The West calls China’s economic model “Leninist” now that it works. But China’s success reveals something far more uncomfortable: markets are exceptionally good at improving efficiency, but they cannot determine a country’s long-term development trajectory.

Is China Really Suffering from “Overcapacity”?

In a recent article, China won’t apologise for overcapacity, The Economist takes at a new paper by China’s Ministry of Commerce, in which Beijing rejects Western criticism of China’s alleged industrial overcapacity. The Chinese argument is straightforward: large export surpluses do not, in themselves, constitute evidence of overcapacity. The geography of global production has always changed over time – the United States once dominated global manufacturing, followed by other advanced economies, and today it is China. Nor is low capacity utilisation unique to China: more than one-fifth of industrial capacity in Europe and the United States is idle, yet nobody systematically describes this as an “overcapacity” problem. Likewise, export strength cannot in itself be proof of excess capacity; otherwise the same charge could be levelled at Boeing, which sells two-thirds of its aircraft abroad.

The Economist concedes that the Chinese ministry is also right to point to the genuine competitive strengths of China’s economy. A combination of innovation, large industrial clusters, economies of scale and extraordinarily intense competition in the domestic market has forced Chinese firms continuously to cut costs and improve quality. Companies that survive this competitive pressure in an enormous domestic market are exceptionally well prepared to compete globally. Nor can these achievements simply be dismissed as the result of subsidies. Chinese manufacturing and technological progress have, for example, contributed significantly to the dramatic decline in the global cost of electricity from solar and wind power. China’s industrial expansion has therefore generated substantial benefits for consumers around the world.

But this is where The Economist makes its crucial turn. China’s competitiveness, it argues, cannot be understood as the spontaneous outcome of market forces, because the state has spent decades systematically creating the conditions for it. The drive for technological self-reliance, reinforced under Xi Jinping, represents a deliberate attempt to reduce dependence on foreign knowledge, technologies and components. And when a country as large as China develops the productive capacity required to replace imports, it simultaneously acquires the capacity to dominate global markets. The Economist points to shipbuilding: China’s objective of sourcing 80 per cent of the components used in advanced vessels domestically has helped transform it into the world’s largest shipbuilding nation.

Much the same applies to subsidies. The Chinese ministry focuses primarily on direct subsidies, whereas The Economist points to a far broader architecture of state support: public equity investment in semiconductor producers, cheap land provided by local governments, preferential financing and rules steering state-owned enterprises towards domestic suppliers. On top of this sits a macroeconomic model characterised by a very high savings rate, to which, in The Economist’s interpretation, China’s relatively weak social safety net also contributes. Because Chinese savings systematically exceed domestic investment, the counterpart must be a current-account surplus – an excess of exports over imports. This, for The Economist, is the economic core of Chinese “overcapacity”: China has built a vast industrial machine whose productive capacity exceeds the requirements of its domestic market and therefore needs global markets as an outlet.

From Trade Competition to a Battle for Industrial Power

The Economist consequently regards Beijing’s response as rather cynical. To Germany, which is losing around 10,000 manufacturing jobs a month, China offers a “China opportunity” rather than a “China shock”. Beijing criticises Western governments for trying to reduce their dependence on China, even though China itself has spent decades systematically reducing its dependence on the West. Similarly, it portrays Western trade restrictions as an attack on mutual trust, while itself using restrictions on access to markets and strategic raw materials as instruments of foreign policy. The dispute over overcapacity is therefore no longer merely about trade policy. It is increasingly a struggle over the future geography of global industrial production – a geoeconomic contest that inevitably translates into the distribution of geopolitical power. Hence The Economist’s bottom line: industrial might creates political might.

This brings us to the article’s central argument. Western firms are not merely competing against BYD, CATL or other highly efficient Chinese producers. They are competing against China’s entire state-backed development system. Rhodium Group describes this as an “industrial policy of everything”: what was once an industrial policy confined to a handful of strategic sectors now encompasses virtually the entire economy. The Economist calls this a “Leninist developmental state”, against which individual Western companies stand little chance. The United States is responding with tariffs, reshoring and attempts to secure critical supply chains, while the EU is struggling to construct the beginnings of a “made in Europe” policy. Yet both have already collided with the consequences of several decades of Chinese industrial policy – from batteries and green technologies to China’s dominance in rare earths. In many new technologies, China now enjoys a classic first-mover advantage: the country that specialises first benefits from economies of scale through lower costs and economies of scope through the ability to develop a wider range of related products.

