Recent breakthroughs in China’s high-tech sectors – particularly the emergence of DeepSeek – have injected some optimism about the country’s medium-term growth outlook. At this year’s “Two Sessions”, senior policymakers continued to prioritize technological innovation, positioning high-tech manufacturing as a key growth engine through a range of policies.
A key question for investors is whether China’s manufacturing upgrade can drive enough economic growth to offset structural headwinds such as the property downturn. In this Asia Economics Analyst, we examine China’s high-tech outperformance in recent years and assess its growth potential.
Two main factors have driven the sector’s outperformance. First, high-tech manufacturing tends to receive more domestic policy support, as policymakers prioritize reducing reliance on foreign technologies and fostering technological innovation. Second, the rapid expansion in external demand, coupled with the sector’s higher export exposure, likely has fueled production growth. We also found that high-tech manufacturing is the only sector within the broader manufacturing with strong profitability.
Using China’s input-output table, we show that high-tech manufacturing (defined as pharmaceuticals, and equipment manufacturing sector excluding metal products and automobiles) has been a significant growth driver, contributing an average of 1.1pp to annual real GDP growth over the last decade. While policymakers have signaled a shift toward high-tech manufacturing as a new growth engine, our estimates suggest it was not enough to fully offset the significant contraction in the property sector. Since 2022, the ongoing property downturn has weighed on GDP growth by an average of 1.7pp per year (vs. +1.1pp per year from high-tech manufacturing in 2022-24).
Looking ahead, our baseline scenario expects that the high-tech manufacturing sector will continue to outperform the broader manufacturing sector, contributing an average of 1.0pp to annual GDP growth from 2025 to 2029, with alternative scenarios ranging from 0.6pp to 1.4pp. On the upside, policy support may intensify, trade tensions may not escalate significantly further, and potential technological breakthroughs could drive strong domestic and external demand. On the downside, the risk of further China-focused tech restrictions, along with growing overcapacity and deteriorating profitability, may constrain investment and production growth in these areas.
The advent of DeepSeek and other globally competitive, cost-effective Chinese AI models has propelled AI and high-tech to the forefront of China’s equity market themes. This momentum is further reinforced by recent commentary at the “Two Sessions”, which underscored strong policy support for high-tech manufacturing. As a result, investors are increasingly interested in whether this momentum is sustainable and how much it can contribute to China’s economic growth.
In this Asia Economics Analyst, we examine the role that high-tech manufacturing plays in the Chinese economy and revisit the key drivers behind its relative outperformance compared to the broader manufacturing sector. We also leverage China’s input-output table to estimate high-tech manufacturing’s contribution to real GDP growth. Looking ahead, we lay out the likely path of high-tech manufacturing in the Chinese economy, contrast it with the property market in terms of their respective contributions to real GDP growth, and conduct scenario analysis given the heightened uncertainties regarding US-China tension and technology breakthroughs.
The manufacturing sector has been a key driver of China’s economic growth. Over the past two decades, China’s manufacturing value-added as a share of global total has increased from 13% to 33%. The manufacturing sector’s importance has increased in recent years, as the Covid pandemic dented household consumption, a severe housing downturn weighed on the broader economy, and heavy debt burdens on local governments slowed infrastructure building. In Exhibit 1, we compare growth rates of China’s major economic indicators during 2019-24 with those in 2014-19. Over the past five years, manufacturing investment and manufacturing IP have outperformed overall real GDP, whereas growth of property investment, retail sales, and infrastructure investment have decelerated much more than real GDP growth.
