(Yicai) July 30 -- Chinese industry has been operating under distinctly unfavorable external conditions, with trade tensions, the pandemic, geopolitical conflicts, and the reconfiguration of global supply chains all exerting pressure on manufacturing. Yet China’s net goods exports have continued to grow and now exceed USD1 trillion, with electric vehicles (EVs), batteries, and machinery expanding their global footprint. Why have external headwinds not weakened China’s manufacturing competitiveness?

A popular explanation points to subsidies, even though the support that Chinese firms receive from direct subsidies is not significantly greater than in other major economies. Because direct subsidies alone cannot sustain this explanation, some recent studies have looked for more implicit forms of support, such as “below-market borrowings” (BMBs), which might show up as a gap between corporate borrowing rates and selected benchmark rates.

Yet this argument also has problems, because much depends on how the benchmark is chosen. When assessing advanced economies, these studies often use funding-market signals like the secured overnight financing rate. But when assessing China, they use the loan prime rate, which typically sits well above funding-market rates. Borrowing below the LPR is a normal financial-market outcome for large firms with strong credit profiles, ample collateral, and stable operations. It should go without saying that if you use a higher lending-rate reference for China but lower funding-market rates for other economies, you will find larger measured BMBs in China.

Nor do the problems stop there. Most of these studies do not disclose the firms in their samples, nor is the sectoral composition fully transparent. That makes it hard to judge whether the sample adequately represents China’s vast and complex manufacturing system. Similarly, a survival bias may be at work. Many failed firms may have received subsidies or cheap financing, but once they exit the market, they disappear from the observed sample. Looking only at surviving firms can therefore overstate the role of subsidies in explaining success.

For these reasons, an explanation that relies too much on subsidization is unpersuasive. At the micro level, China’s most globally competitive firms are often not those receiving the most subsidies or the cheapest financing. It is less efficient, financially weaker firms that are more likely to receive local rescue-type support. Subsidies may provide a cushion, but they are not enough to create industrial competitiveness.

The experience of the United States and Europe is instructive. Both have introduced large-scale subsidies of their own for semiconductors, clean energy, and advanced manufacturing, yet they have not quickly replicated China’s manufacturing efficiency.

China’s industrial competitiveness starts with large, deep, and complete supply chains. Consider Peking duck, which can sometimes be sold in China for as little as USD3, a price so low that it seems almost implausible. But this is not a case of artificial underpricing. A duck’s value is broken down and absorbed by an entire network of downstream industries: feathers are processed into products such as winter jackets and bedding, while duck necks, feet, gizzards, and other byproducts are turned into snacks and processed foods. By the time the duck meat reaches the table, much of its value has already been captured elsewhere. This is the power of a complete supply chain.

The same logic applies to ZXMOTO, a Chongqing-based motorcycle brand. Founded only in 2024, it has already claimed multiple victories in world-class racing events, challenging a field long dominated by European and Japanese manufacturers.

Behind this achievement is Chongqing’s motorcycle industrial cluster. As home to around 50 motorcycle manufacturers and 400 parts suppliers, the city’s local supply chain can provide almost all key components within a radius of roughly 40 kilometers (25 miles). Prototype development and parts validation that may take weeks elsewhere can be compressed into just a few days. These supply-chain advantages systematically boost efficiency and accelerate innovation. Such competitiveness cannot be achieved through subsidies alone.

China’s global competitiveness also comes from intense domestic competition. Its new-energy-vehicle sector is a case in point. From 2018 to 2025, China’s NEV sales increased more than tenfold. Yet this rapid expansion was accompanied by brutal market consolidation. In 2018, China had 487 electric-vehicle manufacturers; by 2023, the number of operating NEV makers had fallen to just over 40, meaning that roughly nine out of ten failed.

The smartphone industry tells a similar story. From 2011 to 2018, the number of newly launched handset models in China fell from 4,745 to 764, as many brands and models were pushed out of the market. After the shakeout, leading firms grew stronger and gained global share.

China’s domestic competition is so intense for two reasons. First, the market is large enough to reward winners at scale. Second, China has continued to liberalize and integrate its domestic market, further reducing barriers and expanding the space for market-based competition. The firms that survive have already passed a demanding stress test that makes them hyper-competitive in global markets.

A third source of China’s competitiveness is the innovative capacity of its technology firms. From 2020 to 2025, Chinese investment in research and development rose from CNY2.4 trillion (USD355 billion) to CNY3.9 trillion, growing at an average annual rate of around 10%. In absolute terms, China’s R&D spending now ranks second globally, and in terms of full-time-equivalent R&D personnel, it has ranked first for 13 consecutive years.

This sustained investment has been converted into industrial breakthroughs. In early 2025, DeepSeek released its R1 large language model, achieving performance broadly comparable to leading overseas models at only a fraction of the cost. Successful Chinese firms owe their strength not just to low costs, but also to their ability to turn technological innovation into industrial competitiveness rapidly.

AI and robotics will further amplify the value of supply-chain depth, iterative engineering, and economies of scale, with larger production systems diffusing fixed costs, accelerating learning, and driving down marginal costs. Because China combines an unusually large manufacturing base, deep supply chains, and fast engineering feedback loops, its industrial competitiveness is likely to remain strong throughout the next wave of technological change. Foreign investors and researchers alike need to update their narrative.

Miao Yanliang, a former chief economist for China’s State Administration of Foreign Exchange, is Senior Managing Director and Chief Strategist at China International Capital Corporation.

Copyright: Project Syndicate, 2026.