Xi Jinping's plans to overtake the United States

Last year, top Chinese leader Xi Jinping paid a visit to Heilongjiang, in the northeast of the country.

Oliver Thansan
Oliver Thansan
02 April 2024 Tuesday 10:22
9 Reads
Xi Jinping's plans to overtake the United States

Last year, top Chinese leader Xi Jinping paid a visit to Heilongjiang, in the northeast of the country. This industrial province, part of the “rust belt,” is an example of the problems that afflict the Chinese economy. Its birth rate is the lowest in the country. House prices in its largest city are falling. The province's GDP only grew by 2.6% in 2023. And, what is worse, its nominal GDP, before correcting for inflation, barely grew, indicating that it is mired in deep deflation.

There is nothing to fear: Xi has a plan. During the visit, she urged her audience to cultivate “new productive forces.” And, since then, that expression has appeared dozens of times in state newspapers and official meetings. It was highlighted last month in the “two sessions”, the annual meetings of the merely endorsement Parliament and its political advisory body (the Chinese People's Political Consultative Conference). In the preface to a new book on the subject, Wang “they shine” even today, Wang writes, suggesting that the “new productive forces” will enjoy similar staying power.

What do those brilliant words mean? Chinese officials are searching for formulas that will allow them to boost the country's economy. For many years its productive forces have been based on the mobilization of labor and the accumulation of capital. Between 1996 and 2015, the country's workforce grew by 100 million people. The capital stock rose from 258% of GDP in 2001 to 349% two decades later, according to the Asian Productivity Organization, a think tank. Following the global financial crisis of 2007-2009, much of that capital accumulation took the form of new property and infrastructure.

Now, China's workforce is shrinking and real estate demand has plummeted: fewer people are moving to cities, speculative profits in real estate are no longer assured, and potential homebuyers are reluctant to purchase flats for free. advance due to the fear that the promoters will have problems and run out of liquidity before completing the projects. The real estate decline has damaged consumer confidence and deprived local governments of crucial revenue from land sales. Even after the abandonment of the strict controls decreed due to covid-19, the economic recovery has been weak and uneven. Spending has not been strong enough to achieve full performance of the existing productive forces. As a result, according to one indicator, deflation has persisted for three quarters in a row.

In China's stage of development, economies tend to pivot towards services. However, the government has its heart elsewhere. The pandemic skyrocketed demand for manufactured goods, from surgical masks to stationary bicycles. US export controls on “bottleneck technologies” have also created a need for domestic alternatives, from lithography machines to aviation-grade stainless steel. China's 14th five-year plan, which covers the period 2021-2025, promised to maintain the share of manufacturing in GDP, which had fallen from almost a third in 2006 to just over a quarter in 2020.

In its pursuit of a sophisticated but autonomous manufacturing system, China has long pursued a number of useful policies. Its Ministry of Education, for example, recently approved a new university specialization in high-end semiconductor science and engineering. According to the think tank Center for Strategic and International Studies, Chinese spending on more explicit industrial policies (which include subsidies, tax exemptions and cheap credit) amounted to 1.7% of GDP in 2019, more than triple the percentage spent by USA.

“What China wants is to be at the forefront of the next industrial revolution,” says Tilly Zhang of the consulting firm Gavekal Dragonomics. To do this, it will have to modernize traditional sectors, break foreign dominance over existing technologies and forge a new path in the sectors of tomorrow. While the central government's ambition is imposing, even disturbing, it will not succeed without the help of cash-strapped local governments and trust-strapped private entrepreneurs. Therefore, the new slogan may reveal a harmful farsightedness, a defect that will prevent leaders from correctly seeing the most immediate economic concerns.

For Barry Naughton of the University of California, San Diego, who confesses to having read some Hegel in his youth, the expression “new productive forces” evokes the “dialectical” idea that an accumulation of quantitative changes can give rise to a rupture. qualitative or a sudden jump, as Hegel expressed it, just as when a progressive increase in temperature turns water into steam. Marx, for his part, pointed out that when new productive forces reach sufficient weight in the economy, they can remake the social order: “The mill moved by hand gives us the society of feudal lords; the steam mill, the society of industrial capitalists.” The new productive forces can therefore represent a great change.

