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February 27, 2023

News in Charts: China’s high-tech dream gathers pace, but is it sustainable?

by Fathom Consulting.

Fathom’s measure of China’s high-tech exports reached an all-time high in 2021, facilitated by rising demand for high-tech goods during the COVID-19 pandemic. China increased its market share mainly in advanced railway, extending its dominance as the world’s largest high-speed railway exporter, and in medical equipment, driven by unprecedented external demand. China’s revealed comparative advantage is still poor in key technologies such as robotics, however, imposing a drag on the automation that the country urgently needs in order to achieve sustained economic growth.

Over the past few decades, China’s growth model has been characterised by exporting low-skilled manufacturing products to the rest of the world, facilitated by the availability of a large pool of cheap labour. However, this labour surplus has started to decrease due to an ageing population, placing China under growing pressure to move up the value-add chain. Announced in 2015, Beijing’s so-called Made in China 2025 (MIC 2025) plan is its most important attempt so far to transform the country’s enormous manufacturing base into a high-tech powerhouse.

What has MIC 2025 achieved so far? We can assess China’s progress in this matter using Fathom’s tailor-made database: RiCArdo. Fathom’s RiCArdo contains detailed export data for more than 200 different countries and regions for the period 2005-2021. The data has been painstakingly whittled down to capture the ‘new’ (i.e., high-tech) sectors targeted by China’s MIC 2025 plan. Our latest update shows that China high tech exports have gained momentum over the past couple of years, reaching an all-time high, although the Fathom estimate is far lower than official numbers and World Bank estimates.

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The reasons for this improvement are mostly pandemic-related. Consumer behaviour changed as a consequence of the lockdowns, giving a boost to high-tech goods such as computers, mobile phones, fibre cabling etc., as people started to work and socialise remotely. China benefited greatly, being the first country to reverse the negative impact on exports of COVID-19. China’s successful containment measures in the first COVID-19 wave allowed production there to recover, even as it was being curtailed elsewhere; and Beijing also benefited from its dominance in the manufacture of medical equipment and electronic goods used to work from home.

Despite this improvement, the ‘old’ manufacturing sectors still make up the majority of China’s exports, with high-tech industries accounting for just 16.5%, little changed from pre-pandemic levels.

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Since our series began, China has gained market share across all nine of the high-tech sectors targeted by its MIC 2025 plan, and holds the top spot in advanced railway, IT, new materials, new energy, and maritime engineering — exporting more of these than any other country within our RiCArdo database. In the past couple of years, the most significant improvement in market share rank can be seen in medical industry goods, no doubt driven by unprecedented external demand for critical medical products such as face masks, ventilators, and ultrasonic scanners in light of the COVID-19 outbreak.

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Rather impressive is the sharp increase in market share for advanced railway over the past couple of years (chart below), far outpacing the improvement of the rest of the MIC sectors. China has the world’s largest network of high-speed railways, representing around two thirds of the total. The astonishing expansion of China’s domestic network has given the country the best capabilities in the world, allowing it to take over new markets abroad despite the pandemic difficulties. The prospects for the future look even better, as China’s rail networks are expected to double in length again by 2035.

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Our RiCArdo database is also able to identify the sectors where China holds a revealed comparative advantage (RCA), or degree of specialisation relative to the rest of the world. RiCArdo suggests that China’s progress has been limited, and it holds a comparative advantage in only four of the nine high-tech sectors targeted by the MIC 2025 plan — the same number as in 2010. In other sectors, such as robotics or aerospace, China has not managed to make significant progress. This may be due to international pressures, as a number of advanced economies, led by the US, have responded to President Xi’s plan with more restrictive trade policies (e.g., semiconductor bans) and a greater focus on developing their own high-tech sectors. At the same time, the increasingly interventionist stance of the Chinese government at home also risks stifling domestic private sector innovation.

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Undoubtedly, pandemic-related developments have benefited China, which has managed to increase its share of high-tech exports and quickly gain market share in some sectors. However, the outlook for China’s progress in high tech appears now more challenging than ever, as its relations with western countries appear to be in a deteriorating trend — a fact which is likely to incentivise advanced economies to continue to build more diverse and less China-centric supply chains going forward.

The views expressed in this article are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.

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