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The post-World War II era witnessed Japan's strategic pursuit of industrial policies, leading to decades of remarkable industrial development. In today's landscape of global power and middle power competition, many countries are increasingly turning to industrial policies to bolster their strategic competitiveness. What insights can policymakers glean from Japan's experience? Firstly, the significance of government-business collaboration cannot be overstated. Japan's model of close cooperation between government and businesses in various sectors empowered bureaucratic leadership in the economy. These ties not only identified key sectors for development, such as shipping, automobiles, and telecommunications, but also shielded domestic industries through import controls and barriers to inward foreign investment. In addition, this model provided Japanese companies with the necessary financial and human resources to expand and compete effectively. Secondly, public participation and accountability within governance are crucial elements. Post-war Japan allowed the public to express their views, which could be forwarded to the top. When central policymakers made their decisions, they seriously considered public opinion – both positive and negative, and, to a certain extent, constrained by the public. Thanks to this institutional design, post-war Japan saw limited corruption among bureaucrats. Ultimately, the public, in general, had a great trust in the Japanese policymakers. This led to a virtuous cycle in Japan during the following decades after WWII. Thirdly, the predominance of private ownership played a significant role. Despite establishing state intervention through the Economic Planning Agency in 1995, a major part of the Japanese economy was still in private hands, which developed widespread efficiency and enhanced productivity in industry, spilling over into the entire Japanese society. It is important to note that, however, strategic sectors critical to national security should be overseen and managed by the central or federal government, as argued here and here. While these aspects of the Japanese model offer valuable insights for policymakers globally, there's a critical lesson to learn from Japan's historical misstep. Japan's reliance on studying and licensing foreign technology rather than investing substantially in domestic basic science and technology, as Harvard’s Ezra Vogel pointed out, limited its ability to develop cutting-edge technologies. This approach left Japan vulnerable in the 1980s. Indeed, during periods of heightened geopolitical competition or de-globalization, the model of heavily depending on foreign technology will be extremely risky, leading to some domestic industries being strangled by foreign powers. In conclusion, policymakers should heed the lessons of Japan's industrial evolution, emphasizing government-business collaboration, public participation, accountability, and strategic investment in R&D to navigate today's complex global landscape effectively.

In an era of global strategic competition, where rapid technological advancements define national power, the insights of Alexander Gerschenkron in his seminal paper "Economic Backwardness in Historical Perspective" published over 60 years ago gain renewed pertinence. Gerschenkron’s paper underscores the need for “backward” (or less developed) countries to adopt tailored strategies to catch up with front-runners. His analysis transcends time, arguing that mere participation in free trade and access to high technology does not guarantee transformative development. He suggested a strategic combination of state-led initiatives and ideological momentum, which may help propel a country in today’s world from technological dependency to innovation sovereignty. Indeed, as countries strive to chart their paths toward technological development and frontiers, they confront the limitations of a laissez-faire ideology. This ideology, with its roots in minimal government intervention, proves insufficient in nurturing the sophisticated ecosystem required for high-tech advancement. As of today, many of us, especially who study political economics, know that state intervention is indispensable. It is through astutely crafted industrial policies that countries can cultivate home-grown technologies and safeguard self sufficiency. However, high-tech development demands more than fiscal incentives or similar policy frameworks; it calls for an intellectual revolution. The state must engineer a climate that encourages not just economic activity, but a shift in the "ideology". In this new realm, the role of the entrepreneur and the businessman transcends the quest for personal enrichment. The motivator becomes a shared belief of a 'golden age'—a future where society at large thrives through the fruits of innovation and technological leadership. This ideological shift is not to be mistaken for mere rhetoric. It serves as the lifeblood of economic dynamism, infusing purpose into the practical mechanisms of high-tech development. Such a spirit can inspire unprecedented levels of investment in research and development, embolden entrepreneurs to undertake risky yet groundbreaking projects, and stimulate the workforce to acquire new skills aligned with future industries. In addition to the "ideology" or "spirit", described by Gerschenkron, institutions are critical, as well. German banks, in their role as financiers, extend beyond the mere provision of capital. They embrace a participatory approach, ingraining themselves within the corporate governance structure through supervisory boards. These boards are not passive observers but are actively involved in steering companies towards strategic, long-term objectives that align with national ambitions. This institutional architecture guarantees that financial investment is not an end in itself but an effective means to reduce misallocation of resources. For contemporary policymakers, Gerschenkron’s analysis inspires a blueprint for high-tech transformation. It requires the construction of a dual framework: on one hand, institutional mechanisms that ensure effective allocation and oversight of resources, and on the other, a pervasive ideology that inspires and sustains the collective endeavor towards technological progress. As countries navigate the complex terrain, they must recognize that the path to technological preeminence is multifaceted. It is paved by the concrete of institutional rigor and supported by a nation-wide "ideology". Only by recognizing and integrating these dual aspects might country hope to emulate the success stories of the past and carve out their prominence in the high-tech arena. In the spirit of Gerschenkron, the journey from backwardness to global competitiveness remains as much a matter of belief and institution building as it is of (high-tech) industrial policy.

The bridged version of this article was published here: https://www.scmp.com/comment/opinion/world/article/3254345/focus-industrial-policy-holds-great-promise-and-risk-chinas-economy Two pivotal statements On March 5, Li Qiang, the incumbent Premier of the State Council of China, delineated the country's principal anticipatory targets for economic development within the government's work report. These ambitions encompass achieving an approximate 5% expansion in Gross Domestic Product (GDP); the creation of over 12 million new urban employment opportunities, with an urban surveyed unemployment rate around 5.5%; a consumer price increment close to 3%; synchronicity between residents' income growth and economic advancement; preservation of a fundamentally balanced international payment ledger; an agricultural yield surpassing 1.3 trillion jin; a reduction in the energy consumption per unit of GDP by roughly 2.5%, and a sustained enhancement in ecological environmental standards. These explicitly articulated objectives underscore the Chinese administration's dedication to maintaining robust economic growth, emphasizing stable employment, price stabilization, improvement of public welfare, and the vigorous cultivation of the low-carbon sector as critical undertakings for China's economic landscape in 2024, which are not unfamiliar to China-focused economists and analysts. Nonetheless, two particular statements deserve special attention to their strategic implications: the "Synchronization of residents' income growth with economic progression" (“居民收入增长和经济增长同步”) and the pursuit of “a basically balanced balance of payments (BoP)" (“国际收支保持基本平衡”). The claim that nominal per capita disposable income expands in tandem with GDP growth year-on-year, presuming a stabilization of consumption expenditure as a fraction of disposable income around 66-67% (akin to the previous year yet elevated from 2020-2022), insinuates a commensurate enlargement of the overall consumption expenditure within the economy to GDP growth. This infers that consumption as a share of GDP will (likely) remain unchanged in 2024. The balanced BoP means that a country's total amount of payments made to other countries is roughly equal to the total amount of payments received from other countries over a specific period. The balance of international payments includes all financial transactions between a country's residents and the rest of the world, including trade in goods and services (exports and imports), financial capital flows, and transfers like foreign aid. A balanced international payments scenario implies several nuances: ·       The export-import discrepancy: the current account surplus will be close to zero. The overall trade balance (exports minus imports) will likely show a shrinking surplus. ·       The relation between GDP growth and exports: China can still witness large (net) exports in certain industries, but this would be counterbalanced by imports and other components of the balance of payments, like financial flows and income transfers. Considering these goals – the alignment of residents' income growth with economic expansion and a basically balanced BoP – investment will play a very critical role in achieving the anticipated 5% GDP growth for 2024. The rationale for investment as a primary catalyst? China’s investment-centric strategy, though with flaws, appears somewhat rational given the current circumstances. Internally, a pervasive lack of confidence among Chinese residents has stifled consumer spending. Externally, geopolitical frictions, inclusive of the U.S.