China’s new ten-year industrial strategy shows its priorities

The annual conflab to sign off on policy decisions gave clues as to the thinking in Beijing. China’s future is bright if it can ride out the coming storm.

Delegates leave after the closing session of the 14th National People's Congress (NPC) at the Great Hall of the People in Beijing on March 11, 2024.
Delegates leave after the closing session of the 14th National People's Congress (NPC) at the Great Hall of the People in Beijing on March 11, 2024.

China’s new ten-year industrial strategy shows its priorities

China’s annual congressional sessions have recently concluded. They lasted just six days. While those who attend conferences may think that six days sounds like a long time, it was, in fact, much shorter than normal—one of the shortest on record.

The idea is to put China’s economy and politics centre-stage, but unusually for China in recent years, there are problems with both.

Footage captured President Xi lecturing his close confidants, and fellow Standing Committee members seated around him during the judicial report session, made Xi’s paramount political status clear.

This year’s oddities

There was the odd mishap. A female reporter raced to the podium too early, and a car rammed into the gate of the Chinese leadership compound late at night, both of which attracted some attention.

Unmentioned were the continued absences of senior ministers and military men who went missing last year shortly before being removed from the posts.

These include former Foreign Minister Qin Gang, former Defence Minister General Li Shangfu, as well as General Li Yuchao, who headed the People’s Liberation Army’s (PLA) Rocket Force Unit, along with his deputy.

The premier’s press conference was cancelled without much warning. It tends to be a highlight and a rare window for China’s leader to showcase his persona.

China's President Xi Jinping (C) applauds at the end of the 14th National People's Congress (NPC) closing session at the Great Hall of the People in Beijing on March 11, 2024.

That aside, China’s leaders still seized the moment to break ground for a ‘new normal’, moving on from the post-Covid rebound and entering a protracted period of economic, domestic, and international challenges.

In this new normal, China is battling the five structural forces in its economy: deceleration, deflation, debt, demographics, and decoupling. Let’s look at each.

Decelerating growth

China’s 2024 GDP growth target is an underwhelming 5%. If hit, this would be China’s slowest growth rate for decades (outside Covid).

Some wonder if 5% is tenable. In his ‘Government Work Report’, Xi said it was “a challenging target in a difficult period”.

The country’s economic transition and demographic forces have led to deflationary pressures. China’s CPI, an indicator of consumer confidence, has hovered in disinflationary or deflationary territory for the past 12 months, while Chinese PPI, an indicator of global aggregate demand for Chinese manufacturing, has contracted.

Demographic statistics do not bring much cheer. For instance, in 2022, China reached a population tipping point when the absolute population shrank. By 2050, a third of China's population will be aged 65+.

More concerning for planners is the even sharper fall in the national fertility rate, currently at a paltry one child per couple, when 2.1 is the national replacement level.

The labour force is falling, too, having peaked in 2017. This makes India and ASEAN countries more appealing as manufacturing supply chain destinations.

China is battling the five structural forces in its economy: deceleration, deflation, debt, demographics, and decoupling.

Demographic transition

An ageing and shrinking population with high youth unemployment suggests that China's deflationary pressures will persist. It reduces China's long-term ability as a consumption power.

This demographic transition makes it highly implausible that China will grow at 5%. Yet, that is not the only area in which China is changing. Chinese society is moving from an investment-led and real estate-centric economic growth model to a new technology-led one.

That means its large existing labour force could quickly become 'unskilled' in the new tech-driven economic environment, leaving China's unemployment rate above 5% and youth employment over 20%.

The mismatch between the skills demanded from emerging industries and the existing labour skillset may mean that more workers become unemployable if they cannot reskill.

Consumer demand becomes more important with the combined effect of its demographic challenges and economic transition.

Real estate slump

The real estate industry used to account for 25% of demand in the Chinese economy. Throughout much of the past decade, property prices in big cities like Shanghai, Shenzhen, and Nanjing have soared by more than 30% a year.

Residential buildings in Chongqing, southwest China, on March 19, 2024.

It was a central source of local government funds, Chinese banks' lending, industrial demand, and Chinese employment, but there were warnings of a "bubble", not least from China's central bank.

