Monday, 6 July 2015

Mighty China’s Tenacity: 
Entre the Dragonomics (Part-I)

‘Wisdom, Compassion, and Courage are the
Universally Recognised Moral Qualities of Men.’


China’s legacy over the past 5000 years illustrates that original innovation has always been an integral part of China’s evolving culture. 

Ancient and Imperial China was punctuated by many episodes of war and turmoil; but also unprecedented periods of peace and stability; where technology, the arts and ancient tradition flourished.

This not only brought prosperity, but gave the Chinese new ways of thinking and creating: producing streams of seminal inventions we take for granted today: Paper, Ink and Printing (preceding the Johann Gutenberg movable type by 1,200 years). Gunpowder (where fireworks and modern artillery shells owe their origin). The Magnetic Compass (via synthesising a mineral known as magnetite). And then not forgetting the world’s first Clockwork Mechanism; Flushing Toilet, Cast Iron; Blast Furnace; Abacus, Ship's Rudder; Woven Silk; Books; Paper Money; Acupuncture; MahJong, Kung Fu, and yes, Football!

Another important part of Chinese history was the dissemination of these innovations throughout the known world. Beginning with the illustrious Silk Road, a pre-modern trade route between the East and West; allowing The Tang Dynasty access to markets in Persia and Central Asia. Maritime trade routes also facilitate trade, enabling Chinese Junks to navigate the South China Seas and Indian Ocean all the way to the Horn of Africa where trade was first thought to have occurred with South African tribes.

The everyday tools, pursuits and trade links came from an inscrutable alchemy that has influenced so many turning points in human history. And now this deep-rooted civilization has continued to evolve; and is now entering a new chapter that has only begun to fine-tune its latent ingenuity and spirit.

Today, 1.35 billion people aggregated in 34 prefectures, including 22 provinces, 5 autonomous regions, 4 municipalities and 2 special districts; stretching some 5,000 Kilometres north to south; with a nominal GDP of $8.23 trillion in 2012 (est. 9.02 trillion eo-2013); with recent growth slowing to a galloping 7.7 percent; with foreign-exchange reserves of more than $3 trillion: Mighty Dragonomics.

China will overtake the USA within the decade, and account for ~19 percent of global GDP in PPP terms by 2020. Challenges loom large, however, including increasing labour costs, a latent real estate bubble and a rapid ageing arising from the government's one child policy.

Home to ~875,000 individual millionaires and 271 billionaires according to the Hurun Rich List; China will be the third richest nation in terms of private wealth within five years, and is expected to grow robustly thereon after. Even in the face of countless private firms holding off Initial Public Offering, the market remains relatively healthy with 5,183 new startups listed on 17 database in 2012.

There has been more than a marked transformation in corporate ownership over the last two decades. According to the Chinese Census National Bureau of Statistics, in 1990 the majority of firms were state-owned; a mere 98,000 were private enterprises (think small holdings). In contrast, funds raised through initial public offerings (IPOs) on China's Shanghai and Shenzhen stock exchanges reached ¥250 billion (39.3 billion US dollars) in 2012, according to PriceWaterhouseCoopers. Half of China’s ~6 million businesses are now in private hands.

Ultimately, China’s continued economic and internal wealth creation relies heavily on trade with the rest of the world. Consequently one of China’s main focuses over the next decade will be economic reforms that promote global trade ranging across diverse market sector access, intellectual property protection, energy regulation, environmental protection and consumer standards and safety.

Chinese policy makers are already some way into addressing changes in the country’s growth strategy especially with regards to avoiding the ‘middle income trap.’ The focus is on quality of growth, structural reforms to harness innovation and economic efficiency and social inclusion to overcome the rural-urban divide and the income equality gap.

This is further emphasised by The World Bank report ‘China 2030 Building a Modern, Harmonious, and Creative High-Income Society.’ The report puts forth six strategic directions for China’s new development strategy:

‘After more than 30 years of rapid growth, China has reached another turning point in its development path when a second strategic, and no less fundamental, shift is called for. Six important messages emerge from the analysis:

First, implement structural reforms to strengthen the foundations for a market based economy.

Second, accelerate the pace of innovation and create an open innovation system.

