High Capacity · China
TIER 4 Thu, 19 Jun 2025 10:49:08 +0000
Renowned Chinese scholar Lu Feng makes the case for why China needs more--not less--industrial development, particularly in its showdown with the US.
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Image: South China Morning Post
This piece is cross-posted with the must-readSinification newsletter by Thomas des Garets Geddes who kindly invited me to write an introduction to a recent interview with Lu Feng.
Lu Feng (路风) is a renowned professor at Peking University's School of Government, specializing in industrial policy, technological innovation, and development. Lu's influential theories of industrialization and development make him a modern-day Friedrich List or Alexander Hamilton.
In a recent interview (summary translation below), Lu Feng presents a theory of what I call "Chinese industrial maximalism." At a time when China is already the world's manufacturing superpower and faces accusations of "overcapacity" from the US and EU, Lu Feng argues that what China needs is more industrial development , not less. There are two main reasons for this.
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The first is that having a large and diverse industrial base is a key precondition for scientific and technological innovation. He argues that "only after becoming an industrial power can a country become a scientific power." Lu Feng points to the historical examples of the US and Japan, which began by mass-producing goods that were invented elsewhere, like cars. The industrial capacity that emerged later generated both the demand and resources needed for scientific innovation, including the creation of entirely new industries, such as semiconductors, computers, and software.
Lu Feng argues that the larger and more diverse a country's "industrial system" (工业体系)--which includes not just different sectors but also supporting factors such as education and financing--the faster its technological advancement. "Complementary relationships" (互补关系) within the industrial system allow technological advancements in one sector to drive progress in others. For example, China's advances in lithium batteries and lidar sensors empower its EV, drone, and robotics industries through what I call "overlapping tech-industrial ecosystems." In a similar manner, Lu Feng believes China's vast industrial base will give it an edge in AI through a positive feedback loop between real-world industrial applications and foundational AI models.
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China's overlapping tech-industrial ecosystems
The second reason for doubling down on industrial development is the geopolitical value of China's industrial base. Lu Feng argues that China's industrial base is its "greatest source of strength" (中国最大力量源泉) and a "strategic asset" (战略性资产) akin to US dollar hegemony or Russian oil and gas. The fact that the whole world relies on China's manufacturing capabilities and finds it nearly impossible to replicate this elsewhere makes China an indispensable part of the global economy.
This gives China geopolitical leverage, a point made clear in the trade war with the US. President Trump's escalation of tariffs on China backfired by revealing how dependent the US was on Chinese manufactured goods, such as smartphones and batteries. The White House was forced to quickly follow up with tariff exemptions for these very categories. (China also quietly put out its own list of tariff exemptions.) Over time, China has sought to decrease its reliance on foreign technology, especially American technology, while increasing the rest of the world's reliance on China, as Ryan Hass at Brookings has pointed out.
Lu Feng argues that China's industrial development is more important than ever in the face of intensifying US-China competition. Rather than caving into notions of "overcapacity" coming from "foreign influences" (外人之风) and "tying our own hands" (自缚手脚) by limiting industrial capacity, Lu says China should forge ahead in both traditional and high-tech industries. This is especially critical now as he believes the "US is gearing up for a showdown with China" (美国拉开架势要与中国对决).
Lu Feng sees the US-China rivalry ultimately as a contest between two systems: China's "industrial socialism" (工业社会主义) and America's "financial capitalism" (金融资本主义). The US was once an industrial powerhouse like China today with half of global production and an "arsenal of democracy" that changed the course of World War II. But, in a critique with strong political resonance within the US, Lu Feng says the US economy became increasingly "financialized" (金融化), dominated by the short-term interests of Wall Street investors, causing America's industrial base to atrophy. In contrast, China's socialist system ensured that financial resources would be directed toward supporting the "real economy" (实体经济) and steer China away from the standard path of deindustrialization.
Lu Feng ends with a bold statement: "The past 500 years of world history show that an industrial power has never lost when challenged by a financial power, even when the financial power is also a global hegemon." For Lu, the answer to China's core challenges--strategic rivalry with the US, sustaining technological progress, an economic slowdown, employment--is even greater industrial strength in every form.
