Tue, May 09, 2017 - Page 8 News List

Lessons of China’s industrial policy

By Richard Kozul-Wright and Daniel Poon

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

China’s industrialization process, like that of other successful East Asian economies, has combined profit-led investment, active industrial policy and export discipline.

However, 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 to fall back, owing to what Harvard University economist Dani Rodrik has called “premature deindustrialization.”

China hopes to avoid this fate, with the help of “China Manufacturing 2025” (CM2025), a roadmap released by Chinese Premier Li Keqiang (李克強) in 2015 to guide the country’s industrial modernization. The strategy focuses on developing advanced manufacturing sectors, but also considers how producer services, services-oriented manufacturing and “green” technologies can complement that process.

As part of CM2025, policy and financial support are to 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 bio-medicine and high-performance medical devices.

CM2025 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.

That experimentation might hold valuable lessons for policy evaluation and innovation elsewhere. Not only are many developing countries devising their own strategies for industrial upgrading and diversification; some developed economies, including the US, are 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 industrialized.

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 percent of domestic demand in 2030, compared with 41 percent in 2015.

One of CM2025’s less-noticed components, financial-policy guidance, is also one of its more innovative. 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. Specifically, the Export-Import Bank of China should strengthen services for manufacturing firms to invest overseas, while the China Development Bank (CDB) should increase loans to manufacturing firms, with a view to “guiding” financing from other institutions, such as venture-capital and private-equity funds.

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