Where does China's production capacity come from?

Estimated reading time: 6 minutes

By Zhong Caiwen, People's Daily

China is a developing country with a population of over 1.4 billion. The fundamental purpose of its production is to meet the ever-growing expectation of the people for a better life.

Since the reform and opening up, China has transitioned from a planned economy to a socialist market economy, which has boosted production in different sectors and enhanced its supply capabilities.

As China's economy continues to grow steadily and with the incremental upgrading of Chinese industries, the potential of China's domestic demand has been consistently expanding and unleashed, which will enhance production capacity in a cycle of mutual reinforcement.

China boasts a large and steadily expanding middle-income group, with per capita GDP surpassing $12,000, creating a huge consumer market.

In 2023, China's total retail sales of consumer goods exceeded 47 trillion yuan ($6.5 trillion), with final consumption expenditure contributing 82.5 percent to economic growth. Consumption has become the main engine driving economic growth and the primary driver of China's expansion of production capacity.

Over the past few years, China has been the world's largest consumer of automobiles, home appliances, clothing, and jewelries, among others. This wouldn't have been possible without massive domestic production capacity, as relying solely on imports wouldn't have been enough.

Technological innovation and enhanced production efficiency are the driving forces of China's production capacity.

Innovation serves as the engine of productivity. China adopts the innovation-driven development strategy and keeps expanding investment in scientific and technological innovation. It ranks second in the world in terms of total R&D investment. A total of 679 Chinese companies were listed among the world's top 2,500 R&D investors last year.

Technological innovation has enhanced China's production efficiency and forged more comparative advantages. In recent years, China's traditional top three products, or the "old three" -- mobile phones, computers and home appliances, and three major tech-intensive green products, or the "new three" -- new energy vehicles (NEVs), lithium-ion batteries and photovoltaic products, have gained widespread popularity in the global market. This success is attributed to the continuous technological innovation and efficiency improvements in the extensive and specialized industries in China, along with the unwavering commitment to excellence by Chinese entrepreneurs.

It is particularly important to see that China is the only country in the world that possesses all the industrial categories in the United Nations industrial classification. By harnessing the well-established industrial ecosystem and leveraging market dynamics, China can quickly transform technological innovation achievements into high-quality production capacity.

A Bloomberg article said that the global energy transition is largely attributed to China's provision of low-cost and clean products.

China is embracing the new round of sci-tech revolution and industrial transformation worldwide and has no intention of criticizing or suppressing other countries that are leading in areas such as artificial intelligence, commercial aerospace, and low-orbit satellites. Instead, China is genuinely committed to learning from others with an aim to promote scientific and technological development through mutual learning and exchanges.

Similarly, developed countries should embrace China's technological advancements in areas like new energy with fairness and openness, keeping in mind the benefits of all humanity.

A large portion of China's production capacity is attributed to multinationals.

Foreign-invested enterprises have played a significant role in the growth of China's manufacturing. As China becomes more integrated into the global economy, many foreign enterprises have chosen China as their primary production base, producing goods for sale on a global scale. Among them are many American companies.

For instance, the remarkable success of Apple as the second most profitable and highest-valued company in the world can be largely credited to the dedicated Chinese workers and efficient Chinese enterprises along its supply chain. Apple has announced to expand its R&D labs in China to better support its production line.

Tesla produced over 1.84 million new energy vehicles last year, with half of them being manufactured in its Shanghai Gigafactory. Tesla's exports from China account for nearly 30 percent of Chinese exports of the NEVs.

Multinationals often follow a typical approach: making decisions at headquarters, manufacturing products in China, distributing them in global markets including China, and repatriating the profits generated to their home countries. Such business model can lead to win-win outcomes for all stakeholders.

By launching more important projects in China in the coming future, particularly in industries such as chemistry and the NEVs, multinationals are set to see more improvements in their competitiveness and production capacity.

The growth of China's production capacity is credited to the combined efforts of an efficient market and a proactive government.

Throughout the history of industrial development in developed countries, successful industrial upgrading relied on both market dynamics and government strategies to guide and support industries.

For instance, the rapid economic growth of countries like Japan, Germany, and South Korea after World War II was largely a result of government assistance for key industries. Industrial policies have been a longstanding practice in the United States, with the CHIPS and Science Act alone providing over $52 billion in subsidies.

Since the reform and opening up, China has drawn lessons from developed countries and used strong domestic demand to drive economic growth. By directing the allocation of resources through industrial planning, China has been actively developing a modern industrial system.

Since the accession to the World Trade Organization, China has consistently complied with the subsidy-related rules and developed its production capacity within a market economy environment.

China's industrial policies never violate market principles. China does not seek to exclude competition with other countries or unreasonably favor its own industries. Instead, China aims to continuously improve marketization levels and adopt tailored industrial policies that suit local conditions. This approach allows for orderly competition among industries, ultimately achieving an equilibrium between supply and demand.