Can China’s slowing economy sustain its tech ambitions?

The recent IMF economic forecast trimmed China’s economic growth rate to 4.6% in 2026 and 4.1% in 2027, from 5% in 2025. This is a stark contrast to the first decade of the 21st century, when China enjoyed an unparalleled double-digit growth rate (an average of 11% between 2001 and 2010, according to IMF data). While it is unrealistic to expect the Chinese economy to maintain a high-speed growth rate forever, the slowdown of the world’s second largest economy carries far-reaching global consequences.

Beijing has tried to sustain economic momentum by shifting the economy from labour-intensive to technology-oriented manufacturing for more than two decades. The most recent policy, China’s 15th Five-Year Plan for National Economic and Social Development (2026-2030), released in March 2026, highlighted the need to energise the economy through enhancing traditional and future industries, developing key technologies, strengthening digital infrastructure, and so forth.  

While the policy to promote technological development could increase productivity and improve economic efficiency, the sluggish economy, due to unspectacular net exports, limited private consumption and ineffective capital investment, is likely to pose a challenge to the government’s long-term financial commitment to transforming the country into one equipped with cutting-edge technology as the main source of economic growth. 

What caused the economic slowdown

Several factors have contributed to the economy’s decline over the last two decades. First and foremost, China has depended on foreign technological input. Although China has become the largest exporter of high-tech goods (such as smartphones, computers, laptops, etc) in the world, it relies heavily on imports of foreign inputs (such as advanced chips) to assemble into final consumption products.

In addition, China relies on foreign intellectual property (IP) in the production of high-tech goods. The charges for IP are one of China’s largest sources of service trade deficit. Hence, despite the enormous merchandise exports, the reliance on foreign goods and services that contain essential technologies reduced China’s net exports (exports minus imports) contribution to the economy.

Second, Chinese households tend to save most of their income for future needs rather than spend on current consumption. China’s gross domestic savings as a percentage of GDP are 43% in 2024, higher than the global average of 27%, according to the World Bank. 

The stagnant property market has dampened private consumption further in recent years. The contribution of government expenditure to economic growth has been constrained due to its mounting debt. As a result, although domestic consumption, including both private and government consumption, made a relatively large contribution to China’s economic growth, it was not strong enough to offset the shrinking net exports and sustain the economic momentum.

The contribution of capital formation from companies has declined over the last decade. The pessimistic economic outlook could have reduced investors’ confidence in investing in China. Investment for exports was also overshadowed by the US's higher tariffs on Chinese goods. The government’s subsidies to boost domestic investment in manufacturing production only resulted in overcapacity and fierce price competition. 

A subdued economy affects high-tech development 

The Chinese government considers control of key technologies imperative not only for modernising industries but also for increasing the country’s resilience against external disruptions in the domestic economy. Applying technology across the civilian economy is key to increasing productivity, reviving private consumption and making Chinese manufactured exports more competitive, laying the foundation for long-term economic prosperity.

To achieve the goal of technological self-reliance, the Chinese government plans to increase its research and development (R&D) expenditure by 7% annually. Nevertheless, if the current economic downturn continues, the country might have difficulty keeping up with the greater R&D expenses in the long term. 

Constantly large financial devotion to R&D could also squeeze the financial allocation for other sectors that are essential for the country, such as social welfare. From 2013 to 2025, China’s expenditure on social security and employment increased significantly by over 200%. The ageing population is likely to add an even greater financial burden to the government in the future.

Apart from increasing R&D expenditure, the government has been subsidising private companies heavily in semiconductors and other high-tech industries. The government’s financial support allowed Chinese companies to compete internationally at the lowest cost. However, significant technological advancement requires more than financial input. Although China made progress in innovation, the tremendous public investment in private businesses also lured people into corruption. 

The continuous US export measures will make technological breakthroughs an even more challenging task. China also risks being excluded from the global supply chain network if the rivalry with the US persists. A non-red supply chain network without China’s involvement is in formation. The effort and investment in high technology could make China the largest legacy chip maker in the world. However, China is not yet leading the chip-making technology. China’s active pursuit of self-reliance has proved to be the least cost-effective and the most time-consuming so far.

Unemployment problems ahead in the AI era

China also intends to modernise the economy through the wider use of artificial intelligence (AI) across industries. Although using AI to replace humans could increase economic efficiency, it could worsen unemployment problems, especially among the youth. The unemployment rate for people aged 25-29 years rose to 7.1% in June 2026, from 6.4% two years ago, according to China’s National Bureau of Statistics. 

As AI becomes more widely adopted, the workforce is likely to shift away from highly repetitive tasks that are easily automated towards roles that are more difficult for AI to replace. However, the number of such jobs is limited. As a result, many workers may face unemployment or be forced to transition into lower-paying occupations.

Technological advancement always causes labour migration and unemployment. In China’s case, the structural changes in China’s labour market began when the wage hike caused several labour-intensive manufacturers to relocate their factories to other developing countries with lower labour costs. 

China’s official statistics show that manufacturing employment has declined over the past decade as workers have shifted into the service sector, even though manufacturing wages remain higher on average than those in services. In other words, more workers are now concentrated in relatively lower-paying service jobs, while fewer remain in better-paid manufacturing positions. As AI accelerates the automation of routine work, this migration could intensify, further widening income inequality.

Technological development vs economic resilience

Technological advancement and economic development are mutually beneficial. Government subsidies to Chinese tech companies and increased R&D spending might help boost China’s economy in the short term. Nonetheless, sustaining high levels of expenditure will require a resilient economy capable of supporting long-term financial commitments.

Hence, China’s economic future may ultimately hinge on which comes first: a technological breakthrough capable of reigniting growth, or an economy resilient enough to sustain moderate growth while developing the critical technologies needed to reduce reliance on foreign suppliers.

Until such breakthroughs materialise, China’s economic outlook is likely to remain subdued, particularly amid persistent tensions with the US. Unless Beijing can identify a sustainable source of long-term growth, relying on massive government spending to drive technological upgrading is unlikely to be fiscally or economically sustainable.

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