The Economist - UK (2022-04-16)

The Economist April 16th 2022 Finance&economics 61

mature  break  with  the  technological  con­
vergence  that  has  served  China  well  since
the  1980s,  when  foreign  companies  began
setting  up  factories  using  advanced  tech­
nologies.  This  tech  was  eventually  trans­
ferred to local firms or reverse­engineered
at little cost. 
The  payoff,  argues  Raymond  Yeung  of
anz, a bank, was the realisation of produc­
tive efficiencies. One crucial feature of the
convergence  model  was  that  it  presented
few  risks.  China  needed  only  to  continue
liberalising,  and  foreign  companies  only
to  continue  to  bring  in  capital  and  high­
tech gear, to reap the reward.
But the era of convergence is drawing to
a  close.  China’s  total­factor  productivity
growth  languished  at  just  above  1%  per
year between 2010 and 2019. Tech transfers
are now far more restricted by America. Mr
Xi can surely imagine the sanctions devas­
tating Russia being aimed at China. The re­
sponse has been to end reliance on foreign
tech  and  to  refocus  the  growth  model  on
what can be created at home.

High-stakes gamble
Rather  like  a  venture­capital  investor  tak­
ing high­risk, high­reward bets, Mr Xi will
shoulder more risk in this era. His plan re­
quires the creation of big, globally compet­
itive  groups  akin  to  Huawei,  a  telecom­
munications  giant.  “But  they  will  have  to
develop lots of Huaweis,” says Mr Yeung. If
the  investments  do  not  produce  returns,
the  plan  will  have  saddled  the  economy
with yet more debt, and too little growth.
Past Chinese leaders have focused their
reforms  in  coastal  cities,  where  manufac­
tured  goods  could  easily  reach  ports.
Shenzhen,  700km  south  of  Zhuzhou,  be­
came emblematic of China’s rise as the fac­
tory of the world in the 1990s. Some of that
business crept westwards to cities such as
Chengdu  and  Chongqing.  Mr  Xi’s  time  in
power  at  first  focused  on  boosting  con­
sumption, which also favoured the largest
coastal  cities.  On  his  watch,  Alibaba  and
Tencent, based in the eastern and southern
entrepôts of Hangzhou and Shenzhen, re­
spectively,  rose  to  prominence  as  engines
for consumption and were often hailed as
such by Party officials. 
This  has  changed  rapidly  over  the  past
two  years.  Mr  Xi  is  reorienting  the  econ­
omy  back  towards  manufacturing.  The
move  away  from  consumer­internet  tech,
or soft tech, was made clear in the 14th five­
year plan published in 2021. It emphasised
instead rapid development in hard tech, or
areas  such  as  ai,  semiconductors,  indus­
trial software and big­data processing. The
new industrial policy does not require easy
access to ports. 
The  efforts  could  redraw  China’s  eco­
nomic map. An emphasis on manufactur­
ing had pushed migrant workers not just to
coastal  towns  but  also  to  inland  cities

wherenewfactoriescouldbebuiltcheaply,

saysChiLoofbnpParibas,a bank.Thelast

greatpulseofinlandmigrationbeganin

2001,whenChinajoinedthewto, andlast­

eduntil2013,whenMrXicametopower

and consumptionbecame thefocus for

growth.Thepasteightyearswitnesseda

shift,withmigrationoutofinlandcentres

tocitiesintheeast.MrLobelievesChinais

nearthestartofanotherwaveofinlandmi­

grationthatwillpowerMrXi’snewindus­

trialrevolution.

Migrationisessentialifthenewtech

firmsaretobestaffed.Areviewofcompa­

ny­registration data by The Economist

showsthatfirmsdealinginbigdata,ai, the

internetofthings,robotics,cloudcomput­

ingandcleanenergyaresettingupatan

unprecedented pacein China’s interior.

Manyofthenewhubsarecapitalsofpoor

provinces. Butmany smallercities, too,

suchasZhuzhou,arealsoexperiencingex­

plosivegrowthintechfirms(seechart).

