[Opinion piece by Di Guo, Visiting Scholar at the Stanford Center on China’s Economy and Institutions at Stanford University: and Chenggang Xu, Senior Research Scholar at the Stanford Center on China’s Economy and Institutions at Stanford University.]
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No industrial revolution has ever emerged outside advanced democratic capitalism. This is no accident. Like its predecessors, the AI-driven industrial revolution requires robust institutions to ensure secure property rights, enforceable contracts, the ability to attract and empower talent, efficient allocation of resources, and — crucially — sustained demand.
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The People’s Republic was founded on the principle that the Communist Party of China “leads everything.” That remains true today: The CPC controls courts, markets, banks, universities, and the media, and even commands private firms. Under such powerful party-state rule, the regime can mobilize massive resources and produce shining stars like DeepSeek (or Sputnik, in the Soviet case). An industrial revolution, however, depends on more than isolated breakthroughs; there must be a series of disruptive innovations in technology, business models, and institutions that build on one another. The Soviet experience makes this clear. The USSR and its satellites in Eastern Europe could not keep up with the West during the third industrial revolution, and this failure eventually contributed to the collapse of their communist regimes.
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China’s economy has been trapped in a vicious cycle of weak demand, overcapacity, high unemployment, and persistent deflation, which is fundamentally incompatible with any industrial revolution. AI-led automation offers no remedy for such problems, which are rooted in the country’s institutional foundations. The massive government borrowing used to finance China’s bid for AI and chip dominance has only deepened concerns about its already severe debt burden and chronic soft budget constraints — problems reminiscent of what the Soviet Union faced during the Cold War arms race.
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Sustained innovation requires free institutions and robust demand. Breakthroughs come when entrepreneurs and scientists are empowered by independent courts, supported by risk-taking private investors, and tested through open debate and market competition. In CPC-controlled China, demand is suppressed because the state controls key resources that limit household income and entrepreneurial initiative, and capital is funneled into state-directed projects rather than open-ended discovery and innovation. While a “DeepSeek moment” may capture our attention, achieving long-term competitiveness and fostering a genuine industrial revolution is another matter entirely. After all, AI is not a remedy for deflation – and deflation itself is fundamentally incompatible with any industrial revolution.
