China’s Alternative Logic: travels in an innovation economy

Nangang Smart Center - the intelligent manufacturing hub of Nanjing Steel

In China recently, engaging counterparts across the country’s tech space, I was struck by a paradox central to debates over the country’s economic future. On one hand, I encountered great confidence in China’s resilience and even in its lead over the U.S. in important fields. For example, one think-tank analyst remarked that China’s innovation model was already ahead in cost efficiency, its supporting energy system, and even possibly in human capital. On the other hand, some acknowledged massive challenges such as youth unemployment and the stubborn lack of consumer spending.

Such contrasts mirror debates over China’s economy: that China benefits from a unique economic system following its own logic versus those who believe its unemployment, overcapacity, and weak consumption show it will eventually succumb to the laws of orthodoxy. Many economists have long argued that sustainable growth requires 'rebalancing' from massive, state-driven investment toward household consumption. Yet despite the property market crash and widespread overcapacity, the government seems to be doubling down on investment - only now the targets are high-tech frontiers like robotics and AI, the so-called ‘new quality productive forces’ championed by Xi Jinping. The recent Fourth Plenum discussions of the next Five-Year Plan confirmed this: China will prioritise high-tech innovation, self-reliance, and security over short-term consumption growth. The question is not simply whether China can sustain growth, but whether its distinctive fusion of market adaptation and state direction has reached its limits or remains capable of reinvention.

Broadly, the literature on China’s economy divides between those who view its problems through orthodox economics and those who see a system governed by a different logic. Representing the first camp, observers like Michael Pettis interpret China’s slowdown as the inevitable result of structural imbalances: over-reliance on state-directed investment has produced diminishing returns, rising debt, and weak household demand. The very mechanisms that fuelled China’s rise - cheap credit and local-government investment vehicles - have now trapped it in a cycle of overcapacity and under-consumption. The solution lies in allowing market forces to reallocate capital and resources to the private sector and consumers, even at the cost of slower short-term growth.

By contrast, scholars such as Barry Naughton, Sarah Eaton, and Sebastian Heilmann argue that China’s trajectory is not a distorted version of capitalism but a coherent system with its own rationale. Economic efficiency is often sacrificed for political and strategic goals. Naughton describes a hybrid economy in which markets exist but the state retains decisive influence over capital and direction, while Eaton shows how since the 2008–09 stimulus the state’s role in coordinating finance, technology, and industry has only expanded. Heilmann’s ‘Red Swan’ thesis argues that China’s mode of innovation encourages major experimentation within the limits of political control.

From such perspectives, what might seem inefficient to an orthodox economist can be accepted in the interests of national security, employment stability, or technological sovereignty. The state’s centrality is therefore not a distortion but an essential feature of a system that prioritises political security and strategic autonomy over economic optimisation. This logic implicitly challenges a decades-long assumption of Western economic thought: that efficiency and growth are the highest policy goals. Much of the post-war Western order has been governed by what some call the 'tyranny of GDP,’ in which governments are judged above all by growth and productivity figures. Though dissenters have proposed ‘green GDP’ or well-being indices, China’s case is distinctive because it is not a marginal critique but a powerful state asserting, through its performance, that credible alternatives exist to the efficiency-centred model of the Western mainstream.

The debate has sharpened as China’s difficulties mount. While some argue that trade-offs can no longer be postponed, Beijing itself is doubling down on its own model. Chinese policymakers believe the shift to advanced manufacturing and digital infrastructure is precisely how the system renews itself. The emphasis on ‘high-quality development’ represents a bet that investment-led growth can continue if redirected toward technologies that enhance national power.

This conviction was evident throughout my trip, especially in discussions comparing Chinese and American innovation models. Chinese officials and business figures repeatedly highlighted the state’s role in providing stable funding, coordination, and long-term vision and contrasted this with what they saw as the more chaotic U.S. approach. For them, state support was not a drag but an enabler, ensuring innovation serves strategic goals such as industrial self-reliance and national security rather than purely commercial gain.

