity and the percent is falling. All companies are losing money; Ford has said it has lost money in China five years in a row; GM has taken a $5 billion write-off and will probably totally exit. Hyundai has closed one of its four plants. But no Chinese company intends to close. Why?
Four of the gas-powered car companies are state-owned. All companies have been state-subsidized in the past. They owe state-owned banks and local governments. No level of government wants to close plants because of the resulting unemployment. The national government fears that unemployment could weaken social stability and possibly government control. So “zombie” plants are kept alive through further loans and local support. The uncertainty is: how much longer?
One possibility is that the state will wait for gas-powered car capacity to shrink as foreign companies stop production.
Some of the same dynamics is already happening in the EV sector of the industry. EV companies are not paying their suppliers. But suppliers can’t carry them indefinitely. The government has “instructed” EV companies to pay overdue money owed to suppliers. Compliance has been slow.
Some companies are receiving new loans from state-owned banks. There may be some local relief through lower or deferred tax payments and loan payments. No local government wants to lose its EV plant.
So this is where Chinese political economy differs from a purely capitalist model. Even in capitalist countries, state and local governments compete with subsidies and tax abatements to attract new manufacturing plants. But these plants are allowed to go bankrupt. Creditors – suppliers and banks – often force them into some form of bankruptcy. Creditors take a loss and the local economy suffers. At least for a while. Near me, in Tarrytown, GM closed a big assembly plant. Now the area is covered by upscale condo developments and expensive restaurants. The attraction is that the plant was right on the Hudson River.
All this is part of a pervasive pattern, not just EVs. The Chinese government picks technologies and industries it wants to develop and subsidize. Companies are encourage to export. This industrial policy is a major component of China’s geopolitical competition with the United States. Local government officials are politically sensitive and encouraged to compete to subsidize and attract new companies and plants. The result is often overcapacity. Demand may or may not increase to equal total capacity. Some older industries, dominated by state-owned companies, have massive overcapacity; companies lose money but stay in business. Again, the question is when the government decides to close the companies.
Overcapacity compared to demand leads to financial loses covered by state-bank loans but not bankruptcy. Closing plants is delayed and often based on political considerations. The different levels of the Chinese government will probably continue to subsidize EV companies until demand catches up with capacity. The strange economics of China.
For some of the reasons why total domestic demand for cars may not grow very much, if at all, see
Quick summary of demand-side reasons. Extremely low birth rate (far below replacement), shrinking numbers of labor force age group, high youth unemployment, large number of “gig” (temporary and transient) workers, low family formation, loss of family wealth because of housing market collapse.
The Wall Street Journal recently published an article on how China has stopped publishing important economic statistics. The article also implies that some economic statistics are manipulated.
Getting reliable figures has always been a problem. Years ago I read a thorough analysis of Chinese figures that indicated China was overestimating its real GDP growth rate by 2% a year. I still use that correction. In recent years, it may be even larger. If 2% is a reasonable correction, it means that China’s real economic growth rate in 2024 was around 3%, not the reported 5%, which was about the 2024 U.S. real growth rate.
Many estimates come from private or non-government sources, as illustrated in this article. Some numbers have been almost impossible to get. Much of China’s macro economy occurs and is reported at the provincial and local level. Local officials have always fudged the figures since their careers depend on their figures being equal to or greater than the quotas and financial goals given to them by the national government. The situation has probably gotten worse since local and provincial revenue has depended heavily in the past on land sales and deals with housing developers.
Chinese government statistics were reporting youth unemployment at over 20% before the stat stopped being publish. A “revised” statistic reported 14%. Either way, these are high numbers. Unemployment of recent college graduates is also high.
There is conflicting data on the housing situation. It seems reasonable to assume that there are about 50 million housing units either empty or for sale. Many of the empty apartment units are owned by families as an investment and are a major part of their savings. The recent fall in the market value of housing has reduced the value of total household wealth.
It is impossible to tell what is the total yearly deficit of the entire country. Cumulatively, it is impossible to tell what the national debt/GDP ratio is. Estimates indicate that at about 120% it is higher than the U.S. national debt/GDP ratio.
