It has become fashionable among Western commentators to predict the decline of China’s economic “miracle.” Slowing growth, a troubled real estate sector, and demographic shifts are regularly cited as evidence of malaise. Tensions with the United States – especially under the past two administrations – have further fueled this narrative.

Yet the picture is far more nuanced. Under President Donald Trump, Washington has avoided the most sweeping tariffs and measures that his campaign rhetoric had initially suggested. Three days before his inauguration, Trump remarked: “I anticipate that we will address numerous issues together, starting right away. We talked about trade balance, Fentanyl, TikTok, and various other topics. President Xi and I will do everything we can to make the world more peaceful and secure.” These comments suggest an implicit recognition that China’s economy is evolving, not collapsing – and that the United States, despite its rhetoric, understands Beijing’s structural shifts.

From state-led growth to private-sector dynamism

It is true that China’s early success was driven by export-led manufacturing and state-owned heavy industry. Today, more than 65 of the 69 Chinese companies on the Fortune Global 500 are state-owned. In recent years, Beijing has pushed for SOE mergers to bolster “national champions,” especially in strategic sectors. At a glance, such actions might reinforce the narrative of state dominance.

Yet the ground is clearly shifting. In the late 1990s, state-owned enterprises accounted for more than half of China’s industrial output. Today, they produce roughly 30%. Private firms have become the economy’s engine of job creation and efficiency gains. Private companies now contribute more than 50% of tax revenue and over 60% of GDP. Consumption, long overshadowed by investment and exports, has risen in importance – from 35% of GDP a decade ago to nearly 55% by 2023.

New policies bolster private players by offering greater access to scientific infrastructure and improved financing channels. The objective is clear: preserve strategic state oversight while harnessing the dynamism of the private sector.

DeepSeek: Innovation with Chinese characteristics

An example of this private-sector dynamism is DeepSeek, founded by hedge fund manager Liang Wenfeng. The company recently unveiled its R1 large language model (LLM), a groundbreaking AI system developed on a relatively modest budget. DeepSeek’s trajectory challenges the notion that Chinese firms rely solely on state-driven innovation. Its story instead highlights the private sector’s capacity to overcome domestic hurdles and external restrictions alike.

Lessons from early US-led AI breakthroughs steered DeepSeek toward an innovative path that diverges sharply from Western norms: the company developed novel training methods and “pure reasoning capabilities” without any supervised data, all while rejecting the typical model of massive resource investment seen in America. Operating under hardware constraints imposed by sanctions, DeepSeek created unique optimization techniques to fully utilize less powerful GPUs, a feat that has surprised US researchers. Using just 2,048 Nvidia H800 GPUs and $5.6 million, it trained a model with 671 billion parameters – comparable to efforts by American giants such as OpenAI and Google, which often spend multiples of that amount.

For Beijing, technological self-reliance has long been an economic characteristic of strategic priority. At a recent meeting of entrepreneurs with Premier Li Qiang, China’s second-most powerful leader, the message was blunt: “Concentrate efforts to break through key core technologies.” DeepSeek’s success aligns with this vision. The company’s “local-first” approach – staffing its ranks with PhDs from Chinese universities – illustrates Beijing’s broader strategy to reduce reliance on foreign technology while cultivating homegrown talent. It is part of a broader push toward a self-sustaining innovation ecosystem capable of weathering geopolitical pressures.

From assembly lines to algorithms

Even today, China’s economic evolution is often misconstrued as a move away from manufacturing. In reality, it is a shift up the value chain. The country continues to leverage its vast manufacturing prowess – built over decades – to dominate high-tech industries such as renewable energy, electric vehicles, and AI. DeepSeek’s rise mirrors the broader trajectory of firms like Huawei and ByteDance, which have transformed from imitators into global innovators.

At the same time, China leads the world in AI-related patents and boasts one of the largest pools of graduates in science, technology, engineering and mathematics. Its digital economy accounts for over 40% of GDP, driven by e-commerce giants Alibaba and JD.com. Newcomers like DeepSeek are pushing boundaries further by demonstrating that even global-scale AI can emerge from smaller budgets – if paired with the right mix of technical expertise and business acumen.

