China’s next revolution? Modern agriculture, industry, national defense, and science and technology.
Made in China 2025 targets ten key sectors for additional government support. These sectors are: (1) new energy vehicles, (2) next-generation information technology (IT), (3) biotechnology, (4) new materials, (5) aerospace, (6) ocean engineering and high-tech ships, (7) railway, (8) robotics,‡ (9) power equipment, and (10) agricultural machinery.
SOURCE: The 13th Five-Year Plan_Final_2.14.17_Updated (002).pdf
Summary and Excerpts:
China is an important market for U.S. firms. Policies outlined in the 13th Five-Year Plan seek to create new Chinese competitors that will be able to challenge U.S. companies abroad while slowly closing market opportunities in China for U.S. and other foreign firms in important high-tech sectors such as bio-pharmaceuticals, robotics, and aviation. This staff report analyzes the 13th Five-Year Plan, the Chinese government’s most important strategy to address its economic, social, and environmental challenges over the next five years, focusing on key national targets (including subsequently announced localization and innovation targets), market access commitments, and its implications for the U.S. employment, innovation, and economic growth.
Made in China 2025 (中国制造 2025) is a ten-year strategy to build intelligent manufacturing capabilities, enhance innovation, and upgrade ten key sectors. These sectors are: (1) new energy vehicles, (2) next-generation information technology, (3) biotechnology, (4) new materials, (5) aerospace, (6) ocean engineering and high-tech ships, (7) railway, (8) robotics, (9) power equipment, and (10) agricultural machinery.281
Supply-Side Reforms (供给侧结构性改革) are aimed at boosting productivity and the effective use of production factors, including resources, skilled workers, and technology.278 Key objectives include: reducing overcapacity, reducing real estate inventory, deleveraging and otherwise strengthening balance sheets, and lowering corporate costs directly and by reducing government bureaucracy.279
In line with its objectives to move up the value-added chain and meet its growing domestic consumption needs, the Chinese government uses the 13th FYP to encourage advanced technology and high-quality consumer product imports and inbound foreign investment in select industries.248 This lowering of market barriers on previously restricted sectors creates new markets for foreign firms. However, this expanded access is unlikely to last. The Chinese government has a history of gradually pushing out foreign firms by reinstituting investment restrictions once domestic firms become competitive.249
In addition, the Chinese government’s continued interference in the domestic economy and legal system reinforces its objective to open the world to China, not China to the world. The Chinese government continues to use preferential support for domestic firms, localization targets, and high market access barriers to build domestic capacity and eventually replace foreign technology and products with domestic technology and production first at home then abroad.247 These policies are slowly closing market opportunities for U.S. and other foreign firms in China, and creating new Chinese competitors that will be able to challenge U.S. companies in the United States and in third country markets, with potential negative impacts on U.S. employment, productivity, and innovation.
In line with its objectives to move up the value-added chain and meet its growing domestic consumption needs, the Chinese government uses the 13th FYP to encourage advanced technology and high-quality consumer product imports and inbound foreign investment in select industries.248 This lowering of market barriers on previously restricted sectors creates new markets for foreign firms. However, this expanded access is unlikely to last. The Chinese government has a history of gradually pushing out foreign firms by reinstituting investment restrictions once domestic firms become competitive.249
In addition, the Chinese government’s continued interference in the domestic economy and legal system reinforces its objective to open the world to China, not China to the world. The Chinese government continues to use preferential support for domestic firms, localization targets, and high market access barriers to build domestic capacity and eventually replace foreign technology and products with domestic technology and production first at home then abroad.247 These policies are slowly closing market opportunities for U.S. and other foreign firms in China, and creating new Chinese competitors that will be able to challenge U.S. companies in the United States and in third country markets, with potential negative impacts on U.S. employment, productivity, and innovation.
Guiding investment to industrial and economic objectives: The 13th FYP highlights ongoing negotiations of bilateral investment treaties with the United States and the EU and loosening of capital controls and some market access restrictions. To meet growing domestic demand and remedy the lack of domestic capacity, the 13th FYP pledges to loosen foreign investment restrictions on preschools and childcare centers, elder care, architecture, accounting, auditing, banking, insurance, and securities. Reflecting both its industrial and economic objectives, the 13th FYP also encourages greater foreign investment in advanced manufacturing, high-tech, energy-saving and environmental protection, and modern services, particularly in central and western provinces.187 However, China maintains a pattern of first welcoming foreign investment into strategic sectors to gain foreign technology, intellectual property, and know-how then restricting investment in those sectors as domestic firms become competitive.* This policy creates market space for China’s new firms by pushing out foreign competitors.188 Thus, the sectors outlined in 13th FYP will likely enjoy only a temporary respite from a loosening of China’s market access barriers. Foreign companies operating in industries championed by the 13th FYP are likely to see market barriers temporarily loosened in ways that benefit domestic competitors.