Obviously local land sales to developers and residential construction have fallen even more since the data stopped being published. On the other hand, the national government is investing huge new sums of money on industrial modernization and expansion, especially of new, critical industries. China, as usual, is building ahead of demand, hoping that economic growth and increased exports will catch up.
Some older industries such as steel and other building materials have excess capacity because demand has fallen, particularly for housings and probably for big public infrastructure projects. This is one reason for rise in exports and Chinese building of overseas infrastructure projects, especially in Asia and Africa.
There is massive overcapacity in the electric vehicles (EVs) industry. Even as some of the early companies in the industry go bankrupt, new producers are entering the industry. Some have ties to e-commerce, social media and telecomm companies; their technology is apparently transferable to the electronics and “infotainment” components of EVs. EV sales are replacing gas-powered car sales, leaving an unprofitable industry with very low capacity usage.
China produces half of the world’s coal. At some point Chinese investment in renewable energy will lead to a large shrinkage of China’s massive coal industry.
While China is the world’s largest producer and installer of solar panels. China is still expanding coal production to generate more electricity. The government promises that coal production will begin to decrease after 2030 and total carbon emissions will start to fall in a few years.
Related, Chinese cities have some of the worst air pollution in the world.
China is trying to stimulate domestic consumption but with the fall in the value family wealth, high unemployment among young consumers, and the uncertain impact of American tariffs on Chinese exports, it is hard to see how this will happen, at least in the near term.
Like in the United States, economic growth in China will mostly be a function of developing new technologies and selling into the global economy.
For a detailed look at the Chinese economy, see my
In 1600, England had been an insular and agricultural nation, trading primarily with nearby northern Europe. By 1700, England’s commerce was complex and global, as London competed successfully with Amsterdam for American produce and Asian luxuries.
Alan Taylor, American Colonies: The Settling of North America, 258.
A theme that runs through this essay is the global maritime rivalry with Holland. England and Holland became global trade rivals in the 1600s. They fought three wars that weakened Holland and eliminated it as a naval rival.
England’s main instrument in its rivalry with the Dutch in Asia was the English East India Company (EIC). In America and the West Indies, it was the Navigation Acts.
By the end of the century, England was on its way to becoming a global maritime trading and naval power. The Dutch had lost out in North America but had established a vast trading network throughout Asia, centered in the Dutch East Indies (Indonesia). It was generally not competitive with the main Asian trade of the EIC or competitive with England as a European political power.
This essay on the spectacular economic progress of England in the 1600s also provides background and context for three other essays on this blog.
This background essay helps explain the changing relationship between England and her North American colonies in the context of England’s expanding global trade. It emphasizes the importance of England’s Navigation Acts to the American colonies. The objective was to reduce the role of the Dutch in the American colonies and the West Indies and monopolize all trade with the American colonies and the British West Indies.
The Dutch were instrumental in financing early sugar production in Barbados. They also dominated early financing and shipping of the tobacco industry in the Chesapeake (Virginia and Maryland). Dutch shipping rates were lower than those of the English.
The English sugar islands in the West Indies, mostly Barbados, was the largest source of English imports in the 1600s and an important source of import taxes. In the North American English colonies, England was able to take over the Dutch settlement at New Amsterdam, renamed New York, and using the Navigation Acts, to eliminate Dutch shipping that dominated the trans-Atlantic tobacco trade from the Chesapeake.
NAVIGATION ACTS
As part of its maritime rivalry with Holland, England passed the Navigation Acts.
First enacted in 1651 and strengthened in 1660 and 1663, the Navigation Acts were aimed at the Dutch. All exports and imports of the American colonies and West Indies had to go through England, on English or American ships. Even foreign goods bound for the Americas had to pay custom duties in England. The only exceptions were American exports other than the main exports of tobacco, rice, and indigo. As sugar production in the West Indies, exploded after starting in the 1600s, most other American exports went to the British West Indies.
