China’s Development Strategy

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New Chinese Nuclear Power Plant

 

China’s development strategy is based on a division of labor between an authoritarian government and competitive private companies. The old idea that a Communist party protects workers from their capitalist exploiters seems quaint. The capitalists and the Party are now partners in exploiting workers without permanent residence permits.

 

China’s government identifies areas of the economy that it thinks will drive economic growth. Since 2015, those areas have been new or emerging technologies the government decides will drive economic growth and technological dominance in the global economy. The government backs its objectives with massive investment in infrastructure, education, and new companies in targeted industries. 

  

 

China begins by building infrastructure, concentrating on transportation. The latest is a new high-speed rail network linking cities and ports in the Pearl River megapolis.  It also directs resources and personnel into research and early development of the favored technologies. Colleges and incoming students are directed into programs that will support the future development of these technologies. 

 

When it is time to turn research and inventions into innovations, the levels of government begin to compete for new companies. They offer the companies free or cheap land, subsidies, and tax breaks. Companies then compete on the basis of reaching scale, lowering unit costs, and continuously innovating.

 

In earlier stages of development in the past, China imported foreign technology by joint ventures with foreign companies, buying or stealing the technology, and then trying to improve on it. Now, more and more, China originates the technology and then rapidly develops it. Many of the new technologies are interrelated and can be applied to other products and markets. After rapid development because of fierce competition at home, the surviving companies have high market share at home and may become major exporters.

 

The outstanding example is electric vehicles. China is the world’s largest producer of electric vehicles (EVs). It is also the world’s largest market as EVs are rapidly replacing gas-powered cars. China also has a large program testing robotaxis in 50 cities.

 

Chinese companies are beginning to export electric vehicles. Effectively banned in the U.S. and somewhat restricted in Europe, Chinese companies are concentrating on markets in Southeast Asia and Latin America.

 

One weakness in China’s development strategy is the government’s reluctance to close companies and reduce overcapacity. In older industries, state-owned companies account for much of the production. This policy becomes a barrier to progress when an existing technology is replaced by a new technology, as is the case of automobiles. Similar problems might arise when fossil fuel companies, especially coal, are replaced by renewable energy companies. The national government is politically sensitive to the social and political instability caused by causing unemployment. Plus, local governments fight to keep open unprofitable companies and coal mines.   

 

China’s manufacturing output is higher than the next four countries combined. If the United States does not radically change its domestic policies, China's dominance of the interconnected group of high-tech products will make China even more the dominant technology and manufacturing country in the world. China will dominate the global economy by exporting its high-growth products at falling prices and developing joint production in many countries. Because some of these products are effectively banned in the United States or subject to high tariffs, and President Trump favors fossil fuels and thinks global warming and climate change are a "con job," "scam," and "hoax," America could become a high-cost, high-price economy.

 

This includes renewable energy. China is the world's largest and lowest-cost producer of most renewable energy technology, especially solar panels and batteries. Chinese companies are selling cheap, stand-alone solar panels in less-developed countries. 

 

China is making a huge investment in next-generation nuclear power plants. 

 

These strategies have geopolitical aspects. China fears that the U.S. can cut off oil imports coming from the Middle East through the Strait of Malacca. China cannot count on always receiving discounted oil from Russia, Iran, and Venezuela.

 

If current American energy policies favoring fossil fuels continue and China follows through in its promise to greatly reduce coal production, within ten years America will replace China as the largest emitter of greenhouse gases.

 

China is the world’s largest user of industrial robotics; domestic production is increasing rapidly. New manufacturing plants are highly automated; older plants are being modernized. This is also a possible solution to the future decrease in the size of China’s labor force.

 

Combined with China's surge in exports to the world outside of the United States, as a reaction to American tariffs and bans on Chinese exports, much of the world's advanced technology will be based on Chinese technology. 

 

There is an important exception. AI development. The chain of ASML, TSMC, and Nvidia dominate the design and production of the world’s most advanced chips. Both countries are building new data centers but American data centers and foreign centers using Nvidia chips will contain the most advanced chips and supporting technology. China’s current strategy is a “work-around;” use massive amounts of less-powerful chips and concentrate on AI applications.

 

Because of America’s punitive tariffs on Chinese imports, the American market now accounts for only 10% of China’s total global trade. The decrease in exports to the U.S. has been made up with increased exports to the rest of the world. Combined with China's surge in exports to the world outside of the United States, as a reaction to American tariffs and bans on Chinese exports, most of the world's advanced technology will be based on Chinese technology.

 

China will have to deal with internal, domestic problems. The long-term problem will be the large decline in population, especially the shrinking of the working age cohort. China is not adequately supporting its large and growing older population. Pensions are low and health care facilities outside of Beijing and Shanghai are inferior. One possible type of improvement is a massive use of telemedicine, taking advantage of China’s huge telecom companies and possibly incorporating AI chatbots. Chinese pharmaceutical companies have become a major source of new drug discovery.

 

The main point of all this is that development of new technology is the key strategy for domestic economic growth and increasing exports. They see global competition with the United States as much as a geoeconomic and technological struggle as a geopolitical competition.

 

This essay is based on data and analysis in the following essays:

 

The Strange Political Economics of the Chinese Auto Industry

 

China's Economy, Politics, and Demography

 

China's Economic Statistics

 

Robots. "It's Alive"

 

 

 

 

 

 

 

 

 


 

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