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Nation opts for innovation-led industrial upgrade

Technological upgrading placed firmly at center of China's next stage of economic development, signaling decisive shift from traditional growth drivers

By LI JING | CHINA DAILY | Updated: 2026-03-30 07:52
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A technician trains a humanoid robot for data collection at a data acquisition center in Qingdao, Shandong province, on March 18. ZHANG JINGANG/FOR CHINA DAILY

China's economic model is shifting gears from a traditional reliance on heavy industry and infrastructure to enter a new phase — one increasingly driven by technological innovation rather than capital-intensive expansion.

As China recently concluded the two sessions — the annual meetings of the country's top legislature and national political advisory body — technological innovation was placed firmly at the center of the next stage of economic development, signaling a decisive shift from traditional growth drivers toward an innovation-led industrial upgrade.

For policymakers, economists and industry leaders alike, the strategic objective is clear: steer the world's second-largest economy through a structural transition from traditional factor-driven growth toward productivity — and innovation-led expansion.

The policy tone was crystallized in the 2026 Government Work Report, which pledged to advance industrial innovation initiatives, encourage central State-owned enterprises to open more real-world application scenarios for new technologies, and establish mechanisms to increase funding and share risks in emerging industries.

Together, these measures form the policy backbone of China's attempt to cultivate new growth engines as the country navigates sluggish global demand and a more competitive technological landscape.

For the first time, the government identified six emerging pillar sectors, including integrated circuits, aerospace, biomedicine and the low-altitude economy, as strategic industries expected to anchor future growth, underscoring a policy push to cultivate new engines for the economy.

Official data from the National Bureau of Statistics showed that China's research and development spending intensity reached 2.8 percent of GDP in 2025, surpassing the Organization for Economic Cooperation and Development average for the first time, a milestone that places the country firmly among the world's leading innovation economies.

China currently ranks 10th in the Global Innovation Index and hosts 26 of the world's top 100 innovation clusters, the highest number globally for three consecutive years.

Multiple research institutions have reached a similar conclusion: innovation is increasingly becoming the central driver of China's economic growth.

The outline of the 15th Five-Year Plan (2026-30) proposes that nationwide R&D spending grow by more than 7 percent annually, maintaining the momentum established during the previous planning cycle.

That direction is reinforced by broader institutional assessments. Analysts from the Chinese Academy of Social Sciences say the country's 4.5-5 percent growth target for 2026 will rely increasingly on improvements in total factor productivity — a sign that economic expansion is shifting away from traditional factor accumulation toward efficiency and technological upgrading.

The World Bank has likewise noted that China is gradually transitioning from a "world factory" toward a global innovation hub, particularly in areas such as renewable energy and the digital economy.

Taken together, these assessments point to a systemic transformation for a large economy: a shift from factor-driven growth toward innovation-led development.

Economists say the emphasis reflects both strategic necessity and opportunity as global technological competition intensifies.

"The new round of technological revolution and industrial transformation is accelerating globally," said Shao Chi, a member of the National Committee of the Chinese People's Political Consultative Conference and deputy head of the Shanghai Municipal Committee of Jiusan Society.

"Promoting the deep integration of technological innovation and industrial innovation is now a critical task to build new quality productive forces and strengthen the real economy," he said.

China's innovation ecosystem has expanded rapidly over the past decade.

According to the NBS, total R&D spending in 2025 exceeded 3.9 trillion yuan ($566 billion), while China ranked first globally in international patent filings for several consecutive years.

Yet challenges remain. Shao said China still faces gaps in original innovation capability, breakthroughs in core technologies and the modernization of industrial supply chains.

During the two sessions, lawmakers and political advisers broadly converged on three priorities: strengthening breakthroughs in core technologies, accelerating real-world industrial applications of emerging technologies, and deepening the integration of innovation, industry, capital and supply chains.

In the healthcare sector, technological breakthroughs are already reshaping the structure of China's pharmaceutical industry.

Farmers check the rice growing condition at an intelligent seedling factory in Shaoyang, Hunan province, on March 18. TENG ZHIZHONG/FOR CHINA DAILY

Li Yan, a deputy to the 14th National People's Congress and president of Qilu Pharmaceutical, said innovation across the entire pharmaceutical value chain — from drug discovery to clinical trials and manufacturing — is essential to building new quality productive forces.

"Innovation in medicine must connect research, clinical application and production," Li said.

Industry data suggest that China's pharmaceutical innovation capacity is gaining increasing global recognition.

