By Kenneth Rapoza, CPA Industry Analyst
By most measures, China is preparing for the future. The 2021 Government Work Report is a reminder of what China plans to do remain resilient and a dominant force in global supply chains.
The best way to look at China’s annual Government Work Report is that it is Beijing’s draft blueprint on how they’re going to beat you.
You can take that to mean how they are going to beat all of Asia to the punch, and maybe the United States to boot. Or you can take it to mean how Beijing is building an ecosystem to continually lift millions out of poverty and keep them all gainfully employed while making things – in many respects – for the rest of the world. For China, both outcomes are a win.
On Friday, China’s premier Li Keqiang presented the 2021 Government Work Report to the National People’s Congress (NPC) – the country’s main legislative branch. The report is an annual tradition and is part of the closing first week of the so-called Two Sessions – where the NPC and the Chinese People’s Political Consultative Conference (CPPCC), the country’s top political advisory body, come up with their economic policy plans in what is known as the Five Year Plan. We will have some sense of the CCPs 14th Five Year Plan come March 11, the last day of the Two Sessions.
Li’s Work Report makes for good prologue. It shows Beijing keeping China on course for opening up its economy and expanding its domestic tech prowess in an effort to rely less on foreign sources of semiconductors. If you don’t think they will succeed at this, you haven’t been paying attention to China long enough.
Now they are talking about taking a Silicon Valley approach to their nascent semiconductor industry by bringing in foreign talent, something akin to our H-1B visa program. Some Silicon Valley venture capital firms are already in mainland China. Beijing aims to bring in more foreigners and make their Greater Bay Area project a bona fide Asian Silicon Valley in hopes that many more will follow.
To attract more talent, China will explore the establishment of a skilled immigration system and possibly grant the right to own or use scientific and technological achievements to researchers. China also plans to strengthen judicial protection and enforcement of intellectual property rights and increase fines for intellectual property infringements as they become designers of chips, not just the manufacturers in foundries owned by Foxconn and others.
American venture capital is already flowing into these new China tech firms, including chip makers. In 2019, they launched the STAR Board in Shenzhen, a stock listing of new semiconductor firms. Wall Street, along with CCP loans and incentives, will help them grow.
R&D and Tax Breaks
The 2021 Work Report noted that by making both time-limited large-scale tax and fee cuts, China reduced the tax burden on companies by more than 2.6 trillion yuan in 2020, including 1.7 trillion yuan in social security and payroll tax reductions.
The US, meanwhile, is still discussing tax increases, though President Biden has been quiet on this so far. Such an increase would have China renaming its Five Year Plan into the Two and a Half Year Plan as they would be able to achieve those goals in short order as more US firms offshore to avoid domestic cost increases. If they don’t go to Mexico, they’ll just go to China, or Vietnam, which has become an outpost of mainland China corporations.
Li said that China’s R&D spending will increase by more than 7 percent per year starting in 2021, which is expected to account for a higher percentage of GDP than the last Five-Year Plan.
They are keeping their 75 percent tax deduction on companies’ R&D expenses, Li said. But the tax deduction for R&D costs to manufacturing companies will be raised from 75 percent to 100 percent this year. Much of these incentives are expected to go towards developing 5G networks and gigabit optical networks.
Green Tech and Climate Change
For years, China has taken a cue from Brussels and Washington on climate change rhetoric. They have been making promises to cut C02 emissions since the Obama years, but these promises have not yet resulted in reduced emissions over time. Right now, they are increasing their investments in new coal fired power plants as the economy jumpstarts from the pandemic.
But Li’s report was fairly heavy on climate change and going carbon neutral within a decade, thanks in part to more alternative fuels, of which nuclear power will eventually replace coal, alongside solar and wind.
Make no mistake, once China lowers its C02 footprint by eliminating coal from its energy matrix – something it intends to do as outlined again in Li’s report – future carbon tax threats from Europe, Canada and the US on China become moot. Instead, China will be an even more integral part of the clean energy supply chain. This is the plan.
According to the 2021 Government Work Report, China “will draw up an action plan for carbon emissions to peak by 2030. China’s industrial structure and energy mix will be improved (and) we will make a major push to develop new energy sources and take active and well-ordered steps to develop nuclear energy.”
As the US switches to sources of cleaner power, namely wind and solar, government policy makers need to be aware that the bulk of that supply chain resides in Asia, controlled by Chinese multinationals. The US – and indeed the world – struggles to compete with the economies of scale afforded to China’s solar industry. If there is one country in the world set up to be the Green OPEC leader, it is China. Li knows it and China’s industry knows it.
“The goal of achieving a carbon peak by 2030 and carbon neutrality by 2060 marks the acceleration of China’s green transformation, which creates thematic investment opportunities in the medium and long term,” said Shen Jianguang, vice president at JD.com and the chief economist for JD Technology Group, one of China’s premier tech firms. Shen wrote about the government working paper in an op-ed published by Caixin Global this weekend.
Here in the US, policy wonks continue to discuss the need to be less dependent on China supply chains. They all include working with allies, as Foreign Policy pointed out recently. Given the fact that all of those allies are in the World Trade Organization and we can barely see eye-to-eye within that well-established rules based organization, a Made in the Free World project is already a three legged race.
China’s five year plans are their industrial policy.
Jared Bernstein, a member of the White House Council of Economic Advisors, has advocated for a US version of this before. In the Senate, Marco Rubio has made a national industrial policy a part of his portfolio.
Some 3,000 members of the NPC will be in Bejiing this week to discuss China’s recent past, and its five-year future. They will include President Xi Jinping and his six fellow members of the CCP’s Politburo Standing Committee. Provincial government leaders will also be in attendance and have their say, as will some company executives and military commanders.
Li Keqiang and Foreign Minister Wang Yi held their press conferences to kick things off. The Two Sessions end on Thursday with the usual ratification of the Five-Year Plan, which will run through 2025, as well as the approval of more distant national goals for 2035. We suspect advanced technology supply chain resiliency, and a focus on future science and tech fields will get the usual mention. Climate change will be a bone to Brussels and Washington, and a business plan for Chinese manufacturers.
To China’s government, economic security is a national security imperative.
We don’t need to imitate China’s political model, but we can take away a few things from these reports. And that is that at the very least, Washington – which often frames foreign policy matters in terms of national security – should consider things like critical medication, energy and the raw materials used to make things from steel to EV car batteries in the same nationalist vein.
Where China wants to run most of their own domestic semiconductor supply chain from design to foundry, so should we. Where China wants to expand its use of alternative sources of energy, and be an indispensable supplier of the polysilicon and the solar cells that go into making solar panels at the same time, we should want this too. Wind turbines and EV car batteries are next.
If we fail, the United States will be wholly dependent on China for critical technologies of the future. That might be the cobalt and lithium that goes into your electric car. Or the robots used to build them. That translates into an American prosperity for the few and a jobs program in China for the many. In short, failure cannot be an option. Our economic and national security depend on it.