China’s dual industrial mandate: Autonomy and productivity

This is a thought leadership report issued by S&P Global. This report does not constitute a rating action, neither was it discussed by a rating committee.

The Chinese government is pursuing a “dual mandate” of autonomy and productivity, which involves the simultaneous pursuit of greater technological and supply-chain independence on one hand, and productivity-driven development on the other. In this context, “autonomy” refers to a state-led strategy to enhance self-reliance and reduce exposure to external vulnerabilities — rather than market-driven independence from state direction. This approach marks an evolution from an earlier industrial policy approach that focused more on attracting foreign direct investment and expanding industrial production.

Another defining feature of this approach is elevating national security to a “central organizing principle” of industrial policy. This signals the Chinese government’s intent to improve resilience and reduce foreign reliance through efforts to control critical inputs and innovate domestically.

Global competition is fueling the push for autonomy

The rise in global protectionism and intensifying competition with advanced economies — including the US and the EU — have heightened the urgency behind the push for economic autonomy. These goals are so described as they do not aim for autarky, or cutting-off of trade. They aim to improve self-reliance and reduce foreign dependence, which is often referred to as “de-risking” among policymakers in many advanced economies.

Trade tensions, technology restrictions, and the risk of tariff escalation have led China to accelerate efforts behind these goals. To mitigate the impact of external shocks, the Chinese government is also placing greater emphasis on the development of indigenous capabilities in critical sectors.

Growth imbalances are raising the need for productivity

China’s rapid productivity gains of the 2000s have moderated for more than a decade (Chart 1). Returns are diminishing as the economy approaches the technological frontier. Unless otherwise specified, productivity in this report refers primarily to total factor productivity, rather than labor productivity.

They are also declining as more capital was allocated toward state-owned enterprises and strategic sectors, since many investments did not consistently translate into strong productivity gains. (Chart 2). These trends have increasingly underscored the need for industrial upgrading and technological advancement.

Domestic challenges are driving the urgency for change

China’s property slump has squeezed local government finances and undermined household consumption. At the same time, manufacturing excess capacity has led to declining utilization. Labor market pressures, particularly among younger cohorts, further amplify the urgency to shift toward higher-quality growth

Dual mandate: Autonomy and productivity

In response to the domestic and external pressures, the industrial policy is now anchored by the dual mandate: an emerging two-pillar framework centered on economic autonomy and industrial productivity.

The Chinese government seeks to enhance economic autonomy by reducing exposure to key external vulnerabilities. This includes securing reliable access to essential inputs — raw materials, core components, and critical technologies — to limit dependence on foreign chokepoints.

At the same time, the government seeks to maintain access to overseas markets while gradually reducing reliance on them through policies that aim at steering the economy toward stronger domestic consumption. The policy challenge is to strike a balance between state-led mobilization and market mechanisms that reward efficiency and innovation.

The state is taking an expanded role in directing and funding strategic sectors, particularly those linked to advanced manufacturing and critical technologies. This state-led approach aims to address both immediate vulnerabilities and long-term growth imperatives, moving away from the previous emphasis on sheer economic expansion.

National security is elevated to be a central organizing principle for economic policy. China’s Fourth Plenum in October 2025 and 2026 Government Work Report confirmed this shift, signaling an even greater role for the state in strategic sectors.

While China’s development model has long been state-led, the dual mandate marks a shift in emphasis: from maximizing output growth toward a more selective approach that prioritizes strategic control, productivity, and risk management. Policy tools increasingly differentiate between frontier technologies, where state support is concentrated, and mature sectors, where market discipline and consolidation are encouraged. Whether this approach will succeed is an open question.

Strategic pillars of industrial planning

Technological self-sufficiency and domestic substitution

The government is deploying large-scale funding, policy incentives, and regulatory support to foster domestically developed substitutes in pursuit of long-term resilience, even where efficiency tradeoffs exist.

This is evident in the rapid scaling of “new quality productive forces” — including domestic semiconductor, AI hardware capacity, and emerging industries such as energy and aerospace — as well as the push for breakthroughs in “future technologies” of quantum technology and biomanufacturing — illustrating the autonomy pillar of the dual mandate.

