How should China adjust its industrial policy?

Made in China 2025 will boost manufucturing

http://www.chinadaily.com.cn/a/201804/14/WS5ad15aa0a3105cdcf6518423.html

US misreading Made in China 2025 by design

http://usa.chinadaily.com.cn/a/201804/10/WS5acbf11ba3105cdcf6517163.html

Made in China 2025: The domestic tech plan that sparked an international backlash

SupChina

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According to media reports, China is drafting a replacement for the "Made in China 2025" plan, with a new program promising greater access to China's markets for foreign companies and playing down China's bid to dominate manufacturing.

The "Made in China 2025" plan is a key concern of the US. The high tech products made by Chinese companies have been targeted amid the US-provoked trade war against China.

All major industrial countries have their own industrial policy that aims to promote high tech development, such as Germany's "Industry 4.0" strategy.

The intent in drafting the "Made in China 2025" plan is obviously justifiable. The discontent and concern it has stirred among the US and other Western countries shows the plan has unique implications for those countries.

The "Made in China 2025" plan emphasizes support to State-owned enterprises (SOEs) and the investment of huge amounts of capital. China's private enterprises have faced difficulties for quite some time and there has been talk of a trend known as "the State advances while the private sector retreats." Therefore, it has become necessary and urgent to create an environment that provides fairer competition between SOEs and private firms.

The objections to the "Made in China 2025" plan made by the US have been beyond China's expectations.

Drafting the plan is a matter of China's sovereign right and China can totally ignore the attitude of the US and focus on its own decision. But China is now deeply intertwined with the world and there are practical reasons to mutually coordinate China's interest and those of Western countries including the US. Expanding areas of common interest is an important way that China has adopted to continuously move forward its reform and opening-up.

China will likely adjust its future industrial plan and policies accordingly while insisting on its right to develop the country's high technology sector.

The major direction of the adjustment could be granting the market a bigger role and creating an environment for fairer competition between enterprises with different forms of ownership.

Regarding whether or how China should adjust its industrial plan, we would like to analyze the key changes of the overall environment and the principles China should stick to in adapting to these changes.

First, the external environment of China's development and the dynamic of internal and external economic interactions have undergone major changes since the beginning of this year. We need to adopt a pragmatic attitude toward these changes and respond actively.

Second, external pressure has always been a driving force for China's domestic reforms. The more open China is, the more it needs to respond to external demands. China's interaction with the outside world is a result of the need to better realize national interests, rather than being pushed to make humiliating concessions in which sovereignty is oppressed. In the 21st century, China should no longer hold the belief that being tough and confrontational is more politically correct than making concessions.

Third, China's development must lead to win-win results for the world. This is the lifeline of our peaceful development and cannot be a mere slogan. China needs to be more open to the world, increase its momentum of development through expanding foreign cooperation, and bring more benefits to the world.

Fourth, China should not fear taking economic or political risks in further expanding its opening-up policy. Fair competition between all types of companies will force SOEs to reform. In fact, many SOEs are not short of funds, but lack a competitive management mechanism. By unleashing the vitality of various enterprises, China's technological innovations will usher in a new chapter. If a more robust development is achieved, we will have more resources to maintain the political cohesion of the country, avoiding greater ideological risks.

Reform and opening-up is the only path China should follow. We have achieved successful results over the past 40 years, as will we do in the future. We must effectively emancipate our minds and resolutely overcome all the difficulties on the road to success - this should be the motto of Chinese society from generation to generation.- Global Times

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Risk of rising McCarthyism warned amid China-US spat

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China’s business people, researchers, scholars say they ‘feel the chill’ in US

Growing China-US tensions have affected technology cooperation as Chinese scientists and researchers in cutting-edged sectors such as big data and artificial intelligence have seen rising obstacles in working with US counterparts this year.

Tensions have intensified after Canada announced the detention of Huawei Chief Financial Officer Meng Wanzhou at the request of the US.

This move is believed to be part of the US' intentions of dampening Chinese companies and investment, which aroused worries that McCarthyism is back in Washington.

"Some open-sourced platforms developed by American firms, such as in the machine learning algorithm sector, have started to limit access or charge fees for tapping into those platforms," a senior scientist in a Shenzhen-based AI company, who asked for anonymity, told the Global Times on Thursday.

"Some Chinese scientists were denied visas this year when they planned to attend academic meetings in the US, and the US' cautious attitude toward Chinese engineers has become more obvious," he said.

