Xi Pursues Economic Fortress

Brian Spegele is a senior correspondent in The Wall Street Journal's Beijing bureau. He writes broadly about political, economic and business development in China, and he has traveled throughout the country for his reporting. This is Brian’s second posting in China for the Journal. He was previously based in Beijing as a reporter from 2011 to 2017, where he covered the rise and early rule of President Xi Jinping.

Jason Douglas reports from The Wall Street Journal’s Singapore bureau on economics in Asia. He writes about trends and developments in China’s economy as well as the economic forces reshaping the world’s most populous continent.

Yoko Kubota is The Wall Street Journal's deputy bureau chief in Beijing, responsible for business news coverage in China including the technology, autos and consumer sectors. She oversees a team of correspondents and researchers in Beijing, Shanghai, Singapore and New York. They together cover areas including Chinese and multinational companies, industry and trade policy, supply chain and the tech rivalry between the U.S. and China. They write:

“A day in China could easily start like this: Roll out of bed and swipe through WeChat messages on your Huawei smartphone. Hop into a BYD electric car and drive to the railroad station, where a highspeed train from a state-run factory whisks you to your destination. Chinese-designed nuclear plants, solar farms and wind turbines power the city’s lights.

China is racing to make itself less reliant on the outside world’s products and technology— part of a yearslong effort by leader Xi Jinping to make China more self-sufficient and impervious to Western pressure as tensions with the U.S. rise. Beijing has poured hundreds of billions of dollars into favored industries, especially in high-end manufacturing, while exhorting business leaders to fall in line with the government’s priorities.

In many ways, the effort is succeeding.

Instead of relying on foreign companies for robots and medical devices, China is making more of its own. Chinese made solar panels are replacing some of the country’s need for imported energy. The success of China’s electric-vehicle makers and artificial-intelligence upstart DeepSeek has ignited fears that China might even eclipse the West in some cutting-edge sectors.

Beneath those wins, however, Xi’s industrial policy is hugely expensive, eating up state resources as government revenue is stagnating. One estimate by the Washington--based Center for Strategic and International Studies put China’s annual spending on industrial policy at around $250 billion as of 2019.

Large sums have been wasted on projects that failed, especially in areas such as advanced semiconductors.

The flood of investment pouring into Chinese factories is also causing problems for China abroad, as it leads to enormous quantities of Chinese goods that are being pushed onto foreign markets at cut-rate prices, exacerbating trade tensions. Western countries have sought to block advanced chips from flowing to the country, and China’s growing manufacturing dominance in some high-value sectors is set to be a flashpoint as President Trump turns up the heat on Beijing.

China needs to find new growth levers right now, to offset the drag on its economy from a languishing real-estate sector and a darkening global backdrop for trade. Many economists said China should be building out its threadbare social safety net to drive a durable pickup in consumer spending, rather than throwing more money at its vast industrial base, racking up more debt with no guarantee on future returns.

But Beijing believes that channeling huge resources into advanced manufacturing and technology will boost national security by making the country less susceptible to Western pressure. If that means some economic problems are neglected or add to tensions with the West, Chinese leaders are signaling that the risks are worth it.

The cost of China’s effort “has been a lot of burnt capital,” said Alfredo Montufar-Helu, head of the China Center at research group The Conference Board in Beijing. “Is China going to be able to bear the cost? In the eyes of the Chinese government, they are being forced to bear this cost.”

“Self-reliance in science and technology is the basis of our national strength and prosperity, and necessary for our security,” an anchor with state broadcaster CCTV said this month.

Flying Solo Xi formalized his ambitions to make the country more self-reliant in 2015, when he unveiled an initiative dubbed “Made in China 2025.”

A government document that laid out the program’s goals stressed that the world was on the cusp of a new technological revolution and that China would only succeed by investing in a more advanced manufacturing base.

While the initiative sought to elevate Chinese manufacturing across the board, it highlighted 10 sectors such as robotics, aerospace and new energy vehicles as priorities. It also set explicit goals for raising the domestic content of core components and basic materials. A gusher of state subsidies and other financial support would help China achieve its goals.

