Between July 2 and July 13, material related to the ruling appeared in an estimated 220,000 posts, reposts, and comments on the Chinese internet, according to a Chinese media-monitoring analysis. Topic pages on Weibo, China’s equivalent of Twitter, recorded more than 400 million aggregate views.

As criticism mounted, the stories surrounding Louis Vuitton became much more dramatic — and more bizarre. Widely shared posts claimed that the company had sued a Chinese noodle shop over its décor and a residential compound for its building design. Both accounts were later shown to be false.

More recently, social-media accounts claimed that celebrities had boycotted a Louis Vuitton fashion show in Shanghai. That story is also reportedly under question.

Louis Vuitton, meanwhile, has remained conspicuously silent throughout the controversy, leaving one of the world’s most recognisable luxury brands with little visible role in shaping the narrative around its conduct in a crucial market. The world’s second largest economy remains a “cornerstone of luxury market growth” this year, according to Bain.

A Trademark Dispute Turned into Cultural Ownership Debate

At the centre of the case was Molly Tea’s use of a black four-petal emblem across its shopfronts, drinks packaging, online accounts, and promotional materials.

On 19 June, a court in Suzhou found that Molly Tea had infringed seven registered flower-device trademarks owned by Louis Vuitton. It ordered the chain to pay 10 million yuan in damages and a further 300,000 yuan in enforcement costs, and to publish statements on six online platforms. Molly Tea has said it will appeal.

The court said it considered whether the resemblance between Louis Vuitton’s classic four-petal motif and Molly Tea’s emblem could lead consumers to believe that the two companies had entered into a licensing agreement, collaboration, or other commercial relationship.

Much of the online response, however, focused on whether Louis Vuitton was using trademark law to claim control over motifs from China’s visual heritage. Users circulated side-by-side comparisons of its flower designs with baoxianghua, a Buddhist floral motif, as well as traditional Chinese patterns, ancient musical instruments, garden windows, and temple decorations.

The comparisons also became a source of ridicule. Images circulated online comparing Louis Vuitton’s Monogram flowers with ventilation grilles and tiles found in older public toilets, giving rise to the nickname “toilet bag”. A separate video purported to show the letters “LV” on a public toilet in Henan, suggesting that they stood for “lavatory”. Local authorities later said the footage had been digitally altered, and that the person responsible was given an administrative penalty.

The reaction reflected a broader shift in Chinese public sentiment in recent years, as growing cultural confidence has increasingly been accompanied by a more assertive sense of national identity. In disputes involving foreign brands and traditional symbols, questions of trademark ownership can quickly become entangled with concerns over cultural appropriation, national dignity, and the right to define China’s own heritage.

Many users accused Louis Vuitton of “claiming Chinese traditional motifs as its own, then suing a domestic brand.” Others said that it was “bullying Chinese ancients for failing to register trademarks.”

In a commentary, the People’s Daily took a more moderate position. It argued that companies may build trademarks from traditional motifs, but that such rights should have clear limits, and called for more precise boundaries on commercial claims to traditional Chinese patterns and aesthetic elements.

Rumours fill the information gap

The controversy soon spread to businesses and disputes with little or no connection to the Molly Tea case.

Reports that Louis Vuitton had filed for judicial review of a separate decision by China’s intellectual-property regulator were recast online as the company “suing the Chinese government” and challenging China’s authority over its own cultural symbols. Such court challenges, however, are a standard legal procedure for companies seeking to overturn administrative trademark decisions in China.

In Nanjing, a lawsuit over another restaurant’s use of four-petal motifs in its decorations and plate design was misreported as action against a seller of duck-blood noodles, a popular local staple.

In Xiamen, a pending case against a shop accused of selling counterfeit Louis Vuitton goods — and against property managers accused of failing to supervise it — became a claim that the company had sued a residential developer over four-petal carvings on its buildings.

A Louis Vuitton event in Shanghai on 25 July, described online as a major runway show, was similarly said to have been shunned by Chinese celebrities seeking to avoid association with the brand. However, the Chinese edition of Fashion Network, citing an industry source, said there had been no major public show, only a routine private presentation for clients.

Louis Vuitton has made no public statement on the Molly Tea case or the wider backlash. Its official accounts on Weibo and Xiaohongshu — the latter a popular lifestyle app — had previously been updated regularly but have posted nothing since 1 July. The prolonged silence has further raised questions about the brand’s handling of the controversy.

The backlash in China comes as LVMH and its controlling family face scrutiny at home. In France, Le Monde has published a six-part investigation into founder Bernard Arnault’s political and media influence, as well as the unresolved question of succession within the group.

For Molly Tea, though, the episode appears to have provided an unexpected marketing windfall.

Chinese media reported that the company’s Douyin [TikTok’s Chinese sister app] account gained about 350,000 followers in the days after the ruling and that some branches experienced a surge in orders.

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One constraint is the country’s skewed sex ratio: among those born between 2006 and 2010, there were more than 120 boys for every 100 girls. As these cohorts enter their prime marriage and childbearing years, the imbalance is likely to further depress marriages and births. At the same time, women have come to make up a growing share of the highly educated population, reaching about 53 per cent in 2020, creating partner shortages at both ends of the educational spectrum.

Meanwhile, China’s migrant workforce is ageing, the rural labour pool that powered decades of industrialisation is nearing exhaustion, and population growth is becoming concentrated in a smaller number of productive metropolitan regions. This risks leaving transport infrastructure underused as ageing widens social-security finances.

The report is authored by Li Xunlei, Chief Economist at Zhongtai Financial International Limited; Tang Jun, an FOF fund manager at Zhongtai Asset Management; and Li Qianyun, head of Zhongtai’s fund research team. It was posted on 12 July 2026 on 李迅雷金融与投资 Finance & Investment with Li Xunlei, Li’s personal WeChat blog.

Li has kindly authorised and reviewed the translation.

—Yuxuan Jia

中国人口往何处去？（2026年版）

Where Is China’s Population Headed? (2026 Edition)

Abstract

China’s population will age rapidly between now and 2050, and this trajectory is largely unavoidable. Even a substantial rebound in fertility would do little to slow the acceleration of population aging. By 2031, people aged 65 and over are projected to account for 20 percent of the population, placing China among the world’s super-aged societies. By around 2050, that share is expected to reach 29 percent — roughly the current level in Japan, the world’s most aged society.

Gender imbalance may become an important constraint on any recovery in fertility. Among children born between 2006 and 2015, the male-to-female ratio remained above 115:100. Within five years, this imbalance will likely have a significant and lasting impact on birth rates. At the same time, women have come to make up a growing share of the highly educated population, reaching about 53 per cent in 2020, even though women account for less than half of the population overall. This implies an even sharper gender imbalance among people with lower levels of education.

Policies designed to encourage childbirth are likely to raise the number of births to some extent, but they will have little effect on the pace of population ageing in the near term. China still has a very large population and has already entered a period of accelerating ageing. Even if fertility rises, any meaningful reduction in the old-age share or the dependency ratio is unlikely to become visible until after 2050.

The decline in China’s total population is already clear. Under the baseline scenario, the population is projected to fall below 1.3 billion in 2037, below 1.2 billion around 2046, and below 1 billion around 2060. By 2100, it may fall below 500 million. The dependency ratio is projected to reach 47 per cent by 2035 and 62 per cent by 2050.

In 2025, China’s migrant workers had an average age of 43.3, and 32 per cent were aged 50 or above. The number who age out of migrant work and return to their home areas will continue to rise. The rural labour pool available for migration to cities is therefore nearing exhaustion. Future population growth in large cities will increasingly come from redistribution within the urban system and from the continued concentration of people in major metropolitan areas. Excluding natural population growth, net population inflows are increasingly concentrated in Guangdong, Zhejiang, and Jiangsu.

Among 337 Chinese cities classified as fifth-tier or above, 185 recorded a decline in their resident population between 2024 and 2025 — more than half of the total. (Because city-level data remain incomplete, these figures have not been adjusted for natural population change.) A further 65 cities had not yet released resident-population data for 2025.

A vibrant private sector and digital economy have made some regions especially attractive to migrants. Zhejiang is one of China’s most economically dynamic provinces and has recorded the fastest growth in net population inflows. Excluding natural population change, its resident population increased through net migration by 7.6 per cent over the past eight years, far faster than in any other province. The Yangtze River Delta is already relatively aged, so its population growth depends heavily on inward migration. In 2025, after adjusting for natural population decline, Zhejiang and Jiangsu recorded net interprovincial inflows of 389,000 and 227,000 people, respectively.

Major provincial capitals and metropolitan centres continue to draw population from surrounding areas. Between 2017 and 2025, the resident populations of Chengdu–Chongqing, Wuhan, Zhengzhou, Changsha, Xi’an, and Hefei each grew by more than one million. Chengdu led the group, adding 5.49 million residents. Yet every province containing these cities recorded an overall decline in resident population over the same eight-year period.

China’s high-tech industries are still expanding rapidly in both scale and revenue. The growth of high-value-added industries and the wage premium they offer draw young people and skilled workers across regional boundaries. Supporting service workers then follow, creating a complete ecosystem of population concentration. Zhejiang, Shanghai, and Jiangsu offer large numbers of jobs in advanced manufacturing, the digital economy, and services, making them the main drivers of population concentration in the Yangtze River Delta.

This is the third report in our series on births, population ageing, and internal migration in China. The first two reports were based on national and provincial demographic data released in 2022 and 2024. In recent years, however, local governments have disclosed less demographic information, making analysis and forecasting increasingly difficult. Comparing our earlier projections with subsequent outcomes, we found that we had overestimated births and underestimated the pace at which life expectancy was improving. We have therefore revised the model used in this report. Since China’s total population began to decline in 2022, we have continued to track changes in the age structure and sex composition of the population, patterns of regional migration, and the relationship between migration and industrial development.

Why Were Births in 2025 Lower Than Expected?

In Where Is China’s Population Headed? (2023 Edition), we projected China’s demographic and ageing trends on the basis of two main assumptions.

First, we used fertility data from 2018 and 2019 to estimate the underlying willingness to have children. Births in 2016 and 2017 had been temporarily elevated after the relaxation of birth restrictions released pent-up demand for second children, while pandemic controls between 2020 and 2022 may have caused some couples to postpone childbearing.

Second, we assumed that the willingness to have children would continue to decline, drawing on the experience of Japan, South Korea, and other countries. International evidence suggests that fertility generally falls as the urbanisation rate and per capita income rise. Combining these assumptions with the number and age distribution of women of childbearing age, we projected China’s future population and the pace of population ageing.

When data for 2024 became available, it became clear that our original assumptions had been too optimistic. In Where Is China’s Population Headed? (2025 Concise Edition), we therefore lowered the starting fertility-rate assumption while retaining the assumption that fertility would continue to decline. That report reached three main conclusions:

1. Annual births were projected to fall below 9 million in 2025, below 8 million in 2028, and possibly below 7 million by 2035, with the pace of decline easing over the following decade.

2. China’s total population could fall below 1.4 billion in 2027, below 1.3 billion in 2039, and below 1.2 billion in 2047.

3. Population ageing would accelerate. China was projected to become a super-aged society around 2032 and to reach Japan’s current level of ageing by 2048.

According to the National Bureau of Statistics, China recorded 7.92 million births in 2025, well below our model’s estimate of about 8.9 million. From 2022 to 2025, the model overestimated births while projecting a total population lower than the figure eventually reported. This indicates that the assumed mortality rates for older age groups were also too high. Put differently, life expectancy improved faster than the model had anticipated.

The economic consequences of China’s demographic shift may therefore be more severe than expected. Births falling below 8 million this early suggest that many people are not optimistic about their own or their families’ future prospects. Meanwhile, the fact that the total population declined more slowly than projected indicates that older people are living longer. This will accelerate population ageing and place additional pressure on public finances.

Further Refinement of the Population Projection Model

Core Assumptions: Age-Specific Fertility and Mortality Rates

Earlier versions of the model focused mainly on assumptions about the initial level of fertility and the speed at which it would decline. Age-specific mortality rates were largely projected by extending historical patterns. Recent results, however, show that changes in mortality at older ages—and thus in life expectancy—have a substantial effect on projections of both China’s total population and the share of older people. These assumptions therefore require more careful treatment.

Figure 1 provides a schematic overview of the model. It rests on two main sets of assumptions: age-specific fertility rates, including both their current levels and future paths; and age-specific mortality rates. Once these assumptions are established, the size of each age group can be projected forward over time.

For example, the number of births can be calculated by combining the age distribution of women of childbearing age with the fertility rate for each age group. Five years later, those births determine the approximate size of the population aged 0–4. Applying the assumed mortality rate then allows the model to estimate how many of that cohort will be aged 5–9 five years later, and the same process can be repeated for each successive age group. Projected sex ratios determine the future number of women of childbearing age, which in turn feeds into the next projection of births. The model thus forms a closed, internally consistent system that can be extended forward through time.

Figure 1. Schematic Framework of the Population and Age-Structure Projection Model

Using age-specific fertility rates and projecting how they will change is more appropriate than setting a single total fertility rate directly. China’s historical baby booms and decades of birth-control policies have produced a highly uneven age distribution among women of childbearing age. The number of women aged 35–49, for example, is substantially larger than the number aged 15–29. This can distort the total fertility rate and make it unusually volatile. Using it directly as an input may therefore generate larger forecasting errors.

Assumptions about fertility at different ages must also be demographically plausible. Fertility among women aged 15–24 may continue to decline, while fertility among those aged 30–49 may increase in relative terms. At the same time, the total fertility rate implied by these age-specific patterns must remain consistent with each scenario’s broader assumptions—continuing to fall in the pessimistic scenario, for instance, or gradually recovering in the optimistic scenario.

Assumptions about age-specific mortality are, in effect, assumptions about life expectancy. Life expectancy is calculated from mortality rates at each age. Unlike the average age at death, it measures how long a newborn would be expected to live if current age-specific mortality rates remained unchanged throughout that person’s life, and it is not affected by the population’s age structure. The average age at death, by contrast, is simply the average age of all those who die in a given year. It is easier to calculate but heavily influenced by demographic composition. As the baby-boomers move into old age, for example, a larger share of annual deaths will naturally occur at older ages, pushing up the average age at death.

Scenario Analysis of Population Ageing in China

To examine how the share of older people may evolve under different paths for fertility and life expectancy, this report considers three scenarios.

Pessimistic scenario: The total fertility rate continues to decline at its current pace, while life expectancy rises by about 0.2 years per year throughout the projection period.

Baseline scenario: The total fertility rate remains at roughly its current low level of 1.05 and no longer declines. Once life expectancy exceeds 80 years, its annual increase slows to about 0.1 years.

Optimistic scenario: With stronger policy support for childbearing, the total fertility rate gradually rises above 1.3, after which the pace of increase slows. Once life expectancy reaches 85 years, annual gains ease further to about 0.05 years.

The model produces the projections shown in Figure 2. Five conclusions follow.

1. Rapid population ageing before 2050 is unavoidable. Even in the optimistic scenario, a substantial rise in fertility has little effect on the share of people aged 65 and over before 2050. China’s current age structure has already determined the pace of ageing over the next two to three decades.

2. Under the baseline and pessimistic scenarios, the old-age share and dependency ratio eventually reach exceptionally high levels. By 2100, people aged 65 and over are projected to account for 41 per cent of the population in the baseline scenario and 50 per cent in the pessimistic scenario. The corresponding dependency ratios—the combined population of children and older people relative to the working-age population aged 15–64—reach 90 per cent and 120 per cent, respectively.

3. A substantial rise in fertility would significantly reduce ageing and dependency pressures after 2050. Under the optimistic scenario, both the old-age share and the dependency ratio will be markedly lower in 2100.

4. Higher fertility raises the dependency ratio in the short term. The projected dependency ratio in 2050 is actually higher in the optimistic scenario than in the other two scenarios because more births initially increase the number of dependent children before they enter the workforce.

5. A steep decline in the total population is unavoidable. China’s population falls substantially in all three scenarios, largely because of the country’s existing age structure.

Figure 2. Scenario Analysis of Population Ageing in China

More specifically, under the pessimistic scenario, the total fertility rate is projected to continue along its current downward trajectory, falling to 0.93 by 2050 and 0.87 by 2100. For comparison, South Korea—the country with the world’s lowest fertility rate—recorded a total fertility rate of 0.80 in 2025.

Figure 3. Projected Total Fertility Rate Under the Three Scenarios

Unless fertility rises substantially, annual births will fall to between 5 million and 6 million by 2050 under both the pessimistic and baseline scenarios, and to fewer than 2 million by 2100. Under the optimistic scenario, in which the total fertility rate recovers to above 1.3, annual births stand at about 7.9 million in 2050 before declining to roughly 3.5 million by 2100. Even in this more favourable scenario, the long-term fall in births remains pronounced.

Figure 4. Projected Annual Births Under the Three Scenarios

All three scenarios show a similarly rapid rise in population ageing before 2050, with only modest differences among them. Around 2030, people aged 65 and over are projected to account for 20 per cent of the population, the threshold the UN used for a super-aged society. By around 2050, the share reaches 29 per cent—approximately Japan’s current level. The three paths diverge thereafter. Under the pessimistic scenario, the old-age share continues to rise until it reaches about 50 per cent by the end of the century. Under the optimistic scenario, it peaks at around 37 per cent before falling gradually to 32 per cent in 2100.

Figure 5. Projected Share of the Population Aged 65 and Over Under the Three Scenarios

International comparisons underline the speed of China’s transition. China is projected to move from a deeply aged society to a super-aged society in only about ten years. The same transition took 36 years in Germany, 24 years in France, and 12 years in Japan. China is indeed ageing at an unusually rapid pace.

The dependency ratio rises sharply in all three scenarios until around 2060, levels off for roughly a decade, and then climbs again before peaking around 2085. Under the optimistic scenario, it reaches a high of about 91 per cent and then declines to roughly 74 per cent by 2100. Under the pessimistic scenario, it peaks at a dramatic 125 per cent and remains close to 120 per cent at the end of the century.

Figure 6. Projected Dependency Ratio Under the Three Scenarios

China’s total population declines substantially in every scenario. It is likely to fall below 1.4 billion within the next two years, below 1.3 billion around 2037, below 1.2 billion around 2050, below 1 billion around 2060, and below 800 million around 2070. By 2100, it falls to about 400 million in the baseline and pessimistic scenarios and to roughly 500 million even in the optimistic scenario.

Figure 7. Projected Total Population Under the Three Scenarios

Reflections on Raising China’s Fertility Rate

Low fertility is, to a large extent, a natural consequence of socioeconomic development. As discussed in Where Is China’s Population Headed? (2023 Edition), a clear international pattern links higher urbanisation and higher per capita income with lower fertility. It can be seen not only in affluent European countries and in Asian economies such as Japan and South Korea, but also in Muslim-majority countries such as the United Arab Emirates and Qatar. Low fertility therefore deserves serious attention and a sound policy response, but it should not be used to fuel unnecessary public anxiety.

Policies designed to encourage childbearing may be more effective in rural areas and small towns. The inverse relationship between urbanisation and fertility suggests that raising fertility may be easier in these areas, where the pressures of daily life are generally less acute than in major cities. According to China’s Seventh National Population Census in 2020, the total fertility rate was about 1.20 in urban areas and 1.54 in rural areas. Rural China’s fertility advantage came mainly from higher rates of second, third, and subsequent births. Addressing the difficulties faced by older single men in rural areas in finding suitable partners is also closely linked to efforts to raise fertility.

Policies that support second and subsequent births may also be more effective than policies focused mainly on first births. Where Is China’s Population Headed? (2025 Concise Edition) compared age-specific fertility rates in China with those in Japan, France, England and Wales, and Scotland. China’s fertility rates among women aged 15–19, 20–24, and 25–29 were clearly higher, while fertility among women aged 30–34, 35–39, and 40–44 was markedly lower. Women in China also have their first child at a younger age on average, while the proportions who remain unmarried or childless throughout their lives are much lower than in Europe, Japan, and other developed economies. Taken together, these patterns suggest that China’s lower fertility is driven mostly by low rates of second and subsequent births.

International experience also shows that as economies become more developed and societies become more open, individuals gain greater freedom in decisions, and more people choose not to marry or have children. Policies aimed at persuading this group to marry and become parents are unlikely to be as effective as measures that help families who already want children to have a second or third child. Supporting policies should therefore reduce the financial and practical burden on larger families.

Gender imbalance may be another major constraint on a fertility recovery. As noted in Where Is China’s Population Headed? (2023 Edition), among those born between 2006 and 2010 — now roughly 16 to 20 years old and likely to enter marriageable age over the next five years — there were about 20 per cent more males than females. The gap narrowed among later birth cohorts but remained more than 115 boys for every 100 girls until 2016, when it began to move back toward 105:100.

The cohorts entering marriage and childbearing age over the next decade will therefore remain significantly imbalanced by sex. Differences in educational attainment make the matching problem even more complex. As shown in Figure 8, women’s share of undergraduate and postgraduate enrolment rose steadily and remained above 50 per cent after 2011. Yet women account for less than half of the overall population aged 20–29, and their share in this age group continues to fall.

Among children born between 2006 and 2015, the sex ratio remained consistently above 115 boys for every 100 girls, and exceeded 120:100 between 2006 and 2010. From around 2031, these cohorts may begin moving into the key childbearing ages of 25–34. The imbalance is likely to have a visible effect on both marriage and fertility rates.

Women make up a larger share of highly educated groups even though they account for a smaller share of the total population. This means that the gender imbalance is even more pronounced among people with lower levels of education. Men with less education — especially those in rural areas and small towns — may find it increasingly difficult to find suitable partners. At the same time, traditional expectations often lead women to seek partners with equal or higher educational attainment and socioeconomic status, which can make partner matching difficult for highly educated women as well. Addressing these structural obstacles to marriage will be crucial to efforts to raise fertility.

Figure 8. Women Account for a Larger Share of Undergraduate and Postgraduate Students

Urbanisation Is Slowing

The Pace of Urbanisation Is Losing Momentum

China’s urbanisation rate rose to 67.89 per cent in 2025, but the pace of increase has slowed markedly. Between 2012 and 2020, the urban share of the population rose by an average of 1.34 percentage points a year. Since it passed 64 per cent in 2021, however, the average annual increase over the past five years has fallen to just 0.80 percentage points. At that pace, China’s urbanisation rate will pass the theoretical turning point of 70 per cent around 2028 and enter a more mature phase in which annual gains continue to slow.

Figure 9. China’s Urbanisation Is Slowing

Among 337 Chinese cities classified as fifth-tier or above, 185 recorded a decline in their resident population between 2024 and 2025 — more than half of the total. (Because city-level data remain incomplete, these figures have not been adjusted for natural population change.) A further 65 cities had not yet released resident-population data for 2025. Most of the cities losing population were third-tier or lower, indicating that urbanisation is becoming difficult for small and medium-sized cities.

Figures 10–11. Changes in Resident Population Across Chinese Cities in 2025

Note: The city tiers follow the 2025 Ranking of China’s New First-Tier Cities, released in May 2025 by Yicai’s New First-Tier Cities Research Institute. The ranking evaluates cities on five dimensions: concentration of commercial resources, strength as transport and business hubs, urban vitality, competitiveness in the new economy, and future potential. It draws on multiple sources of big data, including branded-store networks and patterns of internet use.

Migrant Workers Are Becoming Less Mobile

During the 2010s, China’s migrant-worker population increased by more than five million a year. Large-scale, one-way movement from the countryside to cities was the main force behind rapid urban expansion. By 2025, however, the total number of migrant workers stood at 301.15 million, only 1.42 million more than a year earlier, for growth of just 0.5 per cent. Of the total, 121.09 million worked within their local townships, an increase of 70,000, or 0.1 per cent. A further 180.06 million worked away from home townships, up by 1.35 million, or 0.8 per cent.

Figure 12. Growth in China’s Migrant-Worker Population Continues to Slow

The slowdown in the growth of the migrant-worker population has been accompanied by a steady decline in the share moving across provincial boundaries. Many rural workers now prefer jobs in nearby counties or cities rather than long-distance employment in another province. Large-scale interregional migration is contracting. In 2025, 67.65 million migrant workers moved across provincial boundaries, 750,000 fewer than the year before, a decline of 1.1 per cent. By contrast, 112.41 million moved within their home provinces, an increase of 2.1 million, or 1.9 per cent. Interprovincial migrants accounted for 37.6 per cent of migrant workers employed away from their local townships, down 0.7 percentage points from the previous year.

Even in Central China, the region with the highest proportion of interprovincial migrant workers, the share has fallen to 51.4 per cent and is declining. In 2025, migrant workers had an average age of 43.3, and 32 per cent were aged 50 or above. As more workers grow older, leave migrant employment, and return home, labour mobility will weaken further.

Figure 13. Share of Migrant Workers Moving across Provinces by Region, 2016–2025

Metropolitan Concentration Continues

Strong Provinces, Metropolitan Regions, and Manufacturing Hubs Continue to Attract Migrants

Rural China is older than urban China, and the pool of surplus rural labour available for migration is nearing exhaustion. Population growth in large cities will therefore depend increasingly on redistribution within the urban system and on the continued concentration of people in major metropolitan regions. Excluding natural population growth, net population inflows are increasingly concentrated in Guangdong, Zhejiang, and Jiangsu.

In 2025, Guangdong recorded a net population inflow of 500,000 (excluding natural population change), overtaking Zhejiang’s 389,000 and Jiangsu’s 227,000 to regain first place nationwide. Chongqing returned to positive net migration, ranking fourth with an inflow of 115,000. Sichuan and Anhui, both of which had recorded large net inflows in 2023 and 2024, shifted back to net outflows in 2025.

Figure 14. Net Population Inflows and Outflows by Province in 2025

Zhejiang Has Become China’s Most Dynamic Province

Over the longer term, China’s population has continued to concentrate along the Yangtze River, along the coast, and in major inland city clusters. The Yangtze River Delta, Pearl River Delta, and Chengdu–Chongqing region have recorded some of the largest net inflows. Zhejiang already has a large population, yet after natural population change is excluded, net migration increased its resident population by 7.6 per cent over the past eight years — far faster than in any other province.

Guangdong, Jiangsu, and Sichuan also recorded net gains of around 1–2 per cent over the same period upon their already large populations, reinforcing the nationwide concentration of people in economically dynamic core regions. Hainan, Xinjiang, Chongqing, Shanghai, Fujian, Shaanxi, and Tibet, though smaller in population, also maintained net inflows over the past eight years. In contrast, the six populous provinces of Henan, Hunan, Hubei, Hebei, Shandong, and Anhui all experienced net outflows.

Figure 15. Growth in Net Population Inflows by Province, End-2017 to 2025

Within major metropolitan regions, people are concentrating further in the core cities. By 2025, Hangzhou and Ningbo in Zhejiang, Suzhou and Nanjing in Jiangsu, Shenzhen and Guangzhou in Guangdong, and Chengdu in Sichuan together accounted for around 30 per cent of their respective provincial populations. Changes in resident population show that these core cities contributed most of the population growth in their regions.

Between 2017 and 2025, Guangzhou and Shenzhen accounted for more than half of Guangdong’s total population increase. Hangzhou and Ningbo contributed more than 95 per cent of Zhejiang’s. The population gains in Suzhou and Nanjing, and in Chengdu, were larger than the net increases recorded by Jiangsu and Sichuan as a whole. Even in 2025, when the resident populations of both Jiangsu and Sichuan declined overall, Suzhou, Nanjing, and Chengdu continued to grow. Population concentration within metropolitan regions is therefore likely to intensify. (Because city-level birth and death data are incomplete, these urban population figures have not been adjusted for natural population change.)

Figures 16–18. Population Concentration Continues to Increase in Major Metropolitan Areas

Within Provinces, Urban Growth Is Increasingly Concentrated in Provincial Capitals

Even in provinces with weaker economies or smaller populations, almost every provincial capital continued to expand. In 2025, all provincial capitals gained population except Shijiazhuang of Hebei and Xining of Qinghai, whose populations fell by just 300 and 1,300 respectively; Nanchang of Jiangxi had not yet released updated data. Harbin of Heilongjiang lost a cumulative 1.042 million residents between 2017 and 2025 as a result of ageing and regional outmigration. Yet in 2024 and 2025 it added 110,000 residents, helped by temporary labour demand generated by its winter-tourism boom and by modest inflows from surrounding parts of Heilongjiang.

Over a longer period, provincial capitals have been the principal source of population growth within their provinces. Several provincial capitals in Northeast, Central, and Western China gained residents over the past eight years even as their provinces continued to lose population. These capitals are clearly drawing people away from surrounding cities. (Because city-level birth and death data are incomplete, the figures have not been adjusted for natural population change.)

Figures 19–20. Less Developed Provinces: Cumulative Population Change in Provincial Capitals Compared with Provincial Totals, 2017–2025

Figures 21–22. Less Developed Provinces: Population Change in Provincial Capitals Compared with Provincial Totals, 2025

China May Be Entering a Phase of “Passive Urbanisation”

“Passive urbanisation” refers to a stage in which the urbanisation rate no longer rises mainly because rural residents are moving into cities. During a prolonged period of total population decline, the urban share may increase because the rural population is shrinking naturally faster than the urban population, and because of administrative boundary changes.

Japan offers a useful example. Between 2000 and 2010, much of the increase in its urbanisation rate resulted from municipal boundary changes and the deaths of older residents in towns and villages, rather than from large inflows into cities (Qin Hong and Wang Yanfei, 2024). Population growth became concentrated in Tokyo and Osaka, helping property prices in those two metropolitan areas remain relatively firm after 2010, while housing markets in most other cities remained weak. This helps explain why Japan’s urbanisation rate rose from 77 per cent when its property bubble burst in 1991 to about 90 per cent in 2010 even as nationwide housing prices continued to fall. Passive urbanisation did not create substantial new demand for urban housing.

Figure 23. Urbanisation Rates in China and Japan (%)

China may enter a similar phase around 2030, after its urbanisation rate reaches 70 per cent. China has less room for further urbanisation than Japan and many Western countries, partly because it is ageing before becoming fully affluent. Once a society becomes deeply aged, population mobility declines, and will weaken further as ageing accelerates.

Urban–rural gaps in China’s basic healthcare mean that life expectancy remains lower in rural areas than in cities. The rural population is therefore likely to decline naturally at a faster rate, pushing up the national urbanisation rate. Meanwhile, continued metropolitan concentration is causing many third-, fourth-, and fifth-tier cities to lose population. Together with natural population decline, administrative changes such as converting counties into urban districts can turn some rural residents into urban residents without any actual migration.

Regional Migration Through the Lens of Industrial Development

Manufacturing Export Cycles Create Population Tides

Guangdong’s resident population increased by 790,000 in 2025, including 290,000 from natural population growth and 500,000 from net migration from other provinces. Even after natural growth is excluded, Guangdong remained the country’s largest destination for migrants, well ahead of Zhejiang’s net inflow of 389,000 and Jiangsu’s 227,000. Six of the ten Chinese cities with the largest population gains in 2025 were in Guangdong. In addition to the strong pull of the two first-tier cities, Shenzhen and Guangzhou, major manufacturing and export centres such as Dongguan, Foshan, Zhongshan, and Huizhou also continued to attract migrants.

Figure 24. China’s Ten Cities with the Largest Population Gains in 2025

Manufacturing is the backbone of Guangdong’s economy. After natural population change is excluded, the province’s net inflows show a strong positive relationship with China’s export growth. Between 2000 and 2019, when Chinese exports expanded rapidly, Guangdong consistently ranked first nationwide in net migration. When exports came under pressure in 2022 and manufacturing employment contracted, population inflows slowed markedly. As exports recovered in 2024 and 2025, Guangdong returned to first place.

Figure 25. Net Population Inflows into Guangdong and Growth in Imports and Exports

Looking ahead, the profitability of traditional manufacturing is likely to remain under long-term pressure. Conventional manufacturers will find it difficult to create large numbers of new routine jobs simply by expanding capacity. As the working-age population shrinks and industrial robots and artificial intelligence are adopted more widely, manufacturing’s capacity to absorb low-skilled workers is likely to decline year by year.

Figure 26. Profits of Industrial Enterprises in Guangdong Province

A Vibrant Private Sector and Digital Economy Act as a Magnet for Migrants

The Yangtze River Delta is already relatively aged, so population growth depends heavily on inward migration. In 2025, Zhejiang recorded a natural population decline of 79,000 and Jiangsu one of 307,000. After natural change is excluded, however, the two provinces recorded net interprovincial inflows of 389,000 and 227,000 respectively.

Fast-growing small businesses, e-commerce, and cross-border trade in cities such as Hangzhou have created a large number of flexible jobs. Relatively low barriers to starting a business attract not only employees but also entrepreneurs. Jiangsu, meanwhile, has a strong foundation in advanced equipment, chemicals, biopharmaceuticals, semiconductors, and other high-end manufacturing industries. The dense concentration of high-tech firms in industrial parks across southern Jiangsu makes the province especially attractive to skilled technicians and science and engineering graduates.

High-tech industries and services are likely to account for an ever larger share of employment. Under China’s statistical classification, the tertiary sector currently produces 57 per cent of GDP but employs only 49 per cent of the workforce, leaving an eight-percentage-point gap. In the United States, by comparison, services have long accounted for a slightly larger share of employment than of GDP; in 2025, the sector employed 84 per cent of the workforce.

Figure 27. China’s Service Sector Has Considerable Room to Expand Employment

Figure 28. The Service Sector’s Share of U.S. Employment Has Long Exceeded Its Share of GDP

China’s high-tech industries are still expanding rapidly in both scale and revenue. The growth of high-value-added industries and the wage premium they offer draw young people and skilled workers across regional boundaries. Supporting service workers then follow, creating a complete ecosystem of population concentration. Zhejiang, Shanghai, and Jiangsu offer large numbers of jobs in advanced manufacturing, the digital economy, and services, making them the main drivers of population concentration in the Yangtze River Delta.

Figure 29. China’s High-Tech Industries Continue to Expand Rapidly in Scale and Revenue

Core Cities in Central and Western China Are Drawing People Back

Central and Western China comprises 18 provinces and provincial-level municipalities, covers more than 70 per cent of the country’s land area, and is home to more than 500 million people. It is China’s strategic hinterland. The development of a unified national market is strengthening the region’s capacity to absorb industries relocating from elsewhere. Core cities such as Chengdu and Chongqing, Wuhan, Zhengzhou, Changsha, Xi’an, and Hefei are building complete industrial chains in electronic information, new-energy vehicles, advanced equipment, and other sectors. Their large local consumer markets are also supporting better urban amenities and making these cities more attractive to people seeking work closer to home.

Between 2017 and 2025, the resident populations of Chengdu–Chongqing, Wuhan, Zhengzhou, Changsha, Xi’an, and Hefei each increased by more than one million. Chengdu led with an increase of 5.49 million. These cities continued to gain population in 2025. Although Chongqing’s total resident population declined, the fall was mainly due to natural population change. Once that factor is excluded, Chongqing recorded a net inflow of 115,000 in 2025, ranking fourth among all provinces and provincial-level municipalities.

Figure 30. Manufacturing Centres in Central and Western China Draw Population from Surrounding Areas

Central and Western China is also rich in coal, oil and gas, minerals, wind, and solar resources. As energy and mineral inputs become more important to emerging industries, resource-development projects are creating large numbers of jobs and supporting related industries. They attract skilled workers and professionals from other provinces while also offering employment to rural workers within the region. This helps retain younger local residents and reduce labour outflows.

Figure 31. Resource-Based Urban Development Drives Population Growth

Over the long term, ageing will continue to reduce population mobility. Even so, metropolitan concentration is likely to persist because large cities provide better public services and more job opportunities than small and medium-sized cities. The number of Chinese cities with populations above 10 million will likely continue to rise. At the same time, some fifth-tier cities may eventually be administratively consolidated, much as many natural villages in rural China have been combined in previous decades.

A smaller population and declining mobility as a result of ageing will also make overcapacity in transport infrastructure an increasingly serious concern and add to fiscal pressure. Accelerating ageing will also widen funding gaps in the social-security system, requiring a growing share of public spending to support pensions and other social insurance programmes. These challenges require advance planning.

(Since 2022, local statistical authorities have released increasingly limited demographic data, particularly on births and deaths. This has made demographic research and forecasting more difficult, and we appreciate readers’ understanding.)

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Zhang Ming, Deputy Director of the Institute of World Economics and Politics, Chinese Academy of Social Sciences (CASS), and Deputy Director of the National Institution for Finance and Development, suggests that China is pursuing a different model, one rooted in the strength of its manufacturing sector rather than the dominance of its financial markets. That strength could allow China to sustain current-account surpluses even as Chinese companies, banks and investors send more capital abroad. Supplying renminbi through financial-account outflows and drawing it back through current-account surpluses, he argues, is emerging as a distinctively Chinese path to currency internationalisation.

This article was first published on 15 June in Issue No. 12, 2026, of China Forex, a publication overseen by the State Administration of Foreign Exchange (SAFE), China’s foreign-exchange regulator.

Zhang has kindly reviewed and authorised the translation.

—Yuxuan Jia

货币国际化的中国路径

The Chinese Path to Currency Internationalisation

One view holds that the renminbi internationalisation will remain constrained as long as China continues to run a current-account surplus. The reasoning is that a country must run current-account deficits to supply its currency to the rest of the world.

The United States is often cited as the leading example. It supplies dollars to the global economy through persistent current-account deficits while attracting those dollars back through sustained surpluses in its non-reserve financial account. This combination of a current-account deficit and a financial-account surplus has underpinned the global circulation of the dollar.

The United States’ persistent financial-account surpluses reflect the competitiveness of its financial markets. On the one hand, U.S. markets can supply large volumes of global safe assets—most notably U.S. Treasury securities—to meet other countries’ demand for reserve investments. On the other hand, they offer a broad range of higher-return risk assets, particularly U.S. equities, to meet the investment needs of private-sector investors around the world.

The well-known concept of “petrodollar,” for example, describes how oil-exporting countries reinvest in the United States the dollars they earn from oil exports.

However, the model of supplying dollars through current-account deficits is subject to the Triffin dilemma. To meet global demand for dollar liquidity, the United States must continue to run current-account deficits. Yet persistent deficits also increase its net external debt.

As that debt approaches a level investors consider difficult to sustain, concerns may grow that the U.S. government will seek to reduce the real burden of its liabilities through a sharp depreciation of the dollar. There is therefore an inherent tension between supplying the rest of the world with sufficient dollar liquidity and preserving the stability of the dollar’s value.

U.S. net external debt has now risen to more than 90% of nominal GDP, compared with only 20% when the global financial crisis erupted in 2008.

There is no single prescribed path to currency internationalisation. A country seeking to expand the international use of its currency must choose the approach best suited to its resource endowments and competitive strengths.

For China, advancing renminbi internationalisation through a combination of a current-account surplus and a non-reserve financial account deficit may be both more realistic and more sustainable.

On the one hand, Chinese manufacturing is highly competitive globally. Its strength lies not only in price competitiveness, but also in product reliability, comprehensive industrial supply chains, and the ability to respond quickly to changing market demand.

China now accounts for roughly one-third of global manufacturing value added. Given its continued strength in both traditional and emerging manufacturing industries, the country is likely to maintain a current-account surplus for a considerable period.

On the other hand, Chinese companies, financial institutions, and households all have strong incentives to expand their activities overseas.

For Chinese companies, the combination of China-U.S. trade frictions and intensifying geopolitical tensions has made the global diversification of supply chains increasingly necessary. As more Chinese companies invest and establish production facilities abroad, China’s outward FDI may continue to exceed inward FDI.

Chinese financial institutions and households also have considerable demand for global asset allocation as they seek to achieve a better balance between risk and return. Given China’s vast pool of domestic savings and the resulting demand for internationally diversified securities portfolios, outward portfolio investment may continue to exceed foreign portfolio investment in China.

In addition, because Chinese interest rates are now significantly lower than those in the United States, overseas demand for renminbi-denominated financing has increased markedly. As a result, the “other investment” component of the balance of payments is also likely to remain in deficit, making China a net provider of cross-border credit to the rest of the world.

Indeed, China’s balance-of-payments structure in recent years has increasingly exhibited precisely this pattern: a current-account surplus combined with a financial-account deficit. Direct investment, portfolio investment, and other investment have all recorded deficits to varying degrees.

Supplying renminbi to the rest of the world through financial-account outflows, while allowing the currency to flow back to China through current-account surpluses, is emerging as a distinctively Chinese path to currency internationalisation.

Compared with the U.S. model, persistent current-account surpluses would increase China’s net external assets. Over the medium term, this could reinforce expectations of renminbi appreciation and help China avoid the Triffin dilemma to some extent. The Chinese path may therefore prove more sustainable than the U.S. model.

The United States itself followed a similar path during the early years of the Bretton Woods system, combining current-account surpluses with financial-account deficits.

Under the Marshall Plan, for example, the United States extended loans to European countries, which then used the funds to purchase American machinery, equipment, and other goods needed for postwar reconstruction.

This historical experience suggests that currency internationalisation may proceed in two stages.

In the first stage, a country’s principal competitive advantage lies in manufacturing. It therefore promotes the international use of its currency through a combination of current-account surpluses and financial-account deficits.

In the second stage, as the relative competitiveness of its financial markets rises and that of its manufacturing sector declines, the country shifts towards a model based on current-account deficits and financial-account surpluses.

The internationalisation of the renminbi is currently in the first of these two stages.

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This is the argument made by Dandan Zhang, a Professor in Economics and Deputy Dean at the National School of Development (NSD), and Deputy Dean of the Institute of South-South Cooperation and Development, Peking University.

One of China’s leading labour economists, Zhang argues that in today’s global race for technological advantage, no country is likely to slow its investment in AI. The real policy challenge, then, is not to hold back technological progress, but to make the transition as employment-friendly as possible: identifying the skills most at risk, adapting education and retraining, and strengthening safety nets for workers who may otherwise be left behind.

Professor Zhang delivered the speech for TAIXUE, a TED-like initiative by New Economist Think Tank. The video was uploaded on 10 June 2026. Zhang has kindly authorised and reviewed the translation.

— Yuxuan Jia

Hello everyone, I am Dandan Zhang, an economics professor at Peking University. I specialise in labour economics research. It is a great honour to be here at Taixue today to share some thoughts with all of you. In this talk, I will be exploring how artificial intelligence is reshaping the world of work.

On 30 November 2022, a large language model (LLM), namely ChatGPT, was officially released. Its arrival was so sudden that it felt almost otherworldly, as if something from beyond our world had suddenly landed among us. Since then, our generation has found itself standing right at the centre of a massive transformation.

Our jobs may be the first thing it touches. And this is one of the great uncertainties of our time: what will artificial intelligence mean for the employment prospects of our generation?

Today, I would like to examine this question through the lens of labour economics. Drawing also on my own research in recent years, I will share how economists understand the ways in which AI is reshaping employment.

The first fundamental economic question we need to answer is: does technological progress inevitably lead to unemployment? To answer this question, economists often begin by looking back. We ask: what impact did past waves of technological progress have on employment?

Let’s look at what has happened over the past 100 years. The world has experienced several technological revolutions, including electrification, computerisation, and, in the past decade or two, automation. All of these technological advances sparked job anxieties to varying degrees. Yet in every case, they all seemed to reach a state of employment equilibrium.

One study found that around 60 per cent of today’s jobs did not exist in 1940. What does this tell us? It tells us that technology does not simply destroy jobs. It also creates them. As old jobs disappear, new ones continue to emerge. For example, with the information revolution and technological progress in computing, computers replaced typists and some basic text-based work, but they also gave rise to the entire IT industry and millions of new jobs.

So the critical question is whether technological progress can create jobs at a pace that keeps up with the jobs it replaces. In other words, replacement itself is inevitable, and it is not something we need to fear in itself. What we really need to examine is whether, in the process of technological progress, there is a sufficient window of time for new jobs to be created.

Historically, the disappearance of old jobs has typically unfolded over a very long period of time, possibly several decades. That gradual transition gave society an essential window of time for new occupations to emerge and develop.

Next, I would like to summarise two key ways in which this wave of technological progress differs from previous ones.

First, artificial intelligence is not replacing physical labour; it is replacing mental labour. Previous waves of technological progress primarily displaced repetitive, operational work on assembly lines. In other words, replacing physical labour. This time, AI is acting on human cognitive abilities, such as comprehension, reasoning, creativity, and judgment. These are precisely the core competitive advantages of knowledge workers.

This year alone, Claude has dealt a significant blow to the programming profession. Models like Sora and Seedance also had a disruptive impact on video editing.

What deserves even more attention, or perhaps even caution, is a more recent change: AI is no longer only capable of “thinking”. It is now moving towards having both a “brain” and “hands”.

For example, OpenClaw, the personal AI assistant that has recently become very popular on social media, can actually get things done. Large AI models are moving from simply “talking” to being able to roll up their sleeves and help us complete many concrete tasks.

So this wave of technological progress is not only replacing mental work. It is also beginning to replace hands-on execution. This is the first key difference.

The second key difference is that AI technology can be deployed very quickly, and the cost of executing tasks with AI is extremely low. Compared to previous waves of technological progress, generative AI operates on a completely different cost structure. Take intelligent manufacturing, for example: deploying it is a very tedious process. First, you need to remodel the factory, order a bunch of different equipment, and fully reintegrate the production lines, all of which demands massive fixed-asset investments.

In the past, the deployment of new technology took time. It moved forward gradually, industry by industry, or region by region. Equipment had to be purchased unit by unit. Production lines had to be built one by one. As a result, the replacement of jobs also happened gradually and within a relatively limited scope.

This created time. But this time, generative AI is different. Through cloud services, APIs, and open-source models, both enterprises and individuals can access and deploy AI at a very low cost. In particular, with the expansion of many open-source models, the capabilities of large models can now be called upon almost instantly.

The cost of local deployment is also falling as models continue to iterate and as their use becomes more widespread. For example, I recently saw a remark by the renowned mathematician Terence Tao. He said that “AI has basically driven the cost of idea generation down to almost zero.” This means that the cost of a lot of knowledge-based tasks — for example, editing, copywriting, or contract reviewing — is dropping drastically.

So if you were a business owner, obviously you would want to use this new technology to replace relatively expensive human labour if the cost to implement this technology is low. The low cost incentivises businesses to replace human labour with technology.

So, to summarise, this wave of AI-driven technological progress is no longer just about replacing physical labour. It is replacing both mental work and hands-on execution. On top of that, compared to previous waves of technological progress, it carries significantly lower deployment and usage costs. The spread of this technology no longer has to unfold gradually from region to region or industry by industry; instead, a single model can emerge and take effect globally and simultaneously. It may affect an entire technological layer, or an entire category of occupations, all at once. And that is precisely what may shrink the window of time available for new jobs to be created.

