Dominic Barton is a Canadian diplomat and business executive, having formerly served as his country’s ambassador to China, Global Managing Director of McKinsey & Co, and Chancellor of the University of Waterloo.

I have spent much of my professional life in and around China—living there for 10 of the past 20 years, most recently three years ago, and visiting regularly whenever I have not been based there. Over that time, I have watched the Chinese economy move through three distinct phases: the first built on low-cost labor; the second on low-cost, large-scale manufacturing systems; and the third—the phase we are witnessing now—on an innovation-driven supply-chain system.

Shenzhen skyline, an epitome of urban development and one of China’s most striking economic success stories | Source: Shutterstock
 

The Asian century is no longer a forecast; it is already here. Asia’s share of global GDP has risen from 42 percent in 2000 to more than half today and is projected to reach 53 percent by 2050. China alone accounts for around 17 percent of global GDP, making it the world’s second-largest economy. Asia produces 55 percent of global manufacturing output, while China accounts for about 32 percent. Alongside this industrial weight sits a rapidly growing consumer base: Asia’s share of the global middle class has climbed from 28 percent in 2000 to 56 percent in 2024—now expected to reach two-thirds by 2030. Within that, China’s middle class is forecast to expand from 140 million people in 2022 to nearly 390 million by 2035.

For two millennia before the fossil-fuel era, China led the world in what historians call the “hydraulic age,” pioneering irrigation, canals, and water-powered machinery that enabled large-scale agriculture and transport. The same combination of practical engineering, state coordination, and long-term planning that defined that period still characterizes China’s approach today—now applied to digital infrastructure, manufacturing, and renewable energy.

China’s progress in this new phase rests on a formidable set of capabilities. It has a large and highly skilled workforce, a world-class education and research pipeline, a long-term policy framework, and a modern innovation environment. It now leads in 57 of the OECD’s 62 economic growth indicators, a reflection of its competitiveness across productivity, trade, technology, and education. Its capital markets mirror that dynamism: China leads the world in initial public offerings, with China recording 385 IPOs raising about $28 billion in the first seven months of 2025 alone.

Short-term challenges remain. The property market is in a major restructuring with prices dropping considerably. Competition in some industries has become extremely intense, prompting the government to encourage consolidation and greater price discipline to prevent what Chinese commentators call “involution”—too many companies chasing the same opportunity for diminishing returns. These adjustments are difficult but healthy. They are driving higher efficiency, stronger productivity, and better-directed capital.

Looking ahead, the forthcoming 15th Five-Year Plan (2026-2030) will continue to advance these objectives on innovation. It is expected to focus on technological self-reliance, high-quality growth, next-generation infrastructure—from data centers and smart grids to healthcare systems and quantum computing, brain-computer interfaces, and hydrogen and nuclear fusion. In so doing, it will carry China further along the path from manufacturing scale to innovation scale—and help define the shape of the Asian century that is now firmly under way.

 

Why Asian Innovation is Underestimated

Foreign observers still tend to underestimate the experimental power of China’s major cities. A single urban market can host tens of millions of digitally connected consumers. Shenzhen’s population equals that of Australia’s five largest cities combined, yet it operates as one integrated innovation zone. This density allows companies to test and scale products at unmatched speed. Municipal governments reinforce this through industrial parks, venture funds, and regulatory “sandboxes” that make each metropolis a testing ground for new business models.

China’s digital economy, valued at over $7.5 trillion—larger than Germany’s entire economy—permeates every sector. What began with e-commerce and payments has evolved into a nationwide industrial network. Data from factories feed directly into suppliers’ dashboards; logistics routes self-optimize; and consumer feedback, gathered through social channels, shapes design in real time. I have met entrepreneurs who sell nationally while spending less than a tenth of one percent of revenue on marketing—an efficiency made possible by these digital feedback loops.

Speed has become one of China’s defining strengths. Xiaomi’s SU7 electric vehicle moved from concept to mass production in just 1,003 days. BYD designs and builds much of its own machinery, enabling production lines to be retooled within weeks. In robotics, firms such as AgiBot now design, build, and deploy humanoid machines within a single industrial park. These cycle-time advantages have become a kind of embedded intellectual property—an organizational capability that compounds with each project.

