China is entering a new phase of its economic development in which low-cost production is no longer an advantage and both exports and foreign direct investment (FDI) are encountering difficulties. In addition, the country is facing the major challenge of an ageing population. (para. 1).

To sustain growth, China needs to shift to a new economic model focused on innovation, digital technology and the domestic market. The core of the change is to move from growth driven by low-cost advantages to growth driven by innovation. (para. 2)(para. 3).

Harvard Business School professor Michael E. Porter identified key factors that influence innovation efficiency, such as the degree of openness of a country and the vitality of the private sector. (para. 5)(para. 7). In a complex international environment, openness to innovation is crucial. For example, if China cuts off cooperation with countries that control the most advanced technologies, this could hinder scientific and technological progress. (para. 6)Strengthening the private sector is also crucial to sustaining innovation, and building entrepreneurial confidence remains an urgent challenge. (para. 9).

Technological innovations have driven the development of the “new three” – electric vehicles, lithium-ion batteries and solar cells – and their exports have attracted international attention. But US Treasury Secretary Janet Yellen said China’s excess capacity could disrupt international trade and hurt US industry and employment, a reference to China’s growing competitiveness in certain areas. (para. 11)(para. 12)In the past, China’s exports of surplus products have not provoked major reactions, but escalating geopolitical tensions and the growing size of the Chinese economy have made the issue more complex (para. 15)(para. 17)(para. 18).

Despite progress in the “new three,” China’s innovation remains limited. Given its size and level of development, the country should have a broader range of innovations. Policymakers should focus on overcoming technological bottlenecks rather than simply copying existing products. However, local governments often support new energy products even when they do not work well, which is problematic. (para. 21)(para. 23).

To avoid persistent overcapacity, it is crucial for China to address macroeconomic imbalances. Investment and consumption must be balanced, as excessive consumption without investment or excessive investment without consumption can hinder economic growth. While recent policies have encouraged consumption, the impact may be limited if consumers are already cutting back on spending. The government should consider increasing spending directly through improved social protection, improved benefits for urban residents, or direct cash transfers. (para. 24)(para. 27)(para. 29)Despite all the resistance, direct financial assistance can stimulate aggregate demand, leading to more orders, more production, more employment and potential economic growth. (para. 28).

A complete elimination of macroeconomic imbalances is unlikely in the near future, meaning that trade surpluses will persist. To address these challenges, China should maintain a multilateral and open international trade and investment system, encourage domestic companies to invest abroad, and work with Belt and Road countries to implement a “Green Development Plan for the Global South.” This plan aims to support green transition and economic development in developing countries that need green technology but lack resources. (para. 31)(para. 34)(para. 37)(para. 39).

Huang Yiping, dean of the National School of Development at Peking University, based this article on a speech given in June that has been edited for length and clarity. (para. 40).

AI generated, for reference purposes only