Emerging Policy leading up to 2025 Industrial Ambition, Industrial Policy, Digital Economy, Market Liberalization, Special Weekend Edition of 16 January
Intelligence and insights on China's government actions, foreign policy, economy, and the capital markets.
Introduction: Fragility and Strength of China’s Industrialisation over the coming years
China's posture in global politics rose, while its significance in the global economy fell in 2021.
The economist Ruchir Sharma predicts that China's role as the global engine of growth may have peaked last year. The country currently contributes a quarter of global GDP expansion, compared to one third before Covid-19.
While the US helped hasten global growth between 2018 and 2019, it was a drag on the global economy at the onset of the pandemic in 2020. In contrast, China's global economic contribution has consistently been a net positive for the past four decades. This may change in the year ahead.
Adjusting its economic course in 2021, China inflicted pain onto its most prized and once-vibrant technology and real estate giants. The cost has been steep. While the future remains uncertain, it may still be too early to call the China party over.
With that said, there is much to expect for China in 2022, and here are a few predictions.
China, treading the path of most industrialised economies, has gradually transitioned from investment to consumption as the main driver of its economic growth.
But facing a lacklustre consumption recovery coming out of the pandemic, China will revert to the familiar: a strong level of infrastructure stimulus in 2022. Except this time, the infrastructure will serve as the motherboard of China's green and digital future.
Different from building roads, rails and bridges, the new-era infrastructure will centre on digitalisation and renewables. China's carbon-neutrality pledge alone is forecast to unleash $15 trillion green energy infrastructure by 2050, according to the state planner.
The future US-China strategic competition will be won not by the party that is the bigger consumer, but the one that is the superior producer. A strong, service-based economy heavily reliant on global supply chains, nestled on a hollowed out domestic manufacturing base, can be a fatal weakness in today's global competition.
This is a valuable lesson China has learned from the US. The remnants from the American rust belt region evoke a bygone manufacturing era.
China's industrialisation will fight against a double-edged sword as well. China has indeed lost its labour premium in manufacturing and it must strangle fossil-fuel power supplies and steel production in exchange for a renewable future.
But China will surely continue to be self-reliant in steel, aluminium and other high-end industrial manufacturing, whatever the costs. The alternative of relying on global imports brews self-defeat.
As for the Chinese stock market, the best analogy might be that of a giant newborn. The market is large, but the system is still in its infancy.
Since the Shanghai and Shenzhen exchanges debuted back in 1990, the public markets have long been a destination for retail investors and infested with market speculation.
Meanwhile, the red-hot Chinese real estate market has also dried up nearly all serious capital from hard-working Chinese savers in recent years. And China's stock markets have long been plagued by opaque listing rules and loopholed corporate governance.
Despite all this, Chinese stock markets' capitalisation – combining Hong Kong, Shenzhen, Shanghai and Beijing – is today the world's second-largest, and poised for a regulatory overhaul.
China's securities regulator aims to fully adopt a registration-based IPO system in 2022. Contrary to the previous, approval-based IPO system, the government's "visible hand" in determining the fate of IPOs will be fully removed. Both listings and delistings will be determined by the market.
China is also increasingly opening the markets to Wall Street houses - Blackrock and JP Morgan included - to participate in institutionalising China's capital market. Improving the institutional architecture, the state reaps the reward of massive capital drawn into the stock market to finance China's drive for technology breakthroughs and industrialisation.
And as far as trade is concerned, New Year's Day saw the death of one trade landscape for China and the birth of another. Following the unsatisfactory closure of the US-China Phase One Trade Deal, the historic Regional Comprehensive Economic Partnership (RCEP), a free trade agreement among Asia-Pacific nations, was enacted.
China is still in a de facto trade freeze with Australia, except for iron ore. And it has suspended all trade with Lithuania, an EU member country. Its Bilateral Investment Treaty with the EU is on indefinite hold, tussled between Brussels and Berlin.
US President Joe Biden's Xinjiang Human Rights Bill further bans all imports that involve supply chains from Xinjiang. All US manufacturers in China are compelled to weigh that law against their profits.
While trade relations with developed nations sit on ice, China's trade with emerging markets continues to boom. Forty-nine per cent of trade in 2021 was with the developing world, spanning South-East Asia, Africa and Latin America.