Third, seize the opportunity to ‘go green’ through a mix of market incentives, regulations, public investments, industrial policy, and institutional development.

Fourth, expand opportunities and promote social security for all by facilitating equal access to jobs, finance, quality social services, and portable social security.

Fifth, strengthen the fiscal system by mobilizing additional revenues and ensuring local governments have adequate financing to meet heavy and rising expenditure responsibilities.

Sixth, seek mutually beneficial relations with the world by becoming a pro-active stakeholder in the global economy, actively using multilateral institutions and frameworks, and shaping the global governance agenda.’

From these proposals come the Communist Party of China’s Central Committee’s ‘12th Five-Year Plan (FYP) for National Economic and Social Development.’

FYP’s guiding principles focus on ‘inclusive growth,’ ensuring the benefits of economic growth are spread to a greater proportion of Chinese citizens. Key themes being rebalancing the economy, ameliorating social inequality and protecting the environment. Initiatives include a notional GDP growth rate of 7 percent, promoting consumption over investments and exports, closing the income gap through minimum wage hikes and increased social safety nets, and a range of energy efficiency targets. Healthcare, energy and technology sectors should also see a major boost. Not only have segments of these sectors been singled out as China’s new Strategic Emerging Industries (SEIs), but they also dovetail with the FYP’s emphasis on ‘inclusive growth.’

The government is encouraging foreign business participation in SEI development, but to what extent is a key question given China’s indigenous innovation drive. Foreign business can expect an increased cost structure during the 12th FYP period. Increased costs from wage and tax hikes, and raw material resource price reforms. On the positive side, foreign business can expect the government to continue opening up China’s services sector, to develop talent recruitment through education reform, and to strengthen the country’s intellectual property (IP) regime. The implementation of certain 12th FYP goals, such as increasing technological capabilities in a wide range of sectors, will have Chinese regulators welcoming advice and training from experienced foreign companies.

The 12th FYP is expected to pick up where the 11th FYP left off in terms of broad policy direction. The 11th FYP was considered a major policy shift for the Chinese government as it moved away from a focus on ‘growth at any cost’ toward a more balanced and sustainable growth pattern, under the ‘harmonious society’ (和谐社会 or hexie shehui) and ‘scientific development concept’ (科学发展观 or kexue fazhan guan) policy frameworks.

No longer content with being considered the world’s factory, Chinese planners have included several preferential tax, fiscal, and procurement policies designed to develop seven SEIs. Including biotechnology, renewable energy, high-end equipment manufacturing, energy conservation and environmental protection, clean-energy vehicles, new materials, and next-generation IT. With an aim to increase SEI’s contribution from today’s approximately 5 percent of GDP to 8 percent by 2015 and 15 percent by 2020.

The 12th FYP Guidelines has changed the previous creed of ‘Strong State, Wealthy People’ (国强民富 or guoqiang minfu) into ‘Wealthy People, Strong State.’

A key priority of the 12th FYP is for China to transition from ‘Made in China’ to ‘Designed in China.’ In order to achieve this goal, the government plans to heavily invest in science and technology education and R&D, and support ‘Next-Generation IT’ as an SEI.

China’s indigenous innovation drive will also continue to play a central role in this sector throughout the 12th FYP period. This is supported by so-called indigenous innovation support capabilities in technology through the use of several tools: including R&D investment in science and technology, to enable breakthroughs in sectors such as core electronic devices, integrated circuits, life sciences, space, marine, earth sciences and nanotechnology; Intellectual Property creation, use, protection and management; Administration strengthening fiscal and financial policies that support high-tech industry, including updating research funding management and venture capital investment; Commercialization to get the research undertaken at government-sponsored universities and research institutions to the marketplace; Next-Generation Information Technology accelerating the creation of G4 and G5 information networks, mobile communication and Internet; and finally, the government plans to invest in R&D of the ‘Internet of Things,’ cloud computing, and develop digital and virtual technologies.

Hence China’s technological innovation challenges over the next two decades will be nothing short of historic, in turn with a goal of taking 1.35 billion to ~1.8 billion people by 2025, moving up to a middle-to-high-income status all within the backdrop of an ongoing globally interconnecting economy. 

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