The Chinese academic community has felt the chill in relations since the beginning of this year, and the recent arrest of Meng has escalated conflict between the US and China. Some industry representatives even deemed the arrest as a long-term plan by the US to curb China's rise in high technology.

Meanwhile, the effects of the tension have also expanded to business. Hong Kong political risk consultancy SVA said they noticed a remarkable increase in inquiries from US-based companies about potential problems of traveling to China after Meng's detention for fear of China's retaliation, the Japan-based Nikkei Asian Review reported on Tuesday.

A Hong Kong-based financial technology company also moved two investor meetings from Shanghai to Manila to avoid being affected by Meng's case in consideration of its US co-founder, according to the Nikkei report.

The Trump administration has been restricting visas for the Chinese academic community studying in sensitive research fields to one year since June 11, reflecting its efforts to stop alleged intellectual property theft and hinder China's push for technological supremacy, the New York Times reported in July.

"The consensus of curbing China's influence has been forged inside the US government, and Chinese companies should be well prepared for confrontation in the long term," Sun Qingkai, partner of the major Chinese AI firm CloudWalk, told the Global Times on Thursday.

Sun's remarks are echoed by the tendency of Americans to habitually doubt anything related to China, particularly to Huawei at this moment.

The Brookings Institution, a Washington-based think tank, released a report in October 2017 on safe cities. The report, supported by Huawei, speaks highly of a new policing technology implemented in the Kenyan capital of Nairobi and the Chinese city of Lijiang but failed to mention that the technology was provided by Huawei.

An opinion piece of The Washington Post published on December 7 listed financial support from Huawei to Brookings and interactions between the writer of the report, Darrell M. West, who is also Brookings vice president, and Huawei founder Ren Zhengfei.

It then said that such relationship raises doubts over West's scholarship practices and represents "a worrying example of China's influence on one of America's leading think tanks" without providing any hard evidence.

China's cooperation with other countries was also negatively affected, especially those in high-tech sectors. An example is the Japanese government's recent ban on Huawei and ZTE from official contracts. The move followed an earlier warning from the US about security risks involved in using Chinese-made equipment, Washington Post reported on Monday.

McCarthyism warning

The current US strategy of blaming China for its own domestic economic and social problems reflects the country's anxiety and myopia facing these problems, which would only worsen the situation, Zha Xiaogang, a research fellow at the Shanghai Institute for International Studies, told the Global Times on Thursday.

Zha warned that although it seems impossible for the US to return to the McCarthy-era "red scare," when the anti-communism campaign penetrated all aspects of US society, such risks remain if the situation continues to escalate.

"There is already a dire ripple effect from the US-China trade war, which will hurt the US itself and global technology collaboration," said the Shenzhen-based senior scientist.

However, technology companies have been urging more cooperation instead of confrontation, which would hurt global advancement in this sector.

Major tech giants such as US firms Google and Apple, and China's Huawei have highlighted the importance of global collaboration, which will be the driving force for technology advancement.

Google Vice President Jay Yagnik told the Global Times in an earlier interview in September that technology has been a greater "uniter" globally from a historical view. Instead of thinking about competition, companies should think about it in terms of bringing the world together and taking society to the next level.

It is in everyone's best interest that the US and China reach an agreement on trade and future intellectual property and technology collaboration, Chris Dong, global research director at International Data Corporation, told the Global Times on Thursday.

"A more open market with less government intervention, and with mutual respect and reciprocity, will benefit not only a healthier US and China trade relationship, but also the talent and knowledge exchanges," Dong said.- Global Times

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From Industrial 4.0 to Finance 4.0

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MOST people are somewhat aware about the Fourth Industrial Revolution.

The first industrial revolution occurred with the rise of steam power and manufacturing using iron and steel. The second revolution started with the assembly line which allowed specialisation of skills, represented by the Ford motor assembly line at the turn of the 20th century.

The third industrial revolution came with Japanese quality controls and use of telecommunication technology.

The Fourth Industrial Revolution, or first called by the Europeans Industry 4.0, is all about the use of artificial intelligence, robotics, genomics and process, creative design and high speed computing capability to revolutionise production, distribution and consumption. Finance is a derivative of the real economy – its purpose is to serve real production. Early finance was all about the finance of trade and governments to engage in war.