When the real estate sector eventually fell, Chinese unemployment rose, local governments' debt rose, and financial firms went bust.

In January, 70 of China's largest cities said house prices were falling. In places like Beijing, Shanghai, and Shenzhen, they fell by over 6%, the steepest decline since China's real estate privatisation.

During the Congressional session, China's housing minister said any financially insolvent real estate firms should go bankrupt, signalling that a large-scale government bailout of the sector was off the table.

At the same time, China's more financially prudent state-owned real estate developer, Vanke, scrambled into debt swap discussions with its creditors. Its risk of default means that China's real estate market really could turn ugly.

With neither a bailout nor a monetary stimulus on the horizon, Chinese real estate's recovery cycle is unlikely to be any quicker than it was for the US crash of 2007. It may yet be 2-3 more years before the market finds its bottom.

With neither a bailout nor a monetary stimulus on the horizon, China's real estate recovery is unlikely to be quick.

Pushing debt around

Local governments traditionally relied on real estate land sales tax as a main form of revenue, so the slump has led to dwindling balance sheets.  

To cover the difference, the central government has been issuing low-interest, long-term sovereign debt to replace local governments' lost income, yet this has just transferred the problem of fiscal debt stress.

To partially limit the problem, Beijing has forbidden a dozen of the most heavily indebted local governments from making further infrastructure investments.

The Chinese central bank's balance sheet has expanded by nearly RMB 5tn ($690bn) or 12% over the past seven months, which is larger than usual.

This has led some to suggest that China is now embarking on its own version of Quantitative Easing (QE) to stop local governments from going bust.

New industrial policy

During the Congressional sessions, China unveiled its new national industrial policy, titled New Quality Productive Forces.

Its predecessor policy called Made In China 2025, was initiated in 2015 and aimed to transform China into a leader in global high-end manufacturing. Measured against its objectives, it has been exceptionally successful.

A man tests a Huawei smartphone at the Mobile World Congress (MWC) in Shanghai on June 28, 2023.

By 2019, China produced half of the world's smartphones. By 2021, it will have produced half of the world's lithium batteries and solar panels. By 2023, it will have produced half of the world's electric vehicles (EVs).  

The New Quality Productive Forces policy covers frontier technologies, including infotech, biotech, AI, quantum computing, new energy, new materials, deep space, deep ocean, and deep mind (neuroscience). 

The strategy aims to achieve three objectives: foreign technology substitution, rapid industrial adoption, and strategic defence empowerment.

Talking the talk

A lot goes into this. Talent is recruited from around the world. Research and development are cutting-edge. Financing gets state backing alongside industrial subsidies. The policies also support foreign technology substitutions.

China's Big Fund—the state-backed semiconductor investment fund—aims to raise another $27bn to invest in crucial technologies and facilitate rapid tech commercialisation and industrialisation.

In terms of both quantity and quality, Chinese research is already world-leading in new materials, new energy, and telecoms, and it is moving ahead of the US in areas such as aviation, AI, quantum, and biotech.

If this new industrial policy is as successful as the last, China is likely to produce the next generation of hypersonic jets, hydrogen and nuclear energy facilities, AI algorithms, clever pharmaceuticals, and advanced robots.  

By 2019, China made half the world's phones. 2023, it made half the world's electric vehicles (EVs). 

Defending the realm

Another announcement that will have raised eyebrows is China's decision to increase its defence budget by 7.2%, with a significant focus on the technology of future armed warfare.

That means its defence budget in 2024 will grow to RMB 1.67tn ($244bn), almost four times the United States' budget.

China's economy is not a quarter the size of the US economy, but rather two-thirds, so Washington still spends a far bigger percentage relative to Beijing. The pair's focus now seems to be different, with China shifting heavily towards frontier technologies. 

These will be important to modernising its armed forces. As such, driving technological innovation will now become a defence priority.

On the sidelines of the Congressional session, China officially announced that the Type 004 Aircraft Carrier was developing well, although a Chinese admiral refused to say whether it would be nuclear-powered.

China has been looking to expand its aircraft carrier fleet as it aims to develop a modern "blue-water" navy within the next decade.

Although China owns 232 times the US's shipping building capacity, America's navy is still the more modern and lethal.

