EditAnalysis: Subsidies and overcapacity alone cannot explain China’s global economic expansion
How industrial policy, human capital, dense supply chains and strategic market conquest underpin China’s competitive rise
For China, market conquest is treated not as the reward of success but as its precondition, writes Borislav Sretkov.
Borislav Sretkov is a former businessman, now art curator and author based in Berlin.
Over the past two years the world has witnessed a powerful Chinese export surge. China has established global leadership in electric vehicles, batteries, solar panels, industrial robots, mature-node chips, high-speed trains, steel and shipbuilding, overtaking many of its Western competitors. The conventional explanation offered to the public is straightforward: the Chinese state heavily subsidises these industries and has deliberately created excess domestic capacity. With household consumption still relatively weak – 39.9 percent of GDP in 2024 – and a managed currency, the argument runs, Chinese firms dump surplus production onto international markets at artificially low prices.
Data from the OECD and the IMF appear to support this view. In June 2026 the OECD’s Magic Database of Industrial Subsidies examined 525 of the world’s largest firms and concluded that China ranks first in state support, with subsidies accounting for roughly 60 percent of its increased international market presence. Between 2008 and 2024 Chinese subsidies averaged 1.3 percent of annual sales – three to eight times higher than those received by comparable firms elsewhere. The IMF earlier estimated Chinese industrial subsidies at 4 percent of GDP, twice the European level, and calculated that the auto sector alone received support equivalent to 4.6 percent of turnover versus 0.4 percent in Western Europe. Shipbuilding, chemicals and green energy are similarly large recipients.
Yet these figures, while real, are insufficient. All major economies subsidise strategic industries; the United States, the OECD notes, provides the largest absolute support for advanced semiconductors. Chinese subsidies take both direct and indirect forms – preferential loans, regulatory forbearance and tax relief – but the bulk of cheap credit flows to large state-owned enterprises. With more than 60 million firms in China, the overwhelming majority of which are private small and medium-sized enterprises, the picture is more nuanced. Five-year Chinese Libor sits around 3.5 percent, while 10- and 30-year government bonds yield 1.7–2.2 percent. State firms paying roughly 3 percent are not receiving dramatically below-market rates relative to the government’s own borrowing costs. Moreover, official data show that subsidies, particularly to new technology firms, have been substantially reduced between 2020 and 2025 even as provincial governments struggle under more than $11 trillion in debt. Beijing has simultaneously created a national market for technology subsidies precisely to curb wasteful local competition.
Western analyses also struggle to explain why, amid a deep crisis in the property and construction sectors, China’s current-account surplus remains strongly positive. The combination of stagnant construction investment and record trade surpluses generates large volumes of free cash. Of the $1.2 trillion goods surplus recorded last year, services showed a $238 billion deficit and Chinese tourists spent $199 billion abroad. The residual is recycled in ways that remain under-examined: through equity issuance by listed Chinese technology and industrial firms, especially on the Hong Kong exchange, where Chinese companies accounted for over 90 percent of IPOs last year. Market capitalisations dwarf the subsidy figures. CATL, the world’s leading battery maker, is valued at $271 billion; BYD at $130 billion. The $840 million subsidy CATL received in 2023 or the $1.5–1.8 billion BYD received in 2024–2025 are modest relative to the equity capital these firms can raise and the collateralised borrowing they can command.
China operates a coherent, long-term industrial policy that deliberately concentrates capital, talent and institutional effort on selected sectors. The resulting competitiveness rests on far more than grants. It rests on a deep manufacturing base that still accounts for roughly 29–32 percent of GDP – compared with 18 percent in the European Union and 16 percent in India – together with dense domestic supply chains, ruthless internal competition, rapid scale economies and continuous learning-by-doing.