The logic of scale and strategic inefficiency was visible across several sectors I encountered. In robotics, China has become both the world’s largest market and an increasingly sophisticated producer, backed by immense state support. The rationale is twofold: to offset demographic decline through automation and to achieve technological self-reliance. At one innovation showroom, the first humanoid robot to complete a marathon without falling over was offered as a symbol of that ambition. From an orthodox standpoint, the sector’s over-investment and dependence on foreign high-end components reflect misallocation - too many firms on thin margins. Yet within China’s policy logic, this ‘strategic redundancy’ is deliberate. By flooding the market with capital and demand, the state builds scale and knowledge that may close technological gaps. In robotics, as in semiconductors, inefficiency is the price of sovereignty.

A similar pattern was visible in the so-called ‘low-altitude economy’ - a term covering economic activity below about 1,000 metres. It includes uncrewed aerial vehicles (UAVs) for logistics, inspection, and mapping, and emerging passenger craft. These technologies are being explored worldwide, but China’s state-orchestrated approach stands out: authorities designate pilot zones, reform airspace rules, and standardise infrastructure to accelerate adoption. In Hefei, I saw a demonstration of an uncrewed passenger vehicle designed for park use, and in Nanjing a local college leader described how drones will carry goods up and down steep tourist mountains. While commercial viability remains tentative because regulation and airspace control still limit large-scale operations, the sector shows how rapid mobilisation and experimentation are achieved through state coordination.

At Nanjing Steel, this approach is extended into heavy industry. The ‘Smart Nanjing Steel’ programme integrates AI-driven process control and partners with battery-maker CATL on zero-carbon logistics. Recognised nationally for its adoption of new tech the company exemplifies the fusion of digitalisation and decarbonisation under state coordination. This is the essence of the ‘new quality productive forces’: a tech-industrial model pursuing strategic autonomy and energy security. For critics, this remains a costly top-down experiment, but for advocates it is proof that China still modernises on its own terms.

Some Chinese economists have urged stronger household support and higher public spending to boost consumption. Yet the government remains committed to its own course, emphasising the ‘upgrading of productive forces.’ This fits China’s ideological frame: economic management as a tool of national rejuvenation. ‘Security is the prerequisite for development, and development the guarantee for security,’ declared China Daily after the Fourth Plenum.  One Xi Jinping quote I spotted at a tech incubator summed up the mood: ‘We must rely on innovation, and unceasingly increase the level of innovation and upgrade our industries to medium and high levels. We must uphold our strategy of opening up, but while maintaining that opening we must also promote independent innovation.’

This trip revealed stark contrasts: automation and AI adoption symbolised dramatic progress beneath the shadow of the property slump, youth unemployment and local debt. China’s leaders hope that tech innovation, not liberalisation, will power the next stage of development. Its robotics factories, drone corridors, and smart steel plants all testify to a belief that coordination and learning-by-doing can substitute for textbook efficiency. Whether that belief can withstand demographic decline, financial strain, and global pushback will define the next phase of China’s rise.

In global discourse, China’s model is increasingly framed against that of the United States: the U.S. as a private-sector-driven innovator reliant on venture capital and market selection, China as a state-coordinated system mobilising resources through industrial policy and tolerating overcapacity. This raises an important question: do Chinese elites see their model as a deviation from orthodoxy that must one day be corrected—or as a deliberate, sustainable alternative? The answer seems mixed.

At one forum, Chinese scholars did not forcefully defend the 'China model.’ I perceived a slight sense that the state’s dominance, though effective, could one day constrain creativity. Yet at the official level, confidence remains firm. The recent Xinhua Research Institute report on 'mind colonisation' argued that the United States has created a false consensus that its own economic model was universally valid. The implication is clear: Beijing believes that economics need not be ‘one-size-fits-all’ and that China’s success shows a viable alternative.

This suggests Beijing will not shift course dramatically. Just as Soviet leaders once insisted that U.S. capitalism’s crisis was inevitable - because their ideology predicted it - many within China’s system seem convinced that their hybrid model remains both viable and superior. As was asked at one discussion I attended: will there be an inflection point or not? For now, China’s leadership plainly believes there will not.

The China I saw last month was neither collapsing nor triumphant. Beijing remains convinced of the power of planning, is experimenting within its own framework, and using innovation as both economic policy and political narrative. Orthodoxy may insist that the numbers no longer add up, but China’s alternative logic still commands faith within the system. If that faith proves justified, China will not only sustain its material rise but also overturn one of the deepest assumptions in Western economic thought: that an active state necessarily inhibits innovation. China’s experiment suggests the opposite: planning and dynamism can reinforce each other, forcing the world to rethink what makes an economy work.