URGENT UPDATE: Chinese leader Xi Jinping has raised critical questions about China’s unwavering focus on high-tech sectors like artificial intelligence (AI) and electric vehicles (EVs). During a pivotal meeting on urban development in Beijing, Xi challenged whether all provinces should pursue the same industrial dreams, signaling a possible shift in China’s economic strategy.
This unexpected statement comes as China’s economy faces significant hurdles, including fierce price wars and an alarming level of industry overcapacity. Xi pointedly asked, “Do all provinces in the country have to develop industries in these areas?” reflecting a growing concern that the nation’s singular focus may be backfiring both economically and politically.
Recent developments indicate that the Chinese government is increasingly aware of the intensive hyper-competition threatening its economic stability. The People’s Daily reported on Thursday that Xi’s remarks highlight a more cautious approach as China grapples with “involutionary” competition that has plagued its high-tech sectors.
Specifically, the EV industry is witnessing an intense price war that has squeezed profit margins and raised alarms about sustainability. Beijing is now advocating for market consolidation and taking action against practices like compelling businesses to sell below-cost, as noted by Lynn Song, ING’s chief economist for Greater China.
Adding to the urgency, China’s producer price index (PPI) plummeted 3.6% in June, marking the steepest decline in nearly two years. This deflationary pressure presents a dual threat: it not only undermines local businesses but also risks heightening global trade tensions as cheaper Chinese exports flood international markets.
Despite a reported GDP growth of 5.3% in the first half of 2023, much of this momentum is attributed to export frontloading and temporary consumption subsidies in anticipation of new U.S. tariffs. However, beneath these headline figures lies a struggling economy—consumer confidence remains low, and youth unemployment continues to rise.
Economists at Nomura noted that persistent PPI deflation has finally captured the attention of China’s leadership, suggesting that significant changes could be on the horizon. As the country reassesses its industrial strategy, the implications for the global market and local economies could be profound.
As this situation develops, all eyes will be on how China’s leadership will respond to these challenges and whether they will pivot away from their current high-tech focus. The international community is watching closely, as the repercussions of these decisions are likely to extend beyond China’s borders.
Stay tuned for updates on this critical economic shift as authorities work to navigate the complexities of a rapidly changing landscape in technology and trade.
