Beijing may be bidding farewell to “China 2025,” its plan to dominate global high-tech manufacturing President Trump loves to hate. Does that matter?
Yes—but it’s far from enough to satisfy China hawks like U.S. Trade Representative Robert Lighthizer. Markets clearly recognize this: The S&P 500 ended up only 0.5% Wednesday after the news broke. Moreover, the China 2025 plan itself—despite all the attention it has received—may be less menacing than it seems.
What’s really needed to take negotiations to the next level, and assuage market concerns, is for China to enact a few big-bang reforms to convince foreigners that Xi Jinping’s administration is committed to level dealing. Doing away entirely with most joint-venture requirements—instead of endless foot-dragging and qualifications—is one possibility. Radically streamlined procedures for approving new products would be another. Hospitals and health care could be unconditionally opened to all foreign investment. China could do away with Hollywood movie quotas.
On China 2025 itself, there have been some legitimate concerns. The local content targets are highly unfair. And there is little doubt China is marshaling massive finance in support. By late 2017, the Import-Export Bank of China had supported China 2025-related lending of nearly 700 billion yuan ($102 billion) according to state media. Funding from other government sources adds up to hundreds of billions more.
The thing is, there’s little evidence the money is being spent well—a problem China’s economic czar, Liu He, has also highlighted. In addition to advanced robotics and microchips, China 2025 funding will support projects like smart refrigerators, smart rice cookers, and intelligent toilet seat covers, according to state media. China is producing tons of robots—but not necessarily good ones, as anyone who has visited government-supported robotics parks in far-flung provinces like Anhui can attest. Chinese robotics manufacturers’ domestic market share actually fell 6 percentage points to 25% in 2017 according to the International Federation of Robotics.
At the same time China is already heavily indebted. After plateauing in 2017, China’s debt-to-GDP ratio jumped to 261% in early 2018 according to the Bank for International Settlements. Bloated state enterprises already hog most of the bank lending, while productive private firms are starved for cash. Lending billions more to build low-end robotics or microchip plants is as much a threat to China’s already-rickety financial system as it is to the U.S.
A common saying in Chinese is “drinking poison to quench your thirst.” If Beijing wants to drown China in more questionable debt—rather than reforming its banking sector to get more cash to real innovators—so be it. What investors should hope is that U.S. negotiators focus on concrete measures to ensure China is open for American business, whatever happens.
Write to Nathaniel Taplin at firstname.lastname@example.org