This Special Issue includes an eclectic collection of papers that address China’s technological development and policy making, two important forces for China’s economic growth. It has been well noted that China’s economy is experiencing a transformation, shifting from an old model that relies on the property sector investment and low-value added manufacturing and exports, to a new paradigm that is predicated on technological innovations and internal market expansion. In this process of transformation, technological development is imperative to promote productivity growth and industrial upgrading. Meanwhile, adaptive policy making that supports the new growth engines while preserving economic stability and resilience becomes all the more important. In this Special Issue, we show that with the financing support to the science and technology development, total factor productivity of the Chinese economy has been enhanced. We show that China has been building an Augmented National Innovation System (ANIS) with complex and dynamic relations between the state, enterprises, and research and academic institutions. Such a system also includes distributional considerations. Further, the semiconductor industry, a material foundation for the ANIS, has been growing rapidly thanks to the state investment, policy support and all-out efforts by the private enterprises.
China’s economic vitality is largely dependent on the unique synergy and symbiosis between the state and the market. However, with the economic transformation and new challenges, it is important to continue reform and improve the efficacy of policies. We find that policy making of an important financial regulatory body, the Chinese Banking and Insurance Regulatory Commission (CBIRC), is more influenced by other government agencies than by financial and economic variables. While this implies policy coordination among the Chinese regulatory agencies, it also suggests that policy making should be more geared toward economic conditions. When examining fiscal policy, we also find that the fiscal system in China is fraught with limitations. A fiscal reform is urgently needed to support the economic transformation.
More specifically, in “China’s Augmented National Innovation System (ANIS) and the Development of the Semiconductors Industry,” Haider Khan argues that China is forming an ANIS with two prominent features. One is that efforts have been made to move the innovation system toward a more egalitarian system to align with the goal of creating a harmonious and moderately prosperous society. And the other feature is to develop the semiconductor and AI technologies as the foundation for the 4th Industrial Revolution. Khan demonstrates that one of the major improvements in China’s ANIS is a better connection between university research and technological absorption at the enterprise level. Further, the state-owned enterprises have operated at the frontier of new product development. Reflecting on the evolution of the semiconductor industry development, Khan shows that the state has played an instrumental role by providing financial incentives, preferential investment policies, R&D incentives, import and export subsidies, human resources initiatives and intellectual property rights protection. Khan documents the great progress in China’s semiconductor industry development, in spite of the US technological sanctions. Khan also suggests that China’s technological innovations would have tremendous geoeconomics implications.
The paper by Li Shujuan, Min Xi and Dongmei Li, titled “Research on the Impact of Sci-tech Finance on Industrial TFP,” focuses on China’s total factor productivity (TFP) growth. Based on provincial panel data from 2009-2016, this paper constructs a comprehensive index of regional sci-tech finance and explores the impact of Sci-tech finance on industrial TFP. Sci-tech finance is defined as financial support for science and technology innovations. The paper explores the channels by which sci-tech finance affects industrial TFP, and these channels include screening and allocation mechanism, governance mechanism, and integration mechanism. Sci-tech finance has a significant role in promoting the industrial TFP, but this promotion needs to meet certain financial development conditions. In the high-level financial development areas, the promotion effect is significant. The effect, however, is not linear. There is a threshold effect with the diminishing marginal efficiency. Sci-tech finance mainly promotes industrial TFP through boosting the industry’s scientific and technological innovation capacity.
Shifting to the studies of policy making, in “Predicting Chinese Banking Policy Incidence Using a VAR Model,” Sara Hsu and Zhihao Fan examine the effect of economic and noneconomic indicators on policy making by the Chinese Banking and Insurance Regulatory Commission (CBIRC). Based on monthly data taken from February 2005-December 2017, their model indicates that State Council construction policies likely influence CBIRC policies in a positive manner. They reason that because an increase in construction requires additional bank lending, and therefore, CBIRC introduces new policies to facilitate lending and manage risks. In addition, foreign exchange policies carried out by the State Administration of Foreign Exchange (SAFE) tend to negatively CBIRC policies. That is, when SAFE issues new policies, CBIRC tend to refrain from making additional policies. They speculate that this may be because a shift in focus from domestic economy to the international economy, or it could be due to the reduced need to prevent exchange rate risks from migrating into the banking sector, as SAFE policies address the exchange rate risks. They also found that CBIRC policies are less sensitive to financial and real variables, such as interest rates, exchange rates, consumption, inflation rates, financial loans and deposits, etc. They conclude that CBIRC policies are influenced more by other regulatory agencies’ policies than by financial and real variables.
Finally, Yan Liang’s paper, titled “An MMT Informed Fiscal Reform for China,” provides a Modern Monetary Theory (MMT)-informed analysis of China’s fiscal system and a proposal for reform. She argues that there are three major limitations of the current fiscal system. First, fiscal revenues are centralized at the central government while expenditures are decentralized at the local governments; second, fiscal spending focuses on public investment but is insufficient in providing social safety net and public services; and third, indirect tax accounts for a great majority of tax revenues, leading to limited progressivity of the tax system. These limitations have constrained the effectiveness of China’s fiscal policies and generated many perverse impacts, such as the over-reliance on land lease financing at the local government level and the rising local government debt. MMT provides an unconventional framework to understand the nature of money and the workings of monetary and fiscal operations. It posits that a monetarily sovereign government does not face financing constraint but real resources constraint; and that taxes are not to raise revenues for fiscal spending but to serve other purposes, such as improving income distribution and incentivizing certain economic behaviors. Based on the understanding, the paper proposes fiscal reforms that realign fiscal resources and spending responsibilities between the central and local governments, increase fiscal spending on social security and public services, as well as broaden personal income tax to improve the distributive effect of taxation.
In all, the collection of the research papers delves into the most significant elements of the Chinese economy, that is, technological development, productivity growth and policy making. The findings and reform proposals help shed new light on the next steps of China’s economic transformation and development.
Disclosure statement
The authors declare there is no Complete of Interest at this study.