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Why China's New Industrial Development Plan is ruffling feathers

Publication Date: 12 Jun 2018 - By Market Mogul By Market M.

Macro Multi Asset Asia ex-China China


It was not so long ago that the slogan ‘Made in China’ conjured up some very specific images. The cheap piece of clothing still hanging in your wardrobe, a dodgy piece of tech, or the pair of shoes that developed holes more regularly then the tick of a knock-off Rolex.

Amid the broader trade negotiations currently taking place between China and the US, however, it is surprising that this very slogan has come to be a focal
point of debate. China’s industrial development plan ‘Made in China 2025’ plans to erase memories of cheap low-quality products, and replace them with ones
of reliable, innovative, and cutting-edge hi-tech.

The ten-year industrial developmental policy announced in October 2015 and implemented by China’s Ministry of Industry and Information Technology in February 2017 identifies ten hi-tech industries that China wants to become globally competitive in by 2025, and sometime later this century globally dominant.

Made in China

So what’s the big deal? As far as national policies go, industrial development plans do not tend to generate much global attention, let alone condemnation, and yet ‘Made in China 2025’ continues to attract just that.

Unsurprisingly given all the back and forth that has been seen between heads of state in recent weeks, the industries that China aspires to dominate are all those in which the US and its allies are the current forerunners. From robotics, autonomous and electric cars to artificial intelligence, biotech and aviation, China plans to take the slogan ‘Made in China’ and repackage it in slick wrapping paper, going from the low-end manufacturing of clothing and footwear to being a hi-tech trendsetter and powerhouse.

It has been observed that where the English translation of the policy (in Chinese: Zhōngguó zhìzào 2025) captures China’s aim of localisation, it misses the inherent focus on manufacturing. This distinction is important because it explains why so many countries are feeling troubled by China’s new developmental blueprint. Aside from the impact that the realisation of ‘Made in China 2025’ would have on global trade, it is more the means by which China hopes to achieve this goal that has people on edge.

The Chinese government has become infamous for strategically intervening in domestic markets to facilitate the dominance of Chinese enterprises—a trend seen to be intensifying in the aforementioned sectors. Large funding schemes such as the Advanced Manufacturing Fund, amounting to ¥20bn ($3.1bn) and the National Integrated Circuit Fund amounting to ¥139bn ($21.5bn) demonstrate the extensive backing being dedicated towards the development of China’s indigenous capacity for advanced technology manufacturing.

Harvesting Foreign Technology

This is a two-pronged strategy of state-sponsored technology substitution, with the government systematically disincentivising and disadvantaging foreign competitors from operating in China. Exclusion from local subsidy schemes and pervasive collection of company data by the Chinese state embody two such discriminatory practices. A report issued by the European Union Chamber of Commerce in 2017 for example, argued that European businesses “face intense pressure to turn over advanced technology in exchange for near-term market access”.

There are further concerns that the self-sufficiency quotas outlined by the policy may be in violation of rules pertaining to open and fair markets set by the World Trade Organisation (WTO), a body that China has been a member of since 2001.

China aspires to achieve 70% self-sufficiency in core components and basic materials in specific hi-tech industries by 2025. While this would have a tremendous
impact on those countries that rely on exports of advanced technologies such as Germany and South Korea, more significantly it demonstrates the unbalanced way in which China chooses to pull down upon the levers of economic globalisation.

China’s Exploitation of Markets

Critics point to opaque business deals allegedly instigated by the Chinese government to acquire cutting-edge technologies from foreign companies. They argue that China exploits open markets in Europe and elsewhere abroad to facilitate large-scale technology transfer while denying foreign competitors access to its own markets.

In 2016, these issues coloured US President Donald Trump’s road to the White House and were a driving point of his overarching ‘America First’ campaign. As China’s industrial plan now kicks fully into gear, critiques of the policy are re-emerging in the current rounds of US-China trade negotiations.

Ultimately, it is still to be seen whether preventing foreign companies from competing with China’s own will actually restrict or bolster domestic innovation. It is undeniable that in recent decades we have seen unprecedented levels of innovation and progress within the technological realm arise from intensified competition and deepening connections between actors in the global market.

Some insist that the policy will be successful in elevating a small vanguard of Chinese manufacturers to a higher level of efficiency, productivity and global competitiveness. At the same time, however, questions surrounding the mismatch between political priorities and industry needs, the lack of bottom-up initiative and investment, and exactly how China intends to educate the highly skilled workforce needed to implement the plan remain unanswered.

Regardless of the potential for success, ‘Made in China 2025’ will undoubtedly remain a key policy document as the country presses forward on its new path of industrial development. But for the meantime, at least, in most of the world the slogan still brings to mind the memory of cheap goods and undesired gifts.

This post appeared first on The Market Mogul.


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