China counts the costs of its lurch from market reform to ‘Made in China 2025’

The year 2013 was a critical year in China’s development. At the Central Committee third plenum in November, President Xi Jinping’s new administration promised to dramatically marketise China’s economy. However, in August that year, the Chinese Academy of Engineering had begun research on an alternative model, “Made in China 2025”. The fact that this industrial plan has superseded the 2013 reform programme has enormous implications for China and its relations with the world. 

At the 14th party congress of 1992, China announced the establishment of a socialist market economy, where the market would form the basis of the economy and the public sector would play a decisive role. Every congress thereafter reconfirmed that stance. But in 2013, perhaps prodded by a joint report by the World Bank and China’s Development Research Centre of the State Council, the third plenum notes reversed those positions, giving the market the “decisive role” in the economy.

A host of reforms were outlined in these documents. An expanded private sector would more easily obtain bank loans while state-owned enterprises would undergo intense changes. Decades-old barriers to trade between provinces, between the rural and urban economies, and between China and the world, were to be removed. A robust social welfare regime would be funded by an increasingly vibrant public sector and the hated hospital system would be reformed. Under a new landholding system, villagers would be able to use their land as collateral for new businesses that, by some accounts, could inject 2 trillion yuan (US$298 billion) into the countryside and smaller cities.

However, very few of these initiatives came to fruition. Reports suggest that many proposals based on those goals have not seen the light of day because no senior official is pushing them.

“Made in China 2025” began in 2013 when the Chinese Academy of Engineering initiated nationwide research on what was then called the “Strategy of Innovation Design”. This project involved interviews with 153 firms in 32 cities, over 50 seminars with local governments and design organisations, as well as a dozen academic lectures, and culminated in a report that was a clear challenge by the academy and its partner, the Ministry of Information and Industrial Technology, to the reform programme.

The report was submitted to Beijing in 2015, and then endorsed by Premier Li Keqiang.

“Made in China 2025” has two main goals. First, transform China from an assembler of hi-tech products into a manufacturer for advanced industries, such as robotics, advanced information technology, aviation and new energy vehicles. China’s share of processing exports has steadily declined from almost 50 per cent in 2009, but as of 2016 was still almost 35 per cent.

Second, by fostering indigenous innovation and subsidising state-owned enterprises to import foreign hi-tech, China hopes to move up the value chain and avoid the middle-income trap (where less developed countries rapidly reach per capita gross domestic product of between US$8,500 and US$18,500, only to see growth drop and never achieve high-income status). According to the World Bank, out of 101 middle-income economies in 1960, only 13 became high-income by 2008.

But the West sees “Made in China 2025” not as an effort to join the ranks of hi-tech exporting countries but as a mercantilist strategy to replace them.

China says these goals are merely aspirational. But semi-official documents set concrete targets and funding has followed. An advanced manufacturing fund, worth 20 billion yuan, and an Integrated Circuit Industry Investment Fund, worth 138.7 billion yuan, funnel money into Chinese state-owned enterprises. Provincial funds complement these funds. While the Chinese strategy has been likened to the German government plan Industrie 4.0, the German funding of 200 million euros (US$225 million) is less than a 10th of the total Chinese investment.

The victory of “Made in China 2025” over the 2013 reform programme has significant implications. Rather than expand the market, Xi’s government has helped state-owned enterprises take over private firms by merging large state firms into even larger ones, thereby enhancing their monopolies in pillar industries. In 2015 and 2016, 11 extremely large state-owned enterprises merged, creating monopolistic national champions in the energy, railway, steel, shipping, mining and food sectors, whose technological strengths enhance their global competitiveness.

Xi may feel he has made the right choice. Upgrading China’s exports, rather than remaining the assembler of the world, should help the country avoid the middle-income trap. Reportedly, Xi never bought into the 2013 reform programme – he only asked if it would undermine the Communist Party and weaken state firms, and when told “no”, he signed off on the plan. Xi’s Chinese dream, his “Belt and Road Initiative” and his goal of making China a world power by 2049 all depend on state-owned enterprises and a powerful Communist Party, hence “Made in China 2025”.

These two visions of China’s future present stark choices and different outcomes. At the recent National People’s Congress meetings, Li insisted that banks increase lending to small companies by 30 per cent. And while China no longer discusses “Made in China 2025”, it still tries to implement it and the policy has generated pushback from the West. Chinese purchases of German firms could be a thing of the past, for one thing.

“Made in China 2025” was at or near the top of the list of complaints that the US presented to China in the current trade negotiations. It was mentioned in the United States Trade Representative’s Section 301 report on China’s unfair trade practices 116 times! In retrospect, the 2013 reform programme, which was heralded by the West and leading Chinese economists, might have prevented today’s trade and tech war.

Life is made of choices and one can only hope China’s leaders will reconsider the enormous value of the path not taken.

David Zweig is chair professor in the Division of Social Sciences at the Hong Kong University of Science and Technology and director of Transnational China Consulting Limited