As Xi Jinping arrives in the United States
this week for a state visit, China’s advances in artificial intelligence will be
in the air. Less discussed: China’s economy in its worst shape in decades.
1.
China’s
AI advances narrowing the U.S. lead
o Recent U.S. assessments suggest that China
has rapidly narrowed the American lead in artificial intelligence.
o President Xi Jinping has made AI and advanced
technology central to China’s industrial and strategic development.
2.
AI
success contrasts with economic weakness
o The article highlights a sharp
contradiction: China is making major technological advances while its broader
economy is experiencing serious weakness.
o Economists, including those close to the
state, have warned that excessive resources are being directed toward AI while
insufficient attention is being given to household demand, employment and the
wider economy.
3.
Youth
unemployment remains high
o Youth unemployment, excluding students,
reached 18.9% in August.
o Consumer spending remains weak, while:
§ Domestic car sales fell 20% year-on-year during
the first half of the year.
§ Housing sales declined another 14%.
o The article characterizes the situation as
a deflationary spiral.
4.
Chinese
economists call for stronger consumer support
o Li Daokui, former central-bank adviser, said the
economy was “running too cold” and that high-tech sectors could not by
themselves lift the broader economy.
o Liu Shijin, another former central-bank adviser,
proposed substantially increasing basic pension payments for rural residents to
stimulate consumption.
o Huang Haizhou, a central-bank adviser, argued that
Beijing needs mild inflation and stronger corporate profitability for sustained
technological advancement.
5.
Large-scale
state support for AI
o The precise scale of Chinese government AI
support is difficult to establish.
o Stanford's AI Index estimated that state-initiated investment funds
deployed about $184 billion into AI companies between 2000 and 2023.
o Xi has instructed the government to use
tax breaks, government contracts, financing and infrastructure access to
accelerate AI development.
6.
Huge
planned data-centre investment
o According to Bloomberg, China is preparing
to spend approximately $295
billion over the next five years on data centres.
o These facilities are expected to be
operated by state-owned companies.
7.
Unusually
strong warnings from establishment economists
o The article notes that outspoken criticism
from economists close to the Chinese establishment was significant because
economists have historically faced pressure for excessive pessimism.
o Their warnings before the Politburo's
midyear meeting indicated the seriousness of concerns about China's economic
trajectory.
8.
Politburo
maintains incremental stimulus
o After its 30 July meeting, the Politburo acknowledged
the need for “proactive” economic measures.
o However, it continued with relatively
incremental stimulus and simultaneously pledged to develop an “intelligent new economy.”
o State media did not announce a domestic
growth target, breaking with previous practice.
9.
Fixed-asset
investment contracts
o Fixed-asset investment, including
infrastructure, property and equipment, fell 4.1% during the first five months of the year.
o Li Daokui compared the contraction with
only a few historical episodes of comparable severity in the People's Republic.
10. Xi's different measure of economic success
o Xi has argued that China should not assess
progress solely through GDP
growth.
o His emphasis is increasingly on “hard power,” advanced industries and
technological capabilities.
o From this perspective, slower economic
growth does not necessarily represent failure if technological development
continues.
11. Preference for technology-led
transformation
o Rather than primarily using cash
transfers, shopping vouchers or an expanded social safety net to boost
household demand, Xi's approach emphasizes state-led technological modernization.
o The expectation is that advanced
technologies will eventually modernize traditional industries and generate
economic value, although the benefits could take years to materialize.
12. AI investment is nevertheless expanding
rapidly
o China cannot afford to abandon the AI race
because the technology could significantly transform its economy and strengthen
its position relative to the United States.
o Investment in information services, which
China's statistics agency said was being driven by AI, increased 19.2% in the first half of 2026.
13. Opportunity cost of AI spending
o Economist Xu Chenggang argues that China's fiscal and
monetary resources are limited despite Beijing's strong control over the
banking system.
o His central concern is that money directed
toward state-backed technology represents money that is not being directed toward employment and
consumption.
