By Li Wei, DRC

2017-03-08

In 2016, under the leadership of the CPC Central Committee headed by Comrade Xi Jinping, we focused on the supply-side structural reform, followed the principle of seeking progress while keeping economic performance stable, maintained a steady and sound economic growth and got a good start in economic and social development during the 13th Five-Year Plan period. Meanwhile, we are clearly aware that after economic development entered the state of the new normal, the downward economic growth trend and imbalanced economic structure have not been fundamentally changed, risks are piling up in the financial and housing sectors, and difficulties for development in some areas have increased. Therefore, it is imperative for us to unleash innovation vigor through reform, cultivate new drivers for development through innovation to support economic growth, optimize economic structure and resolve potential risks.

I. We need to have a correct understanding of the connotations of new drivers.

The cultivation of new drivers requires a correct and thorough understanding of new drivers and related connotations.

The concept of new drivers has become a hot issue in recent years. People have come to see that new drivers could help maintain a rapid economic growth. However, to maintain a stable growth is not the only purpose of cultivating new drivers. The cultivation of new drivers should also be conducive to economic structural optimization and risk dissolution. In other words, the new drivers should be featured by both “quantity” and “quality”. We need to take multiple perspectives to view the new drivers in light of different development stages, various economic structures and relevant governmental supervision capabilities. If that is the case, facts will show that some newly-emerged driving forces in economic operation are not actually what we call new drivers.

For example, some newly-emerged economic activities could bolster economic growth for a certain period of time, but they might bring harm to the economic structure and lead to risk accumulation. In the beginning of the new century, after the outburst of hi-tech stock bubbles, the U.S. adopted the subprime mortgage policy and a series of new financial tools based on it, so as to promote the rapid development of housing sector and boost American economic growth. This measure made the U.S. housing price soared from 10.8 trillion dollars in 1999 to 24.9 trillion dollars in 2006, thus triggering the world financial crisis in 2008. Facts show that these new financial tools bring more negative impacts than positive factors.

For another example, some emerging economic activities are positive energy to economic development in a sound systematic environment; yet they can be negative against the backdrop of inadequate systems. In the case of the swift Internet finance development these years, it is true that cyber credit can lower the information asymmetry and improve the efficiency of allocating credit funds; yet if there are loopholes in the supervision system, this financial innovation is prone to evolve into the “Ponzi scheme” in China, similar cases are online lender Ezubao and Fanya Metal Exchange which are both illegal fund-raising companies. According to statistics issued by wdzj.com, the number of accumulated closed-down businesses and platforms with improper market performance in 2016 alone reached 1741. What is even worse is that some people utilized these platforms to make financial frauds and then skipped with all the money, which has exerted negative influence not only on economic operation, but also on some social groups.

It shows that the new drivers we are going to cultivate must be qualified. This kind of new drivers should be able to shore up economic growth and serve as motive power to propel economic structural optimization and dissolve relevant risks.

II. We need to make the real economy become bigger and stronger.

It is necessary for us to make innovations in cultivating new drivers and take making the real economy become bigger and stronger as the major task for realizing innovations.

Cultivating new drivers requires us to focus on innovation in cutting-edge technologies and emerging industries. Currently, in view of the long cycle of technological and industrial revolution and the short cycle of economic operation, the world is witnessing swift emerging of new technologies and industries. Unlike the development of traditional technologies and industries, China stands at the same starting line with those developed countries in these cutting-edge technologies and emerging industries, and even boasts the late-developing advantage without bothering by long-overdue issues left over from the past. On the other hand, after the financial crisis, global trade growth has declined sharply, trade frictions between countries are on the rise, some regional organizations cannot perform properly and relevant arrangements in investment and trade are in a precarious state, the anti-globalization signs are looming up, and China’s development is facing mounting external pressure. Under such a landscape, a slew of developed countries will adopt more strict restrictions on the export of hi-tech products and build higher tariff barriers against China’s endeavour to expand overseas market. Only by making breakthroughs in the frontier sector and achieving great progress in the emerging industries can the new drivers be cultivated for a major developing country as China, and can China make its due contribution and help the world economy get out of the plight.

The cultivation of new drivers requires us to lay emphasis on innovation in virtual economy. Virtual economy is a key component of the national economy and plays an indispensable role in meeting people’s diverse needs and serving the real economy. Currently, we are experiencing the major information technology revolution in human history and the rapid progress in IT has provided unprecedented condition for the development of virtual economy. It is both necessary and possible to make innovations in the virtual economy. To meet the demand of cultivating new drivers, we need to encourage those virtual economy-based innovations which are beneficial to break the market barriers, promote business competition and enhance the real economic efficiency; we need to bolster virtual economy-based innovations to create new employment opportunities, and to expand the mid-income groups; and we need to shore up the service sector innovations and help enhance people’s life quality. In the meantime, we need to inhibit those virtual economy innovations that might cause market monopoly, hinder the increase of employment opportunities and lead to excessive concentration of wealth.

