How China can be more self-sufficient in tech development
- Beijing needs to adapt its investment system to achieve greater efficiency and less waste, with more public-private cooperation and smarter fiscal support
- As long as the investment system remains on track, there are good reasons to be optimistic about China’s domestic technology development
Despite strong commitments from Beijing, it is unclear whether China can achieve self-reliance in a variety of areas, with semiconductor chips top of the list. Given the large gap between China and the United States in the semiconductor industry, China will have to make gigantic investments over a long period to catch up.
China is well positioned to develop high-end technologies and improve its self-reliance. Economies of scale provide a considerable advantage in technology competition. For advanced technologies, such as semiconductor chips, high front-end investment is required to establish research and production facilities while marginal production costs will decline quickly after the supply chain reaches a certain scale.
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As the world’s largest single market in terms of population and GDP measured by purchasing power parity, China’s domestic demand should be sufficient to support technology firms in reaching economies of scale.
On this basis, domestic internet giants have been able to provide services to nearly a billion people, with the average cost per client declining steadily. When mobile internet penetrates nearly every aspect of people’s lives, aggregate tech company profits grow rapidly and, in turn, support the development of new technologies.
In taking this major role in providing initial investment, Beijing effectively assumes the financing risks. While such tactics can generate powerful momentum, controversy surrounds the efficacy and efficiency of such central-government-led activities, as well as the burden it places on local government debt levels.
Local governments’ huge investment in tech has resulted in cycles of bubbles, subsidy scandals, growing debt and sector reshuffling, forcing some local governments or their state-owned enterprises involved in these sectors to exit the game. However, sector winners did finally emerge from the competition and benefit from the economies of scale in mature domestic supply chains.
All these success stories suggest enormous potential for China to develop its tech system on the basis of its economic scale and quickly mobilised, government-driven model.
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As a result, the government needs to adopt a smarter investment system for higher efficiency and less waste. In recent years, government investment funds have taken a more market-oriented approach with closer public-private cooperation to improve investment decisions. The fiscal supportive measures have also evolved to avoid policy arbitrage and subsidy scandals.
As long as the investment system keeps on this track, it is reasonable to be optimistic about China’s domestic technology development.
Chaoping Zhu is a Shanghai-based global market strategist at JP Morgan Asset Management