Can new productive forces rescue China’s economy?

Jianlu BI, Jianxi LIUEditor’s note:

Jianlu Bi is a current affairs commentator based in Beijing. He holds a doctoral degree in communication studies and a master’s degree in international studies. His research interests include international politics, international communications and branding. Jianxi Liu is also a current affairs commentator based in Beijing. She holds a master’s degree in journalism. She has been focused on international relations in recent years.

As the Chinese government is under massive pressure to tackle its deepest economic challenges in years, a push for “new productive forces” has turned out to be a new recipe. While repeated endorsements of the phrase show China’s determination to reinvigorate its economy against heavy headwinds, observers doubt the real results.

“These new productive forces are unlikely to be enough to replace the old ones, especially in the case of the property sector,” reads an article in Bloomberg. The Lowy Institute is concerned that “the world cannot absorb infinite Chinese exports.” In the meantime, domestic demand in China, as seen by some economists, is “not sufficient to absorb all the new capacity Beijing will be force-building with Xi’s policies.”Are “new productive forces” simply old wine in a new bottle? Can these forces rescue China’s economy?

Old wine in a new bottle?

Chinese President Xi Jinping coined the term during an inspection trip to Heilongjiang Province in China’s rustbelt northeast last September. The birthplace of the term is no coincidence. With its reputation as the heartland of the country’s heavy industries, the northeast region has been struggling with heavy economic decline in recent years.

To shift away from traditional growth drivers, Xi stressed the need to promote high-quality development of advanced manufacturing. “With innovation playing the leading role, new productive forces mean advanced productivity that is freed from traditional economic growth and productivity development paths,” Xi said.

In the face of a shrinking real estate sector and local government indebtedness, China’s eagerness to shift its economic structure from low-cost manufacturing to high-value services had been apparent, and Xi’s proposal to employ new productive forces further signals China’s top-down determination to power innovation-led engines and fight a way out from the current economic woes.

Can China produce new productive forces?Though determination is essential, alone it does not guarantee desired results. There are still unanswered questions of how to foster and transform new productive forces into positive economic figures.

At the supply end, the output of China’s high-tech manufacturing sector grew by 2.7 percent last year, the lowest since the National Bureau of Statistics (NBS) began releasing data in 2018. For a country eager for revolutionary technological breakthroughs and industrial transformation, the figure is far from ideal.

But the slow growth cannot be interpreted as an inability to innovate. The figure is partly a result of tensions with the United States. Since 2018, the U.S. government has been manipulating every possible means to impede Chinese high-tech enterprises. The harmful results of Washington-led decoupling efforts on China’s high-tech manufacturing are an undeniable fact.

But it is also a fact that the harder the U.S. squeezes, the more China tries to innovate. Official statistics show that China’s total expenditure on research and development exceeded 3.3 trillion yuan ($458.5 billion) in 2023, an 8.1 percent year-on-year increase. Against Washington’s decoupling attempts, China has established science-tech partnerships with over 160 countries and regions in artificial intelligence, clean energy and biomedicine. In 2023, for the first time, China overtook the U.S. with the most science & technology clusters.

“I don’t think the United States can do that much damage to the Chinese economy, although it will try… In terms of developing cutting-edge technologies, which matters the most, China will continue to do very well for itself in the future,” says John Mearsheimer, distinguished service professor of political science at the University of Chicago.

And don’t forget, for any country across the world, a complete shift in economic structure takes time. This means China’s slow growth in high-tech manufacturing is temporary. Jon Taylor from the University of Texas at San Antonio believes that it is going to take time for industries of new productive forces to take off, and China’s new emphasis on technological innovation may pay off in the long term.

But are these new productive forces welcomed?At the demand end, there is no sign that China is “resistant” to initiatives to propel consumption, an issue about which some economists are concerned. Instead, the country has been formulating policies that could cause the locus of growth to shift from investment to domestic consumption. According to the government work report released Tuesday, China will launch a year-long program to stimulate consumption.

China is also witnessing a shift in spending patterns. This helps to consume the new capacity the country is building. “The consumer landscape in China is undergoing a remarkable transformation as Chinese buyers increasingly prioritize high-quality goods over mass-produced, cheaper alternatives,” says Jian Shi Cortesi, investment director of China and Asia equity GAM Investments. This determines the popularity of new productive forces in the Chinese market.

To say the least, even if China cannot consume what it produces, the international market is there to absorb it. Despite Washington’s efforts to keep Chinese products out of the global supply chain, electric vehicles (EV), solar cells and lithium batteries – known as China’s tech-intensive “three new” – reported a combined export value of 1.06 trillion yuan ($150 billion) in 2023. China’s EV carmaker BYD Auto, for instance, became the No.1 in global EV sales, overtaking American auto giant Tesla for the first time in the fourth quarter last year.

Undeniably, there are still many unanswered questions and challenges. But in many areas, new productive forces have already turned out to be a success story.

In the face of complex economic situations both at home and abroad, a structural shift based on new productive forces will not come easily for China. But the country has harnessed its determination and action to foster and transform new productive forces into positive economic figures.