-China trade war and heightened trade regulatory actions in developed economies, have posed considerable impediments to Beijing's external commerce. For the country's top leadership, maintaining growth is always of the utmost importance both economically and politically. They perceive invigorating investment as the most feasible approach to achieve a targeted GDP growth rate of approximately 5% in 2024. What varieties of investment and by what means? Investment, as widely recognized, manifests in multifarious forms, including private sector initiatives, public projects, infrastructure, and technology. In 2024, China will have infrastructure and real estate investments, but it has started prioritizing strategic investments in high-tech sectors. The Chinese government is poised to implement aggressive industrial policies to spur domestic investment, particularly in strategic high-tech domains. Scholars typically conceive industrial policy as a governmental intervention in market dynamics to enhance the competitive edge of preferred corporations or sectors. These interventions span tax policies, subsidies, and market entry restrictions. China’s industrial policy is broader. In my publications within the academic journal Global Policy and the Centre for Economic Policy Research (CEPR) in London, I described Chinese industrial policy as encompassing a wide spectrum of government strategies aimed at fostering the growth of national industries. This includes initiatives to stimulate research innovation, scientific breakthroughs, and their commercialization, suggesting that industrial policy transcends mere scientific inquiry to also involve the industrialization and commercialization of research outcomes. China's monetary and fiscal policies are expected to extend robust support to sectors such as artificial intelligence, electric vehicles, supercomputing/quantum computing, and telecommunications (e.g., 5G and 6G), as well as clean energy. Such industrial strategies are anticipated to facilitate continuous industrial upgrading within high-tech and low-carbon domains, thereby rendering the economy and society increasingly "smart" and "green". Concurrently, these policies are likely to precipitate shifts in the labor force composition, with a gradual reallocation of labor towards secondary and particularly tertiary sectors. Nevertheless, it is imperative to critically appraise the industrial policy's dualistic nature. On one hand, it can significantly amplify economic disparities between communities possessing high-tech capacities and those without, thereby exacerbating wealth inequalities. On the other hand, due to institutional deficiencies, industrial policies might lead to overinvestment and surplus production capacities in certain sectors. When domestic consumption fails to absorb this excess, it necessitates exportation to balance out. Implications for International Trade? The implications for international trade are profound. Leading Economist Barry Eichengreen highlighted in 2015 that projects like the AIIB and Silk Road offer alternatives to domestic investment inefficiencies. Indeed, when government industrial policies lead to overcapacity (as observed with solar panels and EVs), exporting subsidized products can mitigate the repercussions of unproductive domestic investments. However, this may inadvertently result in foreign producers bearing the costs of subsidies granted to Chinese manufacturers, as eminent expert Michael Pettis elucidates. Particularly under the current global geopolitical rivalry backdrop, leveraging industrial policies to accelerate industrial development might ignite intensified competition in strategic technological arenas with other countries. Foreign governments might respond by bolstering market access barriers and increasing restrictions on foreign direct investments, thereby escalating trade frictions and potentially sparking more trade wars, which could introduce uncertainties into global supply chains and trade relations. Reflecting on post-World War II Japan, the Japanese government's adoption of extensive industrial policies to shield domestic industries, such as automotive, electronics, and semiconductors, elicited profound concerns from the United States. The U.S. viewed these policies as distorting international market competition, and coupled with domestic political dynamics, trade disputes ensued. How might Chinese policymakers refine their industrial policy approach to mitigate its adverse effects? Effective governance and institutional reforms are essential for policymakers to manage the formulation and implementation of domestic industrial policies. Specifically, policymakers can enhance their industrial policy governance through several measures, including establishing comprehensive data collection and analysis systems to provide clarity on industry development status, market trends, and policy impacts. This would assist in policy direction adjustments, ensuring positive outcomes. Moreover, instituting detailed industrial policy evaluation mechanisms, such as quantitative assessments to verify if policies achieve their intended objectives and establishing accountability systems to curb overinvestment, is crucial. Furthermore, crafting explicit regulations to standardize government market interventions, bolstering innovation support through intellectual property protection and technology transfers, and engaging in international cooperation to mitigate potential conflicts in transnational industrial competition are also pivotal strategies for improving industrial policy management.

This article is written exclusively for the East Asia Forum and part of an EAF special feature series on 2023 in review and the year ahead. In recent years, the world has witnessed a complex tapestry of economic and technological dynamics between the United States and China, with 2023 marking a period of continued economic interdependence and techno-strategic rivalry. Despite a nominal dip in U.S. imports from China, the bilateral trade volumes remained substantial. According to the latest data from the U.S. Census Bureau, U.S. exports to China totaled $135.8 billion and imports stood at $393.1 billion for January-November 2023. Trade represents only a facet of the economic bond between the U.S. and China. Policymakers, cognizant of the perils inherent in economic decoupling, have started to eschew such a course. High-level meetings and initiatives, like the U.S.–China economic and financial working groups established in September 2023 and the Biden-Xi meeting in November 2023, offered a glimpse of positive potential in bilateral relations, as highlighted by Chinese President Xi’s willingness to partner with the United States. Contrastingly, the high-tech landscape in 2023 was tense. The U.S. reinforced its global stance against China’s ascendancy, supported across American political parties. In response to escalating external pressure, “struggle” and “fight” resurfaced in China’s strategic discourse. Key issues such as the ongoing tariff war and stringent export controls on critical technologies continued to underscore the intense rivalry between the world’s two superpowers. Moving into 2024, U.S.-China economic and technological relations are poised to undergo a cautious shift, characterized by enhanced communication, selective cooperation, and balanced management of both interdependence and competition. Firstly, there is a mutual understanding among senior officials of the potentially devastating repercussions associated with misunderstandings and miscalculations in the U.S.-China relationship. It is anticipated that this year will witness an increase in economic dialogues between Beijing and Washington. U.S. Treasury Secretary Yellen, speaking at the U.S.-China Business Council on December 14, 2023, expressed intentions to reinforce enduring communication channels, intending to build resilience in dialogue to avert escalation from disagreements and unforeseen events. Similarly, Chinese commerce officials are preparing for an inaugural vice-ministerial meeting in early 2024 to better comprehend U.S. strategies and concerns while also conveying China’s commitment to maintaining robust bilateral economic ties. Secondly, the focal points of U.S.-China commercial cooperation will likely pivot towards climate finance and financial markets. Joint endeavors in climate finance have the potential to elevate both countries as frontrunners in mitigating climate-related risks. Additionally, cooperation in financial markets could bolster economic stability for both countries. China is expected to further open its market to attract U.S. businesses and investment amidst global economic uncertainties, thereby alleviating trade tensions and promoting a more cooperative economic milieu. In 2024, Chinese local governments will likely continue improving the treatment toward foreign firms, including American companies, particularly in the realms of government procurement, bidding processes, and the establishment of industry standards. Thirdly, the year 2024 is set to witness intensified great power technological competition. Amidst this, national security concerns will continue to drive fierce competition between the two superpowers. The U.S. government is likely to escalate its pressure on China, especially in the high-tech sector. The 2024 U.S. presidential election will bring China policy into sharp focus for both political parties. A tougher stance to counter China’s growing strategic high-tech industry is expected to be a significant part of the political narrative, reflecting the strategic importance and sensitivities surrounding this area. Moreover, it is possible that more voices in the U.S. to call for revoking the Permanent Normal Trade Relations with China, hoping to reverse the decline of U.S. manufacturing. On the Chinese side, industrial policy is poised to gain momentum in the broad context of a strategic tug-of-war, where an increasing number of countries including the U.S. are strengthening state intervention and vying for global technological competitiveness. Domestically, Chinese policymakers plan to leverage industrial policies to ascend the value chain and sustain economic growth. Beijing will adopt an active fiscal policy in 2024, increasing government expenditure and focusing resources on major initiatives. So far this year, more than a dozen provinces and cities have announced ambitious plans to issue special bonds to support massive investment in new-generation information technology, biopharmaceuticals, and artificial intelligence. It is also worth noting that although U.S.-China economic interdependence is highly likely to persist in 2024, to mitigate potential economic frictions with the United States and buttress China’s exports, Chinese policymakers will further strategize in Southeast Asia, the Middle East, Latin America, and Africa, strengthening and expanding commercial exchanges with countries involved in the Belt and Road Initiative, thus transitioning from a “reactive” to a “proactive” global approach. The year 2024 is destined to be another eventful year for both China and the United States, shaped by a multitude of domestic and systemic factors. The trajectory of U.S.-China economic and technological relations will have consequential impacts on the internal economies and political landscapes of both superpowers, with far-reaching implications for other countries worldwide.

