SocialismToday           Socialist Party magazine

Socialism Today 109 - May 2007

Can China be a new tiger?

Continuing our series of articles on China, RON GROVES looks at the Chinese economy and assesses the claim that it can repeat the experience of post-war Japan, South Korea and other South-East Asian states.

IN THE EYES of the Chinese government, the road to sustainable development and the emergence of the country as one of the leading capitalist powers lies in China’s ability to harness science and technology, thus enabling its firms to reach world levels by commercialising research and development. The viability of this perspective is increasingly debated, both inside the country and by the capitalists internationally, as China has emerged as a major economic force, with a clear distinction emerging between the ‘optimistic’ and ‘pessimistic’ camps. Can China emulate Japan, Korea and the ‘tiger’ economies and create internationally competitive, innovative, high-tech firms like Sony or Hitachi and thus transform itself into a modern industrialised country? Or will its nascent industries be crushed by globalisation now that it has become a member of the World Trade Organisation (WTO) and should be open to the untrammelled gales of international competition?

There is no shortage of capitalist entrepreneurs and bureaucrats in China who have a strong ambition to create a powerful ‘national team’ of firms which will be genuine global competitors. Creating a dynamic, innovating, high-tech sector is central to this aspiration, which is driven by a resurgent nationalism and the lure of exploiting what is potentially the world’s largest consumer market with, for example, already over 400 million mobile phone users. Within the high-tech field, information and communication technology (ICT) is seen as having the greatest potential to transform Chinese society. In the words of Laurence Lau of Stanford University there will be ‘creation without destruction’ due to the IT revolution. (This is a reference to the ideas of the Austrian economist, Joseph Schumpeter, who coined the phrase ‘the creative gales of destruction’ to describe the continuous sweeping away of old industries by those based on new technology under capitalism.) This ideal state of affairs will arise, according to Lau, since China has the ability to leapfrog the advanced capitalist countries because there are no vested interests to protect and no existing businesses to cannibalise.

Leaving aside the rhetoric, there does indeed seem to have been some significant success stories in China’s economic development with the growth of an apparently strong, internationally competitive ICT sector. A survey (August 2004) by the All-China Federation of Industry and Commerce ranked Lenovo, an IT manufacturer which recently bought out IBM’s PC business, as the country’s number one privately managed company by sales revenue. The western business press noticed the development of strong information and communication technology firms several years ago, with The Economist commenting in 1998 that "they have succeeded largely by beating foreigners at their own game".

Indigenous Chinese companies such as Huawei and Great Dragon have captured more than half of the telecom market in direct competition with NEC, Motorola and Alcatel. Lenovo (formerly Legend) has been the PC market leader since 1996, also in competition with international companies such as IBM and Compaq. Stone, a software manufacturer, has 80% of the local word processing market and Founder has become one of the world’s leading developers of colour high-resolution electronic publishing systems. Lenovo, Stone and Founder not only imitated western technology but successfully innovated new products and processes. Their story was a reverse of the common pattern of technology acquisition by ‘developing’ countries, which often starts from labour intensive assembly and only much later, if ever, reaches a point of indigenous design.

The high-tech sector

THE GROWTH OF successful indigenous information and communication technology firms has been underpinned by the large science and technology resources that were inherited initially from the command system and then further developed and marketised by the state. China’s science and technology structures under the command economy were modelled closely on those of the Soviet Union in the 1950s. Of course, consumer/producer relations were entirely different to a market system. The consumer in the command system was the planning body and its demands were transmitted by administrative fiat through industrial ministries to science and technology bodies. Each ministry was responsible for a particular industrial sector, for example telecoms, and had production enterprises, research and development institutes and often higher education bodies under its control.

The system was vertically integrated with very few if any formal horizontal linkages between production units, on the one hand, and the research and development institutes responsible for innovation and higher education bodies with industrial ministry affiliation. The role of such higher education bodies was to provide a pool of highly specialised knowledge workers for the production units and research and development institutes. Other organisations existed outside the industrial ministries that had science and technology functions, such as the institutes of the various academies of science and universities under non-industrial ministries, but they played a minimal role in industrial innovation. Labour mobility was very limited and labour markets for knowledge workers did not exist since jobs were allocated administratively, and were usually for life. The structures for innovation were extensive, with 800 industry branch research and development institutes existing before the market orientated changes began in the mid 1980s.

