China faces many challenges on the domestic front, including an ageing population, income inequality, a shrinking workforce, environmental and health concerns, and conducting trade under growing global protectionism. China’s policy approach to these and related problems includes three broad initiatives: increasing productivity, deepening foreign engagement and enhancing regional integration.
Innovation has been a key focus of each of China’s five-year plans for decades and has been a driver of productivity growth. Since 1980, China has succeeded in building an innovation ecosystem from the ground up. Its gross expenditure on research and development (R&D) is just over 2 per cent of GDP — slightly above the EU average. Its publications in top scientific and technological journals now lead the world in many important domains and China outstrips the United States in annual innovation patent applications.
The central importance of innovation is further emphasised in planned R&D spending and related initiatives such as the ‘Made in China 2025’ plan. The government aims to increase R&D spending to 2.5 per cent of GDP by 2020. This would double expenditure from the current level of US$220 billion per year to US$400 billion per year. Indeed, ‘Made in China 2025’ aims to raise domestic manufacturing value-added to 70 per cent by 2025 —a highly ambitious goal.
The latest phase of Chinese company innovation is outward foreign direct investment into the markets of the developed world — a shift away from the earlier emphasis on direct investment to acquire natural resources and petroleum, mainly from developing countries. This is a consequence of the world-class innovation capabilities that Chinese firms have developed over surprisingly few years coupled with domestic earnings and lending from China’s banks. As a result of this drive to enter developed foreign markets, emerging Chinese multinationals are now less inclined to invest in infrastructure and resource projects in developing Central Asia.
This will have negative implications for financing the BRI. The majority of projects are located in Central Asia or western China, and the capital required is substantial: it is estimated that some US$4 trillion or more will be spent on the BRI over ten years. But investing in these BRI infrastructure projects often involves a developing-country risk, and the projects themselves offer limited opportunities for China’s emerging multinational corporations to acquire the brands, knowhow, market positions and technology that will entrench them in Western economies. It is more likely that they will prefer to invest in Europe and North America.
A final competing priority is the wave of regional agglomerations such as the Jingjinji initiative for the Beijing–Tianjin–Hebei region or the Pan-Pearl River Delta plan that aims to integrate Hong Kong and Macau with Shenzhen, Guangzhou and seven other regional cities through fast transport connections. The latter region is home to 67 million people and accounts for 12 per cent of China’s GDP, and the former is home to 130 million people and accounts for 10 per cent of China’s GDP. The greater Yangtze River Delta River region is another agglomeration, in this case pursuing closer integration between Shanghai and 25 other cities. Together, they collectively account for over 11 per cent of China’s population and 18 per cent of GDP.
These agglomerations strengthen productivity by creating industry clusters, technology parks and innovation regions. Clusters such as special export zones and industrial parks already contribute over 20 per cent of China’s GDP, 60 per cent of exports and a disproportionate share of employment. Recognising this, many provinces are attempting to strengthen their clusters.
As important as these initiatives may be for China’s domestic policy priorities, they will require significant investment. Jingjinji will probably cost around US$300 billion and the Pan-Pearl River Delta will cost as much if not more. 18 more city agglomerations are planned for development by 2020.
Adding these investment requirements together, China could be facing investment needs of US$400 billion a year for the BRI, over US$200 billion a year for regional initiatives, US$200 billion a year for outward FDI and some US$300 billion a year for its investments in R&D — a total of some US$1 trillion per year. Although China has historically invested around 44 per cent of GDP annually and the funds will come from different sources (such as annual budgets and bank lending), these projects will still strain the resources of the Chinese government, the Asian Infrastructure Investment Bank and China’s domestic banks. State-owned enterprises will attempt to conform to government priorities, but emerging Chinese multinationals cannot be relied on to fill the gap without turning away from their expansion into the developed world.
How China will resolve these competing priorities is unclear but it creates an opportunity for foreign firms to take a stronger role in BRI investment projects. A number of foreign firms are providing materials and equipment to BRI projects, mainly as suppliers to Chinese firms. They would probably invest themselves if assurances regarding risk were forthcoming. If China were to develop a more welcoming attitude towards foreign investment, China and BRI countries in the region could reap not only technology and equipment but also foreign capital and expertise — without having to trade off against Chinese domestic initiatives.
Bruce McKern is an Adjunct Professor at the University of Technology Sydney and an Adviser to the Maritime Silk Road Society in Hong Kong.