Since this impact is inevitable, let’s take a look at how economists believe what kind of effects AI would have on employment. I will introduce three very frontier research methods. Through these different methodologies, we can see how economists approach this question.

The first method is called the AI Exposure Index analysis. In the AI era, the way economists look at employment, occupations, and industries is very different. We would deconstruct occupations, stripping them down into individual tasks or specific skills, so that we can analyse them along different dimensions.

If we want to understand how an occupation will be reshaped, we need to analyse it at a very micro, almost atomic level. Tasks are the basic atoms of a job. We need to define which atoms make up the jobs in today’s labour market.

For this, we need something like the periodic table of elements in chemistry. In labour economics, we do have something similar. For example, O*NET and other international databases have compiled tasks into a kind of dictionary. In total, there are around 20,000 tasks that make up more than 1,000 occupations in today’s labour market. Every occupation is deconstructed. Take a university professor, for example, whose role would be broken down into a specific set of work tasks.

The next step is to evaluate, among these 20,000 tasks, how likely it is that a LLM can complete or accelerate each task.

More specifically, we ask whether AI can save more than 50 per cent of the time required for that task. If it can, we label that task as 1, meaning it is exposed. If it cannot, we label it as 0, meaning it is not exposed. At this point, every task within an occupation has been labelled, with each task carrying either a 0 or a 1 — no exposure or exposed, respectively. These task-level scores are then aggregated up to the occupation level, giving a calculated exposure score for each occupation.

The data used in this kind of analysis mainly comes from recruitment data. We look at the requirements in new job postings: what tasks do these new positions require, and what responsibilities do they list? In this sense, we are using flow information from the labour market.

Our team has also applied this method to research on China. We used more than one million job postings from Zhaopin to calculate AI exposure levels for occupations in China.

Our research found that the occupations with higher exposure — that is, those more likely to be affected by AI — are mainly white-collar jobs. This is basically consistent with international findings. Accountants, editors, salespeople and programmers, in particular, may be among the more significantly affected occupations.

Occupations with lower exposure are mainly blue-collar jobs, such as food service workers, industrial workers and domestic workers. So, in general, high exposure is concentrated among white-collar workers, while low exposure is concentrated among blue-collar workers. Again, this is also broadly consistent with findings from other countries.

Over the past few years, some occupations with high exposure have indeed seen a decline in labour demand. This suggests that high exposure may bring a certain displacement effect. However, although the exposure index method is widely used, it also faces challenges and still needs to be improved. One major issue is that it actually measures potential exposure. But exposure does not equal actual replacement, just as standing in the sun does not necessarily mean you will get sunburned. The risk exists, but it is still a potential risk.

So the exposure index does not measure actual replacement. It measures theoretical substitution. It tells us whether AI can complete a certain task, not whether AI will replace a particular job. That’s why we can’t jump to a completely negative conclusion — even if the exposure is high, we shouldn’t assume the worst.

As I mentioned earlier, our research does show a negative relationship between AI exposure and labour demand. In other words, the higher the AI exposure, the lower the demand tends to be. However, using data from China, Singapore, and the United States, we found that the exposure levels for many occupations are concentrated between 0.7 and 0.8. Although the overall relationship is negative, the picture becomes more nuanced within this range. At the same level of exposure, demand falls for some occupations, remains unchanged for some, and rises for others.

For example, computer-related jobs, which are highly exposed, have seen a decline in demand. Yet, other roles with the same level of exposure see an increase in demand, such as retail sales positions. Meanwhile, some remain unchanged, like business operations. So even at the exact same level of exposure, if we look closely at different occupations, demand is falling for some, staying flat for others, and rising for others.

This raises an important point: at the same level of exposure, not all occupations will be replaced. This shows that the exposure index does not automatically point to the inevitable replacement of an occupation.

So what exactly is going on here? One main reason is that, as I said earlier, a job is made up of tasks. If AI replaces only some of these tasks, or completes part of the work, then human workers can redirect their attention to the remaining tasks that AI cannot do. They can spend more time on the parts of the job where human contribution is still needed.

The other reason has to do with what the O-ring theory, which looks at the relationships among the tasks that make up a job. If the tasks within a job are in an O-Ring relationship — meaning the different tasks are complementary — then focusing more effort on certain tasks can greatly increase output and improve labour productivity. But if the tasks are parallel, meaning that they can substitute for one another, then AI may lead to unemployment.

So, ultimately, whether an LLM will actually replace a job depends on two things: the combination of tasks within that job, and the nature of the relationships among those tasks. Occupations may have similar levels of exposure, but their actual likelihood of being replaced may be very different. This depends on the two factors I have just described.

Therefore, looking at exposure level alone is not enough. We also need to determine, at the occupational level, whether AI’s impact is pushing in a positive or negative direction. The goal is to give the exposure index more depth and nuance — one that can actually tell us whether displacement will eventually occur. That is what our team is currently working on, refining the methodology behind the exposure index.

Now let me introduce the second method, which we might call AI job-integration analysis. The previous method looks at the potential, or theoretical, impact of AI. This second approach looks instead at real-world implementation at the firm level.

This line of research comes from a 2025 NBR working paper by two PhD students from Harvard University. The paper, titled Generative AI as Seniority-Biased Technological Change, has been widely cited. It argues that generative AI does not favour high-skill workers, but rather those with seniority.

The authors analyse the full text of firms’ recruitment advertisements over the past several years. They identify whether a firm is hiring for roles specifically responsible for implementing or integrating AI technologies into the company’s workflow. If a firm posts this kind of job opening on a given day, the authors treat it as evidence that the firm has already started using AI and is using it in a relatively deep way.

So, as you can see, this method follows a completely different logic from the previous one. It no longer uses theory to infer whether AI may affect certain jobs. Instead, it directly observes firms’ actual behaviour: are they hiring people to bring AI into their workflows? And the findings are very interesting.

The authors found that generative AI represents a form of seniority-biased technological change. Among firms that had adopted AI, hiring for junior positions declined significantly, while hiring for senior positions remained stable, and in some cases even increased. In other words, the impact of AI appears to fall most heavily on those at the lower end of the career ladder, especially entry-level workers.

The authors also found that the main effect was a slowdown in new hiring, rather than layoffs or resignations. In other words, firms were not necessarily cutting existing workers; they were hiring fewer new ones.

Furthermore, when looking across different education levels, from elite universities to mid-skilled technical colleges and low-skilled institutions, the authors found that mid-skilled technical graduates bear the heaviest impact, while graduates from top-tier universities and lower-skilled workers remain largely unaffected by the slowdown.

This research offers an important insight: AI may not first affect the existing employed population in the labour market — what we might call the stock of employment. Instead, it may gradually compress labour demand by reducing the number of new positions. There may still be a window between potential exposure and actual substitution. AI may first reduce the entry of new workers into the labour market, while the existing stock of employed workers may, at least for now, be less affected.

This method also has limitations. It has very high data requirements. It needs access to a company’s complete hiring history to determine whether AI is genuinely being used.

The third method I am going to introduce is based on actual AI usage data. Rather than theorising about what AI can do, which is what the exposure index approach does, it directly observes how people interact with LLMs, and through that interaction data, draws conclusions about what people are actually using AI tools for.

This is a very recent and widely circulated study. Many of you may have seen it circulated on WeChat official accounts. It was released by Anthropic, the company behind Claude, in an employment report published earlier this year. In this report, Anthropic introduced an important concept: the observed exposure.

The first method I introduced measures theoretical exposure. This third method measures observed exposure. The data used in this research comes from actual conversations between users and Claude. The researchers looked at how users interact with Claude every day and what tasks they use Claude to complete. They then identified the specific things users were doing when they used a LLM and extracted those tasks for analysis.

The next step was to examine whether the LLM directly completed those tasks, or whether it helped humans complete them. If the model completed the task directly, this was treated as substitution. If the model helped the person complete the task and enhanced their capability, this was treated as augmentation.

Their findings are very interesting. They found that, so far, actual replacement has not really occurred on a large scale. What we mainly see is complementarity. LLMs are mainly improving our work efficiency, rather than producing obvious substitution.

They also compared observed exposure with theoretical exposure, which is what the first method captures. They found that theoretical exposure is much higher than actual observed exposure. For example, in computer and mathematics-related occupations, theoretical exposure suggests that more than 94 per cent of tasks could be completed by AI. But in actual Claude usage, Claude only covers about one third of these tasks. The difference between more than 90 per cent and just over 30 per cent is very large.

Why can AI theoretically do more than 90 per cent of the tasks, while in practice it only does a little over 30 per cent? There are many reasons for this gap.

One reason is that model capabilities are still limited. Another is legal and compliance constraints. In many cases, when models use certain types of data, human verification is still needed. There are also barriers related to software integration. So there is still a gap between actual use and theoretical substitution.

Using the observed exposure index, the researchers found that 57 per cent of tasks were augmentation-type tasks, while 43 per cent were substitution-type tasks. So, overall, augmentation remains the main pattern.

Augmentation-type use improves productivity, but it does not reduce employment. Substitution-type use is what directly threatens employment. So their findings are somewhat reassuring: AI is making us better at what we do, while not yet taking away our jobs on a large scale.

That said, this method has its limitations. It relies on a single LLM — Claude — and the range of tasks it covers is quite narrow. As mentioned earlier, the full task dictionary contains 20,000 tasks, yet this study only captures 800 of them as they appear in Claude interactions. The analysis is therefore partial and incomplete. Nevertheless, the study introduces a valuable new perspective: by looking directly at how people actually interact with AI, it suggests that the reality may not be nearly as alarming as it sounds in theory.

I’ve now finished introducing these three methods, so let’s do a quick comparison. These three methods actually complement each other. They seem to capture three different stages of AI’s impact: from theory, to firms, to people. The exposure index, the first method, mainly looks at the potential exposure, or the theoretical exposure. It relies on flow data, especially new recruitment information.

The second and third methods both look at actual adoption, drawing on existing employment data to understand how much of the current employment structure may be affected. These methods can complement one another, and I believe only by combining them can we get a more comprehensive and more precise analysis.

So this is how economists are now analysing the question of how LLMs affect employment. These methods are all at the frontier of current research. Our own research team is also trying to apply these methods to study China.

The first point I want to emphasise is that we now need to build a dynamic monitoring and early-warning system. This is really important. We need to track, in real time, how the tasks and skills contained in today’s jobs are changing. Which skills are needed in this new era? Which skills may be phased out? This lets us spot the risk signals and take action well before any changes start showing up in the employment data for the existing workforce.

Second, policymakers need to develop education and training programs based on the monitoring results. People need to know quickly which abilities are needed and which skills are becoming more important, so that they can fill their own skill gaps as soon as possible.

Here, I want to emphasise individual initiative and creativity. Through our research and conversations with Xianyu [the Chinese equivalent of eBay], we found that new, user-created forms of work emerge on the platform every year. Some are quite unconventional: people offer to argue with someone on your behalf, retouch photos with AI, bathe pets, and provide all kinds of niche services. These examples show just how extremely creative individuals can be.

So I think the first thing we need to do is send clear signals to the market. We need to allow individuals to face and embrace the challenges brought by AI, to reinvent themselves, and to create more employment opportunities for themselves.

But creativity also needs to be guided by information. The hope is that these early warning signals can help each person make better career choices, shorten the time it takes to retrain for new work, and lower the cost of trial and error during this transition.

The third point is about safety-net policies. First of all, technological progress cannot be stopped. So while AI is getting smarter and smarter, policymakers need to develop much more robust risk management strategies during this transition period, particularly creating strong social safety net policies.

In the current environment of international competition, no country is going to slow down its investment in AI or the pace of AI development. So the key policy question, I think, is not about preventing the use or the development of AI. On the contrary, technological progress should be encouraged. At the same time, policymakers need to prevent a situation where workers, who cannot get through this short-term adjustment period, end up permanently locked out of the new employment landscape.

For instance, at this year’s Two Sessions [annual plenary sessions of the National People's Congress and of the National Committee of the Chinese People's Political Consultative Conference] we saw the proposal to build an employment-friendly society. This points to an important general direction. What that means is that going forward, as more firms integrate AI into their workflows, policymakers need to assess whether the employment landscape is actually employment-friendly. This involves a whole range of policy measures, and I believe it can help us open up a real window for employment transition — one where, even as some jobs are being replaced, more new opportunities are being created at the same time.

Finally, let me take some time to summarise today’s talk. The arrival of generative AI is reshaping our labour market. According to the main studies so far, it mainly affects white-collar jobs, entry-level positions and some mid-skill workers. AI may improve work efficiency, or it may bring substitution. The final trajectory of each occupation and each job is still unclear. We cannot say that any particular occupation will definitely disappear.

This process depends, to a large extent, on the initiative of each worker: whether they are willing to adapt and change. It also depends on the way the tasks and skills within each job are combined.

One last point I want to make is that, at present, what we are seeing is still mostly potential impact. The real shock has not yet fully arrived. This means that we are still in a very precious window of opportunity. The question is whether we can make the most of this window and prepare ourselves well. For example, can policy analysis stay a step ahead of each new wave of technology, so it can send the market clearer, more accurate signals and make the right adjustments? That is a shared challenge facing both researchers and policymakers, and it’s what my team and I are working towards. That’s everything I wanted to share with you today. Thank you, everyone.

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A major part of that effort has involved restoring exchanges between the two countries. Direct flights have gradually resumed, while business, tourism and other forms of people-to-people contact are recovering. Under Xu’s leadership, the Chinese Embassy and consulates in India have also been processing increasing numbers of visas for Indian citizens traveling to China. These are not merely administrative steps. They are part of a broader attempt to rebuild the connective tissue of the relationship, restore a degree of normalcy after years of estrangement, and open China more widely to the outside world.

Yet the increase in travel became a target of a group of self-styled “patriotic” influencers. False or misleading claims began circulating that Indians were “flooding” into China and that Chinese diplomatic missions in India were recklessly handing out visas. The attacks eventually turned on Xu himself. A veteran diplomat carefully advancing his government’s policy — and seeking to rebuild a difficult relationship without ignoring its underlying complexities — was accused of betraying the country whose interests he was working to serve.

The recent hostility has an immediate context. China-India relations deteriorated sharply after the deadly border clash in 2020, and the years of tension that followed contributed to a rise in hostile sentiment in parts of each country against the other. But negative views of India predate that episode and have deeper, more complex roots, including perceptions of India as a poorer, less developed country — a form of prejudice that is by no means unique to China but can be found in societies around the world.

What makes this episode particularly revealing is not simply the existence of such attitudes, but what happens when longstanding sentiments are hijacked by racists and then collide with a diplomatic thaw. Nationalist influencers can turn grievance, prejudice and fabrication into traffic. Diplomats, by contrast, must deal with the world as it is: balancing national interests, political realities and the longer-term need to prevent rivalry from hardening into permanent hostility. That is the more difficult and less theatrical task Xu and his colleagues have been undertaking.

The Chinese internet is subject to extensive controls, but that does not mean every strand of public opinion is manufactured from above, or that the authorities exercise complete command over the sentiments circulating online. In this case, some of the people most loudly claiming the mantle of patriotism ended up attacking diplomats for carrying out Beijing’s policy. It is a small reminder that even a state with enormous influence over the public sphere may still have to contend with nationalist pressures that have histories and dynamics of their own — and that responsible statecraft sometimes requires navigating and pushing back against bigotry, rather than staying silent.

—— Zichen Wang

It was against this backdrop that, on July 2, 澎湃新闻 The Paper, a major Chinese digital news outlet, published the commentary translated below. The Chinese Embassy in India later republished it in full on its website, signaling unmistakable support for its argument.

如何看待近期关于印度的一些讨论？

How Should We Think About the Recent Discussion on India?

Recently, Chinese social media has seen a number of posts claiming that Indian visitors are “flooding” into the country and that some have behaved poorly while in China. Some of these discussions have gone further, questioning whether China’s visa policy toward India is too generous, or alleging that Indians are “taking up Chinese resources.” In some corners of the internet, public anger has been stirred up. How should we understand this? A few points are worth making.

The immediate trigger for this round of debate is the claim that some Indian tourists have behaved improperly in China. If foreign visitors break rules or behave inappropriately, people are, of course, entitled to point this out. China has a long tradition of treating guests with courtesy, but guests are also expected to respect Chinese laws, regulations, and social norms. If anyone crosses the line, whatever their nationality, the matter should be handled in accordance with the law. There is nothing controversial about that.

The real problem begins when the behaviour of a few individuals is used to condemn an entire country, or when isolated incidents become an excuse for xenophobia. We should not close the door on India because of a handful of cases. Nor should we pin every negative story on Indians simply because the topic is trending and attracts online traffic.

When thinking about how China should engage with India, we need to look at the bigger picture. Historically, China and India are both ancient civilisations, with more than two thousand years of cultural exchange between them. From Xuanzang’s journey westward and his return with 657 volumes of Sanskrit Buddhist scriptures, to Rabindranath Tagore’s visit to China and his friendship with figures such as Xu Zhimo, to Dr Dwarkanath Kotnis, who gave his life while supporting the Chinese people’s War of Resistance Against Japanese Aggression — these stories of people-to-people exchange are the true foundation of China-India relations.

In practical terms, China and India are neighbours that cannot be moved away. Together, they account for more than one-third of the world’s population, and both are pursuing modernisation. Peaceful coexistence is therefore a necessity. Win-win cooperation, too, is in shared interests.

Of course, differences between China and India do exist. But both countries have the wisdom to manage them. In recent months, the border situation has eased noticeably, which is a welcome development. Both sides also understand that the boundary question is not the whole of China-India relations, that it should be kept in its proper place, so that the broader relationship is not held hostage by a single issue.

In recent years, the leaders of China and India have met in Kazan and Tianjin. Since then, bilateral relations have continued to improve, and practical cooperation has strengthened. According to Indian official statistics, bilateral goods trade reached US$151.1 billion in the 2025–2026 fiscal year, making China India’s largest trading partner. This alone shows how deeply the two economies are connected. Behind the smooth flow of goods worth hundreds of billions of dollars, there must also be channels for people to travel, meet, and do business.

Since 2025, direct flights between China and India have gradually resumed. With more direct flights, it is only natural that people-to-people exchanges have increased compared with the pandemic years. It is also worth noting that more than 80 per cent of the visas China issues to Indian nationals are business visas. In other words, business travel makes up the overwhelming majority. Those coming purely for tourism are only a small share.

Seen from a wider international perspective, China-India relations are no longer just a bilateral issue. The Global South is gaining weight, and the global governance system is being reshaped. Whether in BRICS or the Shanghai Cooperation Organization, in climate talks or WTO reform, the Global South will find it hard to make its voice heard without coordination between China and India. India is chairing BRICS this year, and China has said it supports India in fulfilling its responsibilities as the BRICS Chair and working together to promote the growth of the BRICS mechanism. All this suggests that what may appear to be a simple easing of travel is, in fact, the renewed connection of two major engines of the Global South.

Back to the visa issue. In recent years, China has introduced a range of visa facilitation measures. These are not aimed at one particular country, but at the world as a whole. So far, China has concluded mutual visa-free agreements with 160 countries and has granted unilateral visa-free access to nationals of 50 countries. These measures are a proactive move in China’s deepening opening up. They bring not only more international tourism revenue, but also more trade opportunities, a better business environment, and a stronger reputation for openness. These are real national dividends, and in the end they also benefit ordinary Chinese people.

China’s decision to open its doors wider reflects the confidence and breadth of vision of a major country. The goal is not short-term “reciprocity” in every narrow sense, but long-term mutual benefit.

That is why discussions about “unequal visa treatment” between China and India should also be approached rationally. It is true that in recent years India tightened visa issuance for Chinese citizens. Although it has now resumed issuing business and tourist visas, there remains a clear gap and delay compared with China’s approach. China should expect India to show sincerity and take concrete steps. At the same time, we should recognise that India’s policy is also in a process of dynamic adjustment. If the visa issue is endlessly escalated and turned into an outlet for anger, the result will only be counterproductive, narrowing the space for the relationship to improve and develop.

After the noise dies down, we still need to return to reason. Over the past few years, the disruption of exchanges between China and India has widened not only an information deficit, but also a trust deficit. Some people like to post sensational clips and stories about India and other South Asian countries, or to amplify alleged misconduct by Indians in China. This has left many Chinese people with a view of India that is increasingly fragmented, label-driven, and stereotyped. Such content may appear to be “patriotic,” but it is little more than clickbait that fuels confrontation and exclusion. In essence, it exploits patriotic feeling and national sentiment for traffic. It pollutes the online environment and does not reflect the open and confident mindset a major country should have.

Chinese civilisation has always valued openness and inclusiveness. As the saying goes, the sea is vast because it accepts all rivers. As citizens of a major country, we should have that same sense of proportion, confidence, and generosity.

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Feng Kaidong, a professor at Tsinghua University, challenges that account. “Market-for-technology” did help China expand production, improve factory management, and enter global manufacturing networks. Yet in case after case, foreign partners kept a tight grip on product design, technical approval, and engineering changes, while explicit technology-development clauses in joint-venture contracts were narrowed, delayed, or blocked in practice.

The examples are revealing. In the FAW–Toyota partnership, Chinese engineers complained that the drawings they received were “full of holes,” with information unnecessary for assembly literally cut out. At a Xi’an electronics and instrumentation company, a 300-person research team was dismantled, with researchers reassigned to production, after-sales service, and quality control. Fewer than 20 people remained in the technical team. At Dongfeng, R&D was kept away from mainstream production, severing the link between design and manufacturing. During early Santana production at SAIC Volkswagen, even a minor rear-door hinge problem identified by Chinese engineers was left unresolved until it was raised through diplomatic channels.

This explains why indigenous innovators that emerged around 2005 often had to build far beyond their original businesses. BYD pushed deep into batteries and components. Huawei built everything from power systems to optical cables. To make new products, these firms first had to build much of the ecosystem themselves.

For Feng, these cases show that China’s industrial transformation hinges on who controls the organisation of innovation. Innovation depends on the ability to define problems, mobilise resources, coordinate firms and engineers, and accumulate capabilities through repeated interaction.

This is why Feng calls for system-building under today’s harsher international environment. With U.S. technology restrictions and Europe’s “de-risking” exposing the fragmentation of China’s domestic innovation system, markets alone cannot assemble the dispersed capabilities required for complex innovation. The state’s visible hand, he argues, is needed to identify firms, suppliers, research institutes and engineering teams, pull them into sustained collaboration, and rebuild the organisational architecture through which innovation can take place.

The following essay is excerpted from an article originally published in Issue 8 of the Journal of Area Studies in 2024, a journal published by Peking University, where Feng was a professor before joining Tsinghua.

Professor Feng has kindly reviewed and authorised the translation.

—Yuxuan Jia

快速工业化、全球化和“新全球化”：理解当代中国工业发展的几次转变

Rapid Industrialisation, Globalisation, and “New Globalisation”: Understanding the Major Shifts in Contemporary China’s Industrial Development

In November 1978, Zhou Zijian, then China’s Minister of Machine Building Industry, was leading a delegation to Europe when word reached him that Deng Xiaoping was open to the idea of Sino-foreign joint ventures. Zhou then raised the possibility of cooperation during visits to BMW and Mercedes-Benz, but neither company gave him a clear or positive response. He made a last-minute decision to go to Volkswagen’s headquarters in Wolfsburg.

It was already the weekend. Fortunately, Volkswagen had a conscientious gatekeeper on duty, and one of its vice presidents happened to be there that day. That chance encounter helped open a new chapter in China’s industrial development: the “市场换技术 market-for-technology” strategy, under which China sought to advance industrial modernisation through joint ventures with multinational corporations. It also marked the beginning of a systematic transformation, as China began using foreign investment to strengthen its industrial base and pursue technological progress.

The idea began to take shape around 1978 and was gradually put into practice across major manufacturing industries in the early 1980s. Policymakers at the time did not simply want China to become the “world’s factory.” Across policy documents from that period, “market-for-technology” was consistently presented as serving two goals: expanding production capacity and building technological capabilities.

The first goal, expanding capacity, was tied to the urgent need for import substitution. To be precise, China hoped to quickly increase domestic production by bringing in foreign product drawings, equipment, and management experience, so that Chinese-made products could replace the imported industrial goods flooding into the country after opening up began. This pressure was especially acute in the automobile industry. In 1985 alone, after China opened its automobile import market, the money spent on importing foreign passenger cars exceeded the state’s total investment in the entire domestic automobile industry over the previous three decades. This soon became a serious problem, and the public was unhappy about it. China’s automobile industry therefore had to be mobilised to achieve high-level local production through “market-for-technology” and reduce reliance on the large-scale import of high-end foreign cars.

The second goal was to build China’s own technological capabilities. The senior policymakers who promoted “market-for-technology” all placed great emphasis on technological learning. This included Zhang Jinfu, who oversaw the electronics industry; Rao Bin, who was responsible for the automobile industry; and, at a higher level, Vice Premier Li Peng. For this older generation of policymakers, the purpose of Sino-foreign joint ventures was not to manufacture foreign products forever. It was to learn from cooperation with large multinational corporations, introduce advanced technology and management experience, and ultimately improve China’s own industrial capabilities.

The difficult question was how this path could actually work. Once Chinese state-owned enterprises had multinational corporations as joint-venture partners, how could they carry out meaningful technological innovation within those partnerships? At the time, China did not have a clear answer.

In joint ventures, complex industrial production is always organised and coordinated. The crucial question is who does the organising. For Western multinational corporations, entering China through joint ventures was mainly a way to gain access to the Chinese market, make use of China’s relatively cost-effective labour, resources, and operating environment, and benefit from preferential policies offered by governments at different levels. Helping Chinese firms build technological capabilities—and potentially become future competitors—was not in their interests.

The theory of global production networks makes this point clear. The American-style system of global industrial cooperation is hierarchical: countries and firms higher up the chain use their control over products and technologies to shape the behaviour of those lower down. Global production networks are therefore organised and coordinated by multinational corporations according to their global interests, not according to the innovation needs of developing countries. The goal was to localise production in China while de-organising China’s own technological activities, so that Chinese industry would not develop the organisational capabilities needed for sustained innovation or future competition.

Overall, “market-for-technology” had two major effects on Chinese industry.

The first was a clear improvement in production conditions and management standards. Through joint ventures with multinational corporations, China’s state-owned automobile and telecommunications equipment companies became part of their global production networks. The benefits were not limited to final assemblers. Suppliers also modernised through the same model. The Shanghai Santana project is a good example. In addition to the joint venture between SAIC and Volkswagen, about 130 domestic firms at the beginning—and eventually more than 400 local component suppliers—entered similar cooperative arrangements with foreign companies in different auto-parts categories. Such partnerships brought in foreign drawings, production lines, equipment, operating procedures, and even detailed production-line manuals. During this period, multinational-led global networks provided relatively stable expectations on both the supply and demand sides, allowing many Chinese firms to grow quickly after the 1990s.

The second effect was the suppression of indigenous innovation. During the joint-venture process, multinational corporations de-organised technological innovation within the ventures to varying degrees. This also influenced the behaviour of many state-owned parent companies. In my book The Rising Tide: The Birth of China’s Innovative Enterprises, I describe in detail how multinational corporations did this. Their methods can be summarised in several ways.

First, they tightly controlled the technological information transferred to joint ventures. Chinese partners often received incomplete drawings. Practices varied from company to company, but Japanese and South Korean firms were usually the most restrictive. In the FAW–Toyota partnership, for example, engineers complained that the drawings they received were “full of holes.” Before the drawings reached Chinese engineers, Japanese engineers literally cut out, with scissors, all parts unrelated to assembly, along with the corresponding technical parameters. Why cut them out? To prevent Chinese firms from reverse engineering. Any information not needed for assembly was removed. Some firms from other countries were somewhat more open, but the difference was only one of degree. In general, if a multinational corporation believed that certain drawings or data were unnecessary for assembly in China, that information would be taken out or erased before the materials were handed over to prevent latecomer firms from learning through reverse engineering.

Second, they dismantled Chinese firms’ development organisations, or separated them from production. The Rising Tide discusses in detail the “Beijing Jeep controversy” around 1985. Beijing Jeep Corporation was China’s first automotive joint venture, and its contract clearly stated that the two sides would jointly establish an R&D centre. Yet after the joint venture was formally set up, the American side repeatedly delayed the project. The centre was not established until the mid-1990s.

What happened when the Chinese side already had an R&D centre or technical team? Foreign partners often introduced various “advanced management concepts” that justified breaking up those teams. I once came across an electronics and electrical instrumentation company in Xi’an. In the 1970s, it had been one of the largest instrumentation companies in East Asia and had a research team of around 300 people. After it entered a joint venture with a Japanese company, those 300 researchers were reassigned under the banner of “strengthening after-sales service” and “strengthening quality control.” They were moved to production lines, after-sales service, and other departments. In the end, fewer than 20 people remained in the company’s technical team, making it difficult to carry out effective and systematic product and technology development.

Another method was to separate R&D organisations from production departments, cutting off the interaction between product design and manufacturing. Dongfeng Motor is a typical example. Dongfeng did establish an automotive research institute, but with the exception of a few small-scale military vehicle and electric vehicle projects, the institute had little direct connection to the company’s main production departments.

An even more telling case is the Pan-Asia Technical Automotive Center (PATAC) in Shanghai. After GM and SAIC formed their joint venture, GM set up PATAC in Shanghai, as required by Chinese policy at the time. PATAC had direct access to GM’s global technology database, yet the contractual arrangements deliberately limited cooperation between PATAC and SAIC’s production departments. As a result, PATAC’s work was largely confined to adapting and localising existing GM models for the joint venture, rather than engaging substantively with SAIC’s own manufacturing operations.

In 2005, when China was strongly promoting “indigenous innovation,” SAIC asked PATAC to design several new models. But the designs it produced still fell far short of what large-scale manufacturing and the Chinese market required. The designers incorporated traditional Chinese cultural symbols such as the jade ruyi and palace lanterns, but paid too little attention to manufacturing economics, engineering practicality, and consumer preferences.

Third, and most importantly, multinational corporations kept control over any revisions to the technical drawings. Although production took place inside joint ventures, Chinese partners usually had only the right to use those drawings; the underlying intellectual property remained with the foreign partner. In product development, once a set of technical drawings is finalised, it must be signed off by the party that owns it. This is what is meant by the “technical approval right”: the authority to approve a given technical solution.

Because the drawings used in joint-venture production were usually owned by the foreign partner, even the smallest technical adjustment could be difficult for the Chinese side to make. Any change had to be reflected in the drawings, and the authority to approve those drawings still lay with the multinational corporation. Chinese engineers could report defects or propose improvements through the management chain, but the review process remained in the foreign partner’s hands. Foreign companies had both strong incentives and reasonable procedures to drag out that process, sometimes for one or even two years. Over time, Chinese engineers learned that multinational corporations would not accept any technical changes by the Chinese side. That was what joint-venture engineers meant when they often said, “We couldn’t even change a single screw.”

A well-known example from the automobile industry was the Santana rear-door hinge noise incident in 1985–1986. During the early assembly of the Santana at SAIC Volkswagen, the rear-door hinges often made an abnormal noise when the doors were opened or closed. Chinese engineers identified the problem, reported it to the German side of the joint venture, and proposed running a series of tests to fix it. The German managers, however, did not respond, leaving the problem unresolved.

In the end, the Chinese side had to raise the issue through diplomatic channels before it was finally settled. At the time, Zhu Rongji was personally overseeing the localisation of Santana production, and State Council leaders were following the project closely. After learning that the hinge problem had still not been solved, China’s premier and vice premier took up the issue directly with the German chancellor and foreign minister during diplomatic meetings, urging the German side to act more quickly. Only under this high-level pressure did Volkswagen send a small engineering team from Volkswagen Brazil. The team ran simple tests, discussed a solution in Brazil, then flew to Shanghai and fixed the problem in a very short time.

What does this incident tell us? First, the technical problem itself was not difficult to solve. Second, Chinese engineers were the first to identify it and were ready to work on a solution. Yet the foreign side was unwilling to let Chinese engineers at Shanghai Volkswagen initiate and lead a technical-improvement project because it resisted the emergence within the joint venture of an organisational mechanism through which local engineers could identify problems, develop technical solutions, form project teams, and accumulate experience over time. Anyone with industrial experience would understand that such practices could gradually help local engineers and local firms build their own capacity for innovation and collaboration. That was not in the foreign partner’s interest.

What, then, did the foreign side hope to see? Barkard Welkener, the German management representative at SAIC Volkswagen, once urged his Chinese colleagues: “You should focus steadily on localising Santana production, while we keep the production drawings unchanged. In that way, by around 2000, we could bring the cost of a Santana down to US$5,000 per car. Then the Santana would become the most competitive car in the world.”

Looking back today, the proposal seems absurd. A car that remains technologically unchanged for years is unlikely to win mainstream consumers, even if its production cost falls to US$5,000 per car. Consumers today would not embrace a car designed nearly 20 years earlier simply because it was cheaper. But the deeper issue was not the product philosophy promoted by the foreign side. More importantly, foreign partners did not want Chinese engineers to launch new model projects or carry out technical improvements, even though such activities were clearly written into the joint-venture contracts.

Fourth, multinational corporations also shaped organisational culture. By emphasising manufacturing localisation over a long period while discouraging technology development, they gradually reshaped the values, incentives, and professional orientation of people inside the organisation.

In the early years of the joint ventures, the Chinese side was under pressure to repay the capital raised for plant construction. It therefore attached great importance to localising production, both to stimulate the domestic economy and to reduce costs and improve profitability. In many joint ventures, complete knock-down (CKD) kits for automobile assembly cost even more than fully built-up (CBU) vehicle imports. As a result, employees working on localisation enjoyed clear advantages in job assignments, pay, and promotion. Once localisation targets had been met, companies shifted their focus to expanding capacity to generate higher returns. At the same time, to stay competitive, the joint ventures had to set aside resources to import new drawings and equipment whenever their foreign partners introduced next-generation products.

Over time, these priorities created entrenched interests, rigid decision-making mechanisms, and relatively fixed organisational values. Pay differences also drew talent away from indigenous R&D. FAW, for example, had the strongest technical and human-capital reserves in China’s automobile industry at the time. But after it entered joint ventures, the gap in pay and career prospects between the joint-venture side and the domestic side became very large. Many technical staff from FAW’s automotive research institute were quickly absorbed into production activities in the joint-venture units.

The de-organising measures used by multinational corporations under “market-for-technology” differed by country. As noted earlier, Japanese and South Korean firms were the strictest in controlling the transfer of technical information to China, while American and German firms were relatively more flexible. Sweden’s Volvo was well regarded for training many technicians at Changan. Citroën also genuinely fulfilled its contractual obligations during its cooperation with Dongfeng by training a team of around 30 to 40 engineers.

Structurally, however, multinational corporations behaved in highly similar ways. They did not welcome any technical modifications to joint-venture products proposed by Chinese engineers. They resisted R&D projects and R&D centres. They sought to separate technology development from production. In this sense, differences in the specific practices of multinationals from different countries mattered little when it came to whether “market for technology” could help China develop indigenous innovation capabilities.

More than 30 young designers whom Citroën had trained for Dongfeng later left and joined Chery’s design team. Why? Because after returning from training in France, they found that there was no real place at Dongfeng Citroën for them to put what they had learned to use. The joint venture had no sustained technology innovation projects and no programmes for developing new models. More broadly, Dongfeng as a group continued to form joint ventures with different multinational automakers. Apart from military orders and experimental electric vehicles, it no longer had a passenger-car division under independent local control. For these young engineers, doing meaningful work meant breaking out of the “market for technology” framework.

Under the “market-for-technology” model, even if some firms wanted to move beyond dependence on joint-venture production and allocate strategic resources to product and technology development, they faced a collective-action problem. As China promoted Sino-foreign joint ventures across industries, nearly all of the best domestic industrial firms were placed into the joint-venture system. Any individual firm trying to break away from that model faced serious systemic difficulties, because few other firms were willing to support it as suppliers. This also helps explain why the later rise of indigenous innovators was so difficult: in their early years, very few domestic firms were willing to supply them.

For all these reasons, Chinese firms under “market-for-technology” gradually became participants in global production systems with little voice. Industrial production expanded, but Sino-foreign joint ventures produced few significant technological or product innovations of their own. Nor did they develop organisational mechanisms for accumulating innovation capabilities. Existing domestic product platforms in the automobile industry were abandoned. The Shanghai sedan disappeared, while the Hongqi brand was placed on the Audi 100 platform.

By 2001, twelve large multinational corporations had established nineteen manufacturing joint ventures in China. Yet only thirteen new models were launched nationwide that year—roughly one new model per multinational corporation. Compared with the pace of innovation in China’s automobile market today, the contrast is striking. In fact, the industry now pays little attention to counting annual model launches, because since 2008–2009, more than 200 new passenger-car models have been launched in the Chinese market each year. The pattern of competition has changed fundamentally.

During the “market-for-technology” era, Chinese firms had not developed the ability to create new products or master complex technologies. They also had little bargaining power with multinational corporations. As a result, foreign automakers could put models developed more than a decade earlier into production in China, and a single model could dominate the Chinese market for many years. This gave rise to the familiar categories of the “Old Trio” [Volkswagen Santana, Volkswagen Jetta, and Citroën Fukang], followed later by the “Middle Trio” [Mazda Familia, Buick Excelle, and Hyundai Elantra] and the “New Trio” [Hyundai Elantra Yuedong, Toyota Corolla, and Volkswagen Lavida].

After 20 years of “market for technology,” China’s domestic product-development capabilities had not improved. On the contrary, they had declined. Many homegrown product platforms had been abandoned, and public dissatisfaction was growing. Beginning in 1998, a number of far-sighted automotive journalists began to question this model and steer public debate. At the time, however, indigenous innovators had not yet entered the mainstream public imagination, and no alternative explanation had yet taken hold for what had gone wrong with “market for technology.” Even some ministerial-level officials began to have doubts.

The establishment of the Beijing Hyundai joint venture in 2002 had a clear impact on China’s automobile industry. South Korea had entered the automobile industry later than China, yet Korean automakers were now being brought into China as representatives of an advanced modern automotive industry. Many people in the industry, especially senior engineers, began to reflect on the problems in China’s own development path.

At the time, Beijing Hyundai was rumoured to have found a way around restrictions on CBU vehicle imports. According to these accounts, fully assembled Hyundai cars were taken apart at the port in Tianjin — with the wheels removed, for example — and then shipped back to Beijing for reassembly, allowing them to be classified as Semi Knocked Down (SKD) assembly under Chinese rules. These stories had a powerful social impact. As public debate intensified, the crisis of the “market for technology” approach gradually came into view.

To summarise: innovation requires participants to interact deeply with one another around specific technical needs in a particular time and place. Innovation is fundamentally an interactive process. From this perspective, Chinese enterprises under “market-for-technology” were very similar to enterprises under the planned economy: neither had sufficient strategic autonomy. Objectively speaking, they could not independently decide what activities to allocate resources to, or how to carry out organisational mobilisation.

The only difference was that China appeared to have entered a market economy. From an innovation standpoint, however, this was not really the case. These firms lacked sufficient strategic autonomy to decide what to produce, which technologies to develop, which products to launch, which products they would rely on for competitiveness over the next five, ten, or twenty years, which partners to work with, where to obtain technical information, from whom to buy equipment, which partners to engage for key component development, and which partners to turn to for critical technical services. As a result, local firms did not control the interactive activities required for innovation.

III. Indigenous Innovation: Reclaiming Organisational Control over Innovation

The reform and opening-up policies launched in the late 1970s and early 1980s, together with a series of institutional adjustments, also created crucial conditions for the later rise of indigenous innovation. First, the central government required national defence to “国防服从服务于国家经济建设大局 obey and serve the overall needs of national economic development.” The subsequent demobilisation of one million military personnel forced many affected defence enterprises and institutions in the 1980s to become some of the first actors to challenge, and gradually change, the “market for technology” system.

Funding and orders were cut first for military research units and later for defence manufacturers. These organisations had to develop civilian products to survive. The central government also introduced supporting policies.

Today’s strong electronics supply-chain capacity in the Pearl River Delta, for example, can be traced back to this military-to-civilian transition. The Ministry of Electronics Industry, which retained certain defence-industry characteristics, was among the first to set up a company in Shenzhen: Sedind. Sanda later became part of Shenzhen Electronics Group (SEG), and SEG in turn helped lay the foundations for what is now Huaqiangbei.

Many Hong Kong-funded companies also began moving into the mainland. Some state-owned enterprises went to Hong Kong under the policy of “外引内联 bringing in external resources and linking them with domestic production.” They imported standardised electronic components and low-end parts from overseas, then used them to assemble electronic products in China. In their early years, ZTE and Huawei assembled small radios and electric fans. Later, with guidance from Hong Kong businesses — including some “window companies” set up in Hong Kong by mainland entities — they gradually moved into assembling telephone switches using microcontrollers.

Broader institutional reforms also created increasingly favourable conditions. Even the practice of “market for technology” was rapidly undermining the industrial administrative system inherited from the planned economy. From the mid-1990s onward, China’s industrial ministries were gradually restructured. They were first folded into the State Economic and Trade Commission. Later, as the commission itself was reorganised, most of these ministries disappeared, or were turned into public institutions or state-owned enterprises. These sweeping reforms loosened the state’s control over industry.

The automobile industry provides a useful example. In the past, China strictly regulated which enterprises were allowed to produce passenger cars. In 1988, Guangxi Liuzhou Mini Vehicle Factory quietly tried to cooperate with a French company to bring in an old production line. In principle, this was in line with the broader wave of Sino-foreign joint ventures and cooperative enterprises. Yet it still did not fit the regulatory framework of the time. When the ministries met to discuss how to handle the case, industrial regulators even requested transferring the production line directly to Dongfeng. This shows just how strict regulation was at the time.

After 1994, however, as the former industrial ministries were gradually transformed into state bureaus under the State Economic and Trade Commission, planned-economy controls in various industries began to weaken. When Chery and Geely entered the automobile industry in 1996 and 1997, they generated considerable debate, but the reaction was not as intense as in the earlier Liuzhou case.

Second, reform and opening up allowed indigenous innovation to benefit from changes in the international industrial environment. From the first oil crisis in 1973 through the 1990s, capitalist countries engaged in long and intense competition in manufacturing. The automobile industry is a representative example. Countries invested heavily in what was effectively a global automotive “world war.” After the fierce competition of the 1990s, many giant enterprises could no longer sustain their enormous organisational structures. Some production lines lay idle, and vertically integrated companies began to break apart. Specialised technical companies were spun off from large corporations so that they could survive by serving external markets. Meanwhile, professional design firms, engineering firms, and equipment suppliers that had once served those giants also had to look for new markets outside their original camps.

In this process, it was not only multinational corporations that became eager to enter emerging markets such as China. A large number of experienced personnel also flowed out of those corporations. This is why indigenous Chinese firms were often able to recruit senior engineers from Germany, Japan, and South Korea to provide shop-floor management services. More importantly, the emergence of a large pool of available external resources created favourable conditions for the rise of indigenous innovators.

The pioneer in telecommunications equipment was Great Dragon Telecommunications. Great Dragon grew out of a team led by Wu Jiangxing at the PLA Information Engineering Institute in Zhengzhou. Wu later became both an academician and a general. His team had originally developed large-scale computers for the defence sector, and later applied mainframe computer technology to digital telephone switches. In 1989, when the team first applied to the Ministry of Posts and Telecommunications for network access approval, the ministry rejected the application, arguing that the HJD-04 was a computer, not a digital telephone switch. Because the HJD-04 was a classic case of military-to-civilian technology transfer, senior leaders Yang Shangkun and Jiang Zemin later intervened and asked the ministry to give it another chance. In 1991, the ministry organised a second review, and the HJD-04 finally passed evaluation.

The success of Great Dragon’s HJD-04 was highly significant for China’s telecommunications equipment industry. First, it overturned the pessimistic belief that Chinese engineers could not develop large-scale digital switching systems with more than 10,000 lines. More importantly, it provided a technical model for local innovative firms seeking to develop complex products.

Beginning in the 1970s, digital telephone switching increasingly came to depend on semiconductor integrated circuits and electronic control technologies, often using highly integrated chips. This made imported switches very difficult to reverse engineer, because their core control logic was embedded in those chips. Before developing the HJD-04, Wu Jiangxing had spent two years in Shenzhen trading computer equipment and had become familiar with the second-hand electronic-components market around Chung Ying Street. In the early development of the HJD-04, he therefore used general-purpose chips available on the market and drew on programme-control knowledge from the mainframe computer field to build the system architecture.

As it turned out, this approach was in line with the global direction of digital switching technology at the time. At the frontier of global switching architecture, systems such as the Bell S1240 large-scale digital switch — which China introduced through Shanghai Bell — used a distributed-control architecture. Wu’s team adopted a distributed architecture not because they had access to highly integrated chips, but precisely because they did not. China had no domestic supply of such chips. The team therefore had to use multiple simpler chips and build the switch through a distributed architecture.

This greatly helped Chinese peers understand the core technology behind digital telephone switches. Imported Western switches used highly integrated chips; even those with distributed architectures were packaged around such chips. As a result, Chinese firms could not easily grasp their technical architecture through reverse engineering. HJD-04, however, was built with Motorola general-purpose chips and second-hand chips, which made the architecture far more visible. In a sense, the HJD-04 unpacked the technical architecture of the world’s advanced large-scale digital switching systems. It allowed the essential know-how of “programme control” to spread quickly and made it possible for indigenous firms to enter the field.

In the automobile industry, the pioneer of indigenous innovation was Hafei Automobile. Its parent company, Harbin Aircraft Industry Group, was a helicopter manufacturer. In the early 1980s, as military orders declined, the company had to find a way to sustain itself. Hafei Group therefore had to transfer 3,000 people — beginning with just over 20 — into automobile manufacturing, so that the new business could in turn support the tens of thousands of employees it still had in the aircraft industry. The industrial management system at the time also left a narrow opening for defence enterprises, allowing several state-owned enterprises in the weapons and aviation sectors to share two automobile production qualifications.

As Hafei developed cars, it began cooperating with international technical companies. Its partner was the famous Italian design firm Pininfarina. Pininfarina had long designed exteriors for top sports-car brands such as Ferrari and Maserati, while also providing design services to mass-market companies such as Peugeot. But because of the dramatic changes in the global automobile industry, Pininfarina too had to seek business opportunities in emerging markets, including China. It approached Hafei. At first, the two sides discussed having Pininfarina design the exterior of a new van for Hafei. Later, Pininfarina gradually helped Hafei master a great deal of process knowledge in modern automotive engineering development.

