Upgrading its technology is critical for mainland China to sustain stable growth. Beijing’s latest five-year plan spells out a two-pronged strategy: more basic research at home with new laboratories and universities, while seeking closer ties abroad with science institutions and trading partners.

Despite R&D expenditure rising by a significant 18.6 per cent compound annual growth rate between 1996 and 2019, mainland China’s main weakness lies in the basic research that creates new knowledge with no specific application envisaged. Its dependence on foreign high-tech know-how reflects its limited input in basic and applied research.

Basic research is a long-term endeavour with no benefits materialising in the short or medium term. But it determines the long-term capacity for generating new knowledge, which fuels technological innovation for applied research and experimental development.

In some high-tech sectors, mainland China still has a relatively high dependence on foreign technologies but there have been tensions with the US since 2017, with Washington imposing trade and investment restrictions on technology or related capital flows between the countries. Other economies, including the European Union, have similar rules.

Our analysis suggests that shifts in US technology policy could, depending on the assumptions, reduce mainland China’s annual GDP growth by 0.4 percentage points. Or if other economies also change their policies adversely, GDP could be 1.2 points per annum lower, corresponding to a USD168 billion annual reduction in gross output.

The five sectors most exposed to foreign policy changes are computers, electronics and optical products; electrical machinery; chemicals and pharmaceutical products; telecommunications; IT and other information services. These five sectors account for about 11 per cent of mainland China’s GDP, but the impact on economic growth is disproportionally large.

Beijing’s five-year plan recognises the need to upgrade technology through greater investment in basic research and the establishment of national laboratories plus support to build world-class universities that will be encouraged to join forces with other research institutes.

There will also be tax incentives for R&D spending and encouragement for diversified funding channels to incentivise technology upgrading.

But Beijing also wants to integrate more with the global science and technology community. After signing the Regional Comprehensive Economic Partnership trade deal with other Asian economies in 2020, it wants deals with the EU, Japan and South Korea on investment and free trade, as well as joining the multi-nation trans-Pacific trade pact.

Efforts to resume or speed up negotiations for such agreements should be improved if Beijing continues its reforms, including levelling the playing field and enhancing intellectual-property protections.

 

First published 1st September 2021.

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