“If we focus only on self-reliance and import substitution, China risks becoming another Soviet Union." – Zhang Yansheng, Researcher, China Academy of Macroeconomic Research.
7. Long-term prospects for China’s economy
SCMP: What is your view on the government’s pivot towards the economy and the central economic work conference?
Zhang: The problem with China’s economy right now is that there is a lack of money at the local level, a lack of money for businesses and a lack of money for the people. There is no shortage of projects. Local governments don’t want projects, as they view projects as liabilities.
Let’s look at how the pivot played out. The government held back large-scale stimulus until September, but started with – especially with special bonds – an emphasis on the national strategic projects. This, in local governments’ eyes, had nothing to do with them.
The Politburo meeting at the end of September sent two clear messages: first, we must have effective fiscal support; second, policies can’t only be limited to the national level, we must get localities, enterprises and individuals involved.
China needs to solve problems. These are a lack of demand in the short term, a lack of endogenous momentum in the medium term and in the long term, [external] resistance to high-quality development like Trump 2.0.
I personally still think that China’s economy can get out of this predicament. But the next five years, 2026 to 2030, are likely to be more difficult than in the past. The reason is the uncertainty that comes with Trump.
8. Focusing on high-quality growth
SCMP: How can we understand China’s drive for high-quality growth？
Zhang: Development comes first, but high-quality development is the core of the new era. This is [in official rhetoric] about innovation becoming the driving force, coordination becoming endogenous, [the green transition] becoming universal, opening up becoming the way forward and sharing becoming the fundamental purpose.
This suggests that China’s economy is no longer speed-oriented, it is quality-oriented.
China’s innovation drive is growing fast. We have seen intense research and development, patent application and robust applications of technology. As a result, Chinese goods are becoming higher quality and providing more value for money. But obviously the real problem now is the downgrading [i.e. decline] of demand for quality products and downgrading of consumption.
That is why the economy is fundamental to the problem. There are only two ways to get the economy going; one is to speed up at all costs, and the other is to get quality up at all costs. Our government hopes to improve quality. For me, a gross domestic product growth rate of 4.5 per cent is acceptable.
Now China has reached a new stage, which is how it can reaccelerate total factor productivity through a multipronged approach.
9. Reducing dependence while remaining open
SCMP: The “Made in China 2025” plan has made significant progress, and China’s method of mobilising resources nationwide to make breakthroughs has gained traction. How do you view this system’s role in driving economic growth and addressing external challenges?
Zhang: In terms of mobilising national resources, let’s look at the approach the US has taken.
The change of strategy towards technological development started from 1945, when US President [Franklin] Roosevelt’s adviser [Vannevar Bush] told the government science is the ultimate source of economic growth. Over the next 70 years, the US – which had previously been a follower in science and technology – started to surpass others.
The second major milestone was in 1957, during the technological competition between the US and the Soviet Union. The Soviet Union launched the Sputnik satellite and the US realised it was falling behind in space technology.
The US therefore made two critical decisions: First, it decoupled on tech, forcing the Soviet Union to rely on itself. Second, the federal government invested heavily in science and technology, focusing on original innovations from “0 to 1.” This funding went through the Department of Defense. Thus, US technological innovation was not driven by companies or the market, but by government agencies.
And then the US reflected on why its technological progress has stagnated since 1980. Under neoliberalism, most funding for innovations came from companies. Companies invest in innovation for returns and shareholder profits. As a result, since 1980, the US has seen a significant decline in scientific breakthroughs.
Today, in the competition with China, the US is thinking about what China excels at and what the US lacks. The US realises that China’s strengths are industrialisation, engineering, and application scenarios – areas where the US is weakest. Therefore, the US is now preparing to set up national industrial innovation platforms to compete with China and address weaknesses.
How can China respond? First, we need to figure out the issue of “having or not having.” The US is treating China like an enemy in war, cutting off supplies. In such a situation, we must solve the problem of dependency. However, if we focus only on self-reliance and import substitution, China risks becoming another Soviet Union.
If we follow a mercantilist approach, “winner takes all,” China risks becoming another Japan. Japan’s problem was dominating certain industries, leading to trade conflict with the US – textiles in the 1950s, steel in the 1960s, cars in the 1970s and semiconductors in the 1980s. When Japan’s semiconductor industry became the world’s leader, it accounted for 83 per cent of the market, triggering a strong reaction from the US.