Pininfarina sought to work with Hafei mainly because, thanks to its aircraft-manufacturing background, Hafei had computer-aided design capabilities that were rare in China’s automobile industry at the time. At the same time, Hafei was not on the radar of the large multinational automakers looking to form joint ventures in China.

Hafei succeeded in mastering technical knowledge through its cooperation with Pininfarina because it gave real authority over the project to the Chinese team it had stationed abroad. Decisions such as whether to continue the cooperation and whether to insist that Pininfarina fulfil its contractual obligations were entrusted to that team. For Hafei, these projects consumed almost all the funds the company had available for development. They could not afford to fail. Once fully empowered, the Chinese team, as the client, held organisational leadership in the cooperation. On the basis of the contract, it required the foreign side to open up the product-development process, explain why particular design choices had been made, and clarify any parts of the process that the Chinese side did not understand.

From the perspective of the organisational nature of innovation, the Chinese team had gained access to the innovation process itself, and could require the foreign side to engage with it as needed in response to problems encountered and new information received during development. Through this process, the Chinese side gradually built a systematic understanding of product development. This kind of learning mechanism did not exist in the “market-for-technology” joint ventures of the time.

From a sociological perspective, “indigenous innovation” can be understood as a countermovement against “market-for-technology.” The “market-for-technology” model could operate only within a deeply unequal structure. To make joint ventures attractive to multinational corporations, the Chinese side usually had to put forward its best state-owned enterprises — or strong state-owned enterprises after their “bad assets” had been stripped away — together with preferential policies and direct government investment. This distorted how resources were priced and allocated, and inevitably left many peripheral firms outside the joint-venture system.

The essence of this countermovement was that engineers who had been marginalised within the existing economic system, or who opposed the “market-for-technology” model, began to step forward and challenge the mainstream path. They did so either to create room for their own survival or to defend the industrial values they believed in. Their initial approach was simple and direct: bring together large numbers of people from the planned-economy system and from “market-for-technology” enterprises, and build a new organisational structure through which product and technology development could take place. In other words, the human resources were already there within China’s industrial economy; what changed was the way they were organised.

Chery offers a telling example. Many of its early engineers came from FAW. Even the street address of Chery’s headquarters in Wuhu — No. 8 Changchun Road — carried a quiet but powerful message. [Changchun was the home of FAW, the symbolic birthplace of China’s modern automobile industry.] For several generations of FAW engineers, from those in their thirties to those in their seventies, including Yin Tongyue, founder and chairman of Chery, the address almost read like a statement of intent: China’s passenger-car industry should not remain dependent on multinational technology.

Li Shufu, the founder and chairman of Geely, followed a similar path. He recruited experts from FAW, Dongfeng, and Nanjing Automobile — later acquired by SAIC — to serve as technical leaders at his company. The engineer in charge of Geely’s transmission development, for example, had once been the director of Tianjin Gear Factory. After Tianjin Automobile was absorbed by FAW and entered a joint venture with Toyota, experienced engineers like him found that they no longer had a real place to put their skills to use. Refusing to accept an idle post, the former gear-factory director went directly to Geely to work on transmission R&D.

As The Tide Rises recounts in detail, FAW engineers had once developed a small car on their own initiative called the “Sankoule” [literally, “happiness for a family of three.”] Yet instead of being encouraged, the engineers nearly faced internal punishment. After retirement, several core engineers who had taken part in the Sankoule project soon went to Geely, where they continued to pursue the same commitment to indigenous product development.

Huawei and ZTE were even more effective in integrating personnel from state-owned enterprises and research institutes under the Ministry of Posts and Telecommunications and the Ministry of Electronics Industry, and later, after 1998, from Sino-foreign joint ventures. This is discussed in detail in The Rising Tide. I call this transformation “a repricing of China’s human resources.”

Under the “market for technology” framework, Chinese engineers were often confined to production, quality management, and after-sales service. With the rise of indigenous innovation firms, they were drawn back into production-related R&D, technology development, and product development. Their role was redefined. China’s demographic dividend began to turn into an engineering dividend.

Scholars of multinational corporations have also found that, overall, the turning point for multinational companies to set up R&D centres in China was around 2005. This was clearly influenced by the rise of Chinese indigenous innovation firms and by the shift in national development strategy.

The organisational strategies of indigenous innovation firms were, in fact, highly open. This stood in sharp contrast to many of the claims circulating in the “marketplace of ideas” at the time. During the major debate over indigenous innovation in 2004–2005, critics often described it as “closed innovation,” “building cars behind closed doors,” or even “a retreat from reform and opening up.” These claims were badly out of step with reality. Seen from the perspective of innovation as an organisational process, indigenous innovation firms were far more open than enterprises operating under the “market-for-technology” model.

The core difference between indigenous innovation firms and “market-for-technology” firms lies in who controls the organisation of technological activity. Under “market-for-technology,” that control rested with multinational corporations, and Chinese firms were merely part of their systems. What kinds of interaction took place, with whom, and what information was exchanged were all determined by that system. Indigenous innovation firms were the opposite. Even if their initial products were crude, local firms themselves decided the purpose of interaction, what to interact over, whom to work with, what equipment to use, and what technical adjustments to make. This is the greatest difference between indigenous innovation and “market-for-technology.”

Indigenous innovation firms adopted a “小步快跑 small steps, fast iteration” strategy of organisational learning. They built technical capabilities through repeated development practice. Product and technology development were not only the goal but also the means of competition. A small survey of Chery engineers in 2004 found that young engineers were being assigned to different projects through a matrix structure. At the time, a single engineer could be responsible for as many as twelve development projects. This combination of hands-on training and real responsibility allowed even recent graduates to grow quickly on the job.

In this process, firms were investing not only in product development and complex technologies, but also in the growth of their own people. A new organisational model cannot be created through slogans or textbook prescriptions. It requires firms to commit substantial strategic resources to new technology and product-development projects. Through practice, they mobilise and integrate the organisational and technical capabilities of their people. Through interaction across departments and between firms, these capabilities are then coordinated and rewoven into an organic network that serves local technology and product development.

This process also brought about a political transformation. In my book, I call these firms “engineer-led enterprises.” In their early years, indigenous innovation firms did not enjoy preferential government policies. They were also weak in resources and market influence, which made them unattractive as joint-venture partners for multinational corporations. These firms had to grow by relying on their own engineers. As a result, they delegated decision-making power over resources in technical cooperation and technology development to frontline development teams. These teams could mobilise resources, adjust cooperation mechanisms, and push technological development forward according to the needs of a complex and constantly changing innovation process.

Ren Zhengfei captured this feature well in a 2011 internal speech at Huawei, when he said: “Let those who hear the gunfire direct the battle.” The idea was that engineers and frontline engineering teams, because they were the ones facing problems on the ground, solving them, and coordinating with partners, should have the authority to decide where product-related resources were used and what adjustments needed to be made.

In 2014, Huawei launched a pilot reform at its Guangzhou branch, cutting the number of matters that had to be reported to Shenzhen headquarters from more than 200 to just over 40. The aim was to give frontline engineers and engineering development teams greater autonomy in decision-making.

This shows that, compared with “market-for-technology” enterprises, the rise of indigenous innovation firms was not simply a matter of business strategy or resource input.

A number of counterexamples in the indigenous innovation process make this even clearer. My book discusses the case of Brilliance Auto under the leadership of a financier. As Chery, Geely, and other firms rose, Brilliance also decided to follow the example of indigenous innovation firms and develop its own passenger cars. But its financiers misunderstood what mattered most. They believed that indigenous innovation was primarily about resources: spending heavily to work with top foreign technical firms and buying first-class development and production equipment, etc.

In developing the M1 model, Brilliance outsourced work to more than 40 foreign technical firms. But in these external cooperation projects, it did not place the whole process under the control of its own engineering teams. As a result, the interactions required for innovation during development were not organised by the company’s internal engineering force, but effectively handed over to international technical contractors. The M1 project ultimately cost RMB 4 billion, yet the first vehicles that came off the line still had basic engineering defects, including steering problems that caused the car to drift.

This example fully shows that the core of indigenous innovation is organisational and political. The key question is how a firm reconstructs organisation within industrial and technological activity, and who controls the organisational process of innovation.

IV. Why a New Whole-of-the-Nation Approach Is Needed to Address Major Innovation Challenges

The policy turn towards indigenous innovation in 2004–2005 was another crisis-driven structural transformation. Yet, looking back at the major changes in China–U.S. relations after 2017, that transformation remained incomplete. At the time, innovation was still understood mainly at the micro and meso levels of firms and industries. There was not yet a fully systemic understanding of innovation, and this limitation appeared in several ways.

One was the intense debate over who should carry out innovation. In 2005, within the drafting group for the National Medium- and Long-Term Program for Science and Technology Development, there was fierce debate over who should be the principal actor in innovation. Many participants still believed that research institutes should play that role. Only after intense discussion were enterprises established as the main actors of innovation.

Even so, indigenous innovation was still understood largely as a matter of corporate or industrial strategy. In 2007–2008, the State-owned Assets Supervision and Administration Commission (SASAC) revised the performance-evaluation criteria for the heads of state-owned enterprises, reflecting the belief that innovation was mainly a question of corporate management. But this understanding remained incomplete. Seen from the post-2017 changes in China–U.S. relations, China’s industrial system — or, more broadly, its innovation system — had not yet undergone a systemic transformation. Many firms were still embedded in global production networks led by multinational corporations. They followed other countries’ technology roadmaps and industrial agendas, and relied on foreign components and technical services to develop their own products.

This is why indigenous innovation firms were often pushed toward vertical integration. In their early years, lacking support from local industrial and innovation chains, they often had to invest internally to build small innovation ecosystems of their own.

In the automobile industry, firms such as Geely and Chery directly invested in forty to fifty core component companies. Around them, networks of two to three hundred key suppliers gradually took shape. Chery even acquired Wuhu Shipyard because it could not find domestic shipbuilders willing to provide the roll-on/roll-off vessels needed to carry complete vehicles overseas. The reason was simple: Chery was one of China’s pioneers in automobile exports, domestic shipbuilders had no prior experience in this business, and the future of China’s indigenous automakers remained uncertain. They were unwilling to commit strategic resources to innovation-related interaction with local carmakers. Indigenous automakers therefore had to do it themselves. They had to develop and build roll-on/roll-off ships on their own. In this way, Wuhu Shipyard was also drawn onto a path of innovation. A recent news report noted that China’s first offshore fracturing vessel had been launched, breaking a foreign monopoly. It was built by Wuhu Shipyard.

Chery’s efforts were not limited to shipbuilding. They also extended to robots, forklifts, sensors, and a range of other technologies and products. BYD followed a similar path, pursuing full-stack in-house development across nonferrous metals, batteries, complete vehicles, and many components and systems. As these firms tried to disembed themselves from global production networks, they found that other domestic firms could not yet provide the support they needed. Nor could they rely on market coordination alone to create the patterns of interaction required for indigenous innovation. They therefore had to use the “visible hand” inside the firm to build small innovation ecosystems and secure their own survival and development.

Huawei followed a similar path. It has made power supplies, optical cables, submarine cables, and more. Today it also supplies inverters to the photovoltaic industry and LiDAR systems to the new-energy vehicle industry.

How did Huawei’s solar inverter business emerge? In extremely cold regions, base stations could face nighttime temperatures of minus 40 degrees Celsius, which meant they had to be heated. One way to do this was to install solar panels and use inverters to supply power for heating the base stations. At the time, no domestic company was willing to provide this supporting service, so Huawei had to develop the solar and inverter technologies itself. Today, Huawei has become one of China’s largest inverter suppliers and is even capable of operating large-scale solar-energy projects.

This history helps explain why China began to emphasize the new whole-of-the-nation approach in 2019, when it faced another major shift in the external environment — and another crisis. U.S. “decoupling” and supply-chain disruption, as well as Europe’s “de-risking,” are in essence similar to what multinational corporations had done in China in the 1980s and 1990s. What they share is an attempt to disrupt the autonomous innovation process of Chinese firms by constraining the patterns of interaction on which innovation in developing countries depends.

At the time, many Chinese firms remained tied to global industrial and innovation chains led by multinational corporations, and still lacked organisational leadership over innovation. This was the crisis that prompted the CPC Central Committee’s policy response. The new whole-of-the-nation approach is not merely about breaking through certain key “chokepoint” technologies; more fundamentally, it is about regaining leadership over the organisational mechanisms that coordinate innovation-related interaction among firms.

In practice, the new whole-of-the-nation approach works by using large-scale projects to accumulate experience and draw domestic actors into collaboration: firms with other firms, firms with research institutes, suppliers with one another, and firms across different industries. This cooperation itself becomes a public good. It allows local industrial firms to build the full set of capabilities needed to define problems, analyse them, break them down into tasks, divide those tasks among different actors, and then integrate the results.

The new whole-of-the-nation approach can therefore be understood as an effort, under new circumstances, to use state intervention to build the organisational mechanisms required for systemic innovation. There is a joke often told about China’s semiconductor industry: before the United States began suppressing the sector in 2017, Semiconductor Manufacturing International Corp (SMIC) had little interest in serving China’s domestic electronics companies. SMIC was already one of the world’s top five semiconductor foundries, and its ambition was to serve high-end customers in the global market. Huawei, for its part, would not have sent its orders to SMIC before 2019 either. Its competitor was Apple, so it naturally turned to the world’s leading foundry, TSMC, to manufacture its chips. In other words, even outstanding Chinese companies such as Shanghai Micro Electronics Equipment (SMEE), SMIC, and Huawei had not yet formed deep innovation linkages with one another at home.

After Trump came to power, he taught China a lesson: these companies had to become connected. Once those connections are formed, they can begin to develop into a shared community capable of solving problems together. Each side learns where the other is, what they can do, and what they need.

Of course, China’s domestic industrial chains are still far from complete. After I began speaking publicly about the new whole-of-the-nation approach, people in industry would often tell me that they had come across yet another company, somewhere in China, that supplied motion stages for Japanese lithography machines — the most critical mechanical components in the system. Yet such a company had never received government support. Even the company itself may not have known where it stood in Japan’s lithography production system, while the government and large domestic enterprises knew even less about what it was doing.

In other words, China’s domestic community of innovation interaction remains weak. The ties within this industrial community — between firms, and between industries — still need to be strengthened through the new whole-of-the-nation approach. There are useful precedents for this in the history of the U.S. semiconductor industry.

China, too, built many of the institutions that were later criticised through earlier versions of the whole-of-the-nation approach, even during the planned-economy period. The Chinese Academy of Sciences is one example. Before the “Two Bombs, One Satellite” programme, it had only a limited number of institutes. Afterwards, a much wider range of departments and institutes was established.

The industrial ministry system of the planned-economy period was also developed and strengthened through a series of national campaigns after the Sino-Soviet split in the late 1950s. The Ministry of Machine Building Industry, for instance, was strengthened through the state-led “Nine Major Equipment” programme of the early 1960s, which developed nine sets of large-scale industrial equipment under the leadership of figures such as then Vice Minister Shen Hong. In essence, earlier large-scale engineering and technology programmes created domestic actors and connected them. China needs to do something similar in the new era. The tasks are different, but the underlying logic is much the same.

This is how I understand the major structural transformations in China’s industrial development. Innovation requires enterprises to develop organisational mechanisms of their own. They must build systems capable of providing resources, mobilising people, and integrating capabilities for the kinds of interaction that innovation requires.

As these structural transformations unfolded, policymakers, business leaders, and strategists in developing countries were all learning as they moved forward. Their understanding was always limited by the historical moment in which they lived. They operated within the practices of production and everyday life, and also within the “marketplace of ideas” of their time. Today, new understandings have emerged, making it possible to see the limitations of earlier stages. Yet every period has its own cognitive boundaries, and the realities and contradictions people face are always changing. Twenty years from now, the next generation of students may well look back at today’s ideas, find them incomplete, and perhaps even criticise them.

For this reason, building an indigenous knowledge system in China requires two things at once. On the one hand, China must absorb the best ideas from around the world. On the other, it must remain firmly grounded in its own development experience — in its own efforts to understand problems and solve them.

There will inevitably be detours along the way. In China’s effort to integrate into globalisation, “market-for-technology” helped upgrade products, raise manufacturing standards, and strengthen manufacturing capabilities. But when it came to innovation in complex products and technologies, it could not provide a real driving force.

At the same time, however, “market-for-technology” and China’s market-oriented reforms created a series of favourable conditions for the rise of indigenous innovation. The wave of indigenous innovation that began around 2005 enabled a small number of firms to emerge. But after 2017, and especially after 2019, the challenge China faced was no longer the rise of a few individual firms. It was the transformation of the entire system.

A systemic transformation of this kind can only be initiated through government intervention — that is, through non-market forces that compel actors to connect with one another. Through a series of projects, these actors can complete the interactions and organisational arrangements needed for local innovation. Once such a mechanism has taken shape, the hand of government can withdraw. The mechanism can then reproduce itself, develop the ability to define and analyse problems, and ultimately pursue its own agenda.

Only at that point can a real environment for market competition emerge: one in which firms compete more fully with one another, research institutes and enterprises both cooperate and compete, and innovation is organised through a mature ecosystem of interaction.

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2 months ago · 44 likes · 5 comments · Yuxuan JIA and Zichen Wang

The participants were

• Hu Bo, South China Sea Strategic Situation Probing Initiative (SCSPI), as well as Research Professor and Director of the Center for Maritime Strategy Studies, Peking University;

• Wang Cheng, Senior Fellow at the Chinese Academy of International Trade and Economic Cooperation (CAITIC) under China’s Ministry of Commerce;

• Tang Tianbo, Director of the Middle East Economy and Energy Research Office at the China Institutes of Contemporary International Relations;

• and An Yukang, an energy-sector practitioner.

Drawing on field observations and professional experience, the experts show how quickly the U.S.-Israel-Iran war hit Chinese enterprises — from Middle East orders plunging to less than one-tenth of normal levels, to higher shipping costs, longer delivery times and growing pressure on exporters to assume end-to-end logistics responsibilities.

They also make a broader point: the crisis has vindicated China’s earlier strategic judgments. Its efforts to diversify energy imports, expand strategic reserves, develop new-energy capacity and invest in overseas ports, industrial parks and logistics links have given it a degree of resilience that many economies lack. Assets that may once have looked like “strategic redundancy” in peacetime — from Hambantota and Gwadar to Duqm and Piraeus — could prove valuable backup nodes in a crisis.

They argue that China’s preparations need to go further. It should diversify import sources and transport routes, expand strategic reserves beyond oil to natural gas, critical minerals and key components, strengthen Chinese-controlled shipping and insurance capacity, and develop independent maritime situational awareness systems. The Belt and Road Initiative should increasingly assessed by whether its ports, industrial parks, and logistics facilities have the capacity to serve as backup nodes in a crisis.

But they caution against seeking absolute security or copying the U.S. model of military control over chokepoints. For the world’s largest goods trader and energy importer, the task is to build relative security by keeping trade open while making vital flows more resilient.

—Yuxuan Jia

Roundtable Discussion: “Strategic Chokepoints”

圆桌访谈：“战略咽喉”

The Real Landscape of Global “Strategic Chokepoints”

Hu Bo: Around the world, there are about 25 straits and waterways of major significance, among which roughly nine can be considered critical chokepoints. At present, direct control over these chokepoints rests mainly with the littoral states. After World War II, as countries across the developing world gained independence, these maritime passages were no longer directly controlled by major powers.

For some time, there has been a claim in public discourse that “the United States controls most of the world’s strategic chokepoints.” That is not really consistent with reality. The Strait of Hormuz, for example, is shaped more directly by Iran and Oman.

The importance of these maritime routes is determined mainly by two factors: geography and economic value. Take the Strait of Hormuz. It connects the Persian Gulf with the Indian Ocean, and the Persian Gulf is one of the world’s key energy-producing regions. These two factors together make Hormuz an irreplaceable passage.

During the U.S.-Israel-Iran war, the situation in the Strait of Hormuz caused what has been described as “the largest supply disruption in the history of the global oil market”, raising worldwide concern about the security of maritime routes. Still, the world’s maritime chokepoints remain broadly stable and secure. We should not exaggerate the risks facing other passages simply because of the current situation.

Hormuz is a highly exceptional case. It has almost no alternative. Once it is blocked, it is effectively sealed off. But that also means the case is not easy to replicate. Other countries would find it difficult to copy Iran’s approach to blocking a strait. Other maritime routes, such as the Strait of Malacca, generally have alternative routes. Even if they were blocked, the impact would not be as severe as a blockage of Hormuz.

At the same time, the global trading system still operates mainly on international economic rules and international law. Over the past two years, geopolitical conflicts have led to a marked deterioration in the Black Sea, the Red Sea, and the Strait of Hormuz. But their negative impact has not yet reached the point of overturning the global trading system or the overall security of global strategic chokepoints. The situation as a whole remains within a manageable range.

Since the U.S.-Israel-Iran war broke out, there has been a lot of domestic and international discussion about whether strategic chokepoints can be controlled by military means. On this question, we need to be clear about four things.

First, diplomacy and law remain the main means of safeguarding maritime passage security. Even though the global geopolitical environment has become more strained, and even though the Trump administration has taken military action against countries such as Venezuela and Iran, no country can fully control a strategic chokepoint by military power alone.

Second, there are clear limits to controlling maritime chokepoints through military means. Since the beginning of the 21st century, advances in military technology, the development of international norms, and changes in the political environment have all placed greater constraints on the overseas projection and use of military power by major countries. In military-strategic terms, the balance is shifting. It is becoming easier to deny others access to a maritime area, but harder to maintain control over it. Even the United States, with the world’s most powerful navy, has no particularly effective way to respond to Iran’s blockade of the Strait of Hormuz, even though Iran does not have a conventional navy in the usual sense.

Third, what the Trump administration is trying to do is, in effect, to revive the 19th- and 20th-century pattern of great powers controlling maritime passages. But that runs against the characteristics of the current era, the direction of military-technological development, and today’s political environment. It is therefore difficult to achieve.

Fourth, military power is a backstop. As maritime passage security becomes more important, countries may pay growing attention to military means, and safeguarding maritime routes may gradually become an important responsibility of national armed forces. But military action will not be launched lightly unless diplomatic and legal means have already been exhausted.

The key point is that no major power today has the ability to comprehensively control strategic chokepoints. If the United States finds it difficult to exercise effective control even over the Strait of Hormuz, it certainly cannot control the world’s major maritime routes.

Wang Cheng: One important lesson from the U.S.-Israel-Iran war is that the most important strategic assets of the 21st century are no longer limited to physical resources such as energy and minerals. The ability to keep resources, energy, data, and supply chains flowing has also become a key factor in a country’s strategic competitiveness.

In today’s major-power competition, controlling a strategic chokepoint is like controlling the “valve” of resource flows. At the same time, building diversified alternative routes beyond traditional chokepoints gives a country significant strategic resilience in geopolitical competition. The Strait of Hormuz crisis shows clearly that future major-power competition will not only be about the contest for physical resources. It will also be about control over the movement of those resources.

Traditionally, people understood strategic chokepoints mainly as maritime passages. Today, however, they have evolved into a multi-layered system. This system includes not only traditional sea routes, but also overland transport corridors, cross-border energy pipelines, major hub ports, submarine cable landing points, global data exchange centres, and transport channels for critical industrial chains such as semiconductors.

The core reason is that globalisation today is fundamentally different from what it was over a decade ago. What moves across the world is no longer only oil, natural gas, and physical goods. It also includes capital, data, high-end chips, and entire industrial chains.

Different chokepoints have different functions. The Strait of Hormuz is crucial to global energy transport. The Strait of Malacca carries East Asia's manufactured goods to the world. The Suez Canal is the main artery connecting trade between Europe and Asia. The Taiwan Strait carries the world’s most critical semiconductor supply chains.

Moreover, more than 95 per cent of international data traffic is transmitted through submarine cables. The Gulf region, especially the Strait of Hormuz, is a key hub for submarine cables linking Asia and Europe, as well as Asia and Africa. These routes are not only transport lines for energy and goods. They are also support lines for data, chips, and industrial chains. Together, they form the global network of strategic chokepoints today and for the foreseeable future.

Based on their importance and scope of impact, I would divide global strategic chokepoints into four tiers.

The first tier consists of global strategic chokepoints. Disruption in these passages directly affects the global economy. The main examples are the Strait of Hormuz, the Strait of Malacca and the Suez Canal.

The second tier consists of regional strategic chokepoints. These mainly affect interregional trade and secondary energy flows. Examples include the Bab el-Mandeb Strait, the Panama Canal, and the Strait of Gibraltar.

The third tier consists of industrial-chain strategic chokepoints. These are directly related to the supply-chain security of specific industries. The Taiwan Strait, which is closely tied to semiconductor transport, is one example. The Turkish Straits — the Bosporus, the Sea of Marmara and the Dardanelles — are another, because they affect energy and grain transport from the Black Sea region.

The fourth tier consists of future-oriented strategic chokepoints. These include Arctic shipping routes, global submarine cable nodes, and critical mineral supply-chain networks.

In terms of control, the dominant forces over global strategic chokepoints can be understood as having three layers.

The first layer is the United States. With its globally leading blue-water power projection capability and overseas military base network, the United States still has more influence over the global maritime security system than any other country.

The second layer consists of the littoral states with strategic chokepoints. Relying on their geographic advantages, these countries have the practical ability to impose partial blockades or exercise control over nearby passages.

The third layer consists of emerging major powers. These countries are gradually gaining substantive influence over key chokepoints through ports, railways, energy infrastructure, and cross-border investment networks.

But one point must be made clear: in reality, control is not the same as sovereignty, and the right of passage is not the same as the right to security. We need an objective and rational understanding of what countries can and cannot do when it comes to controlling strategic chokepoints.

Tang Tianbo: Among the world’s strategic chokepoints, the Strait of Hormuz stands out in several important ways.

First, the materials that pass through it are simply too important. According to the International Energy Agency, in 2025, more than one-quarter of the world’s seaborne crude oil and petroleum products, and around one-fifth of global LNG shipments, passed through the strait. Oil and gas are among the world’s most important bulk commodities. At the same time, Hormuz also carries key materials such as fertilisers, sulphur, aluminium, and helium, which are essential for semiconductor production. That makes the Strait vital not only to global energy security, but also to the wider industrial system.

Second, the alternatives are far from ideal. If the Suez Canal, the Bab el-Mandeb Strait or the Panama Canal is disrupted, vessels can still reroute, even if that means longer journeys and higher costs. Hormuz is different. It is the only maritime outlet from the Persian Gulf to the wider world. Saudi Arabia’s East-West Pipeline and the UAE’s Habshan-Fujairah pipeline can bypass the strait for some oil exports, but their theoretical maximum capacities are 7 million barrels per day and 1.8 million barrels per day, respectively. Combined, that is still far below the strait’s normal daily traffic. These pipelines also face the risk of being disrupted by attacks.

Third, its geography makes it easy to block and difficult to reopen by force. The strait is only 33 kilometres wide at its narrowest point and less than 100 kilometres wide even at its widest. Blocking it is much easier than forcing it open. Many outside observers once assumed that the United States would be able to restore passage quickly through military means. In reality, the United States adopted a “dual blockade”: both Washington and Tehran imposed their own forms of control over passage through the strait. That has further confirmed that for Hormuz, the threshold for disruption is low, while the cost and difficulty of countermeasures are high.

In recent years, disruptions to physical strategic passages have become increasingly frequent, whether because of geopolitical conflicts, accidents, or other factors. Major-power rivalry has also intensified interference in chokepoints. For example, the United States has shown a growing desire to assert control over global strategic passages. Trump has publicly questioned the Carter administration’s 1977 decision to transfer control and defence responsibilities for the Panama Canal to the Panamanian government, even considered taking back control of the canal, and claimed that the United States should be allowed to pass through both the Panama Canal and the Suez Canal free of charge. Such moves directly challenge the existing international regime governing maritime chokepoints.

In assessing maritime strategic chokepoints today, Western analysts tend to focus on four main factors.

First, whether the surrounding littoral areas involve so-called “revisionist” states, such as Iran, or non-state actors, such as the Houthis. Such states or non-state actors, they argue, are either isolated within the existing international system or see themselves as insecure, and therefore have a stronger incentive to disrupt passage in pursuit of political objectives.

Second, strategic chokepoints are not necessarily physical. If a country has total dominance over a certain category of critical products and is able to effectively control or even block their supply, then it controls a non-physical strategic chokepoint.

Third, the difficulty of finding alternative routes in the short term is one criterion for identifying a strategic chokepoint.

Fourth, for the party imposing control or a blockade over a strategic chokepoint, the benefits must outweigh the losses it incurs. Only then can such actions be sustained.

An Yukang: The importance of traditional strategic chokepoints is determined by objective factors such as geography and geoeconomics. But U.S. assessments also contain a great deal of subjective threat perception and strategic anxiety.

Since the Trump administration began its second term, it has paid much closer attention to key straits and maritime areas. Its core objective is to control all maritime spaces that it believes could threaten U.S. security interests. That reflects a very strong level of strategic anxiety.

It is worth noting that “maritime blockade” and “maritime embargo” are two similar concepts that are easily confused. The term “maritime blockade,” which the United States now uses frequently, comes from the law of war. Article 3 of the Definition of Aggression adopted by the UN General Assembly in 1974 clearly states that the blockade of the ports or coasts of a State by the armed forces of another State constitutes an act of aggression.

At the same time, the U.S. military has also made broad use of maritime embargoes and boarding inspections. Strictly speaking, a maritime embargo refers to coercive or confrontational measures in peacetime. Since Trump returned to the White House, the United States has sharply increased the pursuit and seizure of vessels linked to Russia, Iran, and Venezuela. From Operation Southern Spear against Venezuela and the maritime embargo on Cuba, to the so-called “maritime blockade” of Iran around the Strait of Hormuz, the United States has openly expanded the wartime concept of “maritime blockade” and turned it into a routine instrument of pressure against hostile countries.

This way of thinking and acting is highly aggressive and destructive. It could have far-reaching effects on U.S. overseas military operations, major-power relations, global energy, and geopolitics.

As the United States escalates its maritime blockade against Iran, security linkages among global strategic chokepoints have become much stronger. For example, while imposing a blockade on Iran around the Strait of Hormuz, the United States has also deployed some forces to the Strait of Malacca and waters near Malaysia. It has held the Balikatan joint military exercise with the Philippines. U.S. amphibious assault ships did not go to the Middle East, but remained in the Indo-Pacific. In April, the United States also signed a Major Defense Cooperation Partnership (MDCP) with Indonesia. Some media reports said Indonesia was considering allowing U.S. military aircraft to fly over its territory, which would make it easier for the United States to conduct maritime and air surveillance around the Strait of Malacca.

The core U.S. calculation behind these moves may be to create two-way linkage between the Strait of Hormuz and the Strait of Malacca, using the latter to prepare for possible maritime interdiction against its competitors.

China should pay close attention to strategic passages related to its core interests, such as the security of iron ore transport. For example, the main routes for China’s iron ore imports from Western Australia involve key waterways such as the Lombok Strait, the Makassar Strait and the Mindoro Strait. The security and stability of these passages are directly related to the supply-chain security of China’s steel industry and broader industrial system.

How the Hormuz Crisis Sent Shockwaves Around the World

Tang Tianbo: Both the United States and Iran claim to have the upper hand and to exercise actual control over the Strait of Hormuz. At the same time, AI-enabled information warfare and limited access to open-source information, including commercial satellite imagery, have made the real picture somewhat unclear. Still, based on the information currently available, three observations can be made.

First, passage through the strait has largely come to a standstill. After the war broke out, Iran required all vessels passing through the Strait of Hormuz to obtain its permission and considered charging passing ships a fee. The United States, having failed to quickly reopen the strait through negotiations or by force, announced that vessels carrying Iranian cargo or entering or leaving Iranian ports would be barred from passing through the strait. It also said it might intercept or sanction vessels that paid transit fees to Iran.

Under this “dual blockade,” the number of vessels passing through the strait since the start of the war has been extremely limited, at less than 10 per cent of prewar levels. At present, thousands of vessels and more than 20,000 crew members remain stranded.

Second, both the United States and Iran want to project toughness. Both sides have relied mainly on force to exercise control over the strait. In addition to intercepting and turning back vessels, the U.S. military boarded and seized the cargo ship Touska on 19 April after it was suspected of heading toward an Iranian port and refused U.S. instructions to turn around. The United States also expanded the scope of its blockade to the Indian Ocean and even the Pacific.

Iran, while attacking and seizing vessels, is also rumoured to have begun laying more mines in the strait. For Iran, the strait is the most important bargaining chip in its contest with the United States. For the United States, if the strait cannot be restored to free passage, Trump’s “winning” narrative will face even greater scrutiny. Both sides therefore have an incentive to keep testing each other’s limits.

Third, passage through the strait is closely tied to the stop-start negotiation process between the United States and Iran. On 17 April, after the United States and Iran held their first round of talks in Pakistan, Iranian Foreign Minister Abbas Araghchi briefly announced the reopening of the strait. Trump expressed thanks, but then said the U.S. blockade would continue. Iran accused the United States of violating the ceasefire agreement, and within 24 hours the shipping lane had been opened and closed again.

A similar scene played out again on 5 May, when Trump announced a pause in “Project Freedom,” an operation to help stranded vessels leave the strait, little more than a day after it had begun. His stated reason was that the United States and Iran were close to reaching an agreement. The military contest around the strait is therefore inseparable from the political and diplomatic bargaining between the two countries.

As for where the crisis goes from here, three points are worth watching.

First, disruption or even a blockade in the Bab el-Mandeb Strait cannot be ruled out, although the likelihood remains relatively low. If the Houthis in Yemen were to take this opportunity to disrupt Red Sea shipping, the risks would be much higher than during their attacks on “Israel-linked vessels” in the Red Sea from 2023 to 2025. With Hormuz already obstructed, any move to block Bab el-Mandeb as well would likely trigger a much stronger international backlash. The Houthis have also previously faced large-scale U.S. military strikes, so they would have to consider the risk of further heavy attacks by the United States and Israel.

Second, the spillover impact of the Hormuz crisis depends largely on the duration and intensity of the war and the actual blockade. Judging from Brent crude prices as of 5 May, the market is worried but not panicked. Its basic assessment appears to be that the war is unlikely to escalate into a large-scale, long-cycle, high-intensity conflict.

Third, in practice, it would be difficult for the strait to become a long-term “toll station.” Stranded vessels may pay in the short term because they need passage urgently, but over time such a model would struggle to gain legal legitimacy or international acceptance.

In this war, there may be no real winners among the major Middle East countries. Iran has suffered serious losses, and postwar reconstruction could face a sizeable funding gap. Even for Israel, the war has damaged one of its key strategic foundations: the special relationship with the United States. On 17 March, Joe Kent, the Trump-appointed director of the U.S. National Counterterrorism Center, reportedly resigned out of frustration that Israel had dragged the United States into the war against Iran. Such a development would once have been hard to imagine in Republican and conservative circles.

The Gulf Arab states have shown some resilience, but they are no longer a “safe oasis” amid Middle Eastern turmoil. Nor has the Gulf Cooperation Council (GCC) presented a unified position during the crisis. The GCC was founded in 1981 in response to perceived threats from Iran, but today there is little consensus on how to deal with Iran, or even on whether Iran remains the primary threat.

Hu Bo: First, it is important to understand that a “blockade” at sea is always relative. The ocean is vast, and a complete physical blockade is extremely difficult to achieve. Iran’s blockade does not mean stopping every vessel. Rather, by threatening or harassing some vessels, it creates a chilling effect, prompting most shipowners to stay away because of safety concerns and insurance costs.

For merchant vessels, safety is the top priority. If insurers refuse to provide coverage and no one is willing to bear the risk, shipowners will be even less willing to take their chances.

Iran has placed its blockade line at the narrowest point of the Strait of Hormuz, while the United States has placed its line outside the strait, in the Gulf of Oman. Even with many warships and vessels deployed, a complete U.S. naval blockade would require a long time and enormous forces, and the result would still be uncertain. The core purpose of the U.S. move is to force Iran to reopen the strait.

In fact, the strait itself is of limited importance to U.S. passage security. But the obstruction of the strait stems from the war first launched by the United States and Israel, which makes it politically and strategically difficult for Washington to extricate itself. As long as the strait remains closed, the Trump administration’s “winning” narrative cannot hold together. The United States will also pay a heavy price in strategic credibility and diplomacy. It therefore has to reach some degree of compromise with Iran.

Since the United States announced its blockade of the strait on 13 April, around 30 vessels a day have crossed the U.S. blockade line, operating mainly between the “Iranian line” and the “U.S. line.”

It is worth noting that even if the war ends, the Strait of Hormuz will find it difficult to return to its prewar state. After this episode, Iran is unlikely to relinquish control over passage rights through the strait. But its current approach — hurting the other side while also hurting itself — is hard to sustain over the long term.

Looking ahead, Iran may seek a solution acceptable to all parties: charging certain fees and using that arrangement to preserve a greater say over the waterway. That is its core objective.

For the United States, the immediate priority is to get out of the war, so any outcome must be politically and diplomatically defensible. If the two sides can package “appropriate fees” in a way that allows both to claim victory at home, Washington may be able to accept it. But no matter how the war ends, Iran is likely to continue seeking some form of control over the strait. This will have far-reaching implications for international energy corridors, energy security, and global trade.

An Yukang: The Strait of Hormuz could become a long-term “toll station.” This possibility stems from two core issues in U.S.-Iran negotiations: Iran’s right to uranium enrichment — especially the U.S. demand that Iran hand over its highly enriched uranium — and passage rights through the Strait of Hormuz.

Iran may accept a lower level of uranium enrichment in exchange for the United States lifting its maritime blockade. At the same time, Iran could ease its own control over the Strait of Hormuz in phases. If all parties come to recognise Iran’s “special influence” over the strait in political and military terms, the United States and Iran may reach a framework agreement based on “uranium enrichment for passage rights” and “lifting blockade for lifting blockade,” with both sides making concessions.

Based on front-line feedback, Iran has opened a “safe corridor” through the strait and released a route map on 8 April. Under Iranian controls, eastbound vessels must pass south of Larak Island, while westbound vessels must detour north through Iranian territorial waters between Larak Island and Qeshm Island and undergo inspection at a checkpoint on Larak Island.

The “safe corridor” has no uniform fee schedule. Oil tankers are charged one U.S. dollar per barrel, and a 300,000-ton supertanker may pay as much as 2 million U.S. dollars. The rate was set with reference to toll levels on the Suez and Panama canals. Given current international oil prices and shipping schedules, shipping companies may not find it entirely unacceptable.

In practice, non-Iranian vessels must contact the Islamic Revolutionary Guard Corps (IRGC) through agents and submit detailed information on vessel ownership, financing, insurance, departure port, destination, charter contract, and cargo, in order to prove that the vessel has no ties to the United States or Israel. Once approval is granted, the IRGC provides a route list and sends speedboats to track and supervise the vessel. Iran also classifies vessels’ countries of origin into five tiers according to the closeness of bilateral relations, granting transit-fee exemptions to friendly countries such as Russia.

Oman once considered opening a “second passage” within its own territorial waters and discussed with Iran ways to ensure smooth passage through the strait. But Iran’s route map designated both the prewar main shipping lane and Omani territorial waters as mine-risk areas and banned vessels from passing through them. At present, vessels publicly transmitting AIS signals are all passing through waters on the Iranian side and are subject to full Iranian monitoring. Vessels not publicly transmitting AIS signals pass through the strait along the Omani coastline.

Pakistan also held talks with Iran to ensure the safety of its own vessels. In fact, Iran has consistently allowed Pakistani vessels to pass directly. In March, Pakistan proposed that large oil tankers stranded in the Gulf reflag under the Pakistani flag to pass through the strait.

The crisis over the Strat of Hormuz is forcing global shipping to reroute and is affecting other chokepoints.

First, alternative logistics corridors built around sea-land transshipment have emerged. Goods from many countries are now being rerouted through Oman’s Sohar Port, the UAE’s Khor Fakkan and Fujairah ports, and Saudi Arabia’s Jeddah Port, before continuing overland. But many of these ports are relatively small, and serious congestion has already emerged.

Second, the disruption in the Strait of Hormuz is now feeding into congestion at the Panama Canal. With Middle Eastern supply disrupted, Asian buyers have turned to crude oil exported from the U.S. Gulf of Mexico, adding pressure on Panama Canal capacity. The Panama Canal Authority’s auction price for priority transit has reportedly risen to 4 million U.S. dollars, allowing winning vessels to move ahead in the queue.

Third, capacity in places such as the Panama Canal and the Red Sea is now being prioritised for oil tankers. This has worsened freight-rate increases and delays for lower-value cargo such as grain.

Fourth, aviation fuel shortages have become more pronounced. Aviation fuel has long been one of the more vulnerable links in the oil supply chain. The global aviation network is now visibly disrupted, with many flights cancelled and both passenger fares and air freight rates rising further.

Wang Cheng: It is not very helpful to describe the current state of the Strait of Hormuz simply as “open” or “closed.” A more accurate description is that it has evolved from a freely navigable international waterway before the war into a highly geopolitical “selective passage filter.”

For most commercial shipowners, however, as long as war risks persist, insurance costs remain high, and confidence in security has not been restored, the strait is effectively closed in commercial terms.

The Hormuz crisis has dealt a severe blow to the transport and logistics networks of the Gulf Arab states. For decades, these networks have been built around the Strait of Hormuz as their core node. The UAE’s Jebel Ali Port, the largest cargo port in the Middle East, and Saudi Arabia’s Dammam Port, the region’s largest energy export port, are both located on the Gulf side of the strait.

This war has highlighted the strait’s role as a “single point of failure.” Even without a complete blockade, the persistent uncertainty created by the chilling effect is enough to reshape market expectations and transport patterns. Its effects will linger and will not disappear with a short-term ceasefire.

It has forced Gulf Arab states to rethink their over-dependence on a single maritime route and to ask whether they can continue relying on the Strait of Hormuz to support their energy trade systems and national economic transformation plans. Previously, this was largely a theoretical discussion. This war has made the costs painfully real, pushing countries to look beyond emergency measures and consider longer-term structural adjustments.

These adjustments mainly involve three areas: alternative maritime routes bypassing the strait, overland energy and logistics corridors across the Arabian Peninsula, and integrated sea-land transport systems.

In this process, the UAE’s weight as the region’s traditional logistics gateway may decline, while Oman and Saudi Arabia may become relatively more important. Oman, with ports such as Sohar and Duqm facing directly onto the Arabian Sea and the Indian Ocean, offers a natural external route that bypasses the strait.

Saudi Arabia, meanwhile, has eastern ports such as Dammam facing the Persian Gulf and western ports such as Yanbu and Jeddah facing the Red Sea, as well as infrastructure connecting the two coasts. It is currently the only country physically capable of large-scale transshipment around the strait, providing an alternative sea-land intermodal route.

That said, all existing alternatives have obvious limits. Fujairah in the UAE and Sohar in Oman are small or medium-sized ports whose transshipment capacity is already saturated, and both are heavily congested. If cargo is rerouted to larger ports such as Jeddah and then transported long distances by land, logistics costs may nearly double, according to estimates by Chinese traders.

These options can serve as emergency responses in the short term, but whether they will become a fixed pattern remains to be seen. This process of structural redistribution depends entirely on how long the U.S.-Israel-Iran war lasts and how it ends. Historically, however, once trade routes, capital flows, and energy pathways have been restructured, it is difficult for them to return to their original form.

The impact on the UAE is especially far-reaching. This is not only a physical shock, but also a fundamental stress test of its development model. In the past, the UAE became a haven for capital and talent in a turbulent Middle East by combining low risk, high openness, and strong mobility. This war has affected all three foundations. Rising geopolitical risk has pushed up risk premiums, and capital flows have become more cautious.

Whether the UAE can continue to function as a regional or even global capital haven and logistics gateway is now an open question. Against this backdrop, the development model and political-economic outlook of the entire Gulf region, and even the broader Middle East, may undergo profound changes.

How Will Global Supply Chains and Commodity Flows Change?

Wang Cheng: Based on my observations during Phase I of the 139th Canton Fair in April, the war has had at least three effects on China-Middle East trade.

First, transport costs have remained high. In the past, shipping a standard container from Shanghai to the Middle East cost about 3,000 to 4,000 U.S. dollars. The base ocean freight rate has now risen to 5,000 to 6,000 U.S. dollars. With war-risk surcharges, additional costs have increased by around 3,000 to 5,000 U.S. dollars. Total transport costs are now roughly three times normal levels and exceed 10,000 U.S. dollars. As a result, many Chinese exporters are taking a wait-and-see approach unless Middle Eastern buyers are willing to absorb the higher costs.

Second, although alternative routes exist, delivery times have generally lengthened from 30 days to 60 days. This has created significant pressure for sectors such as cross-border e-commerce and has had a real impact on China’s exports to Arab countries.

In 2025, China-Arab trade reached 422 billion U.S. dollars, including 233.6 billion U.S. dollars in Chinese exports to Arab countries, up 13.4 per cent year on year. But because of the U.S.-Israel-Iran war, the 2026 figures are expected to come under pressure.

The war coincided with Ramadan in Arab countries, normally one of the strongest periods for local import demand. In previous years, Middle Eastern importers concentrated their purchases of food, daily necessities, production tools and consumer goods around Ramadan. Some exporters from Zhejiang said Ramadan orders in previous years were 50 per cent higher than usual, or even doubled. Some merchants previously recorded monthly sales of more than 20 million yuan, but this March sold only slightly more than 1 million yuan, less than one-tenth of normal levels.

At this Canton Fair, the number of Middle Eastern buyers declined noticeably. Buyers from Central Asia and South America increased, but both their unit prices and order volumes were lower than those of Middle Eastern buyers. For similar goods sold to these regions, profit per container was only one-fifth of that from Middle Eastern orders.

Third, on the import side, prices of bulk commodities such as energy, industrial helium, and various chemical raw materials have risen across the board. This will also affect China’s imports from Arab countries and transmit imported inflationary pressure into China.

But in my view, the deeper impact of this war is that the Hormuz crisis has shaken the underlying logic of global supply chains. For the past 30 years, globalisation has been built around efficiency. Companies pursued the lowest costs, shortest routes, leanest inventories, and highest turnover through global allocation. This crisis shows clearly that this logic no longer works in an era of high geopolitical risk.

