German Chancellor Olaf Scholz will have to raise some difficult issues in China – from unfair competition to relations with Russia. One economic issue weighs particularly heavily: the People’s Republic’s overcapacity. “China is ultimately trying to keep its growth engine running at the expense of its trading partners,” says economist Juergen Matthes from the German Economic Institute in today’s interview.
This interview is the first in a series of opinions on the Federal Chancellor’s visit to the People’s Republic. More interesting expert opinions await you in the coming week.
Economist Matthes warns that China’s unfair competitive pressure is thwarting Europe’s plans to turn modernization into a job engine: In the long term, China could even export unemployment to Germany because the People’s Republic subsidizes sectors in which Germany is particularly strong.
Nevertheless, Beijing regards Scholz as a balancing voice to calm critical voices – including in Germany, as Michael Radunski analyzes. Despite the difficult topics, Scholz will likely receive a warm welcome. The hope in Beijing is that Scholz will not be influenced by the harsh rhetoric of other politicians calling for a “risk reduction” in Sino-German relations.
Like other European and US politicians before him, Chancellor Scholz apparently wants to discuss Chinese overcapacity and cheap exports in Beijing. Is he setting the right priorities?
I actually consider overcapacity and the associated export flood the most important economic problem. Because they could jeopardize our production base. It is an even graver problem than the problematic business conditions for German companies in China, which are often at the forefront of the debate.
China supplies us with good and cheap goods. What is the problem?
China is ultimately trying to keep its growth engine running at the expense of its trading partners. Instead of the real estate sector, it now massively promotes the development of new industrial capacities with subsidized loans. The industry is supposed to act as a new growth driver after the real estate sector continues to struggle. In a recently published study, I showed that the Chinese trade surplus reached a new high in 2023. I also found that around 150 of about 180 countries have a trade deficit with China. The extent of the imbalances indicates that China is acting at the expense of its trading partners.
Let’s assume that, contrary to expectations, Scholz’s words fall on open ears in Beijing. If he wanted to, could Xi Jinping simply stop the overcapacity?
Overcapacity in China is a systemic problem of state capitalism, with its strong industrial policy control. Unfortunately, it is not easy to fix.
Could you elaborate?
With its five-year plans, state capitalism ultimately also relies on a planned economy. To stay in Beijing’s good graces, the provinces invest in the sectors the central government identifies as priorities. Large capacities are often built up without considering whether there is sufficient demand for the new production. This repeatedly leads to overcapacity, as was the case in the steel industry years ago.
And the leadership will not want to change this.
This model has been quite successful for China so far. However, it is increasingly causing the aforementioned global collateral damage. Beijing can no longer ignore this. Otherwise, more and more countries will protect themselves against Chinese imports with trade barriers.
We have been debating China’s overcapacity for decades. What has happened now that it has suddenly become an issue?
What is new is that China is increasingly focusing on the sectors that we in Europe and Germany specialize in or are now focusing on in the wake of the energy transition. And because its subsidies distort competition, there is no level playing field. Last year, I showed in a study that China is taking more and more of the German economy’s share of the EU market and that this shift has even accelerated recently. This affects all industrial sectors in which we specialize. I consider this a threat to our economic model, which is under pressure from many sides as it is. And now China, with its vast renewables overcapacity, is also threatening to dash our hopes that the energy transition will become an employment driver for us, because we are counting on many new jobs in renewables.
So the question is: Will we manage to create enough new jobs for the people who are losing their jobs in the combustion engine industry?
China’s unfair competitive pressure does not make this any easier, to put it mildly.
By definition, overcapacity means that capital is not being utilized profitably. Isn’t this actually the biggest problem for China?
It is true that this indicates an inefficient use of capital. However, China focuses on effectiveness, not efficiency. When dealing with overcapacity, there is a brutal selection process that may ultimately leave only a few strong players in China. This is expensive for China, but it is an even bigger problem for us. After all, China is including us in the selection process and is pampering its companies with unfair subsidies. The solar industry was a very clear example of this process.
We have a labor shortage, China has high youth unemployment. Isn’t it a good idea to manufacture in China?
If China were not distorting competition in its favor through subsidies, you would be correct. But China’s unfair competitive pressure threatens to result in unemployment here, too.
A related question: We have inflation at an uncomfortable level while deflation looms in China. So China could export a little deflation and push down prices here.
Inflation here is already on a sharp decline. Still, your thesis is partly correct. China’s integration into the global market after its accession to the World Trade Organization in 2001 has demonstrably dampened inflationary pressure in industrialized countries in the past. There is also no reason not to import cheap goods from China if there is no threat to sustainable production in your own country.