U.S. officials criticized the program for aiming to shut out foreign firms, a rift that only worsened after Trump took office in 2017. By 2019, under pressure from the U.S., Beijing was signaling it planned to give a bigger role to foreign companies in supplying China.

Yet as relations with the U.S. further deteriorated, China’s bid at self-sufficiency only intensified. The world was growing more turbulent, the government said in its latest five-year economic plan published in 2021, and “self-reliance” in science and technology was paramount.

In EVs, one of the 10 sectors identified in “Made in China 2025,” industrial support surged to more than $45 billion in 2023 from $15 billion in 2019, according to estimates by CSIS. More than 100 brands raced into the market. The cars have been thrashing foreign rivals in China and making rapid inroads overseas as their quality has improved.

Last year, electric and plugin hybrid cars accounted for 48% of car sales in China, up from 41% from a year earlier, or nearly 11 million vehicles, data from the China Passenger Car Association showed. Most of those electric cars were made by Chinese brands, such as BYD and Geely. BYD recently surpassed Volkswagen to become China’s bestselling carmaker, while sales of U.S. automakers such as General Motors, which recently said it would take more than $5 billion in charges linked to its weak China business, have tanked.

For years, China was a net importer of chemicals, especially from the Middle East, Europe and the U.S., as domestic production wasn’t enough to provide all the plastics, fibers and other chemicals consumed by its growing economy. Since 2021, however, that deficit has flipped to a surplus, as rising domestic production pushes out imports. China in 2024 recorded an export surplus of $34 billion in chemicals, compared with a $40 billion deficit in 2020.

Obstacles Ahead In other ways, however, Xi’s self-sufficiency drive continues to face hurdles.

In aerospace, China’s C919 jetliner entered commercial service in 2023, a feat celebrated by the government after years of setbacks. But the plane, built by state-owned manufacturer Comac to rival the workhorse passenger jets of Boeing and Airbus, is chock-full of foreign systems and components, including landing gear from Germany and engines from the U.S. and France.

Beyond technology, a push to boost China’s self-reliance in its food supply is constrained by a lack of arable land and water.

In semiconductors, Western countries are actively working to make sure China doesn’t catch up soon, which has only reinforced Beijing’s determination for self-reliance. Policy--makers a decade ago said they wanted 70% of China’s chip demand to be met by domestic production by 2025. By the end of this year, domestic production will supply around 30% of Chinese chip demand, consulting firm International Business Strategies estimates. Chip imports last year were close to $400 billion, according to Chinese customs data.

China doesn’t have homegrown tech to produce the most advanced chip-making tools, which are now made by a handful of suppliers in the Netherlands, Japan and the U.S. Export-control measures block China from obtaining those tools. Without them, fabricating the most advanced chips has proven difficult for China.

Still, Chinese players have made breakthroughs that surprised U.S. officials. In 2023, Huawei Technologies released the Mate 60 smartphone, which contained an integrated circuit that was a step closer to the technology level of advanced chips in Apple’s iPhones, though industry experts have raised questions about the production yield of these chips and whether Huawei can efficiently mass-produce them. Huawei hasn’t commented on the details of the chip. Huawei also succeeded in developing its own operating system after it was restricted from using Google’s Android system.

The case of AI newcomer DeepSeek provides a counterexample to China’s state-led strategy. DeepSeek was built by a Chinese math geek who had founded a hedge fund. Many economists have argued that China could better rev up its economy by easing controls on its private sector without many of the downsides of its state-led model.”

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China Aims to Build a Fortress of Economic Self-Sufficiency

Brian Spegele continues his theme. He has served as a reporter for The Wall Street Journal’s financial enterprise team in New York, where he investigated topics including the Trump Organization's finances and the role of private equity in the U.S. healthcare system. Brian won a Knight-Bagehot fellowship at Columbia University in 2017 and earned an M.B.A. from Columbia Business School. He speaks Mandarin Chinese and Italian. HE writes:

“The storm clouds for China were gathering when leader Xi Jinping convened the country’s top scientists at the Great Hall of the People in Beijing in May 2018. The U.S. was beginning to clamp down on selling technology to China, with more restrictions on the way. China must not be forced to beg others for technology, Xi said. Only through self-reliance “can we fundamentally safeguard national economic security,” he said.

