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Introduction
China's economic growth and transformation in the past four decades is nothing short of miraculous. Since the reform and opening in 1978, China's annual real GDP growth rate has nearly reached an average of 10%, and the nominal GDP value has increased from 300 billion USD in 1980 to close to 18 trillion USD in 2023. China has lifted over 800 million people out of poverty and urbanized over 60% of its population. From a poor, agrarian country to the second-largest economy with a strong industrial base, China's transformation is an unprecedented historical event. Central to this transformation has been China's ability to continuously upgrade its productive forces. At the 19th National Congress of the Communist Party of China (CPC) in 2017, General Secretary Xi Jinping stated that China has been transitioning from high-speed growth to high-quality development, which aims to achieve greater efficiency, equity, sustainability, and security. To achieve high-quality development, China must focus on developing new quality productive forces to drive innovation, enhance productivity, and maintain sustainable growth. Xi emphasized during the 11th collective study session of the Political Bureau of the CPC Central Committee in January this year that "developing new quality productive forces is an endogenous requirement and a pivot of high-quality development," and that "new quality productive forces have emerged in practice and exhibited their strong role in driving and supporting high-quality development." 1
What Are and How to Develop New Quality Productive Forces?
New quality productive forces represent a systemic evolution of production technologies, processes, and relations. New quality productive forces encompass three dimensions.
First, cultivating new quality productive forces requires technological breakthroughs and the establishment of strategic, emerging industries such as artificial intelligence (AI), quantum computing, humanoid robotics, biotechnology, new materials, new energies, commercial aircraft design, and other advanced manufacturing sectors. These technologies and industries will take the lead in driving productivity growth and providing technological input to other industries.
The second dimension involves upgrading and transforming traditional industries using these new technologies. China has gained tremendous competitiveness in a wide range of industrial supply chains in the past four decades, encapsulating over 200 mature industrial clusters. Developing new quality productive forces does not mean an exit from these traditional industries. Rather, it entails the transformation and advancement of these industries. In particular, the adoption and deployment of digital and green technologies will improve both the quality and sustainability of these traditional industries.
The third and final dimension involves reforms and improvements of the mechanisms and processes involving resource allocation and production. A well-established, unobstructed national market of productive factors and products would facilitate the spread of technologies, boost industrial and geographic linkages, enhance economies of scale, and achieve a higher level of efficiency.
Skeptics often question if China can leapfrog into cutting-edge technologies. They argue that China's success in the past owes more to "perspiration" than "inspiration." Decades of extensive growth by way of heavy input of labor, natural resources, and capital seem to have run out of steam, but it is uncertain whether China is able to move on to the high-quality growth, especially amid the Western restrictions on technological sharing. Notwithstanding these challenges, evidence suggests that China is not only making solid progress in technological innovations but also has the potential to leapfrog. Take AI as an example. By the end of 2023, China had released over 200 large AI models, with more than 20 of them approved to provide services to the public. In 2022, about 40,000 AI patents were granted to Chinese inventors, more than four times the comparable figure of 9,000 for the United States. For all the top three categories of patents, including machine learning, personal devices and computing, and computer vision, inventors with addresses in China again had the highest numbers of patents.
China not only leads in the research and development (R&D) of innovative technologies, but also dominates in the commercialization and production of tech-intensive products. China's global share in semiconductor foundry capacity surged from negligible in 2005 to 27% in 2022. China also installed 290,258 industrial robots in 2022, more than the rest of the world combined. For the "new three" products, China accounts for over 80%, 50%, and 20% of global solar panel production, lithium batteries, and EV exports, respectively. China also accounts for a significant share of other critical industries such as machine tool production, wind power equipment, high-speed trains, civilian drones, and mobile phones. In other words, China's technological advantages are growing and widening in an extensive range of sectors, and its technological competitiveness will spark broader productivity growth and structural transformation. Indeed, in 2022, the technologically intensive green economy and digital economy contributed 4.7 percentage points to China's growth rate, more than offsetting the negative contribution of 3.7 percentage points from the real estate sector.2
Rather than sporadic "green shoots," high tech and green tech are integrating into the broader economy, transforming traditional sectors. AI, robotics, automation, and big data are permeating traditional sectors such as manufacturing, logistics, healthcare, education, agriculture, and many others, ushering in more intelligent, efficient, low-carbon, and safer production methods. Data is a critical productive input being integrated into production through new-generation connectivity and AI. For instance, in smart factories, data is collected in real time by sensors installed on the production lines and equipment. It is then transmitted wirelessly to the internet for real-time monitoring of the production process. Data generated from production undergoes rapid processing and transmission, then is fed back into the production process. This transforms the factory into an intelligent network that can be adaptively managed and adjusted, optimizing industrial control and management. In modern China, many manufacturing enterprises employ solutions like EasyCloud MES for intelligent manufacturing management, leveraging cloud computing for industrial big data analysis. Going forward, through the Internet of Things, including machine networking, Radio Frequency Identification (RFID), and smart wearable devices, advanced manufacturing can establish interconnections and feedback loops among humans, machines, materials, and environments. This improves overall resource allocative and operational efficiency, ensures production security and resiliency, and enhances product quality consistency.
