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As China’s growth slowdown deepens, there are signs that the manufacturing industry is also slipping, as it faces multiple challenges.
Despite excess capacity in various industries, investors in many labor-intensive enterprises are already relocating to neighboring countries in Southeast Asia, where labor is much cheaper. There are also signs that some hi-tech industries are choosing to relocate to developed countries. Recent data show that both the number of factories and the total number of employees in this sector are in decline.
The apparent downturn in China’s manufacturing sector is taking place against the backdrop of other countries making a more concerted effort to develop homegrown manufacturing following the global financial crisis in 2008. The US, for example, has launched its “reindustrialization” scheme. In Europe, the German government proposed the idea of “Industry 4.0” in 2013, while France launched the “New Industrial France” initiative. In Asia, both Japan and South Korea have launched their own strategies to boost indigenous manufacturing.
Recently, Chinese Premier Li Keqiang also launched China’s own indigenous innovation policy, dubbed “Made In China 2025.” Focusing on promoting innovation, industrial upgrading, construction, green industries and the integration of industrialization and information technology to create leading industrial giants, the strategy aims to help the country graduate from its current position as the “world’s factory” to make China the planet’s leading manufacturing power by 2025.
But to achieve its goal, the Chinese government needs to address various problems currently impeding industrial upgrading. Firstly, China needs to further its ongoing anti-monopoly efforts to eliminate access barriers across various sectors, and to further clarify the boundary between the respective powers of the government and the market in the interests of fairness and transparency. In the meantime, the government should strengthen IP protection to truly encourage and reward innovation. Secondly, to promote innovation, the government should consider resorting to structural stimulus to nurture and support the development of innovative industries. During the National People’s Congress （NPC） session held in March, the government announced that it will establish a 40 billion yuan （US$6.45bn） innovation fund to sponsor new businesses, which is a good start, but not enough.
Thirdly and finally, the government should initiate tax reform to reduce the overall corporate tax burden. In recent years, government revenue has been growing at a far higher rate than the country’s GDP , the product of a problematic tax structure. A high overall rate of tax has crippled the ability of domestic corporations to devote more resources into R&D, constricting innovation.
While the Chinese government has vowed to improve its governance and reform itself into a service-oriented government, whether China can achieve the ambitious goals set by its “Made in China 2025” strategy will serve as a litmus test for the nation.
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