Resource security: Critical inputs and minerals

Securing access to critical minerals is a core component of the autonomy pillar of the dual mandate. China is expanding diplomatic efforts and overseas investments in mineral-rich regions, building strategic reserves, and promoting technological advancements in extraction and processing to safeguard supply chains. Export license controls on rare earth elements and related technologies not only aim at giving Chinese firms leverage in expanding overseas, but also creating strategic chokepoints and external dependencies.

However, the US is countering this through international partnerships, investment incentives, and trade negotiations aimed at diversifying supply and building domestic and allied processing capabilities. The competition is embedded in broader geopolitical tensions, with ongoing risks of policy shifts and trade disruptions influencing the global critical minerals landscape.

‘Whole-of-nation’ approach to innovation

China’s “whole-of-nation” system seeks to coordinate resources across government, state-owned enterprises, private firms, and research institutions to accelerate progress in priority sectors.

The central government promotes alignment across ministries, while provincial governments tailor directives to local strengths. For example, Beijing focuses on advanced technology, Shanghai on semiconductors and biomedicine, and Shenzhen on AI and EVs. This model facilitates the state in taking on higher-risk investments and supports long-term strategic objectives, leveraging both central and local government strengths.

Chinese government-backed investment funds — targeted to reach about $2 trillion — will be central to upgrading the country’s industrial base. While these funds provide large-scale, long-term “patient capital” for high-risk, early-stage tech and strategic manufacturing projects, many are administered by local governments with varying capacities and oversight, raising concerns about potential inefficiencies and capital misallocation.

According to industry sources, nearly 90% of Chinese private equity funding as of end-2024 was government-related, channeling resources into high-tech and high-value-added sectors such as advanced manufacturing, AI, robotics, new materials, green energy, biomedicine, and semiconductors.

Much of the financial and execution risk resides with local governments and their financing vehicles and state-linked investment platforms, while the central government provides direction and backstops systemic stability.

Private capital participates selectively where incentives and expected returns align. The state-led approach, role of non-economic (national security) considerations and varying expertise among local governments may make it challenging to achieve the efficiency and productivity objectives.

Trade and global partnerships

This pillar supports industrial policy by helping secure external demand, inputs, and technological linkages that domestic substitution alone cannot provide. China is leveraging initiatives such as the Belt and Road Initiative (BRI), Regional Comprehensive Economic Partnership (RCEP), and the upgraded China-ASEAN Free Trade Area (CAFTA) (Chart 3).

At least 10 free trade agreements (FTAs) are under negotiation and eight more are under consideration, including with countries in Latin America, Africa, and Europe. These multilateral mechanisms focus on trade-related infrastructure and regional development, with China strengthening economic ties and engaging in the global investment and supply chain diversification (Chart 4).

These shifts in China’s industrial playbook are all geared toward advancing the dual mandate of greater technological autonomy and higher productivity, rather than broad capacity expansion.

Industrial policy will continue to accelerate autonomy-focused investment across strategic technologies, supported by “patient capital” in frontier sectors and a gradual pivot toward consolidation, market discipline, and efficiency in mature industries. The durability of this policy shift will hinge on several success conditions: better capitalized consolidation in overcapacity segments, stricter investment discipline at the local level, social policy levers that lift household consumption, and external market access that remains sufficiently open to absorb surpluses.

Emerging industries: State-led acceleration

In emerging sectors such as AI, green energy, and quantum technology, Beijing leans into the "autonomy" side of the dual mandate by using state-led capital and policy support to build domestic champions in technologies where foreign dependence is still high.

Government-backed funds, targeted subsidies, and preferential policies are designed to scale these industries rapidly, with the expectation that they will become engines of future growth and global competitiveness.

The government’s willingness to tolerate lower manufacturing yields for AI processors allows rapid iteration and scaling of technological advances that would not otherwise be commercially viable. Preferential procurement contracts and energy subsidies encourage data centers and state-backed tech firms to adopt local hardware, expanding the market share for domestic champions.

