China’s rise as the world’s leading electric vehicle producer offers an interesting case study in industrial policy. Its experience shows how competition between government agencies, local governments and private capital can drive experimentation and innovation, while also creating challenges for governments seeking to support emerging industries.
China’s rise as the world’s leading electric vehicle producer is not the product of a unified interventionist state but of competition among rival central ministries, development-oriented local governments acting as venture capitalists and capital markets that financed private start-ups excluded from state banking. The institutional model faces mounting pressure from local government fiscal constraints and tighter geopolitical restrictions on US investment in Chinese technology. But its core lessons – technological inclusiveness, subnational development capacity and patient risk-tolerant capital – offer wider applicability beyond China’s unique political economy.
China’s emergence as the world’s leading producer of electric vehicles (EVs) is often attributed to a powerful, interventionist state. But this explanation treats the Chinese government as a single actor and understates the importance of competition, private finance and institutional experimentation.
China’s EV success is better understood as the outcome of interactions among three forces – competing central government agencies, development-oriented local governments and capital markets. This configuration encouraged technological experimentation and enabled private companies to challenge established state-owned and multinational automakers. But it also produced overinvestment, duplicated capacity and increasingly intense competition.
At the national level, industrial policy was neither entirely unified nor consistently directed towards a predetermined technological winner. Ministries competed over regulatory authority, policy resources and preferred technological pathways. This fragmentation sometimes created openings for peripheral businesses such as automakers Chery and Geely, policy entrepreneurs and technical experts to influence policy. Over time, central support for new energy vehicles became more adaptive and technologically inclusive.
Local governments added another layer of competition. Provinces and cities controlled resources that could be deployed to support manufacturers, including land, infrastructure and investment vehicles. Faced with restrictive central industrial policies from the 1990s onwards, many local governments found creative ways to nurture private automakers that lacked formal backing from Beijing.
Regarding capital markets, the state-dominated banking system traditionally favoured large state-owned companies with established assets and political connections. As a result, emerging private automakers relied heavily on stock markets, venture capital and private equity, including US dollar-denominated funds and overseas listings. These channels financed risky entry into a capital-intensive industry while allowing entrepreneurs and key technical personnel to be rewarded through equity and stock options.
The interaction among these institutions was more important than any singular pillar. Capital markets made local government investment more attractive by offering faster exits and higher returns. Cities and provinces increasingly acted as developmental venture capitalists, providing financing, land and policy support while seeking to eventually recover their investments through public listings or rising equity values. The Hefei government’s investments in Chinese EV manufacturer NIO in 2020 and Chinese chipmaker ChangXin Memory Technologies in 2026 demonstrate this broader evolution in local industrial strategy.
This institutional configuration has generated considerable innovation, but its future is uncertain.
Local governments have faced mounting fiscal constraints since the property downturn that began in 2021. Declining land-related revenues and growing debt burdens have reduced many cities’ ability to finance the next generation of technology companies. China’s government non-tax revenues, which historically empowered localities’ equity investment, fell again in 2025, illustrating the continuing pressure on the so-called ‘land-finance’ fiscal system that is closely linked to land lease and property activity.
The role of global capital has also changed. US dollar-denominated venture funds – or their Chinese branches – were crucial to the early development of EV start-ups that stirred up competition such as NIO, XPeng and Li Auto. But geopolitical tensions, tighter investment screening and national security regulations have made US participation in Chinese technology investments more difficult. The United States’ 2025 outbound investment regime restricts or requires notification of certain investments involving Chinese semiconductor, quantum and artificial intelligence businesses. US listings by Chinese technology firms have also become less dependable as routes for financing and investor exit.
Yet the model has not disappeared – variants of it remain visible in emerging industries such as artificial intelligence and robotics. Even competition among a limited number of well-resourced Chinese cities can produce more experimentation than occurs in many entire national markets. China also retains large engineering workforces, extensive supply chains and exceptional capabilities for scaling production. These advantages continue to attract domestic and foreign private equity and venture capital, despite greater regulatory and geopolitical risk.
China’s enormous domestic market, decentralised political economy, local government control over economic resources and proximity to Hong Kong’s internationalised financial system mean that its industrial policy model is difficult to reproduce in other countries. But several principles are widely applicable.
One is technological inclusiveness. China’s new energy vehicle policy supported battery electric vehicles, plug-in hybrids, fuel cells and alternative fuels such as methanol. Not all succeeded, but maintaining several pathways allowed policy to adjust as engineering and market conditions evolved. By contrast, the European Union’s response to the ‘Dieselgate’ scandal increasingly centred the transition on battery electric vehicles. Industrial policy should provide direction without prematurely eliminating technological alternatives.
Subnational governments can also play an important role in development. Vietnam’s 2025 administrative restructuring reduced the country to 34 provincial-level jurisdictions and established a two-tier local government system. Larger and more developed provinces have been established as new centrally governed cities to better mobilise resources. Larger and better-resourced jurisdictions may be better able to pool infrastructure, finance and administrative capacity. But local governments still require appropriate incentives, professional expertise and mechanisms for disciplining unsuccessful investments.
Innovative industrial firms also require patient but risk-tolerant capital, not merely bank lending or public subsidies. The European Commission’s Draghi report, which called for deeper and more integrated European capital markets, emphasised that Europe possesses strong scientific and engineering capabilities but struggles to mobilise sufficient private capital to scale innovative firms.
China’s EV experience offers neither a simple success story nor a template for state-led development. The policy configuration generated innovation, but it also induced overcapacity, duplicated capacity – contributing to a flood of exports to other countries – and may threaten industrial systems based in smaller countries. Economies learning from China’s experience need to secure profits in an economically fair way.
The central lesson from China’s EV success story is not that governments should select national champions. It is that effective industrial policy must construct institutions that encourage experimentation, mobilise diverse forms of capital and allow successful firms and technologies to emerge from competition.
Republished from East Asia Forum
Fengming Lu