If China’s exports threaten America’s core industries, such as aviation, the US will go all-out to fight back. In this case, China must avoid the path of the Soviet Union or Japan. Instead, China should explore an open, inclusive and shared ecosystem for innovation, allowing the world to collaborate with us.
Last year, China invested 3.3 trillion yuan (US$454 billion) in scientific innovation. If we allocated just 5 per cent, 165 billion yuan, to create an international cooperation fund, why not seek global partnerships?
What did China do right in the past? First, reform and opening up. Second, seeking truth from facts. Third, focusing on development. No matter whom we face, if we stick to these three principles, we are unstoppable. Look at the US and its past competitors – none were defeated by the US; they all fell because of their own mistakes. If we lose to the US in the future, it will only be because we deviated from the right path.
What does “seeking truth from facts” mean? It means not blindly following authority or books but focusing on reality. If we can mobilise the passion of every Chinese person and inspire them, who can beat us? Can the US, Europe, Japan or South Korea compete with us?
The key is that we must not make mistakes ourselves. Let them worry about their issues, while we focus on doing our work well. That is the most important thing.
10. How to boost innovation in China
SCMP: What is China’s most pressing problem when it comes to enhancing total factor productivity right now?
Zhang: The most urgent issue is systemic reform. That’s the reason the Central Committee in the third plenary session called for the further comprehensive deepening of reforms. For example, we are ranked 11th in the World Intellectual Property Organization’s Global Innovation Index, but our innovation system lags behind.
The US faced a similar problem. After 1980, it passed the Bayh-Dole Act, which allowed achievements resulting from federal funding to be attributed to the inventors’ organisations. Shortly after the act took force, the conversion rate of scientific and technological achievements increased substantially.
11. The drivers of business expansion overseas
SCMP: In recent years, many Chinese companies have expanded overseas and shifted their domestic and international supply chains. What advice do you have for companies moving forward?
Zhang: There are four criteria for Chinese companies expanding overseas. The first is the presence of a market. The second is cost, they go where land and labour are cheaper. The third is efficiency, places with talent and innovation. The fourth is resources. Now, a fifth has emerged: geopolitics.
Companies move to places with more favourable geopolitical conditions. For example, if the US doesn’t allow them to enter, they might go to Mexico; if Mexico doesn’t allow them, they might go to Mauritius. Who can say no to China in Mauritius? If the US says to the world, “I’m going to impose 100 per cent tariffs on all of you”, then the world will rebel, so how can it still be hegemonic?
Chinese companies going overseas are primarily avoiding geopolitical risks. Also, some companies have reached the stage of internationalisation. This is especially true for the second and third generations of entrepreneurs. Once, I took 10 second-generation entrepreneurs to Suzhou for research. Afterward, I asked them how far they were from internationalisation. They said 3 to 5 years.
I may be old-fashioned, but my children have a clear view of the US and the world. My grandchildren will likely find it much easier to communicate with Americans, Europeans and Japanese. Internationalisation is an innate part of their DNA.
12. China’s rapid internationalisation
SCMP: After going overseas, they have certain needs, such as learning how to manage overseas assets. In this regard, what can they learn from Japan and Hong Kong?
Zhang: What we can see is that there are top levels of development in the world. The first level is the UK and the US, which are top-tier in finance and technology, as well as in discourse power, pricing power and rule-making power. Their national strength and market roles are also top-tier. Hong Kong belongs to this tier. The second level includes continental Europe – France, Germany, Italy – and major East Asian countries, such as Japan and South Korea. [Mainland] China is still in the third tier.
China still lags behind Japan and South Korea in terms of internationalisation. They began their global expansion earlier than us. The Meiji Restoration happened in 1868, and the “Black Ships” event – [the forcible opening of Japan to trade by US warships] – took place in 1853. Furthermore, they seized opportunities in the 1950s. This means they are [at least] 30 years ahead of us.
From this perspective, China has made significant progress. The rapid progress of China is due to its national strength and its market’s role in going abroad. China is now increasingly catching up with continental Europe, Japan and South Korea.
In terms of how to look at China, I would classify them into three groups in terms of research and development [intensity], with aggregate R&D expenditure as the numerator and GDP as the denominator.
First-tier cities [and provinces] include Shanghai, Beijing, Tianjin, Guangdong, Jiangsu and Zhejiang. Last year’s data shows that Zhejiang [province] had the lowest, but its R&D intensity was already 3.2, clearly surpassing the average for Organisation for Economic Cooperation and Development (OECD) countries.
