Trésor-Info - Publications de la direction générale du Trésor - China

Lessons from Past Industrial Policies

2025-02-13T00:00:00+01:00

Industrial policies aimed at the creation and development of specific sectors have made a comeback against a backdrop of a mounting number of crises, trade tensions, an accelerating innovation race and the imperative of combating climate change (see Chart on cover page). A study of policies in eight advanced and catching-up countries from 1945 to 2000 provides useful insight into the conditions determining their success or failure.

Industrial policy had similar aims in all countries studied: (i) growth and competitiveness; (ii) support for major transitions (energy, space, etc.); (iii) strategic autonomy and sovereignty; and (iv) support for declining sectors.

Although different models of industrial policy exist, most countries have intervened in a targeted manner in specific sectors. The catching-up countries (Japan followed by South Korea and China), France and the United Kingdom – up to the 1980s – directly intervened in the development of industrial production capacities. In the United States, sector measures were decentralised and limited to R&D support and government procurement in military and high value-added sectors.

The advanced countries’ sector-specific measures focused on emerging sectors with high stakes in defence- and sovereignty (aviation, energy and space in the post-war period followed, as in the catching-up countries, by electronics and IT). The catching-up countries initially focused on mature, but high-growth-potential mid-tech sectors (automobiles, chemicals and shipbuilding) and then on high-tech sectors (primarily electronics and IT).

International sector-specific industrial policy experiences provide useful insight for shaping today’s policies. For example, the success of both export aid conditional on performance in South Korea and the precise specification of ambitious technological goals in US development contracts suggests that setting high commercial and technological performance targets is a factor for success.

Internal Migration: A Cornerstone of China’s Economic Model

2025-01-28T00:00:00+01:00

Since 1978, hundreds of millions of people in China have migrated from the countryside to cities, mainly in the east, fuelling the country’s remarkable industrial transition from an economy previously dominated by agriculture (see Chart). In 2023, 66% of the population lived in urban areas.

Rural-urban migration has been driven by a gradual easing of the hukou, a household registration system for Chinese citizens based on their place of origin and their status (agricultural or non-agricultural, or rural or urban). The hukou is often compared to an “internal passport”. Dating back to the Mao era, it was introduced to control population flows and encourage migration to areas needing workers, while preventing slums from forming on the outskirts of large cities.

The rapid growth of internal migration has bolstered the working-age population without a hukou corresponding to their actual situation (177 million people, or 22% of the working-age population). While internal migration is now allowed, migrant workers from rural areas seldom obtain hukou from the city in which they reside or access the entitlements that come with an urban hukou. Migrant workers also work mainly in flexible, low-skilled jobs paid at a lower rate than workers with an urban hukou. Migrant labour is cheap for employers who pay virtually no social security contributions for migrant workers. China’s two-tier labour market thereby contributes to wage moderation, maintaining China’s cost competitiveness.

Living in a city without an urban hukou restricts access to property ownership, although restrictions have been relaxed in recent years in response to the real estate crisis. More importantly, migrant workers are not eligible for healthcare, education or government pensions in the same way as other workers. Migrant workers therefore save at higher rates than the rest of the population and human capital accumulation is slower at the aggregate level.

There has been much talk of reforming the hukou system and restrictions have been eased gradually, mainly in small- and medium-sized cities which attract fewer migrant workers.

Japanification: a Risk for China’s Economy?

2024-11-05T00:00:00+01:00

The “Japanification” of a country alludes to Japan’s economic situation starting from the early 1990s following decades of rapid growth. It is characterised by weak growth and inflation rates, and extremely low interest rates.

China currently bears many similarities to early-1990s Japan – its growth model is centred on industry and investment, and is reliant on buoyant exports. China is also laden with debt, and suffers from a population decline, a downward trend in growth (see Chart) and inflation, as well as a property sector crisis since 2021.

However, the extent of the decline in growth may be less considerable than in Japan given some of the Chinese economy’s strengths and its ability to learn from Japan’s difficulties. While China has reached the technological frontier in an increasing number of sectors, it is also looking to switch to a new growth model more focused on new technologies and on ramping up productivity.

The implementation of this new model could be hindered by China’s debt-laden local governments, and more generally there are lingering doubts over this model’s ability to sustain high levels of growth.

A similar fate to that suffered by Japan would mean a severe slowdown in the catch-up process, but not necessarily smaller productivity gains than in other countries: when adjusted for demographics, Japan’s growth had been indeed similar to that of other major advanced countries since 1990.

