China: AI, involution and the national plan

by Michael Roberts

During his New Year’s Eve address broadcast, China’s Communist leader Xi praised the country’s advancements in key sectors. Images ranging from humanoid robots performing kung fu to new hydropower projects rolled on the screen as he spoke. He also announced  that the National People’s Congress would discuss the country’s new five-year plan at its upcoming legislative session in March. 

China’s 15th five-year plan is all about AI. The 14th Plan (2021-2025), which has just ended, focused on the “dual circulation” strategy (domestic + foreign trade) i.e driving economic growth not just through exports, but also through investment in the domestic economy, particularly aiming at self-dependence in technology. The new plan will continue that drive for technological independence, but this time through the diffusion of AI into industrial processes, consumer products, consumer products, health care, education and digital government. The plan is that by 2030 AI is expected to be as widespread as electricity or the internet – and so a big driver of economic growth. The government talks of China becoming an “intelligent society” by 2035.

It seems that China’s leaders are even more committed to making AI succeed than in the major economies of the West, where there are sceptical voices about what it can deliver in new discoveries, higher productivity and profitability.  To me, the difference is that in China there is a plan to meet key targets in technology that will boost the whole economy etc, while in the major capitalist economies, all the AI eggs are in a basket owned by the privately-owned AI hyperscalers and the Magnificent Seven giant tech media companies – and for them, profitability is key, not technology outcomes.

China enters the Year of the Donkey in 2026 and a new five-year plan having achieved mostly what it set out to do in the previous plan. China looks set to achieve 5% real GDP growth in 2025, and while its annual real GDP growth is no longer in double-digits, it is still growing twice as fast as the US economy, which managed 2.5% in 2025, at best, while the rest of the G7 economies struggled to expand by more than 1%.

According to the South China Morning Post, often a strong critic of China’s success, 86% of the 250 targets set in the previous national plan were met or exceeded. Depending on how you measure it, China’s GDP is close to surpassing that of the US and will, at current rates of growth, do so by the end of this new five-year plan.

China’s Western critics say that if you compare nominal GDP growth, which includes inflation, then US nominal GDP rose 5% in 2025, as much as China’s nominal rate. This shows that China is in a deflationary spiral that is weakening consumer spending and lowering investment growth.  Many Western mainstream economists argue that ‘moderate’ inflation is good for an economy. If there is deflation (falling prices), then consumers may spend less on goods and services and save their money in the hope that prices will fall further, and so economic growth will slow. 

Sure, hyper or accelerating inflation is bad news because people’s living standards will dive, the argument goes. But what is good is ‘moderate and steady’ inflation for capitalist enterprises to give them room to raise prices to maintain profits. This argument should apply to China too. But it does not apply to average households in the US, Europe and now Japan, facing unending rises in prices of essential goods, while in China prices are steady and even falling.

Why are prices not rising in China? Apparently, it is all to do with ‘involution’. Veteran ‘China watcher’, American economist Stephen Roach explains that persistent deflation in prices in China reflects involution (in Chinese, “neijuan” (内卷), referring to price declines arising from disorderly, overly-aggressive competition in several key industries.  Prices are falling because competition among producers of vehicles, solar panels, batteries etc is too strong! And yet we are always told in mainstream economics that competition is good.

According to Roach and other Western observers, including many on the left, without greater consumer demand, the Chinese economy remains at risk of falling into a Japanese-like quagmire of falling prices and rising debt. Like Japan during the late 1980s and early 1990s, China’s mounting debts suggests that the possibility of a prolonged balance sheet recession.  The spectre of ‘Japanification’ appears.  In a new study by the Federal Reserve Bank of Dallas, economists Scott Davis and Brendan Kelly argue that “there’s mounting evidence of ‘zombie lending’ in China, banks rolling over bad loans to unprofitable firms and allowing the status quo to continue rather than recognize losses.” They assert, “the current experience in China mirrors that of Japan in the 1980s and 1990s. Rapid growth in private sector debt—also fueled by domestic savings—was followed by the appearance of zombie lending. In Japan, that zombie lending led to the inefficient allocation of capital and decreased productivity, especially in sectors shielded from foreign competition.”