The third dimension of new quality productive forces involves building the "soft infrastructure" to support these forces effectively. To facilitate the most efficient allocation of resources, markets of factors and output must be unified and market competition must be constructive. Local protectionism, which tends to result in resource wastage and diseconomies of scale, must be avoided. President Xi has emphasized the importance of "adapting to local conditions" in cultivating new quality productive forces.3 That is, each local government should take into account local resource endowments, industrial bases, research and development capacities, and talent pools, amongst other factors, to selectively promote the development of new industries, models, and dynamics. It is important to avoid indiscriminate expansion and a one-size-fits-all model. For example, Anhui Province is accelerating the development of three major science and technology innovation hubs in quantum information, fusion energy, and deep space exploration. Heilongjiang Province is focusing on digital transformation in manufacturing, empowering small and medium sized enterprises with digital capabilities, and implementing pilot projects in intelligent manufacturing. These initiatives exemplify the concept of "adapting to local conditions" to develop new quality productive forces.
At the national level, three important aspects of reform are needed to facilitate the development of new quality productive forces. First, developing new technologies is a long-term, uncertain, and costly process. The private sector cannot do it on its own. The government must double down on the R&D spending. In 2023, China spent over 3.3 trillion CNY (about 458.5 billion USD) on R&D, accounting for 2.62% of GDP. While the R&D spending increased by 8.1% year-on-year, it was slower than the average annual growth rate of 11.75% during 2019-2022. Additionally, China's basic research spending as a share of GDP is less than a third of that of South Korea and the United States.4 There is consequently still plenty of room for R&D spending to grow. Second, emerging industries need to be supported by well-crafted industrial policies, trade policies, and other supportive policies. Indeed, the Chinese government has promulgated many long-term plans and policies, such as the National Medium and Long Term Program (MLP) for Science and Technology (S&T) Development (2006-2020), and the 14th Five-Year Plan that codifies and prioritizes the strategic emerging industries. These plans and policies help strengthen policy coordination among various ministries and local governments, optimizing the policy environment for innovation, and tech development. Third, regulations and guidance for collecting, using, and trading data are critically important to promoting data as an essential productive input. This is imperative not only for economic transformation but also for national security. Collaborations with the international community and the harmonization of standards would be instrumental in establishing a coherent framework to encourage and regulate data usage.
Why Are New Quality Productive Forces Necessary?
Why is promoting new quality productive forces necessary? First, as the high-growth model relies on extensive physical inputs and generates numerous negative environmental externalities, the high-quality development model calls for productivity growth with lower demand for natural resources, capital, and labor. China's total factor productivity has declined since the 2008 global financial crisis, as is the case for the rest of the world. Developing new quality productive forces is key to reviving total factor productivity and overcoming the middle-income trap. China is also undergoing a demographic transition, with an aging population and a declining labor force. While demographic dividend supported past growth, future growth requires talent dividend. Therefore, it is necessary to enhance labor skills and productivity, thereby boosting new quality productive forces.
Second, as China grows into a middle-income country, there is a new demand from the public that goes beyond material wealth. People now seek better natural environments, enhanced social services, and higher levels of cultural experiences. To meet these growing demands, China would need new products and services, as well as production forces that underpin these products and services.
Finally, the current global environment is becoming more complex and hostile. On the one hand, Western economies have launched many protectionist measures that obstruct international trade and investment; on the other hand, the race for technological primacy has become more intense. In addition, the emergence of new technologies and the lack of incumbents provide great opportunities for developing countries to make breakthroughs and leapfrog through the technological landscape. For example, while Western transnational corporations dominate the traditional internal combustion engine car markets, Chinese automakers are gaining a competitive edge in the electric vehicle market. This is a telling example of how, by focusing on emerging technologies and industries, China can seize the opportunity to play an important or leading role in global technological development.