14. AI could aggravate employment problems
o Traditional economic stimulus would
normally aim to create jobs, increase household income and generate additional
consumer spending.
o The article raises the concern that AI
investment could instead reduce demand for workers, potentially worsening
China's existing employment problems.
15. “AI Great Leap Forward” criticism
o Some Chinese internet users have
reportedly described the investment drive as an “AI Great Leap Forward,” invoking Mao-era
state-directed industrialization.
o The comparison reflects concerns about
excessive politically driven investment and resource allocation.
16. AI needs a domestic market
o AI companies ultimately require businesses
and consumers willing and able to purchase their products.
o Weak household demand and reduced business
vitality could therefore undermine the commercial market needed to make China's
AI industry financially sustainable.
17. Historical comparison with the Soviet
Union
o Sociologist Sun Liping compares
China's situation with the former Soviet Union.
o The Soviet economy once reached roughly 70% of the size of the U.S. economy
and achieved major scientific and technological accomplishments, yet its
centrally managed economic model eventually stagnated.
18. Core economic problem: insufficient demand
o China's ability to produce large
quantities of increasingly sophisticated goods does not automatically guarantee
economic prosperity.
o Without sufficient consumers:
§ Products remain unsold.
§ Corporate profits remain weak.
§ Household incomes fail to rise.
§ Employment does not improve.
China
is simultaneously accelerating its AI and advanced-technology capabilities and
confronting weak consumption, high youth unemployment, falling property demand
and deflationary pressure. The central issue raised by the article is whether
state-directed AI investment can generate sufficient future economic value to
offset the immediate opportunity cost of resources that could otherwise support
employment, household income and consumption.
“The
U.S. Lead Over China in AI Is All But Gone.”
“China
Is AI-Maxxing.”
“China
Just Erased America’s AI Lead.”
Those
assessments of the artificial intelligence rivalry appeared in U.S. publications
recently, and Xi Jinping will be pleased to have them in the air as he arrives in
Washington this week for a state visit. Under Mr. Xi’s leadership, China has made
huge strides in developing the most consequential technology of our times. What
will be less discussed is that he is also the leader of an economy in its worst
shape in decades.
The
two facts are related.
Economists
in China — even those closest to the state — have openly warned that the government
is pouring too many resources into a technology that creates relatively few jobs,
while doing too little to save the broader economy.
And
it’s an economy in crisis: The country’s youth unemployment rate, excluding students,
reached 18.9 percent in August. Consumers are not spending. During the first half
of the year, domestic car sales fell markedly 20 percent from a year earlier, and
housing sales fell another 14 percent, adding to years of decline. The country is
in a deflationary spiral.
This
summer, the economists’ warnings became a chorus. Li Daokui, a former adviser to
the country’s central bank and a professor at Tsinghua University, said in July
that China’s economy was “running too cold.” Its booming high-tech sectors, he said,
could not lift the larger base.
Liu
Shijin, another former adviser to the central bank, proposed at a forum in June
to raise basic pension payouts, from $30 to $150 per month, for rural residents
to shore up consumer demand.
At
the same forum, Huang Haizhou, an adviser to the central bank, said Beijing must
foster mild inflation and corporate profitability before sustained technological
advancement could occur. “A country mired in deflation cannot achieve technological
innovation,” he said.
The
economists’ comments were earlier reported by Bloomberg and Chinese media.
The
exact amount of government support for artificial intelligence is difficult to know.
Stanford’s AI Index Report noted that state-initiated investment funds deployed
an estimated $184 billion into A.I. firms from 2000 to 2023. Last year, Mr. Xi instructed
the government to use every tool at its disposal, including tax breaks, government
contracts, financing and access to infrastructure, to advance A.I. And, according
to Bloomberg, China is preparing to spend around $295 billion over the next five
years to build data centers across the country, which
will be operated by state-owned firms.