The final version was published by the Financial Times (see here). At the start of 2024, 14 provinces in China, such as Shanghai, Guangdong, Fujian, and Jiangsu, launched a series of “substantial” projects, indicating a sustained, though evolving, investment-driven economic strategy. Despite the calls from many economists and academics, including myself, for a shift towards a consumption-driven growth model over the past 13 years, the local governments' vigorous promotion of investment projects suggests that policymakers and implementers continue to rely on investment to support economic growth. The strategy of leveraging investment to drive the economy under the current circumstances is somewhat rational. Internally, a pervasive lack of confidence among Chinese residents has stifled consumer spending, with Peking University's recent survey indicating a modest 4.1% increase in consumer confidence over the past 6 months. Externally, geopolitical competition, the U.S.-China trade war, and a potential recession in the Euro Zone have all presented challenges to China's foreign trade, especially exports, despite Chinese policymakers' attempts to improve the external predicament through the Belt and Road Initiative. In the eyes of Beijing's top leadership, maintaining growth is of utmost importance both economically and politically. Thus, the most viable means to keep the GDP growth rate in the 4-5% range in 2024 is to (vigorously) promote investment. This time, in contrast to previous investment initiatives, the local governments’ promotion of investment shows a notable shift in objectives and targeted sectors. Firstly, the "science flavor" of the 2024 projects, focusing on new-generation information technology, biopharmaceuticals, artificial intelligence, and low-carbon energies, suggests an ambition to ascend the value chain and develop new growth engines. Secondly, there's a specific focus on investing in public welfare sectors. Thirdly, there's a noticeable decrease in real estate investment projects. Lastly, there is an increased emphasis on private investment. In the realm of public welfare, local investments are primarily targeting affordable housing, education, hospitals, and environmental projects. According to economist Yu Yongding, China still has a significant gap in these areas compared to developed countries. Therefore, bolstering social welfare projects and providing public goods is a highly appropriate measure. Additionally, on the supply side, enhancing investments in public welfare not only boosts resident consumption but also benefits China's economic growth and development. In the real estate sector, the residential inventory in 2023 reached a peak not seen since 2017, making the reduction in real estate investment projects beneficial. However, investing in technology projects and increasing private investments are not without challenges. Whether the goals of productive investment and high-quality growth can be achieved requires further policy improvements and institutional reforms. In theory, investment in high-tech projects has an immediate positive impact on the GDP growth rate in the short term and may enhance total factor productivity in the medium to long term. Amid great power rivalry, it is also advantageous for China to achieve self-reliance on core technologies through promoting its strategic industries. Yet, due to the inherent nature of high-tech projects, they generally have longer cycles, lower input-output ratios, and non-guaranteed returns. Additionally, prolonged investment on a massive scale creates significant overcapacity in sectors like solar, which diminishes productivity improvements. The strategy of escalating private investment, though generally positive, confronts significant hurdles: where does the investment money for private companies come from? Liquidity is a big problem for many private companies in China, and Chinese banks traditionally are hesitant and unwilling to lend to private enterprises. “Equally satisfying the reasonable financial needs of different property developers”, a policy introduced at a People’s Bank of China conference in December 2023, is more readily articulated than actualized. Worse yet, many major projects are funded by local government bonds. The anticipated new special bond for 2024 is expected to reach around 4 trillion yuan, with an increased target fiscal deficit rate. However, in the context of reduced tax revenues, declining land concession fees, and already high local debt levels in China, increasing special bond issuance by the local governments to support major project investments is unsustainable. In 2024, Beijing faces a critical juncture, with the need to intensify its economic interventions and carefully balance its policy strategies. As it seeks to direct the nation's economic trajectory, the central government should strictly control the increase in local government bond quotas and in the meantime share the local pressure. It should provide large-scale available funds, such as adding trillions of special national debts, to support broad-based infrastructure investments as well as investments in high-tech. However, it is not just about spending more; it is about spending smarter. Former Chinese official Huang Qifan mentioned in 2022, “In recent years, the total area of houses sold in China is 40 billion square meters, of which 30 billion square meters of new commercial houses sold are in the hands of the people, and 6 billion square meters of these are vacant.” The data on vacant properties and the immense scale of built-up real estate underline the urgency for a shift away from traditional property investments towards more productive and future-oriented sectors. At the institutional level, both central and local governments must consider the whole picture in project approval, financing, supervision, and acceptance, and carry out necessary institutional reforms. If a system that ensures efficient and high-quality infrastructure investment cannot be provided, China will continue seeing unproductive investments. In the medium and long run, the optimal strategy entails structural reforms aimed at eradicating local protectionism, fostering a fairer market, and ensuring affordability in housing. A fairer market implies creating an environment where medium and small-sized private companies have equal opportunities to secure bank financing and engage in competitive bidding processes within China. This necessitates a robust political will and a holistic vision that not only aims at immediate growth but also sustainable, inclusive development.

The shortened version was published by the South China Morning Post: https://www.scmp.com/comment/opinion/article/3246778/china-steer-steady-economy-amid-structural-and-geopolitical-challenges As the global economic landscape continues to evolve, China's strategic positioning for 2024 unveils a multifaceted approach aimed at stabilizing and enhancing its economic structure. This article provides a balanced examination of China’s anticipated economic directives and their implications for the Chinese stock market, the real estate sector, and the broader economy. Fostering Strategic Industries through Proactive Fiscal and Structural Monetary Policies China's 2024 economic blueprint is heavily predicated on the implementation of proactive fiscal policies designed to catalyze the growth of strategic technological sectors. This initiative is not merely a financial maneuver but a deliberate stratagem to pivot towards high-quality development and a uniquely Chinese modernization in the broad context of great power competition. The state's intervention in funding national strategic high-tech initiatives is a testament to its commitment to technological self-reliance. In the fields of clean energy and low-carbon development, the implementation and improvement of environmental taxation policies and government green procurement will be pursued in order to accomplish the goal of “having carbon emissions peak before 2030 and achieving carbon neutrality before 2060.” Favorable fiscal policies will support innovation in particular, with additional deductions for research and development expenses, tax reductions for key industries, and personal tax benefits for the conversion of scientific and technological achievements. Advanced manufacturing will see tax incentive policies directly linked to investment, which include additional deductions for value-added tax in advanced manufacturing, value-added tax credit refunds, and accelerated depreciation of fixed assets. China's monetary policy for 2024 is set to leverage structural monetary tools to bolster the burgeoning digital economy, which now represents a substantial portion of the national economy. The People's Bank of China is poised to guide financial institutions in directing credit towards specific industries, thereby reducing financing costs and stimulating growth in pivotal sectors such as tech innovation, advanced manufacturing, and green development. However, the gestation period for the fruition of these policies is a labyrinth of complexities, with success contingent upon a myriad of variables that extend beyond the immediacy of policy implementation. For example, even if all policies are fully implemented, technological breakthroughs generally require a lengthy process and cannot be achieved in the short term (i.e., 1 or 2 years). From the perspective of international competition, some industries in China will continue to be “choked” by foreign countries/companies. Stock Market Dynamics Overall, the stock market in 2024 is expected to face ongoing liquidity challenges, affecting stocks and broader societal issues like local debt and real estate. Some portfolio managers told me that with four years of recovery efforts (“疤痕修复”), the market in China bets on the future, hinting at a moderate uptick (“中度上翘“) in 2024. However, until the liquidity issue is fundamentally resolved, I think the stock market will continue to struggle, with at best small rebounds brought about by government stabilization efforts. The Science and Technology Innovation Board (STAR Market) is worthy of investors’ close attention because it might present some good investment opportunities. It is leveraging domestic and international resources to promote dual circulation and attract international investors, focusing on 'hard technology.' Policymakers will continue to seek new growth drivers in areas like semiconductors, pharmaceuticals, ESG, new energy, and high-end manufacturing, which are likely to attract substantial investment. Moreover, the current valuation of the STAR Market is already at a historically low level. In 2024, it is expected to become one of the highlights and probably lead a rebound. Yet, external factors such as international geopolitics (e.g., great power rivalry) and U.S. monetary policies (i.e., fed rates are likely to stay longer and higher than many are currently expecting) will impact the stock market performance, with notable fluctuations likely. The Real Estate Sector: A Balanced Approach The real estate sector, a significant pillar of China's economy, is poised for a period of cautious recalibration. Balancing economic stability, employment preservation, and the prevention of speculative bubbles will continue to be a delicate task for Beijing. Currently, there is widespread concern about the real estate market, particularly the declining housing prices in nearly all of the 70 major cities monitored by the National Bureau of Statistics. Restoring confidence will be challenging. However, Beijing's top leadership is fully aware of the situation and may introduce more favorable policies in 2024. China will continue to implement city-specific policies, enhance the people-oriented nature of real estate, and increase financial support for the construction of affordable housing. Notably, a policy document from the People's Bank of China on December 27th mentioned, “Equally satisfy the reasonable financial needs of different ownership types in the real estate (一视同仁满足不同所有制房地产行业合理金融需求)”. This statement is crucial. It emphasizes treating state-owned and private enterprises impartially. Theoretically, this is a very positive signal for many real estate private enterprises with financing needs. The term "reasonable" has two main implications: one is the continued support for the financing needs of real estate companies, hoping to see relief for some enterprises next year. The other aspect is that policymakers aim to curb the real estate sector's excessive consumption of financial resources, preventing too much financial flow into the industry, reflecting the central government's strategy of "supporting without over-promoting" (“托而不举”). We have paid particular attention to the real estate situation in first-tier cities. In these cities, except for Guangzhou, the other three have not significantly eased purchase restrictions. This is mainly because Guangzhou witnessed the highest housing price drop (-10.95% yoy) among them. The relaxation of purchase restrictions is one of the most impactful policy measures in first-tier cities. Unlike other policies that have previously accelerated the entry of homebuyers into the market, the role of purchase restrictions primarily lies in expanding the demand. Therefore, any relaxation will be introduced with caution. It is expected that this measure will be decided upon based on market conditions and in conjunction with changes in the market in the first quarter of 2024. Even with the relaxation of purchase restrictions, it is expected to be cautious and likely to start with a moderate opening in peripheral areas. Land and housing prices are expected to rebound in some core areas of first-tier and second-tier cities, but the increase will be limited, and significant fluctuations are unlikely in 2024. Overall Economic Trajectory China’s economy in 2024 faces a complex mix of structural transformations, consumer confidence issues, and international tensions. The government's plans to foster a unified market, bolster domestic demand, and promote investment and foreign trade is a clear indicator of its strategic foresight. Again, systemic collapse is considered extremely unlikely. However, the journey is fraught with challenges, and China will be lucky to achieve a 4.5% GDP growth rate next year (note: the World Bank and the IMF’s projections for China’s 2024 GDP growth rate are 4.5% and 4.6%, respectively). Conclusion As we peer into the economic horizon of 2024, China's strategy reveals a tapestry of ambitious initiatives interwoven with cautious pragmatism. The country's economic blueprint is a sophisticated amalgam of policies and reforms designed to support political and economic stability and technological growth. However, the path is laden with uncertainties, from the efficacy of policy measures to the unpredictable currents of global dynamics next year. For policymakers, investors, and observers alike, understanding the nuances and implications of China's economic strategies and policies will be paramount in navigating the complexities of an increasingly interconnected world. As China continues to chart its course, the global community watches with bated breath, anticipating the reverberations of its economic decisions on the international stage.

