Local Industrial Policy in China: The Source of Geoeconomic Power and the “Indispensability of Goods”

1. The Importance of Localities in China’s Industrial System

A key concept for understanding the expansion of China’s geoeconomic power is what could be called the “indispensability of goods.” This refers to the ability to exert influence in the international economy by controlling supply capacity for specific products or intermediate goods that are difficult to substitute.

Such indispensability rests on China’s overwhelming manufacturing capacity and dense industrial clusters. Yet the formation of this capacity cannot be explained solely by centralized direction from Beijing. Rather, China’s vast and diversified supply power has been built through the cumulative development of decentralized industrial growth at the local level.

Individual Chinese provinces often have populations in the tens of millions, with regions such as Guangdong and Shandong exceeding 100 million people—economic units comparable in scale to major countries. Moreover, China’s structure encompasses both advanced coastal regions and developing inland areas. This coexistence of different development stages within a single national economy has enabled the formation of multi-layered supply chains.

In this sense, the local structure of China’s economy constitutes a critical foundation supporting the depth and resilience of the country’s supply capacity.

2. Traditional Local Government Industrial Policy and Its Challenges

Local governments have historically served as the operational engine behind this supply capacity. Keyu Jin (2023) describes China’s local economic system as a “Mayor Economy.” At its core lies an institutional structure in which local governments possess extensive discretion over economic management, while their performance is closely tied to political evaluation.

Since the reform and opening-up period, local authorities have been granted broad decision-making authority over regional economic development and social welfare. Officials who achieved high GDP growth rates were often rewarded with promotion, creating a meritocratic incentive structure that encouraged competition among local governments. This competition drove aggressive investment promotion, industrial development, and infrastructure expansion. Localities competed to attract firms and build industrial clusters, thereby collectively strengthening China’s overall manufacturing capacity and supply power.

In this sense, China’s industrial rise can be understood as the result of inter-regional competition that fostered industrial agglomeration and expanded supply capacity.

However, this system has also produced several distortions. During periods of rapid growth, the broad discretion granted to local governments sometimes resulted in investment decisions that diverged from central policy. Following the global financial crisis, large-scale stimulus programs led by local governments contributed to excess industrial capacity, prompting subsequent supply-side structural reforms.

Furthermore, investment behavior driven primarily by GDP targets often encouraged duplicative investment and local protectionism, and during economic downturns, excess supply has sometimes generated friction in international markets.

3. China’s Pursuit of “New Quality Productive Forces” through Regionally Differentiated Development

Against this background of locally driven industrial expansion, China has recently sought to recalibrate its industrial policy direction. Under the leadership of General Secretary Xi Jinping, the concept of “new quality productive forces” has been promoted alongside the principle of yin di zhi yi— or “development tailored to local conditions”.

Yin di zhi yi emphasizes selecting development pathways based on the specific characteristics of each region, including resources, industrial foundations, and human capital. One objective is to prevent the excessive concentration of investment in a single sector, which had previously occurred under more uniform policy approaches.

“New quality productive forces,” meanwhile, represent a cross-cutting concept focused not on expanding output volume but on improving technological sophistication, efficiency, quality, and innovation capacity across the entire industrial structure.

Within this framework, industries can be broadly categorized into three layers.

First, mature industries (i.e., traditional industries), including steel, chemicals, and general machinery. Rather than simply maintaining these sectors, China aims to upgrade them through advanced manufacturing, digitalization, and green transformation.

Second, emerging strategic industries, such as new energy technologies, advanced manufacturing, electronic information industries, and bio-manufacturing. These sectors already possess significant scale but retain considerable room for technological and market expansion.

Third, frontier industries, or wei lai chan ye (“future industries”), which remain at an early stage of industrialization but may shape future technological leadership. These include quantum technologies, advanced artificial intelligence, brain science, cutting-edge biotechnology, deep-space and deep-sea exploration, and next-generation energy technologies.

Crucially, these three layers are not intended as a simple replacement of old industries by new ones. Instead, the policy aims to reorganize the entire industrial system along the shared dimensions of technological sophistication, efficiency, quality, and innovation, combining the upgrading of traditional sectors with strategic investment in emerging and frontier fields.

Under this approach, local governments are expected to adopt more selective and sophisticated policy frameworks, including industrial specialization based on regional comparative advantages, the development of innovation ecosystems, adaptation to national unified markets, and improved fiscal and financial policy tools.

4. The Diversity of Local Industrial Policy in Practice

These policy principles have translated into diverse industrial strategies across China’s regions.

In advanced regions such as Hangzhou in Zhejiang Province, a group of emerging firms often referred to as the “Six Little Dragons” has attracted international attention. These include the AI company DeepSeek, robotics firm Unitree, BrainCo—developing non-invasive brain-computer interface technologies using biosignals—and ManyCore, which provides 3D interior design tools.

Rather than isolated success stories, these firms illustrate the emergence of regional innovation ecosystems combining start-up support, financing, and talent concentration. Similar patterns can be observed in Guangdong and Jiangsu, where industrial upgrading in electronics and advanced manufacturing is progressing alongside the development of new sectors.

In the realm of industry-academia collaboration, Hefei in Anhui Province has developed an integrated framework linking research commercialization, investment, and talent policies around the University of Science and Technology of China. This institutional model has contributed to attracting firms such as the electric vehicle manufacturer NIO and represents a notable example of connecting research capacity with industrial development.

Resource-based strategies are also prominent. Jiangxi Province has positioned advanced materials industries based on heavy rare earth elements and tungsten as key sectors, while Inner Mongolia has prioritized the development of rare-earth-based new materials. Meanwhile, Guangxi Zhuang Autonomous Region has sought to leverage its geographic proximity to ASEAN to establish a hub for China-ASEAN electronic information industry cooperation, demonstrating how location-based strategies shape regional industrial policy.

5. Local Industrial Policy as the Source of China’s Geoeconomic Power

Taken together, these developments highlight that China’s geoeconomic power derives not only from central government strategy but also from the accumulated impact of industrial policies implemented across diverse localities.

As investment in innovation and future industries continues to expand, the sources of this dynamism are distributed across numerous regions rather than concentrated in a single center. Combined with the simultaneous upgrading of traditional industries and expansion into emerging sectors, China may sustain—or even increase—its global manufacturing share across a broad range of industries.

At the same time, the shift toward “new quality productive forces” reflects an attempt to address the shortcomings of earlier development models characterized by GDP-driven investment, redundant projects, and local protectionism. While principles such as regionally differentiated development, restraint of overheated investment, and greater reliance on market mechanisms have been articulated, the extent to which local government incentives will fundamentally change depends on future institutional reforms and implementation.

Moreover, governance disruptions—including the removal of central and local officials and corporate leaders under anti-corruption campaigns—may also affect the operation of local industrial policy.

Ultimately, the dynamic evolution of China’s regional industrial systems has the potential to shape not only China’s own economic trajectory but also global supply structures and the broader balance of geoeconomic power. Understanding the trajectory of local industrial policy is therefore essential—not merely for analyzing China’s domestic economic trends, but also for assessing the future configuration of global supply chains and geoeconomic competition.

(Photo Credit: Getty)

Disclaimer: The views expressed in this IOG Commentary do not necessarily reflect those of the API, the Institute of Geoeconomics (IOG) or any other organizations to which the author belongs.