The keyword today is no longer efficiency, but resilience. This means that the movement of both ordinary goods and bulk commodities cannot depend on a single route, supplier, port, or inventory centre. Backup options are essential.

Global supply chains may shift from a single optimal route to a system of parallel routes. For example, the traditional route from the Gulf to Europe passes through the Strait of Hormuz, the Bab el-Mandeb Strait, and the Suez Canal. Its reliability has now been shaken. Some shipowners are already considering rerouting around the Cape of Good Hope. Although this adds 10 to 15 days to the voyage and raises costs by 30 per cent or more, it does provide a safer second option.

The global maritime network will increasingly take on a two-layer structure. The first layer is the traditional trunk network, centred on conventional straits and canals, which is more efficient. The second is a resilience backup network, including sea-land intermodal transport, railway corridors, alternative pipelines, and regional transshipment hubs. In future major-power competition, one key question will be who has more alternative routes to choose from.

In commodity flows, oil and natural gas trade will become increasingly friend-shored and securitised. Political reliability, transport security, and controllable sanctions risk will matter much more. Future energy trade will take into account not only price, but also a premium for geopolitical risk.

For China, around 42 per cent of its crude oil imports in 2025 came from Gulf countries, and most of these imports had to pass through the Strait of Hormuz. Even so, China has shown greater overall resilience than many neighbouring countries in the face of energy supply shocks caused by the war. This is because China’s import sources are more diversified, it has adequate strategic reserves, and the share of new energy in consumption has continued to rise as the country has pushed forward its energy transition.

In my view, the global energy system will undergo three major changes. First, the scope of strategic reserves will expand from oil to natural gas, critical minerals, and even key components. Second, companies will move away from the zero-inventory model of the globalisation era and hold larger safety stocks. Third, global capital will flow more toward infrastructure that offers energy security and supply-chain resilience.

Ultimately, we are witnessing globalisation move from an age of efficiency into an age of resilience.

An Yukang: To some extent, this crisis has forced a “security repositioning” of the Middle East. The region is not only the global centre of energy, but also a major hub for bulk commodities such as chemicals and fertilisers.

Previous studies mostly focused on the resilience of specific products such as oil and gas, or on key infrastructure. But regional and systemic supply-chain security risks also need to be considered as a whole.

For example, when war hits the Middle East, the impact does not stop at the energy market. It quickly spreads along the chain from energy and raw materials to petrochemical cracking, intermediate products, downstream manufacturing, and logistics delivery.

Unlike oil and gas, intermediates such as ethylene, methanol, and para-xylene have very limited inventories. There are also no alternative transport routes outside the Strait of Hormuz, nor idle capacity, for these chemical consumables. This is very different from oil and gas, which can be procured from more diversified sources.

According to industry information, since April, operating rates at some Chinese refineries have already declined, while refinery operating rates in Japan and South Korea have fallen by 5 to 15 per cent. Rising international crude prices have pushed up prices across bulk commodity chains such as coking coal and iron ore. Disrupted natural gas supply has also driven up prices of fertilisers and sulphur, which depend on natural gas, putting pressure on the entire industrial network.

Recently, global urea prices have doubled, ammonia prices have risen by 20 percent, and food-security risks in regions such as South Asia have been rising rapidly. With the spring planting season under way, any disruption to fertiliser supplies would directly affect food security in the second half of 2026 and even into 2027, increasing the risk of political instability in regions such as Africa and South Asia.

The obstruction of the strait, combined with supply-chain disruptions, is further dragging on growth in Middle Eastern countries and the global economy. According to the latest IMF forecast, Gulf Arab states such as Kuwait, Bahrain, and Qatar could see negative growth in 2026, while global growth has been revised down to 3.1 per cent. If international oil prices stay above 100 U.S. dollars for an extended period, global growth could fall further, to 3 per cent or even below 2.5 per cent.

At this stage, views differ on how commodity flows will change. There is both certainty and uncertainty on the supply and demand sides.

On the supply side, it remains difficult to determine whether the Middle East crisis represents a structural shift in energy supply or only a temporary disruption. From the energy industry’s perspective, oil production and transport in the Gulf have certainly suffered a serious blow. But disrupted flows do not mean the supply itself has disappeared. If passage through the strait returns to its prewar state, the impact is expected to fade. Politically and militarily, however, significant uncertainty remains over whether the United States and Israel will continue to launch military strikes against Iran, and whether Iran will again tighten its control over the strait.

On the demand side, slower growth in oil and gas demand is highly likely. This crisis has sharply heightened countries’ awareness of energy security, which will inevitably accelerate the shift away from oil and gas. Previously, Middle Eastern oil producers generally expected global oil demand to reach a plateau and remain stable over the next 20 to 30 years. After the escalation of war in the Middle East, that assumption may change significantly.

As energy-security concerns grow, countries will accelerate their energy transitions and increasingly see energy transition itself as a form of energy security. They will invest more in alternative energy sources and technologies, speed up the clean-energy transition, and localise energy production and consumption. Whether by “near-shoring” oil and gas procurement or reviving domestic hydropower, wind, solar, nuclear or even coal resources, countries will drive profound changes in the global energy landscape.

Hu Bo: No matter how this crisis ends, it may to some extent weaken the Middle East’s role in global geoeconomics and geopolitics.

First, in geoeconomic terms, the crisis is forcing Asian and European countries to look for alternative sources of energy, including oil and gas from other regions. This will weigh on Middle Eastern economies.

Second, even if the war ends, the Middle East is likely to enter a relatively long period of instability. This will weaken its position in global financial markets. Global capital had previously been quite attracted to the Middle East, but that preference is likely to weaken after the war.

Once the region’s geoeconomic position declines, geopolitical consequences will inevitably follow. The Middle East’s influence in global geopolitics will remain significant, but it will decline to some extent. The United States has long wanted to extricate itself from the Middle East. I believe this war, whatever the outcome, may accelerate that process. Nevertheless, the Middle East will remain a focal point of competition among all parties.

Tang Tianbo: The Strait of Hormuz crisis is the fourth major shock to global supply chains or shipping-lane security in recent years.

The first was the COVID-19 pandemic. It halted production in many countries and disrupted transport. The zero-inventory, high-turnover production model temporarily turned from a strength into a vulnerability.

The second was the Ukraine crisis. It affected grain exports as well as Russia’s energy exports to Europe. Oil and gas that Russia had previously sold to Europe were redirected to Asia, while the Middle East filled part of Europe’s supply gap. Some studies suggest that the direct death toll from the fighting in Ukraine may have been lower than the number of indirect deaths linked to disruptions in grain exports and related factors.

The third was the global tariff war launched by Trump after his return to office.

The current shock is reinforcing trends that had already emerged among major countries after the first three waves: building greater security redundancy, strengthening strategic reserves, and seeking to keep supply chains and their key transport nodes under the control of their own countries or friendly states.

Implications for China: Building a Global Resilience Network

An Yukang: The U.S.-Israel-Iran war offers China several important lessons.

First, China should improve supply-chain security mechanisms based on extreme scenarios. At present, the energy and maritime transport sectors still lack a genuine backstop mechanism. China should continue stress-testing its systems against severe shocks and build medium- and long-term backstop mechanisms for key links to ensure operational stability.

Second, China should attach great importance to fertiliser security. One unexpected consequence of this war has been a global sulphur shortage. Sulphur is a by-product of natural gas and mainly comes from sulphur-containing gas producers such as Qatar, the UAE and Iran. A shortage of sulphur would affect not only fertilisers, copper, and nickel smelting, and semiconductor manufacturing, but also food and commodity prices.

Third, China should improve its integrated shipping support system, backed by Chinese-controlled vessels, Chinese shipping capacity, and Chinese insurance coverage. The war has once again exposed the dilemma surrounding war-risk insurance. Marine war-risk insurance is generally divided into ordinary war-risk insurance and special war-risk insurance; once a vessel enters a war zone, it must apply to its insurer for special war-risk cover.

After the outbreak of the U.S.-Israel-Iran war, Western insurers, represented by the International Group of P&I Clubs, invoked war-cancellation clauses, meaning that vessels’ existing ordinary war-risk cover would expire. Shipowners were therefore forced to purchase additional special war-risk cover. In this process, a series of problems emerged, including soaring premiums and the transfer of risk, which in practice made it more difficult for shipping to resume.

On 6 March, the U.S. government announced a 20-billion-dollar plan for maritime reinsurance, seeking to strengthen U.S. influence over navigation in the Gulf. This creates a practical need for China to integrate resources across the shipping and financial sectors, expand the role of Chinese insurance in covering Chinese-controlled vessels, and increase the share of state-owned or nationally controlled maritime capacity.

Fourth, China should make better use of technology and build an independent “AI plus digital logistics” system. The crisis has made clear that AIS, or the Automatic Identification System, is no longer sufficient to capture the real situation in the Strait of Hormuz. At present, the digital tools and infrastructure used by Chinese civilian shipping companies, including the BeiDou Navigation Satellite System, still fall short in providing maritime situational awareness in the Middle East. Real-time maritime monitoring and risk-warning information in the region still depends heavily on Western systems.

Fifth, China should strengthen its blue-water capabilities. It should improve shipping alternatives, optimise energy import and cargo trade routes, and in particular reduce reliance on the single Persian Gulf-Red Sea route.

In the meantime, China and Middle Eastern countries may see new opportunities for cooperation in five areas.

First, in regional planning, the Middle East crisis has created major opportunities for China to coordinate connectivity projects across the Indian Ocean littoral. It has also opened up new possibilities for Middle East–South Asia integration and for trilateral cooperation among ASEAN, China, and the Gulf Cooperation Council.

Projects such as Pakistan’s Gwadar Port, Sri Lanka’s Hambantota Port, and Mattala International Airport have fallen short of expectations in terms of economic returns and operational performance. But as the spillover effects of this war spread, their value as strategic backup nodes has risen sharply, with utilisation rates reaching historic highs. On 12 April, Pakistan formally launched an overland trade corridor through Iran to Central Asia to bypass the Strait of Hormuz, creating new opportunities for Gwadar Port.

Second, in postwar reconstruction, Chinese enterprises could play an important role in the repair and reconstruction of oil and gas facilities in Middle Eastern countries. In midstream pipeline infrastructure, countries in the region are actively discussing the expansion of existing pipelines, as well as the accelerated construction of oil pipelines and export terminals that bypass the Strait of Hormuz. For example, the UAE is accelerating construction of a second oil pipeline from Habshan to Fujairah, while recent progress has also been made on infrastructure projects such as the Saudi Landbridge Railway.

Third, in energy transition, geopolitical conflict has further strengthened the export advantages of China’s new-energy industry. There is great potential for cooperation between China and Middle Eastern countries in this area.

Fourth, in the digital economy, the war has exposed new risks in U.S. overseas digital and AI infrastructure. Since the outbreak of the U.S.-Israel-Iran war, U.S. companies’ digital infrastructure in Middle Eastern countries has frequently come under Iranian attack. Iran has also accused the U.S. military of relying on civilian data centres in Middle Eastern countries for AI workloads and communications. This highlights the militarised, weaponised, and insecure risks of U.S. overseas AI deployment.

Chinese companies such as Huawei and Alibaba have already been deeply involved in digital cooperation with Gulf Arab states. Although they face some pressure from the United States, their strong overall competitiveness in technology, cost, and localised services means they will continue to play an important role in the digital transformation of Gulf Arab countries. China and Arab countries can also explore new scenarios for lightweight AI cooperation and develop new models combining Chinese AI with Arabic-language applications.

Fifth, in energy finance, Middle Eastern countries have become more receptive to non-dollar settlement to avoid geopolitical and sanctions risks. This will create more opportunities for two-way capital allocation and cross-border renminbi flows.

Take the UAE as an example. In 2024, the Central Bank of the UAE completed its first cross-border digital dirham payment via mBridge, conducting a 50-million-dirham transaction with the Bank of China. The following year, the People’s Bank of China authorised First Abu Dhabi Bank PJSC to serve as the renminbi clearing bank in the UAE.

Although the petrodollar remains resilient, as regional countries pursue more independent monetary arrangements under the impact of this war, China and Arab countries are expected to further expand the use of the renminbi in energy cooperation.

Tang Tianbo: When assessing the situation, more cross-regional and interdisciplinary expertise is needed to reach meaningful conclusions.

For example, Pakistan’s role in the U.S.-Israel-Iran war should not be underestimated. Clear linkages have emerged between the Middle East and South Asia. Many Southeast Asian countries have faced energy shortages because of the war, and this impact should not be overlooked. International institutions such as the IMF have warned that while the impact on wealthy countries may be relatively manageable, poorer countries could suffer much more severe shocks.

A deeper study of these issues requires breaking down both regional and disciplinary boundaries, and bringing together expertise on the Middle East, South Asia and Southeast Asia, as well as economics and finance.

In addition, questions of passage through the strait and possible blockades now touch on many relatively new fields, including drones, cognitive warfare, artificial intelligence, and cryptocurrencies. Signal and noise are often hard to separate. To interpret, predict, and even describe the situation accurately, more integrated and forward-looking perspectives are urgently needed.

At the same time, the Strait of Hormuz crisis will prompt the international community to rethink the management mechanisms, security guarantees, and future risks of global strategic passages. It has exposed a governance deficit and will likely intensify existing competition over strategic routes.

The governance model for global strategic passages may not change significantly in the short term, but the crisis will encourage countries to develop alternative routes, prepare alternative supplies, and seek alternative partners. The prospects for these alternatives will be shaped not only by geopolitics, but also by economic and technological feasibility.

Wang Cheng: From the perspective of my own research field, the biggest lesson from this crisis is that, as a major trading country, China should build a security support system commensurate with the scale of its trade.

China is the world’s largest goods trader and energy importer, but it still relies heavily on the international public goods for security in energy, shipping lanes, and overseas supply chains. This may not be a major problem in peacetime, but in an era of frequent geopolitical conflict, the risks can be magnified quickly.

Energy security no longer means simply being able to buy energy. It also means being able to bring it home. In other words, China must have the ability to transport the resources it has purchased back to the domestic market.

The reverse is also true. As a major producer, China must not only be able to make products, but also to sell and ship them abroad.

This was confirmed in my exchanges with buyers at the 139th Canton Fair in April. After the U.S.-Israel-Iran war broke out, many Middle Eastern buyers asked to change trade terms from the traditional CIF model — cost, insurance and freight, under which the seller is responsible for transporting goods to the designated port of destination — to DDP, or delivered duty paid, under which the seller is responsible for end-to-end logistics, customs clearance and door-to-door delivery. This poses a major test for Chinese exporters’ logistics and delivery capabilities.

China therefore urgently needs to build a more complete four-dimensional security system: diversified sources, diversified routes, a stronger and more diversified reserve system, and stronger financial pricing capabilities to hedge risk.

At the same time, the Belt and Road Initiative has entered a 2.0 stage. In the past, the emphasis was on construction. In the future, greater attention should be paid to resilience, security, redundancy, and the ability to convert infrastructure for emergency use.

As the examples of Sri Lanka’s Hambantota Port and Mattala International Airport show, assets that may look like “strategic redundancy” in peacetime can become extremely valuable in a crisis. The China-Oman Industrial Park at Oman’s Duqm Port is a similar case.

In my view, if China thinks in terms of major-power competition, or even preparedness for wartime contingencies, it should focus on building three types of overseas nodes: energy transshipment hubs, logistics and replenishment hubs, and assets that can be converted for emergency functions in a crisis.

From Hambantota to Gwadar, and from Djibouti and Duqm to Piraeus in Greece and ports across Africa, these sites could, under extreme circumstances, become important nodes in China’s future global resilience network.

Hu Bo: First and foremost, this crisis has demonstrated the soundness and foresight of China’s previous strategic judgments and policy preparations on maritime passage security and energy security.

Second, China should attach even greater importance to maintaining the security of maritime passages. But it must also be emphasised that in the 21st century, military means have limits, no matter how powerful a navy may be. To maintain maritime passage security, China should still rely mainly on diplomatic, economic, financial, and legal tools.

China already has strong economic influence and substantial diplomatic capacity, which can be leveraged to help maintain maritime passage security. By comparison, its financial and legal tools are somewhat weaker and need to be strengthened. In other words, safeguarding maritime passage security requires a combination of tools, while the military mainly serves as a backstop and deterrent.

Third, China should pursue relative security rather than absolute security. As the world’s largest goods trader, China cannot seek absolute security in the way the United States does. The cost would be unbearable. China’s economic prosperity depends deeply on an open global trading system. If all parties pursue absolute security and turn inward, the logic of global trade would break down.

Military means play a key role in important missions such as escort operations in the Gulf of Aden. Important nodes and important routes must also have military countermeasures available. But it is unrealistic to pursue such capabilities across all strategic routes worldwide.

Finally, China should maintain strategic resolve. At present, the combined scale of China’s navy and coast guard far exceeds that of the United States. This means that if the United States were to impose a non-war “maritime blockade” against China, it would not necessarily gain the upper hand.

After more than 30 years of military modernisation, China’s strength is no longer what it once was. It should therefore maintain its strategic resolve and avoid excessive anxiety whenever the Trump administration makes tough statements. In fact, some Trump administration policies contain more bluff than substance and have little chance of being implemented. China needs to assess carefully what can actually be implemented, what represents an opportunity and what constitutes a challenge, and then respond rationally.

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Pekingnology

The Select Committee on China Finds Something to Like in Pekingnology

I am not sure whether this is the first time the U.S. House Select Committee on Strategic Competition between the United States and the Chinese Communist Party has approvingly cited anything from the Chinese mainland…

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You can read the preface & summary below, originally published on the SCSPI website, or download the PDF for the full report.

An Incomplete Report on US Military Activities in the South China Sea in 2025

Preface

In peacetime, conducting high-intensity military activities in a coastal state’s surrounding waters, such as thousands of close-in reconnaissance operations and hundreds of targeted military exercises, is contrary to the spirit of the UN Charter, the Five Principles of Peaceful Coexistence, and the principles and rules of international law, including “the peaceful uses of the seas” stipulated in United Nations Convention on the Law of the Sea (UNCLOS).

Since 2009, US military activities against China in the South China Sea have escalated both in frequency and intensity. In 2025, amidst the Russia-Ukraine conflict and the US-Israel-Iran conflict, US naval and air forces were continually constrained by situations in the Caribbean, the Middle East, and other regions, leaving them overstretched. Nevertheless, they still maintained a high-intensity military presence in the South China Sea and its periphery.

Under the second Trump administration, the South China Sea has clearly not been a primary focus for the US. However, the US military on the frontlines of the Western Pacific has remained in “autopilot”, continuing to intensify its military presence and activities in the South China Sea. In 2025, the activities of strategic platforms such as carrier strike groups, amphibious ready groups, and bombers showed limited growth, while the frequency of declaratory operations like Freedom of Navigation Operations (FONOPs) declined. Nevertheless, close-in reconnaissance, drills and exercises, and joint operations with allies and partners saw significant increases.

The US military presence and operations remain major factors affecting the situation in the South China Sea. Since 2019, the South China Sea Strategic Situation Probing Initiative (SCSPI) has annually released an Incomplete Report on US Military Activities in the South China Sea of previous year based on open-source data. The report is intended to promote the transparency regarding the South China Sea situation and provide the perspective as a reference for policymakers, research institutions, the media and the public of relevant parties.

— Director of SCSPI, Hu Bo

Key Findings

I. The Sluggish Growth of Strategic Platform Activities

1. CSGs

In 2025, the US military dispatched 4 CSGs, USS Carl Vinson (CVN-70), USS Nimitz (CVN-68), USS George Washington (CVN-73) and USS Abraham Lincoln (CVN-72), for a total of 9 activities accessing the South China Sea.

2. Amphibious Ready Groups (ARGs)

In 2025, the US deployed 2 ARGs in the Western Pacific, namely USS America (LHA-6) and USS Tripoli (LHA-7), but only the latter made a single entry into the South China Sea. Although this number has increased slightly compared to that of 2024, the shortfalls in amphibious readiness are still conspicuous.

3. Nuclear-powered Submarines

In 2025, the US has deployed at least 1 nuclear-powered guided missle submarine and 11 nuclear-powered attack submarines. Based on the operational footprints of auxiliary vessels, US submarine activities spanned the entire Western Pacific, encompassing the South China Sea, the East China Sea, and the Java Sea.

4. Bombers

According to open source information, the US Air Force (USAF) has dispatched a total of 13 sorties across 7 missions of B-52H and B-1B bombers to the Western Pacific region for patrol operations, seeing a decrease in both quantity and frequency compared to previous years.

II. Uneven Growth in Aerial and Maritime Close-in Reconnaissance

1. Aerial Close-in Reconnaissance

Based on incomplete statistics, in 2025, US reconnaissance aircraft conducted a cumulative total of approximately 1200 sorties in the South China Sea, representing a moderate increase compared to 2024, attributed primarily to drones and air bases in the Philippines. These reconnaissance missions were launched from multiple outposts, including Kadena Air Base in Okinawa, Osan Air Base in the ROK, Andersen Air Force Base in Guam, and Clark Air Base in the Philippines.

2. Maritime Close-in Reconnaissance

In 2025, the US military deployed 4 ocean surveillance ships to the South China Sea: USNS Victorious (T-AGOS-19), USNS Able (T-AGOS-20), USNS Effective (T-AGOS-21), and USNS Impeccable (T-AGOS-23), alongside 3 oceanographic survey ships: USNS Bowditch (T-AGS-62), USNS Henson (T-AGS-63), and USNS Mary Sears (T-AGS-65). Their cumulative operational time in the South China Sea amounted to 197 ship-days. Among them, the ocean surveillance ship USNS Victorious was the most active of all the reconnaissance vessels, operating for 55 days.

III. Low-frequency Declaratory Operations

1.Island-Intrusive Freedom of Navigation Operations (FONOPs)

In 2025, the US military conducted only 2 public island-intruding FONOPs, the same as in 2024, showing a general decline compared to previous years. However, other types of FONOPs have not diminished. In August 2025, the US Department of Defense released the FY24 Freedom of Navigation Report, which detailed challenges to 19 “excessive maritime claims” by 11 countries or regions.

2. Taiwan Strait Transits

Throughout 2025, US warships transited the Taiwan Strait three times, each accompanied by high-profile public statements. The year represents a continuation of the downward trend in transits since 2020, with five in 2024, six in 2023, nine in 2022, and 12 in 2021.

IV.Continuously Boosted Joint Operations with Allies

1. Strengthening Infrastructure and Forward Deployments

In 2025, the US continued to regard the Philippines as a critical node in its South China Sea military network. First, it accelerated upgrades and expansions at multiple Philippine bases under the framework of Enhanced Defense Cooperation Agreement (EDCA). Second, within the framework of Mutual Defense Treaty (MDT), the US and the Philippines continuously strengthened the military presence via frequent joint drills and institutional dialogues.

2. Advancing Intelligence Technology and Situational Awareness Cooperation

In 2025, the US and its allies further institutionalized and expanded intelligence-sharing mechanisms in the South China Sea, with a particular focus on multilateral frameworks among the US, Japan, Australia, and the Philippines.

V. Upgraded Multi-Domain Joint Exercises

1. Expanded Alliance and Strengthened Multilateral Efforts

Faced with increasingly limited resources, the US military has significantly increased joint exercises in the region with both regional and extra-regional allies.

2. Deepened Integration of Multi-Domain Data and Factors

Unlike past exercises that weighed more on traditional joint operations, US military drills in 2025 emphasized the integration of factors such as unmanned systems, long-range firepower, cyberspace, and artificial intelligence, reflecting a shift toward high-end warfare.

3.Scenario-Based Exercises Centered on South China Sea Hotspots

Unlike the previous broad “Pan-Pacific” frameworks, in 2025, exercises targeted specific South China Sea hotspots, focusing on sensitive areas like Second Thomas Shoal, Scarborough Shoal, and strategic straits, with scenario-based crisis response replacing symbolic displays.

Download the PDF for the full report.

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Pekingnology

Incomplete Report on US Military Activities in South China Sea in 2024

The South China Sea Strategic Situation Probing Initiative (SCSPI), led by 胡波 Hu Bo, research professor & director of the Center for Maritime Strategy Studies, Peking University, just [Tuesday, March 25, 2025] released its annual flagship Incomplete Report on US Military Activities in South China Sea in 2024…

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Xu Gao, Chief Economist of Bank of China International (China) Co., Ltd., examines the future of the international monetary system at a time when confidence in the dollar-centred Jamaica system is under growing strain. He argues that neither a return to gold or commodity backing, nor a eurozone-style single-currency area, nor sovereignless cryptocurrencies can provide a viable foundation for the next international monetary system. The more plausible long-term path, in his view, is the emergence of a supranational currency linked to a basket of sovereign currencies, gradually replacing the dollar’s central role in international payments.

For China, Xu argues, the priority should not be to overturn the dollar-centred system prematurely or to make renminbi internationalisation a bid to replace the dollar. China still benefits from the external-demand space created by global imbalances under the current system. Preserving the existing system, at least for now, helps China absorb some of the adjustment pressure created by insufficient domestic demand and excess supply. At the same time, making the renminbi the main international reserve currency brings costs that far outweigh the benefits.

Xu therefore argues that China should focus on securing international payment channels, expanding the renminbi payment network, developing mechanisms such as currency swaps and overdraft arrangements to supply renminbi liquidity, and supporting the longer-term development of a supranational currency through SDR reform or proposals such as a BRICS currency.

The article was originally published on 25 May 2026 on Xu’s personal WeChat blog 徐高经济观察 Xu Gao Economic Observation.

Xu has kindly authorised and reviewed the translation.

—Yuxuan Jia

国际货币体系的未来与中国的选择

The Futures of the International Monetary System and China’s Choices

• The current dollar-centred international monetary system—the Jamaica system—has many flaws. Its main weaknesses are persistent global imbalances, the inequity created by the United States’ excessive issuance of dollars, and doubts over the system’s long-term sustainability. In recent years, U.S. unilateralism has further eroded global confidence in the dollar and shaken the foundations of the Jamaica system, prompting renewed debate over the future of the international monetary order.

• To look ahead, one must first look back. Before the Jamaica system, the international monetary order had long been anchored to gold. Under gold-based arrangements, confidence in money was relatively easy to sustain, and trade imbalances among countries could be corrected automatically through cross-border gold flows. The dollar’s decoupling from gold in 1971, followed by the establishment of the Jamaica system, marked the transition from “anchored” to “unanchored” money. Once freed from the constraints of a physical anchor, monetary policy could be adjusted more freely and flexibly, thereby reducing volatility in the real economy. At the same time, monetary de-anchoring made global imbalances possible and, in turn, helped drive the expansion of globalisation. Any future international monetary system can replace the existing one only if it preserves the strengths of the Jamaica system while remedying its weaknesses.

• Looking ahead, several scenarios for the future international monetary system can largely be ruled out: (1) a eurozone-style single-currency area among major economies; (2) a return to commodity-backed currencies or any other physical anchor; and (3) the rise of sovereignless cryptocurrencies as the main instruments of international payment. At the same time, the dollar’s network externalities give it a powerful incumbent advantage, making it highly difficult for any other sovereign currency to replace it at the centre of the system. Once these unlikely scenarios are excluded, the most plausible post-Jamaica path is a supranational currency linked to a basket of sovereign currencies, gradually replacing the dollar’s central role in international payments. The SDR is the embryonic form of such a currency, while proposals such as the BRICS R5 may also point in this direction.

• In the long-term evolution of the international monetary system, China’s interests would be best served by the following choices. First, China should not seek to overturn the dollar-centred Jamaica system, from which it still benefits. Second, renminbi internationalisation should not aim to replace the dollar or make the renminbi the central currency of the international monetary system. Third, renminbi internationalisation should instead focus on ensuring that China has secure international payment channels and on expanding the renminbi payment network globally. Fourth, China should allow overdraft arrangements within the international renminbi payment system, thereby providing renminbi liquidity to other countries through the payment system itself. Fifth, China should support the development of a supranational currency linked to a basket of sovereign currencies, with a view to its eventually replacing the dollar as the main instrument of international payment.

In recent years, the rise of unilateralism, especially U.S. actions that have damaged the international economic and trading system, has put the current dollar-centred international monetary system, the Jamaica system, in turbulence. The unusual surge in gold prices since the second half of 2024 has reflected weakening international confidence in dollar-denominated assets. Against this backdrop, debate has intensified over the future of the international monetary system and possible alternatives to the dollar. But to look ahead, one must first look back. By reviewing the system’s historical evolution, this article seeks to identify the deeper forces behind its development and transformation, infer its possible future trajectory, and clarify the strategic choices China should make.

1. The Many Problems of the Existing International Monetary System

The “international monetary system” refers to the rules, conventions and institutions that enable cross-border trade, investment, capital flows, and other economic exchange. It determines the answers to several core questions: What should serve as international payment instruments and reserve assets? How are currencies exchanged, and how are exchange rates set? Should balance-of-payments disequilibria be corrected, and by what mechanisms? And how should international financial affairs be coordinated?

The current system took shape after the collapse of Bretton Woods in 1971. In 1976, IMF member states signed an agreement in Kingston, Jamaica, establishing the basic architecture of today’s international monetary order. It is therefore known as the Jamaica system1 and has several defining features.

First, it is a fiat-money system, in which the value of money rests entirely on public confidence. Under the Jamaica system, national currencies are not linked to gold or any other physical object, but derive their status as legal tender from government authority. Their purchasing power depends completely on belief. A government can require people to accept its currency, but it cannot fully determine what that currency can buy. If confidence collapses, fiat money will cease to function as a means of payment. In essence, fiat money works because people believe it can be used to buy goods and services, and because they believe others believe the same. This shared expectation gives fiat money real purchasing power, but it has no physical backing and depends entirely on sound policy management by the issuing country.

Second, fiat money gives governments an unconstrained capacity to create money in nominal terms. Since money is no longer tied to a physical anchor, its nominal supply is no longer subject to physical limits. Governments can create as much money as they wish. However, whether that money retains real purchasing power — that is, whether it can really buy stuff — is another matter. To preserve confidence and maintain the currency’s real purchasing value, the issuing government must use its money-creation capacity responsibly and keep monetary expansion aligned with real-economy conditions.

Third, the U.S. dollar remains the dominant currency for international payments and reserves. Under the postwar Bretton Woods system, the dollar was the only currency directly linked to gold, while other currencies were pegged to the dollar. This made the dollar the principal settlement currency in international trade and the preferred reserve asset for central banks. The Jamaica system inherited this dollar-centred structure. At the end of 2025, dollar-denominated assets still accounted for 56.8 per cent of global foreign-exchange reserves, the largest share by far and well ahead of the euro’s second-place share of 20.2 per cent. It is worth noting, however, that the dollar’s reserve share has been declining for the past decade and reached a new twenty-first-century low at the end of 2025. (See Chart 1)

Fourth, floating exchange rates have become the dominant arrangement. Under Bretton Woods, countries generally maintained fixed exchange rates, keeping currency conversion rates unchanged. Under the Jamaica system, floating exchange rates became the dominant arrangement. Currency conversion rates were allowed to fluctuate freely, giving countries a tool to respond to external shocks.

The Jamaica system has promoted globalisation, but it has also exposed a number of weaknesses. In the more than half-century since its establishment, it has contributed to widening global trade imbalances, facilitated the rise of globalisation, and witnessed major shifts in the global economic landscape. In the process, some of its shortcomings have become increasingly apparent.

The first major weakness is the persistence of global imbalances. Since the 1980s, the world economy has settled into a pattern in which aggregate deficits and surpluses have both remained elevated, with the United States accounting for the overwhelming majority of global deficits. Under this pattern, goods and services flow continuously from surplus economies to the United States. Domestic structural imbalances mirror these external imbalances: the deficit-running United States has excess demand and insufficient supply, while surplus economies suffer from insufficient demand and excess supply. As discussed below, under a gold-standard-based international monetary system, trade imbalances would have been corrected automatically, and persistent global imbalances of this kind would not have arisen. By contrast, the Jamaica system’s inability to correct international trade imbalances automatically is one of its central defects. (See Chart 2)

The second major weakness is the inequity created by the United States’ excessive issuance of dollars. Under the Jamaica system, the dollar is the dominant currency for international transactions and reserves, generating enormous global demand. Because the dollar is no longer tied to any physical anchor, the United States has an unlimited capacity to create it in nominal terms. It can therefore extract seigniorage from the rest of the world by issuing dollars on a large scale. From 2001 to 2025, the United States ran cumulative current-account deficits of more than US$15 trillion. This represents the value of goods and services the United States obtained from the rest of the world using dollars. This ability to draw resources from the world through the dollar is the “exorbitant privilege” the currency gives the United States.2

The third major weakness is that, because of the “Fundamental Triffin Dilemma,” a dollar-centred international monetary system is difficult to sustain over the long run. In the January 2026 article “The ‘Fundamental Triffin Dilemma’ and the Rise and Fall of the Global Dollar Cycle,” I discussed the contradiction between “U.S. hegemony” and “U.S. dollar supremacy”: U.S. hegemony supports dollar supremacy, but dollar supremacy in turn erodes U.S. hegemony and ultimately leads to its own decline. This is what I call the “Fundamental Triffin Dilemma.” It means that international confidence in the dollar cannot be maintained indefinitely, and that a dollar-centred monetary system will eventually move toward self-negation.

In recent years, U.S. unilateralism has damaged global confidence in the dollar and shaken the Jamaica system. Since Donald Trump began his first presidential term in 2017, unilateralism has become increasingly pronounced in U.S. policy. Washington has increasingly treated international rules and institutions as constraints and has been more willing to bypass them. In April 2025, shortly after beginning his second term, Trump introduced a “reciprocal tariff” policy, agreesively imposing additional tariffs on countries around the world. This anti-globalisation move further weakened international confidence in dollar assets.3 The United States has also weaponised the dollar, turning the world’s leading payment currency into an instrument of sanctions against other countries.4 This has given other countries stronger incentives to search for alternatives.

The unusual rise in gold prices since the second half of 2024 reflects declining international confidence in the dollar. After the dollar was decoupled from gold in 1971, gold lost its monetary role and became a special precious metal with safe-haven attributes. This safe-haven function is reflected in the countercyclical movement of gold prices relative to other commodities. Consider the one-year rolling outperformance of gold prices relative to the CRB industrial raw materials index. Over the past 40 years, this measure has been significantly negatively correlated with the OECD Composite Leading Indicator (CLI) for G7 Countries, a gauge of economic conditions. When the G7 economies strengthen, gold tends to underperform other commodities; when they weaken, gold tends to outperform. Since the second half of 2024, however, the OECD CLI has risen markedly, a situation in which gold should have underperformed. Instead, gold has significantly outperformed other commodities, producing a pattern not seen in four decades. Behind this unusual move is a decline in international confidence in the dollar and the conversion of some dollar-denominated assets into gold. (See Chart 3)

As the weaknesses of the Jamaica system become more apparent and international confidence in the dollar declines, more people are beginning to consider the future of the international monetary system. Long-term national development strategies and individual investment decisions alike must take its possible trajectory into account and prepare accordingly.

2. The Advantages and Disadvantages of Anchoring Money to Gold

Before looking ahead, one needs to look back. Before the Jamaica system, money had long been linked to gold. From the nineteenth century to the early twentieth century, the international monetary system operated under the gold standard, in which gold itself functioned as money. From the end of the Second World War to 1971, it operated under the Bretton Woods system, a variant of the gold standard known as the gold exchange standard. Under Bretton Woods, the dollar was linked to gold, while other currencies were linked to the dollar. To understand where the international monetary system may go after the Jamaica system, it is important to first understand how the earlier gold-anchored arrangements worked.

From the early nineteenth century to the early twentieth century, Western countries long operated under the gold standard, with the value of money anchored to gold. To avoid confusion, it is worth clarifying what “money” meant under this system. Gold itself was money, and gold coins could be used directly to purchase goods. But gold coins were inconvenient in everyday use, so money also took other forms, including bank notes and bank deposits. To say that money was linked to gold is to say that these other forms of money—especially paper money—derived their value from their link to gold.

Under the gold standard, Britain maintained the link between money and gold through three institutional arrangements: free coinage, free convertibility, and the free cross-border movement of gold. Free coinage meant that any citizen or institution could bring gold to the Royal Mint to be coined, and gold coins could also be melted back into bullion. Free convertibility meant that holders of banknotes and other non-gold forms of money could exchange them for gold at the statutory rate. In this sense, paper money under the gold standard was essentially a gold claim. This maintained the link between gold and other forms of money. The free cross-border movement of gold allowed gold to flow in and out of the country, keeping domestic and international gold prices aligned.

These three institutional arrangements locked together the values of gold, gold coins, and other forms of money. As a result, the total amount of money available to purchase goods in Britain—including both gold coins and other forms of money—was tied to the country’s gold reserves and could not be adjusted at will. In effect, monetary policy was placed in “golden handcuffs.” Governments accepted this self-imposed constraint because it imposed an external hard limit on the money supply and thereby helped stabilise public confidence in money.

Under the gold standard, maintaining the credibility of money was relatively straightforward: as long as people trusted gold and believed that paper money could be converted into gold at any time, they would naturally trust paper money as well. In 1815, the British-led coalition defeated Napoleon at Waterloo, removing a formidable rival. But the high fiscal cost of the war with France, together with the excessive issuance of paper money, had pushed British prices sharply higher. To stabilise prices, Britain passed the Coinage Act 1816, setting the mint price for standard gold at £3 17s 10½d per troy ounce. This marked the beginning of Britain’s gold standard and brought the previous rise in prices under control.

Under the gold standard, governments largely lost the ability to manage the total quantity of money. Once the money supply was tied to domestic gold reserves, it was no longer at the government’s discretion but moved with the amount of gold held in the country. Banks could still create forms of money other than gold coins, including bank notes, but the quantity of such money was constrained by banks’ gold reserves and therefore ultimately by the amount of gold available.

To ensure the free convertibility of paper money into gold, governments required banks to hold gold reserves against the notes they issued. Britain’s Bank Charter Act 1844, for example, allowed the Bank of England to issue £14 million in notes backed by government securities rather than gold, but required every note issued beyond that limit to be backed by 100 per cent gold reserves. Similarly, the U.S. Gold Reserve Act of 1934 required the Federal Reserve to hold gold reserves equal to at least 40 per cent of the notes it issued. In this sense, under the gold standard, the amount of gold a country possessed roughly determined the size of its money supply, while money-supply growth was tied to the growth of gold holdings.

Under the gold standard, governments could expand the supply of paper money by devaluing it against gold, but doing so would undermine public confidence and therefore could not be used frequently. The U.S. Gold Reserve Act of 1934, for example, raised the official dollar price of gold from US$20.67 to US$35 per ounce. This reduced the gold content of each dollar to 59 per cent of its previous level, amounting to a 41 per cent depreciation of the dollar against gold. The devaluation allowed the United States to issue more paper money against the same level of gold reserves, thereby increasing the dollar money supply. But this was not a measure that could be repeated at will. Loosening the “golden handcuffs” could expand the money supply, but it would also weaken public confidence in money and could ultimately bring down the gold standard itself. Under that system, confidence in money rested primarily on the constraints that the “golden handcuffs” imposed on government money issuance.

Because the money supply under the gold standard was determined by gold reserves rather than real economy conditions, it could remain misaligned with the economy’s demand for money for extended periods. The supply of money was tied to the quantity of gold, while the demand for money was shaped by many factors, including the size of the economy, the stage of development and the volume of market transactions. The two did not necessarily match. When they diverged, the price level had to adjust to absorb the gap between money supply and money demand. Over the long term, the stock of gold generally grew more slowly than the economy. This was precisely why gold had value: its scarcity meant that its supply could not keep pace with economic development. When gold-stock growth remained below real economic growth for long periods, the gold standard produced sustained deflation. From the Coin Act 1816 to the eve of the First World War in 1913, Britain remained on the gold standard for almost a century. Over that period, its overall price level fell by a cumulative 18 per cent. (See Chart 4)

The “golden handcuffs” also constrained exchange rates. Because countries on the gold standard all linked their currencies to gold, exchange rates among them were fixed by gold parity. In 1871, for example, the German Reichstag passed the Coinage Act, stipulating that one mark contained 0.358423 grams of pure gold. At the same time, one pound sterling contained 7.32238 grams of gold. The exchange rate between the pound and the German mark was therefore 20.43 marks per pound, calculated as 7.32238 divided by 0.358423. This was the gold parity between sterling and the mark.

For countries on the gold standard, exchange rates were locked by gold parity, and gold moved freely across borders. Governments, therefore, could not use monetary policy to offset differences among national economies. Instead, internal and external imbalances were corrected automatically through cross-border gold flows. A country with insufficient domestic demand and excess supply would export its surplus output and earn gold from abroad. The resulting gold inflow would expand the surplus country’s domestic money supply and push up prices. Higher domestic prices would restrain exports and stimulate imports, narrowing the trade surplus. In the process, domestic demand in the surplus country would rise, as cheaper foreign goods encouraged consumption, while domestic supply would fall as weaker demand for local products restrained production. Conversely, a deficit country would experience gold outflows, monetary contraction and falling prices, which would narrow its trade deficit, reduce domestic demand and expand supply.

This gold-standard mechanism, under which cross-border gold flows automatically corrected economic imbalances, is known as the price-specie flow mechanism. Since it was first proposed by the Scottish philosopher David Hume, it is also known as the Hume mechanism.

Traces of the Hume mechanism can be seen clearly in historical U.S. data. In the century before the Bretton Woods system collapsed in 1971 and the dollar was decoupled from gold, the U.S. current-account surplus—a broad measure of the trade surplus—was clearly positively correlated with U.S. inflation. This suggests that gold moved across borders in response to surpluses and deficits, thereby affecting domestic price levels. Only after the dollar was decoupled from gold did the correlation between the U.S. current-account surplus and domestic inflation disappear.5 (See Chart 5)

The Hume mechanism, as an automatic mechanism for correcting economic imbalances, should be assessed dialectically. On the positive side, it automatically corrected international trade imbalances. Under the gold standard, countries tended in the long run to maintain both external balance, meaning they did not continuously accumulate trade surpluses or deficits, and internal balance between supply and demand, meaning there was no persistent excess or shortfall in domestic demand. As discussed later, it was precisely the absence of such an automatic adjustment mechanism that allowed the globalisation that emerged in the 1980s to produce persistent global trade imbalances.

On the negative side, however, the internal and external balance achieved through the Hume mechanism depended on structural adjustment in the real economy. Such adjustment was usually slow and painful. This was especially true for trade-deficit countries, which had to correct domestic imbalances through deflation. That often meant macroeconomic recession, or even outright economic crisis.

In sum, the “golden handcuffs” imposed by the gold standard had both advantages and disadvantages. By linking money to gold, countries could avoid excessive money issuance and maintain public confidence in money relatively easily. The cost, however, was the loss of flexibility in monetary policy. Under the gold standard, monetary policy served the objective of maintaining the link between money and gold, rather than stabilising the real economy as it does today. Central banks could adjust interest rates, but such adjustments were aimed primarily at preserving the gold parity. As a result, monetary policy could not act as a buffer for the real economy; the real economy had to absorb shocks through its own adjustment. At times, those shocks even came directly from money that is link to gold. Freeing money from the “golden handcuffs” to turn monetary policy into a stabiliser for the real economy was the main reason money was decoupled from gold. It was also the fundamental force behind the move away from the gold standard and into today’s fiat-money system, the Jamaica system.

3. The Progress From “Anchored” to “Unanchored” Money

The history of the international monetary system over the past two centuries is a history of money’s gradual detachment from physical anchors. The system evolved from bimetallism, in which both gold and silver served as standard money, to the gold standard, then to the gold exchange standard represented by Bretton Woods, and finally to today’s fiat-money system, the Jamaica system.

The collapse of Bretton Woods in 1971 marked the full arrival of the fiat-money era: money was completely decoupled from physical objects and no longer had any physical anchor supporting its value. Before then, some countries had suspended or abandoned such anchors because of war, reparations, or other pressures, as Germany did during the Weimar Republic. But these were temporary exceptions, not the international norm. Only after 1971 did unanchored fiat money become the dominant form of the monetary system. In this sense, the international monetary system over the past two centuries has moved from currencies whose value was backed by physical anchors to money whose value rests on confidence alone.

When considering where the international monetary system may go next, one should not focus only on the shortcomings of the Jamaica system, but also recognise its advantages over earlier systems. The evolution of the international monetary system over the past two centuries was not accidental. The Jamaica system eventually replaced earlier systems because it offered advantages they lacked. Any future international monetary system can replace the existing one only if it preserves the strengths of the Jamaica system while remedying its weaknesses.

The transition from “anchored” to “unanchored” money was a major advance, reflecting humanity’s enhanced capacity to manage the economy. It brought several important forms of progress.

First, human societies learned how to maintain public confidence in money even when money was no longer anchored to a physical object. Everyone knows that fiat money is not a claim on any physical asset, and that no one promises to convert it into one at a fixed rate. Yet people generally still believe that fiat money can preserve its purchasing power over the long term and can be used to purchase goods and services at reasonable prices. This confidence rests on a deeper understanding of how expectations are formed and revised, and on the policy capacity to manage them. By appropriately guiding public expectations, governments can sustain confidence in money.

In this sense, modern monetary policy is the art of managing expectations. What it ultimately regulates is expectations, and its primary objective is to maintain public confidence in money. It is because of this deeper understanding of economic operations that human societies have been able to maintain monetary stability under unanchored money over the past half-century. This itself marks an advance in human capabilities.

Second, once money was freed from the physical anchor, monetary policy could be adjusted more freely and flexibly, without physical constraints. This turned monetary policy into a buffer for the real economy and thereby reduced economic volatility. When money is no longer linked to gold, monetary policy no longer needs to make the maintenance of that link its primary objective. Instead, it can treat the stable operation of the real economy as an important goal. Today, countries generally take price stability and the promotion of growth, or employment, as the two main objectives of monetary policy. Through flexible adjustment, monetary policy can cushion the real economy against various shocks and reduce volatility. Judging from the 30-year rolling standard deviation of U.S. economic growth and inflation, both real economic volatility and inflation volatility declined significantly after 1971. In the twenty-first century, both have fallen to their lowest levels in nearly two centuries.

Flexible monetary policy, freed from the constraints of the “golden handcuffs”, gave rise to the Great Moderation. From the 1980s to the outbreak of the subprime crisis in 2008, the global economy became significantly more stable. Economists refer to this period as the Great Moderation, often attributing it to the Federal Reserve Chair Alan Greenspan’s “magic” formula. In fact, the deeper force behind it was monetary policy’s release from the “golden handcuffs” and the flexibility this created. That flexibility did not disappear after the subprime crisis. If anything, the introduction of unconventional monetary policy after 2008 further expanded the range of tools available to central banks. This explains why volatility in U.S. economic growth and inflation continued to decline after the crisis. In that sense, the Great Moderation continued even after 2008.