Since then, China has raced ahead in many strategic sectors—and in some cases is catching up with the U.S. Its electric-car companies are among the world’s best. Chinese AI startups rival OpenAI and Google. The country’s biologists are pushing the boundaries of pharmaceutical research, and its factories are being filled with advanced robotics.

At sea, Chinese-made cargo vessels dominate global shipping. In space, the country has been launching hundreds of satellites to monitor every corner of the Earth. Beyond frontier technology, Beijing is pursuing greater self-reliance in food and energy, and has bulked up its military.

These successes and many others are helping to fortify China and its economy as Xi prepares the nation for an era of sustained hostilities with the U.S., including the continuing trade war. The two sides are entering complex negotiations, with many of the latest tariffs temporarily suspended. The advances are making China less dependent on the rest of the world for goods and services. Imports overall fell to less than 18% of gross domestic product in 2023 compared with about 22% a decade earlier.

Yet China is unlikely to ever be fully self-reliant, having imported more than $2.5 trillion worth of goods last year, including $164 billion from the U.S. The sheer size of its population means that in some areas, total self-sufficiency is virtually impossible.

Xi says China’s system of socialism and state planning is well-suited to winning the race for technologies of the future, allowing the state to concentrate resources where needed. His effort could backfire, with massive waste from the self-reliance campaign exacerbating China’s mountain of debt, and threatening to hold back its economy over the long run.

Money talks China’s efforts to become more self-sufficient were well under way before Trump first took the White House. In 2015, a policy dubbed “Made in China 2025” identified 10 sectors as national priorities, including robotics, aerospace and new-energy vehicles.

Xi took on a more nationalistic tone after Trump launched a trade war against China in 2018. Calls for “self-reliance” became more prominent, especially after the pandemic struck, leading China to largely close its borders. Chinese officials gained confidence that their economy could survive reduced contact with the outside world when it grew 2.2% in 2020, the only major economy to expand that year.

China’s resolve strengthened in the Biden years, as Washing--ton sought to work with European allies to choke off China’s access to advanced technologies such as semiconductors. “Western countries, led by the U.S., have implemented allaround containment, encirclement and suppression against us,” Xi said in 2023. He warned China to prepare for “extreme scenarios,” a thinly-veiled reference to the risk of conflict with the U.S.

Much of China’s success stems from its ability to direct enormous sums of money to prized sectors. Last year, China invested $500 billion on research and development, triple from when Xi took office in 2012. China spends nearly as much on R& D as the U.S., adjusting for purchasing power parity, according to the Organization for Economic Cooperation and Development.

Investment in AI is a major focus. One study last year found that Chinese government venture-capital funds invested nearly $200 billion across 9,600 AI firms between 2000 and 2023.

Local government investment arms have helped the push, backing companies such as Zhipu AI—one of the Chinese AI firms rivaling U.S. companies. The AI startups are also taking in capital from private venture funds and Chinese companies such as Alibaba and Tencent.

China’s technology push is boosting its manufacturing prowess. Chinese companies have been buying as many industrial robots as the rest of the world combined, enabling some factory owners to experiment with highly automated plants that can operate in the dark. For much of the past decade, three-quarters of the robots installed in China came from foreign manufacturers. By 2023, Chinese robot makers captured nearly half of the local market, according to the International Federation of Robotics.

EV robots In the more intricate field of humanoid robotics, Chinese companies such as Shenzhen based UBTech are competing with U.S. firms such as Elon Musk’s Tesla. In electric-vehicle factories, humanoid robots are being trained to work together to sort auto parts or lift heavy duty containers and place them onto shelves.

UBTech says that 90% of its more than 3,000 suppliers in recent years were based in China—a sign of how much China can rely on its own growing ecosystem of suppliers. The company is also incorporating technology from Chinese artificial-intelligence pioneer DeepSeek to help the robots make better decisions.

The self-sufficiency drive extends to highly sensitive areas such as nuclear power. At the Sanmen nuclear power plant, 150 miles south of Shanghai, the first two reactors put under construction in 2009 came from Pennsylvania-based Westinghouse, with key components shipped from the U.S. and American engineers on-site to help get the project online.