Minerals in the Energy Transition

2024-10-24T00:00:00+02:00

The energy transition is expected to involve use of mineral-intensive technologies, with high demand for certain so-called “critical” or “strategic” minerals such as lithium, graphite, nickel, manganese, silicon, rare-earth elements and copper.

In the short term, the global supply of critical minerals appears to be sufficient to meet the new uses related to the energy transition. Lithium and nickel prices have been falling since early 2023 against the backdrop of a sharp uptick in Chinese production and slowdown in global demand. Production nevertheless remains highly geographically concentrated, with a handful of countries holding a monopoly over the extraction of key critical minerals, and China now dominating refining and processing for the majority of these minerals.

Global demand could more than triple between now and 2050 in order to meet international and domestic environmental targets (see Chart below), with this spike in demand far exceeding current production levels for lithium, graphite and cobalt. Although many mineral-producing countries are eager to capitalise on their resources, the possibility of shortages cannot be ruled out – not least because the current low-price environment is weighing on the anticipated profitability of investments and new production sites, potentially leading to projects being postponed.

Many governments have responded to these risks, and to mounting geopolitical tensions, by introducing policies to secure and diversify supplies of critical minerals. At the same time, recent years have seen a sharp increase in trade barriers affecting these minerals, largely as a result of positioning strategies further down the value chain.

How Dependent Are Emerging Market Economies on China's Growth?

2024-01-30T00:00:00+01:00

China is now the top export market for many emerging countries, as its average share of exports from these economies rose from 4% in 2002 to 12% in 2022. Additionally, the growth of outbound Chinese tourism has created new forms of dependence, especially for certain Asian countries.

Emerging economies are also financially dependent on China through commercial and sovereign loans. The main recipient sectors (energy, mining and transport) and regions (Asia and Africa for almost 60% of the loans) are in line with China’s strategic priorities, particularly in terms of its supply needs. China’s total outward foreign direct investment (FDI) flows remain low in relation to loans, but Chinese FDI accounts for a significant share of the FDI stock of several countries (Pakistan, Angola, South Africa and Thailand).

China’s slower medium-term growth – which the IMF has projected will fall to 4% over the next few years, down from 8% in the 2010s – will affect emerging economies through two primary channels. On the trade side, slower Chinese growth will result in (i) a decline in domestic demand and imports, and (ii) price and volume effects on commodities. On the finance side, China’s slowdown will play a role in the continued push, which began in 2015, to reduce the flow of its financing (loans and FDI) to emerging economies (see Chart), and in the country’s geographic and sectoral refocusing, as already reflected in the shift in the official stance regarding the Belt and Road Initiative (BRI). Asian countries and commodity-exporting countries are expected to be the most vulnerable to China’s structural slowdown due to their close trade ties with Beijing.

China's Public Finances: Short-Term Risks and Structural Issues

2023-05-23T00:00:00+02:00

Public finances have been a major driving force behind China’s growth, not least through public investment at the local level particularly since the 2008 crisis. In 2019, China’s public spending amounted to 24% of GDP according to official statistics, versus the 36% and 41% figures reported by the IMF and the OECD respectively.

Analysing China’s public finances is hindered by the lack of clarity in the definition of the prerogatives of various administrative levels (central, provincial, prefecture, county, city) in the Constitution of the People’s Republic of China and Chinese law, as well as by the fact that national laws often merely outline principles which are subsequently implemented at local level with significant leeway. The structure of public accounts is also based on opaque and complex methodology, lacking clarity on what spending falls within their scope, and the line between local and central government sometimes being blurred.

Public accounts structurally post a high level of deficit and debt. These two indicators have considerably worsened over the past few years, particularly as a result of the COVID-19 pandemic (see Chart). The situation at local level now emerges as a financial stability issue, with 57% of total government debt incurred at this level – according to official data – in a relatively
opaque way.

While local financial risks are high, a short-term systemic crisis seems unlikely given the guarantees granted by the central government and the fact that a large portion of the debt is held by major banks and local government entities.

Over the long term, imbalances and risks relating to public finances hamper growth and its necessary rebalancing, implying a shift from investments to domestic consumption. Despite the proactive stance of the authorities and the repeated recommendations of international observers, implementation of the reforms – a designated priority since 2013 – is still a slow and piecemeal process.