However, in introducing the idea, Xi has said that the touchstone of the new productive forces will be improvements in “total factor productivity,” a term taken not from Marx but from mainstream economics and which refers to increases in output that cannot be attributed to increases in measurable inputs, such as capital, labor, and human capital. By mixing Marxist and neoclassical concepts, the new productive forces are a “strange hybrid beast,” says Naughton.

According to Xi, new productive forces will emerge from the application of science and technology to production. The phrase is a sign that China's technological push needs to be more ambitious than it is today and more closely integrated into economic production. Chinese leaders have promised a “whole-of-country” effort to boost technological self-sufficiency. The central government's budget, released in March, has increased spending on science and technology by 10% to 371 billion yuan ($50 billion), the largest percentage increase of any section. That's not frugal innovation, of course.

Six years later, China changed course again. His “innovation-driven development strategy” expressed the conviction that the world was in the midst of another industrial revolution. Advances in digital technologies, the Internet of Things, clean technologies and artificial intelligence promised great advances in broad sectors of the economy. Instead of choosing a miscellany of emerging sectors, the new strategy emphasized that group of technologies capable of reinforcing each other. China aimed to become a “world power” in innovation by mid-century. In 2020, it spent nearly 2.9 trillion yuan (2.8% of GDP) on science and technology, according to consulting firm Rhodium Group. The government's contribution exceeded 60% when including generous tax breaks. One sixth of the beneficiaries were universities or research institutes. Approximately 60% went to companies.

Naughton has called China's innovation strategy the “largest single commitment of government resources in history to an industrial policy objective.” What can the country show us in return? The results so far have been better than expected from any middle-income country. However, they are not as impressive as Chinese leaders had hoped.

In e-commerce, financial technology, high-speed rail and renewable energy, China is at or near the technological frontier. The same is strikingly seen in electric vehicles, whose success helped China become the world's largest automobile exporter last year. In a list of 64 “critical” technologies identified by the Australian Institute of Policy Research, a think tank, China leads in all but 11, taking into account its share of most influential papers in those fields. The country is number one in 5G and 6G communications, as well as in biomanufacturing, nanomanufacturing and additive manufacturing. It is also ahead in drones, radar, robotics and sonar, as well as post-quantum cryptography.

China has also made great progress in broader indicators of a country's innovation “ecosystem.” The Global Innovation Index, published by the World Intellectual Property Organization, combines some 80 indicators, covering infrastructure, regulations and market conditions, as well as research effort, patent grants and citation counts. For a middle-income country with the GDP per capita of China, one would expect it to rank in the 60s. China is ranked number 12.

More difficult to measure is the economic impact of those achievements. China's list of “strategic emerging sectors” has continued to evolve since its introduction in 2010, making progress difficult to track. Two members of China's National Bureau of Statistics once lamented that the inclusion criteria, especially regarding products, are “vague.” How do you know if a boiler counts as “low consumption” or a composite material as “high performance”? However, Chinese statisticians estimate that strategic emerging sectors accounted for 13.4% of GDP in 2021, up from 7.6% in 2014, but below the original target of 15% set for 2020. Instead, the Value added from real estate construction and services (without taking into account upstream links to steel, iron ore and other similar sectors) was approximately 12%.

Although such progress is impressive, Chinese leaders are not satisfied. They have been alarmed by the United States' technological embargoes and by that country's recent technological triumphs. Comprehensive export controls on the sale of chips and chip-making equipment have exposed China's dependence on foreign components, software and equipment. American advances in artificial intelligence have also given food for thought. China believed it had an advantage in that sector. In 2022, the country's leaders were surprised by the introduction of ChatGPT, a large language model developed by OpenAI.

