China’s Next-Generation Industrial Policy: Pervasive State Direction and Global Consequences

Executive Summary

A decade after Made in China 2025, China is not stepping back from state-directed industrial development. According to a new report by Rhodium Group, prepared with a preface by the U.S. Chamber of Commerce, Beijing is doubling down. The country’s next-generation industrial policy is broader in scope, more systematic in execution, and more consequential for global markets. It now covers not only strategic emerging industries but also mature sectors, core supply chain inputs, services, and frontier technologies. This expansion is accelerating China’s trade dominance, deepening foreign dependence on Chinese supply chains, and prompting a strategic recalibration across global economies.

Introduction

The report, “China’s Next-Generation Industrial Policy,” authored by Camille Boullenois, Malcolm Black, and Alessia Caruso, assesses how China’s industrial strategy has evolved since the introduction of Made in China 2025 (MIC25) in 2015. It argues that China has moved from targeted sectoral intervention to what the authors describe as an “industrial policy of everything.” This shift carries major implications for global competition, technology commercialization, and supply chain architecture.

The assessment draws on a decade of independent research, including early translations of China’s foundational “Green Book” planning document by the U.S. Chamber of Commerce, and subsequent analyses by think tanks including MERICS and the European Union Chamber of Commerce in China. These earlier reports warned that MIC25 would create a state-backed competitor with global reach. A decade later, the evidence largely supports those warnings, although progress has been uneven across high-technology sectors.

Background: From Made in China 2025 to a Pervasive Industrial Strategy

Made in China 2025 focused on ten strategic emerging sectors, with specific localization targets for core components and industrial equipment. Rhodium Group’s recent assessment, “Was Made in China 2025 Successful?”, found that China made substantial progress in reducing import dependence and building globally competitive positions in areas such as new energy vehicles and information and communications equipment. However, significant gaps remain in high-end semiconductors, advanced aerospace, biomedicine, and other advanced technology areas.

The next-generation industrial policy builds on this partial success. Rather than retreating from state intervention, Beijing is expanding its reach. The authors observe that policy frameworks now extend across:

• Upstream inputs, including critical minerals, wafers, and magnets, where China already holds dominant positions;
• Industrial equipment and advanced manufacturing capabilities;
• Downstream applications and services, such as software, data processing, and drug development;
• Frontier technology domains, including artificial intelligence, quantum computing, and future energy systems.

This represents a qualitative shift in industrial strategy. Policymakers are no longer treating frontier technologies solely as R&D priorities. They are actively using public procurement, state-owned enterprises, and demand-side policies to accelerate commercialization and domestic adoption.

Main Analysis: An Industrial Policy of Everything

A More Systemic and Pervasive Approach

China’s industrial policy now touches almost every major sector and its underlying supply chains. In mature industries facing overcapacity and price pressure, Beijing is not pursuing structural capacity reduction. Instead, it is supporting companies as they upgrade production technologies, lower costs, and gain market share. The authors note that while authorities acknowledge the need to address imbalances, policy responses have so far fallen short of the structural reforms required to shift China’s growth model. Consumption-boosting measures remain limited, leaving underlying demand weaknesses unaddressed.

The expansion into services is a notable departure from earlier industrial policy. Software, data processing, and drug development have become areas of visible state support. At the same time, the leadership sees the current period as a strategic window to pull ahead in emerging technologies. Artificial intelligence has emerged as a central pillar, but the broader pattern is a pivot toward demand creation. Public procurement and state-owned enterprise demand are being used to create markets for new products at scale.

Refining Policy Under Macroeconomic Constraints

China’s industrial expansion is happening within a more constrained economic environment. Slowing growth, weak domestic demand, rising fiscal pressures, and declining capital efficiency are all limiting the resources available for state intervention. Beijing’s response, according to the report, is not to reduce the scope of industrial policy but to centralize and tighten control over financial resources.

This includes:

• Stronger central control over fiscal spending and local government subsidies;
• Directed bank lending through targeted relending facilities and regulatory guidance;
• Consolidation of government guidance funds and closer alignment with national strategic priorities;
• Greater non-market influence over the operations of banks, state-owned enterprises, and capital markets.

This recentralization may prolong the effectiveness of industrial policy in the short term, but it also risks reducing the efficiency of capital allocation across China’s economy. The authors point to early signs of strain: declining corporate profitability, weakening private investment, and slower R&D growth in some key sectors. Over time, this dynamic could weigh on productivity and long-term growth, even as it supports industrial gains.

Accelerating Global Impact

The global consequences of China’s industrial policy have intensified over the past three years. The combination of sustained policy support and weak domestic demand has driven a rapid expansion of China’s manufacturing trade surplus. The report notes that since 2019, the surplus in manufactured goods has roughly doubled to around two trillion dollars, a trend many observers describe as a “China Shock 2.0.”