The
Chinese economists’ bluntness was itself revealing, as was the timing, just ahead
of the regular midyear meeting of China’s ruling Politburo. They have been warned
against sounding too pessimistic, and some have been censored or silenced for doing
so. That these establishment figures were speaking so starkly right before the leadership
was about to calibrate economic policy suggested how alarmed they had become.
Taken
together, their message was clear: the Chinese economy was in trouble and an A.I.-centered allocation of resources could prove costly to ordinary
people’s livelihoods and the country’s economic future.
The
leadership gave their warnings little heed. When the Politburo meeting ended on
July 30, the party acknowledged the need for “proactive” measures to boost the economy,
but stuck with incremental stimulus policies and vowed to develop “an intelligent
new economy.” State media reports broke with previous practice and did not announce
a target for domestic growth.
Fixed-asset
investment, including infrastructure, real estate and equipment, fell 4.1 percent
in the first five months of the year. Mr. Li, the former central bank adviser, said
a similar contraction happened only twice in the history of the People’s Republic:
in 1961, at the height of the Great Famine, and in 1967, at the height of the Cultural
Revolution. (It also fell in 1989 following the Tiananmen Square massacre, but it
probably wouldn’t be wise to mention that at a meeting in Beijing.)
Mr.
Xi has offered a revealing explanation of how he measures economic progress.
“We
cannot look only at G.D.P. growth,” he said in a speech in March. What mattered,
he argued, was China’s growing “hard power” and its development of advanced industries.
In Mr. Xi’s view, slower growth does not necessarily signify failure if technological
advancement proceeds “upward step by step.”
Rather
than boosting household disposable income with cash or shopping vouchers or expanding
the social safety net, as many economists have suggested, Mr. Xi believes that state-led
technological rollouts will modernize traditional industries and unlock future economic
value. But those gains could take years to materialize.
China
cannot afford to sit out the A.I. race. And in the first half of 2026, investment
in information services, a sector the National Bureau of Statistics said was being
propelled by A.I., jumped 19.2 percent. The technology could transform its economy
and strengthen its position in its competition against the United States.
But at what cost?
Xu
Chenggang, a Chinese economist at Stanford, put plainly what his peers in Beijing
could only imply. China has more fiscal and monetary flexibility than most countries
because Beijing controls the banking system. Every yuan going into state-backed
technology is a yuan not spent on employment and consumption.
“When
you have only this much money, what do you spend it on?” he said.
In
a crisis similar to what China is facing, many governments would use stimulus to
create jobs, Mr. Xu said. When people have jobs, he said, they spend more, creating
a positive economic feedback loop. Instead, Beijing is concentrating its investment
in A.I., a technology that may exacerbate high unemployment by reducing demand for
workers.
Some
Chinese internet users are already calling the investment rush an “A.I. Great Leap
Forward,” invoking Mao Zedong’s disastrous campaign of politically driven industrialization.
A.I.
companies ultimately need more than government support. They need businesses and
consumers willing and able to pay for their products, Mr. Xu said. By weakening
household demand and business vitality, Beijing may be depriving its A.I. industry
of the market it needs to become commercially successful.
China
has repeatedly demonstrated that an authoritarian state can keep an unsustainable
model operating longer than outsiders expect. But history also demonstrates that
“longer” does not mean forever.
Sun
Liping, a prominent sociologist in Beijing, invoked the Soviet Union. At its peak,
its economy was roughly 70 percent the size of America’s, and it surpassed the United
States in some fields of science and technology.
Yet
its centrally managed economy eventually stalled.
China
can produce vast quantities of increasingly sophisticated goods, Mr. Sun wrote in
an article. But who in China will be able to afford them? Without buyers, products
go unsold, businesses earn no profits, household incomes cannot rise and employment
cannot improve.
“That,”
he wrote, “is the fundamental problem with China’s economy today.”