This policy paper illuminates China’s successful advanced technology investment strategy, with the goal of drawing lessons for U.S. policymakers. In particular, we show that China’s investment strategy is much more decentralized than is usually realized. The broad directions of science and technology investment policy are set in Beijing, but much of the execution and funding is undertaken by provincial and municipal officials. We explain the pluses and minuses of China’s “local-facing” investment strategy, and what it means for American governors and mayors.
First, to provide a starting point, we document the persistent weakness in state and local investment spending in the United States. In the United States, state and local government investment spending has stalled out over the past two decades, rising by only 15% in real terms from 2005 to 2025. Meanwhile, federal nondefense investment spending is up 87% over the same stretch, reflecting America’s top-down approach to tech investment policy.
Second, we explain how China’s local-facing investment strategy works, and why it has been successful. Unlike their U.S. counterparts, China’s provincial and municipal governments are pouring enormous sums of money into supporting advanced technology industries such as semiconductors, electric vehicles, satellites, biotech, humanoid robots, and the manufacture of key aerospace materials such as carbon fiber. One example: In 2025, the municipal government of Shenzhen, China’s third-largest city, backed a 5 billion yuan fund that would invest in chip design and other advanced technologies. That can be valued at somewhere between $700 million and $1.4 billion, depending on whether we use the official exchange rate of roughly 7 yuan to the dollar, or the purchasing power parity (PPP) rate of roughly 3.5 yuan to the dollar. In either case, it’s a substantial investment of resources for one city and one industry.
This government decentralization is essential to explaining how China’s government-led science and technology investment policy is able to push ahead on multiple technological frontiers simultaneously. Key advanced technology industries are being subsidized and supported by local policymakers who can move much faster and more flexibly than central government bureaucrats could. The result is the economic equivalent of a stampede — a barely controlled rush to add technological capacity without immediately worrying about profitability or the rapid buildup of debt.
Third, following on that insight, we show the downside of China’s success: Provincial and municipal governments have taken on astronomical levels of debt, on a scale that exceeds the U.S. AI investment boom. International Monetary Fund (IMF) estimates suggest that municipal and provincial Chinese governments, plus their affiliated “local government finance vehicles”(LGFVs), borrowed 16 trillion renminbi in 2024 and 2025, much of that from Chinese banks and state-owned enterprises. That’s the equivalent of adding more than $2 trillion in debt in two years.
Fourth, we identify what the U.S. can learn from China’s example. On the plus side, the success of the Chinese approach should encourage U.S. state and local governments to be more proactive in funding and supporting advanced technology industries. Key state and local investments should include AI data centers, AI application development, worker training, and AI extension programs; space-related infrastructure and manufacturing, funded by new financing tools such as “space bonds” and support for new ventures in advanced biosciences, manufacturing, construction, and agriculture.
However, financially prudent risk-taking is the key to sustainable growth. Chinese provincial and municipal governments have taken on massive debts that may impair long-term growth and perhaps even trigger a financial crisis. U.S. states and cities should invest in their future while keeping their borrowing under control.