This working paper is a collaborative study with Shimelse Mekonnen, a seasoned economist and the founder of Novel Insights LLC, a D.C.-based economic research and data analytics company. Executive Summary This working paper systematically analyzes the dynamic commercial relationship between China and Africa. Utilizing Natural Language Processing and content analysis of meticulously collected policy documents, this study finds that the Belt and Road Initiative (BRI) and other proposals by President Xi have shaped the policy direction of China-Africa collaborations, highlighting areas like industrial evolution, infrastructure synergies, agricultural modernization, and sustainable development. By exploring historical economic data, this study also finds that the BRI has significantly influenced Chinese financial commitments to Africa, with investment benefiting 30 distinct African countries, spanning sectors beyond natural resources, and involving both state-owned and private entities. Trade data suggests emerging signs of diversification and reveals China's consistent trade surpluses with Africa, influenced by significant Chinese capital outflows. While Africa's emerging signs of diversification are encouraging, it needs to further diversify into manufacturing and services to avoid mirroring past trade patterns with the West. Our machine learning analysis anticipates China-Africa trade to surpass $300 billion by 2025-6. In light of evolving policies and economic trajectories, this study identifies burgeoning opportunities in sectors like e-commerce, fintech, and agritech, underlying the immense potential of China-Africa commercial ties. However, it is important to acknowledge that China-Africa commercial cooperation is not without challenges. Disparities in trade balances, concerns about debt sustainability, and local economic impacts have sometimes strained relations. We will discuss this more in our next collaborative report. Keywords Machine Learning, Economic Policy, Belt and Road Initiative, Investment, Trade, Commercial Opportunities The intricate nexus between China and Africa has piqued international attention, epitomizing a sophisticated alliance that has expanded both in nuance and scope over the past decade. Most recently, the BRICS has announced that it will add six more countries, including Egypt and Ethiopia.[1] Clearly, Africa will become an even more important place for China. Ever since Chinese President Xi Jinping heralded the inception of the Belt and Road Initiative (BRI) in 2013, the Chinese central government has rolled out quintessential policies to galvanize mercantile synergies with the African continent. However, no published work systematically examines China's economic policies toward Africa. This working paper adopts the robust methodology Zhang (2023) developed and harnesses document analysis to derive empirical insights from our meticulously collected Chinese policy documents. In addition, we examine BRI investments in Africa and the trade trajectory between China and Africa based on historical datasets and our internal machine-learning algorithms. Finally, we analyze the implications for Chinese and African businesses. I. China's Economic Policies Pertaining to Africa Our acquisition of official policy documents unfolded in a tripartite manner. Initially, we searched China's African policy documents on the websites of various Chinese central government agencies. Subsequently, we deployed keywords like "中国对非政策" in Baidu – the predominant search conduit in China – to ensure no pivotal policy manuscript eluded our scrutiny. In the final phase, we triangulated our findings with reports from authoritative Chinese state-affiliated media outlets, such as articles emanating from the Xinhua News Agency. Our analysis finds that an array of pivotal Chinese policies concerning Africa were publicized under President Xi's aegis, underscoring Africa's strategic gravitas for China. Notably, commercial collaborations, spanning trade and investments, emerge as a salient motif in China's African directives (Table 1). Table 1. China's major policies toward Africa (2015-August 2023) Source: Authors' analysis based on publicly available policy documents By leveraging natural language processing, a machine learning technique, we discern words such as "construction", "cooperation", "development", "investment", "agriculture", "trade", "infrastructure", and "capacity" hold sway in the examined policy documents (Figure 1). Figure 1. Most Commonly Used Words in China's Key Policy Documents Related to China-Africa Commercial Cooperation Source: Authors' analysis based on published Chinese policy documents An in-depth content analysis of the policy documents unveils major avenues the Chinese government aims for commercial collaboration. Industrialization as a Catalyst for Growth China's commitment to Africa's industrialization is evident. Perceiving it as a pivotal avenue for collaboration, China accentuates sectoral alignment and proficiency cooperation. The objective extends beyond mere promotion of industrialization; it seeks to establish a robust foundation for Africa's fiscal autonomy and long-term progression. By tackling impediments such as infrastructure constraints and skill deficits, China endeavors to augment Africa's manufacturing capacities, quality of life, and employment prospects. The inception of economic zones, technological hubs, and industrial precincts epitomizes this allegiance. Chinese enterprises are incentivized not merely to invest, but to assimilate their operations, forging a mutually advantageous nexus. Agricultural Modernization and Food Security Agriculture remains integral to numerous African economic structures. China's strategic direction accentuates the imperative of this sector's evolution. By disseminating agricultural innovations and best practices, China aims to enhance Africa's agricultural methodologies and value chains. The objective encompasses not just yield augmentation but also food security assurance and bolstering the global competitiveness of African niche commodities. Endeavors such as agritech demonstration initiatives and the delegation of agricultural specialists to Africa fortify this dedication. Infrastructure Development Infrastructure is a critical component of economic growth. China's policy encourages its enterprises and financial institutions to be at the forefront of Africa's infrastructure development. From railways and roads to communications and electricity, the scope is vast. The priority is to ensure these projects cater to contemporary requisites while bolstering Africa's industrial evolution. Initiatives such as Kenya's modern railway, emblematic of the profound synergy between China and Africa, highlight the magnitude and resonance of these ventures. Financial Cooperation Financial collaboration underpins numerous Sino-African ventures. Mechanisms like concessional finance, the China-Africa Development Fund, and the BRICS New Development Bank have been harnessed to cultivate Sino-African fiscal convergence. The aspiration is to meticulously channel financial resources to ventures yielding collective expansion. Trade Facilitation Trade remains an integral facet of Sino-African rapport. China's pledge to escalate imports from Africa, especially in the non-resource segments, signifies diversification endeavors. Pursuits aimed at refining market protocols, bolstering customs synergies, and digital commerce promotion encapsulate China's comprehensive strategy towards trade enhancement. Green Development China's green development initiatives in Africa underscore the importance of sustainable growth. From addressing climate change to promoting wildlife conservation, the initiatives are comprehensive. The establishment of the China-Africa Environmental Cooperation Center is a significant step in fostering collaboration in environmental management and sustainable practices. Capacity Building China's capacity-building initiatives are orchestrated to sculpt Africa's imminent leaders. From scholarship endowments to vocational education hubs, the emphasis is on furnishing Africa's youth with the requisite competencies to spearhead their continent's ascendancy. China's diplomatic strategies with Africa transcend mere economic metrics; they encapsulate a comprehensive strategic alliance. Through an amalgamation of industry-led growth, agriculture modernization, infrastructural innovation, fiscal synergy, trade expansion, eco-conscious initiatives, and proficiency enhancement, China envisions an alliance poised to sculpt the "common destiny" of both regions. II. China's BRI Investments in Africa With strong government support, China's investment in Africa through BRI has been massive. In this section, we delve into the BRI investment dataset created by the China Global Investment Tracker[2] and elucidate the contours of Chinese commitments in the region. Variability in Annual Investment The annual capital infusion by the BRI in Africa has displayed marked oscillations over time. 2014 marked a zenith with investments touching $6.8 billion, an accolade again achieved in 2021 at $9.2 billion. Yet, the trajectory has not been consistently ascendant. Noteworthy troughs were evident in 2017 and 2020, with capital allocations contracting to $2.3 billion and $1.8 billion, respectively (Figure 2). These variations in investment paradigms epitomize the fluidity of BRI investments, mirroring global economic cycles, policy recalibrations, and shifting strategic imperatives. Figure 2. BRI Investments in Africa (2013-2022) Source: Authors' analysis based on data from China Global Investment Tracker For instance, the 2014 surge in Chinese financial commitments to Africa can be primarily attributed to the official inauguration of the BRI in 2013. Contrastingly, 2021's resurgence of Chinese investment in Africa is owing to three main reasons. First, the COVID-19 pandemic deeply affected the global economy in 2020 (Baldwin and Freeman 2022, Vogel and Fligstein 2020). By 2021, as economies began to recover, China saw an opportunity to resume heavy investments abroad, aiding Africa's recovery while also securing China's economic interests. Second, amid the U.S.