The "Made in China 2025" area at the China International Patent Fair 2016 in Dalian, Liaoning province. Premier Li Keqiang introduced the Internet Plus and Made in China 2025 policies to redirect China's manufacturing model in 2015.
Experts focus on middle-income trap and green concerns
Countries, like companies, have to change their business models as world circumstances change.
In the early 2000s, China's development model was based on low-wage manufacturing combined with high savings and investment rates. The very success of that model in drastically raising living standards has now led the Chinese government to adopt an ambitious set of policies to upgrade China's industry, to escape the so-called middle-income trap and to support a green environment.
At a meeting of the State Council, China's Cabinet, in May 2016, Premier Li Keqiang said of the country's industrial business model: "China is already a big manufacturing nation, but far from a manufacturing power.…Integration of manufacturing and the internet is an inevitable path of modern industry."
Justin Lin Yifu, director of the Center for the New Structural Economics at Peking University, in a recent article in the Journal of Chinese Economic and Business Studies, outlined the theoretical rationale for China's industrial policy:
"The middle-income trap is a result of a middle-income country's failure to have faster labor productivity growth through technological innovation and industrial upgrading than high-income countries. Industrial policy is essential for the government of a middle-income country to prioritize the use of its limited resources to facilitate technological innovation and industrial upgrading."
China has enormous manufacturing capabilities. According to the Ministry of Industry and Information Technology, China's output ranks first in the world in 220 out of 500 major types of industrial products. It also has world-leading infrastructure, which puts it in a different class from other middle-income countries.
But China's comparative advantage no longer lies with low-wage mass manufacturing. According to a study by the Boston Consulting Group, manufacturing costs in China rose from about 86 percent of the US level in 2004 to about 96 percent in 2014.
"China is being pressured from both sides," an unidentified MIIT official told Xinhua. "Advanced economies such as the United States, Germany and Japan have all formulated policies supporting further development of their own manufacturing. At the same time, emerging economies such as India and Brazil are catching up with their own advantages."
Over the past 15 years, China's real wages have gone up eightfold. This is a good thing in that it raises the living standard of the people, but it forces companies to find higher value-added products.
During the same period, many Western manufacturing companies, particularly in Germany, Japan, the UK and the US, invested heavily in becoming automated and efficient. Meanwhile, fracking technology cut energy costs in the US.
"The government knows clearly that manufacturing is the existing competitive advantage. For the past few years, people have been saying that China's manufacturing is big but not that strong. Given the scale, the government is trying its best to upgrade it to a new shape. They want to do it fast because time is very constrained. In five years, 10 years at most, we will see a new structure of leading countries. The fourth industrial revolution is already going on," said Zhai Xin, associate professor at Peking University's Guanghua School of Management.