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1. China’s quest for innovation: progress and bottlenecks

Author:
Alicia Garcia-Herrero and Robin Schindowski
Publication Date:
06-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
As the Chinese economy continues to decelerate, the central government is investing heavily in innovation, doubling down on research and development (R&D) spending and STEM-oriented human capital. In this paper, we assess China’s progress so far, looking at the inputs to innovation (R&D and human capital) as well as intermediate targets, such as scientific research and patents. We then evaluate how China has fared with respect to the ultimate goal of commercialising this progress, by looking at the value-added of Chinese exports and the overall productivity of the economy. We identify three potential bottlenecks that might be hindering the translation of China’s innovation efforts into productivity growth.
Topic:
Industrial Policy, European Union, Economic Growth, Innovation, and COVID-19
Political Geography:
China, Europe, and Asia

2. Global trends in countries‘ perceptions of the Belt and Road Initiative

Author:
Alicia Garcia-Herrero and Robin Schindowski
Publication Date:
04-2023
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
Drawing on global media reports, we conduct a sentiment analysis of the image of China’s Belt and Road Initiative (BRI) and the evolution of its image over time. Our main finding is that perceptions of the initiative deteriorated significantly in many geographies from 2017 to 2022. The notable exception is in sub-Saharan Africa where the BRI’s image remains positive, even if slightly less so than in the past. This is notwithstanding increases in debt levels with China, much of which now face potential restructuring. Furthermore, we find significant inter- and intra-regional differences in the average sentiment towards China’s landmark project, as well as a much worse image of the initiative in countries which, until today, are not part of the BRI. Finally, we focus on the European Union, Africa and China’s immediate neighbourhood to better understand the complexities behind the perceived benefits and challenges associated with China’s Belt and Road Initiative.
Topic:
Bilateral Relations, European Union, Geopolitics, Economy, and Trade
Political Geography:
China, Europe, and Asia

3. Can Chinese growth defy gravity?

Author:
Alicia Garcia-Herrero
Publication Date:
06-2023
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Chinese growth, astounding since the beginning of the reform era, has slowed in the last decade. We offer a baseline estimate (based on the current trend) of China’s medium-term growth rate, which we project to fall to 2.4 percent by 2035. Several factors create uncertainty around this baseline. China’s rapid aging is already incorporated into our long-term growth scenario, but its impact on growth will depend on how China’s remaining urbanisation process spreads over time, how the shrinking labour supply affects labour productivity and whether the decline in total factor productivity growth, reflecting the lack of reform during the last decade and possibly the rising role of the state, can be reversed. Investment in China, for decades the largest factor in China’s growth, is expected to contribute less to growth given the increasingly low return on assets, particularly on state-led investment. The rapid piling up of public debt is also becoming a heavy burden for the Chinese economy. Finally, the COVID-19 pandemic may have left significant scarring effects, such as structurally high youth unemployment and low investment confidence. On the upside for China, the rise in human capital and research and development expenditure may support innovation and growth, but the magnitude of this effect is uncertain, because it is unclear if higher innovation will translate into higher total factor productivity, and because of the United States’s push to contain China technologically.
Topic:
Industrial Policy, European Union, Economic Growth, and COVID-19
Political Geography:
China, Europe, and Asia