Third, once monetary policy was freed from the constraints of a physical anchor, it became better able to respond to economic crises. This is one way in which monetary policy reduces volatility in the real economy, but it deserves separate discussion. When a crisis breaks out, economic actors in both the financial system and the real economy hoard money to cope with heightened uncertainty. This causes demand for money, or liquidity, to surge. Under the gold standard, the money supply was constrained by a country’s gold holdings, making it difficult for governments to increase liquidity sharply in times of crisis. If that demand for liquidity could not be met, panic was harder to contain, economic activity weakened because of insufficient money supply, prices fell, and the crisis deepened. After the Great Depression began in 1929, the constraints imposed by the gold standard on monetary policy in Western countries were an important reason why the crisis lasted so long and caused such severe damage. Only after Western countries left the gold standard one after another, with Britain abandoning it in 1931, were the conditions created for recovery.

Under a fiat-money system, the money supply can be adjusted flexibly in response to changing conditions, significantly strengthening governments’ ability to manage economic crises. When a crisis erupts, governments can sharply expand the money supply in the short term to meet the market’s demand for liquidity and calm panic. When the subprime crisis broke out in 2008, the U.S. financial system at one point nearly seized up. Yet with the Federal Reserve’s massive liquidity injections, it recovered far faster than the U.S. financial system did after the Great Depression. That the subprime crisis did not produce consequences as severe as the Great Depression owed much to a fiat-money system no longer constrained by a physical anchor.

Fourth, unanchored money has given countries flexible exchange-rate tools, allowing them to use currency movements to absorb external shocks. When currencies were linked to gold, exchange rates were fixed by gold parity, and national monetary policies were effectively tied together by the free cross-border movement of gold. As a result, real economies across countries were forced to adjust in tandem. Changes in one country’s real economy could quickly spill over to others, transmitting shocks abroad.

For example, under the gold standard, a country could fall into a deflationary recession because of technological progress elsewhere. A country experiencing technological progress would become more competitive internationally, expand exports, and run a trade surplus. Gold would then flow into that country, triggering the sequence of effects described earlier under the Hume mechanism. But the technologically advancing country was not the only one forced to adjust. Other countries with stagnant technology would face wider trade deficits, gold outflows, deflation, and declining domestic demand. Their adjustment could be slow and painful, and could even produce economic crises through deflation and liquidity contraction.

In a fiat-money system, countries facing such pressure can respond less painfully by allowing their own currencies to depreciate. When technological progress abroad weakens their competitiveness, they can expand the money supply and let their currencies fall, making their exports more price-competitive in world markets. This helps them preserve international market share and avoid domestic deflation. Currency depreciation, of course, reduces the international purchasing power of the domestic currency and still lowers residents’ welfare. But it allows countries to avoid the slower and more painful real-economy adjustment caused by deflation. As a result, economies facing external technological shocks can experience less volatility and impose smaller costs on their populations.

Fifth, unanchored money supported the “global imbalance” model of globalisation that has prevailed over the past four decades, making an external-demand-driven growth model possible. In international trade, flows of goods are matched by flows of money in the opposite direction: money moves from deficit countries to surplus countries. If money is linked to a physical anchor, such as gold or silver, the global money supply is constrained by the quantity of that anchor. In that case, money in deficit countries would decline, forcing their real economies to adjust and reduce their deficits. This is precisely the effect of the Hume mechanism discussed earlier. When money is anchored to physical objects, no country can sustain a trade deficit indefinitely. Without deficit countries, there can be no surplus countries. Global imbalances, therefore, cannot arise under a physically anchored monetary system. It was monetary de-anchoring that made global imbalances possible, thereby creating external-demand space for economies with insufficient domestic demand. Earlier, global imbalances were described as one of the Jamaica system’s weaknesses. But that weakness also has a beneficial side: it makes external-demand-led growth possible.

For a country such as China, where domestic demand is insufficient, the absence of global imbalances would be unfavourable. Without the trade deficits created by deficit countries, above all the United States, China could not run a trade surplus. In the long run, external demand, or the trade surplus, would then not contribute to China’s growth. China would be unable to use external circulation to offset weak domestic demand, and growth would come under greater pressure. In the five years after the Asian financial crisis of 1997, and again during the subprime crisis in 2008, China’s growth slowed markedly as external demand weakened. If money had been linked to a physical anchor, these two periods of weak external demand would have become long-term, making it much harder for China to maintain its economic stability. From this perspective, China is undoubtedly a beneficiary of global imbalances and of the Jamaica system that sustains them. Since the beginning of the twenty-first century, China’s current-account surplus has moved closely with the U.S. current-account deficit, and the persistence of the U.S. trade deficit has been the ultimate source of much of China’s external demand.6 China still benefits from the macroeconomic support provided by an external-demand-led growth model. (See Chart 7)

In sum, the move away from physically anchored money gave countries a flexible tool of macroeconomic management: monetary policy. On the positive side, money and exchange rates became buffers for the real economy, improving real economy stability. On the negative side, however, their ability to absorb pressure also weakened the incentive for real-economy adjustment, delayed that adjustment, and allowed structural imbalances to persist. The “global imbalances” of the past forty years can be understood as the result of repeated postponement of supply-demand adjustment in both surplus and deficit countries.

Any international monetary arrangement that seeks to change the status quo must preserve the Jamaica system’s main strength: monetary-policy flexibility. As the Chinese saying goes, “It is easy to move from frugality to luxury, but difficult to move from luxury back to frugality.” The same logic applies to the evolution of the international monetary system. Once people have become accustomed to the stability that flexible monetary policy brings to the real economy, any proposal to remove that flexibility and force the public once again to directly bear painful real-economy adjustments is unlikely to gain acceptance and is therefore bound to fail. Some may argue that structural adjustment in the real economy is necessary for long-term economic health. But flexible monetary policy can at least make such an adjustment faster and smoother, reducing the pain involved. Only arrangements that preserve monetary-policy flexibility while correcting the shortcomings of the Jamaica system can become the future of the international monetary order.

4. Future Scenarios That Can Be Ruled Out

After reviewing the history and current state of the international monetary system, it is now possible to consider its future. The following analysis begins by ruling out implausible scenarios before assessing the most likely path among those that remain.

4.1 A Single-Currency Area Can Be Ruled Out

The first scenario to rule out is the creation of a single-currency area composed of multiple countries, similar to the eurozone. If several countries replaced their sovereign currencies with a common currency, cross-border payments within the bloc would naturally be settled in that currency. If the model were extended globally, that currency would dominate the international monetary system. However, a currency area would strip countries of independent monetary policy, and the exchange rate would effectively be locked at 1:1. Economic differences among members could no longer be absorbed through independent monetary policies or flexible exchange rates, and would eventually pull the currency area apart. The eurozone offers a cautionary example.

In its first decade after being launched in 1999, the eurozone developed clear internal imbalances. At the time of its creation, most member states had already signed the Schengen Agreement and joined the Schengen Area, removing border checks and allowing people to move freely within the area. The eurozone’s designers hoped that this free movement of people would reduce differences among member states and promote convergence of real economies. That expectation proved too optimistic. Labour mobility alone was far from enough to bridge the gaps among member states. Between the eurozone’s launch in 1999 and the outbreak of the subprime crisis in 2008, internal imbalances emerged and became increasingly severe. Member states split into two distinct groups: 1) current-account-deficit peripheral countries, including Italy, Spain, Portugal, Ireland, and Greece; 2) Germany, with a large current-account surplus. These widening divergences eventually triggered the European debt crisis in 2010, at one point putting the eurozone at serious risk of disintegration.7 (See Chart 8)

As a monetary union without a unified fiscal system, the eurozone still faces a risk of fragmentation. When labour mobility cannot produce economic convergence, fiscal transfers are needed to narrow disparities and hold the eurozone together. The Chinese mainland offers a useful comparison. China’s provincial-level regions together form a currency area using the renminbi. People can move freely across provinces, yet regional disparities remain significant. Yet because these regions belong to a single state, the central government carries out large-scale fiscal transfers each year from more developed areas to less-developed ones. These transfers prevent regional gaps from widening to the point where they could threaten the unity of the currency area.

However, the eurozone is not a unified state; its members have not formed a fiscal union, and cross-country fiscal transfers face enormous political resistance. Without fiscal transfers to narrow national disparities, and without monetary policy—especially exchange-rate policy—to absorb the resulting economic pressures, the eurozone remains vulnerable to fragmentation caused by excessive internal divergence. Although the eurozone has continued to pursue deeper integration, this problem has not been resolved. In this sense, the euro remains structurally fragile.

If even Western European countries, whose differences are relatively limited, have struggled to form a stable single-currency area, creating one on a broader scale would be even less plausible, regardless of what currency were used. The central problem is that when multiple countries share the same currency, they can no longer use monetary policy or exchange rates to absorb differences among national economies. Either their real economies must converge quickly, or cross-border fiscal transfers must be used to narrow the gaps. The former is difficult; the latter is hard to achieve without political union.

The international monetary system is therefore unlikely to move toward a currency-area model in which multiple countries use the same money. This means that sovereign currencies are unlikely to be replaced by a supranational payment instrument. The following analysis, therefore, does not consider the replacement of national currencies (as it is unlikely). Instead, it focuses on what might replace the dollar as the main international payment instrument and reserve asset. It is noteworthy though, that even if the dollar were no longer the dominant currency for international payments, it would remain the primary means of payment within the United States.

4.2 The “Physical Anchor” Will Not Return

The second future scenario to rule out is the emergence of a commodity-backed currency as the main instrument of international payment. In the future international monetary system, international money cannot return to any physical anchor, whether gold or a basket of commodities. Section 3 has already explained why money’s shift from “anchored” to “unanchored” represented progress. Here, the reasons for ruling out a return to a physical anchor can be summarised in two points.

First, linking money to a physical anchor is far from simple. It is not enough for the issuer merely to announce a conversion rate between the currency and the underlying asset. To make the link credible, the issuer must guarantee free convertibility at the stated rate. In other words, the currency must function as a claim on the underlying asset, backed by sufficient reserves and redeemable whenever the market demands. Given the scale of the international economy and the potentially enormous demand for redemption, such a commitment would be difficult for either a single country or a supranational institution to make.

Second, an international currency tied to a physical anchor would lose flexibility. Far from moderating global economic fluctuations, it could itself become a source of shocks. The benefits of flexible monetary policy, and the costs of losing that flexibility, have already been discussed in Section 3. Here, it is enough to consider one consequence of restoring a physical anchor: large fluctuations in the overall price level. Over the past 50 years, both gold and broad commodity baskets have experienced substantial price volatility. By contrast, the basket of consumer goods most directly felt by ordinary people, as measured by the Consumer Price Index, has been relatively stable. This means that the relative price of gold and commodities against consumer goods has fluctuated sharply. If international money were linked to gold or commodities, the prices of national consumer-goods baskets measured in that currency would also fluctuate sharply. To stabilise domestic consumer prices, countries would then have to allow large swings in the exchange rates between their own currencies and the international currency. This would create persistent turbulence in the international monetary system and would therefore be unacceptable to countries.

Many people have misread John Maynard Keynes’s proposal for the bancor and therefore mistakenly believe that a commodity-linked supranational currency could be created. One common claim is that, in designing the post-war international monetary system, John Maynard Keynes proposed a supranational payment currency backed by 30 commodities and called it the bancor. That is not what appeared in his final proposal, the Keynes Plan. Although Keynes may have considered some form of commodity link while developing the plan, he ultimately chose not to include it. For an economist of Keynes’s calibre, it is reasonable to assume that he recognised the two constraints discussed above.

Nor was the bancor linked to gold. In the Keynes Plan, it had many of the features of an unanchored fiat currency. Countries could obtain bancor by paying in gold, but they could not redeem bancor for gold. Its issuance was therefore not constrained by the issuer’s gold reserves.

Since the international monetary system cannot return to a physical anchor, two possibilities are naturally ruled out.

First, the gold standard, or any variant of it, can not return. More than a century ago, Keynes had already recognised that the gold standard was out of step with the needs of the age, denouncing it as “a barbarous relic.” In A Tract on Monetary Reform, published in 1924, Keynes wrote: “In truth, the gold standard is already a barbarous relic…Advocates of the ancient standard do not observe how remote it now is from the spirit and the requirements of the age.” A gold standard that was already outdated more than a century ago has no real prospect of returning today.

Second, proposals for a supranational currency linked to commodities or other physical anchors will not succeed. Many people imagine a future international monetary system in which a supranational institution issues a supranational currency as an instrument of international payment. The first challenge for such a currency is establishing international trust in it. Linking it to a physical anchor may seem like an easy way to build that trust. But, as discussed above, making a supranational currency genuinely convertible into a physical asset is itself extremely difficult. The issuing institution would need enormous reserves, just as countries under the gold standard needed gold reserves. Even if that could be achieved, a supranational currency constrained by physical reserves and lacking flexibility would still be unable to meet the international community’s needs for payments and reserves. Therefore, even if a new supranational currency emerges in the future international monetary system, it cannot be linked to a physical anchor.8

4.3 Sovereignless Cryptocurrencies Cannot Become the Main International Means of Payment

In 2008, Satoshi Nakamoto published “Bitcoin: A Peer-to-Peer Electronic Cash System,” opening a period of rapid development in digital currencies. Nakamoto invented blockchain technology and used it to design a system that could conduct peer-to-peer electronic payments without verification by a trusted third party. This made it possible for payment systems to operate in a decentralised way, without a central node. Based on this idea, Bitcoin, an unprecedented digital cryptocurrency, was created. Bitcoin’s total market capitalisation now exceeds US$1 trillion. Since then, many other cryptocurrencies based on similar technologies have been developed. The rise of cryptocurrencies has also pushed central banks around the world to accelerate their own digital transformation, prompting several countries to launch central bank digital currencies (CBDCs). The People’s Bank of China launched the digital renminbi, or e-CNY, in 2022.

Digital currencies today fall mainly into three categories: sovereignless cryptocurrencies, stablecoins, and CBDCs. The first category, sovereignless cryptocurrencies, refers to digital currencies that do not rely on the credit backing of any sovereign state, are not linked to any national fiat currency or physical anchor, and are issued and circulated solely through decentralised networks and consensus algorithms. Bitcoin is the leading example and accounts for the largest share of this category. The second category, stablecoins, also uses technologies similar to those behind sovereignless cryptocurrencies. However, to address large price fluctuations, stablecoin issuers peg them to sovereign currencies.9 For every unit of stablecoin issued, the issuer holds an equivalent amount of national currency as reserves. Stablecoins can therefore be seen as an extension of sovereign currencies. The third category, CBDCs, differs from cryptocurrencies. They are digital currencies issued and managed by central banks, operating on centralised payment networks built around the central bank. CBDCs are the digital form of sovereign legal tender.

For three reasons, sovereignless cryptocurrencies cannot become the main instruments of international payment.

First, they are likely to face sustained resistance from sovereign states, which leaves them limited room for development. Currency issuance is a core sovereign power, and seigniorage is an important source of revenue for states. Governments are therefore unlikely to tolerate other organisations sharing in the power to issue money. In addition, sovereignless cryptocurrencies offer a considerable degree of anonymity, making them attractive tools for criminal activities such as money laundering. To protect monetary sovereignty and combat crime, sovereign states have strong incentives to ban or restrict their use.

China has already halted domestic cryptocurrency activities. In September 2021, the People’s Bank of China and nine other ministries and commissions jointly issued the Notice on Further Preventing and Disposing of Risks Related to Virtual Currency Trading and Speculation, which classified business activities related to sovereignless cryptocurrencies, referred to in the notice as virtual currencies, as illegal financial activities in China and strictly prohibited them. On February 6, 2026, the People’s Bank of China and seven other ministries and commissions again issued the Notice on Further Preventing and Disposing of Risks Related to Virtual Currencies and Related Activities, further clarifying that virtual currencies do not have the same legal status as sovereign legal tender, are not legally redeemable as currency, and should not, and cannot, circulate or be used as money in the market.

Second, sovereignless cryptocurrencies suffer from both rigidity and excessive flexibility. Any such currency that seeks to gain public trust must place limits on its own issuance. Bitcoin, for example, has a maximum supply of 21 million coins, fixed by algorithms. If a sovereignless cryptocurrency were truly used as an international means of payment, this quantitative rigidity would cause sharp swings in international commodity prices and disrupt international trade. In this respect, its weaknesses resemble those of money tied to a physical anchor.

At the same time, however, anyone with the relevant technical capacity can create a new sovereignless cryptocurrency. Since Bitcoin, other cryptocurrencies such as Ethereum and Binance Coin have emerged. These new entrants continuously divert liquidity and attention away from existing cryptocurrencies and expose them to repeated shocks. This weakens public confidence in any single sovereignless cryptocurrency.

Third, the decentralised technological model on which sovereignless cryptocurrencies rely faces serious technical constraints. Blockchain technology is subject to an “impossible trinity”: decentralisation, security, and scalability are difficult to achieve at the same time. In practice, a system can usually prioritise only two of the three, while sacrificing the third to some degree. Put simply, if decentralisation is required, transaction capacity, or scalability, is likely to be limited. Bitcoin, for example, currently processes fewer than 10 transactions per second worldwide. Visa, by contrast, processes more than 1,000 transactions per second. Bitcoin’s extremely low throughput clearly cannot support large-scale transaction demand.

Improving cryptocurrency performance would require the introduction of a central node, but that would undermine the very advantage of decentralisation. Technologies such as directed acyclic graphs are being explored as possible ways to address this impossible trinity, but progress remains limited. More importantly, it remains uncertain whether these alternative technological paths can win the same broad public trust that blockchain has acquired, and thereby support cryptocurrencies used at scale.

The analysis above rules out the possibility that sovereignless cryptocurrencies could become the main instruments of international payment. But this conclusion applies only to one form of digital currency. Stablecoins and CBDCs are digital extensions of sovereign currencies and should be understood as digital forms of sovereign money. Although they may use some cryptocurrency-related technologies, they are fundamentally different from sovereignless cryptocurrencies. The preceding analysis, therefore, does not apply to them.

5. Possible Futures for the International Monetary System

With the impossible scenarios ruled out, the analysis can now turn to the more plausible future paths of the international monetary system. Before doing so, three points need to be clarified.

First, the international monetary system changes slowly and over long periods. Although the current dollar-centred system has many problems, it is likely to persist for decades. The future discussed here is therefore not a future one or two years away, but the world around the middle of this century. Even so, long-term trends are already shaping present choices, so it is still worth looking that far ahead.

Second, the central question in assessing the future of the international monetary system is what could replace the dollar as the main international payment instrument and reserve asset. This is different from asking what could replace the sovereign currencies currently used by individual countries. The eurozone has already shown that, without political union, replacing multiple national currencies with a single currency is unlikely to produce good results. Sovereign currencies will therefore continue to exist for a long time. They will not disappear because the instruments used for international payments change.

Third, the claim that artificial intelligence will eliminate money is too utopian to serve as a serious basis for assessing the future of the international monetary system. AI is the most important technological innovation of the present era and is likely to raise human productivity substantially. But however much output expands, it will remain limited relative to unbounded human wants. AI-generated output still depends on resources and energy. AI can improve the efficiency with which humans use those resources, but it cannot abolish scarcity. As long as output remains scarce, markets will continue to function as mechanisms for allocating resources, and money will remain necessary as the means of payment in market transactions. AI will not eliminate money, although it may change the form money takes. That possibility should be taken into account when considering the future of the international monetary system.

With these points clarified, the next question is what might replace the dollar as the main payment instrument in the international monetary system.

5.1 Other Sovereign Currencies: Possible but Unlikely

It is not impossible that another sovereign currency could one day replace the dollar as the central currency of the international monetary system. But the probability is low. Some may argue that, since the dollar became the dominant international payment instrument on the back of American power, the currency of another country or bloc could replace it if that country or bloc were to surpass the United States in overall strength.10 This view underestimates the difficulty of challenging the dollar. As the anchor of the current system, the dollar enjoys a powerful incumbent advantage created by network externalities, setting a very high bar for any challenger.

Network externality means that the value users derive from a network rises with the number of other users connected to it: the more users there are, the more useful the network becomes for each participant. For more than half a century, the world has built a highly developed international payment system around the dollar. For example, if someone wanted to exchange Honduras’s currency, the lempira (HNL), directly into Nepal’s currency, the Nepalese rupee (NPR), it would probably be difficult to find a counterparty who happened to want to exchange Nepalese rupees for lempiras. But it would be far easier to exchange lempiras into dollars, and then dollars into Nepalese rupees. With the dollar as an intermediary, currencies around the world can be exchanged relatively easily. Because so many countries use the dollar in international trade and finance, it is convenient for everyone to keep using it.

Because of these network externalities, another sovereign currency could replace the dollar only if its issuing country, or currency bloc, established an overwhelming advantage over the United States. That advantage would have to appear across many dimensions, including economic size, trade volume, the breadth, depth, and openness of financial markets, the stability of economic and financial conditions, and military power. Globally, the only currencies that might conceivably acquire such advantages in the future are the euro and the renminbi. Yet the eurozone, as a monetary union without a unified fiscal system, remains structurally fragile and is therefore poorly placed to challenge the dollar. China, meanwhile, still lags far behind the United States in financial markets and several other areas. According to statistics from the Bank for International Settlements (BIS), transactions involving the dollar accounted for as much as 89 per cent of all global foreign-exchange transactions in 2025, only one percentage point lower than in 2001. The shares of the euro and the renminbi remained far below that of the dollar. Replacing the dollar with another sovereign currency would therefore be extremely difficult. (See Chart 10)

5.2 A Supranational Currency Backed by Multiple Sovereign Currencies

The most plausible post-Jamaica path is a supranational currency linked to a basket of sovereign currencies, gradually replacing the dollar’s central role. Once the possibilities of a single-currency area, a physical anchor for money, and sovereignless cryptocurrencies are ruled out, and given the great difficulty of replacing the dollar with another sovereign currency, the most likely direction of change is a supranational currency supported by multiple sovereign currencies. There are two reasons.

First, the main international payment instrument after the dollar is unlikely to be another sovereign currency, cannot be a sovereignless currency, and certainly cannot be a natural physical object. It would therefore have to be a supranational currency issued by a supranational institution. This follows from the analysis above. Such an institution could not replace sovereign states; it could only be an international body jointly established by several sovereign states. A supranational currency constructed by multiple countries would also be better placed to overcome the incumbent advantage that network externalities confer on the dollar.

Second, at least in its early stages, such a supranational currency would need to be linked to multiple sovereign currencies to establish international trust. The central question for any new currency is how it can win confidence. Since money cannot be reattached to a physical anchor, trust cannot be built through commodity backing. Nor could the international institution issuing such a currency possess the coercive power of a sovereign state, so it could not rely on force to establish confidence. Its credibility would therefore have to rest on a link to sovereign currencies. Linking it to a single sovereign currency would serve little purpose: users might as well use that currency directly. It would therefore need to be linked to multiple sovereign currencies. In effect, such a supranational currency would have to function as a claim on a basket of sovereign currencies, giving users confidence that it could be exchanged at any time for that basket.

The Special Drawing Right (SDR), created by the International Monetary Fund (IMF) in 1969, is the embryonic form of such a supranational currency. The SDR itself is not a currency, but a book asset whose value is linked to a basket of sovereign currencies. At present, that basket includes five currencies: the dollar, the euro, the renminbi, the yen, and sterling. For the 2022–2027 period, their weights are 43.38 per cent, 29.31 per cent, 12.28 per cent, 7.59 per cent, and 7.44 per cent, respectively. Under the IMF’s Articles of Agreement, SDRs may be held only by IMF member countries and the IMF itself; individuals and private entities cannot hold them. This has limited their use. As of April 2026, total SDRs stood at SDR 660.8 billion, equivalent to about US$900 billion, leaving them relatively small in scale. If the scope of SDR use were broadened, issuance expanded, and private entities allowed to hold and use them for international payments, the SDR could evolve into a supranational currency and potentially become a major international payment instrument.

However, because the United States has veto power in the IMF, the SDR cannot challenge the dollar’s position in the international monetary system. Article XV, Section 2 of the IMF Articles of Agreement stipulates that an eighty-five per cent majority of the total voting power shall be required for a change in the principle of valuation or a fundamental change of the principle in effect. At present, the United States holds 16.49 per cent of the IMF’s voting power. This means that without U.S. consent, the IMF cannot change the rules governing the SDR. Given the United States’ incentive to preserve dollar dominance, it clearly cannot allow the SDR to become an international currency capable of challenging the dollar.

The R5, linked to the currencies of the BRICS countries, is a conception of a supranational international currency similar to the SDR, but one that could bypass U.S. constraints. Aleksei Mozhin, Russia’s Executive Director at the IMF, and Paulo Nogueira Batista Jr., former Brazilian Executive Director at the IMF, have both proposed that the BRICS countries could jointly issue a supranational currency. This currency would be linked to the sovereign currencies of the five BRICS countries: Brazil, Russia, India, China, and South Africa. Coincidentally, the English names of all five currencies begin with the letter R: Brazil’s real, Russia’s ruble, India’s rupee, China’s renminbi, and South Africa’s rand. A supranational currency linked to them could therefore be called the “R5”. The R5 would inherit the advantages of the SDR, while being less vulnerable to an outright U.S. veto, and could therefore become one possible future instrument of international payment.

5.3 The Main Problems a Supranational Currency Must Solve

For a supranational currency backed by a basket of sovereign currencies to challenge, or even replace, the dollar in the international monetary system, three major problems would have to be addressed.

First, how should the seigniorage from currency issuance be distributed? One solution would be to allocate seigniorage in proportion to the economic size of the countries participating in the currency’s issuance. Specifically, newly created supranational currency could be distributed according to the size of participating economies: larger countries would receive more, smaller countries less. This would distribute seigniorage among participating countries in a relatively fair way and avoid the inequity of the United States using the dollar to extract gains from the rest of the world.

Second, how should differences among the real economies of participating countries, and the trade imbalances arising from them, be handled? The answer is that trade imbalances are difficult to eliminate and would have to be tolerated. The experience of globalisation over the past half-century has shown that achieving long-term trade balance among all countries is unrealistic, both today and in the foreseeable future. Under the gold standard, long-term trade balance was achieved through the Hume mechanism, but only by forcing painful adjustment in countries’ real economies. As long as such adjustment can be avoided, people in different countries will be unwilling to bear its costs. This is especially true of surplus countries. When designing the post-Second World War international monetary system, Keynes once proposed taxing surplus countries to force them to reduce their surpluses. In modern society, such an idea would be unacceptable to surplus coungtries. The more realistic option, therefore, is to use a supranational currency to absorb the adjustment pressure created by trade imbalances, allowing global imbalances to persist, and surplus countries would continue to accumulate supranational currency.

Third, how should the supranational currency accumulated by the international community be invested? Trade-deficit countries would need to issue substantial amounts of government debt denominated in the supranational currency, creating a deep international market for such bonds to meet investor demand. Trade imbalances correspond to flows of savings from surplus countries to deficit countries. Once surplus countries accumulate supranational currency, they need to invest it abroad to earn returns. Deficit countries, meanwhile, not only receive supranational currency allocated by the issuing institution, but also need to borrow additional amounts from abroad to pay for imports.

The most workable solution would be for deficit-country governments to issue large quantities of government bonds denominated in the supranational currency, thereby meeting the investment demand of surplus countries. Deficit-country governments would not be the only possible issuers. Surplus-country governments and private-sector entities in various countries could also issue bonds in the supranational currency, increasing the supply of investable assets. But given the direction of savings flows under global imbalances, deficit countries, as importers of savings, should be the main providers of such assets. Compared with private-sector bonds, government bonds are clearly safer and should therefore form the core of the asset pool, at least in the early stage.

If these three issues can be resolved along these lines, a supranational currency could develop relatively smoothly.

5.4 The Path From the Present to the Future

Although it remains unclear what form a supranational currency capable of challenging the dollar might eventually take, current U.S. policy is already pushing the international monetary system in that direction.

First, the anti-globalisation policies adopted by the United States since 2025 have shaken international confidence in the dollar. After Trump began his second term as U.S. president in 2025, the United States introduced measures such as “reciprocal tariffs”. In the article “A Deep Understanding of the Logic and Impact of the U.S. Tariff War”, published on May 12, 2025, I argued that over the past 40 years of global imbalances, the global dollar cycle had channelled foreign savings back to the United States and supported the accumulation of U.S. debt. If the United States seeks to shrink its trade deficit through anti-globalisation policies, the high-consumption, high-debt growth model on which it has relied for the past four decades will become unsustainable. Unless the U.S. economy transforms in time by reducing domestic consumption and raising domestic savings, anti-globalisation policies will expose the United States to debt risks, causing dollar assets—once the world’s safe haven—to lose the trust of global capital. The dollar’s weakness since April 2025, together with the strength of gold over the same period, is consistent with this logic.

Second, the U.S. tendency to use the dollar as a sanctions tool—to weaponise the dollar—has also given the international community stronger incentives to reduce its reliance on the currency. Because the dollar occupies a central position in the international payment system, many global cross-border dollar transactions must be cleared through the U.S. banking system. This gives the United States enormous influence over international payment infrastructure, such as SWIFT. After the outbreak of the Russia-Ukraine war in 2022, the United States imposed unprecedented sanctions on Russia, excluded Russian institutions from SWIFT, and froze Russia’s foreign-exchange reserves. If the United States can use the dollar to sanction Russia, it can naturally do the same to other countries. This gives other countries an incentive to seek alternatives. The Russian and Brazilian scholars mentioned earlier, who advocated the R5, also treat the weaponisation of the dollar as one reason for creating such a supranational currency.

Many countries have already begun building international payment systems outside the dollar. After being cut off from SWIFT, Russia developed the Financial Messaging System of the Bank of Russia (SPFS) as an alternative channel for payments. China has built the Cross-border Interbank Payment System (CIPS) to support international payments based on the renminbi. In 2021, the People’s Bank of China, together with the BIS Innovation Hub Hong Kong Centre, the Bank of Thailand, the Central Bank of the UAE, and the Hong Kong Monetary Authority, launched the Project mBridge, which uses blockchain technology to connect multiple central banks and facilitate more convenient and efficient cross-border payments.

As payment systems built by different countries continue to develop, they will gradually give rise to a supranational currency supported by multiple sovereign currencies. First, because of network externalities, the larger a payment network becomes, the more efficient and convenient it is. International payment networks built by different countries, therefore, have a tendency to connect with one another and eventually form a larger network. Second, as the number of currencies in such a network increases, a central currency may naturally emerge to facilitate exchange among them, with different currencies converted through this central unit. Given the precedent of the dollar’s “exorbitant privilege” and the backlash it has generated, this new central currency is more likely to be supranational than an existing sovereign currency. As discussed earlier, such a supranational currency should be decoupled from physical anchors and linked instead to multiple sovereign currencies.

As this supranational currency and its corresponding international payment network develop, the dollar may eventually be absorbed into the new system. The United States faces a fundamental Triffin dilemma: U.S. hegemony gave rise to dollar hegemony, but dollar hegemony in turn erodes U.S. hegemony. This means that the dollar-centred international monetary system will eventually move toward its own negation. In that process, a supranational currency supported by multiple countries could ultimately replace the dollar at the centre of the international monetary system. At that point, the United States would have little choice but to support the new supranational currency and allow the dollar to become part of the basket of currencies to which it is linked.

Compared with this path, a better long-term option for the United States would be to promote SDR reform and allow the SDR to gradually become the supranational currency that replaces the dollar. Although this would better serve U.S. interests in the long run, it would also require the United States to weaken the dollar’s position by choice, and would probably be difficult for any U.S. government to accept.

The most likely path from the present to the future of the international monetary system is this: as international trust in the dollar weakens, a supranational currency jointly supported by multiple countries will come into wider use and eventually replace the dollar as the central currency of the international monetary system. Ultimately, the United States may be forced to accept the inclusion of the dollar in the basket of currencies to which that supranational currency is linked, completing the transformation of the international monetary system. If the BRICS countries can reach an agreement on establishing an R5 currency, it would have significant potential to become such a future supranational currency.

In discussing this path, however, the resilience of the Jamaica system should not be underestimated. As noted at the beginning of this section, the international monetary system evolves slowly, over decades rather than years. Before any future supranational currency emerges, the dollar-centred Jamaica system is likely to remain in place for a long time. The United States has indeed extracted seigniorage from the world through the dollar. In this sense, the dollar relies on the global economy as the base from which that seigniorage is drawn. But the global economy also relies on the dollar as a payment instrument, a reserve asset, and a pressure absorber that helps sustain global imbalances.

Many people see only the support that the “petrodollar” provides to the dollar, namely, the use of dollars by oil-exporting countries to settle oil trade. They overlook the fact that oil-exporting countries also need the dollar to absorb the pressure created by structural imbalances arising from insufficient domestic demand. For a fairly long period before the emergence of the supranational currency described above, the world economy will continue to need the dollar. That need gives the Jamaica system its resilience.

In the current international economy, the greater danger is not that the world will abandon the dollar, but that the world will lose a credible dollar. As argued above, the international community currently has no good alternative to the dollar as an international payment instrument. The world is therefore unlikely to abandon the dollar by choice. At the same time, however, U.S. anti-globalisation policies and unilateralist tendencies are eroding the credibility the dollar has built up over many decades. If the dollar loses that credibility, and if the international community no longer trusts the safety of dollar assets, international trade could suffer severe damage from the absence of a reliable international payment instrument; international financial markets could experience major turbulence as capital withdraws from dollar assets; and global imbalances could contract sharply as the dollar ceases to provide a buffer. A global shortage of payment instruments and safe assets caused by the loss of dollar credibility could trigger a severe global economic crisis. Such a crisis could, in turn, create the conditions for the emergence of a supranational currency to replace the dollar.

6. China’s Choices

Based on the preceding analysis, the following choices would best serve China’s long-term development during the transformation of the international monetary system.

First, China is a beneficiary of the current dollar-centred Jamaica system and should not seek to overturn it. Measured by purchasing power parity, China’s economy has already surpassed that of the United States and ranks first in the world. Measured at market exchange rates, China’s GDP still trails that of the United States and ranks second globally, but surpassing the United States is only a matter of time. Given China’s continued progress in international trade, financial development, opening up, and many other areas, the renminbi has the long-term potential to challenge the dollar’s position as the central currency of the international monetary system. However, as argued above, China benefits from the current system because the dollar absorbs part of the adjustment pressure created by China’s own economic structure. China should therefore do its best to maintain the existing international monetary system, rather than actively overturning a system from which it benefits.

Second, renminbi should not aim to replace the dollar or become the central currency of the international monetary system. For a country’s long-term development, the disadvantages of having its currency become the main international reserve currency outweigh the advantages. If the renminbi were to become the main international reserve currency, China’s comparative advantage would shift from the real economy to the financial system, and the hollowing-out of its real-economy industries would become inevitable. International doubts about the United States’ “exorbitant privilege” and dissatisfaction with the unfairness of the international monetary system would also be redirected toward China. At that point, China would face the same fundamental Triffin dilemma that the United States faces today and would set itself on a path of national decline. That is not a choice a farsighted country should make.

Third, the main objective of renminbi internationalisation should be to ensure that China has secure international payment channels and to expand the renminbi payment network globally. At the China-U.S. leaders’ Beijing summit in May 2026, the two heads of state agreed to define “a constructive China-U.S. relationship of strategic stability” as the new framework for bilateral relations. This new positioning is expected to provide a basis for stability in China-U.S. relations over the next three years and beyond. In great-power competition, however, China must prepare for all contingencies. Although China-U.S. relations are likely to remain broadly stable, extreme scenarios cannot be ruled out. China, therefore, needs to further expand the renminbi payment network globally and build the necessary infrastructure, ensuring that it has a backup channel for international payments outside the dollar system. The purpose is not to challenge the dollar, but to preserve China’s ability to make international payments under extreme circumstances.

Fourth, China needs a way to supply renminbi to other countries within the international renminbi payment system without relying on trade deficits. Over the past several decades, the United States has supplied dollars to the rest of the world by running persistent external deficits. China’s position is different. As a long-standing surplus country, it receives foreign currency through trade rather than sending renminbi abroad. Without other channels for providing renminbi liquidity to the rest of the world, offshore renminbi would tend to flow back to China through its trade surplus and eventually be drained from the system. Other countries would then struggle to obtain enough renminbi to buy Chinese goods, ultimately harming China’s exports.

One direct way to provide renminbi liquidity overseas is for China to lend renminbi to foreign countries, enabling them to use the borrowed currency to buy Chinese goods. China has already signed bilateral local-currency swap agreements with the central banks of many countries and regions, allowing them to exchange their own currencies for renminbi. Such swaps are, in substance, equivalent to China lending renminbi to other countries. In the future, the scale of such swap arrangements could continue to expand, making them a regular channel for supplying renminbi overseas.

However, as explicit renminbi lending expands, it could attract public attention and dissatisfaction within China, creating resistance to renminbi outflows. To address this problem, China could draw on the European Central Bank (ECB)’s operating model and allow overdraft arrangements within the international renminbi payment system, thereby creating a less visible mechanism for providing renminbi liquidity.

After the European debt crisis broke out in 2010, the ECB used the payment system it had built among eurozone countries to facilitate an implicit transfer of credit from Germany to Europe’s peripheral countries, thereby helping to stabilise the eurozone.

The eurozone had accumulated deep internal imbalances since its creation, and these came to a head after the European debt crisis broke out. Peripheral countries urgently needed financing from surplus Germany to stabilise their economies. Without such financing, they would have been forced into a sharp contraction of their current-account deficits, with severe consequences for their domestic economies. But the German public strongly opposed such lending, creating considerable political resistance.

The ECB, therefore, used the eurozone payment system it had built, TARGET2/T211, to enable an implicit transfer of credit from Germany to the eurozone’s peripheral countries. As of March 2026, Germany’s balance in the TARGET2/T2 system exceeded €1 trillion. This balance can be understood as Germany’s deposits in the ECB’s TARGET2/T2 payment system. At the same time, the combined overdraft balances of five eurozone peripheral countries—Italy, Spain, Portugal, Ireland, and Greece—in the TARGET2/T2 system exceeded €920 billion, meaning that these five countries cumulatively owed the TARGET2/T2 system more than €920 billion. In effect, within the TARGET2/T2 system, Germany had lent more than €920 billion to the eurozone’s peripheral countries, allowing them to obtain sufficient international payment instruments to maintain the stability of their international trade and domestic economies.

China can learn from this ECB operation by allowing other countries to incur overdrafts within the international renminbi payment system, thereby providing renminbi liquidity through the payment system itself. (See Chart 11)

Of course, for China, rather than sending renminbi overseas to support external demand, it would make more sense to find ways to expand domestic demand at home. Whether through higher consumption or expanded investment, stronger domestic demand would do more to improve the welfare of the Chinese people than lending renminbi to foreigners. In the article “The Dialectics of Supply and Demand”, published in June 2025, I discussed the “optimal” and “suboptimal” scenarios for boosting domestic demand: raising consumption by optimising the income-distribution structure, and stimulating investment through policy support. But when neither the optimal nor the suboptimal scenarios can be implemented, using renminbi outflows to support external demand remains an available option. In any case, it is better than allowing the Chinese economy to fall into the non-optimal scenario of large-scale corporate bankruptcies and mass unemployment.

Fifth, China should actively support the development of a supranational currency linked to multiple sovereign currencies, and promote the replacement of the dollar by such a currency as the main international payment instrument. As argued in Section 5, it is feasible for a supranational currency linked to a basket of sovereign currencies to replace the dollar and become the main instrument of international payment. Such an arrangement could also address the unfairness and unsustainability of the dollar-centred Jamaica system, and would therefore be more beneficial to the international community. As a responsible major power, China should support this direction in the development of the international monetary system, both for the sake of its own long-term healthy development and in the interest of mutual benefit among countries.

As early as 2009, Zhou Xiaochuan, then governor of the People’s Bank of China, wrote an article titled “Reflections on Reforming the International Monetary System”, arguing that a supranational currency should replace the dollar’s central position in the international monetary system. In the future, China can use the renminbi to provide backing for, and lend support to, the development of such a supranational currency. Specifically, China should, on the one hand, vigorously promote reform within the IMF and seek to turn the SDR into a true supranational currency. On the other hand, if IMF reform is blocked by U.S. obstruction and becomes difficult to advance, China should actively embrace supranational-currency proposals such as the R5 and promote the transformation of the international monetary system.

The dollar-centred Jamaica system has already passed the turning point from prosperity to decline, and China needs to make the choices most beneficial to itself on the basis of a reasonable assessment of the future direction of the international monetary system. In the article “The Fundamental Triffin Dilemma and the Rise and Fall of the Global Dollar Cycle”, published in January 2026, I argued that the United States’ introduction of “reciprocal tariffs” in April 2025 marked the turning point at which the global dollar cycle moved from prosperity to decline. Although the dollar-centred Jamaica system will continue for a long time, the broad trend of transformation in the international monetary system has already begun to emerge. By tracing the logic of the international monetary system from past to future, this article seeks to clarify the choices China should make and help anticipate the changes ahead.

11

TARGET2 stands for the Trans-European Automated Real-time Gross settlement Express Transfer system. It was a large-value euro payment system owned and operated by the Eurosystem, comprising the European Central Bank and the national central banks of eurozone countries, and was used to settle payments within the euro area. In 2023, TARGET2 was replaced by the more advanced T2 Payment System. The intra-eurozone cross-country payment system can therefore be referred to as the TARGET2/T2 system.

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Pekingnology

Wang Yongli: The rapid development of USD-backed stablecoins offers a profound warning

The East is Read, our sister newsletter, recently shared three discussions on stablecoins by Chinese experts…

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a year ago · 49 likes · Zhijian YAN and Yuxuan JIA

Anxious West seeks to rewrite global trade rules to counter China

Beijing should not be accused of trade unfairness simply because Chinese companies have become efficient, innovative and globally competitive

At the recent Brussels summit, the leaders of all 27 European Union states called on the European Commission to expand the bloc’s trade defence toolbox against “global macroeconomic imbalances”, widely understood to refer to China’s so-called overcapacity.

Measures under discussion include mechanisms for sector-wide tariffs and other restrictions in industries such as chemicals and green technology. Europe, long a critic of Washington’s Section 301 tariffs, is now considering instruments that increasingly resemble them.

For decades, the United States and Europe championed an open trading system built on multilateral rules, comparative advantage and global supply chains. They also urged China to open up its markets, lower tariffs, welcome foreign investment, strengthen intellectual property protection and integrate into the rules-based trading system.

Yet, as industrial competition intensifies, governments increasingly fear deindustrialisation, supply-chain vulnerabilities, technological dependence and the political consequences of economic dislocation. From Washington’s tariffs and industrial subsidies to Europe’s growing embrace of trade defence instruments, protectionism seems to be back in vogue.

That is the context in which the “overcapacity” debate exists. Overcapacity is a misnomer. China’s manufacturing capacity grew because it opened up and integrated itself into global supply chains. Chinese products became more competitive through scale, market discipline, infrastructure, industrial clustering and decades of manufacturing expertise.

China changed laws and regulations to meet international standards. It welcomed foreign joint ventures and wholly foreign-owned enterprises, deregulated its economy, created more incentives for businesses and entrepreneurs, and offered stronger protection for intellectual property rights. In other words, China did the things its trading partners wanted it to do.

Still, the concerns of advanced industrial economies are real and should not be dismissed. Germany, France, Italy, Spain, Japan and South Korea are all export economies with skilled workers, advanced manufacturers and communities whose livelihoods depend on the automotive, machinery, chemicals and other high-value sectors.

China’s industrial competitiveness does create pressure for them. But Beijing should not be accused of unfairness simply because Chinese companies have become efficient, innovative and globally competitive.

BYD is a useful example. Its advantage is not the product of state support. The private company’s advantage comes from vertical integration, digital-native production, battery expertise, engineering discipline, cost control, hard work and technological innovation. Recent estimates suggest BYD produces around 70 per cent of its components in-house, including batteries.

It also benefits from being located in China, the world’s deepest industrial centre, with access to dense supplier networks, skilled labour, engineers, logistics systems and manufacturing know-how. That ecosystem allows companies to reduce costs through efficiency, not merely through subsidies.

Nor is China’s automotive sector a sheltered paradise. It is one of the world’s most brutally competitive markets. It has consolidated sharply since 2018, when there were reportedly 487 electric-vehicle makers to just 129 last year – with only 10 to 15 expected to still be profitable by 2030. And while China’s vehicle exports have risen quickly, it still sells most of its cars at home.

Last year, China made and sold more than 34 million cars, with 8.32 million exported – this is not a sector producing mainly for foreign markets. For comparison, Germany produced 4.15 million passenger cars last year and exported 3.17 million of them, an export rate of 76.5 per cent. Japan produced 8.41 million passenger vehicles last year and exported 4.17 million of them – about half.

IEA data also shows that in 2025, around 20% of Chinese-made electric cars sold overseas in 2025 were made by carmakers headquartered outside China, such as Tesla, Renault’s Dacia, and BMW.

If global production for global markets is normal when Western multinationals do it, it cannot automatically become illegitimate when Chinese companies do it.

At the same time, amid a real transition strain for Europe and other advanced economies, China should and will continue to rebalance its growth model towards stronger household consumption. A larger and more confident Chinese consumer market would not only absorb more domestic production but also create greater opportunities for European, Japanese, Korean and American producers inside China. In doing so, classic market mechanisms would recycle China’s gains into domestic demand and imports.

China should also gradually allow a more flexible and market-responsive exchange-rate regime. The yuan operates under a managed float, but a clearer move towards greater flexibility would bolster the natural shift towards a balance in global markets and increase Chinese citizens’ spending power and quality of life while bolstering foreign manufacturing jobs abroad.

Europe also has a role in addressing the imbalance. Rather than relying mainly on tariffs, it should welcome Chinese investment and partnerships that create local jobs and transfer process knowledge. This is especially important in green industries.

Europe cannot demand a faster climate transition while excluding some of the world’s most competitive producers of electric vehicles, batteries and solar technology. Just as European firms contributed capital and industrial knowledge to China during its reform and opening up, Chinese companies can now support Europe’s industrial renewal.