One of the most critical, yet sometimes overlooked, aspects of China’s continued economic strength is its unrivaled industrial and production base. This ecosystem, painstakingly built over decades of export-led growth, is not simply about low-cost assembly. It is a vast, integrated network of suppliers, logistics hubs, specialized clusters, and infrastructure that supports a range of high-value industries.

1. Scale and integration
   China’s manufacturing network is unmatched in its breadth and depth. From basic components to sophisticated semiconductor machinery, the country’s supply chain spans virtually every sector. Clusters of specialized suppliers allow companies to iterate quickly, reduce costs, and rapidly scale up production. This structural advantage has proven invaluable in high-growth areas like electric vehicles, batteries, and consumer electronics.
2. Robust infrastructure
   Massive public investments in roads, rails, and ports have created a highly efficient transportation network that streamlines the flow of goods. The ability to move large volumes of materials across vast distances at competitive costs is a key reason China has managed to maintain its status as the “world’s factory.” In turn, this infrastructure underpins the development of cutting-edge sectors—from biotech to AI hardware.
3. Economies of scale and rapid prototyping
   Nowhere else can companies scale from concept to mass production as swiftly or cost-effectively as in China. Thanks to a dense network of component suppliers, R&D centers, and testing facilities, Chinese firms can compress development cycles, a vital advantage in fast-moving fields such as renewables and advanced electronics. This synergy fuels innovation by allowing ideas to be tested, refined, and brought to market quickly.
4. Policy support for upgrading
   Beijing actively promotes the modernization of traditional manufacturing. Initiatives like “Made in China 2025” channel resources into high-tech industries, including robotics, aerospace, and new energy vehicles. These policies also encourage collaboration between SOEs and private firms, catalyzing innovation while safeguarding strategic sectors. The result is a manufacturing ecosystem that is continually moving up the value chain – evident in the success of companies like DeepSeek, which benefit from local suppliers of AI hardware and services.

This industrial backbone is more than a relic of China’s past; it is a fundamental platform for the next phase of its economic transformation. Companies developing large language models, EV batteries, or green technologies can tap into a powerful base of suppliers, technicians, and engineers, enabling them to iterate faster and scale more efficiently than competitors elsewhere. It is this synergy that underpins China’s ability to pivot toward cutting-edge sectors without abandoning its manufacturing roots.

Why the decline narrative falls short

Against this backdrop, predictions of China’s imminent downfall appear short-sighted. The country’s current challenges – such as high youth unemployment and the real estate sector’s recalibration – are significant but not unique. Major economies have navigated similar transitions when reaching comparable stages of development.

When the United States’ GDP was roughly China’s current size, it grew at an average of 2.4% annually. By contrast, China posted growth rates of 5.4% in 2023 and is projected to maintain 4%-5% growth through 2025. These figures, while lower than the double-digit expansions of the past, remain impressive for an economy of China’s scale. And with a GDP per capita of $12,970 – significantly below the U.S. level of $83,000 – China still has ample room for “catch-up” growth, especially as it invests more in education, innovation, and domestic consumption.

Moreover, even incremental growth in a $17 trillion economy adds substantially to global GDP. By embracing structural reforms, promoting private-sector innovation, and unlocking household wealth, Beijing appears committed to laying the groundwork for a more stable economic model – one less vulnerable to external shocks and better aligned with a burgeoning middle class of some 400 million people.

Made in the USA, remade in China

Dismissing China’s economy as having “peaked” overlooks its ongoing metamorphosis. The rise of companies like DeepSeek underscores the dynamism of China’s private sector in driving innovation and overcoming externally imposed constraints. DeepSeek’s achievements exemplify a broader narrative of resilience, where challenges – though significant – are neither insurmountable nor indicative of inevitable decline.

A more nuanced perspective reveals China’s transition from an export-driven, investment-heavy model to one centered on domestic consumption and technological innovation. Far from being abandoned, its vast manufacturing infrastructure is being upgraded and redeployed to support a high-tech future. This evolution is a testament to China’s resilience, ingenuity, and capacity for reinvention – qualities that continue to reshape the possibilities for others in the global economy.

#ChinaEconomy #Innovation #Manufacturing #AI #GlobalGrowth