Thanks to RCEP, 57 per cent of Chinese products will trade tariff-free with Japan, a feat in both trade and in geopolitics. China's trade with the ASEAN trade bloc, already its largest trading partner, grew 30 per cent in 2021. China thrives in the upper-middle end of the industrial supply chain. When manufacturers trade tariff-free across the RCEP region, China is destined to capture more foreign direct investments and regional value chains.
Less mighty as the global economic growth engine, China's relevance and centrality will continue to heighten in the developing world. China's rise was once the outcome of serving as the downstream producer for the developed world. Its rise, in itself, is the rise of the developing world, and increasingly, for the developing world.
China's future economic growth will likely settle in the 5 per cent range. A 4.8 per cent GDP growth in the next 15 years implies China will double its economy by 2035, a substantial global game-changer.
The country's strength is ultimately embedded in its fragility. Its system is far from perfect, and yet, its ability to continuously reform and self-correct is far from decay.
Shirley’s Op-Ed on the National (12 Jan.), originally titled “How China's role in the global economy is changing in 2022”
Summary of Articles:
China Lays Out Vision for Development of the Digital Economy in Accordance with 14th Five-Year Plan
China Released Circular on Industrial Supply Chain Migration across Chinese Regions
State Council Proposes Deepening Market-Based Reform
China Introduces Enhanced Tech Rules
China Launches Pivotal Reform Agenda to Liberalize Capital, Labor, and Technology Markets
Eight Ministries Released China’s 2025 Smart Manufacturing Plan
Securities Regulator Releases Multiple Rules to Prep the Stock Market for a Full registration-based IPO System
China Releases 2021-2025 Raw Material Development Plan
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1. China Lays Out Vision for Development of the Digital Economy in Accordance with 14th Five-Year Plan
China’s State Council issued the Development Plan of Digital Economy During the 14th 5-year Plan Period to government entities of various levels and called for extensive coordination. (source)
The development plan has framed China’s overall digital vision. It plans to use data as a new fundamental factor of production, improve the digital economy’s governance system, coordinate the digitization of traditional industries and industrialization of the digital industries, empower traditional industries with digital technologies, incubate new digital industries and new economic models, and support the development of “Digital China.”
the total value-added from the core digital economy should account for 10% of China’s GDP then;
the market and governance systems related to data will be completed in principle;
China will complete a fair, competitive, unified, and mature market-based digital economic system; and
ensure China’s digital economy stays at the most advanced global level.
Major indicators of digital economy development
The development provides 8 specific indicators to measure the development level of the digital economy.
The digital economy core industries to GDP ratio is expected to increase from 7.8% in 2020 to 10% in 2025.
The number of active IPv6 users is expected to rise from 460 million in 2020 to 800 million in 2025.
1000Mb broadband users will grow from 6.4 million in 2020 to 60 million in 2025.
The size of the software and information technology services industry will reach RMB 14 trillion by 2025, up from RMB 8.16 trillion in 2020.
The penetration rate of industrial internet platforms will rise from 14.7% in 2020 to 45% in 2025.
The aggregate value of online retail sales will increase from RMB 11.76 trillion to RMB 17 trillion over the same period.
E-commerce transactions will rise from RMB 37.21 trillion to RMB 46 trillion.
The number of online government affairs services users will double from 400 million to 800 million over the same period.
The plan specifies 8 major areas in need of cultivation for the development of the digital economy:
Digital infrastructure: The state envisions an incremental upscaling of backbone networks, acceleration of the construction of 1000 Mb broadband and 5G internet infrastructure, facilitation of 5G commercial applications on a large scale, and initial preparatory work for the technological composition of 6G and corresponding international standards.
Digital transformation: The government will look to facilitate the digital transformation of various industries and strengthen a small group of highly-specialized SMEs and market leaders.
Fully realize the effect of data as an economic factor: Market entities will be encouraged to explore pricing mechanisms for digital assets to facilitate the construction of a proper pricing framework. Data black markets will be cracked down on to ensure a market of order and stability.
Digital industrialization: The plan emphasizes the importance of boosting innovation capacity in key areas to improve the competitive advantages of core industries. Technologies and products including aiming sensors, quantum information, IT, integrated circuits, software, big data, AI, blockchain, and new materials were all addressed in the plan.
Digitalization of public services: The plan proposes developing “cloud life” services, which integrate cutting-edge technologies such as AI, AR, and 8K high-resolution videos to expand their application in social, commercial, and entertainment settings.
Digital economy management: The plan calls for the active involvement of entities and society in managing the digital economy to strengthen and improve anti-monopoly regulations.
