Forge Magazine: China Economic Reform 2.0
China: Economic Reform 2.0? by Nick Henderson, Director Asialink Business China Practice
In 2018, China celebrated the 40th anniversary of the opening-up and reform of the Chinese economy.
This journey started in 1978, spearheaded by then President Deng Xiao Ping, who initiated several economic transformation projects, policies and experiments to transform China’s centrally planned and state-owned economy into a global economic powerhouse. Many have described the last 40 years in China’s history as an “economic miracle” that has placed China at the forefront of our economic, trade, security and political agendas.
At this juncture, China faces a new economic and social reality.
Economic growth has slowed to a three-decade low of 6.4 per cent. China’s economy is transitioning from being export and production led, to an increasing focus on domestic consumption.
China is driving efficiency, quality and innovation throughout its manufacturing sector to enable the next phase of industrialisation. Its population has shifted from being predominately rural, to having most of the population seeking employment in urban areas. This has led to the emergence of a massive middle class with growing incomes and consumption power.
If we are to categorise this past 40-year period as “Opening Up and Reform 1.0”, what does the next phase of China’s economic evolution look like? What is the economic narrative, and what are the initiatives that are going to drive this next phase in modern China’s development?
Opening Up and Reform 2.0
There are three central policy platforms that are driving the “2.0” agenda. Firstly, President Xi Jinping’s signature Belt and Road Initiative (BRI). Secondly, the Made in China 2025 policy and finally, strategic regional initiatives, including the next generation of free trade zones and the development and promotion of “super regions”.
All initiated in the past few years, these three platforms work in concert with the economic policies of the current 13th Five Year Plan framework.
Importantly, they provide the policy backdrop for a suite of initiatives designed to stimulate the economy and assert China’s economic interests and technological development aligned to its newly claimed place in the world economy.
Beyond China – the Belt and Road
Announced in 2013 by President Xi Jinping, the Belt and Road Initiative (BRI) is an ambitious strategic, political and economic undertaking with the potential to create a new model of growth, from Asia to the Middle East and Europe.
The BRI is a visionary strategic initiative on a global scale which aims to create economic stimulus and stability, whilst expanding China’s role in world trade. It reinforces the role of global trade and investment, which has been central to China’s opening-up and reform since 1978 and is now a central part of the “2.0” reform agenda.
The BRI features an economic land belt from China to Eurasia along the historic silk road route, and a maritime route connecting the Indo Pacific and Africa. Both routes combined consist of around 70 countries, accounting for 60 per cent of the world's population and at least 30 per cent of global GDP.
To put some context to the scale of the initiative, the BRI is more than seven times larger than America's Marshall Plan to rebuild Europe after the Second World War. It encompasses significant investment and development of infrastructure, including ports, roads, railways, airports, telecommunications, technology, renewable energy and energy pipelines, as well as financial institutions and real estate.
And whilst the BRI has attracted its share of public debate in Australia and elsewhere, the reality for international businesses is that the initiative is well underway and there are a number of third-market opportunities in countries along the belt and road.
To date, more than US$1.3 trillion worth of projects have been initiated, with President Xi committing an extra US$124 billion at the Belt and Road Forum in May 2017.
Yet the scale and scope of these projects need to be weighed carefully against potential areas of risk. Many of the projects are being undertaken in countries and regions with nascent legal environments and with potentially complex operating environments and business models.
What is clear, though is that the BRI will be central to China’s Opening Up and Reform 2.0 agenda for the decades to come.
Industrialisation and Made in China: 2025
The Chinese Government has set the ambition to be amongst the ranks of key global manufacturing powers by 2025. Whilst China is one of the world’s largest manufacturing economies, it is still in the late stage of industrialisation.
The ‘Made in China: 2025’ initiative is designed to significantly enhance China’s home grown technological and industrial capabilities focussing on ten key sectors: robotics, next generation information technology, aviation and aerospace equipment, renewable energy, new materials, maritime technology, railway transportation and biotech and health technologies.
As part of the initiative, China is looking to substitute many internationally-sourced high-tech inputs into is manufacturing sector with domestically developed technologies. The goal is to increase the domestic content of core materials in manufacturing to 40% by 2020, and to an ambitious 70% by 2025.
This strong emphasis on enhancing China’s technological innovation and strength provides collaborative opportunities for foreign businesses.
However, it is also viewed as a threat by countries like the United States. Not only will this initiative see a decrease in the purchase of US and other international technology, but the rise of Chinese indigenous technological capability and, in some areas, a new level of global technology competition.
Rise of super regions
Over the past 40 years, through its networks of industrial and export development zones, China’s government has successfully promoted investment, industrial growth and the development of industry value chains. Much of this new advanced industrial capability is strategically concentrated in key regions around China.
China’s population has urbanized rapidly over the past decades, with the World Bank estimating that by 2030, 70 per cent of the Chinese population – some one billion people – will live in cities. This poses a significant economic and social challenge for government to maintain economic opportunities and standards of living.