Encouraging select imports: Expansion of advanced technology and equipment and high-quality consumer product imports is strongly encouraged under the 13th FYP,184 potentially creating opportunities for U.S. high-value-added exports. In addition, the 13th FYP plans a greater opening of the finance, education, health, culture, Internet, and logistics sectors to foreign firms.185 But this expansion of imports appears short-lived. The Consumer Products Standards and Quality Upgrading Plan (2016–2020) in support of the Internet Plus and Made in China 2025 initiatives aim at building Chinese firms into international brands and improving the share of its consumer products that meet international quality standards.186
Internet Plus
To capitalize on China’s huge online consumer market and optimize manufacturing, finance, healthcare, and government, the Internet Plus plan is aimed at building up the country’s domestic mobile Internet, cloud computing, big data, and the Internet of Things* sector firms and creating global competitors by assisting domestic firms’ expansion abroad.69 China’s Internet Network Information Center reported there were 710 million Internet users in China as of June 2016, far outstripping the second-largest Internet user country, the United States.70 China’s big data market is expected to grow from RMB 110.5 billion ($17 billion) to RMB 879 billion ($135.2 billion) by 2020.71 Under the 13th FYP the Chinese government wants to improve Internet access in rural China — thus increasing China’s consumer base — by raising the fixed broadband household penetration ratio from 40 percent in 2015 to 70 percent in 2020 and the mobile broadband subscriber penetration ratio from 57 percent in 2015 to 85 percent by 2020.72 In January 2017, National Development and Reform Commission (NDRC) and Ministry of Industry and Information Technology announced that China would invest $179.1 billion (RMB 1.2 trillion) to improve broadband and mobile networks from 2016 to 2018 to include the construction of more than 56,000 miles (90,000 kilometers) of high-speed fiber optic cables and 2 million 4G base stations. 73 The Cyberspace Administration of China and the Ministry of Finance launched the $14.9 billion (RMB 100 billion) China Internet Investment Fund in January to provide equity investment in Chinese Internet and Internet of Things sector firms.† The Agriculture Bank of China, China Development Bank, and the Industrial and Commercial Bank of China will provide $22.4 billion (RMB 150 billion) in credit lines for firms that the fund has invested in.74 Although this area offers enormous potential, the Chinese government continues to maintain significant restrictions on the Internet, limiting information availability and global connectivity. These restrictions have not only limited the domestic innovation potential but also harmed foreign technology and Internet firms’ operations in China.‡
In October 2015, the Chinese Academy of Engineering, a think tank under the State Council, released the Made in China 2025 Key Area Technology Roadmap that outlines localization targets for these sectors (see Figure 1).63 For example, the roadmap aims to increase the domestic market share of Chinese branded new energy vehicles to 80 percent by 2025.64 Reaching these localization targets would gradually close China’s growing market to U.S. and other foreign firms, a major loss of market and job opportunities.65
The Chinese government is channeling significant state funding to support the Made in China 2025 initiative and its designated sectors. In November 2016, the China Development Bank announced it will provide at least $44.8 billion (RMB 300 billion) in total financing to support the implementation of the Made in China 2025 initiative during the 13th FYP.66 The Chinese government has also created a $20 billion (RMB 139 billion) National Integrated Circuit Fund, a $3 billion (RMB 20 billion) Advanced Manufacturing Fund,* and a $6 billion (RMB 40 billion) Emerging Industries Investment Fund.67 Local governments are also providing strong financial support. For example, 21 cities and 5 provinces have pledged a combined $6 billion (RMB 40 billion) in subsidies for robotics.68
New energy vehicles Advanced computers and servers Autonomous robots Robot core components Advanced medical devices Partially autonomous vehicles Biopharmaceutical materials Mobile phone chips Wide-bodied aircraft
Made in China 2025
The Made in China 2025 Action Plan lays out 12 targets with 2020 and 2025 deadlines that focus on enhancing China’s innovation, productivity, quality, digitalization, and efficiency (see Table 2).57 For example, automation and efficiency targets aim to improve Chinese firms’ productivity and move their products up the value-added chain by increasing intelligent manufacturing capabilities.58 In addition, this initiative seeks to build domestic firms that are globally competitive with a goal of gradually substituting foreign technology and products with local technology and production first at home then abroad.59 Although this top-down initiative reiterates the Chinese government’s long-held objectives toward indigenous innovation and import substitution, Made in China 2025 is larger in scope and resources with greater government coordination than previous plans.60
