How China's Next-Generation Industrial Policy Is Reshaping Urban Economies

Beijing's strategy has widened from a defined set of strategic sectors toward an economy-wide programme. Its consequences are as much urban and regional as they are industrial.

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Executive Summary

A Rhodium Group assessment commissioned by the U.S. Chamber of Commerce, China's Next-Generation Industrial Policy, concludes that China's industrial strategy is entering a new phase rather than retreating under domestic and international pressure. The report identifies two defining shifts.

• Scope. Industrial policy is becoming systemic and pervasive, extending across all layers of production: upstream inputs and industrial equipment, downstream applications and services, and frontier technologies. The report characterises this as a move from targeted sectoral intervention toward an "industrial policy of everything."
• Global reach. Domestic policy dynamics are accelerating China's trade dominance, deepening foreign dependence on Chinese supply chains, and supporting rapid expansion by Chinese firms in overseas markets. Beijing is also deploying policy tools intended to entrench its position in global value chains and to counter foreign diversification efforts.
• Constraints. This expansion is occurring in a more difficult macroeconomic environment of slowing growth, weak domestic demand, rising fiscal pressure and declining efficiency of capital allocation. Rather than scaling back, authorities have recentralised control over fiscal spending, bank lending, capital markets and state investment funds.
• Uneven outcomes. An earlier Rhodium assessment of Made in China 2025 found substantial progress in reducing import dependencies, displacing foreign firms in the domestic market and building competitive positions in new energy vehicles and information and communications equipment, while significant gaps persist in high-end semiconductors, advanced aerospace and biomedicine.
• Urban reading. The policy mix described in the report is, in practice, a metropolitan policy mix. It determines which cities capture value in upgraded supply chains, how local governments finance investment, where energy and logistics capacity is required, and how regions compete for talent, capital and industrial tenants.

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Introduction

Industrial policy is usually analysed as trade policy, technology policy or national security policy. It is also, and increasingly, urban policy. The location of production, the density of supplier networks, the availability of research institutions and the fiscal capacity of municipal governments determine whether a national industrial strategy translates into local economic diversification or into stranded capacity.

The Rhodium Group report, published with a preface from the U.S. Chamber of Commerce, provides a detailed account of how Beijing's approach has evolved since the 2015 planning document that informed Made in China 2025. Its findings matter beyond the boardroom. They describe a set of interventions that will shape industrial land use, port and rail throughput, electricity demand, skills programmes and municipal balance sheets for at least the next decade.

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Urban Context

China's industrial campaigns have always had a spatial signature. Made in China 2025, as translated and circulated by the U.S. Chamber of Commerce in late 2015, set localisation targets that mapped onto existing coastal manufacturing clusters. Subsequent assessments by MERICS in 2016, the European Union Chamber of Commerce in China in 2017 and the U.S. Chamber of Commerce in 2017 consistently warned that state-backed capacity in advanced manufacturing would reshape competitive conditions for industrial economies including Germany, Japan and South Korea. The MERICS heat map of that period became a widely cited illustration of how concentrated that exposure would be.

The current phase intensifies the spatial logic. Where earlier policy focused on a defined list of strategic emerging industries, the report describes intervention now reaching mature sectors, foundational supply chain nodes and frontier technologies simultaneously. In upstream segments such as critical minerals, wafers and magnets, China already holds dominant positions, and policymakers are seeking to extend that position across a wider range of industrial products. In mature industries facing overcapacity and severe price pressure, the report finds continued support and pressure on firms to upgrade production technology to gain share and reduce costs, rather than to cut capacity.

The geographic consequence is that value capture increasingly depends on where a metropolitan region sits within a production chain, not simply on how much it produces. Upstream nodes, equipment manufacturing, applied software, data processing and drug development occupy very different positions in terms of margins, skills demand and infrastructure requirements. Cities positioned in the higher-value segments of the chain are likely to benefit from policy tailwinds; those concentrated in commoditised assembly face continued margin compression.

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Main Analysis

From sectoral targeting to system-wide intervention

The report's central finding is quantitative breadth: industrial policy now touches almost every major sector of the economy and the supply chains beneath them. This marks a departure from the discrete sector lists that characterised the previous decade. Services, relatively neglected in earlier rounds, are receiving more attention, with visible gains in software, data processing and drug development. Frontier domains such as artificial intelligence, quantum technologies and future energy systems are treated not only as research and development priorities but as commercialisation targets, supported through public procurement and state-owned enterprises that generate early demand at scale.