And what if there is? Are the EU Commission’s investigations against, for example, Chinese EVs and wind turbines effective?
I think the European Commission’s probes into EVs and wind generators make sense because we have an important and fundamentally competitive production base here. However, when it comes to solar modules, which are produced in a standardized way and are available virtually off the shelf, it is better to continue importing from China. We have no comparative advantages here and should not spend vast amounts of funding on an industry that has no future here without subsidies.
Juergen Matthes is Head of International Economic Policy, Financial and Real Estate Markets Research Unit at the German Economic Institute. In addition to China, his research focuses on globalization and the European and German export models.
Chancellor Olaf Scholz’s trip to China will be dominated by economic issues. But there will also be plenty of political issues to discuss when the Chancellor meets with party and state leader Xi Jinping and Premier Li Qiang in Beijing on Tuesday. Obvious topics include:
These are difficult topics that show just how much relations between Germany and China have changed. Above all, the fact that China is so firmly on Russia’s side plays an important role for Germany and Europe.
During Scholz’s previous visit to Beijing in November 2022, the Chancellor was at least able to persuade the Chinese President to openly disapprove of Putin’s nuclear threats. But that will not be enough this time. The widespread hope in the West at the time that Beijing might be able to distance itself from Moscow after all should finally be abandoned.
In fact, there is evidence that China is secretly aiding the Russian war of aggression. This involves so-called dual-use goods, items that can be used for both civilian and military purposes – including chips, drones and precision manufacturing tools.
Despite the difficult topics, however, Scholz will receive a warm welcome. The leadership in Beijing has recently launched a veritable charm offensive – at least rhetorically. Germany is increasingly taking on a pivotal role in the West, in an increasingly critical environment from the US, Canada and the UK to Japan, Korea and Australia.
And even in Germany, Chinese analysts bet on the Chancellor. They believe Scholz can ensure a balanced German China policy. Their hope is that Scholz will not be swayed by the harsh rhetoric of other politicians who call for “de-risking” Sino-German relations.
Meaning Germany’s so-called “Strategy on China.” Beijing is convinced that Annalena Baerbock’s Foreign Ministry spearheaded the drafting of the more critical China policy. The document begins with the realization that we “need to change our approach to China.”
Robert Habeck’s Ministry of Economic Affairs is also viewed very critically in this context – in stark contrast to the Federal Chancellery. According to Cui Hongjian, Professor at the Academy of Regional and Global Governance at Beijing Foreign Studies University, Scholz is trying to prevent Germany from being completely hijacked by negative voices or political measures from the Foreign Ministry and the Ministry of Economic Affairs.
The normally critical Global Times writes: “Scholz’s upcoming visit to China signifies Germany’s willingness to maintain pragmatic cooperation with China.” The Chancellor’s efforts are “crucial in preventing strategic misunderstandings between China and Germany.” Following his visit in November 2022, the Chinese press already praised the German Chancellor, saying that Xi and Scholz agreed to strengthen cooperation, maintain dialog and reject decoupling and bloc confrontation.
It is right and important that Scholz is returning to China a year and a half later. But he should not be blinded by Chinese charm. The Chancellor will face a confident Chinese leadership. Despite the weakening economy, Xi Jinping’s leadership role is undisputed. Under Xi, China once again focuses more on ideology. The CCP’s control reaches deep into private companies – even at the expense of economic momentum.
Xi Jinping and Li Qiang will both promise Scholz further opening and reforms. However, Beijing does not define “reforms” as liberalization and opening up. What they mean is the strengthening and adaptation of their own system to new realities. These new realities also include a new, realistic German view of China – including on political issues such as Russia and Taiwan.
According to a media report, the German development bank KfW is largely withdrawing from China. Jochen Flasbarth, State Secretary in the German Development Ministry (BMZ), announced in Beijing on Thursday that the financial cooperation between the development bank and China was largely ending, according to a report by the German newspaper Süddeutsche Zeitung on Thursday evening. Negotiations with Chinese authorities on the last three projects worth 370 million euros, for which the German government assumes liability, will be finalized within a year. Accordingly, China will no longer receive new subsidized loans, but only loans at standard market conditions.
