Sci-Tech China: Macro Innovation Landscape Snapshot
COVID-19 and China
Shanghai at night. Image credit: Zhang Rou/EO Company

Countless attempts to increase the degree of openness, cost efficiency, and unprecedented magnitude have been spurring overwhelming economic growth in China since the end of the twentieth century. As the “world’s factory” had made a qualitative leap, it lost the biggest advantage – cheap labor. Technology then naturally took over the role of a pivotal economic growth driver in the country, resulting in a handful of long-term development programs that organically fit into the so-socialistic five-year plan frameworks.

Current tensions on the global trade and economic scene have exacerbated fundamental structural conflicts existing between the emerging and the developed worlds. Various barriers that are being (and might be further) imposed by the “global partners” ignite countries to fend on themselves, considering even autarky-like scenarios. Hence, they are made to zero in on technology, which is designed to be an accelerator of the multifaceted development. And China’s case is apparently an epitome of this situation.

For one, while making more phones, laptops and smart screens than all the other countries together, China still has to purchase the most valuable electronic components – chips. The country’s manufacturers have paid over USD 1 trillion for the microelectronic products imported throughout the last five years. According to UN Comtrade Database, Chinese firms purchased more than USD 260 billion worth of integrated circuits (HS code: 8542) and USD 28 billion worth of diodes and transistors (HS code: 8541) from abroad in 2017.

The vast majority of the local producers have long-term multibillion-dollar contracts with leading global semiconductor companies. The recent geopolitical practice shows: these trade relations are fragile enough to be reconsidered fathoms deep.

China has carried out several programs to cultivate the “core technology”, backing industry investment funds of tens of billions of dollars. One of them – China National Integrated Circuit Industry Investment Fund (中国国家集成电路产业投资基金), known as the “Big Fund”, – has been pumping money into a number of homegrown chipmakers since its establishment in 2014.

So far, a bunch of companies has disclosed new funding rounds initiated by the fund. Business information service provider ITjuzi has reported on 23 of these events to date. Both pre-IPO upstarts and listed firms could be found on the list, which also comprises Anji Technology (688019:SH) and AMEC (688012:SH) – two of the four semiconductor companies trading on the Shanghai Stock Exchange Star Market.

Microelectronics is not the only field where China is lately trying to make waves. Artificial intelligence, new energy vehicles, advanced IT, robotics, aerospace, biotech, agtech, and other high-tech sectors are more or less covered by the functioning government programs. Businesses receive heaps of capital through the projects aimed at the invention and development of key components of the future global economic system.

So what?

The fair questions are “what are the interim results of these policies?" and "where is China now?”. It is hard to assess the effect in the short term, however, we may talk about some macro shifts happening.

Serving as a core activity in qualitative tech improvement, R&D is perhaps the most important part of the business ecosystem and a key element in the comprehensive development mechanism. In the last several years, China has made decent headway in this direction.

According to UNESCO, total R&D personnel headcount in China grew at a CAGR of 4.4% from 3.25 million in 2012 to 4.03 million in 2017. GERD (gross domestic expenditure on R&D) climbed from USD 292.20 billion to USD 495.98 billion over the same period, making the country closer by this indicator to the world leader, the United States (USD 543,24 billion in 2017).

In absolute numbers, this truly tectonic shift looks more impressive. In fact, the scene is absolutely dominated by the U.S. and China. The pair accounts for over 52% of the worldwide R&D expenses.

Besides, more than 49% of the researchers globally are working in these two countries. This number exceeds their combined contribution to the world economy -- China and the U.S. produce around 40% of the global GDP.

Data show: the measures undertaken have helped China to warm up the private sector: While 21.6% of investment in R&D was made by the state in 2012, in 2017 this number shrank to 19.8%. As for the capital coming from non-governmental enterprises, it hit 76.5% in 2017, up 2.5% from 2012's record.

It is, perhaps, too early to conclude whether all the policies mentioned have been effective. What we can say for sure is that the wheels are definitely getting kicked in China's tech sector.

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