From Lists to Systems: The Second Act of China's Industrial Policy

From List to System: The Second Act of China’s Industrial Policy

Late 2015, Washington. The U.S. Chamber of Commerce completed a rather unremarkable task: translating a Chinese planning document into English. The outside world later called it the “Green Book,” and its content was the underlying logic of Made in China 2025—which links were to be localized, and which industries were to be pushed into the global front ranks. The translation was then distributed to companies, governments, and major research institutions.

Within the following year, three independent judgments emerged one after another. In 2016, the Mercator Institute for China Studies (MERICS) stated bluntly that if China succeeded, foreign companies and industrial nations would face a strong rival backed by state power in multiple advanced manufacturing sectors. In 2017, the European Union Chamber of Commerce in China and the U.S. Chamber of Commerce successively reached equally blunt conclusions: markets could be distorted, competitors could be squeezed out, and the principles of fair competition could be fundamentally undermined. A widely cited graphic at the time was MERICS’s Made in China 2025 heat map, which clearly marked the degree of exposure of manufacturing powers such as South Korea, Japan, and Germany.

Looking back today, these judgments were not alarmist. They were even somewhat restrained.

An Asymmetric Report Card

In May 2025, Rhodium Group, commissioned by the U.S. Chamber of Commerce, completed a retrospective report, “Did Made in China 2025 Succeed?” The conclusion was that China had largely delivered on the goals set at the time—reducing import dependence, replacing foreign capital in its domestic market, and building global competitiveness in a range of industries including new energy vehicles and information and communications equipment. But the report also noted that in the hardest areas to crack, such as high-end semiconductors, advanced aviation, and biopharmaceuticals, Chinese companies had still not closed the technology gap.

This asymmetric report card is the key to understanding the next phase. Facing internal and external pressure, Beijing did not choose to retreat, but to double down. Rhodium’s core judgment is that China’s industrial policy is shifting from “targeted sectoral intervention” to a form that can be summarized as “everything is industrial policy.”

From List to Operating System

Made in China 2025 was essentially a list: a set of strategic emerging industries, a set of localization rate targets. The policy of the new phase is no longer a longer list; it is more like an operating system, covering all levels from upstream inputs and industrial equipment to downstream applications and services, and further to frontier technologies.

One notable detail is that even in mature industries with overcapacity and fierce price wars, Beijing did not choose to “cut capacity,” but continued to provide support, pushing companies to upgrade production technology and spread costs through share. The logic of policy is not exit, but upward migration. At the same time, the previously relatively neglected services sector has been brought into view, with visible progress in software, data processing, and drug R&D.The way frontier technologies are used is also changing. Artificial intelligence, quantum, and future energy are regarded as “window-period” industries, but they are no longer merely targets of R&D subsidies. Public procurement and state-owned enterprises are being used to create demand at scale, providing the first curve for the commercialization and adoption of new technologies. From subsidizing supply to creating demand, this is a substantive leap.

The Paradox: Expansion in the Midst of Tightening

More worthy of scrutiny is that all this is happening in a tighter macro environment: slowing growth, weak domestic demand, fiscal stress, and declining efficiency of capital allocation.

By conventional wisdom, constraints should lead to contraction. Beijing’s response, however, has been “re-centralization”—strengthening control over fiscal spending, bank credit, capital markets, and state-owned investment funds, and directing scarce resources toward strategic priorities. Government guidance funds have been consolidated and aligned with national goals; bank credit is increasingly guided through targeted relending and regulatory guidance; at the local level, redundant and wasteful tax and fiscal subsidies are being cleaned up.

The costs of this shift cannot be ignored. After decades of marketization, non-market considerations are being reinserted into the operating logic of banks, state-owned enterprises, and investment markets. It may extend the effectiveness of industrial policy, but it also has long-term implications for overall economic vitality and efficiency.

The risks are concrete. The broader the industries covered by industrial policy, the greater the possibility that its effectiveness will be diluted; the deepening of state influence over financial markets may further reduce the efficiency of resource allocation. Evidence has already begun to emerge: declining corporate profits, weak private investment, and slowing R&D growth in key industries. These forces may be masked by industrial achievements in the short term, but in the long term they will affect productivity and growth potential.

Shock 2.0, Not a Prediction

Over the past three years, the global impact of China’s industrial and economic policies has accelerated significantly, and it will most likely continue to expand. The combination of sustained policy support and weak domestic demand has driven a rapid expansion of the manufacturing trade surplus. Since 2019, the manufacturing goods surplus has roughly doubled to about $2 trillion, reflecting both rising exports and the success of import substitution.

Many observers call this “China Shock 2.0.” Its nature differs from the previous round: China is no longer merely the “world’s factory”; it increasingly plays simultaneously the roles of an upstream node, a supplier of industrial equipment, and an organizer of value chains. The external world’s dependence on Chinese supply chains is deepening, not diminishing. At the same time, Beijing is increasingly proactive in using policy tools to entrench its dominant position in global value chains and to offset foreign “de-risking” and diversification efforts.

The Real Problem Is Not Information

The analysis from ten years ago has not become obsolete; it was merely shelved. Translations exist, reports were made public, and warnings reached the senior levels of government and business in major economies. The problem is not information but action—crowded out by other priorities, hemmed in by political constraints, or delayed by the belief that “market forces will eventually balance themselves.” The costs are clear today: loss of competitiveness, weakened industrial capacity, and strategic vulnerabilities that require long-term investment to remedy.Therefore, what truly distinguishes the second phase is not greater ambition, but a more systematic mechanism: it relies less on isolated subsidies and more on aligning the direction of the entire financial system and the state-owned enterprise system. In the short term, this means that competitive pressure from Chinese manufacturing will continue to spill over; in the medium term, the costs of resource misallocation will gradually become apparent.

For the outside world, the most dangerous misjudgment may be to still understand China's industrial policy as a list. It has long ceased to be a list.