DeepSeek was virtually unknown when the year began. It is now shaking global stock markets and being called a “sputnik moment” for the US. Last month, xiao hong shi (Little Red Book) also emerged from seemingly nowhere, as US TikToc users began migrating en masse to this Chinese social media site in anticipation of TikTok being shut down. These follow a string of announcements by China’s digital tech giants on new developments in high-end semiconductor chips.

US strategy to contain China through its “small yard, high fence” restrictions on technology transfer is now in disarray.

Far from the tired and unreliable narrative of Chinese economic decline, these developments, together with China’s having emerged as the world leader in electric vehicles and low-emissions transition technologies, point to areas of significant vitality.

The Chinese economy is in the process of massive structural change, the implications of which may only be fully understood in years to come. China is sloughing off its staple low-value added, assembly manufactures as it moves rapidly up the value-added chain. This process has accelerated with the geopolitical tensions in recent times as Beijing has sought resilience against unilateral trade and investment measures applied by the US.

Structural change on this scale and pace inevitably creates dislocation in labour markets as some skills become redundant and time is required to acquire new ones. Nevertheless, in 2024, China’s service sector grew almost three times as fast as GDP: an effective way to mop up frictional and structural unemployment.

Also contrary to the hackneyed narrative that under Xi Jinping the private sector has been squeezed into irrelevance, all of these major developments in new industries have been led by China’s private entrepreneurs.

At a meeting recently in Beijing with some local, US educated and experienced, venture capitalists, I was told of a new breed of Chinese private entrepreneur. These were all mainly young, like Liang Wanfeng the founder of DeepSeek, who use the vast size of China’s domestic market to build rapidly economies of scale and critical mass and then to move offshore. They were described as having been “born global”.

To be sure, China’s economy currently lacks the effervescence of the pre-Covid period. This is attributable mainly to the shakeout in the property market which has smashed consumer confidence along with negative wealth effects in many cases. This has had a knock-on effect to local government debt. The speculative, debt-fuelled, property development merry-go-round has shuddered to a crawl. Confidence has been further harmed by geopolitical head winds.

A wander around Beijing’s and Shanghai’s empty shopping malls and half-filled restaurants makes the point. But in other cities, such as Hangzhou, the home of Alibaba and DeepSeek, a different story is told.

China’s economy did manage to grow by 5% on 2024, an annual growth rate nearly twice that of the US and among the highest for all big economies. And despite nearly eight years of US policy to onshore manufacturing, China still accounts for 31% of global manufacturing, double that of the US. China remains, and will continue to be, the workshop of the world. Moreover, it has done this as it undertakes deep industrial structural change.

In 2024, China’s EV manufacturers accounted for about 60% of units sold and more than 66% of batteries. In 2023, China accounted for 77% of world production of solar panels. BYD is a private Chinese company that is the world’s biggest producer of EVs while Tongwei Solar in Chengdu is the biggest manufacturer of solar panels and is also privately owned. The idea that under Xi Jinping China’s private sector and entrepreneurship has been smothered is fanciful.

The emerging characteristics of China’s dynamic private sector are that it is heavily concentrated in technology and especially data-intensive industries, it is led by youthful entrepreneurs, who seek to build scale rapidly, but with ambitions to move quickly to international markets.

They seek market power first, before profits. In this respect, the model is not that different to that pioneered by Jeff Bezos with Amazon. Their philosophy is “power before money”. “Once you have the market power, you can then start to work out how to make money from the business”, I was told by an investor. This is clearly what Liang Wanfeng is doing with DeepSeek.

As can be seen almost daily, China has no shortage of eager venture capitalists and young smart entrepreneurs seeking fame and fortune. Despite the consumer malaise, the sense of optimism, excitement and energy that characterised earlier periods of China’s economic reforms is still widespread.

According to Newsweek, each year more students in engineering and computer science graduate in China than in the rest of the world combined. While that might lead to intense competition in the graduate job market and frequently disappointed expectations, it also means that China’s entrepreneurs have a huge and relatively low-cost talent pool on which to draw.

China is rapidly strengthening its digital technology ecosystem comprising young entrepreneurs, private venture capitalists, highly accommodating government policies, with internationally focused firms that achieve critical mass quickly from China’s huge market.

The current dance between Washington and Beijing over tariffs is a sideshow to the longer-term structural shifts that are now well advanced. Declinists, who have become increasingly vocal in predicting the end of China’s economic ascendancy, fail to distinguish between cyclical and structural changes in the economy. Most, however, simply want to wish away China as the US’ sole global competitor.

Republished from AFR, 7 February, 2025