Liu He

A minefield to walk through: Vice-Premier Liu He must steer China’s hi-tech industries to greatness, even as a trade war with US looms

Liu’s portfolio, already heavy with industrial, economic and financing concerns, now adds science and research, just when US seeks end to technology transfers and fervour grows for domestic development

PUBLISHED : Tuesday, 15 May, 2018, 6:01pm
UPDATED : Tuesday, 15 May, 2018, 10:32pm

One day before Beijing unveiled plans to slap an additional 25 per cent of tariffs on a list of US imports worth US$50 billion, pushing the world’s two largest economies towards a full-scale trade war, Vice-Premier Liu He, Beijing’s leader in the trade talks, attended an event that did not raise many eyebrows at the time.

Liu, an economist who had studied at Harvard’s Kennedy School of Government, visited the Ministry of Science and Technology on April 3 and listened to reports from the top science and engineering academies.

Repeating the official line from the Communist Party, Liu urged Chinese scientists to toe the party’s line, and to understand the “extreme significance” of science and technology from the perspective of China’s long-term strategic interests.

Liu’s presence in the ministry, overlooked by many at the time, has proved highly relevant to the trade dispute between Beijing and Washington. The visit showed Liu, sometimes called China’s economic tzar for his power and close relationship to President Xi Jinping, in his new role heading China’s science and technology industries, a sector crucial to the trade dispute.

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For the past two decades, China’s technology sector has been placed at a lesser important corner in the party’s politics, set aside, like education or cultural policies, in a portfolio for a vice-premier, or sometimes even a state councillor, further down the political ladder. 

Key disciplines like heavy industry, trade and finance would usually land with other highly regarded  members of the State Council. 

The vice-premier, or state councillor, in charge of the sector would oversee the Ministry of Technology, the Chinese Academy of Sciences and the Chinese Academy of Engineering, all of which have been visited and addressed by Liu, who also supervises China’s heavy industry and financial regulation.  

Liu's new role underscores China's more aggressive drive in its science and research sectors, said Christopher Balding, an economist with Peking University HSBC Business School.

"China targets the research development to drive future Chinese growth, and Liu is bringing all that into his portfolio, too," he said. "Education and university people will have different focuses within science and technology development than someone who’s looking ahead for economic output out of this."

The new mission to spearhead the country’s scientific research also landed on Liu’s desk amid China’s growing ambitions to claim its place as an advanced manufacturing economy in the global market.

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China’s “What happens to 'Made in China 2025' as trade war fears grow” programme to catapult its manufacturing industries, especially in high-tech products, to a world-class level is at the centre of the trade dispute: most of the 10 industries listed in the blueprint document have been targeted for tariffs proposed by US President Donald Trump.

Liu’s task of driving the country’s economy up the industrial ladder and his push for further modernization was further complicated last month when Washington banned sales of American components to ZTE, China’s giant telecommunications equipment supplier. The move came after the US Department of Commerce found that ZTE had allegedly made false statements during an investigation into sales of its equipment to Iran.

The department’s action, which prohibits American tech companies from selling their chips and components to ZTE, had an immediate impact: last week ZTE notified officials at the Hong Kong stock exchange that it had ceased “major operating activities”. 

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The ban – although it could be rescinded, as suggested by Trump in a tweet before Liu’s visit – has fuelled debate in China about its heavy reliance on chips imported from the US, and stirred nationalistic sentiment among scholars and state media. A growing sentiment is that China should invest heavily on research and replace imported high-tech products with home-grown ones.

Days after the ban on ZTE was announced, an article by the social media account of the party newspaper People’s Daily, called for China to develop its own high-tech industries, invoking Beijing’s drive to develop its own nuclear and space programmes in the 1960s.

“Those were accomplished despite global sanctions and domestic poverty, are we worse than half a century ago?” the article asks.

The sentiment is echoed by scholars who work closely with the party and the government, including Han Baojiang, head of the economic department at the Central Party School, the top Communist Party academy.

“The ban on high-tech product is a wake-up call that we should enhance technology innovation,” Han told journalists in Beijing last month. “China is a nation that grow stronger in battles ... once there’s adverse factors from the outside, the whole country will be united and strong.”

Amid rallying calls to pursue domestic high-tech industries regardless of cost, however, many have voiced caution against hyper-nationalism.

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“I do not think the Chinese government should rush on this one, especially at the moment when China is not ready. Technological innovation is one of those things that take time and need a good research environment,” said Jinghan Zeng, deputy director of the University of London’s Centre for Politics in Africa, Asia and the Middle East.

“In this regard, the Great Leap Forward is a lesson from the past.”

In 1958, China kicked off a national production campaign dubbed “the Great Leap Forward”, a movement intended to surpass, in terms of industrial output, the UK in 15 years and the US in 50.

The campaign, remembered for its aggressive collective farming and steel-making, proved disastrous and was ordered to stop in 1962, after causing a massive death toll that reached, according to some accounts, as many as 40 million.

But Yuan Gangming, an economics professor at Beijing’s Tsinghua University, remains optimistic, provided Liu directs policies in the science and technology sector.

Liu, Yuan said, “knows how the system works and is not likely to embark on short-term measures”.

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“It’s enough to pay proper attention to the sector from now on,” he said, adding that projects like the 4 trillion yuan stimulus package (roughly US$630 billion) “will only incur massive bad loans and failures awaiting clean-ups later.”

The stimulus, introduced by Beijing to spur economic growth and fence off the 2008 financial tsunami, resulted in massive investments in the real estate market and infrastructure. Those investments were blamed for China’s industrial overcapacity and so-called “zombie firms”, companies that were unprofitable and relied on state-backed bailouts.

Yuan said that despite Beijing’s lip service to encourage high-end manufacturing, high-tech companies in China have not received much government support.

“Most of the   hi-tech business are considered high-risk, and the firms usually don’t have many assets for mortgage,so it’s very difficult for them to acquire loans,” he said.

Liu’s new mission of upgrading China’s manufacturing sector and increasing its research and development of hi-tech products is no short-term project. But his immediate task will be dealing with the pressure from Washington that threatens it.

“Nationalism in China has soared after the ZTE ban,”said Liu Shengjun, head of the China Financial Reform Institute in Shanghai. “Liu or anyone else tasked with the talk will face a dilemma: if China makes unilateral concessions, its people won’t be happy, and it’ll be undesired too if the talks are stalled. 

“Nationalism poses a major challenge to Liu’s decision-making.”

Though China will remain firm on keeping Made in China 2025 on track, it could make certain concessions to the US  in subsidies, support for state-owned enterprises  and forced technology transfers, he said.

Balding, the economist at Peking University , said that Beijing should assure the US that it would not use any obtained technology to support repressive regimes.

“One of things I would urge China to do is ... emphasise that the government is not using this to censor people around the world, to export this technology to North Korea, export this to Iran, to governments like that using it in specific ways,” he said. “It can go a long way to easing concern of China’s role in this area.”