England imposed high taxes (custom and excise duties) on American tobacco exported to England. During 1660s, new Navigation Acts regulations forced American tobacco growers to ship all their tobacco to England on English ships. Before that, Dutch ships controlled much of the tobacco trade because their rates were lower than English ships. This hurt the tobacco growers because this caused a tobacco glut in England, fewer ships competed for the tobacco trade, and now all tobacco had to go to England and pay high import taxes.
The Navigation Acts were an important part of the mercantilist policies of England. According to mercantilism, the government had the right and the power to shape trade in the political interests of the country. This meant economic war, especially with the Dutch.
The Dutch and English waged three wars, in 1652-54, 1664-67, and 1672-74. The second war was triggered when an English fleet in 1664 conquered Holland’s American colony New Amsterdam, renaming it New York.
ENLAND AND HOLLAND IN THE AMERICAS
England’s main instrument in its rivalry with the Dutch in Asia was the English East India Company (EIC). In America and the West Indies, it was the Navigation Acts.
This rivalry was part of the wider political and economic environment of the American colonies in the 1600s.
In the 1600s, the West Indies became the most valuable part of the English colonial empire. Sugar from the West Indies was far more valuable than tobacco from the Chesapeake.
In 1686, London imported West Indian produce worth £674,518, compared with £207,131 obtained from all the North American mainland colonies. Sugar constituted £586,528 of the West Indian total, while tobacco accounted for £141,600 of the mainland produce.
Taylor, 205
In 1650, the main sugar island of Barbados had a greater white population than the Chesapeake and New England combined.
After failing to raise tobacco and cotton, Barbados struck it rich with sugar, starting in the 1640s. By 1660, Barbados accounted for more trade than all other American colonies combined.
The sugar planters developed a strong lobby in England, partly because many wealthy sugar planters retired to England. They protected sugar imports from high import taxes. The tobacco growers along the Chesapeake were not so lucky.
In 1668-69 the West Indian sugar crop sold for about £180,000 after it paid about £18,000 in customs duty – compared with the £50,000 reaped (netted) by Chesapeake planters over and above their customs duty of £75,000.
Taylor, 216
This suggests a number of things about the Virginia tobacco growers. It was probably one reason the Barbados planters were wealthier than the Virginia planters, and why Virginia planters went into debt to buy luxuries and expand production (buy land and slaves). It is also intriguing to speculate that this was one reason American tobacco growers complained about being “slaves” to the English crown and merchants who lent them credit. Some of Virginia’s largest planters supported and led the American Revolution.
By 1775, the American colonies were England’s largest trading (imports and exports) partner.
The new set of Navigation Acts in the 1660s made the economic situation worse for Chesapeake tobacco growers. One aim was to eliminate Dutch ships from buying and transporting Virginia tobacco. This drove down prices and worsened the tobacco glut in England.
England and Holland became global trade rivals in the 1650s and 1660s. In the Americas and West Indies, the Dutch captured most of the carrying trade because they charged less than the English. England passed the Navigation Acts to prohibit American exports to use Dutch ships. In addition to being forced to use English and American ships, almost all produce had to go to England and, in the case of tobacco, pay high excise taxes.
THE START OF EUROPEAN TRADE WITH ASIA. PORTUGAL IN THE 1500s
Spices and luxury goods from Asia were limited and prices went up after the Ottoman Turks conquered Constantinople in 1453. The last leg of trade with Asia was dominated by Venice.
Before the seventeenth century, trade across Eurasia was mostly conducted in short segments along the Silk Road and maritime routes through the Indian Ocean. Business was organized by family firms, merchant networks, and state-owned enterprises. Trade was dominated by Chinese, Indian, and Arab traders.
In 1492, Catholic Spain, after a 400-year crusade, finally conquered the last Muslim area. Spain then bankrolled Columbus’ voyages, expecting he would bring back gold and silver from Asia. The national government expected to use this wealth to finance a continuation of its crusade by conquering Muslim North Africa.