In light of geopolitical developments and changes in China, the German government has been discussing how to deal with the instrument of loans for some time. Traditional bilateral development cooperation was already discontinued in 2009 due to China’s strong economic power. However, China continues to receive subsidized and state-backed loans from KfW. According to calculations by the Federal Ministry for Economic Affairs, China was granted preferential loans worth around three billion euros between 2013 and 2020; in 2021, KfW loans for the People’s Republic totaled around 81 million euros, according to the Ministry of Development Aid. According to OECD criteria, the People’s Republic is still categorized as a developing country. ari
The Chinese economy is in a phase of structural weakness in which various challenges need to be overcome simultaneously:
Against this backdrop, the “Two Sessions” (两汇lianghui) of the Chinese People’s Political Consultative Conference and the National People’s Congress held in Beijing from 4 to 11 March were eagerly awaited. Comments from Western observers focused primarily on Xi Jinping’s displays of power and then the – surprising – realization that no significant fiscal or monetary stimulus to revitalize the economy was on the agenda.
Chinese media reports, on the other hand, focused – no doubt in line with state interests and guidelines – on the presentation of the concept of “new productive forces” (新质生产力 xinzhi shengchanli; actually “new types of productive forces” or those of “new quality”) as a new economic policy model. Chinese state television noted that Xi first used this concept in the fall of 2023 during an inspection visit to China’s northeast, where he stressed the need to shape local structural change by unleashing new productive forces based on innovative technologies and industrial transformation.
Such a statement holds little surprise or even revolutionary novelty for the economically educated observer. So, what exactly is this concept of “new productive forces?” The quasi-official ideological organ Qiushi explains that the concept is closely related to the concept of “high-quality development,” which, in turn, is closely interlinked with high technology and innovation. Other Chinese media and propaganda organs specify that it is about mobilizing “modern, advanced productive forces,” which are to be gained through revolutionary (disruptive) technological breakthroughs, an innovative allocation of production factors, and a profound transformation and modernization of industries.
Innovative technologies should not only be used more frequently, but processes should also be optimized and the institutional structure of the system revised. Success should be measurable through increases in total factor productivity. However, the definition and operationalization of the “new productive forces” policy have by no means been finalized and are still in a state of exploration and consolidation in a larger context.
This ambivalent situation appears to be entirely intentional. For as colorful as many formulations in connection with the “new productive forces” may sound, it would be rash to dismiss them simply as a speech bubble or a rhetorical cover-up of the actual economic difficulties. The current discourse surrounding the concept of the “new productive forces” is similar in process to earlier ideological innovations and fundamental political decisions: After being first mentioned by Xi Jinping in the fall of 2023, the concept initially disappeared into the CCP’s internal discussions.
At the important Central Economic and Financial Work Conferences in the winter of 2023/24, Xi Jinping reiterated his call for theoretical substantiation, which sparked a large number of internal proposals from Chinese think tanks and universities. After rigorous internal selection, these proposals were fed into the decision-making process at the top of the state and party. This process of internal conceptual development is ongoing.
In the process, various policies – from tourism and pilot zones to space projects and security policy – are being tied to the new term. The “new productive forces” thus become an important framework for domestic economic policy discussions in China. The parallelism between this development and other core concerns of Xi Jinping, such as the genesis of the New Silk Road Initiative, is significant.
From an external perspective, the concept of the “new productive forces” also appears to have little revolutionary substance. Ultimately, the aim is to achieve nothing more and nothing less than increasing the productivity of economic activity through the rapid introduction of innovative knowledge and modern technologies into economic activity. The prominent characteristic of the “new productive forces” can primarily be seen in the (planned) consistent implementation of the concept in all areas of economic performance and interaction and the idea of a systematic interweaving of the innovation system, industry, and the security apparatus.
The latter follows the logic of a mission-driven policy of strengthening the innovation system to promote overall economic crisis resilience and strengthen the country’s military and security policy capacities in an increasingly perceived hostile global environment.
The state strives to transform new knowledge from the innovation sector into economically usable (“marketable”) products as quickly as possible. This addresses a crucial intersection between the innovation system and industry, which was considered a weakness of the Chinese economy in the past. The “artificial intelligence computing centers” (人工智能计算中心 rengong zhineng jisuan zhongxin) set up in almost all provinces last year provide a blueprint for how this can be achieved: Government-funded but operationally managed by Huawei, these centers aim to provide AI services for companies and scientific institutions that do not have their own capacity for using artificial intelligence.
Equally important is that the state’s “new productive forces” policy creates a very substantial demand for innovative “future” technologies. In doing so, it reduces economic risks in these highly uncertain fields of innovation and generates incentives for investment and entrepreneurial initiatives on a broad scale.
Regardless of the existing conceptual ambiguities and the media propaganda dazzle, the political guideline of the “new productive forces” seems quite substantial and suitable for providing a positive impetus for economic development in the People’s Republic of China. However, the extent to which this endeavor can succeed remains uncertain. In the past, large-scale hopes for macroeconomic productivity increases through the introduction of new technologies have been bitterly disappointed.