The process of change in the Chinese science and technology structures began in 1985 with the publication by the Central Committee of the Communist Party of the resolution on structural reform of the science and technology management system. These market orientated ‘reforms’ have continued, empirically driven, ever since and have produced, intentionally or otherwise, some dramatic changes.

Patenting activity by Chinese firms increased in the 1990s, which could be significant since writing patent applications can give an indication of innovative activity in firms. In the period 1998-2003, patent applications increased ten times. This explosive growth was unbalanced, however, focussed in three regions only: Guangdong, Jiangsu, and Tianjin. China is now in fifth place in world patent filings according to the OECD.

The number of scientists and technologists in China ranks only after the USA, Japan and Russia, with two million listed, nearly half of whom were working in research and development. (China Statistical Yearbook on Science and Technology, 2001). In 2000, China became the world’s eighth largest contributor to academic journals in science and technology, with nearly 50,000 papers listed in Science Citation Index, Engineering Index and Index to Science and Technology Proceedings. This totalled 3.5% of world output, a 7.5% increase on the previous year. In basic science output, China was ranked eighth in the world by Science Citation Index, up from 15th five years previously. Also, China produces 352,000 graduate engineers a year, compared to 137,000 in the USA.

Gross expenditure on research and development (GERD) as a percentage of GNP, a widely used performance indicator, was 1.31% in 2003, a doubling since 1998, and a 17% increase on the previous year. The Chinese GERD/GDP percentage of 1.31 compares to 2.62 in the USA, 1.88 in the UK and 0.88 in India, indicating that, although there is still a significant difference with the advanced capitalist countries, the gap is closing rapidly. In the last decade research and development spending has more then doubled as a share of GDP and China is now second to the USA in total research spending, pushing ahead of Japan.

Commercialising R&D

WHEN THE CHINESE government launched its programme to harness science and technology using market methods in the 1980s, it sent a delegation to the USA to study western approaches to commercialising research and development. As part of this fact-finding mission, officials visited Silicon Valley in California where explosive high-tech growth was driven by a rapid proliferation of spin-off companies from existing big firms, universities and research institutes.

In an attempt to emulate the perceived success of the Silicon Valley model, in 1988 the State Council, a leading body in the Chinese regime, designated China’s first national high-technology development zone in Beijing, where there was a very high concentration of universities and research institutions, and encouraged other cities to prepare to develop their own zones. Since then, spin-off companies in the Beijing high-tech zone have become some of the best known in China, such as the Founder Group of Beijing University, the Tongfang group of Tsinghua University, and Lenovo, spun off from the Institute of Computer Technology of the Chinese Academy of Science. There are now 14,000 companies employing nearly 500,000 workers, making it the largest science park in the world. Information and communication technology is the dominant industrial sector, but there are also other significant firms working in bio-tech, advanced materials including optics, and nanotechnology.

In 1991, 26 zones in other cities were selected and designated as national high technology zones, leading to the significant growth in these areas of high-tech spin-off ventures, sometimes called new technology enterprises, which grew rapidly to 900 by the mid-1990s, if the companies linked to the Chinese Academy of Science are included. This rapid growth was given a further boost by the government Torch programme to establish ‘incubators’ and technology development zones. There are now 436 incubators and 23,000 ventures linked to them. The success rate of these high-tech start-ups was reported in the late 1990s as 10%, comparable to the figure found for similar western ventures.

Science parks now account for the great majority of output and activity in the high-tech sector in China. Three quarters of all high-tech firms are based in science parks, which employ more than four million people. In 2000, industrial products from high-tech parks accounted for 25% of China’s value added output and total income from them in 2001 was 13% of GDP.