The Market Is Incapable of Choosing a Country’s Development Path

And this is precisely where The Economist makes a characteristically ideological conceptual error. What it portrays as an almost pathological “Leninist developmental state” is, in fact, a textbook example of successful development policy. Markets are excellent mechanisms for decentralised resource allocation, competition among firms and improvements in efficiency. But markets cannot, by themselves, answer the long-term development question of what a country should be producing twenty or thirty years from now, in which technologies it should build comparative advantages, and which strategic supply chains it needs to control. Markets can optimise extremely efficiently within a given economic structure. What they cannot do on their own is determine the long-term direction in which that structure should evolve.

That requires a state capable of setting a development trajectory through industrial, technological, educational, infrastructure, energy and trade policies. Private firms and market competition can then search for the most efficient solutions within that framework. This distinction is crucial. The role of the state is not to replace markets or decide how many cars, batteries or solar panels individual firms should produce. It is to shape the environment in which investment, innovation and structural transformation take place. China is perhaps the clearest contemporary demonstration that strategic state direction combined with brutally intense market competition can be extraordinarily effective.

A Developmental State Is Not Central Planning

Describing this as “Leninism” is therefore less an analytical insight than an expression of the intellectual helplessness of those who still believe in the almighty invisible hand of the market. Chinese firms are not successful because Communist Party officials tell them how many electric vehicles or batteries to produce or at what price to sell them. They are successful because, over several decades, the Chinese state systematically built an ecosystem in which globally competitive firms could emerge: infrastructure, universities and research institutes, technology programmes, cheap long-term financing, industrial clusters, domestic supply chains and, crucially, a sufficiently large market in which fierce competition could take place. BYD, CATL, Huawei and other Chinese companies are not products of Soviet-style central planning. They are products of the combination of a strategic developmental state and darwinist-type of market competition.

Anyone who wants to see how China’s developmental-state model actually worked in practice – how the Communist Party used strategic priorities, financing and other forms of state support to steer private companies into strategic technology sectors without replacing entrepreneurial initiative and market competition – should read Eva Dou’s excellent account of it in the book House of Huawei: The Secret History of China’s Most Powerful Company (2025).

When China Does It, It Is “Leninism”. When the West Does It, It Is “Strategic Autonomy”

The irony is that the West is now doing precisely what it spent decades criticising China for doing. The United States subsidises semiconductors, batteries and other strategic technologies, imposes tariffs and restricts exports of advanced technology. The European Union is developing its own “made in Europe” programmes, subsidising batteries, semiconductors and green technologies, and discussing European preferences in public procurement. When China does this, it is a “Leninist developmental state”. When Washington or Brussels does it, it becomes “strategic autonomy”, “economic security” or “resilience”. The main difference is that China started several decades earlier – and pursued its strategy far more consistently.

This is also why China’s industrial supremacy has suddenly become so uncomfortable for the West. As long as China produced textiles, toys and cheap consumer electronics, globalisation was celebrated as proof of the superiority of free markets. But once China began applying the same development logic to electric vehicles, batteries, solar panels, shipbuilding and a growing range of advanced technologies, the very same process suddenly became a problem of “overcapacity”. Yet the real problem is not that China has too much productive capacity. It is that European and American firms increasingly struggle to match Chinese costs, speed of innovation and scale of production. Even The Economist acknowledges that Western firms are no longer competing merely against individual Chinese companies, but against an entire industrial ecosystem that China has deliberately built over decades.

And this is the real lesson of China’s development. Comparative advantages do not fall from the sky. Nor do they emerge by accident. They can be created through deliberate policy. Germany once built them in chemicals and mechanical engineering, Japan in automobiles and electronics, South Korea in automobiles, shipbuilding and electronics, and China is now building them in green technologies, batteries, electric vehicles, robotics and other advanced industries. In all these cases, the state played a much larger role than the neoliberal narrative of spontaneously emerging market outcomes is willing to admit.

The West Does Not Have Too Much China. It Has Too Little Industrial Policy

The Western obsession with Chinese “overcapacity” is therefore largely a misdiagnosis of the West’s own problem. China’s problem is not that it has built too much industrial capacity. The West’s problem is that it has built too little new industrial capacity and, in the belief that markets would automatically determine the optimal future structure of the economy, allowed significant parts of its industrial ecosystems and supply chains to erode. It is now trying to compensate for the consequences of this development failure through tariffs and trade restrictions.

But tariffs do not, by themselves, create new technologies, supply chains, engineers, industrial clusters or economies of scale. At best, by providing temporary protection from cost competition, they can buy time. If Europe and the United States want to compete with China over the long term, they will have to do what China started doing decades ago: identify strategic development priorities, mobilise public and private resources, and systematically build domestic technological and industrial capabilities. Markets should then do within those strategic development priorities what they do best – use competition to select the most efficient firms, technologies and business models.

The alternative to Chinese industrial policy is not more market. It is better industrial policy.