-China trade war and global high-tech competition (Zhang and Chang 2021, Eichengreen 2023), China looked to strengthen its geo-political ties with Africa. Third, on the policy front, at the Beijing Summit of the 2018 China-Africa Cooperation Forum, President Xi proposed the "Eight Major Actions" for the ensuing years, accentuating domains like industrial evolution, infrastructural synergies, trade facilitation, eco-conscious development, and capacity building (Xinhua News, 2018). The contractions observed in 2017 and 2020 were predominantly instigated by exogenous shocks. In 2017, China's BRI investment in Africa dropped significantly due to a slew of unfruitful projects. Some analyses indicate that China "suffered great investment losses in politically unstable countries" (Yang 2018). Some attribute the decline to debt issues, as many of these projects are funded through loans, and Chin's investments in Africa raised concerns about Africa's rising debt levels.[3] In 2020, the global outbreak of the COVID-19 pandemic disrupted international commerce, including foreign direct investments. This event likely significantly reduced Chinese investments in Africa as the world grappled with the pandemic's negative impact. Pan-African Geographical Spread Investments stemming from the BRI demonstrate an expansive geographical distribution across Africa rather than a myopic focus on select nations. A total of 30 distinct African nations have derived economic gains from the BRI. Notably, the Democratic Republic of the Congo boasts the zenith of investment receipt, aggregating to $10 billion. Nevertheless, nations including Guinea, Zimbabwe, Namibia, South Africa, Tanzania, Nigeria, Zambia, Ethiopia, and Kenya prominently feature among the chief beneficiaries. A regional analysis of these investments portrays East Africa as the predominant beneficiary. However, West Africa trails just marginally, with both Southern and North Africa also procuring notable investments. This broad geographical spread underscores the BRI's commitment to a holistic African engagement, emphasizing regional connectivity and collaboration rather than a narrow, concentrated approach. Prioritization of Key Sectors The sectoral distribution of BRI investments in Africa is revealing. Predominantly, sectors like Metals, Energy, and Real Estate have been at the forefront, with Metals alone securing a staggering $21.5 billion. Energy and Real Estate sectors have garnered $6.6 billion and $5.7 billion, respectively. While other sectors, such as Transport, Chemicals, and Technology, have also seen investments, they lag in comparison (Figure 3). This sectoral preference aligns with China's broader strategic objectives in Africa, encompassing raw material procurement, energy security enhancement, and infrastructural development. Figure 3. BRI Investments in Africa Source: Authors' analysis based on data from China Global Investment Tracker Types of investors Both state-owned enterprises (SOEs) and private companies are involved in the BRI (Table 2). A meticulous examination of the BRI's investment dataset for Africa reveals the critical role of Chinese state-owned enterprises. Specifically, state-owned investors have spearheaded 62 investments, juxtaposed against the 36 investments embarked upon by private investors. Intriguingly, the mean investment quantum for both state-affiliated and private investors exhibits negligible divergence, standing at $390 million and $380 million, respectively, suggesting the pivotal role state-owned enterprises play within the BRI's blueprint while simultaneously spotlighting the substantial leverage wielded by private-sector investors. Table 2. SOEs and Private Companies Involved in the BRI Source: Authors' analysis based on data from China Global Investment Tracker III. Trade From the early 2000s to 2021, Africa's export trajectory to China witnessed exponential growth, amplifying over twenty-fold. Notably, China's commerce outflows to Africa burgeoned, reaching a commendable $165 billion from an erstwhile modest annual export of $1.3 billion in 1993. Simultaneously, its commerce inflows from the continent surged from $0.35 billion to $117 billion. A pivotal observation is China's trade surpluses with a persistent trade imbalance (Figure 4).[4] As Pettis noted, "To the extent that BRI financing causes an increase in net capital exports from China, it must also cause an increase in the Chinese trade and current account surpluses."[5] Indeed, the capital account can drive the trade account.[6] Figure 4. China's Trade with Africa Source: Authors' analysis based on data from China Africa Research Initiative and UN Comtrade China-Africa trade has seen consistent growth since 2013. Weak commodity prices since 2014 have impacted African exports to China. However, Chinese exports to Africa remained relatively stable. There was a drop in China-Africa trade value to $176 billion in 2020, down from $192 billion in 2019. However, it rebounded to $251 billion in 2021. In 2021, leading exporters to China from Africa were South Africa, Angola, and the Democratic Republic of Congo. Conversely, Nigeria, South Africa, and Egypt were the top buyers of Chinese goods.[7] In April 2023, the trade value between Africa and China was recorded at $25.5 million. China exported goods valued at $17.1 million to Africa and imported goods worth $8.3 million.[8] While resources indubitably command the commercial spectrum, burgeoning evidence suggests emerging signs of diversification in trade compositions. Recent policy recalibrations in China have catalyzed an augmentation in non-resource exports from Africa. Through the institution of zero-tariff inducements for a vast array of taxable commodities originating from the least-developed African nations, China telegraphs its expansive import aspirations. Commencing in 2018, China's strategic policy to dismantle import impediments for select African commodities—encompassing sesame, chili, avocados, cashew nuts, and apples—precipitated a marked escalation in agricultural exports from Africa. The impetus underpinning such initiatives is unambiguous: to expedite the ingress of a more diverse assortment of African commodities, especially within agricultural and manufacturing sectors, into the expansive Chinese marketplace. This diversification trajectory is palpable in the subsequent growth of these agricultural exports from erstwhile negligible benchmarks. However, one must appraise these transitions with discerning scrutiny. Although laudable, the ascendancy in non-resource exports has its genesis in a humble foundation. An intricate, comprehensive exploration is requisite to discern if this trajectory emblemizes a genuine transition from predominant resource exports. The evolving policies implemented by the Chinese government, amalgamated with specific data trends, allude to an uptrend in agricultural exports, but the longitudinal trend remains under observation. The stratospheric ascendancy in Sino-African commerce is emblematic of China's economic renaissance and intricate, multi-dimensional rapport with Africa. Harnessing historical datasets and past commerce trajectories, our in-house predictive analytics, underpinned by machine learning, posit that the commerce quantum shared between China and Africa is poised to surpass the $300 billion benchmark imminently. IV. Implications for Chinese and African Businesses With the existing business activities between China and Africa and the evolving Chinese government policies promoting China-Africa commercial cooperation, it is expected to witness massive potential business opportunities for companies and investors on both sides. Infrastructure Development Construction & Engineering: With China's emphasis on building roads, railways, ports, and other infrastructural projects, there is a significant opportunity for construction firms, architects, and civil engineering companies to collaborate on large-scale projects. Technology & Equipment Suppliers: Infrastructure projects require machinery, technology, and equipment. Firms manufacturing or supplying these can find a vast market in Africa, especially if they can offer after-sales services and training. Project Management & Consultancy: As these projects are vast and complex, there is a need for expert project management and consultancy services to ensure they are completed efficiently and effectively. Agricultural Modernization Agri-tech: With the push for modernizing Africa's