Shift to Higher-Value-Added Manufacturing
The Chinese government recognizes that heavy industry* and low-end manufacturing are creating neither sustainable engines of growth nor the jobs matching China’s increasingly educated and skilled workforce. The 13th
FYP reiterates support for the “Made in China 2025” (中国制造 2025; zhongguo zhizao) and “Internet Plus” (互 联网+; hulianwang) initiatives as key policies to move up the value-added chain.53 These initiatives seek to accelerate China’s transition to higher-value-added, intelligent manufacturing† by focusing on innovation and upgrading emerging industries, such as high-end equipment, integrated circuits, biomedicines, cloud computing, mobile Internet, and e-commerce.54 In support of these sectors, the Chinese government cultivates local and national champions, negotiates for technology transfers as the price of market access, regulates foreign investment and technology imports through government catalogues, promotes Chinese technology standards domestically and internationally, and supports greater Chinese exports through its “Going Out” strategy.55 However, without meaningful reform, the 13th FYP’s policies to move up the value-added chain through indigenous innovation and other state-directed policies risk recreating the overproduction and distorted market conditions that occurred under the 12th FYP with strategic emerging industries (see Table 3 for a list of strategic emerging industries).56
The 13th FYP adds two additional targets to improve its innovation capability: Internet penetration and the contribution of science and technology to economic growth (see Appendix II).44 The expansion of the penetration ratio for fixed and mobile broadband subscriber ratios aligns with the Chinese government’s broader push to leverage the interconnectivity and data from the Internet to optimize manufacturing, finance, healthcare, and government.45 The contribution of scientific and technological advances to economic growth should grow from 55.3 percent to 60 percent, but how the Chinese government will measure this contribution remains unclear.46 To facilitate this innovation, municipal governments are creating technology and innovation hubs. For example, Tianjin plans to build 100 innovative hubs by the end of 2016, and Suzhou aims to build more than 300 such hubs by 2020.47
The ambitions of the 13th FYP and its subsequent science and technology innovation plan are dampened by the fact that innovation efforts under the 12th FYP were plagued by inefficient allocation of funding, worthless patents, and plagiarism.48 According to Kai-Fu Lee, a former Google and Microsoft Corporation executive who founded the China-based venture capitalist fund Innovation Works, while China’s planned establishment of at least 400 innovation hubs dwarfs the 44 such hubs in San Francisco, only 5 percent of China’s incubators have the necessary funding and high-quality services to support startups.49
Innovation-Driven Development (创新发展)
As the first major section of the 13th FYP, innovation is emphasized as a cornerstone of China’s development strategy. Innovation “essentially set the overarching framework from which many of the other areas of the plan flow,” stated Damien Ma, a fellow at The Paulson Institute, at the Commission’s April 2016 hearing on “China’s 13th Five-Year Plan.”† 30 The Chinese government is seeking to use innovation to accelerate efforts to move Chinese manufacturing up the value-added chain, reestablish China as a global center of innovation and technology, and ensure long-term productivity.31 On May 19, 2016, the CCP Central Committee and State Council released Guidelines for China’s Innovation-Driven Development Model that builds upon the 13th FYP and establishes broad goals for China’s economy to become an “innovative nation” by 2020, an international innovation leader by 2030, and a world powerhouse of scientific and technological innovation by 2050.32
* For more information on China’s fiscal and financial challenges, see U.S.-China Economic and Security Review Commission, Chapter 1, Section 3, “China’s 13th Five-Year Plan,” in 2016 Annual Report to Congress, November 2016, 161–164, 167–168, 173–174. https://www.uscc.gov/sites/default/files/Annual_Report/Chapters/Chapter%201%2C%20Section%203%20-%2013th%20Five- Year%20Plan.pdf; For more information on China’s shadow banking sector, see U.S.-China Economic and Security Review Commission, Chapter 1, Section 3, “Governance and Accountability in China’s Financial System,” in 2013 Annual Report to Congress, November 2013, 113–152. https://www.uscc.gov/sites/default/files/Annual_Report/Chapters/Chapter%201%3B%20Section%203%20Governance%20and%20Acco untability%20in%20China%27s%20Financial%20System.pdf.
† For testimony and transcript from the hearing, see U.S.-China Economic and Security Review Commission, Hearing on China’s 13th Five-Year Plan, April 27, 2016. https://www.uscc.gov/Hearings/hearing-china%E2%80%99s-13th-five-year-plan.