4. Will China’s new financial regulatory reform be enough to meet the challenges?

Author:
Martin Chorzempa and Nicolas Veron
Publication Date:
03-2023
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Effective financial supervision plays a crucial role in maintaining financial stability and a healthy financial system. China’s leadership has made financial risk a core priority, and in reforms approved in March 2023, it reassigned regulatory responsibilities, creating a new supervisory body that will take over some responsibilities from the central bank, the banking and insurance regulator, and the securities regulator. The aim is that a change to the financial supervisory architecture (who does what in financial supervision) will make China’s system more effective and stable. In this policy brief, we argue that this incremental reform will not solve the core issues China faces in financial supervisory effectiveness. We provide an overview of China’s large and complex financial system, including its largely state-owned banks (some of which are the largest in the world by assets), securities markets and other financial intermediaries. Traditional divisions between different types of activities and institutions have been blurred by the rise of large financial conglomerates, risk-transfer techniques and internet-based finance. Reforms in 2018 to China’s supervisory architecture did not eliminate perceived shortcomings, including failures to effectively regulate financial conglomerates, fintech and regional banks. We then survey global benchmarks against which China’s financial supervisory architecture can be compared, including the United States and European Union. China’s supervisory system is already more streamlined, at least on paper, than either of these most comparable global counterparts. Like them, China’s system does not correspond exactly to any of the three textbook archetypes of supervision: sectoral, twin-peaks or integrated supervision. Ultimately, the effectiveness of China’s financial supervisory architecture suffers from excessive state intervention in the financial system through other channels, including through the unique and pervasive influence of the communist party, which hampers supervisory independence and makes it difficult to establish accountability for regulatory failures. While the recently announced reform may improve coordination across supervisory bodies, coordination within the new quasi-integrated supervisor, across central departments, and between them and local branches, will remain a challenge.
Topic:
Reform, Regulation, Finance, and Financial Stability
Political Geography:
China and Asia

5. The private sector advances in China: The evolving ownership structures of the largest companies in the Xi Jinping era

Author:
Nicolas Véron and Tianlei Huang
Publication Date:
04-2022
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
This paper documents recent structural changes in China’s corporate landscape, based on company level data, providing a complementary perspective to that of official Chinese statistics. We classify China’s largest companies by revenue since 2004 (based on Fortune Global 500 rankings), and largest listed companies by market capitalisation since 2010, into state and private-sector categories, using a conservative definition of the private sector. Among the largest companies by revenue, the private sector was non-existent in the mid-2000s but has grown steadily in the past decade, even though the state sector still dominates. The aggregate revenue of private-sector companies grew from zero in Fortune’s ranking in 2005 (based on 2004 revenue) to $104 billion in the 2011 ranking, or merely 3.8 percent of the $2.78 trillion in aggregate revenue for all Chinese companies in the ranking, and to $1.7 trillion in the latest 2021 ranking (based on 2020 revenue), or 19 percent of the Chinese companies’ aggregate revenue. As for market value of the largest listed firms, the private sector’s share in the top 100 listed Chinese companies was only 8 percent at end-2010 but crossed the 50 percent threshold in 2020 and retreated slightly in 2021 to 48 percent, following that year’s regulatory crackdown on several private-sector-dominated industries. These findings do not support a narrative of broad based rollback in recent years of previous private-sector expansion.
Topic:
Business, Private Sector, and Corporations
Political Geography:
China and Asia

6. How difficult is China’s business environment for European and American companies?

Author:
Uri Dadush and Pauline Weil
Publication Date:
05-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Despite tensions over China’s discriminatory business practices, China’s trade continues to thrive, and the country has taken over from the United States as the first destination for foreign investment. American and European businesses continue to be engaged in China’s large and growing market, even amid a trade war between China and the United States. Drawing on surveys of companies and international comparisons, we show that – contrary to the prevailing narrative – China’s business practices have improved significantly in recent years. China’s business environment is today generally more favourable than that in other large countries at similar levels of development and, in some though certainly not all aspects, is in line with the Organisation for Economic Co-operation and Development average. Differences over geopolitics and human rights must be addressed, but it is clear that trade and investment agreements conditioned on accelerated reforms in China would yield substantial dividends. The benefits of such deals would accrue not only to foreign investors in China and exporters to China, but also to consumers and importers in the European Union and, especially, in the US, where punitive tariffs on China remain in effect. Critical aspects in the negotiations would include better access for American and European investors to China’s market for services and improved enforcement of rules and regulations in China. As in many middle-income countries, uneven enforcement of the law (rather than the law itself) remains a critical problem in China.
Topic:
Development, Bilateral Relations, European Union, Business, and Investment
Political Geography:
China, Europe, Asia, North America, and United States of America