- Kyle Chan
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Name:Lu Feng (路风)
Born : Dec. 1955 (age: 69)
Position : Professor, Department of Political Economy, School of Government, Peking University (since 2003)
Previously : Director, Institute of Enterprise and Government, School of Public Policy and Management, Tsinghua University
Other : Civil-service decade in Beijing, serving successively in the General Office of the Beijing Municipal People's Government, Financial and Trade Office of the Beijing Municipal Government, State Economic Commission and State Planning Commission (1982-1991)
Research focus : Political economy of industrial development; Technological innovation and industrial competitiveness; Enterprise and organizational theory, with a focus on SOE governance reform
Education : BA Minzu University of China (1982); MA-PhD Columbia University (1991-1998)
Experience abroad : United States (1991-1999)
Interview with Lu Feng ( 路风)
Published by Guancha.cn on 29 May 2025
1. Building a Complete Industrial System
The founding generation of Chinese Communist Party leaders understood that industrialization was essential for maintaining national independence and achieving economic development. Their views were shaped by the "century of humiliation" and years of revolutionary warfare.
From its inception, the People's Republic of China thus set itself as a core objective the establishment of a complete industrial system.
What does a complete industrial system mean? It means developing every type of industry that exists globally, regardless of its domestic starting point. This included the semiconductor industry, which was still in its infancy.
2. China 's Organizational Capability
It is a misconception to attribute China's post-reform and opening-up development solely to "international industrial transfers" (国际产业转移).
During the first US-China trade war in 2018, there was significant anxiety among Chinese elites that the US would force global industrial chains to shift away from China. However, this fear proved unfounded.
Industry is not something that can simply be relocated like a factory building.
At its core, industry is an organizational and social capability. It is this capability that determines how effectively physical assets are used.
The key point is this: organizational capability cannot be transferred.
Developed countries can bring advanced knowledge, but whether this knowledge can be absorbed and applied depends on two factors:
1. Whether the recipient country has a solid foundational capacity [能力基础];
2. Whether its domestic enterprises can engage meaningfully in competitive markets.
China possessed such a foundation.
Today, China remains the only country in the world with a complete industrial system.
3. How to Avoid "Tying One's Own Hands"
The expression "tying our own hands " (自缚手脚) refers to the PRC's production-restriction system (限产体制) that emerged under the influence of Chinese binary thinking (二分法) in the early 2010s promoted by liberal economists.
Binary thinking divides high growth into two categories:
1. "Old growth drivers" (旧动能), such as traditional industries; and
2. "New growth drivers" (新动能), including scientific research, digitalization and the service sector.
Binary thinking led many PRC economists to believe that China's central economic challenge was to transition from old to new growth drivers.
As a result, China implemented a production-restriction system that compelled traditional industries to reduce capacity, limit output or even shut down, effectively replacing some highly efficient economic activities [经济活动] with less efficient ones.
See Lu's 2023 article entitled "How Can China Restart Medium- to High-Speed Growth? First, these Misconceptions Must Be Clarified".
At that time, local governments were instructed to set clear and specific targets, tighten thresholds related to environmental protection, energy consumption, quality, standards and safety, and to strengthen enforcement mechanisms.
Industrialization is, in fact, a precondition for advancing environmental protection. Only with access to modern energy sources can people stop relying on the destruction of vegetation for basic survival. More importantly, industrialization provides governments and societies with the economic resources needed to invest in environmental protection and restoration.
The production-restriction system culminated in severe power outages across the country in September 2021, prompting Beijing to intervene and introduce the principle of "establishing before breaking" (先立后破).
Despite subsequent assurances that traditional industries would not be abandoned, many remain constrained by output limits.
But even under these constraints, traditional industries remain the main engine of China's economic growth and the industrial sector continues to demonstrate the highest productivity across all sectors.
In the context of intensifying US pressure, China must avoid tying its own hands and lift self-imposed restrictions on industrial development and economic growth.
4. Explaining China 's Economic Slowdown
The primary reason for China's ongoing economic slowdown is the suppression of traditional industries.
This prolonged slowdown only began after economic policymaking came under the influence of binary thinking and the implementation of the production-restriction system.
I believe in the bright future [中国经济光明论] of China's economy, precisely because I argue that the slowdown has been driven by policy missteps, not by underlying structural weaknesses.
The spread of binary thinking and the rise of the "restriction-first" [限产之风] mindset mark the true beginning of China's economic downturn.
This flawed mindset has forced an industrializing country such as China into a premature process of deindustrialization.