agriculture, companies specializing in agricultural technology, from drone farming to precision agriculture, can find a significant market. Supply Chain & Logistics: As agricultural output increases, there will be a need for efficient storage, processing, and transportation solutions. This opens doors for firms specializing in cold storage, warehousing, and logistics. Seed & Fertilizer Companies: Introducing high-yield and disease-resistant crop varieties can be a game-changer. Companies that produce such seeds or organic fertilizers can tap into this potential. E-commerce & Digital Expansion Online Marketplaces: The burgeoning e-commerce scene in Africa offers opportunities for firms to either set up new online marketplaces or collaborate with existing ones. Digital Payment Solutions: With e-commerce comes the need for secure and efficient digital payment solutions. Companies that offer these services, especially those tailored to the African market, can thrive. Logistics & Delivery: Efficient delivery systems are crucial for e-commerce. Firms that offer logistics solutions, including last-mile delivery services, can find a growing demand. Green & Sustainable Development Renewable Energy: Companies specializing in solar, wind, and hydro energy solutions can collaborate on projects to increase Africa's renewable energy capacity. Environmental Consultancy: With a push for sustainable practices, environmental consultancy firms can offer their expertise in ensuring eco-friendly projects. Waste Management: With urbanization and development comes the challenge of waste. Companies that offer innovative waste management and recycling solutions can play a crucial role. Financial Services & Fintech Microfinance & Lending Platforms: Given the entrepreneurial spirit in Africa, there is a demand for microfinance solutions. Fintech firms that offer accessible lending platforms can fill this gap. Insurance: As businesses grow, there is a need for varied insurance products, from crop insurance for farmers to business insurance for SMEs. Digital Banking: With a significant portion of Africa's unbanked population, digital banking solutions catering to this demographic can be revolutionary. Education & Skill Development Online Education Platforms: Companies offering online courses, especially vocational training, can cater to Africa's growing young population. Skill Development Centers: Setting up centers that offer training in skills that are in demand, like digital marketing, coding, or machinery operation, can be lucrative. References Baldwin, Richard and Rebecca Freeman (2022) Risks and Global Supply Chains: What We Know and What We Need to Know. Annual Review of Economics, 14: 153-180. https://www.annualreviews.org/doi/abs/10.1146/annurev-economics-051420-113737 China Africa Research Initiative (2023) Data: China-Africa Trade. Accessed on 27 August 2023. http://www.sais-cari.org/data-china-africa-trade China Global Investment Tracker (2023) Worldwide Chinese Investments & Construction. American Enterprise Institute. Accessed on 9 August 2023. https://www.aei.org/china-global-investment-tracker/ Mekonnen, Shimelse and Nida Jafrani (2012) China's Growing Role in Africa: Myths and Facts. Carnegie Endowment for International Peace. Mekonnen, Shimelse and Uri Dadush (2011) Whither Africa? Carnegie Endowment for International Peace, Policy Outlook. Eichengreen, Barry (2023) International Finance and Geopolitics. Asian Economy Policy Review. https://doi.org/10.1111/aepr.12436 International Trade Centre (2022) Enhancing Africa's Agricultural Exports to China. ITC, Geneva. https://intracen.org/file/africa-agri-exports-chinafinalweb2pdf O'Neill, Jim (2023) Does an Expanded BRICS Mean Anything? Project Syndicate. 25 August. https://www.project-syndicate.org/commentary/brics-expansion-potential-and-limitations-by-jim-o-neill-2023-08 Pettis, Michael (2018) Beijing's Three Options: Unemployment, Debt, or Wealth Transfers. The Carnegie Endowment for International Peace. https://carnegieendowment.org/chinafinancialmarkets/77178 Statista (2023) China's African Trade Takeover. Accessed on 27 August 2023. https://www.statista.com/chart/26668/main-import-countries-sources-africa/ Vogel, Steven and Neil Fligstein (2020) Political Economy After Neoliberalism. The Boston Review. 6 October. https://www.bostonreview.net/articles/political-economy-after-neoliberalism/ Xinhua News (2018) 习近平：未来对非重点实施 "八大行动" (Xi Jinping: Implementing the "Eight Major Actions" for Africa in the Future). 3 September. http://www.xinhuanet.com/world/2018-09/03/c_129946121.htm Yahoo News (2023) China's Africa ties: Why food is the new focus. 19 March. https://www.yahoo.com/lifestyle/chinas-africa-ties-why-food-093000913.html?guccounter=1 Yang, Zi (2018) Securing China's Belt and Road Initiative. The United States Institute of Peace. 26 November. https://www.usip.org/publications/2018/11/securing-chinas-belt-and-road-initiative Zhang, Yuhan (2018) The US–China Trade War: A Political and Economic Analysis. Indian Journal of Asian Affairs, 31(1/2): 53-74. https://www.jstor.org/stable/26608823 Zhang, Yuhan and Cheng Chang (2021) Modeling the US-China Trade Conflict: A Utility Theory Approach. Journal of Applied Mathematics and Computation, 5(2): 84-88. http://dx.doi.org/10.26855/jamc.2021.06.003 Zhang, Yuhan (2023) China's 5G and supercomputing industrial policies: A critical (comparative) analysis. Global Policy. https://doi.org/10.1111/1758-5899.13239

The genesis of contemporary currency swap mechanisms can be traced back to the mid-20th century. Under the Bretton Woods system, the burgeoning international payment deficit of the U.S. necessitated strategic countermeasures. In an endeavor to stave off speculatory attacks on the dollar and mitigate gold drainage, the Federal Reserve, in the nascent years of the 1960s, forged an inaugural swap nexus with select European nations, Canada, and the Bank for International Settlements. Following the dissolution of the Bretton Woods system, the purpose of the Federal Reserve's currency swaps changed, using them as crisis-response monetary policies. For instance, following the 2008 global financial crisis, in order to maintain the stability of the international financial market and address the dollar liquidity issue, the Federal Reserve ratified bilateral currency swap accords with a plethora of global monetary institutions. By channeling dollars to multinational banks via these central banking conduits, a liquidity exigency was assuaged. During the recent global COVID-19 pandemic, bilateral currency swaps once again played a significant role. In contrast, China's bilateral currency swaps primarily aim to stimulate international trade and foreign investments, propel the internationalization of the RMB, and gradually de-dollarize amidst the backdrop of international geo-economic competition. Furthermore, the duration of RMB swap arrangements is typically prolonged, with some analyses indicating an average span of approximately three years. Geographically, China's currency swaps encompass a more expansive array of countries. The figure below shows the global coverage of currency swaps with China and the United States. Countries and regions colored in red have consummated currency swap agreements with China's central bank (PBOC); those in blue have engaged in such accords with the U.S. Federal Reserve; and those illuminated in yellow have ratified swap agreements with both China and the United States. Source: China Merchants Securities, accessed on 6 August 2023 For China, there are several salient advantages associated with RMB swap lines: Trade Enhancement and Diversification: The facilitation of direct currency exchange acts as a countermeasure against the overreliance on dominant international currencies, notably the U.S. Dollar. Such a mechanism not only streamlines trade transactions between China and involved countries, especially in the Belt and Road Initiative (BRI), but also fosters economic interdependence and diversification of currency reserves. Bolstering Financial Resilience: In times characterized by liquidity constrictions or pronounced financial volatility, the accessibility of RMB becomes an invaluable buffer. This accessibility is pivotal in fortifying the resilience of the local economy, ensuring the continuity of financial activities, and anchoring the stability of indigenous financial markets. Strategically Advancing RMB's Global Stature: The establishment of these swap lines aligns with China's aim to gently enhance the global recognition of its currency. As more countries consider incorporating RMB into their trade and investment practices, it naturally augments the currency's role in the international financial landscape. However, this evolution should not be construed as an unequivocal indication that the RMB will ascend to preeminent international currency status in the imminent horizon. Although the dominance of the dollar will “inevitably decline”, the currency configuration for cross-border transactions remains dominated by the dollar and the euro. In addition, as Barry Eichengreen argues, currencies of smaller economies may play an increasingly important role as a result of emergent technologies, hinting at a paradigm shift in the international monetary order from a history punctuated by the predominant influence of major powers.