After more than 80 years of trying, in 1497-8 a Portuguese fleet went around the bottom of Africa (Cape of Good Hope) and reached India. And returned laden with spices. It was a very profitable trip. Following voyages established Portuguese trading positions in India and links with Asia east of India. Portugal discovered and conquered the Spice Islands, which were the major source of Asian spices exported to Europe.
Portugal had shown in the 1500s that long-distance voyages from Europe around Africa to India and beyond were both possible and profitable.
But Portugal was a small and poor country. It had a small merchant class. Portugal, relying on a combination of state support (with political objectives) and charted private shipping (much of it foreign), was not able to fully exploit the profit potential of the trade. The number of trips were small, partly because financing was sporadic and inadequate.
Portugal’s Asian trade and Spain’s conquest of Latin America meant that rivalry among Europe’s nation-states was no longer confined to Europe and the Mediterranean. It was now global. Trade and conquest outside of Europe brought new wealth to European countries; the wealth could finance increased national power.
The spice trade from Asia to Europe was both highly profitable and risky. By 1600, both England and Holland were ready to try.
THE ENGLISH EAST INDIA COMPANY: TRADING WITH ASIA
England had defeated a Spanish attempt at invasion in 1588 and was thinking about how to become a colonial power. The country began thinking about colonies in North America and the West Indies.
The merchants of both countries realized that the traditional way to finance trading voyages – merchants and ship owners raising capital for each voyage separately and distributing profits and capital after the voyage – would be inadequate for the huge capital requirements of a sustained, large scale, risky trading venture in Asia. Merchants, investors, and shipowners would have to solicit outside investors to raise enough capital.
They succeeded. For 200 years, the EIC and the VOC were the two largest private companies in Europe, based on book value (total capitalization).
The instrument of England initiating trade with Asia in 1600 was the English East India Company (EIC), a government sanctioned trading monopoly. The goal throughout the century was to reduce or eliminate the competition from the Dutch East India Company (VOC).
Eventually, the EIC evolved into a quasi-state that ruled most of India. The EIC brought great wealth to England’s merchant class and helped develop new financial institutions.
THE ENGLISH EAST INDIA COMPANY (EIC) AND DEVELOPMENT WITH TRADE WITH ASIA
Why England and Holland both decided to make very large investments in the long-distance Asian trade at this time.
Both countries had a poor chance of becoming continental powers in Europe.
Both countries had small populations compared to France, Spain, and Austria.
Both countries were Protestant, often at war with the larger Catholic countries of Europe.
Neither could compete with the Catholic countries in European continental wars.
In contrast, both countries were maritime countries with a strong merchant class growing rich on maritime trade and finance.
·Holland was a republic dominated by its merchant class.
·England was a constitutional monarchy where Parliament had to approve taxes.
·Both had a shipbuilding industry and experienced sailors, the basis of strong navies.
·Both were capable of building large merchant ships that were often armed.
·Financing trade made Amsterdam the financial capital of Europe.
ADVANTAGES OF A PRIVATELY-FINANCED, LONG-DISTANCE TRADING MONOPOLY
The merchants of both countries realized that the traditional way to finance trading voyages – merchants and ship owners raising capital for each voyage separately and distributing profits and capital after the voyage – would be inadequate for the huge capital requirements of a sustained, large scale, risky trading venture in Asia. Merchants, investors, and shipowners would have to solicit outside investors to raise enough capital.
They succeeded. For 200 years, the EIC and the VOC were the two largest private companies in Europe, based on book value (total capitalization).
THE EIC AND VOC IN ASIA
The English East India Company (EIC) was founded in 1600 and the Dutch equivalent (VOC) in 1602. Both had charters that gave them a monopoly on trade between their home country and Asia. They almost immediately became rivals.
In Asia, the EIC suffered defeats at the hands of the competing Dutch East India Company (VOC). The Dutch, led by a very aggressive director, defeated and replaced the Portuguese in the Spice Islands. Then the VOC was able to repulse attempts by the EIC to capture the islands. The Dutch eliminated English attempts to establish entrepots in the Dutch East Indies (Indonesia). The VOC also was the only foreign country allowed to trade with the isolationist Tokugawa shogunate in Japan. The VOC sold the Japanese desired products from all over Asia in exchange for the silver needed to finance the inter-Asian trade and products exported to Holland.
