Innovation has become a buzzword in Beijing’s political circles as China tries to hotwire a stalling economy and overtake the United States in cutting-edge technology.
Earlier this week, a 147.2 billion yuan, or US$21 billion, mega-fund was rolled out to upgrade the manufacturing sector. It will work alongside other crucial investment programs involved in advanced manufacturing and integrated circuits as part of an estimated $110 billion high-tech budget.
“The new fund will invest throughout the entire manufacturing industry value chain,” Zhang Yuzhe, a researcher at the National Development and Reform Commission, which is linked to the powerful State Council, told the Shanghai Securities News.
Major players involved will be the Ministry of Finance and the China Development Bank. But where this money will be channeled remains a mystery. The main concern is that the massive cash injection will be drip-fed into state-owned enterprises and private groups close to Beijing.
“If China achieves persistent or widening technological advantages in emerging fields, this could allow its firms to act like monopolies outside the country, shaping global technology standards to their own benefit and providing economies of scale that boost their revenues, expand their data pool, and fuel future R&D advantages,” James L Schoff, of the Carnegie Asia Program, and Asei Ito, of the Institute of Social Science at the University of Tokyo, wrote in a brief entitled Competing With China on Technology and Innovation.
Moreover, this super-sized investment decision followed key initiatives unveiled less than two months ago and connected to the Made in China 2025 program.
Billed as a wide-ranging high-tech drive, the broad brushstroke plan will help kickstart China’s slowing economy in the wake of the trade conflict with the US. It will also harness cutting-edge sectors, such as artificial intelligence, or AI, smart manufacturing and renewable energy, in a frenzy of country-wide infrastructure projects.
“China’s economy is shifting from high-speed growth to high-quality development,” Ma Jiantang, the vice-president of the State Council’s Development Research Center, said in September.
“It needs to rely on more integrated and efficient innovation to boost productivity and build a modern economic system,” he added.
Ma was the head of the National Bureau of Statistics and is considered a member of Xi’s economic brain trust. His comments came after the Development Research Center, the Ministry of Finance and the World Bank jointly released a study entitled Innovative China: New Drivers of Growth.
The report recapped on the “remarkable” periods of expansion in the world’s second-largest economy during the past four decades. But it also warned that traditional “drivers” are running out of steam.
“China is now at a crossroads, with declining returns to public investment and rapid aging. Developing new [areas] of growth will require more efficient allocation of resources [while] unlocking new drivers will also require reforms to let market forces play a decisive role in allocating resources,” the World Bank said in a statement.
Dovetailing the report was a policy document outlined by the State Council and Central Committee to beef up the nation’s transportation system by 2035.
Again, it was framed in ‘big picture’ language but light on details such as the overall cost for another huge infrastructure push.
Vital aspects include cutting commuting times within metropolitan areas to one hour and under two hours in “city clusters.” Connecting mega-cities to high-speed rail networks in under three hours will be another goal using AI, information technology and smart manufacturing.
“The industries that Beijing wants to use to improve transportation are the same ones it is looking to develop through its Made in China 2025 industrial policy,” Trivium China, the research group based in Beijing, pointed out.
While both initiatives will give the economy a shot in the arm, allocating the funding to include the cash-starved private sector has to be a priority.
Sprawling SOEs have an insatiable appetite in soaking up financial support and government contracts along with privately-owned champions such as Huawei, Alibaba, Tencent and Baidu. Very little is left for the little guys.
On top of that, there are other challenges. This week, World Bank chief David Malpass again urged Beijing to further open up its economy and reduce state subsidies, echoing demands made by Washington during trade talks.
“I encouraged new reforms and liberalization,” he said. “China could improve the rule of law, allow the market to play a more decisive role in allocating resources including debt and investment, reduce subsidies for state-owned enterprises … and remove barriers to competition.
“It is hard to achieve but it is vital for reducing any inequality and building higher living standards,” Malpass added.
Right now, the economy is in the doldrums. Two weeks ago, Premier Li Keqiang warned of the risks ahead at a meeting with economists and policymakers.
“The current external environment [has become] more complex and severe, with increasing downward pressure on the domestic economy, rapidly rising prices of pork and other products, and increasing difficulties in the business operations of companies,” he said as reported by the Chinese media.
Signs of stress have appeared with consumer spending, factory production and investment tumbling in October. To complete a depressing picture, GDP growth in the third quarter dipped to 6%, the slowest rate in nearly three decades.
Next year could be even tougher. The National Institution for Finance and Development has predicted that GDP will grow by just 5.8% in 2020.
“The economic slowdown is already a trend,” Li Yang, who heads the institute, which is affiliated to the Chinese Academy of Social Sciences, said. “We must resort to deepened supply-side structural reform to change it or smooth the slowdown, rather than solely rely on monetary or fiscal stimulus.”
A shift to state-induced technology investment appears to be one way out, overseen by President Xi Jinping’s ruling Communist Party.