And IMF chief Georgieva pivots towards the “Japanification” risk, urging Beijing to let unviable property developers fail, if needed. “We have been urging more attention for closure on this problem,” Georgieva explained. “We call them ‘zombie firms.’ Let the zombies go away.” This is an interesting policy proposal for China, considering that in the global financial crash of 2008, the IMF and Western governments opted for bailing out the banks and sustaining ‘quantitative easing to drip feed unprofitable ‘zombie’ companies that are still crawling along today.  Apparently, it’s one policy for the capitalist economies of the West and another for China.

The property slump has been severe in China.  It is no bad thing, however, for property prices to fall sharply so that housing becomes more affordable.  The solution from here must be an expansion of public housing, not more private development. It’s true that China’s debt leverage ratios have surged in past decades, but they are manageable, especially as most of the debt is concentrated in local government sectors and so can be bailed out by central government.  And China has a state banking system, state-owned companies and massive FX reserves to cover any losses. 

And China is not stagnating like Japan. Take productivity growth. Even though China’s growth in labour productivity has slowed in the last two decades, it is still more than four times higher than in the US and six times higher than in Japan. Why has China succeeded in avoiding slumps, including the Great Recession and in the pandemic? Why has it motored ahead with unprecedented growth rates in such a large economy, while other large so-called emerging economies like Brazil or even India have failed to close the gap with the major advanced capitalist economies?

It’s because, although China has a large capitalist sector, mainly based in the consumer goods and services sectors, it also has the largest state sector in any major economy, covering finance and key manufacturing and industrial sectors, with a national plan guiding and directing both state enterprises and the private sector on where to invest and what to produce. Any slump in its private sector is compensated for by increased investment and production in the state sector – profit does not rule, social objectives do. The Chinese state owns a slight majority (55%) of the total capital of all companies. 

But Western mainstream argument, echoed by some on the Marxist left, continues: China must end its high investment strategy, reduce its export expansion and revert to boosting domestic consumption, just as the major economies of the West have done.  Sonali Jain-Chandra, a top IMF ‘China’ economist, argues that the key is to accelerate “reforms to rebalance demand toward consumption and further open the service sector, which can promote sustainable growth and help create jobs.” While “China’s economic development over the last several decades has been remarkable,” it “has relied too much on investment as opposed to consumption,” Jain-Chandra says.

But has a consumer-led strategy worked well for the major Western economies? Anyway, it is not true that China’s economy is growing at the expense of household consumption. A low consumption to GDP ratio does not necessarily mean low consumption growth.  China’s consumption growth has been way faster than the consumer-led economies of the West. A recent study by Richard Baldwin, found that China may have operated an export-led model up to 2006, but since then, domestic sales have boomed, so that China’s exports to GDP ratio has actually fallen. “Chinese consumption of Chinese manufactured goods has grown faster than Chinese production for almost two decades. Far from being unable to absorb the production, Chinese domestic consumption of made-in-China goods has grown MUCH faster than the output of China’s manufacturing sector.”  So much for ‘over-capacity or ‘involution’. Private consumptiongrowth in China has been much faster than in the major economies, precisely because of faster economic growth driven by faster investment growth. I repeat from previous posts: investment leads consumption over time, not vice versa, as mainstream economics thinks about economies.

Yes, China’s goods trade surplus with the rest of the world is large, reaching $1trn.  But it also runs a $100m deficit in services trade, and its overall current account surplus as a share of GDP is no higher than that of Japan and Germany, at about 4-5% of GDP. Contrary to accusations of China’s “mercantilist determination to sell but not to buy,” the country has remained the world’s second-largest importer for 16 consecutive years.

The real problem for the major economies of the West is that China is increasingly outcompeting them in advanced industrial sectors. 

Between 2005-2025, growth in Chinese output per hour worked has dwarfed that anywhere else, if still behind the US and the major capitalist economies in the level of productivity.

The irony is that the mainstream economists in the West continually tell us that China’s economy is slowing to a crawl and heading for Japanese-style stagnation and may even crash in a debt-fuelled spiral.  And yet they also tell us that China has ‘too much’ capacity and is suffering from ‘involution’, causing falling prices and flooding world markets with cheap goods that threaten the market shares of the major economies. So China must reverse its policy of high investment in manufacturing and become a consumer-led economy.  But if China is heading for stagnation and/or collapse, then surely the Western economic model will triumph, will it not?