Chinese strategists have absorbed the core lessons of Michael Porter’s Competitive Strategy. Porter’s “wheel of competitive strategy” places clear objectives at the centre – growth, market share, efficiency – and surrounds them with coordinated decisions on product, production, labour, finance, R&D, purchasing, distribution and marketing. China has executed every spoke of that wheel with unusual consistency. In human capital, the decisive factor, the numbers are striking. From one million university students in 1999, China now graduates 12.5 million a year, including 3.6 million in STEM fields and 1.3 million engineers, supplemented by 450,000 Chinese studying abroad. Huawei alone employs 115,000 people in R&D; similar talent pools exist at Alibaba, Tencent, Baidu, CATL and the major state groups. R&D spending has grown at more than 10 percent annually since 2020, reaching 3.9 trillion yuan last year – second only to the United States in absolute terms and first in scientific personnel.
On the product side, Chinese firms have systematically recruited top European design talent – former chiefs from Audi, BMW, Volkswagen and Alfa Romeo now lead design at BYD, Nio, Changan and Geely – while simultaneously absorbing foreign technology through both legitimate and less transparent channels. They practise all three of Porter’s generic strategies: cost leadership through massive scale and relentless cost control along the entire value chain; differentiation through continuous innovation and, increasingly, unique products such as high-speed trains and humanoid robots; and focus – an almost obsessive concentration on selected technological and market targets until dominance is achieved.
Internal competition is ferocious. Between 2018 and 2023 the number of electric-vehicle makers collapsed from 487 to roughly 40 even as sales multiplied more than tenfold. Smartphone models fell from 4,745 in 2011 to 764 in 2018. Survivors emerge battle-hardened and then attack global markets. Industrial clusters compress time and cost. In Chongqing a motorcycle ecosystem of 50 assemblers and 400 suppliers within a 40-kilometre radius allows prototype validation in days rather than weeks; a new entrant founded in 2024 is already winning international competitions. Around Shanghai, Tesla’s Gigafactory sits inside a Chinese supply web that delivers 95 percent of components within a four-hour radius and employs more than 20,000 Chinese workers. Tesla itself has received loans at 1.18 percent – below the official rate – yet remains dependent on Chinese batteries and components for a large share of its global production. BYD has already overtaken Tesla in worldwide volume and produces vehicles at roughly half the cost of many Western rivals.
Market conquest is treated not as the reward of success but as its precondition. China’s strategy is organised in concentric circles: the domestic provinces; the 14 neighbouring states; a wider East Asian zone that includes Japan, South Korea, Australia and the Philippines; and finally the rest of the world. After 2018, when the United States imposed trade restrictions, China accelerated displacement of Japanese, German, British and American products both at home and in third markets. Between 2019 and 2024 Chinese exports rose sharply into Russia, Vietnam, Mexico, Thailand, Indonesia, Saudi Arabia, the Philippines, Brazil, Kazakhstan and Turkey. In 2025 Chinese FDI into Europe and the United Kingdom reached €16.8 billion – 67 percent higher than the previous year – with greenfield projects and acquisitions both surging. Classic Porter entry tactics – internal development of new capacity, low-price penetration, superior or niche products, and acquisition of distressed Western firms (Geely-Volvo, successive German knitting-machine makers) – are applied systematically.
The same logic drives capacity expansion. Chinese planners invest far ahead of domestic demand because they treat global demand as effectively unbounded. Surplus capacity is not an accidental by-product of domestic stimulus; it is an instrument for capturing market share, setting standards and locking foreign economies into Chinese supply chains. The next waves will be powered by artificial intelligence and robotics. These technologies will further compress costs, accelerate learning-by-production and tighten Chinese control over the most critical segments of global manufacturing.
The underlying premise is captured in the name Huawei itself: “Hua” means China; “Wei” means able. China is competitive because it has built the institutional capacity – strategic planning, human capital, industrial ecosystems, financial recycling mechanisms and political focus – to convert ambition into sustained advantage. Western complaints about subsidies and overcapacity address symptoms. They do not explain the deeper sources of Chinese strength, nor the scale of the adjustment that other industrial economies will face as those strengths continue to be projected outward.
Caption: A visitor takes picture of latest Huawei MatePad Air during the launching of Huawei smartphone Pura 90s Series in Kuala Lumpur, Malaysia, 14 July 2026. Huawei unveiled its latest flagship innovations for the international market, including the Huawei Pura 90s Series, Huawei FreeClip 2 S and Huawei MatePad Air. EPA/FAZRY ISMAIL
Updated: August 17, 2026 - 07:26