International and Chinese economic development experience shows that bigger cities are generally associated with higher productivity and faster economic growth. So, Chinese authorities and urban planners have been eager to restrain disorganised and ad hoc urbanisation and concentrate on growth hubs.
China’s City Cluster Plan is another significant economic and policy initiative that is helping to sustain and build momentum in the economy. China’s city cluster plan aims to develop 19 mega urban clusters, anchored around giant hubs and containing dozens of smaller, but still very sizeable, nearby cities.
Currently, China only has three existing cluster regions, which the government plans to transform into internationally competitive mega regions by 2020. Collectively, these three clusters (Yangtze River Delta, Greater Bay Area and Jing-Jin-Ji) already account for around ninety percent of China’s economic activity.
The Yangtze River Delta cluster encompasses the economically developed regions of Shanghai Municipality, Zhenjiang and Jiangsu Provinces, which account for 40 percent of China’s GDP. This internationally oriented region has been central in China’s economic development and economic engagement with the world economy. It is a strategically located logistics and industrial powerhouse.
The Greater Bay Area (also known as the Pearl River Delta) encompasses Guangdong Province, Macao SAR and Hong Kong SAR into a mega region with GDP exceeding US$1.2 trillion. They are driving forces of national economic development that could soon rival the likes of the Tokyo and San Francisco Bay areas.
The third region is a recently developed geographic cluster, developed to integrate Beijing with the port city of Tianjin and neighbouring Hebei province.
More colloquially known as “Jing-Jin-Ji,” the super region is already an economic powerhouse - Jing-Jin-Ji’s combined GDP accounts for around 10 percent of China’s total GDP and is made up over 100 million people – eight percent of China’s population and three times that of the Tokyo megalopolis. In addition to Beijing and Tianjin, there are 11 cities in Hebei province, with the whole region covering over 200,000 km2 – more than twice the size of South Korea. “Jing-Jin-Ji” is also the home to Daxing International Airport, which when completed later this year will not only be Beijing’s second international airport, but the largest airport in the world. This large-scale infrastructure development, including links to local subway and high-speed rail infrastructure are aimed to both serve this new region, and enable its economic development and growth as a region.
China: next generation of development
While there are other significant growth initiatives that could be added to the list, these three examples – Made in China, the BRI and the super city clusters, are the backbone of China’s next generation of economic development policies.
Just how this economic discourse continues to evolve in coming years will be closely linked to innovation and the extensive use of high-speed internet, big data, artificial intelligence and the internet of things throughout business, government and the economy.
Propelled by China’s ambitious and visionary economic development strategy, it is sure to be a fast moving and hotly followed narrative.
For international businesses looking to secure their next phase of growth, a deep understanding of this multi-faceted economic policy – and the political and social contexts that shape it – will be key to staying ahead of the competition and achieving commercial success.
Nick Henderson is the Director of the China Practice at Asialink Business, Australia’s National Centre for Asia capability. He works with businesses of all sizes to help them understand, enter and grow in China.
Q&A on China’s Greater Bay Area (GBA), by Dr Luke Hurst, Director of Research and Information for Asialink Business
Q: What is the Greater Bay Area and why should business take note?
The Greater Bay Area, (GBA) is one of China’s official 19 “city clusters,” and one of the top three (along with the Yangtze River Delta and the Beijing-Tianjin-Hebei clusters) that the central government is building into a world-class cluster by 2020.
The initiative links 11 cities of Hong Kong, Macau, Guangzhou, Shenzhen, Zhuhai, Foshan, Zhongshan, Dongguan, Huizhou, Jiangmen and Zhaoqing into an integrated economic and business hub.
It encompasses almost 68 million residents, and with a combined GDP of $US1.56 trillion it is already $US240 billion larger than the entire economy of Australia.
In fact, by 2030, it’s predicted that the economic output of the Greater Bay will surpass New York, the largest bay area in the world, as well as the Tokyo Bay area.
Q: What makes the initiative so significant? Is it the next Silicon Valley?
The GBA is part of a broader strategic vision to help reform China’s economy, enhance competitiveness and move China up the value chain through a domestic focus on consumption, innovation, finance and trade.
There is nothing new about this ‘super-cluster’ approach. The contribution of city clusters to the global economy is considerable. Take Silicon Valley and San Francisco, which boast an economy the size of Thailand. In fact, the Asia Development Bank (ADB) has argued city clusters enhance productivity to at least 2-3 times that of the non-urban areas.
These clusters share several common traits – they all have a thriving services sector, solid transport infrastructure, top-ranked universities, access to a world class financial centre and an active innovation hub.
But what sets China’s Greater Bay apart is the breadth and scale of skills and services that the cluster encompasses. Each of the 11 cities in the cluster offer distinct strengths and a strategic combination of diverse yet complementary advantages.