The ‘pessimistic’ view

THE ENTRY OF China into the WTO in 2001, if rigorously enforced, could have serious implications for its information and communication technology sector. It was not accidental that this was the part of the accession negotiations that was most heavily pressed by the USA, since nearly all the leading world players are based in America and China is the area where they see huge potential profits. As part of WTO entry in 2001, tariffs on computer equipment were progressively reduced to zero by 2005 and restrictions on the rights of foreign firms to operate freely were all lifted by the same date. It remains to be seen the effect this will have on indigenous ICT firms, and it is possible that the USA and EU will not push for strict enforcement, initially for political reasons linked to preserving China’s role in the present unstable global economic equilibrium. However, the power of a company like Microsoft will be difficult to resist if it is allowed to operate untrammelled and if, as a result, fledgling national champions are seriously threatened, the political pressure on a leadership that relies increasingly for legitimacy on nationalistic rhetoric will be intense.

High-tech development has made a significant contribution to Chinese trade. High-tech exports increased 15 times in dollar terms between 1991-2001, and have continued expanding since. However, most of these exports have been from multi-national corporations with local operations. For example, in the first nine months of 2002, they accounted for 82% of the high- and new-tech export total. Furthermore, many of China’s high-tech products do not possess independent intellectual property rights, especially in critical technologies. These products are located at the bottom end of the high-tech value chain, and firms are negatively impacted by upstream changes in standards, specifications, etc, beyond their control.

A study of the software industry in 2003 claimed that it was still in its infancy, characterised by a lack of technical skills, experience, management know-how, functioning capital markets, transparency and legal protection. In this sector it was concluded that the goal of the regime since 1978, to shift from a planned to a market economy, had only been partly realised. Two non-market factors, government and guanxi (personal networks, often corrupt, based on reciprocal exchange of favours or family ties) continue to affect most aspects of the software industry, with firms dependent on government for contracts and other connections necessary to conduct business. How long this status quo will withstand WTO accession, which was meant to sweep away all distortions such as these to the free market, is a crucial issue for the sustainability of local IT firms.

The consultancy firm, Deloitte Touche Tohmatsu, found that there was very little cutting edge innovation in China, with the possible exception of integrated circuit design and semiconductor fabrication. According to Nicholas Lardy of the US Institute of International Economics, only 15% of the value of China’s exported electronic products are domestic value added, suggesting that the country remains a mere assembler of high-tech products. Although gambling software is more advanced than in the west, capable of supporting hundreds of thousands of players simultaneously, there is an acute shortage of software engineers available to commercialise this advantage.

Although the size of the science and technology base is impressive, the productivity of the sector lags far behind the advanced capitalist countries, partly due to under-funding, particularly in basic science. One measure of this is patent output which, although increasing rapidly, is doing so from a low base. For example in 2000, of the 12,683 patents granted in China in that year, only 8% went to Chinese enterprises (China Statistical Yearbook for Science and Technology, 2001). In output of scientific papers, China still is well behind the USA, with one eighth of America’s publications in 2000.

Also, the impact factor (a measure of international ranking) of the journals that published Chinese papers was consistently lower than for American ones, and the works of Chinese scientists were less cited by fellow academics than were those of their foreign colleagues. In 2004, although it was in ninth place internationally in published scientific papers, China ranked only 124th in the number of citations per paper, which is a measure of international influence and recognition. Finally, despite intense efforts by the state to rectify the situation, China has never won a Nobel prize.

Policy changes have been made affecting the relationship of firms with universities and research institutes that could hit the viability of the information and communication technology sector. The growth of university and research institute spin-offs played a major role in the development of Chinese indigenous industrial research and development, particularly in IT. Many of the biggest and most successful firms such as Lenovo, the world’s third biggest PC manufacturer, Huawai, Stone, Founder, etc, were created through this route and their ‘founder’ academic bodies often still retain formal ownership of them. The close links between universities and their spin-offs helped the firms to innovate by providing them with privileged access to knowledge, but there is now evidence that science and technology structures are characterised by looser university/industry institutional ties, still exploited by firms for reputational advantage, but no longer providing privileged access to technical knowledge.