It is no coincidence that the first central banks (Sweden and England) were established in the 17th century at the start of the First Industrial Revolution. Industrialisation became much more sophisticated as Finance 2.0 brought the rise of credit and equity markets in the 18th and 19th centuries. Industrialisation and colonisation came about at the same time as the globalisation of banks, stocks and bond markets.

Again, with the invention of first the fax machine, then Internet that speeded up information storage and transmission in the 1980s, finance and industry took a quantum leap into the age of information technology. Finance 3.0 was the age of financial derivatives, in which very complex (and highly leveraged) derivatives became so opaque that investors and regulators realised they became what Warren Buffett called “weapons of mass destruction”. Finance 3.0 stalled in 2007 with the Global Financial Crisis and was only propped up with massive central bank intervention in terms of unconventional monetary policy with historically unprecedented interest rates.

We are now on the verge of Finance 4.0 and it may be useful to explore what it really means.

The common definition of Industry 4.0 is the rise of the Internet of Things, in which cloud computing, artificial intelligence and global connectivity means that cyber-physical systems can interact with each other to produce, distribute and trade across the world in a massively distributed system of production.

But what does Finance 4.0 really mean?

What truly differentiates Finance 4.0 from the earlier version is the arrival of Blockchain or distributed ledger technology. The best way to think about the difference is the architecture of the two different systems.

Finance 3.0 and earlier versions were all about a top-down or hierarchical ledger system, like a pyramid, in which trade and settlements between two parties are settled across a higher ledger.

A simple example is payment from Joe in bank A to Jim in bank B is finally settled across the books of the central bank in local currency. But in international trade and payments, the final settlements (at least more than 60%) are settled in US dollar finally across the ledgers of the Federal Reserve bank system.

Finance 3.0 was not perfect and those who wanted to avoid regulation, taxation or any official oversight basically moved trading and transactions off-balance sheet and also off-shore. This was the “shadow banking” system that financial regulators and central banks conveniently blamed on their failure to see or stop the last global financial crisis.

Although technically the shadow banking system is the non-bank financial system, which would include bond, stock and commodity markets, the bulk of illegal, illicit transactions traditionally was done in cash.

Welcome to the technical innovation called cyber-currencies, which was made possible for peer-to-peer (P2P) transactions across a distributed ledger system (commonly known as blockchain). In architectural terms, this is a bottom-up system which technically can avoid any official oversight. Indeed, cyber-currencies or tokens were invented precisely because the users do not trust the official system.

As the populist philosopher Stephen Bannon said, “central banks are in the business of debasing the currency”. Hence, those who want to avoid the debasement of their savings prefer to deal with either cash or cyber-tokens like bitcoin (pic).

What is happening in the rapidly evolving Finance 4.0 is that as the world moves from a unipolar order to a multi-polar world in which other reserve currencies also contend for trade and store of value, the top-down architecture is fusing (or merging) with a bottom-up architecture in which trade, transactions and stores of value are shifting towards the P2P shadow system.

Why this is taking place is not hard to understand. Post-global financial crisis, the amount of financial regulations have tripled in terms of number of rules and complexity on what the official sector can regulate, which is mostly the banking system. It is therefore not surprising that all the innovation, talent and money are moving to outside the banking system into the asset management industry, which is much more lightly regulated.

No talented banker, however dedicated to the values of banking probity, can resist the temptations of working in asset management, away from the heavily regulated environment where he or she is 24x7 under regulatory internal and external oversight.

Another reason why the cyber-P2P business is flourishing is because the official sector is worried that further regulation would hinder innovation. But those who want to increase the complexity of regulation must remember that for every 50 foot wall, someone will invent a 51 foot ladder.

So competition in the 21st century has already moved from the physical and financial space into cyber-space.

If there is one thing I learnt as a former regulator, it is that if the banks are behind the curve in terms of technology, the regulators are even further behind, since they learn mostly from those whom they regulate. But if financial regulators deal with financial innovation through “regulatory sandboxes” where they allow their regulated banks to experiment in sandboxes, they are treating their regulated institutions as kids in an adult game of ruthless technology.

Time for the official sector to make their stand clear or else Finance 4.0 promises to be very different from the orderly world that they are used to imaging. Nothing says this clearer than a recent survey by the Chartered Financial Analyst Institute, which showed that 54% of institutional investors surveyed and 38% of retail believe that a financial crisis in the next one-three years is likely or very likely.

You have been warned.

- Tan Sri Andrew Sheng writes on global issues from an Asian perspective.


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