A road out of middle-income trap

China’s all-round advancement paves its way toward high-income status

On July 1, the World Bank updated its global income classifications for fiscal year 2027, setting the high-income threshold at $14,375 based on gross national income per capita, calculated using the Atlas method. With a GNI per capita of $14,230, China remains in the upper-middle-income category, just $145 below the threshold. The question facing China is no longer whether it can reach high-income status, but how — and more importantly, whether — it can avoid the stagnation that has trapped so many economies.

The odds are sobering. Since 1990, only 34 middle-income economies have managed to shift to high-income status. The rest remained trapped in what economists describe as the “middle-income trap” — a stage where economies lose their advantage in low-cost manufacturing but have not yet developed the technological capabilities needed to rival advanced economies. Escaping this trap requires more than capital accumulation; it demands a fundamental transition from imitation to innovation.

The Republic of Korea’s economic transformation provides a valuable reference. In 1960, its GNI per capita was roughly $1,200; by 2024, it had soared to $33,000. The World Development Report 2024 summarized the country’s success through a “3i strategy”: investment, infusion, and, most crucially, innovation. Samsung’s evolution — from its early trading business in noodles and groceries in the 1930s to a television manufacturer in the 1970s, and eventually to a leading global manufacturer of consumer electronics and semiconductors — mirrors the country’s broader shift from a technology adopter to a frontier innovator. The lesson is clear: technology adoption is a bridge, but indigenous innovation is the destination.

China is now traversing a similar bridge, but with a scale that makes its economic transformation unprecedented.

Three structural advantages give China a solid foundation for breaking through the middle-income barrier.

First, China has built one of the world’s largest innovation ecosystems. In 2025, China’s research and development expenditure reached 3.93 trillion yuan ($580.67 billion), equivalent to 2.8 percent of its GDP — up from 0.57 percent in 1995. In September 2025, the World Intellectual Property Organization ranked China 10th globally in its Global Innovation Index, first among all upper-middle-income economies. China leads the world in patent filings and hosts 24 of the world’s top 100 innovation clusters, with Shenzhen-Hong Kong-Guangzhou topping the global rankings.

These achievements are increasingly reflected in industrial competitiveness. In 2025, it was estimated that China produced nearly 75 percent of the world’s electric vehicles. Companies such as CATL and BYD have become major players in the global battery and EV markets. This represents more than low-cost assembly; it reflects high-value engineering capabilities, supply chain integration and continuous technological improvement.

Second, China is converting its demographic dividend into a talent dividend. In 2025, a record 12.22 million students graduated from Chinese universities, including over 5 million with degrees in science, technology, engineering and mathematics. New entrants to the workforce now receive an average of 14 years of education. Roughly half of the world’s top AI researchers are now trained in Chinese universities. This large pool of engineers and researchers provides the foundation for companies such as Huawei to continue investing in areas including 5G, AI and chip design despite external pressures. Innovation at the frontier is fundamentally a human-capital game. China is now producing that human capital at a scale no other country can match.

Third, China’s enormous domestic market provides a unique testing ground for innovation. With a population of 1.4 billion, China can commercialize new technologies faster than other countries. When BYD rolls out a new battery, it has a domestic market larger than the European Union in which to refine it. When ByteDance deploys new AI features, it can reach hundreds of millions of users in weeks. This “scale-to-learn” advantage creates a self-reinforcing cycle: larger user bases generate more data, improved data enhances products and better products attract more users.

However, these advantages alone do not guarantee success. History shows that moving from middle-income to high-income status remains a difficult transition. China faces unique challenges that the ROK, and many other economies before it, never had to confront.

First, unparalleled scale and complexity. With 1.4 billion people, China must navigate a landscape where world-leading innovation clusters such as Shenzhen and Shanghai coexist with inland provinces still moving through later stages of industrialization. Coordinating resources across such vast geographic, economic, and developmental diversity is a governance challenge without precedent.

Second, strong geopolitical headwinds. China’s transition toward high-income status is taking place amid profound changes in the global economy. Rising geopolitical tensions, tighter restrictions on advanced semiconductors, AI chips and other cutting-edge technologies, and increasing fragmentation in global supply chains have made technological upgrading more difficult. China is therefore pursuing innovation under external conditions markedly different from those faced by many economies during earlier periods of industrialization.

Third, deep regional disparities. China’s east-west gap, urban-rural divide, and uneven distribution of human capital mean that innovation in coastal clusters cannot automatically spread across such a diverse economy. Building an integrated national innovation system requires sustained efforts to narrow these internal divides.

Yet it is precisely because of these constraints that China’s innovation achievements carry unique global significance. Having overcome obstacles of scale, geopolitical isolation and internal divergence, China’s technological breakthroughs are now generating global public goods. In biotechnology, BGI Genomics has driven down gene sequencing costs by orders of magnitude, making precision medicine accessible across the developing world. In quantum computing, the University of Science and Technology of China has achieved milestones that accelerate global research collaboration. In commercial spaceflight, companies such as i-Space and Galactic Energy are developing reusable rockets that promise to lower satellite launch costs for nations previously priced out of the space economy. These reflect frontier research and deep engineering capabilities at a scale no other nation can match.

What truly distinguishes China is its deliberate choice to share these advances rather than hoard them. At the 2026 World Artificial Intelligence Conference in Shanghai, China reaffirmed its commitment to open-source innovation and announced a series of measures to strengthen AI capacity in developing countries, ensuring the Global South is not left behind in the AI revolution. This was a statement of principle by a responsible major power: technological progress must serve all of humanity, not just a privileged few.

China backed this pledge with concrete action. It committed to training 5,000 AI professionals from developing countries over five years, investing in local capacity rather than extracting talent. It proposed a global AI governance framework emphasizing data sovereignty and ethical standards, offering an inclusive alternative to Western-centric models that often marginalize emerging economies. Platforms such as Baidu’s PaddlePaddle and Alibaba’s ModelScope are lowering technical barriers by giving developers access to AI frameworks, models and development tools, creating more opportunities for developers in emerging markets to participate in the global AI ecosystem.

By placing inclusive development at the heart of its innovation strategy, China is demonstrating that rising powers can — and should — shoulder global responsibility for shared prosperity.

It demonstrates how demographic mass can be converted into deep pools of human capital, how innovation ecosystems can be nurtured across multiple tiers of cities, and how technological leadership can be wielded as a global public good rather than a zero-sum competitive weapon. As many nations continue their own development journeys, China’s transition toward a high-income economy may provide a valuable reference for overcoming structural challenges and pursuing shared prosperity.

Qin Xiao is an associate professor of finance at the Antai College of Economics and Management at Shanghai Jiao Tong University. Wu Wenfeng is a professor of finance at the Antai College of Economics and Management and the director of the Division for Development Liberal Arts at Shanghai Jiao Tong University.

The authors contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.