HefeiinAnhuiprovince,oneofChina’s

poorerregions,isa cityofabout9m.Ithas

reinventeditselfinrecentyearsasa tech

hub,withthousandsoffirmsopeningina

shortperiod.In 2021 alonemorethan2,500

companiesclaiming to developbasicai

softwaresetupinthecity,upfromjust 370

in2020.Thousandsmoresaytheyofferre­

latedservices.Thefarnorthernrustbeltci­

tyofShenyangwelcomedmorethan 860

companiesthatsaytheyaredoingrobotics

researchoverthepasttwoyears,upfroma

combined 170 inthefouryearsbeforethat.

Some 4,400 groups claiming to be in­

volvedintheinternetofthingssetupshop

inthesouth­westerncityofChengduin

2021,fourtimesthenumberin2020.

Therapidgrowthinthesecitiesisclose­

ly connected to local­government plan­

ningandtheofferofgeneroustaxandland

incentives.Indeedthefiguresshouldalso

comeasa warningtoplannersthatthetech

boomtheyhaveinducedisleadingtopo­

tentiallywastefulinvestments.Takedata­

centreandcloud­computingbusinesses.

The pandemiccreatedgreatdemand for

consumer­internetfirmsand,inturn,data

services.Localpoliciesencouragedcom­

paniesofalltypestosetthemup,oratleast

try. Property developers needed only to

convincelocalofficialstosellthemland

andpowercheaplyinordertotapintothe

lucrativedata­centreindustry,saysEdison

LeeofJefferies,aninvestmentbank.

Guiyang,a largecityinthepoorsouth­

western provinceofGuizhou, witnessed

anexplosionindata­centre­companyreg­

istrationsin2020,manywithnoexperi­

enceinthearea.Somehaveeventriedto

move into cloud computing, which re­

quiresmoretechnologicalinputthandata

centres.Thewaveofinnovationinai, ro­

boticsandclimatetechiscarryingwithit

many wannabes thatwill draingovern­

mentfunds,notaddtogdp.

Several investors have questioned

where the talent needed to power this

boomwillcomefrom.Thegovernmenthas

announcedacademicprogrammestotrain

peopleup.Buta shortfallseemsclear.The

reroutingofmigrantsdoesnottakeinto

accountthattheirskillshavenotkeptup

withMrXi’sindustrialshift.Almost70%of

thelabourforcehasnothadone dayof

high­schoolinstruction, notesScottRo­

zelleofStanfordUniversity.

The government needsmore than a

startupscenetomakeitsplanwork.Andso

itisnurturinga newcohortofchampions.

These are not the consumer­internet

groups that dominated China’s digital

economy.Insteadtheyarecompaniesen­

gaged in enterprise software, industrial

digitisation,datasecurityandstate­owned

cloudcomputing.FewinvestorsinSilicon

ValleywillhaveheardofBaosight,Max­

scend,Sangfor,SupconorYoueData.Many

arelistedinShanghai orShenzhen, not

NewYorkandHongKong.Theyarea mixof

stateandprivatefirms,butalmostallare

close to the government. And they are

workingtoupgradeChina’sindustrialin­

frastructureinordertousherinMrXi’s

newrevolution.

Baosight isa state­owned industrial­

softwarefirm.Itbuildstheenterprise­re­

source­planning softwareand manufac­

turing­executionsystemsthatareintegrat­

inganddigitising industrialplantsacross

Inland revenues

China

Sources:BNPParibas;Qichacha;TheEconomist

50

45

40

35

10 20

ChinajoinsWTO

1980 90 2000

Manufacturing as % of local GDP

20 inland provinces

Xi Jinping becomes president

Zhuzhou

Chengdu

Wuhu

Shenyang

Zhuzhou

Hefei

Increase in new company registrations in

selected cities and industries, 2016-21, %

0 2,000 ,000 6,000

Internet of hings

Robotics

Artificial inelligence