The region can draw on strong manufacturing bases in Dongguan, Guangzhou and Foshan. Shenzhen (the home of Huawei and Tencent) offers advanced manufacturing, IT and strength in innovation; Hong Kong is a global financial capital, asset management and offshore RMB hub. Macau is a global tourism and leisure mecca.
Q: What are the opportunities for international business?
International business is responding positively to the initiative. In a recent survey by AustCham Hong Kong and KPMG, as many as 77 per cent of 714 company executives polled from Hong Kong, Macau and mainland China expected the Greater Bay Area’s economic growth to surpass that of the rest of China over the next three years.
The study identified a number of key opportunities for international businesses.
These range from innovation and technology, to data management, infrastructure and construction, manufacturing, financial services and legal and arbitration services.
There are less obvious examples as well. Education – along with research and institutional links – for instance, may be another significant opportunity for Australian providers; to attract world-class talent, the GBA will need internationally recognised secondary qualification providers for children of expatriates such as the Victorian Certificate of Education, which has been completed by more than 4000 students in China since 2002.
Q: What are some of the challenges to look out for?
The development of the GBA presents massive opportunities for domestic and foreign investors but this is not guaranteed.
Infrastructure and physical connections between cities are not a problem. The key obstacle that city clusters face all over the world is fragmentation.
City clusters often suffer due to the complexity and difficulty of meeting the needs of different administrative stakeholders – each with independent authority over tax and budget systems, land use planning, transport infrastructure and traffic management, industrial park developments, open space planning and environmental protection, and even labour markets. In the case of the GBA, there are different traffic laws, dual legal systems and three separate tax regimes.
While the complexity arising from the GBA’s one country, two systems environment does increase administrative complexity, it also creates significant opportunities for foreign investors.
For example, companies can use Hong Kong as the gateway into the GBA by taking advantage of its international financial centre for fundraising and its IP protection laws. In the 2018 International Property Rights Index, Hong Kong SAR ranked 17th globally with a score of 7.849, compared to China’s rank of 52nd with a score of 5.904.
To move early on opportunities in the GBA, it is important for international business to have the right knowledge, relationships and ability to adapt that come with being on the ground.
Businesses can assess their readiness to enter the GBA or other Asian markets – and access free resources – via a new and complementary self-assessment tool, available at: www.asiacapabilityassessment.com
Luke Hurst is the Director of Research and Information at Asialink Business.
Smart City case study on Tianjin, China
Cities across the Asia-Pacific region and the world have been facing challenges caused by rapid urbanisation. Significant investments in developing smart cities have already taken place, aiming to improve liveability and sustainability.
At the 4th China Smart City International Expo held in Shenzhen in August 2018, China’s leading insurance company, Ping An, released a White Paper on Smart Cities, promoting the development of “smart cities” utilising internet enabled technologies such as biometrics, AI, Big Data and Blockchain. In collaboration with leading tech firms, namely Alibaba, Tencent and Huawei, Ping An introduced a Smart City Initiative, aimed at boosting China’s position as a global hub for smart cities. Over 500 cities across the country have initiated smart city development plans within the next five years, making China the world’s largest testing ground for smart city and related initiatives.
One of China’s leading “smart cities” is based in Tianjin. Strategically located on the West coast of the Pacific Ocean, Tianjin is adjacent to Beijing, at the meeting point between the eastern land ‘belt’ and the northern maritime silk ‘road’ in China’s Belt and Road Initiative. It is a key logistic hub for northern China, and it plays a crucial role in one of China’s “super regions”, the Beijing-Tianjin-Hebei metropolitan area.
A key growth engine within Tianjin and the region is the Tianjin Binhai New Area, which is an economic development zone sanctioned by the Central Government. The zone is focussed on the development of hi-tech industries and advanced manufacturing and is also home to the Sino-Singapore Tianjin Eco-city, China’s first National Green Development Demonstration Zone. The eco-city, or “smart city” has been envisioned by Beijing as a model for eco-friendly and low carbon smart cities replicable throughout the country.
Amongst its smart city initiatives, the Tianjin eco-city boasts the world’s largest unmanned smart supermarket. Established by online giant JD.com, the 170-square meter-supermarket sells over 800 products, ranging from food, beverages to toiletries for daily use, without a single cashier or sales assistant in store. It is equipped with cutting-edge facial recognition technology, intelligent pricing, AI-operated cash registers and other advanced technologies. Customers can link their ID information with payment information and enter the supermarket via the facial recognition system. When they are finished shopping, they can pay by scanning the codes on their chosen products.
In collaboration with JD.com, the Tianjin eco-city has also initiated the use of autonomous delivery robots. The automatic drive core technology allows the robots to avoid barriers and pedestrians and turn corners. while the advanced AI, environment-sensing, and decision control technology enables them to deliver packages more smoothly.
Given China’s focus on developing multiple smart city initiatives, there are numerous opportunities for a range of Australian businesses. Areas of opportunity include: sustainable urban development, renewable energy, information technology and environmental technologies.
Assess your readiness to do business in China and other Asian markets here: https://asiacapabilityassessment.com/