Xi Jinping is questioning if all of China should chase the same AI and EV dreams

• China's focus on EVs and AI industries is facing challenges amid price wars and overcapacity.
• Chinese leader Xi Jinping recently questioned if all of China should focus on the same high-tech sectors.
• China's top leadership has pledged to address intensive hyper-competition and price wars.

China bet big on electric vehicles and artificial intelligence — but now its top leader is starting to question whether that bet has gone too far.

On Monday, Chinese leader Xi Jinping questioned the country's single-minded focus on a few high-tech sectors.

"When it comes to new projects, it's always the same few things: artificial intelligence, computing power, and new energy vehicles," Xi said at a meeting about urban development in Beijing, the Chinese Communist Party's People's Daily reported on Thursday.

"Do all provinces in the country have to develop industries in these areas?" Xi asked.

Xi's unusually blunt remarks questioning China's industrial strategy come as the country's top leadership recently pledged to curb intense "involutionary" competition. The remarks show a shift from Beijing's usual pushback against Western criticisms over industry overcapacity and cheap exports.

The comments reflect growing concerns that China's pursuit of dominance in EVs and AI may be backfiring economically and politically.

'Involution' and a deflationary trap

The hyper-competition has become especially acute in the EV sector, where an intense price war has squeezed margins and raised alarms about long-term sustainability.

Beijing is now encouraging market consolidation and cracking down on unhealthy practices. These include abuses such as "compelling businesses to sell goods on a below-cost basis," wrote Lynn Song, ING's chief economist for Greater China, last week.

This comes as deflationary pressure is worsening. China's producer price index, or PPI fell 3.6% in June, the steepest drop in nearly two years.

That's not just bad news for businesses and China's economy. It also risks fueling trade tensions as Chinese exports become cheaper and flood global markets.

China posted GDP growth of 5.3% in the first half of the year. Much of the momentum is likely driven by export frontloading ahead of new US tariffs and temporary consumption subsidies.

Beneath the headline numbers, the Chinese economy remains under strain as consumer confidence remains depressed and youth unemployment stays high.

"It appears the persistent PPI deflation has finally caught the attention of the top leadership in Beijing," wrote economists at Nomura last week.