Made in China 2025: everything you need to know

As growth slowed in China, the country sought to attain higher value production, putting together a Made in China 2025 plan that had also landed on the US-China trade conflict table. Below we outline what it is all about.

Chinese flag Source: Bloomberg

What is 'Made in China 2025'?

To condense the concept, the Made in China 2025 (MIC 2025) plan is a state-led initiative to transfer China into a dominant player in the global high-tech manufacturing scene. Premier Li Keqiang first introduced the ten-year plan in May 2015 with the aim of moving the country towards the status of a developed country and in part to avoid being caught in the ‘middle-income trap’. Compared to the earlier Strategic Emerging Industries (SEI) initiative in 2006, MIC 2025 expands the focus beyond technical innovations and promotion of traditional industries, looking towards the entire manufacturing process. This is also phase one of a three-part plan that seek to eventually propel China to become the leading manufacturer in the world.

As the notion of ‘Made in China’ had long been associated with low-end manufacturing and China serving as the world’s factory, MIC 2025 seeks to transform China into a producer of high-end goods. Through the process, the authorities aim to see China catch-up to their wealthier trading partner in terms of their value-add into the products manufactured. China would also depart from the strong reliance upon international technology with the upgraded capabilities.

In order to achieve the broad goals set out, MIC 2025 had established various priority tasks and ten key sectors to target. Heavy funding had also been allocated into the key agendas to attain success. As we have seen with Chinese electronics company, Xiaomi, the company had launched its first smartphone chip on government funding in 2017 as part of the initiative.

Which sectors are prioritised under the Made in China 2025 plan?

As told, ten sectors had been identified under the plan. Target had also been set to raise the Chinese-domestic content of the core materials to 40% by 2020 and 70% by 2025, which are ambitious numbers. The ten sectors are listed as follows1:

  • New information technology
  • Numerical control tools
  • Aerospace equipment
  • High-tech ships
  • Railway equipment
  • Energy saving
  • New materials
  • Medical devices
  • Agricultural machinery
  • Power equipment

Why is Made in China 2025 a contention for US-China trade?

While it is widely common for countries to introduce economic transformation plans to remain competitive and attain higher growth, China’s MIC 2025 having taken a leaf out of the books of Germany’s ‘Industry 4.0’, the plan nevertheless invited scrutiny from their western neighbours.

The contention sits with various aspects of their plans including the abovementioned target set to raise Chinese-domestic content, which would see Chinese companies becoming more self-sufficient. The means to attain such an outcome, had however been regarded as providing domestic corporations with an advantage against foreign companies. Concerns of market access had been invoked in this case, over and above the government support that these Chinese companies would receive. Various claims had also been made by the US on forced technology transfer and the lack of intellectual property control regarding this, going as far as bringing in concerns of national security. To display displeasure, the US had targeted the products focused within the MIC 2025 plan with a first round of tariffs in July 2018, before the matter escalated into a trade war.

How does Made in China 2025 affect financial markets?

Barring all the abovementioned concerns, MIC 2025 serves to be a crucial growth plan to revitalise the key manufacturing sector, boost productivity and have a knock-on effect for the other areas of the economy. Asia’s biggest economy continues to represent an area with a multitude of untapped opportunities for both domestic and foreign investors. A rejuvenation of growth will bring about a pick up for the Chinese market as a whole.

The invitation of scrutiny, as told above, had however invited another form of impact on financial markets through the US-China trade conflict. As it is, foreign companies had found it difficult to partake in China’s take-off directly either due to the market access issues or concerns over technology transfer. The Donald Trump administration had taken it upon themselves to tackle these issues, in addition to the imbalances in trade, and broadly viewed MIC 2025 as a threat. While there is no denying that politics had played a big part, the impact on financial markets had been undeniable as the escalation of trade tariffs saw to an approximate $360 billion worth of goods being affected as of early 2019. Likewise, this had wiped out all gains for the Chinese market in 2018, seeing the likes of the blue-chip CSI 300 chalked up the worst performance seen since the 2008 financial crisis with a 25.3% yearly decline. Thus, while the MIC 2025 had not been a cause, it had nevertheless been a contributor to the market turmoil in China and beyond.

CNH300 chart

CNH300 chart

Latest updates on the Made in China 2025 plan

As noted in the latest 2019 National People’s Congress (NPC), Premier Li had kept silent with regards to the 'Made in China' 2025 initiative. This is the initiative’s first absence since its introduction to the 2015 annual report. China’s response to which had been the lack of space in the speech, though not many would take this at face value. Owing to the controversy on the issue with the US, it may be some time before we hear about it, if at all. China had also taken steps in the latest NPC to approve a new foreign investment law, tackling some of the concerns such as technology transfer. Altogether, the actions had been seen as offering goodwill amid the lack of resolution yet on a trade deal to end the US-China impasse.

China is however unlikely to give up the pursuit for higher growth and economic influence, as with any other country for the matter. With a huge population and widening income inequality, slowing growth would also come with significant socio-economic and potentially political consequences for the country. Despite MIC 2025’s absence in name, similar goals had nevertheless been outlined in Premier Li’s speech. High-quality manufacturing remained a recurring theme with sectors such as information technology, high-end equipment being listed as targets for heavy investments. To a greater extent, analysts and scholars studying the rise of China had also identified the Belt and Road Initiative (BRI) as another avenue for China to be seen attempting to broaden its influence in the world stage. One can only expect some friction to arise as the world powers jostle to move ahead in claiming greater economic influence in the global arena. The impact on financial markets will likewise ebb and flow with these geopolitical drivers.

Sources:

1ISDP, 2018


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