AI Revolution, Demographic Crisis and Supply Chain Security at the Fore of China’s Industrial Policy Concerns: Central Financial and Economic Commission

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The latest meeting of one of the Chinese government’s top financial and economic authorities has highlighted the importance of AI and other emerging technologies for China’s national industrial policy, alongside efforts to improve the quality of the labour force amidst demographic contraction.

On 5 May, President Xi Jinping convened the first meeting of the 20th Central Financial and Economic Commission (中央财经委员会), to discuss matters in relation to the “development of a modern industrial system focused on advanced manufacturing.”

According to the meeting, a modern industrial system is “the material and technological foundation of a modern nation,” while China’s national industrial strategy is part of a broader focus on efforts to drive growth in the country’s real economy.

The meeting engaged in discussion on “grasping the wave of new technological revolutions in areas such as artificial intelligence; enhancing the synergy of industrial policies, and cherishing and caring for outstanding entrepreneurs.”

“The focus of economic development must be placed on the real economy to provide strong material support for the realization of the second centenary goal,” the Commission said. “We must insist on putting the real economy first, and prevent the real from becoming insubstantial.”

The latest meeting of the Commission arrives just after China’s Politburo also signalled greater focus on industrial policy as a key driver of growth in the real economy.

A meeting of the Politburo held on April 28 outlined arrangements for China’s modern industrial system, emphasizing the “accelerated development of a modern industrial system supported by the real economy.”

AI and digital technologies both key focal points for China’s industrial policy

Domestic analysts point out that the development and application of cutting-edge technological innovations – particularly in the area of artificial intelligence the digital economy – lies at the core of China’s national industrial strategy.

Li Wei (李伟), an associate researcher at the Institute of Industrial Economics of the Chinese Academy of Social Sciences, said to state-owned media that the development of a modern industrial system must not only improve the coverage and quality of new infrastructure such as 5G, artificial intelligence, and data centers, but must also comprehensively “consolidate the soil for the development of the digital economy and lead the way for the digital economy.”

“To lay the foundations, it is necessary to strengthen the leading role of a modern infrastructure system in the incubation of key core technologies, and to drive the incubation and cultivation of the underlying root technologies of the digital economy through new large-scale infrastructure investment, so as to build a leading edge in core technologies.”

The Chinese central government has already taken measures to foster the development of the AI sector via state-backed initiatives.

On 3 April, China’s Ministry of Science and Technology said it would strengthen top-level policy design for the AI sector, as well as establish an AI planning and promotions office and launch the implementation of a new generation of major AI technology projects, including an initiative dedicated to “smart healthcare.”

Beijing has also recently launched initiatives such as the “New Generation Artificial Intelligence Ethics Code” (新一代人工智能伦理规范) as part of the development of a broader AI policy framework.

Advanced manufacturing at the core of Chinese industrial poiicy

Domestic analysts point out that maintaining and augmenting China’s manufacturing sector lies at the very core of a national industrial strategy focused on the real economy.

Cai Zhibing (蔡志兵), an associate professor of the Economics Teaching and Research Department of the Central Party School, said that the real economy is the “foundation of a modern industrial system and the “ballast stone of a nation’s economy.”

“It is very important to optimize the real economy, [and] advanced manufacturing is a key to the real economy.”

An executive meeting of the State Council held on 5 May reviewed and approved a set of opinions on accelerating the development of advanced manufacturing clusters.

According to the State Council, the development of advanced manufacturing clusters is an “important starting point for promoting industry from the middle to high end; improving the resilience and security level of the industrial chain and supply chain, and beneficial to the formation of scale advantages and competitive advantages including coordinated innovation, talent pooling, reductions in costs and increases in efficiency.

“It is necessary to place the development of advanced manufacturing clusters in a more prominent position, uphold the nationwide strategic chessboard, guide all regions in giving full play to their comparative advantages, and work hard on specialization and differentiation.”

Wang Qing (王庆), chief macro-analyst at Golden Credit Rating, forecasts that China’s fiscal policy, monetary policy, industrial policy and tech policy will see the introduction and strengthening of policy tools for the development of advanced manufacturing in 2023.

These measures could include targeted tax and fee reductions, loan support plans for manufacturing transformation and upgrades, and the accelerated implementation of a cohort of key investment projects in the manufacturing sector.

Supply chain security the top priority for Beijing

Amidst worsening tensions between China and the US as well as efforts by Washington to stymie Chinese access to key technologies, the latest meeting of the Central Financial and Economic Commission placed especially strong emphasis on shoring up the security of China’s industrial supply chains.

“it is necessary to improve industrial policy in new era of development and make the preservation of industrial security the top priority,” the Commission said.

“[We must] strengthen top-level design in strategic fields and enhance the synergy of industrial policies. It is necessary to strengthen research and strategic resource support for key and core technologies, and in systemic terms make enterprises the main actors in technological innovation.”

Wang Jinzhao (王金照), director of the Industrial Economic Research Department of the Development Research Center of the State Council, said that China “remains under the control of others in the field of basic components with strong general applications such as integrated circuits, industrial software, and instruments, as well as in the field of high-end CNC machine tools.”

Zhang Jie (张杰), a professor at the School of Economics at Renmin University, said shoring up the security and stability of the industrial chain and supply chain is the most urgent task facing China in its development of a modern industrial system.

Zhang believes that China’s current industrial chain and supply chain system suffers from problems including being “big but incomplete”, “complete but not refined” and “tough but fragile”, and continues to suffer from major problem with regard to of regional obstructions and “chokepoints” at key links.”

“We urgently need to achieve breakthroughs in key core technologies,” Zhang said, “The problems faced in the field of ‘key core technology innovation’ where the key industrial chain is ‘stuck’ cannot be resolved overnight by short-term policies.”

Zhang also also highlighted major problems and risks for China’s model industrial system in the form of “homogenised competition in supply chains and insufficient supply capacity for high-quality, high-complexity, and high-value-added products.”

Demographic crisis a key concern for Chinese policymakers

The latest meeting of the Central Financial and Economic Commission arrives just after China saw its population decline for the first time in over six decades in 2022, causing major trepidation for Chinese policymakers.

“Once negative population growth occurs, it will be difficult to reverse, and China could face a population crisis far beyond its imagination,” said a Xinhua report.

At the latest meeting of the Central Financial and Economic Commission, Xi Jinping said population development is “a key matter related to the great rejuvenation of the Chinese nation, and efforts must be made to improve the overall quality of the population and support Chinese-style modernization with high-quality population development.”

The meeting pointed population development in China is currently haracterized by a declining birth rate, ageing population, and regional population differentiation.

In order to help drive productivity gains and innovation breakthroughs as envisaged by national industrial policy amidst these adverse demographic changes, the Commission called for efforts to improve “population quality” while also shoring up fertility.

“It is necessary to fully understand and correctly view the new conditions of China’s population development…improve the population development strategy in a new era, and understand, adapt to, and lead the new normal of population development,” the Commission said.

“[We must] focus on improving the overall quality of the population, and strive to maintain an appropriate fertility level and population size, supporting Chinese-style modernization with high-quality population development.”

The Commission called for “vigorously developing an inclusive childcare service system, significantly reducing the burden of family childbirth and education, promote the development of a childbirth-friendly society, and promote the long-term balanced development of the population.”

“It is necessary to strengthen the development and utilization of human resources, stabilize the labor participation rate, improve the efficiency of human resource utilization, and implement a national strategy to actively respond to population ageing.”