China’s focus on hi-tech, advanced sectors could hold key to revival

China’s new emphasis on innovation-driven development offers hope for sustainable development and avoiding the middle-income trap
A technological breakthrough in advanced sectors could be the decisive driver in transforming the country’s future and keeping pace with the United States

Ningrong Liu

Published: 5:30am, 18 Mar 2024

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The “two sessions” held annually in Beijing, which for this year concluded last week, have captured global attention because of the interconnection between China’s economic recovery and the growth of the world economy.

With an ambitious 5 per cent growth target set for 2024, the Chinese government faces significant challenges, as acknowledged by Premier Li Qiang during the National People’s Congress meeting. While China’s GDP growth of 5.2 per cent last year is commendable, ordinary citizens have not experienced the anticipated economic rebound.

Consumption remains weak, entrepreneurs lack confidence to invest and foreign direct investment has declined. These obstacles pose significant threats to China’s economy, which is burdened by issues ranging from overcapacity and a sluggish housing market to a mounting debt crisis. Moreover, this year began with a stock market rout and deflation levels not witnessed since the global financial crisis in 2008-09.

This year is the Year of the Dragon, and it is fascinating how a single letter like “D” on a number plate could command a staggering price of HK$20.2 million (US$2.6 million) in Hong Kong. However, despite the auspicious connotations traditionally associated with the dragon, the letter “D” does not augur well for China this year. Instead, it represents a series of challenges facing the country.

The first is deflation. China’s economy experienced deflation last year. This deflationary trend, although temporarily offset by a rebound in consumer prices during the Lunar New Year holiday, stands in contrast to the inflationary pressures faced by other major economies.

Deflation is worrying as it can dampen economic growth, worsen unemployment and exacerbate provincial government debt problems.

The second problem is debt. China’s debt-to-GDP ratio reached a record high of 287.8 per cent in 2023, marking a substantial 13.5-percentage-point increase from the previous year, according to a report by the National Institution for Finance and Development. Notably, the debt ratio for households rose to 63.4 per cent, while government debt climbed to 55.9 per cent.

The third “D” represents the demographic crisis. In 2023, the number of people aged 60 and over in China reached a staggering 296.97 million, accounting for around 21 per cent of the total population.

While some might argue against concerns of a labour shortage amid high youth unemployment, it is undeniable that a rapidly ageing society will strain China’s current pension system, necessitating adjustments to address potential future challenges.

The fourth “D” represents decoupling, which refers to the ongoing process of reducing economic interdependence between the United States and China. This decoupling is expected to intensify as the tech war between the two nations unfolds. The US government is tightening tech controls and impeding China’s access to cutting-edge technology.

Finally, the fifth “D” signifies deglobalisation, which marks the end of the post-Cold War era of globalisation. Instead, a new global order led by the US and China is emerging, characterised by differing ideologies and strategic competition. In the post-pandemic era, a new global supply chain is taking shape. Notably, the ongoing chip war between the US and China exemplifies this shifting dynamic.

Given these challenges, where can China find its new driver for economic growth? China’s leadership recognises the imperative to depart from the old growth model and unleash “new productive forces”. The country’s new strategy aims to achieve a new leap forward by prioritising the development of hi-tech sectors.

What does Xi’s hi-tech push mean for China?

China is striving for self-reliance in science and technology. This underscores the necessity of adopting a new model of economic development centred around innovation in advanced sectors.

From this perspective, there are serious doubts about the likelihood of a quick recovery for China’s economy. While China’s rapid growth during the past two decades has heavily relied on the real estate sector, the shift towards advanced sectors could prolong the transformation of China’s economy. The hopes pinned on hi-tech sectors are not without challenges, particularly in the face of fierce competition with the US.

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Artificial intelligence is an area where China’s industry is often seen as a strong rival to the US. However, concerns are growing about the widening gap between Chinese and American competitors, especially after the impressive capabilities demonstrated by OpenAI’s Sora and ChatGPT.

Despite restrictions imposed by the US on China’s access to advanced semiconductors, China remains determined to forge ahead with the development of large language models and generative AI systems.

Battery-powered vehicles have been hailed as China’s new hope for driving exports and fuelling its economy. China has made significant strides and outpaced traditional auto powerhouses such as Germany and Japan in the electric vehicle market. Chinese-made cars have gained popularity not just domestically but also in overseas market.

Meanwhile, semiconductors are an area where China’s industry has faced significant challenges because of the US tech restrictions. The US government’s tech sanctions have severely restricted China’s access to advanced chip-making tools and AI processors.

However innovative, China needs a network to become chip self-sufficient

Although China’s semiconductor sector has weathered a tough year, it is important to acknowledge the limitations imposed by these restrictions. While Huawei’s breakthrough during the visit of US Secretary of Commerce Gina Raimondo was seen as a victory for China, it remains to be seen whether this momentum can truly alter the global economic landscape.

China’s new focus on innovation-driven development offers hope for sustainable development and avoiding the middle-income trap. While some are disappointed at the lack of stimulus to boost the economy, it is important to note the most crucial stimulus for China is confidence. A technological breakthrough in advanced sectors can be the decisive driver in transforming the country’s future.

Ningrong Liu is associate vice-president at the University of Hong Kong, and the founding director of HKU Institute for China Business

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