5. The Fallacy of Chinese Overcapacity
Following the 2008 financial crisis, the United States attempted to shift blame onto China by claiming that Chinese "overcapacity" was the primary cause of global economic imbalances.
Some in China internalized these external narratives, which gradually began to influence domestic policymaking.
Under the Biden administration, the US once again sought to to suppress China, while simultaneously urging it to commit "economic suicide" and accusing it of industrial overcapacity.
This time, however, China's central leadership did not take the bait and successfully resisted being misled by these external narratives.
Lu: "The absolute output or capacity of any industry can never serve as the sole criterion for determining whether that industry is experiencing overcapacity or not."
Lu: "If one focuses solely on the absolute output of a given industry, while ignoring the interdependencies between different sectors within an industrial system, one risks making a fundamental mistake."
Lu: "[In fact,] the production-restriction system is the greatest obstacle to the expansion of domestic demand in China."
6. The Precondition for Major Technological Innovation
A country can only become a scientific power after first becoming an industrial power. This "development sequence" (发展顺序) is a historically proven fact that has never been reversed.
Industrialization generates both the demand for science and the capacity to invest in it.
The process of industrialization always begins with the production of existing goods, not with the invention of entirely new products.
Innovative products can only emerge once a country has undergone industrialization.
Thus, the precondition for major technological innovation is the establishment of a complete industrial system.
Building such a system requires support from other foundational sectors, including education, finance and infrastructure -- all of which take time to develop and mature.
7. Winning the Chip and AI Race
The foundation for fully localizing the semiconductor industry lies in China's independent and comprehensive industrial system.
As internet data approaches saturation, industrial data is becoming increasingly critical to the development of AI -- and China possesses the world's largest reservoir of such data.
For AI firms to start generating revenue, they will need to collaborate with industrial partners to develop domain-specific small models tailored to practical use cases.
Industrial firms are ultimately the primary customers of AI companies. Regardless of how some may label these industries as "low-end", they are indispensable for real-world AI applications.
Thus, the key variable in the US-China AI race is who has the larger and more comprehensive manufacturing base.
In this regard, China holds a competitive advantage as it possesses both AI and industrial companies.
8. On DeepSeek
Zhejiang's "wealth" and continued economic strength are rooted in traditional industry, not high-tech; this solid industrial base, combined with strong investment capacity, a favorable business environment and local universities, has attracted young tech entrepreneurs and enabled the growth of frontier tech firms - such as DeepSeek - that initially depended more on financing than sales.
DeepSeek demonstrated to both the public and Chinese leadership that major technological breakthroughs do not require the state first to allocate large sums to research and then transfer the outcomes to enterprises.
Its rise challenged binary thinking and the production-restriction mindset, reaffirming the principle that technological progress is inseparable from industrial development.
9. Comparing China with the US pre-WWI
China at the end of its high growth period (2013-2014) closely resembled the United States in the decades from the 1870s to the outbreak of the First World War.
Both countries had undergone an initial surge of large-scale industrialization but had not yet fully realized their economic potential.
At that stage, the US was already the world's largest industrial and agricultural producer and ranked first globally in terms of overall economic size.
However, it also faced major domestic challenges, including extreme wealth concentration and environmental degradation.
The United Kingdom remained the global hegemon, and the pound sterling served as the world's reserve currency.
Imagine if, at that pivotal point, US policymakers had concluded that sustained high growth was no longer possible after 40 years of rapid expansion -- and responded by implementing a production-restriction system that halted economic momentum.
Had that occurred, the course of world history would have been fundamentally altered.
10. The US Labor Force
The US labor force has lost the social foundation (社会经验基础) of industrial experience, evolving into one that is high-cost and lacking in manufacturing skill.
By contrast, China's labor force remains low-cost, highly skilled in manufacturing, and with the social foundation for industrial experience continually expanding.
As long as China does not abandon its industrial base, the pressures of rising labor costs can be effectively offset through innovation and technological advancement -- a process already underway in many Chinese industries.
11. Reconstructing US hegemony
Since taking office, Trump's strategic objective has remained aligned with that of previous US administrations: the preservation of American hegemony.
However, in the context of America's declining strength and mounting internal crises, Trump's goal has actually been to reconstruct US hegemony (重塑美国的霸权).