This shift was partly due to policy changes in the past six or seven years. Although close academic/industry links were important at a certain stage in creating high-tech industries in China, the regime saw a danger by the late 1990s that basic research was being seriously undermined by commercially focussed academic/industry relations. Consequently, major policy changes were instituted to weaken and eventually break the links between spin-off firms and their parent academic bodies. The ramifications for information and communication technology sector firms of this change could be serious, because the ‘free’ technical knowledge acquired as a result of the close links between spin-off firms and universities and research institutes helped give these companies a competitive edge that will no longer be available.

Without hidden or not so hidden state support the great majority of Chinese information technology firms will not be able to compete with their counterparts in the advanced capitalist countries, since there is little evidence that many of these firms have developed a capability to innovate cutting edge products. They could survive if they retain privileged access to state dominated markets, but their ability to do this will be tested by the increasing pressure the USA will apply on China to abide by the spirit of WTO entry.

Is the glass half-full or half-empty?

ASSESSING THE sustainability and prospects of the high-tech sector in China is a complex question, partly because reliable information is still sparse, although expanding, and partly because the Chinese economy represents a continuously moving target, where what data and analysis there is rapidly becomes out of date due to China’s current explosive and contradictory development. However, studying the data available does reveal some discernable trends. Firstly, the science and technology base underpinning the information technology sector is large but unproductive in international terms, although the gap has been closing rapidly in the past seven years as a result of a huge increase in government directed investment.

Secondly, several internationally competitive information and communication technology firms have emerged, such as Lenovo, ZTE and TCL, that are aggressively expanding in the home market and to a limited extent now overseas. They have achieved their position partly by obtaining resources from the state, directly and indirectly. Although there is little cutting-edge innovation in China, apart from that mentioned earlier which is mainly in niche areas, this did not appear to be a barrier to economic development for the so-called ‘tiger’ economies, which did not innovate new products until late in the process of industrialisation. There is a debate about whether it is necessary for ‘developing’ countries to innovate new products rather than imitate existing ones, because Japan and the Tigers appeared to be successful without innovating for a long time.

However, in developing their economies, Japan and the Tigers were helped by having a protected home market and by using dubious practices such as industrial espionage and committing patent violations to gain a foothold and competitive edge. This was tolerated by western governments, mainly the USA, due to the imperatives of the cold war. Eventually, as globalisation progressed and the Berlin wall fell, the big corporations in these countries had to compete more on the world market and to do this they needed to innovate. As a very late comer to the capitalist party, the favours extended to Japan and the Tigers in the cold war will not be extended to China, and to survive it will also have to build innovative globally competitive firms.

The biggest potential threat to Chinese information and communication technology firms like Lenovo, and to a far greater extent to those in the second rank below them, comes from WTO accession, because if the full provisions of entry are applied, all will struggle to survive without government sponsorship against the Western ICT giants. This is especially true for the software industry that relies heavily on the state for contracts and other connections.

The vulnerability of Chinese firms is highlighted by the 2006 Research Scorecard compiled by the British government, which is a list of 1,250 leading international companies ranked by their spending on research and development. There are only seven Chinese entries, three from the oil and gas sector (PetroChina, China Petrol, CNOOC), and four from the information and communication technology sector (Lenovo, ZTE, TCL, SMIC). In a ranking of ICT firms there are two Chinese companies in the top 100: ZTE is 61st and Lenovo 75th. Lenovo only achieves this place because it recently took over part of IBM and inherited a big research budget. Before this its spending on research and development was insignificant. (In the statistics, Lenovo and TCL are listed as being from Hong Kong but, in fact, their ultimate owners are in mainland China.) All the Chinese firms listed are hardware producers – PCs, mobile handsets, etc. There are no software companies in the rankings at all.

Another factor, apart from a lack of world-class competitive firms, that will hamper the high-tech sector in China when a fight for survival develops with the western multinationals, is the difficulty local companies have in raising money for research and development projects. There are virtually no functioning capital markets in China, where money can be borrowed on the basis of an objective calculation of the risks involved. The stock markets are like casinos and the banks operate as if they were government departments that lend mainly to big public-sector corporations or to those who have close connections with them such as property speculators. Consequently, most small and medium sized indigenous firms have to fund research from retained profits or borrow money from wealthy individuals they have connections with, which means most cannot afford the huge costs of developing new products.