The answer is not for Europe to follow Washington down the path of unilateralism. The US weakened the World Trade Organization as a mechanism for resolving disputes by blocking appointments to the appellate body after rulings went against it; Europe should not repeat that mistake. Nor should Beijing dismiss every foreign concern as protectionism. China should continue its reform and domestic rebalancing, while Europe should recognise that industrial success is not the same thing as unfair trade.

Both sides should refer these disputes to negotiation and focus on WTO reform and renewed multilateral discipline, working together to manage the dislocations of trade rebalancing while retaining the benefits of free and open markets.

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CCG Update - Center for China and Globalization

Henry Huiyao Wang on China’s Global Governance White Paper

China released a new white paper laying out its vision for global governance reform last Wednesday, introducing China’s principles, proposals and actions in global governance. The paper, titled More Just and Equitable Global Governance: China’s Principles, Proposals and Actions…

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a month ago · 9 likes · CCG Update

Below is the Executive Summary and excerpted report.

Download the full report on the UNDP website.

Executive Summary

Population ageing is one of today’s most pressing global challenges, and proactively addressing it is essential for achieving inclusive growth and sustainable development. An aging population has multiple impacts on development and the SDGs – from a smaller labour force, to a new source of potential sustainable consumption. Policy implications include the impact of increased welfare needs from public finance, along with risks of inequalities widening, including gender divides.

Since becoming an “aged society” in 2021, China’s demographic transition has accelerated. By the end of 2024, the number of people aged 65 and above had reached approximately 220 million (15.6 percent of the population), while those aged 60 and above exceeded 310 million (22.0 percent). Understanding and addressing this demographic shift is critical for long-term sustainable development.

Against this backdrop, the silver economy—comprising economic activities, products, and services designed to meet the needs of the aging population—is growing rapidly and holds significant potential for sustainable economic growth. Valued at around CNY 7 trillion in 2023, China’s silver economy is projected to grow to nearly CNY 30 trillion by 2035, underscoring its vast growth potential. Realizing this, however, requires robust financial support. The Chinese Government has listed “financial services for the silver economy” as one of the “Five Major Areas” of its financial agenda, signalling the vital role of pension and retirement finance in strengthening social security, improving livelihoods and upgrading industries.

This report reflects the diverse and evolving needs of older people and reviews the progress in China’s pension and retirement finance system. It examines how finance can enable the silver economy’s sustainable development, presenting opportunities in two main areas: i) for sustainable investment in the sector and, ii) for contributing to China’s evolving pension and retirement finance scheme.

The report enhances market information for investment opportunities, by exploring innovative approaches to direct financial resources towards areas aligned with sustainable development, using UNDP’s Sustainable Development Goals (SDGs) Investor Map methodology. Six priority investment opportunity areas (IOAs) in the elderly care sector are identified as strongly aligned to the SDGs: (1) smart and wearable devices for older people; (2) digital care service platforms; (3) community-based elderly care and nursing services; (4) palliative and hospice care services; (5) silver tourism; and (6) age-friendly and barrier-free home renovations. These IOAs respond to the increasingly diverse and personalized service needs of older people, while creating new momentum for upgrading the elderly care industry.

The level of pension and retirement security directly influences older peoples’ livelihoods and consumption power, by meeting their savings, wealth management and risk-sharing needs. As expectations for retirement security continue to rise, the financial sector has a role to play through evolving and innovating pension and retirement financial products. Realising the growing need and limited capacity of public funds in 2022, China launched its third-pillar personal pension scheme. This enables personal pension account funds to be invested in bank wealth management products, insurance products, and public mutual funds, providing participants with flexible, diversified investment channels for allocating pension assets. Drawing on international experience while adapting to its domestic context, China is well-positioned to develop a sustainable and inclusive pension and retirement finance system that strengthens financial security for its ageing population.

Population ageing presents not only a social challenge, but also an opportunity for economic transformation and social innovation. The silver economy—comprising a broad range of consumption and industrial activities serving older populations—offers significant market potential and social value in China. Finance will play a central role in allocating resources and diversifying risk in the process of transformation. It will also be vital to ensuring that such a silver economy grows in an inclusive and sustainable way—prioritizing women, low-income aged populations in rural areas and other vulnerable groups, to “leave no one behind”. Moving forward, collaborations among financial institutions, elderly care providers, government agencies, industry associations, the media, and other stakeholders are essential to strengthening the pension and retirement finance system. Only through cooperation across society can a sustainable silver economy expand, in China and beyond – protecting the planet, and some of its most vulnerable people.

Recommendations for Better Adapting to Demographic Ageing

Promoting high-quality, inclusive, and sustainable development of China’s silver economy will require coordinated action from multiple stakeholders, including financial institutions, elderly care providers, government regulators, industry associations, and media etc. Together, these actors can build a more robust and integrated pension and retirement financial ecosystem that supports both economic returns and SDG targets.

Cross-cutting Needs: Incorporating a Gender Lens in Pension and Retirement Finance

Women and men experience ageing differently, with marked disparities in retirement income, caregiving roles, and financial literacy. These differences should be considered when developing ageing and retirement finance in China’s context.

Caregiving roles. In China, women spend around 2.5 times more hours than men on unpaid care work. This unequal burden may reduce women’s labour force participation, lifetime earnings, and pension entitlements. For many elderly women, the responsibility of raising grandchildren further limits their ability to improve their financial security after retirement. Addressing this requires greater investment in affordable and accessible care services—by both government and the private sector. Many of the IOAs identified in Chapter Two offer opportunities to ease women’s unpaid care burden. Expanding formal care services not only redistributes care responsibilities more equitably across society, but also creates decent jobs in the care economy and professionalizes caregiving as a respected occupation.

Retirement income. Due to accumulated lifetime disadvantages, older women are more economically insecure than men. Evidence shows that among people aged 60 and above, Chinese women’s social pensions are roughly half those of men, primarily as a result of shorter working years, lower wages, and lower coverage of occupational pensions. To close this gap, pension design should explicitly account for such gender disparities. For example, Germany offers pension points for child-rearing during the first three years of a child’s life, allowing those years to count as contribution periods in the pension scheme even if employment is reduced or interrupted as a result of parental responsibilities.

Financial literacy. Gender gaps in financial knowledge are evident among older adults in China, with studies showing women score lower than men of similar age and education on financial literacy tests. This limits women’s ability to plan, save, and invest for retirement. Addressing this requires targeted outreach and training programmes, tailored to older women’s needs and learning styles. Closing the financial literacy gap empowers women to better manage retirement savings, reduces vulnerability to financial exploitation, and enhances autonomy in old age.

In summary, gender is a key cross-cutting factor in adapting financial systems to better support an inclusive and sustainable ageing society. Applying a gender lens—by recognizing unpaid care, closing gaps in pension and financial literacy—will help China create an enabling environment that supports all older people fairly and avoids perpetuating lifetime disparities between women and men.

Government: Creating an Enabling Environment to Attract Long-Term Capital

With its ability to shape both the overall business environment and the policy landscape around the industry, government plays two crucial enabling roles in the development of the silver economy. International experience shows that strengthening the pension system and refining the regulatory landscape are essential to improving the quality of financial services for the ageing population. Policymakers can support this by clarifying regulatory frameworks and industry standards in a way that ensures pension and retirement finance products achieve their intended purposes and protect consumer rights while leaving room for further innovation and experimentation. Through a balanced, innovation-friendly, and prudent supervisory approach, the Chinese government can provide a predictable and supportive business environment for all types of market participants.

At the same time, improving market access and enhancing the broader investment climate is needed to attract more long-term capital to the sector. This includes mobilizing and incentivizing pension funds, insurance funds, and corporate annuity funds to invest in elderly care, and implementing complementary policies that enhance the likelihood of strong investment returns. It also involves implementing changes to the regulatory framework for foreign investment in pension and retirement finance to bring more capital into the sector. In particular, the gradual easing of market entry restrictions and the creation of a fairer and more open market will enhance China’s attractiveness to global institutional investors to help meet the substantial financing requirements of the silver economy.

Financial Institutions: Diversifying Pension and Retirement Finance Supply, Enhancing Investor Education, and Adopting UNDP SDG Impact Standards

With their dual function in supporting the finances of retirees and the services they depend on in retirement, financial institutions are essential to enhancing the financial resilience of older persons and mobilizing investment into the silver economy. Financial institutions should further develop their products and services to better meet the distinct needs of individuals at different life stages. Banks and insurance companies are well-positioned to help individuals prepare for retirement through products like retirement savings accounts, long-term care insurance, and annuities. Meanwhile, security firms provide diverse solutions like target-date retirement funds and retirement-focused investment portfolios that enable retirees to preserve and grow their wealth.

Through innovation in financing instruments, financial institutions also have a leading role to play in the provision of long-term and diverse funding needed to support the development of elderly care services and industries. Instruments such as sector-specific bonds for elderly care projects, asset-backed securities (ABS), and dedicated investment funds are powerful tools for channelling capital into areas such as nursing homes, community-based services, and smart ageing technology. Through participation in international conferences, organizations, and partnerships, financial institutions can also help to attract external investment into China’s elderly care sector to supplement domestic funding gaps.

Alongside these two major directions, financial institutions are also important actors in improving investor knowledge and strengthening consumer protection, especially for older customers. Through community seminars, online education, and other forms of targeted outreach, these institutions can help improve financial planning and risk management knowledge among older populations and empower them to take greater control over their retirement finances and spending. At the same time, financial institutions also have a responsibility to enforce suitability standards, avoid misleading sales practices, and protect customers against financial fraud to safeguard the financial security of retirees.

Financial Institutions are encouraged to adopt the UNDP-initiated SDG Impact Standards as a guide and toolkit to frame their investment mandates, guidelines, and other policies in a way that enables them to operate more sustainably and contribute positively to SDGs by providing diversified pension and retirement finance solutions and enhancing financial education among aged populations.

Elderly Care Providers: Innovating Service Models and Enhancing Financial Integration

As the core service providers at the heart of the silver economy, organizations involved in the provision of elderly care are essential to supply-side development. In order to better cater to the increasingly segmented and complex needs of this growing population, relevant entities should focus on strengthening core competencies by adopting new technologies and attracting skilled professionals to further improve product and service quality.

Given the capital-intensive nature and long-term horizons involved when investing in the silver economy, care providers and other related businesses would benefit from diversifying their sources of funding to reduce dependence on single sources and improve their financial resilience. Specific recommendations include:

1. Leveraging the diversity of capital markets by exploring sources such as equity financing, initial public offerings, and other avenues to raise long-term capital and support ongoing innovation in services and products.

2. Utilizing instruments such as corporate bonds and industry-focused Real Estate Investment Trusts (REITs) to unlock more value from existing assets and ease liquidity constraints.

3. Actively collaborating with financial institutions to explore new integrated models that merge elderly care services with financial products and solutions.

Retirement community operators could also partner with banks, insurance companies and other financial institutions to create products and services that help older people live well. This could include offering loans for eldercare, developing long-term care insurance, and improving reverse mortgage options so older adults can use the value of their homes to support their care needs. Building on lessons from pilot projects, these efforts should combine financial tools with healthcare and daily care services, creating integrated solutions such as “healthcare plus finance” or “housing plus finance” to provide older people with more secure and comprehensive support.

Industry Associations and Media: Strengthening Communication and Public Engagement

Finally, within the pension and retirement finance ecosystem, industry associations and the media serve vital functions as facilitators and communicators. Industry associations, for example, can promote standardization and self-regulation by developing professional codes of conduct, training programs, and platforms for skills and knowledge sharing that support professional development. They can also use their international influence to foster cross-border collaboration and draw on best practices from abroad to continually improve the industry landscape. The media meanwhile can leverage its role as a source of information and a public watchdog to help increase public awareness and acceptance of different pension and retirement finance products and services. In-depth media coverage related to these products and services can help the public better understand market developments and investment risks while raising awareness of potential fraud and consumer rights violations. Media oversight will also help expose market misconduct and defend consumer rights. Through coordinated efforts between industry associations and the media, the sector can facilitate healthy public discourse and a strong market ecosystem that ensures more stakeholders recognize, support, and contribute to the sustainable development of pension and retirement finance and the broader silver economy.

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Acknowledgements

We would like to thank the research teams, without which the delivery of this project would not have been possible.

China Industrial Securities Co., Ltd:

Huang Yilin, Wang Bin, Wang Han, Xue Cheng, Xu Yizhou, Wang Yijun, Yang Yating, Yan Xiaoxuan, Pu Zeyun, Yan Haitao, Wang Lianqing, Lu Yanjin, Jia Xiaojun, Zheng Zhaolei and Xu Suoer.

United Nations Development Programme:

Shi Rong, Wang Yali, Wu Lan, Qu Xinyi and Tian Yihan.

The authors would also like to thank Violante di Canossa (UNDP China) for research guidance; Lu Feifei and He Yingming (UNDP China) for inputs and research support; Hu Chen and Zheng Yujing (UNDP China) for research management support; Matthew Walsh for the English translation; and Grace Brown for editing.

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Pekingnology

UNDP Report: Monitoring China's Human Development

The United Nations Development Programme (UNDP) has just published Monitoring China’s Human Development, assessing economic and social progress, as well as environmental costs, across Chinese regions and cities…

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2 months ago · 21 likes · Zichen Wang and Xinyi Qu

According to the Global Solutions Initiative, T20 is one of the official engagement groups of the G20, bringing together think tanks, research centres, and policy experts from around the world to provide evidence‑based insights and policy recommendations to G20 leaders and officials. T20 U.S. in 2026 is being convened as a policy research network under the theme “Harnessing Knowledge and Ensuring Continuity for Better Policymaking in Uncertain Times.”

According to a Stimson Center post, the T20 Advisory Council brings together policy researchers, think tank leaders, former senior diplomats, and practitioners from major economies, international organisations, academic institutions, and policy research organisations. Its members come from countries including the United States, China, Germany, France, Italy, the United Kingdom, Canada, India, Brazil, South Africa, Russia, Mexico, Argentina, the Netherlands, Portugal, Nigeria, Tunisia, and Bangladesh, reflecting broad participation from G20 members, European economies, and countries from the Global South.

As part of the 2026 T20 process, the Advisory Council is expected to contribute policy solutions to the broader T20 U.S. policy process ahead of the 2026 G20 Leaders’ Summit in Miami, helping support policy continuity as the United Kingdom prepares to host the G20 in 2027.

On April 17, 2026, Wang participated in a T20 seminar in Washington, D.C., co-hosted by the Brookings Institution, the Quincy Institute for Responsible Statecraft, and the Stimson Center.

Against this backdrop, we are pleased to repost the Global Solutions Summit (GSS) summary report, available via the Global Governance Innovation Network. The report offers a concise overview of discussions at the Global Solutions Summit and provides further context for the ongoing T20 and G20 policy agenda.

T20 U.S. @ The Global Solutions Summit 2026

Berlin, Germany

June 1-2, 2026

T20 U.S.

Through the T20 U.S. in 2026, the Think Tank 20 (T20) policy research network is once again poised to produce and share practical and timely knowledge products for all G20 policymakers, ensuring continued engagement on key themes of international policy relevance to all Member States and regional groupings. In 2026, these include, but are not limited to, the G20 U.S. working group themes of: 1. removing regulatory burdens; 2. unlocking affordable and secure energy supply chains; 3. pioneering new technologies and innovation; and 4. identifying areas of consensus on trade issues. Additionally, the T20 is committed to continued work on, among other major legacy issues, sustainability, inequality, international financial architecture and collective security reform, human rights, pandemic prevention and public health, migration and refugees, gender and youth empowerment, disabilities, humanitarian action, food insecurity, and peace.

Global Solutions Summit

The GSS is an international platform that supports G20 and G7 processes by bringing together a wide range of stakeholders to develop practical, solution-oriented responses to global challenges. Each year, the summit gathers policymakers, experts, and practitioners from across sectors for a series of interactive sessions designed to translate dialogue into outcomes on topics ranging from international economic cooperation, energy, and climate and sustainability to digital and AI transformation, and global governance. Guided by the 2026 theme, “Finding Common Ground in a Fractured World,” the summit places emphasis on reimagining, and rebuilding trust in, multilateral cooperation at a time of geopolitical tension and inequality. Through cross-sector engagement and innovative approaches, the summit seeks to forge a new multilateralism for a new era, cultivating the alliances needed to turn global disruption into progress.

Major Day 1 Sessions

The Limits of Going Alone: Economic Security vs. Global Cooperation (T20-T7 Troika Dialogue)

The T20-T7 Troika dialogue focused on the growing recognition that no major economy can achieve economic security alone, making multilateral cooperation essential for developing mutually beneficial partnerships and addressing challenges related to supply chains, sustainable development, and long-term resilience. The discussion also assessed the potential risks associated with economic nationalism and explored how more equitable relationships, rather than extractive practices, can strengthen economic security at both domestic and international levels. Participants broadly agreed that the international community is experiencing increasing fatigue and declining confidence within multilateral institutions, underscoring the need for institutional reforms that can reinvigorate cooperation across borders. Several contributors emphasized the G20’s unique role as a central forum for building coalitions that transcend inward-looking, nationalistic agendas and, instead, can help to prioritize human capital development, sustainable economic practices, and inclusive growth worldwide. The dialogue also highlighted energy security and resilience from natural disasters as increasingly urgent international priorities, while stressing the importance of global cooperation to support stable energy transitions and regional stability. The exchange further explored how successive G20 presidencies can strengthen policy continuity by advancing integration as a cross-cutting theme, helping to sustain engagement and generate long-term buy-in across G20 Member States.

G20 Sherpas Private Meeting

T20 and T7 policy research network representatives also participated during the Global Solutions Summit in a rich, private exchange with seven G20 Sherpas from Argentina, Australia, Germany, India, Norway, the OECD, and the United Nations. In connection with offering policy research support across a range of substantive topics, the T20 and T7 policy researchers in attendance engaged the G20 Sherpas in a dialogue on, for instance, i.) facilitating strong, sustainable, balanced, and inclusive growth, including through new approaches to development finance; ii.) skills development to increase women’s participation in the workforce; iii.) global governance of artificial intelligence (e.g., new Global Partnership on AI Governance) and other pioneering technologies, including through the promotion of digital public infrastructure; iv) public health and pandemic prevention; v) energy security and the protection of vital supply chains; vi) social issues, including gender, inequality, and aging populations in especially advanced industrial societies; and

A New Approach to Achieving the Global SDGs: From Aid to a Development Approach?

This discussion examined strategies for accelerating progress toward the Sustainable Development Goals (SDGs) amid growing financial constraints and shifting approaches to international development. Panelists emphasized that achieving the SDGs will require greater levels of investment and growth, especially in regions across the Global South that face persistent development challenges. A recurring theme was that many governments are moving away from traditional aid-based approaches, which makes alternative financing mechanisms, such as private sector investment, longer-term development funding, and domestic resource mobilization, more critical than ever to unlocking opportunities and sustainable growth. Participants also highlighted the continued importance of bilateral and multilateral cooperation in supporting development objectives, while also stressing the need to strengthen implementation capacity, improve accountability, and enhance program effectiveness to rebuild confidence in global development efforts.

Major Day 2 Sessions

T20 U.S. Advisory Council Launch

Complementary to the T20’s Workstreams (see below), the T20 U.S. Advisory Council will once again reflect on and feed carefully researched policy ideas into the G20 U.S. presidency priority themes across the Sherpa and Finance Tracks and beyond, and in light of rapid, multiple changes in global and regional multilateral governance. Specifically, individual Advisory Council members will be asked to prepare at least one brief “Policy Solutions” paper, in a short 1-2 weeks period in response to a G20 Member State’s or regional grouping’s request. The Advisory Council will also provide feedback on “Incubator Concepts,” such as a new T20 Foresight Hub or revival of T20/G20 Implementation Roadmaps and Scorecards. The T20 Advisory Council members can be found here.

The Advisory Council launch, hosted during the Council for Global Problem-Solving meeting, focused on key questions about how the council’s policy solutions papers can better support G20 policymakers, how incubator tools can strengthen follow-through, and how T20 outputs can be better aligned with policymaker needs. Two lead-off presentations showcased these policy solutions in practice: Dr. Maria João Rodrigues emphasized AI governance and digital transformation as drivers of a new growth model, while Dr. Philani Mthembu presented on the T20 South Africa’s work on addressing global inequality through the G20. Each policy solution will be developed with a pragmatic emphasis on political feasibility to strengthen the case for use by government leaders. Additional contributions during the session stressed the strategic importance of AI and the value of better aligning alternative global governance forums on AI, such as the AI for Good Summit and the Global Dialogue on AI Governance, to reinforce coherence in regulatory approaches. The Advisory Council also highlighted the potential for coalition-building among like-minded states to advance responsible innovation and increase actionable commitments found in the policy solutions.

Workstreams

The T20 U.S.’ five distinct Workstreams (formerly taskforces) are led by policy-researchers and scholars that bring diverse expertise to contribute around five policy notes per workstream for the benefit of G20 and other international policy-makers. Across the five thematic areas, co-chairs reported on several of the top strategic priorities emerging from their respective workstreams.

1. Fostering Trade and People-Centered Economic Growth: Co-Chair Dean Bambang Brodjonegoro from the Asian Development Bank Institute emphasized the need to support regional approaches to the WTO/global trade, as well as uplifting lower income countries through trade-based growth.

2. Safeguarding Energy Security and Resilience: Co-Chair Paul Samson, Center for International Governance Innovation, highlighted four areas of focus, including energy diversification, transitioning to strategic energy reserves, nuclear renaissance, and just energy transitions (including the role of critical minerals).

3. Boosting Innovative Technologies, including Artificial Intelligence: Co-Chair Stephanie Diepeveen,ODI-Global, emphasized her workstream’s focus was on bridging the digital divide, disrupting the AI industrial revolution with safeguards, and creating an all digital citizen. There was a healthy conversation on the term “boosting” to ensure that the T20 was not promoting the militarization of AI’s capabilities.

4. Mobilizing Finance and Tackling Debt Constraints, including through International Financial Architecture Reform: Co-Chairs Katharin Berenseman, IDOS and Izabella Textiera, CEBRI, discussed the high cost of debt and the efforts underway to improve the international financial system by reforming priorities and restructuring debt, as well as the need to have high income and low income countries cooperate on international financial architecture reforms.

5. Sustaining and Strengthening Global Coordination on Socioeconomic Development and Peacebuilding: Co-Chair Zach Paikin, discussed the challenge of UN Security Council reform and how there are opportunities across the G20 that are less politicized than the New York-based IGN process to strengthen multilateralism. He also touched on how the G20 can still provide an inclusive platform bringing disparate powers together in the same room at a time when norms surrounding the use of force are contested.

This discussion emphasized that economic resilience depends on a predictable, rules-based open trade architecture that can function as a foundation for sustained, global growth. It identified priorities including strengthening the multilateral trading system, supporting neighboring partners, curtailing trade distortions, and addressing regulatory barriers to cross-border commerce. On energy security, points were raised on securing affordable and reliable energy amid geopolitical fragmentation, with an emphasis on linking energy security to development and inclusion. Regarding emerging technologies, the participants discussed how AI represents a policy challenge that is widely discussed yet difficult to translate into concrete solutions. Participants stressed the need to improve coordination across global AI initiatives to build synergies, manage disruptions, and support more coherent governance.

The fourth workstream examined debt sustainability, the role of national development banks, domestic resource mobilization, and reforms to the international financial architecture. The willingness of G20 countries to cooperate on these issue areas provides important entry points for advancing this unfinished agenda. Finally, participants also focused on strengthening multilateral reform as a pathway to sustainable peace. Discussion included debates over whether this shift entails adjustments to the composition of permanent UN Security Council members, the development of new rules governing the legitimate use of force, and whether efforts should be made to restore elements of the “old” world order.

Select upcoming Calendar-of-Events (and the T20 U.S. organizing team welcomes further think tank self-initiated T20 side events throughout 2026):

● 1-3 July: ACUNS Annual Meeting 2026, including a roundtable on Continuity and Contestation: the G20 at a Crossroads and its Implications for the UN System (Lisbon).

● 31 August - 1 September: G20 Finance Ministers and Central Bank Governors Ministerial (Asheville, North Carolina)

● 20-26 September: UNGA High-Level Week, including a T20 U.S. side-event (New York).

● 12-18 October: 2026 Annual Meetings of the World Bank and the International Monetary Fund, including a T20 U.S. convening (Bangkok).

● 30-31 October: G20 Foreign Ministers’ Meeting (Atlanta)

● 16-17 November: Pre-T20 U.S. Summit Track 1.5 Dialogue (New York)

● 18-19 November: T20 U.S. Summit (New York)

● 14-15 December: G20 Leaders’ Summit (Miami)

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CCG Update - Center for China and Globalization

Henry Huiyao Wang Named to 2026 T20 U.S. Advisory Council

Henry Huiyao Wang, Founder and President of the Center for China and Globalization (CCG), has been named to the Advisory Council of Think20 (T20) U.S. in 2026…

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2 months ago · 9 likes · CCG Update

Yin Yanlin is a former deputy director of the Central Financial and Economic Affairs Commission. He currently serves as Vice Chair of the Economic Affairs Committee of the 14th National Committee of the Chinese People’s Political Consultative Conference (CPPCC).

The article was originally published in Exploration and Free Views, Issue No. 3, 2026, on 30 March 2026.

Opening Up the Service Sector: A Key Lever for Institutional Opening Up

服务业开放：制度型开放的重要抓手

The Fourth Plenary Session of the 20th Central Committee of the Communist Party of China (CPC), standing at a new historical starting point, made important arrangements to “expand high-standard opening up and create new prospects for mutually beneficial cooperation.” It also called for steadily expanding institutional opening up, safeguarding the multilateral trading system, and broadening international economic circulation. China’s reform and opening up has now entered a new stage in which institutional opening up plays a central role.

Service consumption is an important component of household consumption and a key direction of consumption upgrading. The key to high-quality development of the service sector lies in reform and opening up. Indeed, reform and opening up may be described as the only viable path for accelerating the development of the service sector.

The service sector is set to become a central priority in China’s push for high-standard opening up. On the reform front, unnecessary pre-approval requirements in areas such as cultural performances and education should be streamlined, more private and social capital should be encouraged to enter the market, and more diversified and multi-tiered service supply should be fostered. Market access should be further relaxed; discriminatory policies in healthcare, elderly care, education, and other fields should be comprehensively removed; and a negative-list management model, under which entry is permitted unless explicitly prohibited, should be implemented to attract more social capital.

China has already made clear that market access restrictions for foreign investment in manufacturing have been fully removed. The main remaining difficulties in market access now lie in the service sector. Services involve the most complex requirements for institutional opening up. They are also the weakest link in China’s reform process and the area where opening up has advanced most slowly. At this stage, therefore, China should use broader service-sector opening up to drive domestic reform in related fields.

I. Progress and Features of Service-Sector Opening Up

Since the 18th National Congress of the CPC, China has relied on various platforms and mechanisms to advance voluntary opening up in the service sector, achieving notable progress.

First, opening up in telecommunications has continued to expand. Telecommunications is a strategic, foundational, and leading sector of the national economy. It is also an important area for attracting foreign investment and advancing high-standard opening up. When China joined the World Trade Organisation in 2001, it opened its telecommunications market to foreign investment for the first time. The measures included opening 6 of 12 basic telecommunications services, with foreign ownership capped at 49 per cent, and opening 4 of 10 value-added telecommunications services, with foreign ownership capped at 50 per cent.

In recent years, China has continued to expand foreign access to value-added telecommunications services. It has opened all 10 such services to capital from Hong Kong and Macao, opened 8 value-added telecommunications services in pilot free trade zones, excluding internet data centres and content delivery networks, and opened 6 value-added telecommunications services nationwide, with foreign ownership caps removed in 4 of them.

In April 2024, the Ministry of Industry and Information Technology issued the Notice on Launching Pilot Work to Further Open Value-Added Telecommunications Services to Foreign Investment. Pilot programmes were first launched in the Comprehensive Demonstration Zone for Expanding Opening Up in the Service Sector in Beijing, the Lingang New Area of the Shanghai Pilot Free Trade Zone and Shanghai’s leading area for socialist modernization, the Hainan Free Trade Port, and the Shenzhen Pilot Demonstration Area of Socialism with Chinese Characteristics.

The pilot measures include removing foreign ownership restrictions in internet data centres, content delivery networks, internet access services (ISP services), online data processing and transaction processing, certain information services, including information publishing platforms and delivery services, and information protection and processing services. Internet news information services, online publishing, online audiovisual services, and internet cultural operations remain excluded. By the end of June 2025, 40 foreign-funded enterprises had received approval under the pilot programme for expanded access to value-added telecommunications services. The cumulative number of foreign-invested telecommunications enterprises had exceeded 2,600, up 27 per cent year on year.

Second, opening up in education has expanded significantly. Opening up is a defining feature and an important driver of educational modernisation. Since the 18th National Congress of the CPC, China has made notable progress in opening up education, with both “bringing in” and “going global” advancing substantially. China has become the world’s largest source country of international students and Asia’s largest study-abroad destination.

Through Chinese-foreign cooperative education, China has introduced a number of high-quality overseas educational resources. By 2020, more than 2,300 Chinese-foreign cooperative educational institutions and programs had been approved or registered by the Ministry of Education, including more than 1,200 at the undergraduate level or above. At the same time, international Chinese-language education has flourished. Confucius Institutes and their online platforms have created favourable conditions for people around the world to learn Chinese and understand Chinese culture.

Third, opening up in healthcare and medical services has expanded steadily. In recent years, China has gradually opened its medical sector wider. In February 2019, the CPC Central Committee and the State Council issued the Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area, supporting medical and health service providers from Hong Kong and Macao in establishing wholly owned, joint-venture, or cooperative medical institutions in the nine Pearl River Delta cities. At the end of November that year, the first clinic in Hengqin approved to be established by a practising doctor from Macao officially opened.

In December 2023, the National Development and Reform Commission (NDRC) and the Ministry of Commerce issued the Opinions on Supporting the Hengqin Guangdong-Macao In-Depth Cooperation Zone in Implementing Special Measures to Relax Market Access. The document relaxed access restrictions for medical institutions from Hong Kong and Macao, encouraged the establishment of wholly owned and joint-venture medical institutions from Hong Kong and Macao in the cooperation zone, and introduced dedicated policies to support Macao service providers in opening clinics, outpatient departments, and other medical institutions there.

In November 2023, the State Council approved the Work Plan for Supporting Beijing in Deepening the Construction of the National Comprehensive Demonstration Zone for Expanding Opening Up in the Service Sector. The plan proposed supporting eligible foreign doctors and doctors from Hong Kong, Macao, and Taiwan in opening clinics in Beijing. In July 2024, the Beijing Municipal Commerce Bureau, together with relevant departments, issued the Implementation Plan of Beijing for Deepening Opening Up in the Service Sector and Promoting Foreign Investment, further clarifying this policy.

In November 2024, the National Health Commission, the Ministry of Commerce, the National Administration of Traditional Chinese Medicine, and the National Disease Control and Prevention Administration jointly issued the Work Plan for the Pilot Expansion of Opening Up in Wholly Foreign-Owned Hospitals. The plan allows wholly foreign-owned hospitals to be established in Beijing, Tianjin, Shanghai, Nanjing, Suzhou, Fuzhou, Guangzhou, Shenzhen, and across Hainan Island, excluding traditional Chinese medicine hospitals and the acquisition of public hospitals. By April 2025, China had more than 150 joint-venture and wholly foreign-owned medical institutions, mainly concentrated in these pilot cities, and more than 1,500 overseas medical professionals were practising in China on short-term assignments.

Fourth, a multi-channel and multi-tiered framework for financial opening up has begun to take shape. Financial opening up is an important component of China’s broader opening up agenda. In recent years, China has introduced a series of policies and measures to open the financial sector, including the Shanghai-Hong Kong Stock Connect, the Shenzhen-Hong Kong Stock Connect, the Shanghai-London Stock Connect, Bond Connect between the mainland and Hong Kong, and Swap Connect. Chinese bonds have also been included in the world’s three major bond indices.

At the same time, China has removed foreign ownership caps on domestic financial institutions, significantly expanded the business scope of foreign-funded financial institutions, abolished investment quota limits for Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors, and lifted foreign ownership restrictions in banking, securities, fund management, futures, and life insurance. It has also removed access restrictions in corporate credit reporting, credit rating, payment, and clearing.

By the end of August 2025, 907 foreign institutions had been approved as qualified foreign investors, including internationally known institutions such as the Oman Investment Authority, the University of London Pension Plan, and the UK’s Pension Protection Fund. As of March 2025, all 24 foreign global systemically important banks had established institutions on the mainland, and nearly half of the world’s 40 leading foreign insurance companies had entered the mainland market. In September 2025, the State Administration of Foreign Exchange issued the Notice on Matters Concerning the Deepening of Foreign Exchange Management Reform for Cross-Border Investment and Financing, further facilitating foreign individuals’ use of foreign exchange settlement to pay for home purchases in China.

Fifth, the comprehensive pilot and demonstration program for expanding service-sector opening up has continued to advance. This national program is a major opening-up initiative of the CPC Central Committee and the State Council. It is tasked with exploring new paths for service-sector reform and opening up nationwide. The pilot program was first launched in Beijing in 2015 and has now been in place for a decade, during which it has undergone one upgrade and two rounds of expansion.

The latest expansion came in April 2025, when the State Council approved the Ministry of Commerce’s Work Plan for Accelerating the Comprehensive Pilot Program for Expanding Opening Up in the Service Sector, adding nine cities, including Dalian, to the pilot areas. The program now covers four municipalities, Hainan Province, and 15 prefecture-level cities, forming an opening-up layout that broadly spans eastern, southern, western, northern, and central China. Over the past decade, pilot tasks have covered 12 key sectors, including science and technology, telecommunications, culture and tourism, and finance.

To give full play to Beijing’s leading role in service-sector opening up, the state supported Beijing in September 2020 in building the National Comprehensive Demonstration Zone for Expanding Opening Up in the Service Sector. In 2023, the State Council approved the Work Plan for Supporting Beijing in Deepening the Construction of the National Comprehensive Demonstration Zone for Expanding Opening Up in the Service Sector. This was an upgraded version of the 1.0 plan introduced in 2020 and is commonly referred to as the “2.0 plan.”

The 2.0 plan places greater emphasis on exploring institutional opening up. It introduced more than 170 new pilot measures, including 70 measures related to alignment with high-standard international economic and trade rules, accounting for 40 per cent of all pilot tasks. For example, in optimising the financial services system, the plan proposes exploring ways to improve negative-list management under the capital account, facilitating enterprises’ cross-border capital flows, and promoting financial services for green, low-carbon, and circular economic development. In building a digital-economy institutional framework, it proposes establishing and improving systems and mechanisms for data trading, registration of data rights, valuation of data assets, and data development and utilisation.

Beijing’s 2.0 plan for service-sector opening up represents the latest practice in high-standard opening up. It will provide strong support for China’s efforts to join high-standard economic and trade agreements and to build a high-standard institutional framework for opening the service sector.

II. Difficulties and Problems in Service-Sector Opening Up

In fact, China’s early opening up began, to some extent, in the service sector. International hotels, for example, were among the first fields to allow foreign capital, especially capital from Hong Kong and Macao, to enter and establish a presence. These hotels were high-end and offered strong service quality, meeting the accommodation needs of overseas businesspeople and investors. The problems currently seen in service-sector opening up are, therefore, in essence, problems that have emerged in the course of development.

Overall, many opening-up measures still represent isolated breakthroughs rather than broad-based, systemic opening. Sectors such as wholesale and retail (distribution services), tourism and travel, and transportation are relatively open. By contrast, telecommunications (communications services), finance, Medicare (healthcare and social services), and education remain less open.

In education, opening up still faces many difficulties. Beyond restrictions on Chinese-foreign cooperative education and on the nationality of managerial personnel, problems remain in areas such as the incomplete mutual recognition of academic degrees and diplomas, as well as the lack of official recognition for degree-granting remote cross-border education.

Preschool education, general high schools, and higher education institutions are limited to Chinese-foreign cooperative models, which must be led by the Chinese side and headed by principals with Chinese nationality. Chinese-foreign cooperative educational institutions may not establish branch campuses. Chinese members must account for no less than half of the boards of trustees, boards of directors, or joint management committees. Foreign educational institutions are also not allowed to establish wholly owned vocational training institutions.

At present, there is a significant gap between the current level of educational opening up and domestic demand for high-quality overseas educational resources. Since 2013, at least 400,000 Chinese students have gone abroad to study each year. With per capita expenses ranging from RMB 300,000 to RMB 600,000, at least RMB 100 billion to RMB 200 billion in education consumption flows overseas annually.

In healthcare, opening up still faces many bottlenecks. In addition to access restrictions concerning joint-venture models, foreign ownership ratios, and the nationality of practitioners, the medical services sector also faces problems such as incomplete implementation of national treatment.

In the mutual recognition of professional qualifications, there are objective differences between China’s licensing systems and standards and those of other countries, but domestic regulation also presents certain obstacles. Foreign doctors who come to China to practice on a short-term basis must register their practice. Those seeking to practice long-term must complete access approval and practice registration in accordance with regulations and participate in regular physician assessments.

This level of opening up also falls short of domestic demand for high-quality foreign medical services. A special form of overseas travel has emerged: medical tourism, in which people go abroad for treatment, medication, or surgery. Demand for high-end medical services among high-income groups is strong, but existing domestic supply cannot fully meet it.

In finance, opening up still faces difficulties. Although market access restrictions have been lifted, foreign-funded financial institutions still face constraints in areas such as business scope, lengthy approval procedures, insufficient capital-account opening, and restrictions on cross-border payments and capital flows. The current level of financial opening up does not fully meet the needs of financial internationalisation. It is closely related to the international pricing of renminbi assets, as well as the stability of the real estate market and the stock market.

III. Priority Areas for the Next Stage of Service-Sector Opening Up

Opening the service sector is a priority for institutional opening up. As China seeks to expand domestic demand and facilitate internal and external circulation, the need to open the service sector has become increasingly urgent. The CPC Central Committee has repeatedly emphasised the need to expand service-sector opening up and accelerate related pilot programmes.

On August 19, 2024, a State Council executive meeting called for further relaxing foreign investment access and moving quickly to advance opening up in service sectors such as telecommunications, education, and healthcare. The Fourth Plenary Session of the 20th CPC Central Committee emphasised expanding market access and opening up more areas, in particular in the service sector.

Against this backdrop, I suggest advancing service-sector opening up in the following five areas:

First, high-standard opening up in telecommunications should be further advanced. In the next stage, China should explore relaxing foreign investment access restrictions in basic telecommunications services in the Hainan Free Trade Port to promote the healthy development of China’s telecommunications market and strengthen its international competitiveness.

Pilot programs should be launched to remove foreign ownership caps on internet access services (limited to providing access services to users), and information services (limited to app stores and excluding areas where foreign investment is prohibited). Domestic internet virtual private network (VPN) services should also be opened to foreign investment, with foreign ownership capped at no more than 50 per cent. China should encourage the development of the data annotation industry, improve the data trading market system, support new business forms and models such as cross-border data processing services, and promote the overseas expansion of the gaming industry.

Second, high-standard opening up in education should be further promoted. The Third Plenary Session of the 20th CPC Central Committee explicitly called for advancing high-standard opening up in the education sector and encouraging first-rate foreign universities of science and engineering to develop partner schools and programs in China. The Ministry of Education and seven other departments have issued the Opinions on Accelerating and Expanding Opening Up in Education in the New Era.

In the next stage, China should deepen reform of Chinese-foreign cooperative education and explore appropriately relaxing restrictions on the qualifications of cooperative education entities and on school-running models. Support should be given to the Guangdong-Hong Kong-Macao Greater Bay Area in building an international education demonstration zone, to the Yangtze River Delta in taking the lead and conducting pilot trials, to Xiong’an New Area in creating a new benchmark for educational opening up, and to Hainan in building an international education innovation island.

Except in compulsory education and religious education, wholly foreign-owned operations may be considered in other areas. For example, the Hainan Free Trade Port, the Guangdong-Hong Kong-Macao Greater Bay Area, and pilot free trade zones could take the lead in relaxing restrictions on foreign-funded preschool education, general high schools, and higher education institutions, with reference to requirements for private schools.

At the same time, cooperation with international educational institutions should be strengthened. Mechanisms for mutual recognition of degrees and diplomas should be improved, international student mobility should be enhanced, and education quality should be raised. Degree-granting remote cross-border education should be gradually recognised. Modern information technology should be fully used to raise the level of educational internationalisation, attract more high-quality international educational resources, and support high-quality development in education.

Third, opening up in healthcare should be further expanded. China should formulate a list of overseas professional qualifications to be recognised in health and medical services, and support eligible foreign doctors and doctors from Hong Kong, Macao, and Taiwan in establishing medical institutions in Beijing. Beijing municipality should formulate measures for the filing and administration of clinics and support filing-based administration for eligible clinics from Hong Kong and Macao.

China should explore removing restrictions on joint-venture models and on the nationality of medical management personnel. Restrictions on wholly foreign-owned medical institutions could first be lifted in Beijing, Shanghai, Tianjin, Shenzhen, and other cities before being gradually extended nationwide. Relevant regulations should be improved with reference to the regulatory approach applied to private medical institutions.

China should promote mutual recognition of physician qualifications with developed countries and advance the internationalisation of industry standards and qualification certification. While ensuring data security, it should explore the joint development and sharing of health and medical databases and strengthen the standardisation and inter-hospital sharing of clinical medical data.

Fourth, the pace of financial opening up should be accelerated. China should speed up the development of Shanghai as an international financial centre, improve the pre-establishment national treatment plus negative list management model, and support eligible foreign institutions in participating in financial business pilots. Financial market connectivity should be expanded in a prudent and steady manner, and the Qualified Foreign Investor system should be optimised.

China should align with the financial rules of high-standard international economic and trade agreements, streamline restrictive measures, and make cross-border investment and financing more convenient. Greater support should be provided for cross-border investment and financing by multinational companies. Relying on the integrated domestic- and foreign-currency bank settlement account system, China should optimise settlement services for funds under cross-border trade and investment.

Policies for centralised cross-border fund operations by multinational companies in both domestic and foreign currencies should be upgraded in order to further facilitate group-wide pooling and use of funds and expand the business scope of foreign-funded financial institutions. Capital-market opening is a key focus of market attention. Improving the Qualified Foreign Investor system would allow global investors to share more smoothly and fully in the opportunities created by China’s innovation-driven development, while also bringing long-term, stable capital into China’s capital market.

China should also expand the opening of futures and other financial derivatives markets, introducing more risk-management products to meet the needs of the real economy. In addition, capital-account opening should be advanced. China should make cross-border capital flows under the capital account more convenient, support Pudong in taking the lead in exploring pathways for capital account convertibility, develop financial products related to renminbi internationalisation, expand the range of financial products for offshore renminbi round-trip investment, and promote two-way cross-border flows of renminbi funds.

At the same time, China must strengthen its financial risk prevention and control system, improve risk warning mechanisms, and prevent and resolve financial risks in a timely manner.

Fifth, pilot and demonstration zones should play a stronger exemplary and guiding role in service-sector opening up nationwide. Beijing municipality has focused on modern service industries such as science and technology, telecommunications, and culture, and has implemented more than 120 pilot measures. Since the service-sector opening-up pilot program began in 2015 and the demonstration zone was established in 2020, Beijing, as China’s first national comprehensive pilot and demonstration zone for expanding service-sector opening up, has launched a total of 526 tasks and produced a series of nationally pioneering innovations.

In areas such as expanding service-sector opening up, facilitating trade in services, and improving the business environment for an open economy, Beijing municipality has implemented nearly 50 nationally pioneering policies, launched more than 70 landmark national projects, built more than 90 functional service platforms, and established more than 50 innovative institutional mechanisms. It has taken the lead in exploring a model of industrial opening up driven by the service sector.

On the basis of the Beijing demonstration zone and the practices of other pilot provinces and cities, China should systematically summarise the successful experiences and practical approaches of pilot regions. It should fully leverage the guiding and exemplary role of these pilots in service-sector opening up nationwide and promptly replicate and promote successful practices in other pilot provinces and cities across the country.

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Pekingnology

China must dispel "services are virtual while manufacturing is real" misconception, ex-Vice Commerce Minister says

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3 years ago · Zichen Wang

Wei Chen and Shiping Tang argue that the difference was not state support itself, but coordination. High-speed rail had a powerful “pilot agency” — the Ministry of Railways — able to centralise procurement, bargain with foreign technology providers, set technical standards and coordinate manufacturers, suppliers, local governments and research institutions. That authority helped turn imported technology into domestic capability.

The automobile industry, by contrast, had no equivalent commanding institution. Responsibility was fragmented among ministries, industry associations, and local governments, leaving no agency strong enough to coordinate technology transfer or align carmakers with suppliers and researchers.

The following is an excerpt from Wei Chen and Shiping Tang, “The Political Logic of the Developmental State: Causes of Hits and Misses in China’s Industrial Policies,” published in the Journal of Contemporary China on 2 October, 2025.

Wei Chen is an Assistant Professor at the School of International and Public Affairs, Shanghai Jiao Tong University. Her research interests include the developmental state, comparative political economy and Chinese Political Economy.

Shiping Tang is Chair Professor at the School of International Relations and Public Affairs and Director of the Centre for Complex Decision Analysis, Fudan University.

Tang has authorized this publication.

The Political Logic of the Developmental State: Causes of Hits and Misses in China’s Industrial Policies: Excerpt

KEYWORDS

East Asian developmental state; policy coordination; China’s high-speed railway industry; China’s automobile industry

ABSTRACT

As an East Asian developmental state (EADS) with a long socialist legacy, China regularly implements industrial and science and technology (S&T) policies to ‘create winners’ in key industries. This article examines the political logic behind China’s EADS model, arguing that its success partly hinges on an institutional system that can, though not always, coordinate policies across local governments, enterprises, and different bureaucracies. We demonstrate the principle through two in-depth case studies. The high-speed railway (HSR) industry achieved rapid catch-up because its pilot agency coordinated policies effectively, while the automobile industry failed to make significant progress due to poor coordination. By identifying the political reasoning behind the EADS model, our study offers important lessons for other countries developing their industrial and S&T policies.

Introduction

China has made tremendous technological progress over the past four decades, becoming the world’s largest manufacturing economy.1,2 However, China’s economic ‘miracle’ poses a major puzzle for mainstream economic theories. How can a nation prosper with a weak rule of law, rampant corruption, and widespread misallocation of resources? More specifically, how can an economy that started with technology far behind global standards catch up so rapidly and reach the technological frontier in key industries such as high-speed railways, information technology, mobile phones, solar panels, and wind turbines, now home to many leading global companies like BYD (electric vehicles and battery technology), CATL(battery technology), DJI (unmanned aerial vehicles or drones), and Huawei (telecom and mobile phones)?