The EIC early centered their operations on the entrepot trade in western India. The EIC’s first ships arrived in India in 1608, received permission to establish a factory (trading center) in 1613, and was granted permission by the Mughal emperor in 1615 to establish factories throughout the Mughal Empire.
A historical look at the early evolution of global trade and how this led to the creation and dominance of the European business corporations English East India Company (EIC) and Dutch East India Company (VOC).
Both countries saw an opportunity to become rich using their merchants, merchant capital, and shipping.
This essay describes the most immediate causes of the Industrial Revolution starting in the late 1700s, including some of the reasons it happened in England. But England had undergone changes in the prior two centuries that increased the chances the Industrial Revolution would start there. Economic growth had depended on England developing a global trading system partly based on its imperial empire. Trade (importing raw materials and exported finished goods), shipping, increased wealth, and a rising merchant class prospering from trade were key to this change. This transformation began in 1600.
THE RISE OF ENGLAND AS A NAVAL AND MARITIME TRADING POWER IN THE 1600s
Except for the Dutch, no other European nation depended on foreign trade for such a high proportion of its employment and gross national product.
English merchant shipping more than doubled, from 150,000 tons in 1640 to about 340,000 in 1686.
Taylor, 259
The explosion of imports from the West Indies was one reason for the large increase in English shipping in this period. A related reason was the Atlantic slave trade, which England came to dominate. Barbados needed a large number of slaves to harvest sugar cane and produce sugar. The port of Bristol became wealthy by specializing in this trade. The town later put up a statue to one of its wealthiest slave traders. It was pulled down in 2020 in a Black Lives Matter rally.
Shipbuilding remained a major industry in England into the 1900s.
By 1700, England was the leading naval power in Europe, with the largest fleet. The English navy was twice as large as the Dutch navy. London was Europe’s most important center for commerce and finance, passing Amsterdam. England’s power and wealth now depended on overseas trade and commerce.
In 1600, England had very little trade outside of Europe. By 1700, about 40% of English shipping tonnage carried American and Asian goods.
England had developed a global trading system. It would begin to assemble a global imperial system. Holland could not match England but continued to own a very lucrative colony in the Dutch East Indies and carried out extensive intra-Asian trade.
INTO THE FUTURE
The main point of the essay on the EIC is that the creation of the modern corporation and the extension of long-distance international trade developed together. These created great wealth in England, especially in its trading, shipping, and merchant class. Unlike wealth in land, this wealth was liquid (mobile) and would later be invested in railroads and manufacturing.
Like the EIC, railroads and manufacturing companies were able to raise large amounts of capital, partly because the companies were limited liability companies and shareholders could sell their shares on the stock exchange. The “railroad mania” of the 1840s was the first stock market speculative bubble of the industrial age. It didn’t end well but it didn’t discourage widespread ownership in new companies.
Also suggests reasons why England was in the best position to start the Industrial Revolution. England was manufacturing goods to be sold in the new English colonies; these markets, especially America, would expand in the 1700s. By mechanizing cotton textile production, England opened up a new, major source of trade revenue. England imported cotton from India and exporting cotton textiles to India and rest of the world.
Later, in the 1800s, America would become the dominant source of cotton for English textile mills. Also the basis for America’s cotton textile industry. Sadly, this rescued slavery from possible extinction.
In both countries, the production of cotton textiles was the first industry of the Industrial Revolution. Cotton textiles were England’s largest source of exports throughout the 1800s. Cotton was the main export of the United States in the 19th century. Export earning helped pay for importing machinery and other industrial inputs.
For a description of the EIC’s structure and strategy, see
There are essays on colonial American History, American Economic History, and why England and America were the countries that started the Industrial Revolution. Also essays on;
China.
Information, innovation, and how markets work.
Business, finance, and economics.
Global and national demographics, population projections, and how they interact and influence economies.
