The recently concluded “Two Sessions” – an annual gathering of China’s top political bodies – highlighted the country’s challenge of balancing slowing economic growth with ambitious technological progress. A key takeaway from the Two Sessions is Beijing’s commitment to integrating private tech firms into national policy decisions on innovation. Leading high-tech firms would play an important role in advancing China’s technological self-sufficiency. The government work report emphasized integrating private tech firms, easing regulations, and investing in AI, quantum computing, and 6G.
The Two Sessions followed close on the heels of an earlier meeting, where top leader Xi Jinping met with private entrepreneurs to reaffirm China’s commitment to its socialist system and to protect private businesses’ legal rights while enforcing the rule of law against illegal activities. Xi envisioned private businesses as important actors driving wealth creation in the country first, followed by contributing to “common prosperity.” The key challenge is ensuring that businesses contribute to equitable wealth distribution, aligning economic growth with broader social objectives.
A Tale of Two Chinas
China’s economy presents a paradox: while it is grappling with structural challenges and slowing growth associated with the old economy, it is marching ahead to forge a high-tech, globally competitive industrial sector in the new economy. The government has sought to revitalize private enterprise to stimulate innovation and domestic consumption. However, state-led investments in strategic sectors continue to dominate, highlighting a dual approach to economic transformation.
On one hand, China has recalibrated its policy stance toward the private sector, easing the regulatory crackdowns that previously hampered growth in industries such as technology and private education. This shift signals an acknowledgment of the private sector’s role in fostering economic dynamism, particularly as Beijing seeks to restore business confidence and attract investment. The emphasis on private enterprise is accompanied by targeted support for high-growth industries, particularly in artificial intelligence (AI), quantum computing, and 6G technology, where state-backed firms receive financial and institutional advantages.
On the other hand, China’s economic policy remains deeply interventionist. Xi aims to regulate and guide the development of private capital to ensure it aligns with the Chinese Communist Party’s goals of common prosperity, national security, and social stability. The government has set an ambitious GDP growth target of around 5 percent for 2025, a goal that will require aggressive fiscal measures amid structural headwinds, including local government debt burdens and a sluggish property market. To stimulate growth, Beijing has announced an expansion of fiscal spending, including 1.3 trillion yuan ($182 billion) in special treasury bonds – 300 billion yuan more than the previous year. These measures reflect a commitment to macroeconomic stability and to reining in crony capitalism domestically, amid external pressures, including China-U.S. trade tensions and geopolitical uncertainties.
China’s Structural Challenges Amid Economic Transition
The Two Sessions addressed measures the Chinese government would take to address its structural issues. First, local government debt remains a major concern, with the government work report acknowledging the need to mitigate associated risks. While fiscal measures have been expanded, the sustainability of local finances remains uncertain, particularly as infrastructure-driven growth slows. The work report specifically mentioned resolving the local government debt problem by “supporting the opening of new investment spaces,” among others.
Rising unemployment, particularly among young people, is another pressing challenge. Beijing has set a target of 12 million new urban jobs for 2025, emphasizing labor market reforms and rural development to absorb excess workforce capacity. In 2024, 12.56 million new jobs were created, keeping the average urban unemployment rate at 5.1 percent. China’s plans to strengthen technical expertise in strategic industries aim to align labor supply with economic demands, potentially boosting both employment and industrial competitiveness.
Another challenge is to increase foreign direct investment capital by reducing skepticism from foreign investors. The government work report underscored the importance of stabilizing foreign trade and investment, introducing policies to attract foreign direct investment in key sectors such as telecommunications, healthcare, and education. By relaxing restrictions on foreign firms and promising greater market access, Beijing hopes to counteract concerns over regulatory unpredictability. Meanwhile, in response to U.S. sanctions on semiconductor exports, China continues its push for technological self-reliance.
Despite its global leadership in the electric vehicle (EV) sector, China’s EV industry faces structural inefficiencies. State-induced incentives have led to an oversaturated market, with excessive competition driving industrial homogeneity. While this competition has fueled rapid innovation, concerns persist over the long-term sustainability of the sector, particularly as firms struggle to differentiate their products and secure profitability.
Rising Defense Spending and Xi’s Anti-Corruption Campaigns
China announced a 7.2 percent increase in defense budget in 2025 amid regional and global tensions. China’s annual government work report also discussed the military’s entrenched corruption challenges, calling for a “deepening of political rectification” within the defense sector.
Over the past two years, Xi has launched sweeping anti-corruption probes. The political demise of several top officials – including former defense ministers Li Shangfu and Wei Fenghe, and ex-Central Military Commission member Miao Hua – underscores how important the fight against corruption is to Xi Jinping. Xi’s purge is about both discipline and reasserting political control within China’s military. For Xi, military modernization efforts go hand in hand with rooting out internal decay, increasing transparency, and restoring confidence in the military.
Conclusion
Since the post-reform era up until China’s entry into the World Trade Organization, Beijing has embarked on governance reforms, aiming to establish a more stable and regulated economic order. These efforts have improved economic development and the anti-corruption landscape, with significant implications for governmental authority and political development, transforming China into the leviathan that it is today.
China’s old economy appears to be slowing, but it is taking a similar approach to remake the new economy, with a new focus: becoming a tech leviathan. On the surface, the country is remaking itself into a tech powerhouse, rapidly advancing in technology and innovation to emerge as a global leader as it pushes for self-reliance.
With the emergence of the new economy and the old economy that has not completely faded away, the real challenge for China is to discipline capitalism into a force that benefits everyone – not just the powerful oligarchs. In a speech in 2022, Xi stressed the need for capital regulation in China’s socialist market economy given the coexistence of state-owned, collective, private, foreign, and mixed ownership capital. Xi stated that the state would play a role in regulating and guiding capital by “improving the legal system for capital development, optimizing the market access system, and fighting, per the law, monopolies and unfair competition, such as the abuse of market dominance.”
In the long term, China will need to reconcile the two Chinas – resolving deep-seated structural contradictions to create a more equitable society domestically. It must curb the social excesses that fuel what Xi Jinping has termed “the disorderly expansion of capital” in order to truly realize Xi’s vision of “common prosperity,” even as it seeks to pursue a path toward global technological supremacy.
