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In less than three decades, China has grown from playing a negligible role in international trade to being one of the world’s largest exporters, a substantial importer of raw materials, intermediate outputs, and other goods, and both a recipient and source of foreign investment. To be precise: China was the 16th largest exporter of manufactured goods in 1984. In 2007, China took the top spot with a market share of almost 20%. However, this was likely one of the first steps of China’s long-term industrial ambition to make China the leading manufacturer in the world.

A/    CHINA’S LONG-TERM INDUSTRIAL AMBITION – IMPORTANCE OF HIGH-TECH INDUSTRIES VS. DEPENDENCE OF MANUFACTURING

Share of manufacturing value-added of GDP (%)

Source: Allianz Global Investors Economics & Strategy, European Chamber, China Manufacturing 2025, March 2017.

China’s long-term industrial ambition

China’s ambitious plan is to build one of the world’s most advanced and competitive economies, with the help of innovative manufacturing technologies. Therefore, China’s industrial masterplan “Made in China 2025” aims to turn the country into a “manufacturing superpower” by gradually raising its value-added contribution by high-tech industries over the coming decades (see Chart A/). In this regard, “Made in China 2025” prioritises 10 industries including robotics, information technologies, high-end equipment, biotech and renewable energy, which aim to become mainly domestic-based by 2025, and is designed to increase China’s self-sufficiency. Semi-official targets for the domestic market share of Chinese products up to 2025 – 40% of mobile phone chips within the Chinese market could be domestically produced by 2025, as well as 70% of industrial robots and 80% of renewable energy equipment.

From “Made in China” to “Innovated in China”

After more than three decades of high growth that was based on its low-wage advantage and relatively favourable demographics, in conjunction with market-oriented reforms and an opening-up to the world economy, China is at a crossroads with a wage level that increased over time, and a shrinking workforce. By necessity, its future growth will likely have to depend more on its ability to generate productivity increases, whilst domestic innovation will be an important part of it. If China makes the transition to a more innovative economy, it needs to make a commitment to research and investment spending as well. In 1991, when systemic data on this subject started to be collected, China invested 0.7% of Gross Domestic Product (GDP) in research and development (R&D). By 2012, its spending had caught up with the OECD average (at 1.9% of GDP), while two years later, China’s R&D spending had reached 2.1% of GDP, leading to an output of innovation as measured by the filing of patents. And in between, China overtook the United States as the country with the most patent filings in the world in 2011 (based on data from the World Intellectual Property Organization).

China embraces ‘New Infrastructure’

After a delay of more than two months due to the previous COVID-19 lockdowns, the annual National People's Congress (NPC) took place in late May 2020. In practice, the NPC rarely has a significant impact on financial markets. This is an event where China’s political elite rubber-stamp existing policies, and formally announce previously flagged policy direction. However, in his government work report Premier Li outlined key economic policies and targets for reviving the economy in 2020. While job market stability is a clear priority, along with greater reform and opening-up to retain supply chains, the government will also likely support investment which will, unlike conventional infrastructure such as building roads and ports, focus on strengthening new infrastructure build-up. That includes three main aspects: information-based infrastructure such as 5G and the Internet of Things (IoT); converged infrastructure supported by the application of the internet, big data and artificial intelligence (AI), such as smart transportation and smart energy infrastructure; and innovative infrastructure that supports scientific research, technology development and product development. Rather than resorting to a massive government-led stimulus to support growth, China is seeking more targeted investments that facilitate innovation and structural adjustments, and reduce the country’s reliance on imported components, while enhancing the sustainability of growth.

However, the government work report also re-emphasised the importance of embracing economic opening-up, with further shortening of the “negative list” of foreign institutions, more pilot programs for the service sector, and the same treatment for domestic and foreign enterprises. With these measures China will likely speed up the economic opening to keep productivity growth at a healthy level in the medium term, to partly offset the structural drags of population aging and the risk of “de-globalisation” in a post-COVID-19 world.

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