Digital economy security: The plan clarifies that personal information will receive strong protection while regulations for the collection, transfer, and usage of identity information, private information, and biometric information will be further standardized. Special protection mechanisms will be introduced for vulnerable communities, including minors and elders.
International cooperation on digital economy: The plan also proposes bilateral and multilateral cooperation on the development of digital economy management and standards.
This is considered China’s top-level development roadmap for the digital economy as a part of the 14th Five-Year Plan.
In the detailed Plan, the commercialization of 5G, R&D of 6G, the integration of AI, VR, and 8K High-definition video technologies are all expected to benefit.
Personal data protection and the standardization of the collection, transaction, and usage of personal data are expected to be carried out.
2. China Released Circular on Industrial Supply Chain Migration across Chinese Regions
Ten Chinese ministries released a circular on China’s industrial supply chain migration across regions by 2025. ( 《关于促进制造业有序转移的指导意见》; the Guidance). This marks a major step forward in strengthening China’s domestic economic circulation.
The recalibration aims to optimize the regional industrial supply chains, make them more efficient and productive, and prevent existing supply chains from leaving China amid increasing global supply chain decoupling.
The Guidance states that by 2025,
China aims to shift more industrial capacity to Central/ Western China and Northeast China, to enhance its domestic economic circulation.
Here are the key highlights:
Encourage the labor-intensive industry, technology-intensive industry, high-load energy industry, and industrial services industry to migrate towards Central and Western China and Northeast China.
The National industrial mapping will consider the differentiated characteristics of China's industrial sectors and geographical regions.
The national plan will pay more attention to the least developed regions and underdeveloped border regions and explore the potential in those regions.
The national plan will also seek to upgrade the high-quality industrial capabilities in China’s major industrial clusters and metropolises.
The national plan also focuses on the “opening-up” of the industrial supply chain. It seeks to upgrade the utilization rate of FDIs in China and promote cross-border industrial migrations to the BRI regions.
The national plan places a hard cap on the development of environmentally polluting industries.
The national plan seeks to encourage the East coast to invest its R&D outcomes in the less developed regions for incubation and commercialization. It encourages East Coast companies to establish management companies and joint ventures to invest in Northeast, Central, and Western regions.
Given the large landmass and differentiated stages of development within China’s various regions, the domestic economic circulation gives opportunities for the wealthier regions to further invest in the poorer regions, and at the same time, leave room to focus on upgrading its own cutting-edge industrial capacity further.
China can be seen as a “federation” of various economic regions. Now the domestic investment and technological migration will shift middle-to-low range industrial capacity to China’s poorer regions, further induce balanced development, reduce income inequality, and solidify China’s comprehensive industrial prowess within the country.
3. State Council Proposes Deepening Market-Based Reform
On January 6th, the Chinese General Office of the State Council (国务院办公厅) released a plan ( 要素市场化配置综合改革试点总体方案) to pilot reforms of market-based allocation of the factors of production. The comprehensive plan has identified the 5 key factors (land, labor, capital, technology, and data) that should be fully integrated as pivotal elements for a functioning market-based reform. (source)
Here is a recap.
The Plan highlights the importance of improving allocation efficiency. It will allow pilot regions to increase autonomy in adapting land allocation to local conditions while ensuring the “3 baselines” of public ownership of land, preservation of farmland, and protection of farmers’ benefits.
The Plan aims for increased fluidity of labor mobility. Pilot regions will use the place of the main residence to replace the previous “hukou” system in establishing residency status. For the 300 million migrant workers in China, it offers a pathway for them to claim urban residency status and the healthcare, education, and welfare benefits from such cities.
The Plan advocates for increased credit provision to suit the needs of small and medium enterprises, improved cooperation between the banking system and outside equity investors to develop diverse fintech products. The wider adoption of the digital RMB has also been cited.
The Plan emphasizes the role of technology commercialization to service the real economy. Technological progress can be achieved by resorting to talents rather than capital investments.
The Plan suggests the use of data and information based on the principle “data remain in their origin. Data remain usable yet invisible” (“原始数据不出域、数据可用不可见”), to maintain the control on both the provenience and the data size.
The timeline for the plan is from 2021 to 2025, with goals of finishing the pilot region selection and planning by the first half of 2022, generating initial results in key markets by 2023, and a successful conclusion of the pilot by 2025.
On the surface, the Plan supports the efficient allocation of resources as determined by market conditions, thus increasing efficiency. However, experts have warned that lessening state control can also hamper the growth prospects of the economy (source)