Beijing has made it clear that the era of traditional growth must give way to “high-quality development.” Its current strategy emphasizes cutting-edge sectors such as semiconductors, advanced manufacturing, AI, renewables, new materials, and next-generation IT—part of a broader effort to reshape the economy.

Still, the ground-level picture often diverges. A number of localities remain committed to the familiar strategy of fueling growth through fixed-asset expansion—pumping money into roads, buildings, and mega-projects. This entrenched approach continues to dominate, despite Beijing’s push toward innovation-first growth.

Investment Gaps Across City Tiers

An analysis of 40 cities reveals major differences in investment intensity. Lower-tier cities, particularly those in the third and fourth categories, plan to invest over 58% of their GDP by 2024. This far exceeds the national average of about 40%. It also confirms that heavy spending on physical infrastructure and factories remains their main economic engine.

Second-tier cities show patterns closer to the national level. While they are less reliant on capital-heavy projects compared to smaller cities, they have not fully transitioned toward consumption-led or innovation-focused growth. Their progress toward aligning with new quality productive forces is still uneven.

First-tier cities, along with a few advanced second-tier hubs like Nanjing, present a sharp contrast. Their investment-to-GDP ratios remain low.

In these cities, growth isn’t fueled mainly by heavy capital investment but by labor, services, and knowledge-driven industries. They show that economies can expand without endless construction projects or capacity building.

Instagram | @twistedchips2 | Nanjing shows how advanced cities rely less on heavy investment and more on services and knowledge growth.

Real Estate Decline Driving Investments

The continued downturn in real estate strongly influences local strategies. As property prices fall, local governments lose a key revenue source from land sales and development. To fill the gap, many cities boost spending on industrial projects and infrastructure.

Although this may help short-term GDP numbers, it raises long-term concerns. Investments often overlap, with multiple cities targeting the same industries, leading to capacity surpluses and pricing pressures. Instead of fostering dynamic innovation ecosystems, this duplication creates inefficiencies and intensifies competition.

Productivity and Consumption Challenges

Greater investment does not automatically deliver higher productivity. Data shows a moderate negative relationship between investment intensity and labor productivity. The link becomes even weaker when measured through total factor productivity (TFP). Cities spending aggressively on fixed assets often achieve lower returns on efficiency.

This pattern exposes a structural issue: “capital deepening” remains the easy option, but without significant productivity gains, the benefits remain limited.

On the demand side, the imbalance is equally visible. In many non–Tier-1 cities, higher investment intensity directly correlates with weaker consumption. The negative correlation, around -0.7, highlights how money funneled into construction and factories often crowds out household demand. Retail sales of consumer goods decline, further limiting efforts to rebalance the economy toward domestic consumption.

The housing downturn amplifies this weakness. Falling property values cut into household confidence and spending. This dynamic has slowed progress toward the national goal of stronger consumer-led growth.

Contrasting Performance of Tier-1 Cities

Beijing, Shanghai, and other Tier-1 hubs show a different path. With diverse service economies, deeper pools of talent, and global connectivity, they rely less on capital-heavy strategies. Their TFP numbers outperform, reflecting efficiency and innovation capacity.

Interestingly, labor productivity in these cities appears lower than expected. Yet this is not tied to inefficiency. Instead, it stems from the large proportion of workers in education, logistics, sanitation, and public administration. While these jobs lower per-worker output measures, they support broader quality-of-life improvements and economic stability.

These cities highlight the role of strong institutions, skilled labor, and service-driven ecosystems in shaping sustainable long-term growth. Beijing, for example, sits at the efficiency frontier, showing how institutional quality can make up for lower direct investment.

Instagram | @entrepreneursonig | Tier one cities grow with strong services and institutions while balancing efficiency with quality of life.

Lessons for Multinational Companies

For global corporations, China’s divergent urban strategies make localization essential. National directives provide a framework, but achieving results depends on aligning goals with the right city.

Tier-1 cities
The strongest choice for high-value activities—R&D, government engagement, and premium services—thanks to their mature institutions and concentration of skilled talent.

Select Tier-2 cities
Cities including Hangzhou, Nanjing, Wuhan, and Jinan present balanced opportunities. They offer a mix of growing consumption and more efficient capital deployment, with many emerging as centers of tech adoption.

Lower-tier cities
Still fraught with risks. Oversupply from heavy investment often meets weak demand. While clean tech sectors are advancing, investment here requires caution.

Key Drivers That Will Shape Future Investment

China’s long-term goals depend heavily on how well policies translate at the local level. For both domestic and global businesses, three factors will shape outcomes:

Market-based lending – Directing credit according to commercial merit instead of administrative mandates will allocate capital more effectively.

Institutional capacity – Predictable rules, stronger legal safeguards, and transparent licensing processes will improve the business environment.

Household income growth – Higher wages and expanded welfare programs will spur consumer demand, reducing reliance on state-led spending.

Building Sustainable Growth Pathways

The blueprint for “new quality productive forces” sets out an ambitious course. But unless local leaders balance policy aims with regional realities, heavy investment alone will fall short of producing sustainable growth.

The balance of human capital, institutional strength, and innovation ecosystems will define the next stage. Cities that align these elements will deliver stronger productivity, healthier consumer demand, and long-term resilience.

For multinational companies, understanding these dynamics will be the difference between short-lived gains and lasting success.