Unsurprisingly, many scholars have tried to explain China’s economic miracle from the perspective of ‘unorthodox economics’, with the East Asian developmental state (EADS) being a key model. Since 1978, China has been a typical EADS with a long socialist legacy. This EADS status and socialist legacy have two main features: 1) a relatively complete industrial system with mostly outdated technologies, and 2) a long history of economic planning with industrial policies and science and technology (hereafter, S&T) policies.

According to the EADS literature, one political logic is critical for crafting and implementing industrial policies: coordination among various governmental agencies is essential for successful industrial policies. This article provides evidence for this key feature of China as a typical EADS identified in the literature on developmental states. We argue that China’s industrial and S&T policies have succeeded partly because the country has an institutional system that can, though not always, coordinate policies across different bureaucracies.

We provide detailed qualitative evidence to support the argument, including two in-depth case studies: one positive example where China has caught up and one negative example where China has failed. Our case studies show that a targeted industry can achieve rapid catch-up when Chinese bureaucracies coordinate policies effectively, whereas it fails when policies are poorly coordinated. The former is illustrated by China’s high-speed railway (HSR) industry, while the latter by China’s automobile industry (producing internal combustion engine, or ICE, vehicles). Together, these studies highlight policy coordination as a key political factor influencing the success or failure of China’s industrial policies.

The rest of the article is organized as follows. Section two briefly introduces the EADS model and its implications for understanding China, then presents our main arguments. Section three provides two case studies of China’s industrial and S&T policies to support the political logic behind the EADS model. Section four discusses implications and concludes.

China as an EADS

According to the EADS literature, five political features are central. First, the state, especially its leadership, focuses on development or catch-up, a form of economic nationalism. Second, the state is fairly capable, especially with a cohesive and meritocratic bureaucracy. Third, the state’s bureaucracy is mostly insulated and autonomous, yet it maintains a symbiotic relationship with the business class when making its policies (hence, ‘embedded autonomy’). Fourth, the state seeks to ‘govern the market’ via carefully crafted and closely coordinated industrial policies targeting specific strategic industries. Fifth, the state puts a pilot organization in charge of crafting and coordinating industrial policies, with the prominent examples being Japan’s MITI, Singapore’s Economic Planning Board, and China’s National Development and Reform Commission (NDRC).

More concretely, when governing the market, insulated or autonomous bureaucracies or agencies identify key industries and emerging technologies and then craft industrial and S&T policies to foster domestic firms’ growth and technological progress in these sectors. In short, they aim to ‘create (and pick) winners’. When implementing these policies, a pilot agency (like the NDRC) will coordinate different agencies and require that they work together effectively. Agencies responsible for industrial policies and S&T policies often coordinate with other agencies that oversee tariffs, taxes, and other financial and fiscal matters to increase the probability of policy success further. This political process of policy coordination is the primary focus of this article.

In addition to a pilot agency, China and traditional EADS share several key characteristics, including: (1) a strong commitment to economic development; (2) consistent economic, industrial, and S&T policies since the mid-1990s; (3) a cohesive national bureaucratic system unified by a consensus on prioritizing economic growth. While China’s economic structure, dominated by SOEs, differs from those of Japan and South Korea, it bears a strong resemblance to that of Taiwan, China between the 1960s and the 1990s. In both economies, SOEs control natural monopoly industries and strategic sectors and dominate banks and stock markets; privately owned enterprises are concentrated in non-strategic sectors with strong competitiveness.

As the largest EADS, China has successfully promoted technological progress across many industries through industrial and S&T policies. Since the mid-1990s, China has launched far more ambitious and integrated industrial and S&T policies. Successive initiatives targeting SEIs, such as the ‘973 Plan’ (also known as ‘National Key Basic Research Program’, released in March 1997), the ‘985’ initiative (officially launched in May 1998 to replace the ‘863’ project), the ‘Medium and Long-term Plan for Science and Technology (2006–2020)’ (released in March 2003), SEI Initiative (initiated in November 2009 and finalized in October 2010), have all clearly outlined their approaches for picking key technologies and industries. The policies have been specifically designed to promote rapid technological catch-up and even leapfrogging by Chinese sectors and firms to ‘seize the commanding heights of the new technological revolution’.

Under Premier Wen Jiabao (2003–2012), there was a significant revitalization, institutionalization, and rationalization of industrial policy and S&T policy.Two aspects are especially notable. First, the organizational structures for economic planning, including crafting industrial policy, were stream lined. Most prominently, a powerful super-planning agency, the National Development and Reform Commission (NDRC), was created. A key responsibility for NDRC is initiating and coordinating significant industrial and economic policies among ministries (like the Ministry of Education and the Ministry of Finance), other government agencies (like the central bank and state-owned com mercial banks), and industries. Additionally, a new and more powerful Ministry of Science and Technology (MOST), responsible for crafting S&T policies, was also created.

Second, policymaking processes became more institutionalized and efficient. The top leadership issues key directives to guide overall industrial and S&T policies for a significant period. Following the top leadership’s directives, MOST is responsible for initiating and drafting S&T policies by consulting with scientists. Although the top leadership has the final authority, the NDRC handles initiating and drafting industrial policies by gathering input from scientists, economists, local governments, and other ministries. These measures have ensured policy continuity over a significant time frame.

According to the EADS literature, a pilot agency capable of policy coordination is essential for the success of industrial policies. We thus reason that China’s achievements in industrial and S&T policies are also partly due to the country’s institutional system that can, though not always, coordinate policies across various bureaucracies. Such policy coordination is even more vital for industries with highly complex technologies, diverse participants, and extended industrial chains, such as most ESIs that China has targeted. In short, a powerful pilot agency is a necessary condition for the success of industrial policies: only with a pilot agency that can effectively coordinate industrial and S&T policies, can these policies succeed.

The Effects of Policy Coordination: Two Case Studies

This section examines two sectors: a sector that has succeeded in technological catch-up and a sector that has not. The former is represented by China’s high-speed railway (HSR) industry, and the latter by China’s automobile industry. For our aims, they share two additional sets of similarities.

First, both sectors are SEIs identified by the state, and the government has implemented clear and consistent industrial and S&T policies for each to promote technological catch-up. As early as 1990, developing quasi-high-speed trains was included in the ‘National Science and Technology Tackling Key Problems Program (1991–1995)’. In 2004, the 34th Executive Meeting of the State Council approved the ‘Medium- and Long-Term Railway Network Plan’, which officially started the rapid catch-up process of the HSR industry. Then, ‘Agreement on the Joint Action Plan for Indigenous Innovation of China’s High-speed Railways’ was issued in 2008 to promote the indigenous innovation strategy.

The automobile industry was prioritized even earlier in the national plan. In 1985, the CPC Central Committee proposed the automobile industry as a key pillar sector in its ‘Proposal for Drafting the Seventh Five-Year Plan for National Economic and Social Development (Draft)’. Following that, China released its first comprehensive industrial policy, ‘Industrial Policy for the Automobile Industry’, in 1994. In 2004, the NDRC introduced ‘The Development Policy for the Automobile Industry’ to encourage domestic innovation in the auto sector. In summary, both sectors underwent the technological upgrading from introduction, learning and absorption, to independent R&D.

Second, initially, SOEs dominate the vehicle manufacturers in these two industries while supplies and parts are mostly supplied by private businesses. Even in the HSR industry, which is usually considered to be dominated by SOEs, many key components are supplied by private companies such as Xincheng New Materials (Pantograph), Huawu Co., Ltd. (braking system), Yonggui Electric (cou pler), Bode Transportation (door and window system), KTK Group (bogies, door and window system), and others.Also, in both sectors, while SOEs are responsible for introducing key technologies through joint ventures with foreign companies, private enterprises mostly developed their products on their own.

To compare the two industries, we measure the success or failure of industrial catch-up from two perspectives: technology and market. Regarding technological catch-up, we choose ‘Can domestic companies reach the world’s cutting-edge technology through indigenous innovation?’ Regarding market catch-up, we use the export of high-end products as the key indicator. As becomes clear below, China’s HSR industry has been a remarkable success because MOR has closely coordinated various policies with different organizations. In contrast, China’s automobile industry has become a dismal failure without a powerful pilot agency to coordinate policies effectively.

Policy Coordination Behind China’s High-Speed Railway Industry

Overview of the Industry

Before 2004, Chinese railway manufacturers could not produce high-speed bullet trains ( > 200 km/ h). In January 2004, the China’s State Council approved the ‘Medium- and Long-Term Railway Network Plan’. This plan set key guidelines for China’s railway industry to import advanced technology, engage in joint design and manufacturing, and ultimately build China’s high-speed railways with indigenous technology. The State Council tasked MOR with implementing the plan.

From 2004 to 2008, MOR focused on importing and absorbing technology through joint ventures. MOR supervised the import of HSR technology from four key foreign companies: Bombardier (Canada), Kawasaki Heavy Industries Ltd. (Japan), Siemens (Germany), and Alstom (France). Joint ventures were formed and worked on developing HSR series like CRH1 (200 km/h), CRH2 (200/250 km/h), CRH3 (350 km/h), and CRH5 (250 km/h).Thanks to technology transfer from foreign firms, Chinese companies could quickly adopt advanced manufacturing techniques and enhance their design skills through reverse engineering.

In February 2008, MOR and MOST issued the ‘Agreement on the Joint Action Plan for Indigenous Innovation of China’s High-speed Railways’. This document marked the start of the second phase of developing China’s HSR industry (2008–2012). China shifted its focus toward indigenous technology innovation by encouraging domestic companies to engage in forward design and technology integration after successfully importing and absorbing cutting-edge technologies from leading foreign firms.

In 2015, China’s HSR industry successfully launched its own 350 km/h electric multiple unit (EMU) train, with Chinese technical standards. Since then, China has achieved many technological milestones, setting three of the world’s four highest speed records in the HSR industry and making breakthroughs in many core technologies, such as traction conversion, microcomputer network, braking technology, etc.

Moreover, the number of China’s EMUs has increased more than ten times, from 285 in 2009 to 3,241 in 2020. By 2022, China’s HSR system reached 42,000 kilometers, making up 60.8% of the world’s total length. Figure 1 shows China’s growing HSR mileage in operation over the past decade. With advanced engineering and equipment manufacturing technologies, China’s HSR industry has become highly competitive globally over the past ten years. Its HSR equipment has been exported to over 100 countries. The top export destinations include Malaysia, Vietnam, Turkey, Israel, Mexico, Ecuador, Nigeria, Ethiopia, Australia, the United Kingdom, and others. In addition, China has undertaken numerous HSR construction projects overseas, such as Indonesia’s Jakarta- Bandung HSR Project, Saudi Arabia’s Haramin HSR Project, and others.These accomplishments demonstrate China’s rapid technological progress in the HSR industry.

History of the Pilot Agency

How did China significantly leap forward in the HSR industry within such a short period? The authors argue that MOR, the powerful pilot agency, with its ability to mobilize resources and coordinate policies across different agencies and enterprises, has been the key driver behind its success.

Although MOR has been restructured multiple times from 2000 to 2019, its core role in organizing the entire industry remains unchanged. Its central position has allowed it to draft, coordinate, and enforce industry policies. Figure 2 visually presents the history of these reforms.

Before 2000, MOR managed China’s railway industry as a closed system, exerting comprehensive regulatory control over planning, construction, equipment manufacturing, communication signals, transportation management, research and development (R&D), and higher education. The system’s R&D and production network includes over thirty engineering companies and four specialized research institutes focusing on locomotive and vehicle development. Although reforms have been underway since the 1990s to separate various functions (such as engineering, manufacturing, communication signals, and R&D) from MOR, MOR retained overall control of the industry.

In 2000, the Locomotive and Vehicle Research Institute Corporation was officially separated from MOR and divided into two large SOEs, China South Locomotive Corporation Limited (CSR) and China North Locomotive Corporation Limited (CNR). From 2000 to 2015, CSR and CNR were responsible for designing and manufacturing HSR equipment, including locomotives and coaches. They competed against and collaborated with each other, which further accelerated technological progress.

In 2013, MOR was split into two entities: China Railway Corporation (CRC) and the National Railway Administration (NRA).CRC is an SOE managed by the central government, primarily responsible for providing transportation services. CRC maintains its monopoly over the demand market for locomotives and systems in the railway industry. NRA, which retains the MOR’s administrative function, is subordinate to the Ministry of Transportation (MOT) and holds a vice-ministerial ranking within MOT. NRA is responsible for implementing industrial policies and overseeing the industry.

Throughout the reform, which lasted from 2004 to 2018, MOR has maintained a stable core position in the industry. With its powerful position, MOR can accumulate economic resources, technical knowledge, and industrial networks, giving it overwhelming power to regulate the industry. Indeed, MOR was so powerful that it could motivate industry participants to engage in HSR projects even without support from central leadership from 1995 to 2003. The Qin-Shen Passenger Dedicated Line (essentially a renamed HSR line) and the early self-developed ‘China Star’ EMUs are achievements made by MOR during that period.

In 2002, Liu Zhijun became Minister of MOR and, in 2003, also the Secretary of the Party Committee. As a result, MOR has been under Liu’s complete control and has become more aggressive in advancing HSR projects.

Successful Coordination

From 2004 to 2018, MOR and its related entities maintained stable authority and close coordination with organizations such as CSR, CNR, MOST, MOT, universities, and other R&D institutions. As a result, policies for the HSR industry were articulated quickly and carried out effectively. Coordination led by MOR operated across three dimensions: vertical-1 (over local railway bureaus), vertical-2 (over HSR enterprises), and horizontal (with other central ministries and departments).

First, MOR successfully coordinated policies with local railway bureaus by leveraging its unique strength. This coordination allows MOR to regulate the demand for products and technologies, thereby boosting the negotiating power of domestic companies when dealing with foreign firms for effective technology transfer. In 2005, MOR eliminated forty-one medium-sized local railway bureaus and merged them into eighteen regional bureaus. Most importantly, it regained the procurement rights from regional bureaus and created a unified market with a single buyer. By doing so, MOR became the sole gatekeeper for locomotive manufacturers and gained extensive power to set criteria for market access, product performance, and technical specifications. For instance, MOR required that only joint ventures could supply China’s HSR systems, thus forcing foreign companies to transfer technology to their Chinese partners. To effectively oversee technology transfer, MOR also created an evaluation system to monitor the results, with its primary measure being whether Chinese firms have successfully acquired the transferred technologies. If the technology transfer was deemed unsuccessful, MOR would refuse to pay for the products.

Consequently, companies from Germany, Japan, and France competed intensely to secure Chinese orders. Leveraging strong bargaining power, China successfully introduced the Velaro EMU (designed for 320 km/h) from Siemens in 2005. Chinese companies not only reduced the price of each train model from 350 million RMB to 250 million RMB and the technology transfer fee from 390 million euros to 80 million euros, but also gained more favorable conditions for technology transfer.

In addition, MOR has coordinated effectively with local governments to ease its financial constraints. By leveraging the spillover effect of HSR on economic development and the desire of local governments to have HSR earlier than their competitors, MOR successfully launched the ‘rail-local strategic cooperation’ project based on the principle of ‘whoever pays first, whose HSR will be built first’.By doing so, MOR has forced provinces and municipalities to co-fund 158 projects, attracting more than 1.4 trillion yuan of investment.

Second, MOR coordinated policies with the EMU manufacturers closely and effectively to promote technological innovation. This coordination scheme has enabled MOR to motivate those manufacturers and help them build innovation capabilities. MOR used its almost complete control to consolidate an oligopolistic supply market into just three high-speed EMU manufacturers: CSR Qingdao Sifang Locomotive and Rolling Stock Co., Ltd (CSR Sifang), CNR Changchun Railway Vehicles Co., Ltd (CNR Changchun), and CNR Tangshan Railway Vehicles Co., Ltd. (CNR Tangshan). On the one hand, MOR established clear technical criteria and required these three manufacturers to compete against each other based on technical goals rather than short-term profits.

To push these enterprises toward rapid technological learning, absorption, and innovation, MOR set strict localization standards and technical specifications for domestically produced equipment.Only producers with advanced technology and competitive prices can secure MOR’s orders. As a result, EMU manufacturers had to continually invest in technological upgrades and reduce costs. For example, CSR Sifang had to independently develop EMUs capable of over 300 km/h to compete with CNR Changchun, based on the imported technology that initially supported 200 km/h speeds. This EMU model was later named the CRH380A (L).

On the other hand, MOR used the oligopolistic nature of the EMU market to ensure the three companies had enough funds to invest in R&D. EMU manufacturers could invest in technological innovation with a more or less guaranteed net profit margin of about 15%.In addition, MOR formed a group of experts in 2003 focused on rail equipment modernization to assist CSR and CNR in upgrading technology. MOR also set up an office to ensure effective daily communication with the enterprises.The experts and the two EMU manufacturers jointly set the specific operational details of the technology introduction and approved the plan ‘Outline for Accelerating the Implementation Process of Locomotive and Rolling Stock Equipment Modernization’.

Third, MOR also effectively coordinated policies with other central ministries and departments, especially MOST, to enhance the industry’s overall innovation capacity. The partnership between the two ministries was officially launched in 2008 with the signing of the ‘Agreement on Joint Action Plan for Indigenous Innovation of China’s High-Speed Railway’. To improve coordination, MOR and MOST established ‘Office 226’ as the command center to oversee and address various planning and coordination issues.

Most importantly, and in line with our thesis that S&T policies should be considered as part of China’s industrial policies, China’s ‘863 plan’ and other national S&T programs allocated significant funds to the HSR industry, including the major project ‘Research and Development of Key Technologies and Equipment for China’s High-Speed Trains’. These funds were allocated solely to consortia comprised of enterprises, universities, and research institutions.By doing so, MOR and MOST established a highly effective Enterprise-University-Research (EUR) cooperation system to make and implement S&T policies dedicated to the HSR industry. It includes ten core enterprises affiliated with CNR and CSR, twenty-five universities, eleven scientific research institutions, and fiftyone key laboratories and engineering research centers.

Effective coordination among the EUR is essential for technological innovation in HSR. High-speed trains are highly complex, consisting of more than 40,000 parts. These product features require locomotive manufacturers to work effectively with other stakeholders. The EUR system allows participants to share knowledge, techniques, human resources, and other scientific and market resources. By involving agencies with advanced research capabilities outside the traditional rail system, manufacturers can learn cutting-edge technology, directly enhancing their efficiency in upgrading technology. With the assistance of universities, enterprises could address technical problems more effectively. For example, when engineers at CNR Changchun, which imported technology from Alstom, faced the repeated fracture of its new wheel-rail during operation, they sought help from Southwest Jiao Tong University (SWJTU). SWJTU professors helped the engineers create a dynamic analysis model of the wheel-rail that improves related technical parameters and successfully resolves the issue.

The system also provides a space for trial and error, allowing manufacturers and their suppliers to build long-term collaborative relationships through joint innovation. Through effective coordination with suppliers, CSR successfully developed a highpower-density IGBT chip, breaking the supply monopoly of foreign companies.China’s CRH380 series EMU trains demonstrate China’s capability of integrating innovation, showcasing the prowess of the EUR system.

To summarize, effective policy coordination among MOR, MOST, enterprises, R&D institutions, and other relevant agencies has been a crucial force behind China’s HSR industry’s successful technological catch-up. By comparison, the lack of effective coordination has directly caused the dismal failure of China’s automobile industry.

Lack of Policy Coordination in China’s Automobile Industry

Overview of the Industry

China has invested heavily in developing its automobile industry since the late 1980s. China first declared the auto industry ‘a critical pillar industry’ in its 7th five-year plan (1986–1990). In 1994, China’s State Council released the country’s first ‘Industrial Policy for the Automobile Industry’ that set clear developmental goals and strategies. Because China’s auto industry was significantly behind the technological frontier at that time, China aimed to jumpstart the sector through rapid technological learning and absorption. Specifically, China planned to obtain technology transfers from foreign firms through joint ventures by leveraging its potentially enormous market (‘market for technologies’, yishichang huan jishu) and hoped to reach targets for large-scale production and industry concentration, setting a goal that the CR3 of the industry should reach 70% by 2000.

Unfortunately, China’s first decade (1994–2004) of industrial policy for its auto industry was a dismal failure marked by technological stagnation.After a decade of enormous push, China’s vehicle manufacturers still could not independently design and develop new vehicle models.

Worse yet, the R&D capability of auto parts suppliers was significantly lower than that of vehicle manufacturers. By 2004, joint ventures dominated the domestic car market, with foreign companies supplying core components, especially engines and transmissions. Car exports from China were nearly nonexistent (see Table 2).

To tackle the worsening situation, NDRC introduced a new industrial policy in 2004, ‘The Development Policy for the Automobile Industry’. This new policy focused on industry concentration and set specific targets for domestic companies, including improving their indigenous innovation capabilities. In its ‘11th Five-Year Plan (2006–2010) for the Automobile Industry’, NDRC set a key goal: by 2010, domestic firms should capture 60% of the domestic market share.

In terms of technological catch-up, while both China’s car makers and parts suppliers have made tangible progress during this second decade,progress has been extremely limited. Most promi nently, while China’s indigenous car-makers could independently design and manufacture new models, they could only do so with dated technologies. As a result, vehicles made by Geely, Chang’an, and Great Wall could only compete in low-end and mid-end car markets.Parts suppliers faced a similar technological situation. While domestic companies could produce auto parts or components with dated technologies, they still could not independently develop core components, especially engines and transmissions.As Table 2 shows, foreign companies accounted for about 80% of the total output value in China’s engine market from 2004 to 2013.

Regarding exports, China’s auto industry did not perform well either. Although the export volume has increased dozens of times, it remains extremely low. In 2015, China exported about 300,000 vehicles. However, most were produced by Chery, Geely, Great Wall, and other mid- and low-end automakers and then exported to Russia, Iran, Vietnam, Afghanistan, and other countries.

History of the Pilot Agency

What were the causes behind the disappointing performance of China’s auto industry? Again, consistent with the EADS model, lacking effective policy coordination has been the key cause. Most importantly, unlike MOR and its successors (i.e., CRC and NRA) in the HSR industry, no powerful pilot agency has ever held dominating authority over the auto industry. Without a powerful pilot agency to coordinate policies, no clear and binding targets have ever been issued for technological learning, absorption, and catching up for the auto industry.

Figure 4 highlights key reform events in China’s auto industry. As shown, the pilot agency in China’s auto sector has shifted among SOEs, industry associations, and administrative bodies from the 1980s to the 2000s. This repeated reshuffling has seriously weakened its ability to develop sufficient technical expertise and industrial networks to create, implement, and enforce consistent industrial policies.

In 1987, the China Association of Automobile Manufacturers (CAAM) became the industry’s pilot agency. However, CAAM was simply a voluntary organization of companies and institutions that provide consulting services for the industry. In 1990, China Automobile Industry Corporation (CNAIC) took on the role, but it was an SOE. As such, neither CAAM nor CNAIC had sufficient administrative power or capacity to oversee the whole industry. Thus, for over 21 years (1987 to 2008), China lacked a consistent administrative agency to oversee the auto industry.

In 2003, the Department of Industry (DOI) was established under NDRC to craft and implement industrial policies across various sectors, including the auto industry. Self-evidently, with so much on its plate, DOI could only dedicate very limited time and resources to the auto industry. More importantly, DOI still lacked the administrative authority because it was merely a division within NDRC hierarchy. Due to its lower administrative status, DOI’s directives were often ignored by most local governments, which have enjoyed considerable autonomy in creating and enforcing policies since the 1960s.

After 2008, the Department of First Equipment Industry (DOFEI) of the Ministry of Industry and Information Technology (MIIT) took over DOI’s role. This reorganization, however, still did not solve the problems associated with DOI. Here, suffice to say that DOFEI is also a bureau/department-level organization. As such, in China’s bureaucratic hierarchy, DOFEI has very limited power over other ministries and local governments, just as its predecessor did. In short, DOFEI has been no more effective than DOI.

Furthermore, apart from DOI or DOFEI, several other central government agencies were respon sible for drafting and implementing specific automobile industry policies. These agencies include MOT, the Ministry of Public Security, the State Bureau of Quality and Technical Supervision, the State Environment Protection Administration, the Department of Motor Vehicles under the Ministry of Machine Building, and the Department of Industry Management under the State Economic and Trade Commission. These agencies can issue various policies related to quality supervision, technol ogy development and management, transportation, market access, and project approval that often overlap with but contradict each other. With such a fragmented institutional setup, effective policy coordination in the auto industry is all but impossible.

Failed Coordination

We now examine how policy coordination has failed in the automobile industry in detail. First and foremost, the pilot agencies responsible for making and coordinating policies have been almost completely powerless in regulating local governments. As a result, the various supposed pilot agencies for the industry had little control over technology transfer, market access, and localization requirements, making it difficult for the auto industry to obtain transfer technologies more effectively. While the central government developed a strategic plan called the ‘Big Three and Small Three’ to promote large-scale production and high industry concentration, this directive had been completely ignored. With lower administrative levels and limited policy tools, the supposed pilot agencies could not coordinate the product market or incentivize the assigned local governments to develop the auto industry. Among the designated production bases, only Shanghai had actively pursued the plan, while Guangzhou and Beijing did not prioritize the auto industry in their regional development strategies at all.

Meanwhile, many local governments left outside the plan, lured by the potential profits of the automobile industry, rushed to establish their carmakers, in open defiance of the directives from the central government. Most prominently, Wuhu, a municipality in Anhui province, secretly established Chery Automobile. Although numerous regulations and directives were issued to rein in local governments, they were almost universally dismissed.As shown in Figure 5(a), between 1994 and 2014, there were roughly 120 automakers in China, more than the number of companies worldwide. These automakers competed intensely for technology transfer, thus weakening their own bargaining power while strengthening the bargaining power of foreign companies. Without strong bargaining power, Chinese companies could not obtain key and advanced technologies from foreign firms.

Second, the various pilot agencies have also failed to coordinate domestic automakers and parts suppliers. Because the pilot agencies in the auto industry kept changing from the 1980s to the 2000s, none of them could establish close industrial networks or accumulate enough technical knowledge and economic resources. Lacking those resources, these pilot agencies could not develop technical standards or create an oligopolistic supply market.Without practical technical standards, such as requirements for new car models, the agencies failed to motivate automakers, especially joint ventures, which were most capable of technological innovation at the time, to invest in R&D as long as those enterprises could profit from assembling and selling existing and dated products.

Furthermore, with a market in oversupply and fierce competition, enterprises lacked sufficient funds for R&D. Intense competition prevented individual enterprises from securing enough orders or expanding their scale. In 2001, 60% of China’s automakers produced fewer than 5,000 units annually, significantly below the average size of global automakers. The R&D investment ratio of China’s auto industry remained below 2% from 1998 to 2014, much lower than that of foreign competitors.

Indigenous brand automakers, despite their stronger motivation for innovation, also struggled to achieve sufficient profits due to outdated techniques and their smaller size. In 2009, 33% of these manufacturers were small shops, and nearly half were unprofitable. Even well-known brands such as Geely and Chery continued as imitators and relied on operational process improvements rather than product innovations to earn profits.

Pilot agencies also failed to coordinate auto parts suppliers. For example, to promote the localization of Santana, a model made by Shanghai-Volkswagen, the central government established the Santana Parts Community that aimed to coordinate national auto parts suppliers to collaborate and provide quality parts for Santana. However, in 1997, Shanghai-Volkswagen purchased 85.5% of parts from local suppliers instead of national suppliers, and even 50% of total parts from within its own group.Coordination failures like this case led to the technical stagnation of China’s auto parts companies before 2004.

Third, the supposed pilot agencies could not effectively coordinate with other central departments either. In fact, their low administrative ranking has made them essentially irrelevant. Unsurprisingly, when different policies issued by various central agencies conflicted with each other, the supposed pilot agencies could hardly resolve these conflicts. Without adequate policy coordination across departments, these supposed pilot agencies have been unable to establish an effective EUR system to facilitate innovation as MOR did for the HSR industry. There was no command center or consensus on working principles guiding participants in China’s auto industry. Within the system, firms, universities, and research institutions were guided by different departments and focused on specific tasks rather than the larger picture. Indeed, there is no clear division of labor between those organizations or in-depth cooperation. This coordination failure has deprived the auto industry of the opportunity to build an efficient system to foster innovation capabilities.

Overall, China’s auto industry failed to meet the objectives outlined by its industrial policies: mass production, increased industry concentration, and technological innovation.

Conclusion

Industrial policy has become more prominent recently, partly due to the growing geopolitical competition (especially the Sino-U.S. rivalry) and the need for industrial transformation of developed capitalist countries.Exploring the success or failure of industrial policy has become a focus of political economy again. As a successful EADS in the twenty-first century, China’s experience with industrial policies provides valuable lessons for crafting and implementing industrial policy. In this article, we highlight a central political logic behind China’s industrial and S&T policies: a strong pilot agency is necessary for effective policy coordination and successful industrial and S&T policies. This finding is more applicable to latecomer industries with more complex technologies, higher capital requirements, and higher industrial concentration. China’s development experience offers a new perspective for re-examining the EADS model.

In addition, our article also offers important insights for two broader areas of literature: the potential synergy between the ‘carrot’ and ‘stick’ in implementing industrial policies and the role of state capacity. First, most studies on industrial and S&T policies have focused on supporting policies as ‘carrots’. However, EADS’s experience has long taught us that effective industrial and S&T policies must also include ‘sticks’: firms receiving support must meet pre-set targets (such as absorbing key technologies or exporting) or face the consequences. Intuitively, ‘carrots and sticks’ should work better than ‘carrots’ or ‘sticks’ alone. Our case studies strongly support this idea. MOR had both ‘carrots’ and ‘sticks’, whereas no agency in China’s automobile industry has enough ‘sticks’.

Second, the EADS model explicitly assumes a strong state with adequate state capacity. The model’s focus on state capacity aligns with the renewed interest in the state’s role, state capacity, and governance quality in political economy and broader social sciences.In this context, one can argue that China’s robust state capacities in mobilizing resources and implementing policies are key factors in its success at catching up in major industries. In short, China’s bureaucracies and top decision-makers, supported by their ‘embedded autonomy’, have made some correct decisions despite many mistakes.

State capacity, however, does not operate in isolation: successful economic development also relies on institutions and specific policies. Therefore, state capacity, institutional frameworks, and socio-economic policies form a ‘new development triangle’.Unfortunately, due to issues with conceptualization and measurement, much of the empirical research on the relationship between state capacity, governance quality, and economic, social, and political outcomes has been inconsistent and unpersuasive. More rigorous work is urgently needed.

Appendix: a list of acronyms

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On July 5th, at 7.30pm, in Beijing’s Liaoning Mansion, Tsinghua University’s Institute of International Relations will again hold its International Relations Basic Knowledge Proficiency Test. The elementary level is open to the general public. The intermediate and advanced levels are reserved for those who have passed the previous stage. The exam is closed-book, written, multiple-choice, and free of charge. A score of 60 or above earns a certificate from the institute. The syllabus is austere: basic concepts, research design, modern and contemporary international history, and, at higher levels, theory and methods.

China is hardly short of exams. To many Chinese, the word carries both civilisational weight and modern fatigue: the old prestige of the imperial examination, and the daily irritation of credential-chasing. When the notice was mentioned to a friend, her first reaction was perfectly Chinese: “What is this exam useful for?”

Probably not very much, at least by the usual Chinese measure of usefulness. It will not get anyone into a university, secure a job, bring a promotion or confer a professional licence. Nor will it stop bad commentary about America, Europe, Ukraine, Japan, or the “changing world order” from circulating online. The loudest voices in the public arena are not waiting to be certified by the institute's founder and one of China’s best-known international-relations scholars. The exam cannot regulate the pundit market. It can only signal, to those still willing to learn, that this field has a minimum vocabulary and a minimum discipline.

Still, usefulness may be the wrong way to judge it. The exam looks more like a small act of resistance.

The first such test was held in 2023. According to the institute, 337 people registered. Its stated purpose was to help students, teachers, practitioners and interested members of the public test their grasp of basic international-relations knowledge, and to promote the “scientification” of the discipline. The word is ungainly in English, but the intention is clear enough. International relations should have some resistance to mood, slogan, gossip, vanity and traffic-seeking speculation.

There is a deeper reason this matters. International relations is a serious business. It is about war and peace, human lives, national fortunes, and the choices that can shape entire regions for decades. A society that talks about the world carelessly may end up understanding its own position carelessly.

Yan has been making a related point for years. In 2021, at a large academic conference attended by political scientists and international-relations scholars from across China, he warned that public visibility should not be allowed to stand in for academic merit. Clicks, views, and wanghong status—even notoriety earned through provocation—are not measures of scholarly ability. A WeChat post with 100,000 views might be influential. That does not make it good scholarship.

In a memorable scene, the applause was loud. Somewhere in the audience sat a well-known Shanghai-based university employee and internet personality who had made his name commenting on politics and international affairs. One wonders whether he felt personally addressed.

The unease is not about public interest in foreign affairs. A country as large and internationally exposed as China is bound to debate the world around it. The problem is the deterioration of that debate. Some people with titles and institutional affiliations have become increasingly casual with facts and extravagant in their claims. Alongside them is a large class of online personalities with little basic training but enormous confidence. Together they have made discussions of geopolitics noisier, cruder, and easier to mistake for entertainment.

This is why the old comparison with Beijing taxi drivers keeps returning. For years, they have been a minor institution in foreign reporting: voluble, patriotic, cynical, worldly, sometimes perceptive, sometimes wildly wrong, and always quotable. The joke is that some experts do not sound much better. This may be unfair to taxi drivers. It is not always unfair to experts.

No country has a monopoly on bad geopolitical analysis. America, with its think tanks, cable panels, podcasts, and X warriors, produces plenty of confident nonsense of its own. But China should not afford to treat others' errors as permission for its own. A country trying to understand its changing place in the world needs a clearer view of facts, power, risk, and consequence. When basic facts are handled casually, when certainty becomes theatrical, and when logic gives way to mood, the result is not only bad analysis. It makes it harder for Chinese readers—especially young ones—to understand China’s actual strengths, weaknesses, and choices.

Yan’s criticisms over the years can be read as one connected argument. Inside the discipline, he has warned against the weakening of theoretical research, the lowering of professional thresholds, the overproduction of current-affairs commentary, and the chase for online attention. In the classroom, he has worried about students who reach conclusions before acquiring enough facts. In public debate, he has objected to the habit of treating popularity as proof and stance as analysis.

That concern became sharper as a new generation came of age. Chinese students born after 2000 grew up after China became the world’s second-largest economy, and many have known only a rising China and a troubled West. Such an experience can produce ambition and confidence. It can also produce a sense of superiority that is more inherited than earned. Yan has warned them against a crude “China versus foreign countries” frame, in which all good values are assumed to be Chinese and all bad ones foreign. He has also criticised the habit of mistaking online rhetoric for common sense, treating influencers as authorities, and reducing complex realities to conspiracy theories, economic determinism or wishful thinking about Taiwan and China’s future power.

There is an old-fashioned teacherly quality to this criticism. It is stern, sometimes unfashionably so, but not cynical. If China matters, it should be studied seriously. If the world is changing, the change should be understood with care. Young people who may inherit a larger international role deserve something better than slogans delivered as analysis.

In an influential video addressing the younger students a few years ago, Yan described the problem with unusual bluntness. In international-relations analysis, he said, there had emerged a tendency to “set facts aside first and discuss stance.” The sentence is memorable because it exposes a common temptation in discussions of foreign affairs: to decide first what should feel patriotic, correct or emotionally satisfying, and only then look for evidence. For China, resisting that temptation is not a matter of intellectual taste. It is part of seeing the country and the world as they are.

Seen in this light, the exam tries to establish a floor. Before talking about the international order, one should know some history. Before using a concept, one should know what it means. Before declaring a trend inevitable, one should know what evidence would count for or against it. Phrases such as “the West” and “since ancient times” should not be allowed to do more work than they can bear.

Responding to the age of influencers with a closed-book test may seem quixotic. Against the speed of social media, Yan’s institute offers multiple-choice questions. The gesture is almost comically modest. Yet it also reveals a stubborn faith in standards that the market has little reason to protect.

A one-hour exam will not rescue public debate. Some people will still prefer the thrill of stance to the discipline of facts. But public intellectual life is also shaped by small rituals that signal what a community still values. A multiple-choice test on international relations may be a modest instrument, but it carries a serious hope: that public discussion of the world can begin with facts, methods and the humility to learn the basics; that a grave subject can be treated with the gravity it deserves; and that China’s conversation about the world can become a little more disciplined, a little less reckless, and ultimately more useful to China itself.

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In Lin’s view, this amounts to a “structural revolution” in modern economics. By taking seriously the differences among countries’ economic structures and the ways those structures evolve, New Structural Economics seeks to challenge the universalising assumptions of mainstream theory and offer a framework better suited to China and other developing countries.

Lin also issued a challenge to younger scholars. If Chinese economists merely use Chinese data to test Western theories, he warned, they may publish papers but miss the larger historical opportunity. As China’s economic weight grows, he argued, the centre of global economic research and theoretical innovation will also shift towards China. But that shift will require original theory, not simply the adaptation of imported frameworks.

Professor Justin Yifu LIN is Dean of the Institute of New Structural Economics, Dean of the Institute of South-South Cooperation and Development, and Professor and Honorary Dean of the National School of Development, Peking University. He also served as Senior Vice President and Chief Economist of the World Bank, 2008-2012.

Lin delivered the following speech at Peking University on 14 May 2026. It is titled “Building an Autonomous Knowledge System for New Structural Economics and Expectations for Young Scholars”, lightly edited for clarity by New Economist Think Tank. The Chinese original was published on the New Economist Think Tank’s WeChat blog on 14 May.

—Yuxuan Jia

林毅夫最新主题演讲实录：新结构经济学将掀起对现代主流经济学的“结构革命”

Transcript of Justin Yifu Lin’s Latest Keynote Speech: New Structural Economics Will Launch a “Structural Revolution” in Modern Mainstream Economics

Welcome to this morning’s Seminar on Building an Autonomous Knowledge System for New Structural Economics. I would like to thank the previous speakers for recognising the efforts of the Institute of New Structural Economics in advancing autonomous theoretical innovation and building the knowledge system of New Structural Economics.

As we know, autonomous theoretical innovation is the core of an autonomous knowledge system, and an autonomous knowledge system is the systematic integration of such innovation. As someone who has promotes autonomous theoretical innovation in New Structural Economics and advocates the construction of its autonomous knowledge system, I would like to use today’s opportunity to explain why I have pursued this endeavour since 1988. I will also discuss how to further deepen theoretical innovation in New Structural Economics, build its autonomous knowledge system, and share a few expectations with the young friends present today.

Why promote autonomous theoretical innovation in New Structural Economics?

As we know, the function of theory is to help us understand the world and transform it. From the perspective of economics, mainstream economics has developed a highly sophisticated body of knowledge. Yet whether any theory is applicable depends on whether its premises and assumptions match the context in which it is applied.

Since Adam Smith, Western economics has largely been built on the experience of developed countries such as the United Kingdom and the United States. These theories therefore take, as their implicit premises, the economic, social, political, and other conditions of the developed countries in which they were produced. As a developing country, China differs markedly from those countries in both economic structure and level of development. Applying these theories directly to China therefore creates the problem captured by the Chinese saying: “An orange grown south of the Huai River is sweet, but when grown north of it, it turns bitter.” This is something we must clearly recognise. I came to this understanding in 1988.

In 1988, China experienced inflation of 18.5 per cent, the first such high inflation since the founding of the People’s Republic of China. According to mainstream Western theory at the time, inflation should be tackled by raising interest rates. This would reduce investment demand, lower consumption demand, bring down aggregate demand, and thereby affect inflation expectations. It was also seen as an efficient approach: once interest rates rose, only highly profitable projects would survive, and low-return projects would be eliminated. In theory, this would both curb inflation and improve the efficiency of resource allocation. The logic seemed highly persuasive.

Yet in 1988, China adopted a policy of “governance and rectification”, using administrative measures to cut back investment projects. From the standpoint of mainstream Western theory, this was highly irrational and inefficient. But then I faced a contradiction: if the Chinese government was truly as irrational as mainstream Western theory suggested, how had China maintained an average annual growth rate of 9.9 per cent from 1978 to 1987, with only limited fluctuations?

For a developing country, even several percentage points of growth in a single year is no easy achievement. China at the time was not only a developing country, but also an economy in transition. Sustaining 9.9 per cent growth for nine consecutive years showed precisely that the Chinese government was highly rational and had a deep understanding of the country’s conditions.

It was this intellectual conflict that led me to reflect on the so-called mainstream theories we had studied and applied. Theories from developed countries take their own development stage and conditions as implicit premises. This made me realise that every theory, in a sense, carries the risk of fighting the last war, for it starts from the specific conditions under which it was first developed.

When those premises do not fit developing countries, those of us who wish to contribute our knowledge and wisdom to national progress must develop a deep understanding of our own national conditions and put forward new theories. I am particularly pleased that New Structural Economics began to take shape in 1988, using factor endowments and their structure, which reflect the characteristics of China’s development stage, as the starting point for analysing China’s development. The first article that emerged from this line of thinking was written with Li Zhou and examined the institutional causes of China’s 1988 inflation. Since then, we have developed a distinctive perspective on China’s transition and development based on factor endowments and their structure, which gradually evolved into the analytical framework of New Structural Economics.

In 1994, Cai Fang, Li Zhou, and I published The China Miracle. In that book, the analytical perspective and framework of New Structural Economics were already largely in place. The analytical paradigm was: factor endowments determine industrial structure, which in turn requires corresponding infrastructure and compatible institutional arrangements.

Because our perspective and analytical approach differed from mainstream theory, many of our judgements and arguments were controversial. But the vitality of a theory lies in whether the inferences it produces can be borne out by later practice.

For example, as discussed in The China Miracle, the dominant international view at the time held that because China had not followed mainstream shock therapy or the “Washington Consensus”, its collapse was inevitable despite its strong performance. The “China collapse” thesis was then highly fashionable. In response, we predicted that if China continued with its pragmatic, gradual, dual-track transition, its economy would surpass that of the United States in purchasing power parity terms by 2015, and in market exchange-rate terms by 2030.

This was an extremely bold judgment at the time, but practice confirmed it: China surpassed the United States in purchasing power parity terms in 2014. As for market exchange rates, I believe China is very likely to surpass the United States by 2030.

Later, in 2007, I was invited to give a lecture at the University of Cambridge. I applied this analytical framework, derived from China’s experience, to examine the successes and failures of developing economies around the world after the Second World War. This allowed me to identify the fundamental reasons why a small number succeeded while the overwhelming majority failed, and to develop a fuller analytical framework and set of theoretical propositions.

As China’s economy continued to grow, I had the opportunity in 2008 to serve as Chief Economist and Senior Vice President of the World Bank, becoming the first economist from a developing country to hold that position. My colleagues at the World Bank, as well as the economic research team I led, which comprised more than 1,000 outstanding professionals from both developing and developed countries, were all deeply committed to promoting development in developing countries. The World Bank also had extensive project resources and should have been the world’s most influential development institution. Yet the reality was that, despite the World Bank’s ambitious goal of building a world free of poverty, and despite the fact that China’s reform and opening-up had lifted more than 800 million people out of poverty, the number of poor people in the rest of the world had not fallen, but risen.

These World Bank elites had mastered the most advanced theories and had development projects designed to put those theories into practice. Yet they failed to achieve the expected results. The reason was exactly what I had realised in 1988: they were applying mainstream theories derived from developed countries to developing countries with very different conditions. Their intentions were good, but the outcomes diverged sharply from what the theories predicted.

That is why, on the first anniversary of my appointment as Chief Economist at the World Bank, I proposed the term “New Structural Economics”. The central point was this: countries at different stages of development have different material conditions, and therefore different industrial and institutional structures. We must incorporate the heterogeneity and endogeneity of structures across countries at different development levels into our theoretical thinking, and develop new theories to guide development practice. Only then can we achieve the noble goal of helping developing countries escape poverty.

In 2011, I was invited to deliver the Kuznets Lecture at Yale University, one of the world’s most important economics lecture series. There, I spoke for the first time on “New Structural Economics: A Framework for Rethinking Development”. I later turned the lecture into an article published in The World Bank Economic Review, formally announcing the birth of New Structural Economics to the economics community.

I am also honoured that, as Director Zhao Chuandong, Deputy Director of the National Office for Philosophy and Social Sciences under the Publicity Department of the Communist Party of China Central Committee, mentioned earlier, I was invited to speak at the 2016 Symposium on Philosophy and Social Sciences Work. Nearly ten years have passed since then. Autonomous theoretical innovation has taken on new vitality, and I, like many colleagues here today, have been greatly encouraged by this development.

Next, I would like to discuss how to deepen autonomous theoretical innovation in New Structural Economics and build its autonomous knowledge system.

Any economic phenomenon can be explained by multiple theories. Western economics, in the nearly 250 years since Adam Smith, has built a highly comprehensive body of knowledge. For almost any phenomenon in China, one can find ready-made theories to explain it, and those explanations often appear quite convincing.

Take state-owned enterprise (SOE) reform during China’s transition, for example. It became a major issue because state-owned enterprises were widely seen as inefficient. At the time, the most influential framework was the property-rights theory of new institutional economics, which holds that the most efficient corporate arrangement is one in which ownership and management are unified—that is, where property rights belong to the operator. Otherwise, a divergence of interests between owners and managers will inevitably produce inefficiency. Managers, as employees rather than owners, have no residual claim on operating returns. On this basis, the theory concludes that SOEs are inherently inefficient. If firms are simply divided into state-owned and private enterprises in a regression analysis, private firms appear more efficient by almost any statistical measure. This argument was, therefore, particularly intuitive within the American economics discourse.

For those of us engaged in autonomous theoretical innovation, the first requirement is to adopt a mindset of “changwu” [constant non-presupposition]. When faced with any phenomenon, we should not immediately ask what existing theory says about it. We must first examine the phenomenon itself in depth and on its own terms.

As I noted earlier, many theories can be brought to bear on the same phenomenon. In the case of SOEs, mainstream property-rights theory appears rigorous, and it has been embraced by many leading Chinese scholars in related fields. Yet closer observation shows that state-owned and private enterprises differ in more than ownership. SOEs are often concentrated in capital-intensive sectors linked to national security and the commanding heights of the economy. They also help prevent private capital from using control over scarce resources to extract excessive profits. Private enterprises, by contrast, are mostly found in competitive sectors. Only by observing these differences can we see that mainstream theory is inadequate in distinguishing between industries with different characteristics, or between enterprises that serve different objectives.