It may need those newer ships. Tension with the Philippines in the South China Sea and across the Taiwan Strait suggests that China will prioritise its naval capabilities.

A confrontation between two Chinese and Philippine Coast Guard vessels in the South China Sea on July 5.

Read more: China slowly grows its naval presence in the Middle East

Better buy Chinese

Interestingly, the over 5,000 congressional representatives attending the annual political sessions did not have iPhones due to national security concerns over US-owned Apple devices.

China has been accelerating a national initiative to replace foreign hardware and software with domestic counterparts in important national security sectors. The iPhone seems to have been a casualty.

These eponymous phones are beloved by the Chinese, accounting for almost a fifth of China's phone sales. Again, it was the best-selling smartphone in China in 2023.

As a result of the scare, however, iPhone sales in China fell by 24% in the first six weeks of 2024, as the government banned their use by public sector workers. The trend accelerated when Huawei unveiled its 5G phones last August.

It is not just phones. China wants to replace foreign tech in its office operating systems, supply chain management software, and more. Microsoft and Oracle product suites are also being substituted by their Chinese counterparts.

Security vs development

In this year's annual Government Work Report, one word was mentioned 29 times: security. If there were any lingering doubts about whether national security trumped economic growth, this document ought to have allayed them.

However, China is not alone in this. The US also prioritises national security. The two now simply complement each other.

Hong Kong lawmakers endured a 7-day marathon proceeding as the Congressional session progressed to approve Article 23. This brings national security laws in the special administrative region in line with Beijing's.

The judicial report during the Congressional session revealed that over 2.4 million people were "arrested or prosecuted" on national security grounds in China in 2023. Even with such a large population, this is an astonishing number.

China's defence budget in 2024 will grow to RMB 1.67tn ($244bn), almost four times the United States' budget.

Concern has not only fallen on foreign ministers, defence ministers, and military chiefs; corporate leaders and global investors have also been mentioned. No one is safe.

There is distrust at an international level, too, with the US and China looking in particular at the technology sector. In recent weeks, US politicians passed a speedy law to force TikTok's popular Chinese-owned video-sharing app to sell its North American division or face a ban.

China is unlikely to approve the sale due to its own data security laws, which treat TikTok's algorithms as a subject of Chinese national security, so it is likely to be banned. Few think the TikTok tete-a-tete will be the last of the tech run-ins.

Power to the Party

During the Congress, the Organisation Law of the State Council, which governs the institutional structure of the executive arm of government, was officially amended for the first time in more than 40 years.

The amendment changes the State Council's role and reduces its capacity, scope, and independence.

It was previously an independent executive branch of power to the administrative body, carrying out the Party's directives. However, its role now will be to administer according to the authority and unitary leadership of the Communist Party.

Furthermore, the Chinese premier, who was long considered the head of government and China's political number two, has had his authority eroded and is now less able to impose checks and balances on the Party's power.

Chinese Premier Li Qiang addresses the assembly during the annual meeting of the World Economic Forum (WEF) in Davos on January 16, 2024.

Let's talk Taiwan

In January 2024, Taiwan's voters elected Taiwanese nationalist Lai Ching-te and his Democratic Progressive Party (DPP).

Analysts wondered whether China would react furiously, but its response has been rather mundane. Although Congress once again mentioned the "peaceful unification" between Taiwan and the mainland, no provocative military exercises have been conducted, and no major policy shifts have been announced.

Although Beijing hoped for a different outcome, Taiwan's election result was unsurprised. Few now suspect anything big will happen before we know whether Donald Trump or Joe Biden will be US president from January 2025.

The Political Resolution on Taiwan, the summary document on Cross-Strait Relations released by the CPPCC, stated that both sides of the Taiwan Strait "seek peaceful unification" of the motherland.

This is the first time that "seeking peaceful unification" has appeared in Chinese official documents since 2018, indicating a dialling down in Beijing's rhetoric.

With security prioritised over development and technological breakthroughs in the big industries of the future now the official nirvana, China has set its stall out for the next ten years.

However, with debt levels, an imploding property bubble, and awkward demographic trends, China's future may be defined less by a new economic order with the global south in ten years' time than it will be by the next ten months.  

Whatever the 'new normal' is, we're now officially in it.

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