Serving a domestic market of hundreds of millions provides enormous opportunities. Chinese firms excel at designing simultaneously for quality, manufacturability, and price—and they are built to scale from the start. A 100-inch television or a household robot can now sell for a fraction of its Western equivalent while delivering comparable performance. This discipline—designing for scale without losing quality—is now spreading across industries, from consumer electronics to aerospace.

China’s dense supplier networks act as collective learning systems. There are about 80 million workers with deep supply-chain knowledge and experience. Thousands of component makers co-locate around anchor firms, adjusting within days when a key customer changes a process. Localizing supply shortens development cycles and accelerates learning across the entire ecosystem. It is this capability, not subsidies or low labor costs, that underpins China’s continuing industrial strength. As a November 2025 study by Weijian Shan concluded, “China’s manufacturing efficiency is no illusion: its workers in many industries produce double or triple the output of U.S. workers.” That advantage reflects decades of investment in automation, industrial organization, and learning-by-doing at scale.

 

System Enablers

China’s innovation system is increasingly driven by capability building. The central government’s AI Plus plan integrates artificial intelligence across manufacturing, healthcare, transport, and public administration, with targets extending to 2030. State-owned enterprises such as State Grid are applying AI in hundreds of scenarios—from predictive maintenance to grid management. Policy in China is rarely a fixed blueprint; it evolves through pilot projects, measurement, and replication.

This disciplined policy approach—combining central direction with local experimentation—has enabled China to lead globally in critical technologies such as 5G, robotics, and smart mobility. These achievements reflect long-term industrial planning, and coordination between central and local governments.

China produces over a million STEM graduates each year, including around 77,000 PhDs—more than any other country and roughly a third of the world’s total STEM graduates. Experience is just as important: tens of millions of technicians and engineers understand factory processes firsthand. Universities are aligning curricula with strategic fields such as semiconductors, biotech, and robotics, reducing the time from discovery to deployment.

Even amid tighter financial conditions, innovation capital in China remains abundant. Domestic venture funds—many with local-government backing—have matured into sophisticated investors. Public-markets activity is especially striking: Hong Kong recorded 42 IPOs in the first half of 2025 alone, raising about $107 billion, and by July had seen 53 listings raise roughly HK$127.9 billion (around US$16.4 billion). These capital flows reflect confidence not only in entrepreneurs but in the broader innovation cycle—These listings are powering a new wave of growth.

The gap between government, universities, and industry has narrowed. Universities run joint laboratories with manufacturers; regions create test zones for autonomous vehicles and smart grids; and public institutions act as early customers for emerging technologies. These relationships—well documented across sectors—have accelerated commercialization not through decrees but through coordinated collaboration.

 

Sector Spotlights

China’s digital economy is expected to account for more than one-third of national output by 2026. The first generation of platforms—Alibaba, Tencent, Baidu—has evolved into the infrastructure for newer services. Short-video platforms have become powerful engines of product discovery and marketing, linking content creators, consumers, and brands in real time. E-commerce platforms, meanwhile, have expanded beyond online retail to anchor logistics networks, cloud-computing services, and AI model training.

China’s connectivity infrastructure underpins this growth. It operates about 68 per cent of the world’s 5G base-stations and enjoys some of the highest mobile-broadband penetration rates globally. Fiber-to-the-home coverage has increased eightfold since 2014, and widespread smartphone use—supported by Alipay and WeChat Pay—has allowed China to leapfrog traditional credit-card systems. These networks form the foundation for the rapid spread of cloud computing, automation, and AI-enabled consumer technologies.

In places such as Suzhou and Dongguan, even mid-sized factories now run entirely on cloud-based production systems that optimize machine use and energy consumption. Smaller firms gain access to advanced tools, while larger firms achieve double-digit productivity gains. Different regions are specializing: Hangzhou in software and fintech, Shenzhen in hardware and design, Chengdu in AI and gaming. The scale of internal trade among these industrial hubs now rivals China’s external exports.

Robotics reflects the shift from labor-cost advantage to technology-driven productivity. China installs more industrial robots each year than the rest of the world combined. Robot density has already surpassed Germany’s and is rapidly approaching that of South Korea. Domestic suppliers deliver comparable performance at significantly lower cost.