Therefore, if we wish to seize the opportunities of our time and engage in genuine theoretical innovation, we must approach reality with a mindset of “changwu”. Every economic phenomenon contains implicit premises, and every theory is produced in a specific context. This means that any theory, if applied mechanically, carries the risk of fighting the last war. Only with such a mindset of “changwu” can we discern the essence of a phenomenon and the factors that truly shape it.

This is a point I have consistently emphasised in advocating autonomous theoretical innovation in New Structural Economics. I also published a book titled Benti and Changwu: Dialogues on Methodology in Economics, [the ontological object of inquiry and a mindset of non-presupposition]. In my exchanges with teachers and students, I have encouraged them to free themselves from the constraints of existing theories and look at the world again with their own eyes, like newborn infants. Only in this way can we understand the essence of phenomena and their determining factors. In the language of traditional Chinese philosophy, looking at the world through existing theories is a “second-order” mode of observation. What we need is a “first-order” mode of observation: to observe the essence and determining factors of phenomena directly, without theoretical prejudice or presupposition. This is what it means to view phenomena through “changwu”.

But if we are to maintain this mindset and directly observe the essence and determining factors of real-world phenomena, how should we observe them? Broadly speaking, there are two worldviews for analysing the essence of phenomena and their determining factors: idealism and materialism.

Since I began exploring the construction of my own theoretical system in 1988, I have fully endorsed and consistently upheld historical materialism. This position also accords with the spirit of the General Secretary’s speech at the Symposium on Philosophy and Social Sciences Work: Marxism reveals the essence, internal connections, and laws of development of things. It is a great tool of cognition and a powerful intellectual weapon for observing the world and analysing problems.

The views that New Structural Economics has gradually developed since 1988, often in departure from mainstream theory, are grounded in a materialist standpoint. They take factor endowments—a material condition—as the starting point for observing development and transition in China and elsewhere in the world. Why insist on historical materialism? Both my own practice and my reading of philosophy have shown me that historical materialism can reveal the essence of phenomena. Factor endowments offer an especially useful entry point.

As is well known, historical materialism holds that the economic base determines the superstructure, while the superstructure in turn acts upon the economic base. The economic base consists of the productive forces and the relations of production shaped by those productive forces. Relations of production are important, but they are ultimately conditioned by the productive forces. It is therefore the productive forces that play the primary role in driving social progress.

When proposing “new quality productive forces”, the General Secretary also emphasised that industries are an important carrier of these forces. New Structural Economics recognised relatively early how industries are determined: the industries of each country and society are determined by the comparative advantages arising from their factor endowments and their structure.

Thus, if the economic base determines the superstructure, and the economic base is primary; if productive forces determine the relations of production, and productive forces are primary; if productive forces are carried by industries, and industries are in turn determined by factor endowments, then within the entire Marxist chain of analysis, factor endowments and their structure are the primary factor.

New Structural Economics further concretises the primacy of material conditions. It holds that factor endowments and their structure are the primary existence and the primary determining force. Its theoretical innovation begins from factor endowments and their structure as the primary material condition, and uses them to observe the country, society, and development. From this come a series of propositions: production structure is endogenous to factor-endowment structure; infrastructure must be compatible with production structure; and the institutional arrangements within the superstructure should also be compatible with production structure. This is the first basic standpoint of New Structural Economics.

In the process of economic development, however, different structures change at different speeds and with different degrees of difficulty, creating time lags. Because of the internal frictions of structural change, institutional structures and production structures are often not fully aligned. This is normal. At times, the state may also pursue goals other than efficiency, such as security, and therefore promote production structures that differ from those determined by comparative advantage. This creates distortions. Structures are endogenous, distortions are endogenous, and the operation of the economy reveals this endogeneity. This is the perspective of New Structural Economics: “one centre, three basic points”.

If New Structural Economics is to pursue theoretical innovation, it should begin from this perspective, observe the phenomena of development and transition in China and other developing countries, and develop theory on that basis. If we have a consistent perspective to guide theoretical innovation, the theories we develop can be linked together through a coherent logical chain and integrated into an autonomous knowledge system.

New Structural Economics was first proposed as the third generation of development economics. Later, we realised that every branch of modern mainstream economics—macroeconomics, monetary economics, public finance, business cycles, industrial organisation, spatial layout, international trade, and so on—takes the structures of developed countries as its implicit premise. Yet countries at different stages of development have different structures.

If we introduce the structural heterogeneity and endogeneity of countries at different levels of development into the various fields of modern mainstream economics, we can in effect launch a “structural revolution” in each of those fields. Therefore, although New Structural Economics was first proposed as the third generation of development economics, this realisation has made our understanding clearer: it is in fact a “structural revolution” in modern economics. Introducing the endogeneity of material structures into modern mainstream economics is, in essence, a Marxist transformation of modern mainstream economics.

Modern mainstream economics takes the structures of developed countries as its implicit premise and neglects the differences in structure, institutions, and economic operation that arise from different material conditions across countries at different stages of development. From a Marxist perspective, since the economic base determines the superstructure, and the superstructure acts back upon the economic base, we must start from the primary determining role of the economic base. This is, in effect, a Marxist revolution in modern economics.

Finally, I would like to share a few expectations with young friends. As mentioned earlier, modern economics began with Adam Smith’s The Wealth of Nations in 1776. Nearly 250 years have passed since then. If we count 25 years as one generation, it has taken the efforts of ten generations to build such a complete system.

Frankly, it is difficult to find a phenomenon that modern mainstream theory cannot explain. These explanations may not always grasp the essence of the problem, but the knowledge system is highly complete, the logical chain is clear, and the arguments are extremely persuasive. New Structural Economics, by contrast, has existed for only 38 years since its beginnings in 1988. If we count from the 2011 Yale lecture, when it was formally introduced to the academic community, it has existed for only 15 years. Compared with the powerful and well-established mainstream theoretical system, the autonomous theoretical innovation represented by New Structural Economics remains at an early and fragile stage. It urgently needs the young scholars here today to devote themselves to it, generation after generation, just as scholars in the Western mainstream academic community have done. Only through sustained collective effort and deeper theoretical innovation can we ultimately build an autonomous knowledge system of New Structural Economics originating in China. This is a task that will require the joint efforts of several generations.

We often say that young people are the hope of the country. Likewise, young people are the hope of building an autonomous knowledge system for New Structural Economics.

I am particularly pleased to see so many young friends participating today, both in person and online. If you can truly start from the materialist perspective of New Structural Economics and summarise the experience of development and transition in China and other countries, this will be a once-in-a-lifetime opportunity.

As I boldly predicted in 1995, at the 40th anniversary of the Economic Research Journal, the 21st century will belong to Chinese economists. It will be an era in which China produces, in significant numbers, leading scholars capable of shaping the theoretical direction of global economics. Since Adam Smith, the centre of the world economy has also been the centre of economic research, theoretical innovation, and the emergence of great economists.

In purchasing power parity terms, China’s economy surpassed that of the United States in 2014. Looking ahead to 2049, I believe China’s economy could reach twice the size of the U.S. economy or even more. The centre of the world economy is shifting towards China, and the research centre of world economics will inevitably shift towards China as well. If you wish to seize this historic opportunity, you must first adopt a mindset of “changwu”: you must not simply use Chinese data to verify Western mainstream theories. If you apply Western mainstream theory whenever you encounter a Chinese phenomenon, you may well be able to publish papers, but you will not grasp the opportunity of this era. Worse still, you may mislead society, because you will have failed to identify the real problem behind the Chinese phenomenon. Would that not make you like the economists I saw at the World Bank, who were sincerely committed to helping developing countries, but who, armed with inappropriate theories, spent large sums of money on many projects with very little effect?

The purpose of economic research is to understand the world and, more importantly, to transform it. Taking the transformation of the world for the better as the goal of research is the only way to seize this opportunity and advance theoretical innovation.

The opportunity of the times is right before us, but whether we can seize it depends on having the right worldview. We can no longer mechanically apply theories that largely belong to the superstructure and fall within the category of idealism. Instead, we must begin from materialism and from the material foundations of each country. We must uphold the Marxist perspective, namely the perspective of New Structural Economics: “one centre, three basic points”.

At the same time, researchers must have the right outlook on life. The purpose of research is to understand the world and, through that understanding, help people transform the world for the better and promote social progress. This is the most important goal, perhaps even the only goal. Whether a paper can be published is not the main concern.

I emphasise this because, while it is undeniable that the nearly ten years since the General Secretary’s speech at the Symposium on Philosophy and Social Sciences Work have given fresh momentum to autonomous theoretical innovation, such innovation remains, overall, at an early stage. New Structural Economics started relatively early, but it has existed for only 38 years. If you search the literature today, there is still not much related research. Moreover, the editors and reviewers of current journals still largely adhere to the mainstream paradigm, making it difficult to publish articles that put forward original theoretical innovations.

If what you are aiming for is publication, you are very likely to give up on autonomous innovation. And if that is your starting point, it will be difficult for you to seize the theoretical opportunities created by China’s rise as one of the world’s major centres of economic research.

Therefore, to meet the demands of this era, you must have both the right worldview and the right outlook on life. You must be clear about the purpose of research: to understand the world yourself, and then to help others change it for the better and advance social progress. This is the most important goal—perhaps even the only one.

I believe that, as China’s national strength continues to grow through reform and opening up, and as the centre of the world economy shifts towards China, the research centre and direction of innovation in world economics will inevitably shift towards China as well. The great masters who lead the development of world economic theory will also gather in China. We live in an extremely fortunate era. The General Secretary’s call for autonomous innovation ten years ago has created a favourable external environment for us.

I am also particularly pleased that the journal New Structural Economics has been approved for formal publication. This channel will provide all colleagues and young friends committed to autonomous theoretical innovation in New Structural Economics with a platform to publish their work, exchange ideas, and learn from one another.

Finally, allow me to conclude with the General Secretary’s words at the Symposium on Philosophy and Social Sciences Work: “This is an era that needs theory and will certainly produce theory; this is an era that needs thought and will certainly produce thought. We must not fail this era.”

Let us take this as mutual encouragement. Thank you.

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Pekingnology

Justin Yifu Lin: The Basics of New Structural Economics

This article is a comprehensive introduction to new structural economics, as articulated by its proposer, Justin Yifu Lin, former Senior Vice President and Chief Economist of the World Bank (2008-2012…

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3 years ago · 7 likes · Siyan Nan, Shangjun Yang, Peiyu Li, and Zichen Wang

His grave, compassionate account is a rare Chinese eyewitness narrative from that first night, showing how narrowly Ukraine’s survival seemed to hang in the balance.

Ding is now retired from diplomatic service. Publicly available records as recently as December 2025 identified him as a researcher at the Eurasian Social Development Institute under the Development Research Centre of China’s State Council.

Ding studied Russian literature at the People’s Liberation Army (PLA) Nanjing Institute of Foreign Languages, now the College of International Studies at the National University of Defense Technology, before completing two years of military service in 1987.

The article was published on the WeChat blog 永久的心路 on 2 June 2026.

We also put out translations of Ding’s other accounts on Pekingnology and The East is Read.

基辅亲历：那一夜，上帝拯救了乌克兰

Kyiv Firsthand: The Night God Saved Ukraine

On 24 February 2022, Russia-Ukraine war broke out.

By the time night fell over Kyiv, this thousand-year-old East Slavic city was no longer the place it had been.

At 11 p.m., the whole city sank into a deathly silence. A citywide curfew had been imposed, and the power had been cut to avoid missile strikes. Kyiv lay in total darkness. Now and then, a bomb tore across the sky, leaving behind a brief, piercing flash, before everything slipped back into the endless dark. From time to time, the rumble of armoured vehicles could be heard in the distance, dull, oppressive, like the breathing of some enormous beast.

It was in this darkness that, in Mariinsky Park, just beyond the wall from where we were, fierce gunfire suddenly broke out.

Machine guns, submachine guns, grenades—the sounds of every kind of weapon blended together, punctuated by screams and shouted commands. The gunfire crackled in rapid succession. Bursts of explosive light flickered in the dark, throwing the outlines of the trees into sudden relief. The exchange lasted for more than forty minutes, and then stopped all at once, as if nothing had happened. Only the night wind went on blowing, carrying with it the smell of gunpowder and blood.

That night, all of us listened tensely to every movement outside the window. Fearing stray bullets, no one dared turn on a light, still less go near the window. We could only judge the course of the fighting by the direction of the gunfire—now close, now distant, now seeming to close in from every side. Every second felt stretched without end.

Only later did our Ukrainian friends tell us what had really happened in that battle.

As it turned out, on the very first day of the war, a Russian special forces unit had successfully landed on the outskirts of Kyiv. This elite detachment of several dozen men slipped quietly into the city under cover of night. Their objective was unmistakable: to head straight for the Ukrainian Presidential Office and carry out a decapitation strike.

Under the plan, they were to cross Mariinsky Park at night, since the park lies less than one kilometre from the presidential office. Once they had passed through that belt of greenery, the presidential compound would have been right before them.

But as they entered the park, Ukrainian guards posted around the Verkhovna Rada, the Ministry of Health, and the Central House of Officers spotted them. A fierce firefight followed immediately. The Russian special forces were highly trained, but the Ukrainian guards, using the buildings inside the park as cover, held them off with stubborn resistance. The battle lasted nearly an hour. In the end, the entire Russian special forces unit was wiped out.

It was that close.

Had that unit made it across Mariinsky Park; had they broken through the defence line a little faster; had the Ukrainian guards failed to spot them in time—the history of the war might have been written differently. Had the Presidential Office fallen, the consequences would have been too grave to contemplate. The whole course of the war might have taken another turn.

Afterwards, many Ukrainians said, “God saved Kyiv.”

Behind those prayer-like words lay the relief of having survived catastrophe, and the aftershock of fear that came with realising how narrowly disaster had been averted. That night, Kyiv was only one kilometre from falling. That night, the war stood on the edge of a very different ending.

The war has now lasted more than four years. Looking back, people may remember the great counteroffensives that shifted the course of the fighting, the fierce debates at international summits, and the events that shook the world. Yet sometimes, history is turned by a single night, a single park, and a small detachment that never made it through.

History is often like this. Beneath the great tide lie countless moments of “almost”. And it is precisely these almosts that, in the end, converge into the outcome we see today.

That night, the gunfire in Mariinsky Park woke Kyiv, and it woke the world. It reminded everyone that in war, victory is never written in advance. Between defeat and survival, there may be only a wall, a grove, a timely discovery, or a desperate stand.

Whether God truly saved Kyiv, no one can truly say. But one thing is certain: that night, the ordinary Ukrainian guards posted around the Verkhovna Rada, the Ministry of Health, and the Central House of Officers used their flesh and blood to stop a blade aimed straight at the city’s heart. They were the true guardians of Kyiv.

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Pekingnology

Inside China’s Embassy in Kyiv as War Broke Out

The two following essays were published on the WeChat blog 永久的心路 on 26 and 28 April 2026, respectively. They remain accessible on May 1, 2026…

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3 months ago · 83 likes · 14 comments · Yiyang Xu, Yuxuan JIA, and Zichen Wang

In his latest interview, Liu placed this argument within a broader critique of overreliance on investment-led stimulus. The transcript of the interview was published on the official WeChat blog of Tencent Finance on 8 May 2026.

Liu has agreed to this translation and publication.

经济学家刘世锦：给1.8亿农民涨养老金 比大搞投资管用

Economist Liu Shijin: Raising Pensions for 180 Million Rural Residents Would Be More Effective Than Investment-Led Stimulus

“To address weak final demand, policy must start from a first principle: resources should be concentrated, and both policy priorities and funding should be directed squarely at boosting final demand,” Liu Shijin said.

Liu also cautioned against the view that China can rely on ever-larger macroeconomic stimulus to lift growth, calling it a misunderstanding of what policy can achieve. “If growth could be restored simply by making macro policy loose enough, and if it were really that straightforward, then the whole economic problem would be very easy to solve,” he said.

On 16 April, the National Bureau of Statistics released China’s Q1 economic data. GDP reached 33.42 trillion yuan, up 5.0 per cent year on year, a clear improvement from the 4.5 per cent recorded in Q4 last year. Stronger-than-expected exports, robust industrial data, and the early rollout of macroeconomic policy support were among the main factors behind the better Q1 performance.

But behind the 5.0 per cent growth figure, the structural imbalance of “strong supply and weak demand” has not been fundamentally resolved. Where, then, should China’s growth momentum come from? And where should macro stimulus funds be directed?

In an interview with Tencent Finance’s Elite’s Talk, Liu Shijin, former Vice President of the Development Research Centre of the State Council, said that any assessment of the current economy must be based on “a holistic or systemic perspective”. It is essential, he said, to distinguish “which problems are derivative and which are root causes”.

In his view, problems such as nominal growth falling below real growth and persistently weak prices are all “secondary effects”. There is only one true root cause: insufficient final demand.

What is the key to breaking this deadlock? Liu’s answer is clear: raise the incomes of middle- and low-income groups, especially rural residents.

He cited one set of estimates. China’s basic old-age insurance scheme for urban and rural residents currently covers 550 million people, more than 95 per cent of whom are rural residents. Among its 180 million recipients, the average monthly pension is only 249 yuan. That is far below the “more than 6,000 to 7,000 yuan [887-1,034 U.S. dollars]” received by retirees from urban Party and government organs and public institutions, and the “more than 3,000 yuan [443 U.S. dollars]” received by retired urban enterprise employees.

“If the pension could first be raised to 600 yuan, which is roughly the current level of the Rural Minimum Living Standard Guarantee (Rural Dibao), and then to 1,000 yuan, the demand generated would lift GDP growth that year by about 0.8 to 1 percentage point,” he said.

Liu suggested accelerating the transfer of part of state-owned capital into social security funds, or allocating a relatively large share of the annual fiscal stimulus package to raising the incomes of low-income groups.

For Liu, social welfare is never merely a welfare issue. Raising the incomes of middle- and low-income groups, he said, is both a long-term social policy issue and a short-term macroeconomic growth issue. If progress is too slow, short-term growth will be affected.

On macroeconomic policy, Liu stressed that money must be “put in the right place”. “The effectiveness of stimulus policy will vary greatly,” he said, depending on whether it is used at the end of the chain, in intermediate links, or at the source—namely, final demand.

For this reason, Liu remains cautious about calls for investment-led stimulus. The precondition for expanding effective investment, he argued, is first to raise the level of final demand.

The following are highlights from Liu Shijin’s interview.

I. Insufficient Final Demand Is the Root Cause

Elite’s Talk: China’s economy grew by 5.0 per cent year on year in the first quarter, marking a solid start to the year. But Mao Shengyong, Deputy Commissioner of the National Bureau of Statistics, also said frankly that “the domestic imbalance of strong supply and weak demand remains pronounced.” How do you assess the current economic situation?

Liu Shijin: To analyse the current economic situation, we need a holistic or systemic perspective. We must be clear about which problems are derivative and which are root causes.

In my research over the past few years, I have put forward the concept of “final demand”. What does final demand mean? GDP, or gross domestic product, refers to the sum of value added across the economy over the course of a year. It is also known as final output.

Strictly speaking, however, it is not truly final, because part of it consists of productive investment, which then re-enters the production process. This portion therefore needs to be excluded. What remains after that is goods consumption, services consumption, and another category of non-productive investment, which we may call consumption-oriented investment. Together, these make up final demand.

There are many links in the operation of the national economy, but final demand is the most important outlet. It is both the starting point and the destination of economic activity.

In previous years, China’s non-productive investment, or consumption-oriented investment, mainly consisted of livelihood-related real estate, infrastructure, and parts of the services sector. For a long time, as is well known, China’s real estate sector expanded rapidly, as did infrastructure investment. Over the past couple of years, however, the picture has changed. The property sector has slowed sharply, and infrastructure investment is also struggling to maintain its previous pace of growth.

Against this backdrop, the gap between China’s consumption share of GDP and the international average—about 20 percentage points—has become much more apparent. In the past, this gap was not easy to see. In a sense, it was masked by the expansion of the property sector. Once real estate slowed, however, the gap was inevitably exposed. Once exposed, the growth of final demand in the national economy slowed markedly. In effect, this amounts to a relative contraction.

A series of phenomena and problems in the current economy—nominal growth falling below real growth, persistently weak prices, overcapacity in some sectors, rising debt burdens, and consumption downgrading among urban white-collar groups—are all secondary effects. Insufficient final demand is the root cause. Many other problems are derived from it.

II. Raising Rural Pensions to 1,000 Yuan Could Lift GDP Growth by Around 0.8 to 1 Percentage Point

Elite’s Talk: You said that insufficient final demand is a “root cause”. Where, then, is the key breakthrough point?

Liu Shijin: To address weak final demand, policy must start from a first principle. What does that mean? It means resources should be concentrated, and both policy priorities and funding should be directed squarely at boosting final demand.

A large part of the problem lies with China’s middle- and low-income groups, especially rural residents, whose incomes remain relatively low. Weak consumption ultimately reflects weak income growth. Raising their incomes, therefore, requires measures to strengthen social protection, including one issue that has attracted considerable discussion: rural pensions.

China has a basic old-age insurance scheme for urban and rural residents, covering 550 million people, more than 95 per cent of whom are rural residents. At present, around 170 million to 180 million people are receiving pensions under that scheme. How much do they receive each month? The figure is 249 yuan [36.8 U.S. dollars].

By comparison, retirees from urban Party and government organs and public institutions receive more than 6,000 to 7,000 yuan [887-1,034 U.S. dollars] per person on average, while retired urban enterprise employees receive more than 3,000 yuan [443 U.S. dollars] per person on average. The gap between farmers and these groups is very large.

The low level of the basic old-age insurance scheme for urban and rural residents affects not only the living standards of pension recipients. It also directly and indirectly constrains the consumption of more than 300 million employed people who are still working. According to preliminary estimates, it affects the consumption level of roughly half of China’s population.

If this pension level were raised, the boost to economic growth would be very significant. We have done some research and estimates. For example, if the current level of just over 200 yuan were raised in two steps—first to 600 yuan, which is roughly the current level of the Rural Minimum Living Standard Guarantee (Rural Dibao), and then to 1,000 yuan, the demand generated would lift GDP growth that year by about 0.8 to 1 percentage point.

Several proposals are already being discussed. One option is to transfer part of state-owned capital into social security funds. Another is to use a portion of the annual fiscal stimulus package for this purpose. For example, allocating 1 trillion yuan would raise rural residents’ monthly pensions from just over 200 yuan to more than 400 yuan. That would provide a clear boost to domestic demand and, in effect, raise the level of final demand.

III. Social Welfare Is Also a Short-Term Growth Issue

Elite’s Talk: Some people argue that farmers’ pensions cannot be raised too quickly. How would you respond?

Liu Shijin: There are indeed different views on this issue. But it is important to recognise that this is both a social welfare issue and an urgent question of economic growth.

On one level, the government and society should care for vulnerable groups, help low-income people raise their incomes, and improve their access to basic public services.

On another level, it is also an immediate growth issue. Last year, China’s real GDP growth was 5 per cent, yet nominal growth was only 4 per cent—1 percentage point lower. Why? Because demand was insufficient. And where did that shortfall in demand come from? From the insufficient final demand I just discussed.

Improving social welfare and raising the incomes of low-income groups will, at the macro level, translate into higher aggregate demand. Once aggregate demand rises, it can help achieve the planned growth target. On the one hand, economic growth needs to reach 5 per cent. On the other hand, nominal growth should be equal to, or even higher than, real growth.

IV. Bigger Stimulus Is Not Necessarily Better; Money Must Be Put in the Right Place

Elite’s Talk: When it comes to macroeconomic policy, there is a great deal of discussion in the market about the size of stimulus measures and where the money should go. How do you view the role and limits of macro stimulus?

Liu Shijin: Macroeconomic stimulus is meant to address short-term economic balance and stability. It cannot solve the problem of growth momentum.

At the current stage, China’s relatively low consumption rate has much to do with the structure of household demand. If households are grouped into ten income deciles, the gaps between those deciles are quite large. That is what is usually meant by a high Gini coefficient. In such circumstances, both the overall marginal propensity to consume and the average propensity to consume tend to be low.

Solving this problem requires reform of the income distribution system. But it is difficult to make major progress in the short term. That is why macroeconomic policy should be used, at least in the short term, to ease or partially address the problem of insufficient consumption.

Given a certain amount of stimulus funding, where exactly should it go? Should it be used at the end of the chain, in intermediate links, or at the source—namely, final demand? The effectiveness of stimulus policy will vary greatly depending on this choice.

There are two points here.

First, when it comes to stimulus, bigger is not necessarily better. If growth could be restored simply by making macro policy loose enough, and if it were really that straightforward, then the whole economic problem would be very easy to solve.

Macroeconomic policy, whether monetary or fiscal, can boost overall economic activity by injecting additional stimulus. But that only helps stabilise the economy and restore short-term balance. It does not create the ultimate drivers of long-term growth.

Second, when the size of the stimulus is fixed, the key question is where the money should go. The same first-principles logic still applies: funds should be directed towards final demand. That is where they can generate the strongest demand effect and deliver relatively high efficiency.

This, I think, is the issue we need to focus on now.

V. Avoid Ineffective Investment and Invest Where There Are Returns

Elite’s Talk: Another widely debated view is that investment-led growth remains more effective in the short term. How do you see the relationship between investment and consumption?

Liu Shijin: The central authorities have repeatedly stressed the need to prevent ineffective investment. What we need is investment backed by demand and capable of generating returns.

Investment does play a major role in supporting overall economic growth. But the precondition is that there must be demand.

Where does that demand come from? As I said earlier, final demand must first be raised. Only after that can investment truly expand. Much of the current debate still shows a strong bias towards investment, driven by the belief that it produces quick results. But if final demand does not rise and consumption remains weak, further investment will only worsen overcapacity and increase the associated debt burden.

So, to truly expand investment, the first step must be to raise final demand. Once final demand rises, capacity utilisation will improve as well. In some sectors, capacity may then become insufficient, creating a need for additional investment. Only then will investment be backed by genuine demand and capable of generating returns.

From the perspective of the national economic cycle, this is the basic logic behind expanding effective investment. This point must be made clear. In practice, the relationship between investment, consumption, and growth must be managed properly, and China’s various sources of growth potential should be better identified and put to use.

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Pekingnology

China’s Farmers’ Pensions and the Politics of Waiting

In 2025, the worst post I wrote was a speculative one: I guessed that the Communist Party of China Central Committee might use its recommendations for the 15th Five-Year Plan to signal a substantial increase in the urban and rural residents’ pension, a benefit received mainly by elderly farmers. That did not happen…

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4 months ago · 15 likes · 5 comments · JINGYUAN JIANG, Yuxuan JIA, and Zichen Wang

Pekingnology

Investing in people, in Rmb20 instalments

At China’s annual Two Sessions, discontent is usually filed down into ceremony. Delegates praise, endorse, and occasionally offer carefully padded suggestions. They are not meant to look as though they are rebelling against the headline promises of the…

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5 months ago · 56 likes · 4 comments · Zichen Wang

Pekingnology

Calls to address pension inequality grow

A retired top financial regulator has lent his support to the growing calls for the Chinese government to significantly increase pension payouts for its farmers. In a high-profile national forum, he advised that Beijing should bridge the gap between the pensions of farmers and urban retirees…

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a year ago · 25 likes · 1 comment · Zichen Wang

Trump has buried liberal world order but what comes next could be better

The US and China have an opportunity to move beyond ideological confrontation towards coexistence, strategic stability and managed competition

The two terms of US President Donald Trump have shaken the old style of US liberal internationalist leadership. Yet, as some doors close, others open. The summit between President Xi Jinping and Trump in Beijing last month suggests that the United States and China might now have an opportunity to move beyond ideological confrontation and towards a more realistic framework of coexistence, strategic stability and managed competition.

For decades, Washington has held global primacy and pursued a liberal internationalist foreign policy of promoting democracy, open markets and stewardship of global institutions. Trump’s more realist foreign policy has been more transactional, sovereignty-centred and more openly sceptical of the post-war order.

Its focus on tariffs, alliance burden-sharing and resistance to Western progressive social values has changed the narrative that American power serves a universal project larger than itself. Further, even if Trump left office tomorrow, his tenure has made any future attempt to re-embrace old-style liberal internationalism less credible.

Nowhere is this clearer than in the transatlantic partnership. The Trump administration’s criticism of Europe’s reliability, defence posture and direct interference in European politics has weakened the idea that the Atlantic alliance can remain the unquestioned core of global order. Europe’s pursuit of strategic autonomy is now part of a wider reassessment of a world no longer disciplined by US-led blocs.

Multipolarity has also arrived. Middle powers are hedging, alliances are looser, regional institutions matter more and countries across the Global South increasingly resist fixed ideological camps. That creates an opening: with strategic stability newly recognised, the US and China can work to avoid the Thucydides Trap and the Kindleberger Trap.

Avoiding the Thucydides Trap – describing the potential danger when a rising and an established power come into conflict – requires both changing the narrative and de-securitising the relationship. Yet, this trap is by no means an ironclad law that cannot be crossed but, rather, is a subjective construct.

And, while national security concerns are real, they cannot justify cutting every commercial, technological, educational and diplomatic link. Thankfully, the recent Xi-Trump summit has started to move things in the right direction, with three more in-person high-level meetings planned for this year. If the two nations can keep the momentum going, a mutually destructive and pointless war can be avoided.

One priority is establishing a dialogue between these leading powers on the global governance of artificial intelligence (AI). This is vital to reduce the risks of AI weaponisation and misuse, and to get to grips with the upheavals in daily life that AI could bring.

There is also space for selective security cooperation. China and the US have overlapping interests in preventing an escalation of the Iran war, advancing a political settlement to Russia’s war with Ukraine, denuclearising the Korean peninsula and preserving stability across the Taiwan Strait.

China’s relations with Iran and Pakistan give it channels Washington lacks, as demonstrated by the high-level exchanges involving Islamabad and Tehran last month. The US should also avoid using Taiwan as a bargaining chip, support peaceful cross-strait dialogue and reaffirm that it does not support secessionism.

The second danger is the Kindleberger Trap. Named after Charles Kindleberger’s account of the disastrous 1930s, it describes the breakdown of the global order when the established power no longer provides public goods, while the rising power is not yet ready, accepted or empowered to do so. If the US retreats from global governance and China’s contributions are treated as threats, the result will be a governance vacuum.

Beijing has made it clear it is willing to do more. Its five major initiatives – which span the Belt and Road Initiative, development, security, civilisation and global governance – form part of a broader effort to supply development finance, security dialogue, cultural exchanges, infrastructure connectivity and institutional reform.

Last year, China pledged an additional US$500 million over five years for the World Health Organization as global health financing comes under strain. At the World Trade Organization, it has supported the Multi-Party Interim Appeal Arbitration Arrangement, helping to preserve rules-based dispute settlement while the body’s appellate mechanism remains paralysed.

Beijing has also moved to institutionalise mediation as a tool of global governance. In May last year, China and more than 30 other countries signed the Convention on the Establishment of the International Organisation for Mediation in Hong Kong.

Tariff-free treatment for exports from 53 African nations and regional summits with nations from Africa, Latin America, Central Asia, the Gulf states and Southeast Asia all point in the same direction: China is offering the world new development opportunities, market access and a fresh institutional voice.

Instead of engaging in competition, a better direction would be to embrace the narrative of human security and the concerns of human development to transcend the overextension of national security concerns. All countries can benefit in a world where global public goods are supplied by more than one power and through more than one institutional pathway. A system that excludes either will be unstable; a system that allows both to contribute will be more resilient and more prosperous.

The US and China must continue to move away from disordered competition and towards more managed competition and the Olympic ideal of competition that drives us towards self-improvement, to go “faster, higher, stronger – together”. In this way, the world can avoid the Thucydides Trap and the Kindleberger Trap and instead embrace the alternative of a more prosperous and secure world.

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Pekingnology

Henry Huiyao Wang: From Strategic Rivalry to Strategic Stability

Below is the latest comment by Henry Huiyao Wang, Founder of the Center for China and Globalization (CCG), on the outcome of U.S. President Donald Trump’s meeting with President Xi Jinping…

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2 months ago · 14 likes · 1 comment

Pekingnology

Henry Huiyao Wang on building mechanisms for managed interdependence

Below is the latest comment by Henry Huiyao Wang, Founder of the Center for China and Globalization (CCG), on U.S. President Donald Trump’s upcoming visit to China…

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3 months ago · 21 likes · 3 comments

Pekingnology

Henry Huiyao Wang on How China’s patient diplomacy can help secure peace in Iran

Henry Huiyao Wang, founder and President of the Center for China and Globalization (CCG), wrote on Wednesday, April 22 in his opinion column in the South China Morning Post…

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3 months ago · 24 likes

Pekingnology

Henry Huiyao Wang: Middle powers are taking up the mantle of multilateral leadership

Henry Huiyao Wang, founder and President of the Center for China and Globalization (CCG), wrote in his opinion column in the South China Morning Post on Wednesday, March 25…

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4 months ago · 18 likes · 3 comments

The most visible fallout came at Tongji University, a leading Shanghai university, which removed the dean of its School of Life Science and Technology after finding academic misconduct in a Nature paper the blogger had challenged. Nankai University, Sun Yat-sen University, and Shanghai University have also opened investigations into scholars he questioned.

The blogger, known online as “Geng Tongxue Tells Stories,” is a former doctoral candidate at Beihang University in Beijing. He left the programme in 2025, citing growing disillusionment with a publish-or-perish research culture that, as he put it, rewarded flashy papers more than meaningful science.

From April 9 to May 12, Geng publicly questioned papers involving five prominent scholars at four universities. Some of those named hold some of China’s most coveted academic titles, including recipients of the National Science Fund for Distinguished Young Scholars.

The videos quickly spread far beyond academic circles. By 14 May, his Bilibili account had more than 1.8 million followers and about 230 million total views, while his Douyin [China’s equivalent of TikTok] account had 1.34 million followers. What might once have remained a narrow dispute over figures, images, and laboratory data has become a public reckoning over how Chinese academia rewards papers, grants, titles, and institutional prestige.

The controversy has since reached China’s state media, a sign that the issue has moved beyond a handful of disputed papers and is increasingly being treated as a symptom of deeper problems in the academic system. Xinhua News Agency, China’s official news agency, gave Geng a platform, publishing an interview that appeared supportive of his efforts to expose academic misconduct. People’s Daily Online also weighed in, pointing to weaknesses in academic oversight, pressure from rankings, project targets, opaque review procedures, and some institutions’ tendency to protect their own reputations.

In China’s academic system, papers, journal rankings, and grants often decide who wins elite labels such as Distinguished Young Scholar or Cheung Kong Scholar, with election to the Chinese Academy of Sciences or the Chinese Academy of Engineering standing at the top of the hierarchy. Those “talent hats” can then bring larger laboratories, more public funding, greater institutional status, and wider control over academic resources—but often, too, less scrutiny.

The same concern has echoed in the Chinese public debate. One influential expression of that view came from Wang Mingyuan, a researcher at the Beijing Reform and Development Research Association, who published a commentary on 21 May on the WeChat account Fuchengmen No. 6 Courtyard (阜成门六号院). In Wang’s view, once universities are run like factory production lines, academic life is reduced to a bureaucratic ledger of papers, projects, grants, and titles—a system that compacts the soil of academic life and drains it of the nourishment needed for originality.

Lastly, an update on Geng Tongxue. In a video released on 27 May, he made fresh allegations of misconduct involving papers by prominent academics, among them Distinguished Young Scholar recipients, university deans, and a candidate for membership in the Chinese Academy of Engineering. He said he had reviewed only about one-tenth of Distinguished Young Scholar recipients and had already found, in his words, a “bumper harvest” of problems. But he also said he would stop reporting alleged misconduct directly to the scholars’ institutions, citing concerns over his family’s safety.

—Yuxuan Jia

中国学术的泡沫化、绩效网格化和板结化

The Publication Bubble, Bureaucratic Metrics, and the Stifling of Chinese Academia

Strip away the thick froth of inflated academic rankings, and a harder truth emerges: despite China’s extraordinary progress over the past two decades, the country still trails the United States by a wide margin in basic research, frontier technologies, and top-tier scientific achievements. In many respects, China remains in the second tier of global science, alongside countries such as Britain, Germany, and Japan.

The greatest value of academic and intellectual work lies in originality, not in the sheer volume of output. By nature, it resists precise measurement and is especially ill-served by fixed quantitative indicators. An overly bureaucratic, metric-driven evaluation regime risks compacting the soil of academic life, stripping it of the nutrients needed for intellectual growth.

The blogger “Geng Tongxue Tells Stories” has criticised prominent professors at elite universities, including recipients of the National Science Fund for Distinguished Young Scholars, for padding papers and fabricating data. His criticism exposes academic corruption and the “Great Leap Forward” in paper production. Judging from close observation of people around me, as well as from my broader analysis of China’s science and technology data over the past two years, these concerns feel deeply familiar.

Over the past two or three decades, treating academia like a factory production line and reducing scholarship to the manufacture of papers has become a common malaise in global higher education. In 1990, the world produced roughly 620,000 SCI-indexed papers. By 2024, that figure had risen to more than 2.3 million. The number of papers published over the past fifteen years exceeds the total output of the previous five thousand years of human civilisation. The number of papers included in Nature Index journals rose from around 56,000 in 2014 to about 100,000 in 2024, nearly doubling in just a decade.

Needless to say, this does not mean that science and technology have advanced dramatically in such a short period, or that humanity has suddenly discovered far more truths and created far more knowledge. It means, rather, that the academic factory has produced more standardised parts to bureaucratic specifications, many of them with little real novelty. Indeed, genuinely original and intellectually substantive work may have become much less common. The attacks on universities by American conservative politicians, along with repeated calls by some entrepreneurs to do away with universities, especially the humanities, are in part a reaction to the corruption and declining quality of global academia.

In China, this distortion has reached an extreme. During the Cultural Revolution, the country swung to the opposite pole, denouncing academic publishing as part of the “bourgeois white expert line”—a label used to attack technically competent but politically unreliable intellectuals. Most academic journals in the country were shut down, and China went an entire decade without publishing a single international paper. After reform and opening up, China became acutely aware that it had fallen behind. To improve university rankings, it began actively encouraging faculty members to publish papers. Over time, this turned into publishing for the sake of publishing and ranking for the sake of ranking. Backed by China’s enormous pool of human resources, the number of papers then expanded explosively.

Take SCI-indexed journal articles. In 1992, China published just over 6,200 of them. By 2024, the figure had reached 867,000, an almost 140-fold increase, far outpacing GDP growth. To be fair, China’s publication output was unusually low in the early reform period, and part of this rise reflected a genuine process of catch-up, until around 2010. But by 2015, China was already publishing 229,700 SCI papers a year. In the next nine years, that figure nearly tripled, adding about 640,000 papers, roughly equivalent to the entire annual publication output of Europe. This does not mean that the research capacity of Chinese universities tripled, nor that China produced, in just nine years, scientific progress equivalent to the output of the whole European research system.

In the CWTS Leiden Ranking Traditional Edition, Chinese universities take 16 of the world’s top 20 spots when institutions are ranked by the number of publications among the top 50 per cent most cited in their field and year. This is an unparalleled quantitative advantage, even greater than the dominance enjoyed by American universities in the second half of the twentieth century. Zhengzhou University, for example, already ranks 25th globally by publication volume, ahead of Stanford and Oxford. And this ranking is based on data from 2020 to 2023. If the latest data were used, China’s advantage would likely appear even more pronounced.

The same ranking also shows that Jiangsu University, hardly regarded as one of China’s elite universities, has already surpassed long-established global institutions such as the University of Chicago, McGill University, Purdue University, and the University of Hong Kong in terms of publication volume. Jinan University, little known even in Shandong Province, ranks only one place below the Chinese University of Hong Kong internationally. One might ask whether those top-scoring students from Shandong who chose to study in Hong Kong should now regret their decision.

Looking at the Nature Index, which tracks higher-quality papers, from 2014 to 2024, China’s publication count rose from 5,022 to 32,122. In 2024, 892 universities in the Chinese mainland published papers included in Nature Index journals, accounting for 17 per cent of all institutions globally and more than 30 per cent of total papers. Among the world’s top 100 universities in the Nature Index, 42 were from the Chinese mainland. The rankings produce revolutionary scenes: Sichuan University ranks above Stanford, Jilin University above MIT, South China University of Technology above Oxford, and Nantong University appears broadly comparable to National Taiwan University and Northeastern University in the United States.

Global university ranking organisations and leading academic publishers have also profited handsomely from the Chinese market. Web of Science established a consulting company in China, Clarivate Analytics Information Services (Beijing) Co., Ltd. Nature has set up a dedicated Chinese-language website. In the first half of 2025 alone, Chinese authors reportedly paid around RMB 140 million in article processing charges to Nature Communications. China has become both the most obedient participant in this academic evaluation system and its richest market.

Yet if one adjusts the parameters in scientific publication databases even slightly, the true quality behind China’s supposed status as the “world’s No. 1 research power” becomes much clearer. Measured by the proportion of SCI papers ranked in the global top 10 per cent by citation impact, the top five institutions are all American universities. Among the global top 20, 11 are American and four are British. From the Chinese-speaking world, only Hong Kong Polytechnic University and City University of Hong Kong enter the global top 50, while the Chinese University of Hong Kong and the Hong Kong University of Science and Technology rank between 50th and 60th. Tsinghua University ranks 73rd globally, while Peking University ranks 164th. This is also one reason many outstanding students still choose to study in Hong Kong.

If the standard is made stricter still, and only papers in the global top 1 per cent are counted, Chinese universities and research institutions remain far behind their American and European counterparts. Between 2020 and 2023, the Chinese Academy of Sciences published more than 100,000 SCI papers, but only 1,525 entered the global top 1 per cent, a rate of just 1.4 per cent. Stanford University, by contrast, had a top-1-per cent rate of 3.8 per cent. Although Stanford published only 47,168 papers in total, 1,813 of them reached the global top 1 per cent. Among the world’s top 20 institutions by the number of top-1-per-cent papers, 11 are American and four are British.

Measured by the proportion of top-1-per cent papers, the performance of Chinese universities and research institutions becomes even more sobering. Only Bohai University enters the global top 100, but this is largely due to statistical distortion. Bohai University publishes relatively few papers overall, ranking outside China’s top 350 institutions, and its small base artificially raises the probability of a high top-1-per cent ratio. In practical terms, the highest-ranked institution from the Chinese-speaking world is the Chinese University of Hong Kong, which ranks 109th globally with a rate of 2.7 per cent. Tsinghua ranks 204th, Peking University 327th, and the Chinese Academy of Sciences—the world’s largest producer of papers—ranks only 765th.

Among the global top 20 by this metric, 10 are American universities and five are British. The top three are MIT, Stanford, and Princeton.

Take papers published in Nature itself. To generate commercial value, Springer Nature has in recent years promoted the so-called Nature Index, an expanded ranking system in which China’s position has risen rapidly. China’s Nature Index score has now exceeded 60 per cent of the U.S. level and is roughly four times that of the United Kingdom. But if one looks only at Nature itself, China still trails far behind the United States and remains below Britain. Last year, U.S. researchers published 1,431 papers in Nature, compared with 506 by British researchers and 471 by Chinese researchers, only slightly ahead of Germany’s 422.

Strip away the thick froth of inflated academic rankings, and a harder truth emerges: despite China’s extraordinary progress over the past two decades, the country still trails the United States by a wide margin in basic research, frontier technologies, and top-tier scientific achievements. In many respects, China remains in the second tier of global science, alongside countries such as Britain, Germany, and Japan.

The basic structure of global scientific competitiveness has not fundamentally changed. That is a reality China should confront with more sobriety.

Over the past couple of years, some scholars and experts have repeatedly claimed that the global centre of science and technology has shifted from the United States to China. The claim does not stand up to reality. Thanks to its vast market and dynamic technology companies, China has indeed become one of the world’s major centres for industrial R&D and technological application. But in science and technology research, the gap with developed countries remains large. Industrial rise depends on economic-system reform, which China has managed remarkably in the past. The rise of basic research and original innovation, however, depends on reforming the education system and the governance institutions of scientific research. On that front, China has made little progress over the past two decades.

No country in history has possessed scientific human resources on the scale that China does today. In 2025, China admitted more than 170,000 new doctoral students, roughly equal to the combined total of the United States, the European Union, and Japan—about 60,000, 100,000, and 12,000, respectively. To fundamentally overcome technological chokepoints, China must reform its university hiring systems, evaluation mechanisms, and student training models to genuinely encourage originality.

Academic and intellectual work, by nature, resists precise measurement and is especially ill-served by fixed quantitative indicators. Laozi produced the roughly 5,000 characters of the Tao Te Ching over a lifetime. Goethe spent forty years completing Faust. Several Japanese Nobel laureates over the past decade did not speak English fluently and had not published papers in international journals. Under today’s academic evaluation system, they would all have been filtered out.

The deepest value of academic and intellectual work lies in even the smallest measure of originality, not in piles of standardised papers and monographs. But originality needs unhurried time, independent thought, and an open intellectual and social environment in which it can take root.

If academia is managed like a factory assembly line or a bank-teller system, with bureaucratic indicators covering project rankings, funding, publication counts, titles, and countless other metrics, the result is a profound distortion of scholarship and a serious insult to intellectual creativity. Applied to teachers, researchers, and graduate students, such a box-ticking, metric-driven evaluation regime risks compacting the soil of academic life, stripping it of the nutrients needed for intellectual growth.

The current evaluation and training system will only reduce the efficiency with which China uses its intellectual resources. China may train more than three times as many PhDs as the United States, but its capacity for research, invention, and original creation will hardly rise by anything like the same multiple. Such a system only produces “professional practitioners of academic and research activities”—people skilled at managing relationships, chasing research grants, winning national projects, and accumulating titles. It does not help truly gifted minds emerge. Under such a system, figures such as Qian Sanqiang [father of the Chinese nuclear programme] and Chen Jingrun [Chinese mathematician] would very likely have been buried.

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Inside China

Wang Mingyuan: Rethinking Meritocracy in China

For decades, meritocracy has been regarded as the core engine driving China’s leapfrog development. Within the economic system, this mechanism rewards diligence, competence, and efficiency, tightly linking individual effort to material reward and ensuring that the public’s pursuit of an abundant material life is fulfilled…

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3 months ago · 13 likes · 2 comments · Fred Gao