AI Will Deepen Divide Between the PRC’s Two Economies

The Jamestown Foundation | George Magnus

China’s 15th Five-Year Plan places artificial intelligence at the core of the nation's industrial ecosystem, referencing technology 52 times as Beijing seeks a revolutionary productivity leap. General Secretary Xi Jinping aims to transform the country from a global assembly platform into an integrated leader controlling advanced manufacturing and supply chains via the "AI+" initiative.

This technological drive exacerbates structural fractures across China's dualistic economy. The state-guided technology sector accounts for 13 percent of gross domestic product, while the remaining economy grapples with excessive debt, weak consumption, and persistent unemployment. AI creates a major positive supply shock alongside a negative demand shock. This dynamic deepens systemic oversupply. At the 2026 Inclusion Conference on the Bund in Shanghai, Chinese economists highlighted growing risks around model governance and algorithmic security. Despite buoyant capital spending in electronics, AI integration fails to resolve broader macroeconomic stagnation or demographic labor contraction across non-priority industrial sectors.

Comment

State-directed capital allocation under the 15th Five-Year Plan reinforces a structural distortion within China’s industrial ecosystem. By concentrating fiscal subsidies into dual-use artificial intelligence and advanced automation, Beijing risks starving traditional manufacturing supply chains of necessary capital upgrades. The state-guided technology sector absorbs immense capital inflows, yet non-priority manufacturing sectors face worsening capital depreciation. This widening productivity gap limits broad-based industrial throughput outside designated strategic emerging industries.

This divergence in capital intensity directly impairs the resilience of peripheral supply chains supporting state enterprises. Higher input costs in non-subsidized sectors erode sub-tier supplier margins, creating bottlenecks for primary assembly facilities. Consequently, the 15th Five-Year Plan accelerates a dual-track industrial structure that undermines overall supply chain cohesion across local state-owned enterprises.

Strategic Question for Discussion

Which factor presents the greater long-term constraint on Chinese industrial capacity — the erosion of capital investment across traditional supply chains, or the operational vulnerabilities inherent in integrating AI across local state-owned enterprises under the 15th Five-Year Plan?

The trajectory indicates that capital starvation across lower-tier component suppliers represents the more immediate systemic bottleneck. While advanced AI integration enhances productivity within high-priority sectors, the broader manufacturing base remains vulnerable to capital depreciation and escalating operational costs. Consequently, industrial throughput will likely experience localized supply chain disruptions before the operational benefits of the 15th Five-Year Plan can fully materialize across state enterprises.

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