China’s innovation strategy has become increasingly centralised.
With its rapid advancements in critical technologies, today, China is a formidable competitor to the developed West for global technology leadership. Innovation can take many forms, including process innovation in which China excels to leveraging its large and dynamic manufacturing base.
“However, this is not enough. Technological progress also hinges on a nation’s ability to develop and spread innovation, to boost aggregate productivity and potential growth. On this, China’s innovation strategy has become increasingly centralised, with the government favouring specific sectors and systematically cracking down on others,” noted Claire Huang, Senior EM Macro Strategist, at the Amundi Investment Institute.
“A dynamic private sector and decentralised approach are essential for new technologies to spread and become accessible, fostering progress. In this respect, the environment for Chinese companies and institutions to innovate has deteriorated recently.”
Today, the United States and its allies still hold significant advantages in capital markets and innovation ecosystems, while Chinese regulators crack down on the financial sector.
“For China to sustain its technological rise, it must prioritise final-demand innovation. While top-down, state-driven approaches have been effective in certain areas, they may not be sufficient to boost long-term growth. If China’s policies continue to stifle these market forces, its technological rise may plateau. China’s future success will depend on whether it can balance its top-down, state-driven approach with the bottom-up forces of consumer demand and commercialisation,” she noted in the attached paper ‘China in the race to technological leadership’.
“Ultimately, the key to long-term technological leadership lies in a nation’s ability to commercialise and spread its innovations. As the Soviet Union’s experience shows, technological discovery alone is insufficient for sustained growth.”
The United States hosts the world’s most efficient capital market that incubates pioneering innovators (from 0 to 1). Its single and unified market provides a fertile ground for enterprises to expand their scale with unparalleled ease.
China has developed the world’s largest and most cost-efficient manufacturing sector. With its intricate and highly developed supply chains, it empowers companies to innovate through execution and scaling (from 1 to 100). Numerous Chinese manufacturers, with their ‘can-do’ spirit, produce goods that others often find economically unfeasible to replicate.
“Investing in Chinese tech leaders via selecting ‘scaling champions’ is a viable approach, considering the high barriers to entry created by their cost efficiency.
“Although corporate China exhibits competitiveness across multiple domains, geopolitical tensions and deflationary pressures loom large, potentially undermining its profitability and long-term growth prospects. A strategic shift towards stimulating consumer demand is crucial to fighting deflation and sustaining China’s technological ascendancy. A failure to escape deflation may weaken the investment case for China tech,” added Huang.
Asia commands the lion’s share in the production of sophisticated information technology hardware. “Attempting to relocate these established supply chains to the United States would almost certainly result in diminished profit margins, reduced yield rates and escalated costs for downstream consumers. Companies with higher pricing power and gross margins are likely to better absorb the costs of reshoring, thus mitigating the risks associated with America First policies.”
In this respect, it is worth mentioning the very active subsidies programme from the Chinese government, at every level of an industry that the government considers as strategic (e.g., within the semiconductor industry, subsidies are given to the upstream companies such as chemical or semi-equipment providers, to midstream fabs and subsidies are given to the downstream buyers of the end products).
“This process around subsidies at every level to develop an ecosystem from scratch at an unprecedented speed and scale is now proven, which China’s policymakers have learned from their previous successful experience in low/mid-end manufacturing.”