China’s supercomputing industry adeptly adapted to US embargoes in 2015 by pivoting to domestically produced components, but its 5G industry failed to do so when faced with similar US sanctions in May 2019. This column argues that while China’s supercomputing industrial policies were well designed, with the central government accentuating the acceleration of upgrading the entire industrial chain, its 5G industrial policies, particularly from 2015 to May 2019, misdirected companies and investors, hampered optimal resource distribution, and skewed industrial progression. Immense national economic resources and state intervention may not necessarily translate into industrial advancement and technological superiority. Industrial policies, once scoffed at by mainstream economists, have surged in prominence over the last 15 years, a trend magnified following the 2008 global financial crisis (Rodrik 2010, Vogel 2021). Within the recent five-year context marked by the ongoing US-China trade war and great power high-tech rivalry (Zhang 2018, Zhang and Chang 2021, Eichengreen 2023), an increasing number of countries have augmented their reliance on industrial policies in a bid to bolster international competitiveness. Significantly, the Chinese central government has ardently promoted two strategic high-tech industries – 5G and supercomputing – with robust industrial policies. Intriguingly, while the supercomputing industry adeptly adapted to US embargoes in 2015 by pivoting to domestically produced components as alternatives to US imports, China's 5G industry failed to do so when faced with similar US sanctions in May 2019. Why could the 5G industry not produce key upstream components, whereas the supercomputing industry could? Centralised governance in China exerts an influential grip over its economic, business, and social activities (Lardy 2019, Lee and O’Brien 2021). Previous scholarship has shown the causal effects of industrial policies on China’s domestic industrial development (Lin 2017, Wang et al. 2022). Building upon the existing literature, in my recent paper (Zhang 2023), I address this puzzle with a focus on China’s central government-level 5G and supercomputing industrial policies. I also endeavour to provide insights into the driving factors steering these policies. It is imperative to clarify that I do not solely attribute the divergent outcomes to industrial policies; however, devoid of a critical examination of the 5G and supercomputing industrial policies, one remains bereft of a comprehensive understanding of the disparate development trajectories of the aforementioned industries. Further, an in-depth analysis of the Chinese 5G and supercomputing industrial policies can contribute to academic and policy debates on the efficacy of industrial policies, especially how they should be practiced (Rodrik 2010, Kalouptsidi et al 2019). Prior to presenting the discoveries, it is worth noting that both the 5G and supercomputing industries encompass upstream, midstream, and downstream segments. In the Chinese context, upstream refers to the research and development (R&D) and the production of core components such as 5G and supercomputing chips and software. Midstream signifies infrastructure construction like 5G networks, base stations, and supercomputing centres. Downstream points to applications and related services. Notably, the upstream segment is crucial for enabling 5G infrastructure construction and the operation of supercomputers. Divergent 5G and supercomputing industrial policies Using natural language processing, a machine-learning technique, and qualitative content analysis based on meticulously collected official documents and secondary sources, I identify salient policy differences. The principal findings are as follows. First, China commenced the promulgation of 5G industrial policies in 2015. Before May 2019, these policies were significantly unbalanced. Within the corpus of twelve official documents from 2015 to May 2019 concerning 5G, words epitomising midstream and downstream activities – such as commercial application, network, and industrialisation – overshadowed their upstream counterparts, indicating that the central government put much less weight on the upstream than the midstream and downstream. While these documents sporadically mentioned phrases associated with 5G chips and components, signalling a modicum of attention to the upstream segment, a careful review reveals that merely four documents (33.3%) mentioned developing the upstream, whereas seven (58.3%) and a staggering twelve (100%) championed midstream and downstream advancements, respectively. Alarmingly, the scant references to 5G chip development were bereft of specificity, leaving a void in strategic prioritisation. Consequently, Chinese upstream companies lacked incentives and sufficient resources, thereby either focusing on labour-intensive production or relying on purchasing foreign core components. Second, in stark contrast, supercomputing industrial policies were well designed, with the central government accentuating the acceleration of upgrading the entire industrial chain. The most commonly used words in the policy documents were intellectual property rights, research, technology, independence, infrastructure, and industrialisation. These documents also highlighted the development of essential parts, software innovation, and integrated circuits. The 863 Program – a national-level industrial policy spanning from 1986 to 2016 – played an indispensable role in achieving technological independence in the supercomputing industry. This programme birthed an expert responsibility system, ensuring the supercomputing industrial policy advice and design by the experts resonated with the overarching vision of the central government. It also made government-funded public entities instead of private companies the dominant player in the research, development, and deployment of supercomputers. Such an arrangement prevented the problem we have witnessed in the case of 5G development. Public entities’ objective was not to reap short-term economic profits; rather, they served Chinese national interests and focused on long-term technological advancement. Third, from 2021 onward, a marked inflection was discernible in the 5G industrial policies, specifying the types of 5G chips China aspired to indigenously produce. Certain policy documents have explicitly demanded comprehensive R&D encompassing not just the chips but also other upstream components. This policy shift had immediate effects, driving more Chinese companies to flock to the upstream and develop their own components with venture capital funding. However, an analytical overview intimates that the overall policy attention devoted to the upstream segment remains much lower (28.6%), in contrast to the midstream (64.3%) and downstream (92.9%). Motivations for the policy divergence Drawing from political economics frameworks, I point out that domestically, the allure of swift GDP augmentation stemming from 5G infrastructure investments and downstream applications juxtaposed against the resource-intensive and high-risk nature of upstream research largely influenced policy choices. Internationally, a propitious environment made it easy for China to import key 5G upstream components. Consequently, China’s 5G policies between 2015 and May 2019 exhibited an inadvertent sidelining of upstream endeavours. Although policies have started to rebalance since 2021, significant challenges in internal economic transitions (Zhang 2011, Pettis 2021) coupled with exogenous supply shocks (Freeman and Baldwin 2022) rendered infrastructure investment and commercial applications the sole viable conduits for economic growth. In contrast, a confluence of international antagonism, domestic impetus, and Deng Xiaoping’s imprimatur shaped the Chinese supercomputing policy landscape and trajectory in its own unique way. On the international front, the lingering animosities of the Cold War era in the 1980s galvanised an unwavering commitment among the Chinese top leaders and strategic scientists to indigenously develop high technologies including supercomputers. At the heart of this domestic confluence was Deng Xiaoping, China’s paramount leader of the era, who decisively spearheaded the 863 Program that spanned three decades and cast a long shadow over China’s supercomputing-related industrial policies. Lessons learned Many scholars accept the claim that industrial policy can successfully promote the development of targeted industries. My analysis, however, shows that China’s 5G industrial policies, particularly from 2015 to May 2019, misdirected companies and investors, hampered optimal resource distribution, and skewed industrial progression. This observation further implies that immense national economic resources and state intervention may not necessarily translate into industrial advancement and technological superiority. A salient takeaway centres on the imperative of formulating astute industrial policies. For strategic high-tech industries critical for economic growth and national security, industrial policies should not overlook the development of any segment of the industrial chain. Core components and technologies need to be self-built. Furthermore, the nature of these strategic sectors mandates profound governmental stewardship rather than a sheer dependence on market dynamics. The strategic amalgamation of national resources, leveraging national labs and publicly funded academic institutions for pioneering R&D endeavours, instituting stringent oversight and accountability frameworks, and fostering symbiotic alliances with technically adept enterprises can collectively engender well-balanced industrial evolution. This point finds strong resonance in the trajectory of China’s supercomputing industry. Lastly, as countries increasingly recalibrate their industrial policies, the foundational tenets of the liberal international economic order (Roland 2021) are under threat. Industrial policies such as local content requirements and high-tech export restrictions thwart foreign countries’ access to domestic markets, impede the unfettered dissemination of knowledge and technology, and engender geoeconomic rivalry. This column was originally published by VoxEU.org on August 25, 2023. It can be accessed at https://cepr.org/voxeu/columns/industrial-policy-strategic-industry-case-chinas-5g-and-supercomputing-industries References Eichengreen, B (2023), “International Finance and Geopolitics”, Asian Economic Policy Review 9999: 1-17. Freeman, R and R Baldwin (2022), “Global supply chain risk and resilience”, VoxEU.org, 6 April. Kalouptsidi, M, N Zahur, and P J Barwick (2019), “Industrial policy: Lessons from China”, VoxEU.org, 11 September. Lardy, N (2019), The State Strikes Back: The End of Economic Reform in China, The Peterson Institute for International Economics. Lee, S and Kevin O’Brien (2021), “Adapting in difficult circumstances: protestant pastors and the Xi Jinping effect”, Journal of Contemporary China 30: 902-914. Lin, J Y (2017), “Industrial policy and China’s economic development: from the perspective of new structural economics”, Fudan Journal of the Humanities and Social Sciences 10: 419-429. Pettis, M (2021), “China’s private sector is a victim of the CCP’s growth model”, Carnegie Endowment for International Peace, 24 November. Rodrik, D (2010), “The return of industrial policy”, Project Syndicate, 12 April. Roland, G (2021), “China’s rise and its implications for International Relations and Northeast Asia”, Asia and the Global Economy 1(2): 100016. Vogel, S (2021), “Level Up America: The Case for Industrial Policy and How to Do it Right”, Niskanen Center, 28 April. Wang, X, K Sun and Z Xiao (2022), “Industrial policy and the rise of China’s strategic emerging industries”, American Economic Association. Zhang, Y (2011), “China’s economic growth ‘miracle’ and its outlook by 2020”, VoxEU.org, 13 November. Zhang, Y (2018), “The US–China Trade War: A Political and Economic Analysis”, Indian Journal of Asian Affairs 31(1/2): 53-74. Zhang, Y and Cheng Chang (2021), “Modeling the US-China Trade Conflict: A Utility Theory Approach”, Journal of Applied Mathematics and Computation 5(2): 84-88. Zhang, Y (2023), “China’s 5G and supercomputing industrial policies: A critical (comparative) analysis”, Global Policy 00: 1-14.