7. China’s state-owned enterprises and competitive neutrality

Author:
Alicia Garcia-Herrero
Publication Date:
02-2021
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
As China’s economic weight continues to grow, so does the global impact of its companies. Chinese state-owned enterprises (SOEs) produce a large share of Chinese goods and services. Given their importance both in China and increasingly globally, it should be measured whether SOEs introduce distortions into markets and how significant those distortions are. Foreign governments negotiating trade or investment deals with China need this information so they can better measure how far China is from offering a level playing field to foreign companies on its domestic market. In this context, competitive neutrality is an important working concept that can be used to asses how far a market is from being a competitive environment. The Organisation for Economic Co-operation and Development defines a framework of competitive neutrality as one in which public and private companies face the same set of rules, and no contact with the state gives competitive advantage to any market participant. Quantifying the concept is difficult, but we provide a preliminary measure of the lack of competitive neutrality in relation to Chinese SOEs. In particular, we focus on debt and tax neutrality and compare the situation for Chinese state-owned and private firms on aggregate and sectoral levels. Our results support the view that China’s competitive environment is generally poor. The advantageous position of SOEs in China is true for most economic sectors, though to a variable extent, with the automotive sector one of the furthest away from competitive neutrality. A working measure of competitive neutrality applied in China could help improve the level playing field for foreign companies in China. It could also be applied globally given the very large size and global footprint of Chinese SOEs. The concept could even be introduced in a potential reform of the World Trade Organisation.
Topic:
Business, Trade, Neutrality, and State-Owned Enterprises
Political Geography:
China and Asia

8. Deglobalisation in the context of United States-China decoupling

Author:
Alicia Garcia-Herrero and Junyun Tan
Publication Date:
12-2020
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
After decades of increasing globalisation on every front, from trade – pushed further by the growing role of value chains – to technology, movement of people and investment, there now seems to be a turn towards slower globalisation if not deglobalisation, at least in some areas. Deglobalisation is not a new concept but rather a megatrend which has been seen before, for example right before the First World War. Signs of deglobalisation, measured by decelerating trade and investment, and smaller global value chains, started to appear already in 2008. But this trend seems to have accelerated because of the United States’ push to contain China in the context of the strategic competition between the two. Such containment is apparent not only in bilateral trade and investment flows but also in technology. COVID-19 has been a second very important factor contributing to deglobalisation. The most obvious impact has been in movement of people. However, the trend towards deglobalisation is much less evident for finance, with the exception of foreign direct investment, though increasing attempts by the US and China to decouple particular types of financial flows are emerging, including the delisting of Chinese companies from US stock exchanges and the imposition of sanctions for transactions with certain Chinese companies and individuals. Overall, it is too early to confirm the depth and the sustainability of the current wave of deglobalisation, but an increasing number of signals suggest a trend of deglobalisation is underway.
Topic:
Globalization, Bilateral Relations, Geopolitics, Investment, Trade Policy, and COVID-19
Political Geography:
China, Asia, North America, and United States of America

9. COVID-19’s reality shock for external-funding dependent emerging economies

Author:
Alicia Garcia-Herrero and Elina Ribakova
Publication Date:
05-2020
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
COVID-19 is by far the biggest challenge policymakers in emerging economies have had to deal with in recent history. Beyond the potentially large negative impact on these countries’ fiscal accounts, and the related solvency issues, worsening conditions for these countries’ external funding are a major challenge.
Topic:
Monetary Policy, Regulation, Finance, Economy, Central Bank, and COVID-19
Political Geography:
Europe, Asia, and Latin America

10. The state of China-European Union economic relations

Author:
Uri Dadush, Marta Dominguez-Jimenez, and Tianlang Gao
Publication Date:
11-2019
Content Type:
Working Paper
Institution:
Bruegel
Abstract:
China and the European Union have an extensive and growing economic relationship. The relationship is problematic because of the distortions caused by China’s state capitalist system and the diversity of interests within the EU’s incomplete federation. More can be done to capture the untapped trade and investment opportunities that exist between the parties. China’s size and dynamism, and its recent shift from an export-led to a domestic demand-led growth model, mean that these opportunities are likely to grow with time. As the Chinese economy matures, provided appropriate policy steps are taken, it is likely to become a less disruptive force in world markets than during its extraordinary breakout period.
Topic:
Economics, Governance, European Union, Investment, and Trade
Political Geography:
China, Europe, and Asia