US-China tech war: state-led economy crucial to meet challenges of American sanctions, says prominent economist

Karen Yeung
·4-min read

China’s socialist economic model that mixes strong government direction and support within a market economy is the key to faster development and meeting technology challenges posed by US sanctions, according to Bai Chong-en, dean of the School of Economics and Management at Tsinghua University.

The government will play a crucial role in the development of “chokehold technologies”, areas of knowledge where the United States has weaponised its advantages by banning or sharply reducing the ability of American companies to supply key components and products to China, Bai said.

The private sector cannot be relied upon to supply the technology – most of which is only available in advanced economies – because of the extremely high costs and risks associated in developing such innovative products. This requires the state to step in, Bai said at a Credit Suisse sponsored conference in Hong Kong on Monday.

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China’s state-led economic model is at the heart of Beijing’s conflict with Washington, which strongly opposes the idea of Communist Party-led, state-run market economics. Western nations have long complained Chinese state firms enjoy preferential treatment compared to international companies operating in the world’s second-largest economy.

However, a state-run approach could lead to problems in innovation, an area where market forces typically performed better, said Bai, who is also a member of the National Committee of the Chinese People’s Political Consultative Conference (CPPCC), China’s main political consultative body.

Still, the combination of market forces and state direction to drive technology development was important, especially as China was catching up with advanced economies, he said.

“That is the secret to success, and what is special [about China],” Bai said. “You will not succeed every time, you may waste a lot of money in some sectors, but you just play the odds.”

The Biden administration is reported to be looking at adding new targeted restrictions on certain sensitive technology exports to China in cooperation with European and Asian allies. The administration of former president Donald Trump implemented a series of measures to prevent American companies from exporting critical products and sharing technology with foreign nationals.

The balance of [domestic market] openness with economic security is very much emphasised in the 14th five-year plan

Bai Chong-en

The Trump administration’s approach was “a wake-up call” and the emphasis of the new five-year plan for 2021-25 is to solve chokehold technology problems, Bai said.

“The balance of [domestic market] openness with economic security is very much emphasised in the 14th five-year plan.”

China’s 14th five-year plan, which was approved by the National People’s Congress earlier this month, identified seven areas of technology on which the government will focus research in the years ahead, including artificial intelligence, quantum computing, semiconductors and outer space.

Under the new blueprint, which is based on the new “dual circulation” economic strategy introduced by President Xi Jinping in May last year, the government will focus on self-sufficiency by boosting domestic consumption to reduce China’s dependence on overseas markets and technology.

The government also pledged to accelerate reform of China’s state-led economy, while promising to continue strong support for state-owned enterprises (SOEs).

“The focus is on serving the country’s strategy, accelerating the positioning of the state-owned economy, strengthening the competitiveness of the state-owned economy and making state-owned capital and state-owned enterprises stronger, better and bigger,” the government plan said.

China’s goal of productivity growth faster than the overall economy hinges on rural education, innovation

Beijing’s subsidies for SOEs, and the preferential treatment they receive in the domestic economy, is one of the key complaints from the US and European Union about China’s economic model.

The ideological difference will continue to set China apart and could generate additional political and trade tensions in the years ahead.

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