Sustained enhancement of China’s global competitiveness driven by innovation

By Robin Xu, Head of Research, UBS Securities

Yu Song, Chief China Economist, UBS Securities

Wei Xiong, China Internet Research Analyst, UBS Securities

Executive Summary

China managed to grow by 5% in recent years thanks to robust growth in export related industries and the rapid rise of the “new economy” sectors. These innovation-driven sectors have grown to 15-20% of the economy and contributed around 1/4 of GDP growth during 2020-2024. China’s technological rise is closely tied to its investment in innovation capacity. Multiple structural advantages have underpinned China’s technological progress:

Infrastructure: China has established an extensive and resilient energy and digital infrastructure system. Centralized electricity production and transmission networks, coupled with continuously improving information and communication technology (ICT) infrastructure, provide a solid foundation supporting the development of high-tech industries and the digital economy.

R&D spending: China’s R&D expenditure has continued to expand. Measured by purchasing power parity (PPP), China’s total R&D investment ranks among the highest globally, reflecting the nation’s sustained commitment to technological innovation and providing essential resources for technological iteration and industrial upgrading.

Talent pool: China boasts a large and structurally optimizing pool of engineering, technical, and research talents. The country consistently produces the most science, technology, engineering and mathematics (STEM) graduates globally,with its higher education system demonstrating an increasing capacity to support technological innovation. Meanwhile, by expanding international cooperation and talent acquisition mechanisms, China is progressively enhancing its participation and openness in the global innovation network.

Market dynamism and corporate entities: China has a vibrant entrepreneurial ecosystem. A multi-layered market structure combined with high industrial mobility provides fertile ground for the commercialization of new technologies and business models, fostering, to a certain extent, the growth and diffusion of technology-driven enterprises.

Policy environment and financial support: Technology and innovation has been embedded into the national development strategy framework. Diversified financing channels, a continuously improving system of public funding support, and relevant institutional advancements collectively lowered the institutional costs associated with innovation activities.

The combination of all these factors creates synergy and positive feedback loops, propelling China to catch up rapidly and even nascent leadership in several frontier technologies, including AI. This developmental trajectory is not accidental but rather the resultant outcome of long-term policy orientations, industrial foundations, and factor allocations.

“Going global” has evolved into a vital strategic direction and choice for enterprises to develop and expand. This trend reflects both enterprises’ proactive adjustments to the operating environment over a longer horizon, as well as alignment with policy objectives of promoting higher-standard opening-up and enhancing the international competitiveness of domestic industries.

Among the sectors, China automotive industry has upgraded from simple product exports to full-spectrum global brand building, with new energy vehicles (NEVs) at its core. China motorcycle and heavy-duty truck sectors are outperforming global peers via electrification, securing a first-mover advantage inhigh-growth niche segments. China bus industry has secured an absolute dominant position in the global electrification wave, and emerged as core suppliers for global public transport decarbonization with their leading electrification technology and full product portfolio. China construction machinery industry accelerated overseas expansion with an increasing popularity in emerging markets. China consumer sector is also experiencing a remarkable rise in ASEAN markets, with growing recognition and sticky loyalty among local consumers.

Investor interest in and recognition of China’s AI development has increased notably over the course of 2025. In 2026, we expect China’s AI to benefit from accelerated adoption and monetisation, and we expect continued evolution across the industry value chain. On the model layer, we expect continued rapid domestic large language model (LLM) capability iteration to catch up with US peers. On the application layer, we note China and the US are following similar AI monetisation paths, with cloud and ads as the most visible areas. We expect broadening AI use cases (e.g., agentic commerce, AI-native ads, multimodality, edge AI, etc.) and accelerating monetisation in 2026. On the infrastructure layer, we expect computing power localisation to continue, with progress in chip-level performance and supernodes taking over an increasing share of inference and even training workload.

Overall, amid profound shifts in the global technology and industrial landscape, China is well-positioned to sustainably elevate its comprehensive competitiveness across key sectors by advancing innovation-driven development, industrial structural upgrading, and higher-standard opening-up. Throughout this process, striking a dynamic equilibrium between stabilizing growth, advancing structural transformation, and mitigating systematic risks will remain a critical and ongoing focus in policy design.

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