China has been striving to transform its economy for some time. However, efforts have been fast-tracked since 18th National Congress of Communist Party of China for multiple reasons. First, China realised its status as a world factory, reliance on exporting traditional products, export-led growth, and conventional growth drivers would not help its transition to next stage of development. There is a real possibility it could lead to a middle-income trap, which would be a bad sign for country. It could slow progress towards second-century goal of national rejuvenation and return to a rightful place on global stage.
Second, no doubt, China achieved miraculous economic growth and became second-largest economy, but it could not divert sufficient attention to environment, comprehensive development, and social development standards. CPC leadership concluded inadequate and unbalanced development always leads to inequality and social disruption. It will disturb stability, a prerequisite for economic growth and development. Therefore, China needs to reverse process and look for sustainable solutions.
President Xi Jinping summarised and culminated the discourse, presenting third principal contradiction: “unbalanced and inadequate development and people’s ever-growing needs for a better life”. He further elaborated on his vision and plans during 19th National Congress of Communist Party of China, branded as China in New Era. He introduced his vision for China’s economy in New Era. It gave a new impetus to transmission efforts, and China kick-started comprehensive reforms and programmes under the umbrella of Economy in New Era. China accelerated transformation process by adhering to President Xi’s third principal contradiction.
China envisioned, in pursuit of President Xi’s vision for Economy in New Era, the first step would be to shed tag of world factory and move towards becoming the world’s laboratory. It needs to introduce new drivers of growth and move away from traditional export-led growth model. Moreover, China will have to ensure green, environmentally friendly, and ecologically sound development. It is required to address challenges posed by environmental and ecological degradation and climate change.
Therefore, China embraced New Philosophy of Development, which President Xi presented. The new philosophy emphasises openness, inclusiveness, and green, low-carbon, sustainable development. Simultaneously, China introduced new vision of High-Quality Development, which emphasises quality over mere GDP numbers and prioritises people’s welfare and their prosperity. It aims to bring positive changes to people’s lives and reduce inequalities in society. It honors Natural boundaries and principles. For that purpose, the country will have to transition from traditional industrial expansion, infrastructure investments, and integration into global trade networks to intelligent industrial development, future-oriented investments, and increased domestic consumption. It was also envisioned innovation, intelligent supply chains, and advanced productive forces would drive high-quality development.
Therefore, innovation, a modern services ecosystem, an AI-driven industry, and green transition will become new drivers of growth. To support these efforts, China will have to invest in artificial intelligence, quantum computing, advanced chips and semiconductors, services ecosystem, rare-earth metals, and clean energy, along with other areas. In the pursuit of this and as a first step, China fostered transition from Industry 3.0 to Industry 4.0. China was confident to transition, as it successfully achieved objectives of previous two transitions, from Industry 1.0 to Industry 2.0 and from Industry 2.0 (mass production, world factory) to Industry 3.0 (automation, computerisation), but “world factory” tag remains. Therefore, China has accelerated transition from Industry 3.0 to 4.0, which focuses on AI-powered, innovative, and intelligent industry.
Simultaneously, China is focusing on opening up and creating new opportunities and avenues for foreign investors. China believes to build an economy of New Era, fully implement new philosophy of development and high-quality development, China needs to pursue comprehensive opening up and create new economic linkages with the world. Therefore, President Xi urged policymakers to pursue comprehensive opening and create a competitive market. As a first step, the catalogue of encouraged industries for foreign investment is undergoing radical changes and continues to expand. Hence, during last few years, catalogue has added new investment sectors for foreign investment.
The catalogue analysis shows in 2017, it included only 987 items. Of these, 348 were at national level, and 639 regional and area-specific. Since then, list has continued to grow. The 2024 draft catalogue contains 1700 items, including 620 at national level and 1080 at regional level. The primary objectives of expanding catalog are 1) to encourage investment in manufacturing and supply chain, 2) to encourage investment in Western region, and 3) to integrate development of services and manufacturing sectors. These will help modernise economy. It is expected that, with launch of 15th Development Plan, number of items will increase, as China plans to accelerate implementation of high-quality development and give impetus to industrial transition from Industry 3.0 to 4.0.
However, China is aware to achieve objectives of new philosophy of development, high-quality development, and build an economy of New Era, China needs to focus on four capitals. China should work on “physical capital” to make assets, equipment, goods, and industry, environment, and human-friendly in accordance with principle of sustainable development. They should help reduce carbon emissions without sacrificing quality. China must align human capital with future needs and train people to support high-quality development and a shared community future. It is worth noting human capital has been designated as a cross-cutting area, and China is working on it diligently. President Xi believes quality human capital is essential for transition, as it will be crucial to cultivating a culture of knowledge creation, innovation, and technological development. In short, quality of human capital will determine success or failure of transition.
China needs to work to protect natural capital and promote sustainability. Therefore, China is adopting a policy of rational resource use and respecting natural limits and principles. Additionally, industries focused on reuse, sustainable consumption, and recycling have been encouraged to achieve these goals. China should focus on strengthening social capital and building a well-functioning society. Efforts should aim to improve social networks and cooperation. Society members should be encouraged to join forces to address challenges and promote societal welfare.
In conclusion, however, China is cognizant of the fact the transition will not be easy, as situation is highly complex, and China faces malicious propaganda campaigns and trade sanctions. The West, led by US, has implemented many policies to limit interactions between its companies and those of China. The most recent policy intervention was CHIP and Science Act. It requires US and Western companies to stop or limit business with Chinese firms and not share CHIP and semiconductor technology. Although this has been ongoing for many years, it is now formal policy. Therefore, China must be prepared to face difficulties and develop strategies to overcome them.