The next frontier is embodied intelligence. Companies such as Fourier and AgiBot are deploying humanoid and service robots for logistics and manufacturing. The challenge is data: robots learn by doing, and China’s vast network of operating sites provides an unmatched training ground. Clusters are forming—Shanghai and Suzhou for hardware, Shenzhen for sensors, Beijing for AI. By 2030, the domestic robotics market could exceed $150 billion, supported by national procurement programs and demographic pressures.

Electric vehicles demonstrate China’s ability to integrate policy, capital, and engineering. China is now the world’s largest vehicle exporter—5.8 million units in 2024—with EVs representing more than a fifth of the total. BYD sells more EVs globally than Tesla; Huawei’s AITO M9 has set new domestic benchmarks; and Xiaomi’s SU7 shows how quickly new entrants can industrialize.

Behind these brands lies a domestically anchored supply chain. Battery materials, power electronics, and software are increasingly produced in-house. Costs continue to fall. Separator films—thin membranes that keep a battery’s anode and cathode apart while allowing ions to flow—used to cost about $4 per square meter in 2020 but now cost just $0.10, while copper and aluminum use in current collectors has dropped by more than two-thirds.. Regional specialization supports this ecosystem—Shanghai and Hefei in assembly, Ningde and Changzhou in batteries, Chengdu and Wuhan in materials. The combined GDP of China’s top automotive hubs already exceeds Italy’s total. Abroad, the momentum is visible: in 2025, four of Australia’s 10 best-selling cars were Chinese EVs, reflecting how quickly these brands have gone global.

Artificial intelligence has moved from research to infrastructure. The AI Plus strategy extends across six domains—industry, agriculture, services, governance, science and education, and international cooperation—with specific adoption targets for 2027 and 2030. On the consumer side, Chinese platforms lead the world in algorithmic personalization. On the industrial side, AI is being embedded in utilities, healthcare, and legal services. The regulatory approach—“sandbox first, codify later”—has allowed rapid experimentation under supervision.

China’s creative industries are building global reach. Pop Mart, founded in 2010, now earns more than half its revenue overseas with collectible products that blend art and fashion. Game studios and streaming platforms are also exporting their work.

In retail, the pace of innovation is striking. KFC China has reinvented itself within the country’s fast-moving consumer market, adapting its business system to operate with local agility. It develops products specifically for Chinese tastes, launches dozens of new menu items each year, and digitizes nearly every part of its operation—from supply chain to customer interface. Real-time data from its membership app shapes pricing, promotions, and design, while autonomous delivery is being tested in multiple cities. Coffee and lifestyle chains such as Luckin and M-Stand follow similar models, expanding through social-commerce networks and data-driven feedback loops that compress innovation cycles to weeks rather than months.

The outdoor-lifestyle boom—camping, hiking, fitness—has driven several Chinese brands to annual revenues in the hundreds of millions of dollars, with some surpassing $500 million. The common pattern is fast design and nearby manufacturing: from sketch to shelf in under three months.

 

Short-Term Headwinds, Long-Term Momentum

The property downturn continues to weigh on public mood, and youth unemployment remains high. Yet other signals are positive. Domestic travel has exceeded pre-pandemic levels; retail sales are recovering; and equity markets in Shanghai and Hong Kong have strengthened. Hong Kong remains one of the world’s leading IPO venues by value in 2025, though the scale is closer to tens—not hundreds—of billions. Chinese households hold savings of more than $22 trillion: a powerful reserve of spending potential once confidence improves.

At the same time, China’s demographic profile is shifting. The working-age population is beginning to contract and age, creating short-term pressure on labor supply and consumer dynamics. But this transition is also accelerating investment in automation, robotics, and digital productivity, which are helping to offset the effects of an aging workforce. In the long run, this technological adaptation—supported by policy and enterprise—will be central to sustaining growth as China moves from scale-driven expansion to efficiency-driven development.

Exports to the United States and Europe have dropped, while trade with Southeast Asia, Latin America, and the Middle East has expanded. These emerging markets now account for most incremental export growth, consistent with China’s price-performance advantage in many sectors.

China’s technology progress is now reshaping the global economy. It leads in seven of ten key advanced technologies tracked internationally—from batteries and photovoltaics to integrated circuits and radio-frequency communications—and eight of the world’s top ten research institutions are Chinese. This leadership is driving a rebalancing of global research capacity, investment flows, and climate-technology development, particularly in clean energy and electric mobility.