Their momentum is innovation-driven, and their internationalisation is accelerating. The second tier includes 12 provinces and cities, such as Anhui, Shandong and Hunan [provinces], which have an R&D intensity lower than the OECD average. If you look at this indicator over eight years, they are very close to the OECD average. Their momentum is still investment-driven, relying on economies of scale, but they are progressing very quickly.
The third tier includes 13 provinces and autonomous regions whose yearly investment is less than half of Guangdong’s annual investment. Their momentum is resource-driven.
Therefore, China is a large country with developed regions, moderately developed regions and developing regions. China’s overseas expansion from the first tier is accelerating. Outstanding enterprises in the second tier are also beginning to expand abroad. The third tier is only sporadically starting to expand abroad.
The peak of China’s outbound direct investment was in 2016, reaching around US$160 billion. Its enterprises are still in an early stage of going abroad, an exploratory phase. However, internationalisation is accelerating rapidly.
13. How to improve “One Country, Two Systems”
SCMP: You mentioned that Hong Kong is in the world’s top tier. What kind of role can the city play?
Zhang: With internationalisation, marketisation and rule of law, Hong Kong is in the top tier. Hong Kong’s advantages here are stronger than those of continental Europe, Japan and South Korea.
On the other hand, Hong Kong’s economy and industries are focusing on the most profitable parts of different businesses. But without being deeply embedded in the soil of the real economy, without a root, you will float in the sea or be blown by the wind. Therefore, its characteristics are “short, quick and fast”. When you can seize an opportunity, you do it quickly. Secondly, you focus on the most profitable part and never do the rest on a large scale.
From this perspective, Hong Kong must make these characteristics serve the mainland’s larger economy under the “one country, two systems” framework. The large economy is primarily about scale.
To maintain the foundation of “one country, two systems” in Hong Kong, it is important to figure out how to make Hong Kong understand the mainland, and the mainland understand Hong Kong. Mainland enterprises, institutions and regions need to understand Hong Kong to make the best use of it.
Personally, I think it will take some time, as the mainland is also exploring how to manage “one country, two systems.” In this new phase, the challenge is how to preserve both systems while serving one country. This model needs to be explored. I think the core issue is that the mainland should get to know Hong Kong, and then set off again in accordance with the principle of “Hong Kong people governing Hong Kong”.
Key Points
Trump’s threats to raise tariffs on China could either be genuine or just a negotiating tactic.
Implementing such tariffs would entail huge administrative costs, which might deter the new administration from imposing them.
If enacted, there is broad consensus in China to avoid a tit-for-tat response.
Although domestic pressure to retaliate could arise, Beijing will probably respond by strengthening its commitment to free trade.
However, this does not mean China would accept new tariffs passively; rather, it would seek ways to circumvent them.
Although a small faction of “extremists” in Washington advocates for tariffs, the broader American business community remains committed to trading with China.
Regardless of his intentions, Trump cannot compel other countries to act against their own interests.
China cannot fully offset the impact of high tariffs through yuan devaluation. A more effective strategy would involve further liberalising the economy, boosting domestic demand and expanding investments outside the US.
In the long term, China aims for the yuan to become a super-sovereign currency.
Confidence remains the most important issue in China’s capital markets. The Chinese government needs to get better at communicating policy clearly and managing market expectations.
Despite several policy announcements since September, the market, businesses and scholars remain unconvinced that sufficient action has been taken.
Although China’s economic challenges are solvable, the next five years are expected to be more difficult due to uncertainties stemming from Trump’s second term.
In stimulating the economy, the government is rightly focusing on quality rather than just maximising GDP growth.
A target growth rate of 4.5% would be both reasonable and acceptable.
China must reduce its vulnerability to potential US economic sanctions without becoming obsessed with self-reliance or shifting toward mercantilism.
Instead, China should aim to foster a shared global innovation ecosystem and make funding available for international collaboration.
China’s past success has come from reform and opening, its adherence to the principle of “seeking truth from facts”—prioritising practical solutions over dogma—and its focus on development. Future success will depend on staying true to these principles.
Enhancing total factor productivity will require systemic reform. For example, China’s innovation system struggles to translate scientific and technological achievements into practical applications.
China could learn from US legislation which allows inventions funded by federal programmes to be attributed to the inventors’ organisations.
Mutual understanding between Hong Kong and the mainland is essential for leveraging Hong Kong's unique advantages. This includes ensuring that the special administrative region retains its autonomy.
A reposting from scmp and
