What will form the 'foundation' as China moves towards overtaking the US to become the world's biggest economy?

Described as the "foundation" that will determine China's "strength and its future position in the world", manufacturing is once again taking over as the main engine of economic growth that could help challenge the United States as the world's biggest economy.

Amid rising competition with both developed and developing countries, China is renewing its effort to reboot its manufacturing sector, while moving away from its old playbook of relying on property and infrastructure spending to grow its economy.

Admittedly, China still significantly trails behind hi-tech manufacturing heavyweights Japan and Germany, according to National Development and Reform Commission (NDRC) deputy secretary general Gao Gao.

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But China's 14th five-year-plan crucially focuses on raising wage levels in the manufacturing sector, developing new manufacturing industries and integrating manufacturing and services, all of which aim to make manufacturing attractive again to jobseekers, Gao added.

When will China overtake the US to become the world's biggest economy?

Last week, the State Council also said it is aiming to offer subsidies to train more than 75 million people in a bid to increase the number of skilled workers.

"From a long-term perspective, the demographic structure is undergoing in-depth adjustments, the number of working-age people has declined, and the supply of labour has decreased," Gao said earlier this week.

China has said by the end of the current five-year plan for 2021-25, it is possible for it to become a high-income country to help it double the size of its economy by 2035 - which may mean it will overtake the US to become the world's largest economy.

In July, forecasts from Bloomberg Economics suggested that China could even grab the top spot as soon as 2031.

In the past, China's economic growth has relied on investment in infrastructure and property, but Beijing wants to control growing debt levels and instead direct spending into manufacturing.

And with consumption yet to fully recover from the impact of the coronavirus, manufacturing is seen as a saviour to China's future growth.

"The high quality development of manufacturing is important to the high quality economic development," the NDRC said in a report released in June.

The economic planner stressed that manufacturing is integral to China's plan to become a "moderately prosperous" society and strategic to its goal to be a "modern socialist country".

"[Manufacturing] is the foundation of deciding the country's strength and its future position in the world," the NDRC report added.

Xia Le, chief economist for Asia-Pacific at BBVA, said that to meet China's growth target of around 5-5.5 per cent in the next 10 to 15 years, the contribution of manufacturing to gross domestic product (GDP) should not fall further.

He added that policymakers might be more tolerable to a slowdown in other parts of the economy, but their primary aim is to steady the growth in the manufacturing sector in the coming years.

The contribution of manufacturing to China's GDP has been declining over the past four years from over 30 per cent down to 27.7 per cent in 2019.

The NDRC report said the number of newly registered companies in the manufacturing sector fell at a rate of 5.2 per cent on average between 2017 and 2019, while the number of manufacturers closing down rose significantly during the same period at an average rate of 24.6 per cent.

George Magnus, an associate at Oxford University's China Centre who is also a research associate at SOAS University of London, said it is feasible that China could upgrade its manufacturing industry to rival or even overtake countries such as the US, Japan, South Korea and Germany in some sectors, but still come up short in terms of innovation.

"In other words, economic heft and weight is not only about having a vibrant manufacturing sector, as the Japanese experience, for example, shows. I think China will need to marry its commitment to manufacturing with a rebirth of the reform to which the government is now closing the door," Magnus said.

China's 14th five-year-plan marks a shift away from the traditional growth focus of Beijing's previous strategies. Instead, the plan stresses "quality development", turning its economy more inward looking. This has raised concerns that China's participation in international trade may well be sidelined, pushing back its promises of increasing market efficiency and further opening up.

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However, Zhang Ming, deputy director of the Institute of Finance at the Chinese Academy of Social Sciences (CASS), believes that while the formula of reforms and opening-up has been effective, China will need to find new growth at home in response to deteriorating China-US relations, which means China can no longer count on external demand.

The US government has tightened hi-tech exports to China over a range of issues including Beijing's economic practices, its crackdowns in Hong Kong and alleged human rights abuses in Xinjiang.

Zhang said China needs to leverage its resources better by closely connecting cities to pool resources and prevent losing its industries to low cost developing countries.

"It is not necessary for these industries to exit eastern China, they can relocate to the central and western regions. But because it is expensive to move, it's cheaper to just leave," Zhang said in an interview with the state-backed China News Weekly last week.

"We are already seeing some changes in policy from the central government to help offset restrictions of asset and capital movement across different provinces."

Zhang said the hurdles of moving capital and assets within China has obstructed industry development because local governments always wish to retain resources.

"The most important task is to change the evaluation of local government officials. Take the Yangtze River Delta as an example, in the future, the assessment of Jiangsu, Zhejiang and Shanghai officials could consider including integrated development as a benchmark," Zhang said.

Analysts also believe it is unlikely that China will completely walk away from infrastructure and property spending as an option to boost its economy despite Beijing's debt concerns, and whether China can transform into a tech powerhouse may depend on delivery from local governments.

Li Xiaohua, an associate professor at the Institute of Industrial Economics at CASS, said that some local governments are more inclined to focus on short-term economic growth.

They are inclined to pour resources into hi-tech industries, but this often leads to over capacity and advanced development being turned into low quality projects.

"There is often a choice between partial and overall, short-term and long-term [economic planning]," Li wrote in the official People's Tribune magazine last week.

"Some local governments only consider building a small market in the region and engage in their own small economic cycle, but do not care about building a unified national market and help national development."

This article originally appeared on the South China Morning Post (SCMP).

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