Looking ahead, the forthcoming 15th Five-Year Plan (2026-2030) will prioritize innovation, technological self-reliance, and national security while aiming for more inclusive prosperity. Early signals point to an agenda focused on reform and upgrading rather than expansion for its own sake. The plan is expected to deepen the shift toward a “modern industrial system”—anchored in advanced manufacturing, digital infrastructure, and green energy—while accelerating the growth of the services economy and domestic consumption. It will also stress urbanization as a key driver of productivity, noting that China’s current urbanization level, roughly equivalent to that of the United States in the 1950s, still has significant room to rise.

Other priorities include expanding ‘soft’ infrastructure—hospitals, universities, sports and cultural facilities—to improve living standards and stimulate demand; diversifying exports toward the Global South; and building a stronger framework for social support, including measures to encourage fertility and strengthen welfare provision. China’s GDP growth is expected to average 4.5 percent a year, but the focus is shifting decisively from the amount of growth to its quality, resilience, and inclusiveness. In that sense, the new plan is less about chasing targets than about building the institutional and technological foundations for the next phase of China’s modernization.

Across the firms I have visited, I see common traits. Their missions are bold but clear, translated quickly into execution. Teams are flat and technical, with young managers trusted to decide and iterate. Partnership networks cut across suppliers, customers, and even competitors, encouraging joint problem-solving. Above all, these organizations are data-driven: feedback loops guide design, marketing, and service. This culture—empirical, collaborative, and fast-learning—turns scale into knowledge and knowledge into advantage.

China now functions as the region’s innovation nucleus. Its vast industrial base and dense supplier networks enable end-to-end design, engineering, and production within a single national ecosystem. Supplier depth and proximity shorten development cycles and help safeguard intellectual property. Every product launch becomes an experiment; every failure, a shared lesson. Policy, talent, and capital are aligned to shorten the distance between idea and impact. Together, these elements give China an innovation rhythm that is faster, more adaptive, and more integrated than that of any other major economy.

The result is a gravitational pull across Asia: neighboring countries benchmark themselves against China’s cost-performance curve. In EVs, robotics, and batteries, the global price leader already sits east of the Himalayas.

China’s outward expansion is more diffusion than export. Brand globalization is leading the charge: Pop Mart, Anta, and Shein are redefining perceptions of Chinese design, with overseas revenues now exceeding half of total sales for some. Supply-chain transplantation is spreading Chinese process know-how to countries such as Vietnam, Indonesia, and Mexico, helping them climb the value ladder while China remains the design and tooling hub. Capital and talent are following this flow: Chinese investors support overseas ventures, and returnee founders connect ecosystems. What we are seeing is not decoupling but the global spread of a Chinese innovation model—fast, integrated, and adaptive.

The truth is that most outsiders miss deeper realities about China. Here is what they could learn:

1. Lower the cost of experimentation.

When it’s cheap to try new things, innovation accelerates—not just in business but across the economy. China has reduced barriers to research, product development, and industrial upgrading through strong R&D investment, an education system that produces millions of STEM graduates, and forward-looking policies promoting clean energy, advanced manufacturing, and digitalization. Making innovation affordable—and aligning it with sustainability—has become one of its defining advantages.

2. Let feedback drive quality.

Real-time consumer data, social media responses, and user reviews act as a self-correcting mechanism. Firms learn directly from customers, shortening the cycle between idea, product, and improvement.

3. Design the system, not just the parts.

China’s success rests on linking policy, industry, and technology in mutually reinforcing ways. The lesson for others is that innovation depends as much on integration—across supply chains, regulation, and financing—as on any single breakthrough.

 

The Next China is China

For years, the world saw China as the factory of the future. It is better understood today as a method: a way of linking policy, talent, technology, and production so that ideas move from concept to scale with unusual speed. The essence of the Asian century is not demographic mass alone but adaptive intelligence—the ability of cities, companies, and people to learn faster than their peers.

China’s vast network of urban economies provides that learning platform. Its pragmatic policy, technological intensity, and manufacturing depth form a development model that will influence both emerging and advanced economies.

To study China today is to watch the twenty-first-century operating system being written in real time. The next China is not elsewhere, it is China’s ongoing reinvention—an engine turning scale into speed, and speed into knowledge.

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