That demand-creation component is the more consequential change for urban economies. When public buyers and state enterprises become the first customers for new products, the geography of early adoption is determined administratively as well as commercially. Cities with concentrated public-sector demand become de facto test markets, which in turn influences where suppliers, engineers and supporting services cluster.

Refining the playbook under tighter fiscal conditions

Expansion is taking place under constraint. The report notes slowing growth, weak domestic demand, rising fiscal pressure and declining efficiency of capital allocation. The response has been consolidation rather than retrenchment: tighter coordination of fiscal spending, bank lending, capital markets and state investment funds; consolidation of government guidance funds aligned more closely with national objectives; lending steered through targeted relending facilities and regulatory guidance; and the culling of wasteful or redundant tax and fiscal subsidies, particularly at the local level.

For municipal governments, this is a significant shift. Local incentive packages, land discounts and matching subsidies have been a standard instrument of urban industrial recruitment. A more centralised allocation of financial resources narrows the room for discretionary local competition, even as it raises the premium on cities that can demonstrate alignment with national priorities, credible research capacity and reliable infrastructure.

The cost side of the ledger

The report is explicit about risks. Widening industrial policy across an ever-broader set of sectors risks diluting its effectiveness, while greater state influence over financial markets may further reduce the efficiency of resource allocation. Evidence of strain is already visible in declining corporate profitability, weakening private investment and slowing research and development growth in key sectors. Over time, the report suggests, these dynamics could weigh on productivity and long-term growth potential even as they deliver short-term industrial gains. Efforts to boost consumption remain limited, leaving underlying demand weaknesses largely unaddressed.

A new phase of global impact

The report describes an acceleration of external effects over the past three years. Sustained policy support combined with weak domestic demand has driven a rapid expansion of China's manufacturing trade surplus, which has roughly doubled since 2019 to around $2 trillion, reflecting both rising exports and successful import substitution. Many observers characterise this as a second China shock. For industrial regions elsewhere, the practical question is not whether adjustment occurs but how quickly local economies can reposition within reconfigured supply chains.

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Metropolitan Impact

Urban economies. The report's account implies a widening divergence between metropolitan areas that host higher-value supply chain segments and those reliant on commoditised production. Regions anchored in equipment, software, advanced materials or drug development are better positioned to absorb policy-driven demand than regions dependent on assembly volume.

Infrastructure. Expanded capacity in frontier manufacturing, data processing and future energy systems carries implications for electricity grids, industrial water supply, logistics corridors and port throughput. Infrastructure modernisation becomes a precondition for participation in national industrial programmes rather than a separate investment category.

Transportation and freight. Import substitution and export expansion change the composition of freight moving through metropolitan gateways. Higher-value, lower-volume goods place different demands on rail, airport cargo and urban freight management than bulk commodity flows.

Housing and commercial development. Industrial expansion in selected corridors affects local labour demand and therefore residential markets, while consolidation of local subsidies and fiscal tightening constrain the development budgets that have historically funded commercial and industrial real estate in smaller cities.

Technology adoption. The report's emphasis on public procurement and state enterprise demand suggests that government and state-owned entities will remain decisive early adopters of artificial intelligence, industrial software and automation. That adoption pathway differs from market-led diffusion and shapes which technology ecosystems scale.

Public services and inclusion. Skills provision, technical education and digital public services become central to whether industrial upgrading translates into broad labour market gains or into a narrower set of high-skill enclaves.

Sustainability. Continued support for mature industries under price pressure, rather than capacity reduction, has direct consequences for energy demand and emissions intensity in industrial regions, and therefore for the credibility of urban carbon commitments.

Competitiveness and investment. For economies competing with Chinese supply chains, the report's findings frame industrial policy as a question of regional competitiveness rather than only national trade posture. Foreign direct investment decisions, supplier diversification strategies and public co-investment programmes all sit in that frame.

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Strategic Insights

The report's evidence points to several priorities for city and regional decision-makers.

• Plan for chain position, not sector labels. Metropolitan strategies that specify a role within a production chain, from materials to equipment to services, are more durable than strategies built on sector branding.
• Treat infrastructure as industrial policy. Grid capacity, digital connectivity, logistics and industrial water are the binding constraints on participation in advanced manufacturing programmes.
• Rebalance local incentives. As national governments centralise financial allocation, municipal competitiveness depends more on institutional quality, research capacity and permitting efficiency than on subsidy depth.
• Invest in adoption, not only invention. Demand-side instruments, including public procurement and standards, determine how quickly technologies such as urban artificial intelligence and digital twins move from pilot to routine use.
• Anticipate adjustment costs. Where import substitution reduces foreign supplier share, affected regions require transition strategies covering skills, land reuse and business support.
• Build diversification options. The report notes that Beijing is deploying tools to deter foreign diversification. For importing regions, supplier concentration risk is now a municipal resilience issue as much as a corporate one.
• Align climate and industrial strategy. Capacity expansion in energy-intensive sectors complicates urban emissions trajectories; integrating industrial and climate planning reduces the risk of contradictory policy signals.
• Strengthen regional cooperation. Metropolitan regions that coordinate across municipal boundaries on skills, land and infrastructure are better placed to host integrated supply chains than fragmented ones.

