Don’t forget the downsides of China’s innovation push

Not so long ago, Westerners dismissed China as a copycat, a fast follower or a “fat tech dragon”, consuming vast amounts of money and manpower while rarely taking flight. But as China has triumphed in high-tech industries such as electric vehicles, clean energy and lean AI, the condescension is giving way to admiration, fear and even envy.

Now some Western governments are paying the copycat nation the compliment of imitating its policies. The European Union has offered subsidies to Chinese battery companies that share their know-how. America’s government is taking a stake in Intel, a once-mighty chipmaker, in the hope that state ownership will restore its fortunes. Back in China, techno-optimism is helping fuel a market rally. Cambricon, a potential rival to Nvidia, has reported first-half revenues up by over 4,000% year on year.

Amid the hope and hype, it may seem churlish to point out the downsides of China’s innovation push: the fiscal cost, market distortion and policy duplication. But ignoring these pitfalls would be a mistake, not least because they have recently begun to trouble China’s own government. Indeed, one of the most prominent critics of its industrial policy is the man whose vision it is meant to reflect: the supreme ruler, Xi Jinping, himself.

Industrial subsidies, direct and indirect, cost China over 1.7% of GDP a year in 2019, compared with about 0.6% in dirigiste France. The country boasts more than 2,000 government-guided investment funds scattered throughout the land, aiming to raise over 10trn yuan ($1.4trn). That could buy a lot of innovation. But as these funds have grown, private venture capital has dried up. Waste and fraud also take their toll. One pot of money earmarked for semiconductors, known as the “Big Fund”, became notorious for big corruption, leading to the investigation or detention of at least a dozen people.

Even when they invest honestly, policymakers don’t always invest wisely. Local officials, Mr Xi noted in July, always promote the “same few things: artificial intelligence, computing power, new-energy vehicles”. This has led to overcrowded industries and vicious price wars. Leaders now complain about “involutionary” competition: companies are cutting prices to poach customers, forcing rivals to do the same, which leaves everyone’s profits lower and no one’s market share higher.

Supporters say this is all part of the plan. The government encourages excessive entry into promising areas, knowing that the frenzied competition will propel improvements. Once the best companies have proved their worth, the government can cull the rest. But this process does not always yield the most innovative or efficient firms. Often it favours those with the most indulgent provincial patrons, or firms that are too big to cull.

Moreover, China’s industrial policy has not achieved all its goals. Civil aviation and cutting-edge chipmaking remain elusive. And not all successes owe much to explicit policy. DeepSeek was the side-hustle of a hedge fund, an industry frowned upon by Beijing.

China’s innovation push has met with some undeniable success. At this year’s Spring Festival celebrations, robot dancers stole the show. But the government’s industrial choreography is not nearly as tight as this example suggests. Instead it resembles the “robot Olympics” held recently in Beijing. The events featured bustling fields of competitors. Their human controllers huffed and puffed alongside them, like over-protective local officials. Even so, several of the robots fell flat on their faces—and others struggled to stay in their lane. ■