China’s industrial policy is often criticized as a system designed mainly to support unprofitable firms, especially state-owned enterprises. While unprofitability is a visible outcome in some sectors, this narrow view fails to capture the broader goals and deeper logic of China’s industrial strategy. In reality, China’s industrial policy is a long-term structural project aimed at economic transformation, technological upgrading, and strategic autonomy. Understanding it only through the lens of losses and inefficiency obscures both its ambitions and its consequences.
At its core, China’s industrial policy seeks to reshape the country’s production structure. Through tools such as subsidies, tax incentives, preferential credit from state-owned banks, government procurement, and coordinated local government support, the state directs resources toward selected industries. These industries—such as semiconductors, renewable energy, electric vehicles, advanced manufacturing, and artificial intelligence—are chosen not merely for short-term profitability, but for their perceived importance to future growth and national security. As the International Monetary Fund (IMF) notes, China’s industrial policy operates on a large scale and is intended to influence factor allocation across the entire economy, not simply to rescue failing firms (IMF, 2024).
This broader perspective helps explain why China tolerates short-term losses in strategic sectors. Many firms are allowed to operate with low or negative profits while they build capacity, achieve economies of scale, and acquire technological know-how. In industries like solar panels and batteries, Chinese firms initially relied heavily on state support, but over time they became globally competitive leaders. Thus, unprofitability in the early stages can be understood as part of a state-led investment strategy rather than simple economic failure. As scholars of industrial policy argue, such state intervention is often justified by learning effects and coordination problems that markets alone may not solve (Aghion et al., 2015).
However, this approach also creates serious challenges. Extensive state support can lead to misallocation of resources, where capital and labor remain trapped in inefficient firms instead of moving to more productive uses. Research on “zombie firms” in China shows that easy access to credit and government backing allows some unviable companies to survive indefinitely, dragging down overall productivity (Banerjee & Hofmann, 2020). Moreover, policy-driven expansion has contributed to overcapacity in sectors like steel, solar energy, and electric vehicles, intensifying global competition and provoking trade tensions with the United States and the European Union.
Beyond economics, China’s industrial policy has a strong geopolitical dimension. Recent strategies emphasize “self-reliance” in critical technologies to reduce dependence on foreign suppliers. This shift has become more pronounced amid rising geopolitical rivalry and export controls imposed by advanced economies. Analysts note that industrial policy in China is increasingly intertwined with national security concerns, making profitability a secondary consideration compared to strategic resilience (Naughton, 2021).
In conclusion, China’s industrial policy cannot be adequately explained by unprofitability issues alone. While inefficiency and financial losses are real and significant concerns, they represent only one aspect of a much larger strategy. China uses industrial policy as a tool for structural transformation, technological upgrading, and strategic positioning in the global economy. Evaluating its success or failure therefore requires looking beyond balance sheets to consider long-term productivity, innovation outcomes, and global spillover effects. Only by adopting this broader perspective can policymakers and scholars fully understand the rationale, risks, and implications of China’s industrial model.
References:
(Aghion, P., Boulanger, J., & Cohen, E. (2015). Rethinking Industrial Policy. Bruegel Policy Brief.
Banerjee, R., & Hofmann, B. (2020). Corporate Zombies: Anatomy and Life Cycle. BIS Quarterly Review.
International Monetary Fund (IMF). (2024). Industrial Policy in China: Quantification and Economic Impact. IMF Working Paper.
Naughton, B. (2021). The Rise of China’s Industrial Policy, 1978–2020. East Asian Economic Review.)
