Chinese Journal Review: CASS Scholars Propose a Five-Year Strategy for China's Industrial Development
Elements include investments in green tech, advanced manufacturing, and infrastructure
On Friday, the Institute of Industrial Economics at the Chinese Academy of Social Sciences (CASS) published the most recent edition of China Industrial Economics. CASS is affiliated with the State Council.
CASS researchers pen the journal’s first essay. They articulate a five-year strategy to promote industrial development in China. I’ve included a translated summary below.
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Title: China’s Industrial Development Strategy During the 14th Five-Year Plan (“十四五”时期中国工业发展战略研究)
Journal: China Industrial Economics (中国工业经济)
Author: Research Group of the Institute of Industrial Economics at CASS
Publication Date: March 2020
In 2020, China enters the final year of its 13th Five-Year Plan. In this essay, CASS scholars propose an industrial development strategy for the next five years. They write that China should pursue policies and investments that help the country modernize its economy, avoid the “middle-income trap,” maintain global dominance in manufacturing, utilize advanced technologies to propel growth, and accelerate economic development in less-developed parts of the country.
After many decades of remarkable growth, China’s economy faces new challenges:
First, the world is experiencing an “anti-globalization” wave. Between 2008-2017, G20 member states introduced 6,616 trade restrictions versus only 2,254 measures that liberalized trade.
Second, developing and developed countries are “squeezing” Chinese industry at both ends of global supply chains. Multinationals in labor-intensive industries are increasingly moving their operations to other developing countries where wages and other production costs are lower than in China. The proportion of China’s clothing exports to the world dropped from 39.2 percent to 33.6 percent between 2013-2017, whereas the share of clothing exports from South Asian and ASEAN countries increased from 9.3 percent to 12.2 percent over the same period.
Following the 2008 global financial crisis, many developed countries have also introduced measures to incentivize their companies to produce goods at home, especially in the high-tech and advanced manufacturing sectors. Some developed countries like the United States have also “blocked” Chinese companies from working in their domestic high-tech sectors. Dynamics like these make it more difficult for Chinese companies to compete in high-value industries.
However, these challenges are buoyed by the following positive trends:
First, as China’s economy has grown, China’s purchasing power parity (PPP) has also increased. China can promote domestic consumption by meeting increasing consumer demands for high-quality goods.
Second, fast growth in other developing countries creates new market opportunities for Chinese companies. The Belt and Road Initiative, which so far includes 136 countries, will help Chinese companies more easily access these new markets.
Third, China will still maintain its dominant position in global supply chains over the next five years. This is because China has fast and robust supply chains that can produce goods in every sector. Few low-income countries are well-positioned to produce goods where advanced manufacturing equipment or highly specialized knowledge is needed. Chinese labor quality is also generally higher than in low-income countries and the cost of Chinese labor is still less than in developed economies.
Finally, in recent years, China has made significant investments to build advanced research and development (R&D) centers around the country. It has also upgraded its national infrastructure, including in telecommunications and the Internet via its Internet Plus initiative. Investments like these will make the country more competitive and innovative in the next five years, especially in emerging technologies such as quantum computing, cloud computing, and artificial intelligence.
Strategic Areas for the Next Five Years
During the next five-year period, the authors recommend that China should:
Target manufacturing as a share of GDP at 30 percent. In 2018, manufacturing as a share of GDP was 29.4 percent, down from 32.5 percent in 2006. Manufacturing, especially advanced manufacturing, is a source of economic prosperity and national security. Policymakers should not allow manufacturing as a share of GDP to dip below 27 percent.
Focus on smart manufacturing. With the gradual weakening of China’s global competitiveness in manufacturing sectors because of rising production costs, investments in automation and “smart manufacturing” can bring costs of production back down.
Promote high employment by supporting labor-intensive industries. Global economic challenges put downward pressure on China’s economy, which jeopardizes stable employment in labor-intensive industries. China can reduce pressures for these industries by reducing taxes and other fees, as well as investing in human capital development programs to help workers upgrade their skills to move to new sectors.
Invest in industries that can stimulate domestic consumption. Firms should direct more investments to technologies that improve quality-of-life and increase consumer-driven consumption, such as wearables, intelligent robots, smart homes, next-generation mobile devices, and virtual reality.
Prioritize investments in green tech. Green manufacturing will bring down carbon emissions and promote energy savings. Investments here will also lead to the development of new industries.
Invest in technologies that have the potential to be “irreplaceable”. In addition to establishing China as a technology leader, developing “irreplaceable” technologies that are considered essential for emerging industries will cause the West to remove many of its restrictions on trade with China in the technology sector.
Policies and Programs China Can Adopt to Achieve these Goals
The authors write that policymakers can help realize these goals by doing the following:
Adopt policies to improve China’s industrial ecosystem.
Break down barriers to doing business in China, including by lowering corporate tax rates and other transaction costs.
Increase investments in infrastructure to make it easier for companies to trade with each other within and outside of China. Invest in cross-border rails, cross-border pipelines, and cross-border optical cables.
Provide targeted support for small and medium-sized enterprises, as well as private firms, working in high-priority industrial sectors.
Work with the financial services sector to bring down the costs of financing for industrial projects in priority sectors.
Build capacity and increase investments in education.
Help companies invest in staff and R&D, especially for those that work in high-priority sectors such as energy efficiency and smart manufacturing.
Direct resources to help technical schools, research universities, and enterprises train more people in science and technology fields.
Target interventions to support advanced manufacturing.
Encourage universities, research institutes, and private enterprises to invest in cutting-edge technologies through tax deductions, exempting duties on imports of advanced scientific equipment, and by establishing special research funds.
Reform intellectual property rights laws to encourage more scientists to pursue advanced research.
Direct investments to create new R&D centers, business incubators and accelerators, venture capital, legal services, and management consulting.
Improve Chinese product branding.
The government should make efforts to improve the negative stereotypes associated with the safety and quality of Chinese goods. Instead, audiences should see Chinese products as “green, safe, and high-quality.”
Increase quality supervision and safety inspections, crack down on intellectual property rights infringement, and create platforms to help Chinese firms improve their brands’ images at home and abroad.
Increase global engagement.
China can expand its access to new international markets by investing in R&D centers overseas, increasing foreign investments as part of the Belt and Road Initiative, and negotiating bilateral investment agreements, including with the United States and European Union.
The government should also direct more investments to China’s central and west regions to better position those geographies to play a larger role in global trade.
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