Nevertheless, although Chinese firms are in a weak position to withstand competition, since it joined the WTO over five years ago the impact on the indigenous information and communication technology sector has not been dramatic. One possible reason is that it is hard for the WTO to eliminate guanxi, which gives local firms a non-market advantage, because it is so deep-rooted and hidden in Chinese society. Another reason, and probably the main one, appears to be that the advanced capitalist countries choose not to enforce the WTO rules because precipitating a conflict with China could both destabilise the world economy and threaten the big investments many multinationals have made in the county, in anticipation of a hoped for growth of a new mass consumer market.

Breach of intellectual property rights, a prime target for the WTO, is commonplace and most software in use is still pirated, but the Western capitalists take little effective counter-action. For example, it is possible to download music from hundreds of pirate websites via China’s leading internet search engine However, a Beijing court ruled last November that Baidu’s links to the pirate websites were legal and dismissed an action brought by the International Federation of the Phonographic Industry (IFPI), a body representing western music companies. Baidu has now proposed a compromise method for downloading music, in partnership with EMI. EMI agreed to this, despite describing the method in question as illegal, and has pulled out of the planned appeal by the IFPI. In another context, China heavily restricts foreign involvement in domestic financial markets in contravention of an undertaking to the WTO to allow foreign stakes of up to one third in brokerages by last year. The government has announced it will not take action for another year, with little protest from the west.

The current stand-off in implementing the provisions of WTO entry mean that the local high-tech industry will survive for the moment, but China has no prospect in the short or even medium term of building trans-national corporations to compete with the likes of Microsoft, Intel or Sony. It is possible theoretically that other sectors apart from information technology could emerge as global challengers, such as nanotechnology where the government has been spending heavily on basic research. This seems to be getting some results and could put China in a potentially strong position. However, the nanotech industry is in its very early stages of development internationally and it is far too soon to draw any conclusions about it forming the basis for a new ‘techno-economic system’ underpinning a fresh period of capitalist growth. At the very least it will take a considerable time before its potential is apparent, and time is something that China probably does not have.

It has been suggested that the best chance of creating viable competitive firms in the long term is to harness the talents of those Chinese working for foreign companies in China and to attract back the millions of émigrés mainly working in the USA. There are some problems with this suggestion. Firstly, the extent to which foreign firms actually carry out research and development in China is not clear. Many set up operations for public relations reasons. A recent study found that only 30 were doing innovative research. Secondly, persuading émigrés to return in large numbers from the USA will not be easy because of their high salaries and the repulsive nature of the Stalinist regime in Beijing. Nevertheless, it is true that the skills and technique now learnt by these people could help transform China rapidly into a modern industrialised (and environmentally sustainable) society, but harnessing such talent cannot be done without overcoming the deep structural problems built into world capitalism, which China is now at the heart of. At some point, which cannot now be long delayed, China will be a victim of these contradictions it helped to create as the mechanisms supporting the unsustainable growth of the world economy begin to break down.

When this happens China will be at a crossroads. With the world economy moving into reverse, and a consequent downward pressure on profits, the western imperialist powers and Japan will no longer tolerate any free-riding by China in terms of breaking WTO rules, and local firms will face being wiped out very rapidly by foreign multinationals. This is the rule of all crises of capitalism: the weak go to the wall and the strong survive. This will dash the ambitions of China’s rulers of competing as an equal partner in the global economy which, for a regime that relies increasingly on nationalism for legitimacy, will provoke a deep crisis. The alternative on a capitalist basis though will be equally unattractive to the Stalinist leadership. A move to economic nationalism to protect home markets and firms, using import and capital controls, will be counter-productive because it will hit China’s huge export sector which employs tens of millions of workers and has been the basis of its massive economic growth. China is integrated to such a great extent into the world market that going down the road to a siege economy would cause mayhem in society with tens, if not hundreds of millions thrown out of work in a country already prone to huge unrest caused by the conditions created by the move to capitalism. The leaders of the regime will probably soon be recalling the old Chinese saying, ‘we are cursed to live in interesting times’.


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