Measuring the Pace and Scope of China's Innovations

Five years ago, few would have expected that China would create four of the top ten worldwide internet companies (by number of visitors) — Alibaba, Baidu, Tencent, and Sohu — as well as revolutionary multinationals like Huawei and Xiaomi. Nor would most have anticipated China’s increasing provision of global public items, including its One Belt, One Road strategy, which aims to provide the facilities needed to knit Eurasia into a single vast market.

More news that’s remarkable has just emerged in spite of slowing economic-growth rates, China, along with Hong Kong, has recorded US$29 billion in initial public offerings so far this year — almost twice the actual funds raised in All of us markets.

By any measure, the interest rate and scope of development in China has begun to improve. How has this occurred, and why is it happening right now?

The answer lies in the unprecedented challenges that China encounters, including corruption, pollution, unsustainable local debts, ghost towns, shadow banks, inefficient state-owned enterprises (SOEs), and excessive government control over the economy. Certainly, nobody would argue that these are good developments for China; nonetheless, they have arguably been a blessing in disguise. They’ve imbued reform efforts with a degree of urgency that has had a far-reaching impact. Indeed, conventional GDP data do not reflect the size of the transformation that they are traveling.

Of course, China has long been committed to market-driven structural reforms, at the national and municipal levels. It couldn’t have attained its position as the world’s second-largest economy or else. However, the key to China’s success has been constant testing, and the pursuit of that credo have intensified.

For example, the social networking of telecommunications, roads, rail, air, and maritime transport enabled China to become a global hub for the production of customer durables, and improve their distribution. More recently, China began to apply the exact same approach to building a more innovative, knowledge-based economy — one in which the providers sectors, together with domestic consumption, drive growth.

As a result, the nation has increasingly been concentrating on the so-called ‘killer apps’ that, based on the historian Niall Ferguson, drove the West’s rise to economic dominance: competition, science, property, modern medicine, consumerism, and an ethic of hard work. Particularly, China has worked to boost marketplace competition and foster technology and innovation, with improvement in these areas underpinned by efforts to improve governance, strengthen mechanisms of accountability, and increase investment in public goods.

Crucially, even while China’s specific goals possess shifted, its policymakers possess adhered to the experimental approach that has served the country very well thus far. It was the combination associated with broad-based education, openness to technology and innovation, investment in sophisticated telecommunications infrastructure, and ideas in manufacturing smartphones which fuelled China’s rapid development in the e-tail and internet industries. This openness to innovation — along with what some say is lax regulation — also allowed platforms like Alibaba to integrate payments and logistics prior to many Western players did.

China’s ‘learning by doing’ approach is likely to continue to yield revolutionary solutions to emerging problems. For example, faced with a shrinking labour force, the government has ramped upward investment in robotic automation along with other productivity-enhancing technologies. The impact on China’utes competitiveness of rising real wages —, which have been increasing through more than 15 percent annually because 2008 — will, the country’utes leaders expect, ultimately be offset by the benefits of productivity-led growth, not to mention the much-needed increase in household consumption.

Of course, China’s approach has brought significant stresses, setbacks and failures. China’s real estate, credit and stock market pockets —, which produced ghost cities, bad local debts as well as stock-price volatility — attest to that. But the policy decisions that offered rise to these problems — decentralising control over land and permitting markets to direct the movement of talents, trade, investment and capital — have also been critical to progress.

China’s leaders appreciate this well. Rather than avoiding danger, they remain prepared to reverse failing policies. In addition, if necessary, they’re willing to pay for mistakes. Given the savings the country has built up, reflected in bulging foreign-exchange reserves, the central government has got the fiscal room to afford this.

Today’s anti-corruption campaign should be considered an effort by China’s leaders to correct another negative consequence of past policies. The approach is two-pronged: the government is privatising a few SOEs, so that market competition may check the behaviour of corporate managers, while treating the actual managers of other (typically larger) SOEs as public servants, susceptible to the increasingly severe guidelines of public accountability, such as party discipline. Earlier this month, Leader Xi Jinping announced a new wave associated with measures.

China’s government is actually running real risks because it pushes through structural changes that are unprecedented in pace, scale and complexity. Fortunately, China has both the encounter and the wherewithal to experiment with the next stage of structural change.

China’s challenges drive experiment-driven reforms is republished with permission through East Asia Forum