China has made significant advances in artificial intelligence (AI) technology under President Xi Jinping’s leadership, solidifying its position as a global competitor in the field. However, this progress comes amid growing concerns about the broader health of the country’s economy, which is facing persistent challenges including high youth unemployment, weak consumer demand, and ongoing deflation.

Recent analyses from economists in China, including several former advisers to the People’s Bank of China, have highlighted a disconnect between China’s considerable investment in high-tech sectors and the performance of its overall economy. The youth unemployment rate, excluding students, reached 18.9 percent in August, while consumer activity has slowed sharply. For instance, domestic car sales dropped by 20 percent in the first half of 2023 compared to the previous year, and housing sales fell by 14 percent, continuing a multi-year decline. These trends point to a deflationary spiral that economists warn undermines economic stability and growth.

The government has devoted substantial resources to AI development. According to reports, state-funded investment in AI firms totaled an estimated $184 billion between 2000 and 2023. President Xi has directed the use of various policy tools—including tax incentives, government contracts, financing, and infrastructure access—to accelerate AI innovation. Additionally, plans call for nearly $295 billion in spending over the next five years to build data centers operated by state-owned enterprises, aiming to support the AI infrastructure across the country.

Despite these efforts, some economists caution that focusing heavily on AI and other advanced technologies may come at the cost of addressing more immediate economic challenges. Li Daokui, a former central bank adviser and Tsinghua University professor, described the economy as “running too cold,” noting that growth in high-tech industries has not translated into broader economic recovery. Other experts have suggested measures such as raising rural pension payouts to stimulate consumer demand, arguing that sustainable economic progress requires fostering mild inflation and improving corporate profitability.

At a Politburo meeting in late July, Chinese leadership acknowledged the need for proactive steps to boost the economy but refrained from setting a specific growth target. The government signaled a commitment to developing what it describes as an “intelligent new economy,” continuing incremental stimulus policies without the large-scale interventions some economists recommend. Fixed-asset investment, covering areas like infrastructure, real estate, and equipment, declined 4.1 percent in the first five months of 2023, a contraction of a scale historically seen only during periods of severe crisis in China’s past.

President Xi has emphasized that economic success should not be measured solely by gross domestic product (GDP) growth, but also by increases in “hard power” and technological advancement. His approach favors state-led modernization of traditional industries through technological innovation, which he believes will generate long-term economic value, though such benefits may take years to manifest.

Critics argue that this focus risks neglecting immediate issues such as job creation and consumer spending. Xu Chenggang, an economist affiliated with Stanford University, noted that government control of the banking system gives China more fiscal and monetary policy flexibility than many countries. Yet, investment in AI technologies may exacerbate unemployment by reducing labor demand, potentially deepening economic woes rather than alleviating them.

Some observers have drawn parallels to the former Soviet Union, which achieved significant scientific and technological advances but ultimately suffered from economic stagnation due to structural weaknesses and insufficient consumer demand. Sociologist Sun Liping pointed to the challenge of producing advanced goods that may remain unaffordable to the broader population, posing a fundamental dilemma for China’s current economic model.

Overall, while China’s advancements in AI highlight its ambition to lead in next-generation technologies, the broader economic landscape remains fraught with challenges that policymakers must navigate carefully to achieve balanced and sustainable growth.