*The writer is research associate at Oxford university’s China Centre and at Soas and an adviser to the China Observatory, Council on Geostrategy. He is a former chief economist at UBS.*
China’s industrial policy is not well understood. The fiscal price tag, highlighted in the latest IMF report that Alphaville covered on Tuesday, is eye-poppingly large at around 4.4 per cent of GDP. And the Fund reckons it costs the country a further 2 per cent points of GDP each year in lost productivity.
The impact of Chinese industrial policy on the world economy is so large that Donald Trump’s tariffs are, by comparison, a minor nuisance. America’s roughly 8 per cent share of world imports is less than half of China’s share of world exports. And the industrial policy-export nexus is not only aggravating China’s own domestic systemic problems, but becoming increasingly problematic for a growing number of countries.
The economist Barry Naughton, renowned guru of Chinese industrial policy, has described China as being engaged in ‘the greatest single commitment of government resources to an industrial policy objective in history.’ Other estimates as to the measurable cost of Chinese industrial policy have been made by the OECD, the CSIS, and the Kiel Institute. Ballpark — these come to around 1.5-2 per cent of GDP, or 4-5 times that of large OECD countries. The IMF report has more than doubled this, but even so there is much that is hard to quantify, and more that is impossible to get a handle on. These include:
* the government industrial guidance funds — essentially public-private venture capital funds, designed to raise capital for innovation, industrial transformation, and local economic growth with a target of 11 trillion RMB;
* local government subsidies, which can be larger than national subsidies, especially where land purchase is concerned;
* financial largesse in the form of ubiquitous implicit guarantees and below-market credit and financing rates;
* below market input prices for energy and land;
* the subsidisation of supply chain firms, and;
* regulatory, procurement, and market access favours to preferred companies.
And that’s before we count benefits to firms from tariff protection, an undervalued Renminbi, and the use of ‘golden shares’ by the state. If the IMF reckons 4.4 per cent of GDP is a base, it’s not hard to get a more holistic price tag up to at least 5, maybe 7-8 per cent of GDP, and possibly even more. Everyone can get the message: the CCP is deadly serious about this, and it’s important to understand why. Firstly, China pursues industrial policy for commercial reasons. But it also craves self reliance in key technologies and resilient supply chains, and thinks national security is a big deal. More specifically, it desperately needs something to pick up the slack from the structural funk in real estate and overbuilding of uncommercial infrastructure, absent a marked shift towards a more consumption-driven growth model. But China’s industrial policy only makes sense if one also acknowledges its geopolitics too. Not to mince words, China’s industrial policy is a state-backed effort to knock the United States off the perch of global technological leadership. Having missed out on the mechanisation, electrification and information revolutions, as the CCP narrative has it, China — following Marxist doctrine about the role of ‘productive forces’ — must now try to dominate the fourth industrial revolution. And this means new technologies including AI, big data, quantum computing and biotechnology. Unlike other nations that have used industrial policy to catch their rivals, China wants to leapfrog them.
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*The writer is research associate at Oxford university’s China Centre and at Soas and an adviser to the China Observatory, Council on Geostrategy. He is a former chief economist at UBS.*
China’s industrial policy is not well understood. The fiscal price tag, highlighted in the latest IMF report that Alphaville covered on Tuesday, is eye-poppingly large at around 4.4 per cent of GDP. And the Fund reckons it costs the country a further 2 per cent points of GDP each year in lost productivity.
The impact of Chinese industrial policy on the world economy is so large that Donald Trump’s tariffs are, by comparison, a minor nuisance. America’s roughly 8 per cent share of world imports is less than half of China’s share of world exports. And the industrial policy-export nexus is not only aggravating China’s own domestic systemic problems, but becoming increasingly problematic for a growing number of countries.
The economist Barry Naughton, renowned guru of Chinese industrial policy, has described China as being engaged in ‘the greatest single commitment of government resources to an industrial policy objective in history.’ Other estimates as to the measurable cost of Chinese industrial policy have been made by the OECD, the CSIS, and the Kiel Institute. Ballpark — these come to around 1.5-2 per cent of GDP, or 4-5 times that of large OECD countries. The IMF report has more than doubled this, but even so there is much that is hard to quantify, and more that is impossible to get a handle on. These include:
* the government industrial guidance funds — essentially public-private venture capital funds, designed to raise capital for innovation, industrial transformation, and local economic growth with a target of 11 trillion RMB;
* local government subsidies, which can be larger than national subsidies, especially where land purchase is concerned;
* financial largesse in the form of ubiquitous implicit guarantees and below-market credit and financing rates;
* below market input prices for energy and land;
* the subsidisation of supply chain firms, and;
* regulatory, procurement, and market access favours to preferred companies.
And that’s before we count benefits to firms from tariff protection, an undervalued Renminbi, and the use of ‘golden shares’ by the state. If the IMF reckons 4.4 per cent of GDP is a base, it’s not hard to get a more holistic price tag up to at least 5, maybe 7-8 per cent of GDP, and possibly even more. Everyone can get the message: the CCP is deadly serious about this, and it’s important to understand why. Firstly, China pursues industrial policy for commercial reasons. But it also craves self reliance in key technologies and resilient supply chains, and thinks national security is a big deal. More specifically, it desperately needs something to pick up the slack from the structural funk in real estate and overbuilding of uncommercial infrastructure, absent a marked shift towards a more consumption-driven growth model. But China’s industrial policy only makes sense if one also acknowledges its geopolitics too. Not to mince words, China’s industrial policy is a state-backed effort to knock the United States off the perch of global technological leadership. Having missed out on the mechanisation, electrification and information revolutions, as the CCP narrative has it, China — following Marxist doctrine about the role of ‘productive forces’ — must now try to dominate the fourth industrial revolution. And this means new technologies including AI, big data, quantum computing and biotechnology. Unlike other nations that have used industrial policy to catch their rivals, China wants to leapfrog them.