China is now the world’s second largest applicant for patents. It has overtaken France, Korea, Germany and Japan and is edging closer to the US.

Private firms have invested heavily in research & development after a prolonged period of deleveraging, especially in technology-centred new manufacturing sectors.

The deleveraging cycle started before the financial crisis. Beijing launched three rounds of stimulus policy between 2008 and 2016 but they mainly benefited big state-owned enterprises while rising costs and weak demand forced private-companies to accelerate debt-reduction.

But this deleveraging produced creative destruction: uncompetitive firms ceased trading more adaptive and productive companies emerged. Some firms increased their competitiveness by allying with more advanced overseas partners, some invested in home-grown innovation.

The end of deleveraging was accompanied by a recovery in private-sector fixed-asset investment as the global economic upturn lifted demand and inflation boosted profits. The private capital-expenditure cycle thus bottomed in late 2016 with technology-based sectors growing most strongly.

The recovery held up well in 2018, despite tightening credit conditions and the US-China tariff war, with investment in manufacturing rising fastest, especially industries such as communication equipment and electrical machinery.

Rising investment in innovation and industrial upgrading means that the current capital-expenditure expansion is not only cyclical, but also structural: investment in innovation and industrial upgrading should push up productivity, which in turn should raise long-term potential growth.

Beijing’s current policy easing is mainly targeting the private corporate sector through a mix of regulatory 'carrots' and 'sticks' to direct banks' loan allocation towards private enterprises.

We estimate that new loans to this sector could rise 33 per cent to RMB6.1 trillion in 2019 – about USD900 billion. Further, cuts in fees and taxes, including VAT and social security, can save businesses RMB2 trillion this year, allowing increased investment in technologies that will help them stay competitive.

The government has also stepped up tax incentives for R&D and is accelerating structural reforms that will enhance intellectual-property protection, including setting up an IP court within the Supreme Court.

So China’s pick-up in private investment can generate self-sustained growth recovery. By benefitting more than 80 per cent of urban employees and consumers it will boost demand for products and services.

This cyclical recovery is happening hand in hand with technological upgrading. The current monetary and fiscal policies, together with structural reforms, will reinforce the private capital-spending expansion and encourage yet more investment in innovation and industrial upgrading.

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