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Future Outlook

The report's projections, and the dynamics it documents, suggest several lines of development over the next five to fifteen years.

Artificial intelligence and frontier technology. Beijing's willingness to fund commercialisation of cutting-edge technologies through procurement and state enterprise adoption is a structural change. Over the coming decade, the competitive question for other metropolitan regions is likely to shift from research capability to deployment speed in public services, mobility systems, industrial automation and urban operations.

Supply chain reconfiguration. Import substitution and export expansion are expected to continue. Whether diversification efforts by importing economies produce meaningful change in supplier concentration over a ten-year horizon remains uncertain, and is likely to vary by sector.

Industrial geography within China. Continued consolidation of guidance funds and tighter control over local fiscal subsidies may reduce the number of cities able to sustain large-scale incentive programmes, concentrating advanced capacity in fewer, better-connected metropolitan regions.

Housing and municipal finance. Weak domestic demand and constrained local finances limit the fiscal space available to offset industrial adjustment, which has implications for infrastructure maintenance, public service quality and urban redevelopment capacity.

Energy transition. The report links frontier energy systems to industrial strategy. Investment in generation, storage and grid capacity is likely to be treated as industrial infrastructure, with implications for how metropolitan energy transitions are financed.

Governance innovation. Centralised coordination of credit, investment funds and subsidies represents a departure from decades of liberalisation. Its long-run effect on productivity and on the quality of urban investment decisions will be a central theme in assessments over the next decade.

Metropolitan competitiveness. For cities outside China, the practical outlook is one of sustained competitive pressure in tradable manufacturing, increasing value placed on supply chain resilience, and growing policy attention to the industrial base of metropolitan regions rather than to services alone.

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Conclusion

The Rhodium Group assessment describes a state-directed industrial campaign that has achieved many of its core objectives while falling short in some of the most technologically demanding sectors. Its next phase is broader, better coordinated and more tightly financed than the last, and it is being pursued under conditions of slower growth and constrained public finances.

For metropolitan leaders, the implications are concrete. Industrial policy now determines where investment lands, which infrastructure is stressed, how municipal budgets are constrained and how regions compete. Cities that understand their position within changing supply chains, and that align infrastructure, skills and land use accordingly, will be better placed to convert national strategy into durable local economic development. The window for that adjustment is not indefinite.

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Key Takeaways

• China's industrial policy has shifted from targeted sectoral intervention to an economy-wide programme covering upstream inputs, industrial equipment, downstream applications, services and frontier technologies.
• The report characterises this as an "industrial policy of everything," supported by public procurement and state enterprise demand for commercialisation of new technologies.
• Manufacturing trade surplus has roughly doubled since 2019 to around $2 trillion, reflecting both export growth and successful import substitution.
• Expansion is occurring under fiscal constraint: growth is slowing, domestic demand is weak, and allocation of financial resources is being recentralised and consolidated.
• Persistent gaps remain in high-end semiconductors, advanced aerospace and biomedicine, according to an earlier Rhodium assessment of Made in China 2025.
• Mature industries facing overcapacity continue to receive support and upgrading pressure rather than capacity reduction, with consequences for energy demand and emissions.
• The urban dimension is decisive: cluster position, infrastructure capacity, skills provision and municipal fiscal health determine how national strategy translates into local outcomes.
• For competing metropolitan regions, supply chain concentration is now a resilience question that belongs in city and regional planning, not only in trade policy.

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SEO Keywords

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Sources

• Rhodium Group, China's Next-Generation Industrial Policy (commissioned by the U.S. Chamber of Commerce): https://rhg.com/research/chinas-next-generation-industrial-policy
• U.S. Chamber of Commerce and Rhodium Group, Was Made in China 2025 Successful? (May 2025): https://www.uschamber.com/international/report-was-made-in-china-2025-successful
• MERICS, Made in China 2025 heat map (2016), European Union Chamber of Commerce in China (2017) and U.S. Chamber of Commerce (2017) assessments, as cited and discussed in the Rhodium Group report referenced above.