Growth in total factor productivity (Xi's preferred touchstone for measuring the new productive force) has also slowed. China's technology program introduced in 2006 assumed that the contribution to growth should increase to 60%. Instead, it has fallen to less than a third, according to calculations by Louis Kuijs of credit rating agency S

The innovative impulse now seems divided into three. On the one hand, the country is determined to reproduce “critical” technologies that the rest of the world might try to deny it. A second goal is to invent technologies that the rest of the world has not yet created. In January, the Ministry of Science and Technology, along with six other ministries, released a list of “future sectors,” many of which are even more pioneering than the emerging strategic sectors of the past. They include photonic computing, brain-computer interfaces, nuclear fusion, and digital twins (digital simulacrums of patients that doctors can monitor for diseases likely to appear in their flesh-and-blood counterparts). The Chinese government is encouraging laboratories and research institutes to spend more than half of basic research investment on scientists under 35, believing that young researchers are more likely to achieve the breakthroughs the country needs.

Such totally disruptive goals could be seen as foolishness that China cannot afford, as a distraction from the dogged pursuit of self-sufficiency, which requires indigenous versions of the technologies that China can no longer count on importing. However, according to Gavekal's Zhang, Chinese leaders hope that futuristic sectors will indirectly contribute to the country's technological sovereignty to the extent that they will provide “bargaining chips” in the technological battles to come. If the United States threatens to cut off China's access to a vital input, China will be in a position to retaliate in kind.

Chinese commentators often talk about “overtaking the curve.” China's success in the electric vehicle sector, following its long failure to displace traditional vehicle manufacturers, shows that it can sometimes be easier to make progress in fields not occupied by well-established incumbents. According to Jie Mao of the Beijing University of International Business and Economics and his co-authors, China's science and technology policies between 2000 and 2012 boosted the productivity of nascent sectors more than that of mature sectors. at home or abroad. It is known that, in a guerrilla war, Mao Zedong was in favor of occupying the countryside before advancing on the cities. Similarly, China may be entering the wilds of technological discovery, where its long-established adversaries have less of an advantage.

A third objective is to modernize existing industrial sectors. “Even the most traditional agriculture can form new productive forces,” said Wang Yong of Peking University, as long as it uses revolutionary technologies. Wang cites automated seeding or selective breeding using big data. At the two sessions, the annual meetings of the Chinese parliament and its advisory body, the delegate of a major state distillery went so far as to argue that new productive forces can be found even in powerful alcoholic beverages.

The fight for these goals will be costly. One lesson of the last ten or fifteen years is that large sums of money cannot guarantee a Hegelian transformation of production. Now, lack of spending will undoubtedly prevent it.

Chinese leaders should therefore be concerned that local government budgets are tight and morale is flagging. In the past, much of the money for China's technology push came from funds raised by local governments through land sales and “special bonds.” Between 2022 and 2023, its revenue fell by more than a fifth.

In a situation of economic boom and abundant liquidity, local authorities are free to invest in initiatives that may not bear fruit for five or ten years, says Matt Sheehan of the Carnegie Endowment for International Peace think tank. In 2010, for example, growth was picking up and economic stimulus could flood into electric vehicles, solar panels and other evolving technologies. However, for local governments in these more pressing times, “fighting economic fires will eventually crush attempts to think long term,” Sheehan predicts. Companies will be urged to invest in projects that offer short-term benefits. They may also suffer pressure and harassment to extract taxes and fees intended to help balance the accounts of their provincial or municipal employer.

In the two sessions last month, Chinese Premier Li Qiang outlined the country's “main tasks” for the coming year. First on Li's list is to “modernize the industrial system” and develop “new quality productive forces.” The expansion of domestic demand, necessary to dispel deflation, was only in third place. If morale and markets are not revitalized, local governments will struggle to replenish their coffers and private investment may fall short. Xi is determined to reinvent the Chinese economy. To do this, he first needs it to expand again.

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Translation: Juan Gabriel López Guix