Getting growth right (this time)

The industrialisation of China has been historically a narrative of low-cost, large-scale manufacturing in contrast to the vitality and creativity of the American economy. With Beijing notorious for its intellectual piracy, it has become convention to think of it as good at emulation, but poor at innovation. But is this an accurate perception?

PROMISE UNFULFILLED

The Chinese were the originators of gunpowder, the compass as well as both printing and paper-making — collectively known as the four great inventions of China. They made advances in time-keeping as well as military and maritime technology well ahead of the West.

However, the Chinese did not realise the revolutionary potential of these inventions. Paper-making and printing did not result in the education of the masses. The possession of the compass did not extend the boundary of China. Their arsenal could not resist the advances of foreign powers.

More self-injurious was a turning away during the Ming Dynasty from the world just when China achieved a scale and reach that could have been a springboard for its global dominance. Having sent fleets out into the world and discovered that China was more advanced than other civilisations, the Ming leadership seemed to have decided that they had nothing to learn from the world. They thus failed to act decisively on their own achievements and strengths.

It was arguable that a social structure rooted in Confucianism had a part to play in both the withering on the vine of innovation and the withdrawal from the wider world. Confucianism accorded the highest social status to gentry, whose preoccupation with the dogged rote-learning of Confucian classics and mastery in the arts did more to promote a literary culture than an innovative one.

GETTING IT RIGHT

The China of the early 21st century could not be more different in its attitude to innovation.

First, driving innovation is a central concern of the central government. In the 12th Five-Year Plan in 2011, the Chinese Communist Party’s target is for research and development expenditure to account for 2.2 per cent of China’s gross domestic product and for Beijing to achieve a rate of 3.3 patents per 10,000 people.

The 2013 World Intellectual Property report showed China being the main driver of global growth in intellectual property (IP) filings in 2012. Chinese residents accounted for the largest number of applications for all four types of IP — patents, utility models, trademarks and industrial design.

China’s State Intellectual Property Office was also the only IP office to record double-digit growth for all four types of IP filings. It received 2.4 million IP applications last year; a third (825,000) of these pertained to the “invention” or patent category.

Today, Beijing has the highest number of graduates in the world. It adds seven million graduates to the job market each year. It produces more than half a million engineering graduates annually — more than either the United States or European Union.

Second, far from ignoring the world, Beijing is extending itself on several different planes — political, diplomatic, economic and financial — into all corners of the globe.

Modern China has shown itself eager to learn and innovate. From high-speed trains, alternative energy generation to complex infrastructure management, these skills have been picked up by Chinese firms over the past four decades.

In information technology, Lenovo is set to become the world’s largest manufacturer of personal computers after acquiring IBM’s PC and server businesses. Its technology entrepreneurs have copied and improved on ideas from the West to develop Sina Weibo (a hybrid of Facebook and Twitter), Taobao (similar to eBay and Amazon) and Baidu (an Internet search engine). By volume of service, these platforms are set to become the world’s largest of their kind.

These trajectories and achievements give reason for optimism that the Chinese economy will manage the transition from merely efficient manufacturing to being creative and innovative. The future global consumer and technology standards may well be set by Beijing Road, Guangzhou, rather than Madison Avenue, New York.

INNOVATING FOR REGIME PRESERVATION

China faces multiple internal challenges. First, it will have a rapidly ageing population after 2025. This is largely the result of the historical one-child policy.

Beijing cannot for much longer rely on the masses of cheap labour from the countryside to fill its factories. Its labour force will progressively be characterised by more educated urbanites with middle-class aspirations.

Second, for the ruling Chinese Communist Party (CCP) to maintain its legitimacy, it has to spread the benefits of economic growth.

The income gap between its urban and rural residents is significant, at 3.1 times in 2012 and the national Gini coefficient is a high 0.473. To tackle this, all geographical areas have to be connected to the economy so that wages can grow.

Innovation is an important part of the answer to all these internal challenges. Moving from low-cost and low-wage manufacturing to an economic model with higher value-add and, hence, higher wages is critical.

The wage growth will show the increasingly well-educated populace that they are benefiting from economic growth. But the new rich will need to consume to help rebalance the economy from one that has been investment-led.

CRITICAL QUESTIONS

As I close this series on contemporary China, it is useful to recap the critical questions that need to be resolved both for China to fulfil its potential and for it to do so peaceably and stably.

First, can Beijing continue to maintain a stable coexistence between an open economy and a closed-policy system?

Second, can China maintain its geographic integrity in the face of the economic disparity between metropolitan centres and the countryside?

Third, can China transition smoothly from a labour-intensive and investment-driven economy to an innovative, consumption-powered economy?

Finally, can Beijing and other powers navigate its passage in the international arena such that it takes its place at the top table without catastrophic miscalculations?

Given the inexorably growing importance of China, the working out of answers to these questions will occupy not only the Chinese, but also the rest of us.

ABOUT THE AUTHOR:

Devadas Krishnadas is chief executive officer of Singapore-based Future-Moves Group, which provides consultancy and executive education on strategy and risk. He is also the author of Sensing Singapore: Reflections in a Time of Change.

This is the third of a three-part series on Understanding China. To read the first two parts, visit tdy.sg/comchina9may and tdy.sg/comchina16may.