‘AI-plus’ initiative

Unveiled in August 2025, the “AI-plus” initiative aims for deep AI integration in six key areas and 70% penetration of intelligent terminals by 2027. Policy emphasis is placed on achieving breakthroughs in core AI technologies, including advanced semiconductors to improve yields and meet domestic demand for large language model ecosystems, as well as wider and deeper AI adoption to improve productivity. This initiative is a test case for how China intends to use industrial policy to lock in both technological sovereignty and productivity improvements across the real economy.

In the near term, large-scale AI development will likely focus on non-strategic sectors — such as manufacturing, healthcare, education and consumer services — where rapid integration can spur productivity and economic growth per China’s industrial policy objectives. To accelerate this, the government will likely expand fiscal incentives (e.g., tax breaks, venture capital access, and the development of a unified national data markets) to attract private sector investment in AI R&D. However, adoption in strategically sensitive areas — such as defense, infrastructure, and governance — will likely advance more cautiously, with strict oversight to ensure state security and control. This approach is consistent with government attempts to harmonize private-sector innovation with national security priorities.

China’s private sector is large in scale but operates in a system where state-linked finance and policy priorities shape access to capital and sectoral direction. Private firms dominate employment and significant value-added activities, yet participation in frontier technologies often hinges on alignment with government-guided funds and procurement.

These opportunities coexist with execution and coordination risks that could influence both elements of the dual policy mandate — namely, the pursuit of greater technological autonomy and higher productivity growth.

Industrial policy in transition

Rapid technological change introduces uncertainty around demand and investment returns. Advances in battery chemistry or magnet design, for example, could alter reliance on specific rare earths and other materials, requiring adjustments in resource strategies. The emphasis on maintaining industrial self-sufficiency may reduce policy flexibility if technological pathways shift unexpectedly.

Policy prioritization may also lead to uneven resource allocation, as funding concentrates in designated strategic sectors. This creates opportunity costs for industries outside priority categories, potentially reshaping the broader balance of industrial activity.

Balancing policy direction and market performance

An expanded government role can strengthen coordination in strategic industries, yet it also introduces operational challenges. Overlapping support programs can encourage capacity expansion over profitability, as seen in segments such as solar modules and EVs.

Persistent oversupply reflects incentives embedded in a supply-centric growth model — local performance metrics, state-preferred finance, and a policy tilt toward capacity expansion in strategic sectors. Authorities are signaling more discipline through capacity rationalization, consolidation, and anti-‘involution’ measures, yet sustainable rebalancing likely requires stronger demand-side reforms, such as income distribution, social safety nets, and more market-based capital allocation, to lift household consumption and investment efficiency over time.

Such dynamics may compress margins and reduce available resources for research and development. At the same time, administrative guidance mechanisms may slow the market exit of weaker firms and influence pricing dynamics, potentially affecting overall competitiveness and investment conditions.

The key policy question is how to align industrial coordination with market-based incentives that promote efficiency and innovation. Over time, adjustments in corporate governance, market mechanisms, and local performance evaluation systems could improve resource allocation and support higher-quality growth. There have been ongoing efforts from the government to guide restructuring and consolidation within manufacturing segments such as renewable energy and automotive, aimed at improving long-term competitiveness.

External environment and global exposure

Industrial upgrading remains closely linked to China’s external economic relations. Evolving trade policies, export controls, and investment screening frameworks are creating new sources of uncertainty for supply chains and financing decisions. Shifts in external regulatory environments — including tariff adjustments or technologyspecific restrictions — can raise costs for projects linked to critical minerals or advanced manufacturing.

A core tension within the dual mandate lies between the pursuit of greater domestic autonomy and continued reliance on external demand to absorb industrial surpluses. Soft household demand and recurrent surpluses heighten China’s reliance on exports to absorb capacity, amplifying friction with trading partners as strategic sectors scale. Industrial policy can mitigate chokepoint risks, but without stronger domestic absorption, it may reinforce external tensions through price competition and market-share shifts in sensitive product categories.

Trading partners have introduced various protective trade measures across industries sensitive to price competition, including machinery, electronics, and light manufacturing goods. China’s own export licensing and control frameworks similarly increase compliance requirements for global firms, prompting supply chain diversification in some markets.

The overall trajectory of industrial policy will hinge on the authorities’ ability to manage these technological and external challenges while maintaining momentum in upgrading and structural reform.