China counts the costs of its lurch from market reform to ‘Made in China 2025’
- The Xi government pledged market reform in 2013, the same year a think tank began research on a competing plan that would become ‘Made in China 2025’. The latter has outpaced reforms, arguably to the nation’s loss
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.
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.
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.
“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