Rarely do assessments of the performance and potential of an economy differ as much as they do in the case of China. Although some economists praise China's past successes and future prospects, others fixate on perceived flaws in its development model and suggest that Middle income trap expected. But even more remarkable than the strong disagreements over China's economy is the fact that both sides are able to produce ample evidence to support their views. Few would dispute that China owes much of its economic success to date to this technical imitationenabled and promoted by trade in – and direct investment from – developed economies, particularly in the 1990s and the first decade of this century. But one cannot argue that translating technological imitation into rapid economic growth is not an achievement. After all, most low-income countries have failed to do this.
To point out in this discussion that China still lacks some key technologies, or that it has retained most of its technologies thanks to the pull of its huge market, is nitpicking. The true measure of technological success is the ability to transform new technologies into profits, growth and development engines. And China has achieved this not only by using Western technologies in their original form, but also by rapidly developing and adapting them.
Today, China is at the forefront of sectors such as 5G, renewable energy, Lithium batteries And Electric Vehicles (EVs)and it is a world leader in artificial intelligence. The question we should be asking, as former U.S. Treasury Secretary Lawrence H. Summers once remarked, is not whether China's technological prowess began with imitation, but how a country with a quarter of the U.S.'s per capita income achieved it has managed to produce so many world-beating technology companies.
According to Keyu Jin of the London School of Economics, the answer is simple: China is a truly innovative country. Western observers find this difficult to see because their view of China is so politicized. But MIT's Yasheng Huang insists that China has merely repurposed Western technology because deep-rooted Chinese traditions hinder innovation. If these traditions cannot be broken, economic decline is all but inevitable, he concluded.
Both economists provide evidence from entire books for their analyses. How is that possible? One explanation could be that in China's highly complex political economy, many of the factors that can be viewed as incompatible with innovation are offset or complemented by innovation-promoting policies and structures.
People visit the green agriculture area at the China International Supply Chain Expo in Beijing on November 30, 2023. Photo: XinhuaIt has often been argued that economic management in China is top-down – including the comprehensive implementation of state industrial policies and the maintenance of large state-owned companies (SOEs) in key sectors – is fundamentally incompatible with dynamism and innovation. Critics point out that excessive control by the central government can lead to economic inefficiency, misallocation of capital and financial distortions.
But even as the central government issues unifying policies and strategic documents, it also gives local governments ample leeway to encourage innovation in the private sector, not least by creating a near-perfect business-friendly environment. Although the degree of autonomy of local governments is not static, measures tailored to the local economy are generally encouraged.
In addition, the Chinese leadership is aware that subsidies can not only hinder competition, but also promote it. For some technology companies to drive the development of an emerging industry, enormous barriers to entry must be overcome. In most Western countries this is possible through the support of developed financial and capital markets, but even then companies need sufficient time to achieve scale and competitiveness. Since this involves high fixed costs, early subsidies are very valuable – even necessary.
In China, many local governments are willing and able to share these fixed costs, not only by providing subsidies but also by establishing investment funds for emerging industries. This makes it easier for more companies to enter the market and leads to the development of larger production capacities.
Manufacturing researcher Yang Xiaojun adjusts equipment in a laboratory in Xian, Shaanxi province, Jan. 17. Photo: Xinhua
What is crucial is that this capacity is spread across different locations, with companies operating in highly competitive individual markets rather than a single market. In this sense, China's economic segmentation – often cited as a weakness by critics – is a source of strength.
China's extensive industrial ecosystem means that companies gain a competitive advantage through external network effects and economies of scale. This helps explain the rapid rise of China's electric vehicle and lithium battery sectors – an achievement that critics attribute to China's industrial subsidies and proponents to a competitive domestic market environment.
For China's critics, excessive bureaucracy, dominant state-owned enterprises, an underdeveloped financial sector and fragmented markets stand in the way of the emergence of a highly dynamic and competitive economy. And yet, as any long-time observer of China can tell you, the reality is not so simple. China is a vast country with a long history as a single state, deep cultural traditions and a highly complex government structure that appears both centralized and decentralized, both rigid and flexible.
Top control goes hand in hand with, and even enables, autonomy at the local level and bottom-up innovation. It is this “double helix” phenomenon that leads to radically contrasting analyzes of the economic outlook.
Zhang Jun, dean of Fudan University's School of Economics, is director of the China Center for Economic Studies, a Shanghai-based think tank. Copyright ©: Project syndicate
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