Trump is using high tariffs in an attempt to reverse US deindustrialization, framing this strategy as "manufacturing reshoring" (制造业回流).
He is also focusing particular effort on suppressing what he regards as the greatest threat to US hegemony: China -- and China alone.
12. US Industrial Decline
The fundamental cause of US industrial decline lies in the country's pursuit of global hegemony.
Trumpism gained widespread popular support by recognizing that America's core problem lies is industrial decline.
However, Trumpism mistakenly attributes this decline to other countries (including China and even US allies).
The US has approached the problem of industrial decline from a hegemonic standpoint (霸权主义立场), which distorts its diagnosis and hinders recovery.
The United States has already undergone deindustrialization, and reindustrializing is far more difficult than industrializing for the first time.
No matter how high Trump raises tariffs, such measures cannot address the country's underlying structural problems.
The challenges confronting Trump stem from over fifty years of accumulated industrial decline -- issues that cannot be resolved within a single presidential term.
14. PRC Industrial Socialism vs. US Financial Capitalism
Industrialism (工业主义) refers to a development model in which economic growth and social progress are driven by the continuous rise in productivity, rooted in industrial and real-economy activity (实体经济).
Industrial socialism (工业社会主义) holds that only socialism can ensure China's continued path of industrialization and uphold a "real-economy-centered model of development" (实体经济为主的道路).
Socialism gives the state the capacity to direct financial flows into the real economy and to coordinate the relationship between finance and industry.
History has shown that under capitalism, industrialism inevitably gives way to financialism (金融主义).
Under American hegemony, all developed countries have undergone processes of economic financialization (经济金融化).
As long as China maintains institutional mechanisms that enable the state to intervene directly in the real economy, it can avoid falling into the trap of financialization.
Although financial capitalism has allowed the US to maintain global hegemony, it has also hollowed out the foundations of that hegemony and torn American society apart.
Maintaining global hegemony and achieving reindustrialization are fundamentally incompatible goals: to preserve hegemony is to abandon reindustrialization; and to pursue reindustrialization is to forfeit hegemony.
We are thus witnessing a "confrontation" between American financial capitalism and Chinese industrial socialism.
The past 500 years of global history show a consistent pattern: an industrial power has never lost when challenged by a financial power -- even when that financial power was the reigning global hegemon.
15. US-China Rivalry
At present, China's conflict with the US is centered primarily on tariffs.
However, this confrontation is very likely to expand into additional domains in the future.
In responding to this US-led confrontation, China must abandon binary thinking and reaffirm a fundamental truth: the industrial system is China's greatest source of strength.
This industrial system is its greatest strategic asset (战略性资产) -- one that is extremely difficult to replicate or imitate, comparable to the US dollar's hegemonic role or Russia's oil and gas reserves.
The strength of China's industrial system and production capacity was already demonstrated during Trump's 2018 trade war, when attempts at "decoupling" failed to dismantle China's position in global supply chains.
The stronger China's industrial system becomes, the more difficult it will be for any country to successfully "decouple" from it.
China must free itself from the restrictive mindset of categorizing growth into "new" versus "old" drivers.
Relying on China's industrial system means fully mobilizing the potential of the Chinese people. Although China possesses a cadre of highly educated professionals, they make up only a small portion of the labor force.
Hundreds of millions of intelligent and hardworking Chinese workers, many with limited formal education, still need stable employment and the opportunity for economic participation.
16. China 's Economic Prospects
Those who claim China's economy is now only capable of slow growth are promoting an irresponsible and damaging policy agenda.
Anyone who asserts that China's growth potential has already been exhausted lacks any scientific or empirical basis.
In reality, China's industrial system retains considerable "elasticity of demand" (需求弹性).
China's "golden era" of economic growth lies not behind us, but ahead.
If industrialized countries attempt to block Chinese goods through high tariffs, they will only isolate themselves and impose higher living costs on their own populations.
As more Chinese industries achieve overwhelming superiority, no force will be able to halt the great rejuvenation of the Chinese nation (中华民族伟大复兴].
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| Apr 25
The US and China are in a cold war, not a trade war. This is something much bigger than tariffs and trade deficits. It is much bigger than Taiwan or semiconductors. And it began long before Trump or Xi. The US and China are locked in a global contest of power that is playing out along every dimension: economic, technological, military, cyber, soft power…
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