This trade dominance is accompanied by deepening foreign dependencies on Chinese supply chains. Beijing is increasingly deploying policy tools to entrench its position in global value chains and to counter foreign diversification strategies. Chinese firms are also expanding globally at a faster pace. The result is a more complex competitive landscape for companies and governments around the world.

Innovation Impact

The evolution of China’s industrial policy has important implications for technology development and innovation ecosystems:

• Technology development: China is directing substantial state resources into AI, quantum computing, and future energy systems. This accelerates domestic innovation, but also raises contestability concerns in global markets.
• Research translation: Demand-side policy tools such as public procurement close the gap between laboratory research and commercial deployment. This may shorten commercialization cycles for state-supported technologies.
• Industrial transformation: Mature industries are being pushed toward higher-value segments rather than being allowed to decline. This creates competitive pressure on established industrial economies.
• Investment landscape: Consolidation of state investment funds and greater policy direction in capital markets change the risk/return profile for private investors, both domestic and international.
• Global supply chains: Foreign dependence on Chinese inputs creates vulnerabilities and reshapes corporate sourcing strategies.

Strategic Insights

Technology Readiness and Competitive Dynamics

China’s industrial policy is not uniformly successful. The report acknowledges persistent weaknesses in high-end semiconductors, advanced aerospace, and biomedicine. This suggests that despite broad state support, some technology gaps remain difficult to close. Companies and policymakers should assess sector-specific readiness rather than treating China’s industrial strategy as a monolith.

Commercial Opportunities and Strategic Risks

For global firms, the expansion of Chinese industrial policy creates both opportunities and risks. On one hand, Chinese demand for advanced equipment and inputs may continue to grow. On the other hand, localization policies may increasingly limit market access. Competitive strategy must account for sector-specific policy trajectories.

Regulatory and Governance Considerations

The recentralization of financial resources and the use of non-market steering mechanisms may conflict with established principles of market competition. Multilateral institutions and trading partners will need to evaluate whether current rules adequately address state-directed industrial competition.

The Role of Innovation Ecosystems

China’s industrial policy is explicitly strengthening domestic innovation ecosystems, from guidance funds to public procurement. Other economies may need to consider how their own innovation ecosystems respond to a more systematic competitor.

Future Outlook

Over the next five to ten years, China’s industrial policy is likely to continue expanding in scope and consequence. Several trends bear watching:

• Artificial intelligence: AI is now a central pillar of industrial policy. Expect greater state investment in AI infrastructure, computing power, enterprise adoption, and governance frameworks.
• Frontier technologies: Quantum computing, synthetic biology, and advanced energy systems are likely to receive increased state-directed funding and commercialization support.
• Supply chain entrenchment: China will likely seek to extend its dominance in upstream inputs and industrial equipment, deepening foreign dependency in new areas.
• Demand creation: Public procurement and state-owned enterprise adoption will become more important tools for deploying new technologies at scale.
• Macroeconomic constraints: Fiscal pressures and debt levels may force further centralization of resources, potentially reducing the efficiency of state-directed investment while maintaining strategic focus.
• Global competition: The response from other economies will shape the degree of market distortion and supply chain fragmentation. Innovation policy is becoming a central dimension of global economic competition.

The long-term question is whether China’s next-generation industrial policy can sustain growth and innovation without undermining the market mechanisms that underpin productivity. The report suggests that the path is not without friction. For now, however, Beijing appears committed to a more expansive state role in shaping the technological and industrial future.

Key Takeaways

• China’s industrial policy has evolved from targeted sectoral plans to an all-encompassing approach covering mature industries, core inputs, services, and frontier technologies.
• Beijing is centralizing financial resources to maintain the potency of industrial policy despite macroeconomic constraints.
• The manufacturing trade surplus has roughly doubled since 2019 to around $2 trillion, intensifying what some call “China Shock 2.0.”
• Persistent gaps remain in high-end semiconductors, advanced aerospace, and biomedicine, indicating uneven technological progress.
• Demand-side tools such as public procurement and SOE adoption are increasingly used to commercialize emerging technologies, especially AI.

Conclusion

China’s next-generation industrial policy represents a decisive shift toward broader and more systematic state intervention. A decade after Made in China 2025, the world faces a more competitive and more state-directed Chinese economy. The global implications are already visible in trade surpluses, supply chain dependencies, and the global expansion of Chinese companies. For decision-makers in business and government, the report reinforces the need for sustained attention and evidence-based strategy. The window for effective response may be finite.

Sources

• Rhodium Group: China’s Next-Generation Industrial Policy
• U.S. Chamber of Commerce: Was Made in China 2025 Successful?