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China Economy

What ‘Made in China 2025’ can teach Trump’s America about reviving industry

Richard Kozul-Wright and Daniel Poon say China’s 10-year road map aims for policy and financial support for technological innovation, and institutional foundations for new sources of growth, offering valuable lessons for a US tackling an eroding manufacturing base

PUBLISHED : Monday, 01 May, 2017, 4:10pm
UPDATED : Monday, 01 May, 2017, 4:10pm

While the world watches anxiously for signs of US President Donald Trump’s next move vis-à-vis China, Chinese leaders remain focused on the next stage of their country’s ongoing economic transformation. What they do should interest everyone – especially US policymakers.

China’s industrialisation process, like that of other successful East Asian economies, has combined profit-led investment, active industrial policy and export discipline. But that approach has its limits, exemplified in the numerous developing countries that have attempted to climb the same development ladder, only to become stuck on the middle rungs or even fall back, owing to what Harvard University economist Dani Rodrik has called “premature de-industrialisation”.

China hopes to avoid this fate, with the help of “China Manufacturing 2025” or “Made in China 2025” – a road map released by Premier Li Keqiang (李克強) in 2015 to guide the country’s industrial modernisation. The strategy focuses on developing advanced manufacturing sectors, but also considers how producer services, service-oriented manufacturing and green technology can complement that process.

Made in China 2025: How Beijing is revamping its manufacturing sector

As part of the strategy, policy and financial support will be provided to spur technological breakthroughs in 10 key areas, including next-generation information technology; high-end computer-controlled machine tools and robotics; space and aviation equipment; alternative-energy vehicles; and biomedicine and high-performance medical devices.

Made in China 2025 has sometimes been portrayed as a return to old-school, top-down mercantilist practices and import-substitution policies. But that reading overlooks China’s active experimentation with industrial and financial policies.

Some developed economies, including the US, are currently seeking to revive their manufacturing bases

In fact, that experimentation may hold valuable lessons for policy evaluation and innovation elsewhere. Not only are many developing countries now devising their own strategies for industrial upgrading and diversification, developed economies, including the US, are currently seeking to revive their manufacturing bases.

Start with industrial policy. According to China’s strategy, by 2025, the country should have a set of internationally competitive multinational firms that have made progress in upgrading their positions in global value chains. Moreover, by that date, key Chinese industries should adopt international efficiency standards related to energy and material consumption and pollution. By 2035, China expects its economy to be fully industrialised.

These broad objectives are underpinned by an array of specific domestic (and international) targets for market share in key areas. For example, production of integrated circuits should rise to 75 per cent of domestic demand in 2030, compared to 41 per cent in 2015.

One of the less-noticed components of the 2025 plan – financial policy guidance – is also one of its more innovative. In order to reduce the cost of capital for manufacturing firms, the strategy calls for the creation of new financing channels, while instructing China’s development-finance institutions to increase their support for particular ends.

China plans ‘enormous’ investment in 15 innovation centres to take manufacturing sector to next level

Specifically, the Export-Import Bank of China should strengthen services for manufacturing firms to invest overseas, while the China Development Bank should increase loans to manufacturing firms, with a view to “guiding” financing from other institutions, such as venture capital and private equity funds.

One of the less-noticed components of the 2025 plan – financial policy guidance – is also one of its more innovative

This approach, China hopes, can drive progress towards its objectives for upgrading and reform, by creating a set of purpose-built financing vehicles, or so-called government guidance funds, that are responsible for allocating public investment funds. As a report by McKinsey & Company puts it, this “more market-based investment approach” is a “bold experiment designed to improve the likelihood of success”.

Exemplifying this approach, China’s state-backed Tsinghua Unigroup recently secured 150 billion yuan (HK$161 billion) in new financing to support upgrading in the country’s semiconductor industry. Of that financing, 100 billion yuan came from the China Development Bank and the rest from the National Integrated Circuit Industry Investment Fund, a national-level government guidance fund created in 2014.

China sets up 100 billion yuan state fund to invest in the internet

The role of guidance funds will only grow. In 2015, nearly 300 were created with slightly more than 1.5 trillion yuan of available capital – a fivefold increase from 2014. Municipal-level funds were the most numerous; but provincial-level ones led the way in terms of funding.

Last year, two more national-level guidance funds were created: a US$30 billion state venture capital investment fund and a US$50 billion state structural adjustment fund. In both cases, the main shareholder is a holding company owned by the State-owned Assets Supervision and Administration Commission.

Be afraid: China is on the path to global technology dominance

In January, China’s Silk Road Fund – along with other Chinese investors, as well as investors from Singapore and Japan – founded the US$800 million Hou’an Innovation Fund, to invest in technology start-ups in areas like the internet of things, autonomous vehicles, cloud computing, big data and artificial intelligence.

As the benefits of innovation are diffused throughout the economy, China will move closer to its goal: becoming a high-income country

Much remains to be seen about Made in China 2025 and the use of these various new investment vehicles. But China appears poised to boost investment significantly in a range of new and advanced technologies in strategic sectors, while retaining equity stakes as they are developed and commercialised.

If it succeeds, it will have laid the institutional foundations for new sources of growth. And, as the benefits of innovation are diffused throughout the economy, China will move closer to its goal: becoming a high-income country.

China’s experiments with industrial and financial policies may end up providing emerging economies with valuable insight into how to avoid the middle-income trap. But, for a US concerned with its eroding manufacturing base, the lesson is already apparent.

The US should act now to revive its tradition of a pragmatic industrial policy, put finance back to work for the real economy, and invest in new activities that can reinvigorate a struggling middle class.

Richard Kozul-Wright is director of the division on globalisation and development strategies at the United Nations Conference on Trade and Development. Daniel Poon is an economic affairs officer at the United Nations Conference on Trade and Development. Copyright: Project Syndicate