Challenges to Cultivating New Quality Productive Forces and How to Overcome Them
To continue nurturing and strengthening the new quality productive forces, some steps must be taken. First and foremost, China must mobilize resources to break through the "bottlenecks" in some of the critical technological areas. Semiconductor fabrication and AI are the two most critical technologies, given that they are the core ingredients for many other technologies and sectors. Domestically, China needs to mobilize all societal efforts from governments, entrepreneurs, scientists, and engineers, and provide all necessary resources, from financial capital to human capital to infrastructure, to develop these two critical technologies. Internationally, China should seek partnerships, especially with technologically advanced companies, and attract international talents. A business-friendly environment, incentives, and a holistic support system must be established to foster international cooperation and collaboration on critical technologies.
Second, China needs to continue to invest in human capital. This requires not only increasing access to education, especially in rural areas and less populous cities, but also improving educational quality. A key focus should be on expanding vocational education programs. Although China already has the world's largest vocational education system with around 10 million students in 2022, there is still a shortage of skilled workers in the manufacturing sector; the shortage is estimated to reach 30 million by 2025, according to the Ministry of Human Resources and Social Security.5 The lack of specialized teachers, social respect, and corporate participation has contributed to the shortcomings of the vocational education system, leading to a shortage of skilled technical workers. The amended Vocational Education Law, which took effect in May 2022 and aimed to elevate the status and pay of technical workers, is a step in the right direction. Finally, efforts must be made to deepen cooperation between universities, vocational schools, and enterprises to strengthen the synergy amongst scientific research and industrial applications and commercialization.
Third, as mentioned above, the third dimension of the new quality productive forces is more efficient mechanisms to allocate resources and more effective ways to organize production. That is to say, production forces and production relations mutually reinforce each other. It is crucial to coordinate and harmonize production relations between the public and private sectors, between managers and workers, between different localities, and between different stakeholders. For example, the public and private sectors have their own unique roles in the economy, and their symbiotic interactions are of great significance. For infrastructure and basic research, the public sector should fully leverage its strengths in mobilizing, organizing, and coordinating the efforts. Meanwhile, both public and private enterprises should be encouraged to utilize and commercialize research outcomes. Institutional and market barriers should be removed for private enterprises to participate in emerging industries and tech sectors. A fair, dynamic, and competitive market that is tolerant of failures and full of vitality is most conducive to innovations and technological breakthroughs.
In conclusion, promoting new quality productive forces is key to transforming China's economy from the past high-growth model to the modern high-quality paradigm. Nurturing and strengthening high-quality productive forces requires technological breakthroughs in critical areas, the development of strategic emerging industries, the integration and adoption of new technologies in traditional industries, and the reform of public and private institutions to support new quality productive forces and to adapt to new production relations. Through calibrated policies and effective mobilization of all resources, including capital, entrepreneurship, and talent, China is forging ahead in developing new quality productive forces and transitioning to high-quality growth.
1. "Xi Stresses Development of New Productive Forces, High-Quality Development," Xinhua, February 2, 2024, https://english.news.cn/20240202/db7f1bd3714a4b7c8bc0835abe4c35f7/c.html.
2. "Global Competitors Outpace US in Patents," National Science Board, February 29, 2024, https://www.nsf.gov/nsb/news/news_summ.jsp?cntn_id=309184&org=NSB&from=news.
3. "Xi Calls for Developing New Quality Productive Forces Tailored to Local Conditions," CGTN, March 6, 2024, https://news.cgtn.com/news/2024-03-06/Xi-Developing-new-quality-productive-forces-adapt-to-local-conditions-1rKrdxUPaX6/p.html.
4. Camille Boullenois, Agatha Kratz, and Laura Gormley, "Spread Thin: China's Science and Technology Spending in an Economic Slowdown," Rhodium Group, December 15, 2023, https://rhg.com/research/spread-thin-chinas-science-and-technology-spending-in-an-economic-slowdown/.
5. Mandy Zuo and Mia Nulimaimaiti, "Despite China's Push, Vocational Education Is Still Struggling with a Shortage of Staff and Lack of Respect," South China Morning Post, January 8, 2024, https://www.scmp.com/economy/china-economy/article/3246043/despite-chinas-push-vocational-education-still-struggling-shortage-staff-and-lack-respect.
Please note: The above contents only represent the views of the author, and do not necessarily represent the views or positions of Taihe Institute.
This article is from the April issue of TI Observer (TIO), which focuses on the concept of "new quality productive forces" and tries to interpret its theoretical grounds and strategic importance. If you are interested in knowing more about the April issue, please click here:
http://www.taiheinstitute.org/UpLoadFile/files/2024/4/29/1720023057288b81-e.pdf
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