The Chinese central government has greatly supported two strategic high- tech industries: 5G and supercomputing. However, when both encountered similar U.S. sanctions, the 5G industry failed to make crucial upstream components while the supercomputing industry could. This article argues that the central government- level industrial policies contributed to these divergent outcomes. Using natural language processing and qualitative content analysis of meticulously collected official documents and secondary sources, key policy differences were identi-fied. Before the U.S. sanctions in May 2019, China's 5G industrial policies were significantly unbalanced, with inadequate attention given to research and devel-opment of vital upstream components, contributing to a lack of upstream invest-ment. Although recent attempts to rebalance 5G industrial development since 2021, the policy focus remains largely on the mid and downstream segments. In contrast, before the U.S. sanctions in 2015, the supercomputing industrial poli-cies emphasised the development of the entire industrial chain, including crucial upstream components, resulting in China's possession of entirely homegrown supercomputers. Leveraging a tri- level analysis framework rooted in political eco-nomics, this study also offers possible explanations for the policy divergence and discusses implications. It contributes to the existing literature and ongoing debate on China and industrial policy amidst great power high- tech competition. This article was published by the SSCI-indexed Global Policy in July 2023, which can be accessed at https://doi.org/10.1111/1758-5899.13239 .

On 11 November 2022, the People's Bank of China and the former Banking and Insurance Regulatory Commission jointly issued the "Notice on Doing a Good Job in Current Financial Support for the Stable and Healthy Development of the Real Estate Market" (《关于做好当前金融支持房地产市场平稳健康发展工作的通知》), outlining 16 supporting policies, aimed at "maintaining orderly and stable real estate financing, improving financial services for building handover, handling risks of distressed real estate companies, and increasing financial support for housing rental". Since then, China's overall real estate policy has relaxed. On 10 July 2023, the People's Bank of China and the National Financial Supervision and Administration Bureau issued an additional notice to extend the policy period, reaffirming Beijing's commitment to supporting the "healthy development" of the real estate industry. The policy extension involves two key points: 1. Financial institutions were encouraged to actively support existing real estate development loans and trust loans, using methods such as loan extensions and adjusted repayment arrangements. Loans due before December 31, 2024, could be extended for an additional year without changing their classification. 2. For commercial banks adhering to Notice (2022) requirements, loans issued to support the delivery of unfinished projects before 31 December 2024 will not be downgraded in risk classification during the loan term. For newly issued loans that become non-performing, the related institutions and personnel who have fulfilled their duties can be exempted from liability. Despite the perceived moral hazard and the hurdle it presents to China's desired consumption-driven economic development model, Beijing's persistent policy support for the real estate industry raises the question: why does the Chinese government staunchly back this industry? Three political-economic explanations shed light on this conundrum. Firstly, sustaining economic growth is the primary national interest in China. As per the Proposal from the Fifth Plenary Session of the 19th Central Committee of the Chinese Communist Party, China aims to become "a medium-level advanced nation" by 2035. China is now in the process of rapid urbanization and industrialization. Even though the country's GDP growth rates are expected to be lower in the foreseeable future than in the last three decades, the government still aims to maintain modest growth rates of around 4-5% per annum. These targets reflect the Chinese top leadership's strong will to sustain the Kuznetsian modern economic development and the political legitimacy of the Chinese Communist Party. Over the past decade, the real estate industry has significantly contributed to China's "economic miracle", accounting for an average of 13.4% of GDP since 2013 (Figure 1). Figure 1. Real Estate Industry's Investment as % of GDP in China Source: Author's analysis from China's National Bureau of Statistics Assuming a total consumption coefficient of approximately 0.6, the real estate industry's total contribution to China's GDP in 2022 was estimated at 17-18%. Given the unstable external environment and the challenges of domestic economic transition, high-level fixed asset investment and support for the real estate industry appear to be the Chinese government's most viable options for the near and medium term. Secondly, Chinese local governments rely heavily on revenues generated from selling land to real estate developers. This land sales revenue forms a substantial part of the Chinese local governments' income (Figure 2). When adding taxes, the real estate industry contributes nearly 40% of the government's fiscal income. The fiscal income from the real estate developers is utilized for local economic development, including infrastructure projects. These infrastructure developments, in turn, attract further investments, stimulate local economies, and create jobs, forming a cycle of economic growth. As a rational player, the Chinese government, especially at the local level, has strong incentives to support and stabilize the real estate industry. Figure 2. Land Sale Revenue as % of Government Fiscal Income in China Source: Author's analysis from China's Ministry of Finance; note that with taxes, China's real estate industry accounts for nearly 40% of the Chinese government's fiscal income. It is certainly true that the land-sales-focused fiscal system could potentially lead to a myopic view in governmental decision-making, with an over-reliance on the real estate sector that has already led to an imbalance in the broader economy and raised concerns about long-term sustainability. Still, as a significant source of government fiscal revenue, the real estate sector is favored even at the expense of other vital sectors. Thirdly, the real estate industry employs a significant portion of the workforce. According to the Fourth National Economic Census, as of 2018, the industry directly employed 12.64 million people, a 44% increase compared to the end of 2013. Considering the housing construction industry, which employed 35.91 million workers, the total number of people in real estate-related jobs in 2018 was close to 49 million. During times of economic hardship, the role of the real estate industry as a significant employment support becomes exceptionally crucial. Over the last five years, due to the U.S.-China trade war, the pandemic, and domestic deflationary pressure, China's surveyed unemployment rates in 31 large cities have increased more than 12% to 5.5%. More notably, surveyed unemployment rates of workers between 16 and 24 years old have spiked 86% to 20.8% (Figure 3). If widespread unemployment were to occur within the real estate industry, the consequences could be far-reaching, causing more extensive economic damage and social problems. Therefore, the resilience of the real estate industry is of paramount importance for the Chinese government to stabilize the Chinese economy and society for the foreseeable future. Figure 3. Surveyed Unemployment Rates in China Source: Author's analysis from China's National Bureau of Statistics In summary, despite the Chinese government's insistence that "houses are for living, not for speculation" to curb speculative bubbles in the real estate industry, it has consistently supported this sector due to its crucial role in underpinning China's GDP, generating governmental fiscal revenue, and preserving employment. The government is likely to continue propping up the real estate industry to prevent systemic issues in the foreseeable future. Twelve years ago, I argued in a VoxEU article that the path of China's economic transition would be bumpy. My current analysis suggests that the journey remains challenging and prolonged. The real estate sector, while it has been instrumental in China's rapid economic growth, presents complex challenges in the context of this transition. Balancing economic stability, employment preservation, and the prevention of speculative bubbles has been and will continue to be a delicate task.

The ongoing trade war cannot achieve the outcomes that President Donald Trump desires and it could be avoided by resolving the structural trade imbalances and undertaking enduring and effective strategic communications. First, the trade war cannot significantly reduce or eliminate the current account deficit1 of the US. The capital account can drive the current account, and the US capital account surpluses persist due to the country’s sublime capital markets and inflows of foreign excess savings. Second, it is almost impossible to impede China’s technological advancement. Technology development can increase China’s gross output, especially the wages of skilled laborers, which is essential for China’s much-needed consumption-driven economy. This, in turn, is crucial for reducing China’s excess savings. The Chinese government possesses an unyielding determination and capacity to advance technologies. It is worth noting that stifling China’s technological advancement will likely be detrimental to the aim of trade rebalancing. Pursuing the goals simultaneously – fixing the trade imbalances and halting China’s technological advancement – will be challenging as they are counteractive. Surely, the trade war strikes the vulnerable Chinese economy. In order to fix the trade imbalances as well as to end and avoid the war, China must step up economic reforms. In the immediate run, it needs to prevent the further devaluation of China’s renminbi (RMB) and raise its interest rate. The US might need to reduce the capital account surpluses by allowing and encouraging foreign central banks to accumulate a synthetic currency instead of the US dollar. It is also imperative that both countries return to the negotiating table. Both countries need to accurately communicate their “bottom lines” and correctly interpret each other’s signals. This research article went through a rigorous peer-review process and was published by the Indian Journal of Asian Affairs in 2018.