U.S.-China Economic and Security Review Commission 6
The 13th FYP largely reiterates the Chinese government’s state-directed strategy started under the 12th FYP,* including “indigenous innovation,” an initiative strongly condemned by U.S. and other foreign governments and firms upon its inclusion in the 12th FYP.33 U.S. and other foreign governments and firms have argued that this policy inherently discriminates against foreign firms by seeking to replace foreign technology with products and services from Chinese firms.† In August 2016, the State Council released its 13th Five-Year Science and Technology Innovation Plan, which reiterates three targets in the 13th FYP and provides nine additional targets (see Table 1 below).34 By 2020, this plan aims to increase China’s global innovation ranking from 18 to 15,‡ the share of R&D spending as a percent of GDP from 2.1 to 2.5, the number of patents filed per 10,000 people from 6.3 to 12, and the number of personnel in R&D.35
Major targets include:
Increase spending on R&D: Under the 12th FYP, overall spending on R&D increased from $105 billion (RMB 706.3 billion) in 2010 to $194.3 billion (RMB 1,301.6 billion) in 2014 but failed to reach the 12th FYP’s 2.2 percent target for R&D spending as a share of GDP by 0.1 percentage points.36 The 13th FYP raises the 12th FYP’s 2.2 percent target to 2.5 percent by 2020.37 In comparison, projected spending on R&D in the United States reached 2.8 percent of GDP in 2014.38 If China reaches its target, public and private R&D spending will total $1.2 trillion (RMB 8 trillion) during the 13th FYP.§ The 13th Five-Year Science and Technology Innovation Plan expands upon the 13th FYP targets by pursuing growth of R&D intensity, or firm’s R&D expenditures as a share of its net sales.39 This focus on both overall spending and more market-based company spending targets some of wasteful spending that occurred under the 11th and 12th FYPs.
Raise the quality and volume of Chinese patents: The 13th FYP accelerates the successful uptick in filing for patents under the 12th FYP by raising the target for the number of patents per 10,000 people from 6.3 in 2015 — nearly double the 12th FYP target of 3.3 — to 12 by 2020.40 But while the quantity of patents has skyrocketed, the quality of these patents is debatable.41 To address the quality of patents, the 13th Five- Year Science and Technology Innovation Plan aims to raise the number of international citations and Patent Cooperation Treaty patents, which are higher bars to meet.42
Enhance human capital: The 13th Five-Year Science and Technology Innovation Plan sets goals to increase the share of China’s R&D personnel and population with scientific degrees to enhance its scientific base. China plans to increase the number of R&D personnel per 10,000 people employed per year from 48.5 in
* For a comprehensive analysis of China’s state-directed science and technology, industrial, defense, and energy development plans, see Tai Ming Cheung et al., “Planning for Innovation: Understanding China’s Plans for Technological, Energy, Industrial, and Defense Development,” University of California Institute on Global Conflict and Cooperation (prepared for the U.S.-China Economic and Security Review Commission), July 28, 2016. https://www.uscc.gov/sites/default/files/Research/Planning%20for%20Innovation- Understanding%20China%27s%20Plans%20for%20Tech%20Energy%20Industrial%20and%20Defense%20Development072816.pdf.
† For an overview of foreign firms’ concerns regarding indigenous innovation, see James McGregor, “China’s Drive for ‘Indigenous Innovation’: A Web of Industrial Policies,” American Chamber of Commerce, 2010. https://www.uschamber.com/sites/default/files/legacy/reports/100728chinareport_0.pdf.
‡ This ranking is based on the Country Innovation Index compiled by the Chinese Academy of Science and Technology for Development under the Ministry of Science and Technology. In 2015, the Country Innovation Index ranked China as the 18th most innovative country; the United States was ranked first followed by Japan, Switzerland, South Korea, and Israel. By comparison, the 2016 Global Innovation Index published by Cornell University, French business school INSEAD, and the World Intellectual Property Organization ranked Switzerland first, followed by Sweden, the United Kingdom, and the United States at fourth. The 2016 Global Innovation Index placed China 25th out of 128 countries. Ministry of Science and Technology of the People’s Republic of China, “Country Innovation Index Report 2015” Released, July 25, 2016. Staff translation. http://www.most.gov.cn/kjbgz/201607/t20160725_126747.htm; Soumitra Dutta, Bruno Lanvin, and Sacha Wunsch-Vincent, eds., “The Global Innovation Index 2016,” 2016. https://www.globalinnovationindex.org/gii- 2016-report.
§ R&D spending from 2016 to 2020 assumes China reaches its 2.5 percent target for R&D spending and its GDP target of RMB 92.7 trillion by 2020 with an annual R&D growth rate of 2.73 percent and an annual GDP growth rate of 6.5 percent. People’s Republic of China, 13th Five-Year Plan on National Economic and Social Development, March 17, 2016. Staff translation. http://www.gov.cn/xinwen/2016-03/17/content_5054992.htm
Openness: In support of greater openness, the 13th FYP lays out objectives to expand exports and select imports, increase outbound and inbound investment, promote the international use of the renminbi (RMB), and enhance China’s role in global economic governance. The Chinese government is seeking to expand its interregional and international trade through the creation of the Beijing-Tianjin-Hebei megaregion, the Yangtze Economic Belt, and the One Belt, One Road initiative. Reflecting China’s broader industrial and economic goals, the 13th FYP also pledges to loosen foreign investment restrictions in select sectors such as elder care, banking, and finance, and encourage imports of advanced technology and equipment and high-quality consumer products.6