What’s more important in the current stage for cultivating new drivers is certainly to put the focus of innovation on upgrading the existing industries and products and take it as the major task for making the real economy become bigger and stronger. On one hand, it is not easy to make innovations in the frontier sector and cultivating emerging industries, where capital, pilot practice as well as accumulation of knowledge and experience are needed. It is impossible for these new technologies and industries to become the pillar of China’s economic development in the short term. On the other hand, although China has become the largest manufacturer in the world, the scale of real economy still needs to be expanded. According to the World Bank, China’s added value of the secondary industry reached 4.4 trillion dollars in 2014, 27% higher than that of the U.S. However, to be objective, China’s real economic development is far from being adequate. China’s per capita added value of the secondary industry was less than one third of that of the U.S. in 2014. Even if the figure is elevated to merely half of the U.S. level, China’s scale of secondary industry added value can still expand around 70%.

Meanwhile, we should be aware that in the traditional industrial sector, the gap between China and developed countries in technology and management has been narrowed, but there still remains a large room for improvement. According to the global input-output tables compiled by the OECD and other world organizations, the added value rate for China’s textile and apparel manufacturing industry was merely 20% in 2014, while that of developed countries were basically above 30%, such as the U.S., Germany, Japan and Britain with their respective figures being 30%, 34%, 37% and 51%. The differences in added value rate show that China’s traditional industry still has a long way to go relating to innovation in technology, technique procedures, brand value and operation management. We need to focus on making the real economy become stronger and bigger to promote innovations in technology, products, techniques, management and marketing.

III. Reform could unleash the vigor for innovation.

To cultivate new development drivers, it is necessary to create a sound innovation ecological environment through reform and unleash the innovation vitality of various innovation entities.

In recent years, China has made remarkable achievements in innovation. China is growing from a large aerospace country to an aerospace power; China has the longest high-speed mileage in the world and has helped some countries build high-speed railways; and China’s Internet-based enterprises’ performance is leading the world development trend. But we need to face up to the fact that China’s innovation weaknesses remain prominent. 1. The key sectors are in dire need of innovations, core technologies are enslaved to other countries, and the inadequate major technology supply has seriously constrained the sustained and sound economic development. For example, China’s car production in 2015 exceeded 24.5 million and has ranked the first place for seven years in a row, but the core components of the engine still rely on imports; and China’s mobile phone production in 2015 registered around 1.8 billion, but the phone chips and operation systems still heavily rely on foreign manufacturers. 2. In some sectors with relatively large potential market scales, there lacks some innovations that are not complicated in technology, but are capable of enhancing product quality and management efficiency. Some office facilities and daily necessities, such as printers, ball-pens, electric rice cookers and toilet lids, are not that complicated with hi-tech content as aerospace and aviation products. However, we are unable to make products that are as good as foreign-made ones.

There are many reasons for that. 1. Some state-owned innovation resources are not sufficiently integrated and utilized. In some major technology sectors such as the manufacture of car engine, a large number of innovation resources with the same technology content and similar functions could be found in different R&D centers. Without a synergy for innovation, technological breakthroughs are in no way to be realized. 2. Few innovation resources are owned by innovation entities. In 2015, China’s R&D inputs reached 1.4 trillion RMB, ranking second worldwide; but in terms of the innovation resources owned by different entities, China’s corporate innovation inputs lag far behind that of developed countries. According to the Ranking List of R&D Inputs for Global Enterprises 2016 issued by European Commission, in the 2015-2016 fiscal year, there was only one Chinese enterprise ranking among the top 50 in terms of R&D investment, which is extremely unmatched with China’s huge economic aggregate. 3. Various innovation entities’ motivation and potential are not brought into full play. Research staff spends much time on trivial affairs such as project application, fund use, and technical title assessment; some entrepreneurs put too much emphasis on short-term interests; and some workers at the production line lack the motivation to learn technical know-how.

To make up for the weak links, it is necessary for us to bring the decisive role of the market into play in allocating innovation resources and leverage the advantages of the new-type nationwide system to coordinate and organize various innovation resources for good utilization. We need to keep increasing inputs into innovation resources and enhance the resource inputs level for relevant innovation entities. We need to, through reform, establish and flesh out the systems and mechanisms for encouraging various entities to make innovations, so as to unleash the innovation vigor of social groups. We need to respect research personnel for their scientific work, follow R&D law and create an open and free academic environment by improving the distribution system, fund management system and technical title assessment system so that researchers can concentrate their whole energy upon making innovations. We need to create a fair competition environment, strengthen property protection, especially the protection of intellectual property rights, and curb speculation acts of various sorts, so that entrepreneurs could put more efforts on the long-term and sustained development through innovation. We need to ensure better benefits and a higher social status for technical workers, remove the barriers restricting their promotion or transfer to other fields, thus paving the way for them to enjoy a decent life and have a promising future. An atmosphere favorable for enhancing innovation should be formed to inspire the innovation vitality of various professionals; and a system for protecting innovators should be established so as to ensure that their life will not be affected in case they suffer setbacks in make innovations.

The Central Economy Work Conference points out that the general line of seeking progress while keeping economic performance stable is a major principle for the governance of the country and also a methodology for doing a better job on economic work. It is stressed at the meeting that the key is to ensure a steady economic progress and on the basis of that we could make achievements in key sectors in a moderate manner. We hold the view that achievements hinge on reform and progress rests on innovations. We need to remove the institutional barriers restricting various innovation entities to unleash their vigor through reform and form an ecological system allowing them to have the readiness, responsibility and capability to make innovation. With more dynamic innovation, we can cultivate stronger new drivers and promote a more efficient, sound and sustained economic development.

Note: Li Wei, research fellow and President (Minister) of the Development Research Center of the State Council