Context:

Due to the impact of Covid-19, the first half of 2022 ended with an economic growth rate of 2.5 percent, which was below the annual target of 5.5 percent proposed by the Chinese government at the beginning of the year. The author systematically analyzes the current problems that China faces in achieving the proposed target in the second half-year and provides potential solutions involving both the demand and supply sides.

Key points:

• Covid-19 will continue to be a key uncertain factor impacting China’s economic growth, which needs to be balanced with epidemic prevention and control. A stable business environment should be created to minimize the negative impacts on the majority of people and businesses.
• Global inflation is another factor weighing on China’s economy. With international energy and food prices rising sharply, the domestic Consumer Price Index (CPI) published in June was 2.5 percent and continues to rise. The author suggests that these external impacts can be contained within a limited range for three reasons: 1) internal circulation can absorb the external impacts, 2) sufficient supply, especially for food and energy, stabilizes prices, and 3) strong regulation also stabilizes prices.
• On the demand side, the real estate market is the key to stabilizing economic growth. According to the author’s analysis, demand peaked in the Chinese real estate market a few years ago. Beginning in the second half of 2021, however, it has steadily declined. With its large influence on other industries, especially finance, and on people's livelihood, continuing deterioration in the real estate industry will have a systemic impact. Timely and effective measures must be taken to stabilize the real estate market, and a long-term strategy of healthy development should be considered.
• With regard to increasing consumption, the author suggests that two problems need resolution: 1) relieving the economic burden on the low-income group, and 2) boosting the consumption of the middle-income group. During the pandemic, the low-income group’s real income decreased. The existing social security compensation programs are under-utilized by this group and should be simplified and publicized so that they can be more easily accessed by the people who need the relief. Also, more public monies should be used to expand equal services for low-income groups.
• The author proposes the “1+3+2” plan for potential economic growth: First, “1”, is to further develop the metropolitan areas; second, is to resolve the “3” major shortcomings (inefficiency in basic industries, an insufficiently large middle-income group, and weak basic research and development capabilities); and finally, it is necessary to incentivize the “two” economic growth drivers, the digital economy and green development.
• It is also important to set reasonable expectations for economic development. When economic growth slows, the people may become doubtful about and criticize socialism with Chinese characteristics. It is necessary to fortify the people’s faith in the overarching strategy, as well as those in private enterprises, which is key to promoting common prosperity.

Context:

The Outline of the National Medium and Long-Term Science and Technology Development Program (2006-2020), China’s principal guide for independent innovation strategy, has been completed. Over the program’s 15 years, China has made significant progress in the fields of high-speed railroads, semiconductor displays, UHV electricity transmission, energy equipment, and new energy batteries. However, many industries are still stymied by US-imposed technology restrictions. From the sanctions on Huawei to The CHIPS and Science Act, and the latest US Department of Commerce Economic Development Agency’s export controls, all signs indicate an intensifying technological blockade against China. However, the trade disputes, and the challenges caused by Covid-19 have provided a new window of opportunity for China’s innovation and accelerated the domestic application of technological industries.

Key points:

Two perspectives on innovation evolution and the problems to be solved in China’s innovation practice

• There are two perspectives on China’s innovation evolution: the supply-side and the demand-side. The former focuses on the production of technological knowledge and organizational capabilities, dominating international innovation research, and innovation practices in China; the latter is more concerned with the scale and attributes of markets and end users, thus playing a complementary role. The "open innovation", however, that has gained more emphasis in recent years, still does not balance the supply side with the demand side approaches.
• At present, the biggest resistance to independent innovation increasingly lies on the demand side, the market for and application of this innovation. The government has been encouraging SOEs to purchase domestic products in the petrochemical, energy, and military sectors. However, in regard to core technological products, domestic enterprises are often treated as back-ups. In the increasingly open and competitive market, policies should be implemented to guide users to purchase domestic products, so that domestic companies have opportunities to improve innovation quality and prove that they are competent to compete in the international market.

The new trend and adaptation of China’s innovation

• The US technological blockade and Covid-19 have unintentionally provided historic opportunities for China’s technological products and formed a new trend. Downstream users are forced to shift to domestic suppliers. Sanctioned by the US in 2018, Huawei was forced to turn to the domestic supply chain and to strive for "de-Americanization" of its core products. This, in turn, created opportunities for many Chinese companies. The outbreak of Covid-19 also drove the domestic medical supply companies to provide qualified medical equipment and meet the urgent demand of masks and ventilators. The strength and potential that Chinese companies have shown during the disruptions of the international supply chain have been significant.
• The Chinese government should maximize the potential and strength of domestic suppliers in each industrial chain and promote them in the domestic market. The government should also encourage domestic companies to meet the continuous and urgent demand of medium and high-end technologies and support the core technological innovation of upstream producers. As Chairman Mao wrote, China shouldn’t be intimidated by blockades; instead, it should seek opportunities and solutions from these difficulties.