The next two reactors were also based on Westinghouse’s technology. Now, a new pair will be totally Chinese. Known as Hualong One, the reactor model allows Beijing to better control costs and construction timelines, while eliminating the danger that the U.S. could one day refuse to sell China more reactors.

Efficient government coordination, readily available financing from state banks and a highly-developed nuclear supply chain means China has already managed to build some Hualong One reactors in about five or six years. The latest Westinghouse reactors in the U.S. took more than a decade to complete, at far higher costs. In many emerging sectors, China seeks to go beyond government subsidies and other fi nancial support, pushing companies to compete with each other to boost efficiency and innovation.

Two of China’s leading battery makers, Contemporary Amperex Technology and BYD, have disclosed several billion dollars in subsidies between them over the past three years. At the same time, they say they have spent more than $20 billion combined on R& D. Within weeks of one another recently, CATL and BYD each announced that they had developed new fast-charging systems that could bring down charging times for EVs to just five minutes.

In space development, a key focus for Beijing has been improving Chinese satellites that capture images and other data for civilian industries such as construction, as well as for defense purposes. Last year, when a group of U.S. think tanks ranked the world’s best such commercial satellite systems, Chinese firms won five out of 11 gold medals. The U.S. had four. One winner, Chang Guang Satellite Technology, was launched in 2014 with $30 million in intellectual property from a research institute under the state-run Chinese Academy of Sciences.

Today, the firm is well on its way to building the world’s largest constellation of commercial remote-sensing satellites. With 117 satellites already in orbit, the company says it can observe any point on Earth up to 40 times a day. Some Chinese users claim to have used the network to scope out the U.S.’s latest stealth bomber at an air base in the Mojave Desert.

In its push for self-sufficiency, China now has roughly two-thirds of global corn reserves, despite only having about 17% of the world’s population, and has built massive stockpiles of oil and metals. It is slowly expanding the use of its yuan currency in foreign trade and developing alternatives to Western financial payment systems. The Defense Department estimates that China has tripled its nuclear warhead stockpile to more than 600 in recent years. China’s leaders present the self-reliance drive as something like insurance that must be paid to guard against foreign aggression. And it does confer advantages.

Last year, Chinese shipyards delivered 53% of global tonnage, according to shipping-information provider Clarksons Research, compared with 8% in 2002. Those gains reflected decades of state support, including cut-rate prices for land to build shipyards, favorable loans and subsidized steel. The U.S. made up just 0.1% of global commercial tonnage last year. China’s shipbuilding prowess has helped it to build the world’s largest navy, with more than 370 ships and submarines today.

Chip production Meanwhile, Huawei and other Chinese firms have made progress in reducing one of China’s biggest vulnerabilities: its lack of advanced semiconductors. Washington in recent years has used export controls to try to choke off China’s access to the most sophisticated chips, such as Nvidia’s bestperforming products—galvanizing China to build up its domestic production.

In 2023, Huawei grabbed U.S. attention when it released a high-end smartphone powered by an advanced processor that industry analysts say was locally produced in China. More recently, it has been gearing up to test a new chip it hopes will be more powerful than Nvidia’s H100 chip, released in 2022.

For all of China’s technological progress, it still faces economic challenges, with sluggish growth and mounting fears domestically that standards of living might not catch up to those in the U.S. One explanation, economists say, is that structural issues such as high debt levels and tanking real-estate prices are overriding gains from technology improvements.

Another possibility is that China’s state-led model is a big part of the problem. Financial waste and fraud have plagued the government’s spending on self-reliance. This month, the former chairman of a government- supported chip conglomerate was handed a de facto life sentence for alleged crimes including illegally acquiring $65 million of state assets.

In electric cars, 500 companies initially raced into the market to tap easy money from local governments. Most have since flopped, and many that remain are unprofitable.

The inefficient allocation of money has contributed to slowing productivity growth. Absent reforms, China may be able to sustain GDP growth of just 2.8% on average from 2031-2040, according to economists at the International Monetary Fund, compared with an average of around 6% over the past decade.

“In every country, even a country as vast as China, resources are limited,” said Carnegie Mellon economist Lee Branstetter. “If they’re used inefficiently, this will hold back living standards in the long run.”

Next time: Two risks the West must counter