According to the National Medical Products Administration, out-licensing transactions for Chinese innovative drugs reached $135.7 billion in 2025 across 157 deals, compared with $51.9 billion across 94 deals in 2024.

The strong momentum has continued into 2026. According to a recent research note by China Galaxy Securities, the total value of out-licensing and business development deals for Chinese innovative drugs reached $53.28 billion in the first two months of 2026 across 44 transactions.

The deal value in just two months surpassed any single quarter in 2025 and approached the total for the entire year of 2024.

Jiang Jiandong, director of the Institute of Materia Medica at the Chinese Academy of Medical Sciences and an NPC deputy, said the elevation of biomedicine to pillar-industry status could accelerate a strategic transformation.

"It will help the industry move from selling products to exporting technologies," Jiang said, adding that Chinese innovative drug pipelines now account for around 30 percent of the global total, ranking second worldwide.

Beyond healthcare, innovation is also rapidly transforming China's energy and advanced manufacturing sectors.

Chen Jun, an academician of the Chinese Academy of Engineering and an NPC deputy, said the global energy transition represents a fundamental restructuring of the world's energy systems.

"The essence of the new energy revolution lies in systemic upgrading," Chen said. "Technological innovation that delivers cleaner, more efficient and lower-cost energy is driving structural changes in the global energy mix."

Today, China's leadership in the green sector extends far beyond industrial scale. Across solar panels, wind energy, new energy vehicles, batteries and high-speed rail, the country is setting the global benchmark for how swiftly and broadly these technologies can be integrated into everyday life.

In 2025, new energy vehicles accounted for more than 50 percent of new car sales in China, ending the dominance of conventional fuel vehicles in the world's largest auto market. The rapid expansion of electric vehicles alone is projected to cut China's demand for refined oil by around 20 million metric tons annually, according to industry estimates.

The dividends of this transition are spilling over globally. According to the China Association of Automobile Manufacturers, China exported 583,000 new energy vehicles in the first two months of 2026, a surge of 110 percent year-on-year.

Workers are busy on the assembly line that has been upgraded through intelligent manufacturing for new energy vehicles installation at Lynk & Co's factory in Yiwu, Zhejiang province, on Feb 27. LYU BIN/FOR CHINA DAILY

Another sector attracting attention was the low-altitude economy, which includes flying cars, drones and aerial logistics services.

NPC Deputy and XPeng Chairman and CEO He Xiaopeng said the year represents "a critical stage for the low-altitude economy to move from pilot projects to commercialization".

Improved regulatory clarity regarding airspace management and airworthiness certification could accelerate the rollout of applications ranging from urban air mobility to airborne logistics services, he said.

China has adopted a revised Civil Aviation Law, effective July 1, including dedicated provisions on low-altitude economy, classifying airspace below 300 meters and enabling one-click approval for routine flights.

Economist Justin Yifu Lin, a member of the Standing Committee of the 14th CPPCC National Committee and dean of the Institute of New Structural Economics at Peking University, said China's long-term growth prospects remain strong despite external uncertainties.

"As a super-large economy, China has four key advantages: talent, market size, a complete industrial system and institutional capacity," Lin said.

Using a maritime analogy, he said:"A small boat rises and falls sharply in rough seas, but a large ship can still move forward as long as it stays on course."

Lin noted that China's growth target of 4.5 percent to 5 percent for 2026 leaves room for external volatility while preserving space for domestic reform.

For global markets, the implications extend beyond China's domestic growth. The country's push toward technological upgrading is reshaping supply chains and accelerating the global energy transition.

Multinational companies are also expanding cooperation as China's innovation ecosystem evolves.

Airbus is stepping up cooperation in areas such as sustainable aviation fuel, digital aviation services and smart manufacturing.

George Xu, CEO of Airbus China, said the company's R&D and innovation center in Suzhou, Jiangsu province, is working on new technology projects that support Airbus facilities in Europe, Tianjin and Chengdu, Sichuan province.

Yang Ting, vice-president of Agilent Technologies and general manager for Greater China, said China has become a central hub in the company's global supply chain and manufacturing network.

"China possesses a world-class business environment, a globally leading reserve of high-end talent and a comprehensive supply chain ecosystem," Yang said.

"These advantages drive us to expand local production, increase R&D investment and deepen domestic partnerships and innovation."

Global companies increasingly view China as not only a major market, but also as a key node in global innovation, manufacturing and trade networks.

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