In this context, the “Solow Paradox” is perhaps best known. It states that although the computer age had obviously dawned in the 1970s/80s, the expected acceleration in overall economic productivity development failed to materialize. It remains to be seen what the Chinese ” new productive forces” initiative can achieve.
Germany and Europe should pay close attention to the developments concerning China’s “new productive forces.” Not only because these future technologies, which are also of fundamental significance for the European economies, are taking center stage. At least equally important is the fact that this new political guideline also has a strong security political dimension.
For example, Xi Jinping personally used the Central Economic Work Conference in December 2023 to reiterate the close relationship between “high-quality development” and “high-level security.” On the other hand, the Chinese leadership is well aware of the friction between promoting innovation in the sense of traditional cooperation between the state, companies and research institutions (including the involvement of selected foreign players) and the aspiration to promote national sovereignty and security through innovation.
The search for a new program will not be easy here. That is why foreign observers should focus less on finding out which sectors will be associated with the “new productive forces” in the coming months. There will be many. What is probably more important is understanding the dynamics of the Chinese debate and influencing how European players can gain access to China’s emerging “new productive forces” innovation and industrial complex.
Joern-Carsten Gottwald is Professor for East Asian Politics at Ruhr University Bochum since 2011. His previous assignments included the Centre for Chinese and East Asian Politics at Free University Berlin, the Chair in Government and Politics: Politics and Economy of China, University of Trier and the Irish Institute of Chinese Studies, National University of Ireland Cork.
Prof. Dr. Markus Taube holds the Chair for East Asian Economic Studies / China as a faculty member of the Mercator School of Management. He is also the Director of the IN-EAST School of Advanced Studies at the University of Duisburg-Essen and a founding partner of THINK!DESK China Research & Consulting.
Lang Lang – the “Leonardo da Vinci of the piano”? The Chinese star pianist was certainly celebrated as such when he was honored on Hollywood’s “Walk of Fame.” The 41-year-old received the 2778th star plaque on Hollywood Boulevard. In his acceptance speech, the world-famous musician said it was his dream come true. Lang started playing at the age of two. He moved with his family to the United States at 14. Performances in China included the opening ceremony of the 2008 Olympic Games in Beijing.
German Chancellor Olaf Scholz will have to raise some difficult issues in China – from unfair competition to relations with Russia. One economic issue weighs particularly heavily: the People’s Republic’s overcapacity. “China is ultimately trying to keep its growth engine running at the expense of its trading partners,” says economist Juergen Matthes from the German Economic Institute in today’s interview.
This interview is the first in a series of opinions on the Federal Chancellor’s visit to the People’s Republic. More interesting expert opinions await you in the coming week.
Economist Matthes warns that China’s unfair competitive pressure is thwarting Europe’s plans to turn modernization into a job engine: In the long term, China could even export unemployment to Germany because the People’s Republic subsidizes sectors in which Germany is particularly strong.
Nevertheless, Beijing regards Scholz as a balancing voice to calm critical voices – including in Germany, as Michael Radunski analyzes. Despite the difficult topics, Scholz will likely receive a warm welcome. The hope in Beijing is that Scholz will not be influenced by the harsh rhetoric of other politicians calling for a “risk reduction” in Sino-German relations.
Like other European and US politicians before him, Chancellor Scholz apparently wants to discuss Chinese overcapacity and cheap exports in Beijing. Is he setting the right priorities?
I actually consider overcapacity and the associated export flood the most important economic problem. Because they could jeopardize our production base. It is an even graver problem than the problematic business conditions for German companies in China, which are often at the forefront of the debate.
China supplies us with good and cheap goods. What is the problem?
China is ultimately trying to keep its growth engine running at the expense of its trading partners. Instead of the real estate sector, it now massively promotes the development of new industrial capacities with subsidized loans. The industry is supposed to act as a new growth driver after the real estate sector continues to struggle. In a recently published study, I showed that the Chinese trade surplus reached a new high in 2023. I also found that around 150 of about 180 countries have a trade deficit with China. The extent of the imbalances indicates that China is acting at the expense of its trading partners.
Let’s assume that, contrary to expectations, Scholz’s words fall on open ears in Beijing. If he wanted to, could Xi Jinping simply stop the overcapacity?
Overcapacity in China is a systemic problem of state capitalism, with its strong industrial policy control. Unfortunately, it is not easy to fix.
Could you elaborate?
With its five-year plans, state capitalism ultimately also relies on a planned economy. To stay in Beijing’s good graces, the provinces invest in the sectors the central government identifies as priorities. Large capacities are often built up without considering whether there is sufficient demand for the new production. This repeatedly leads to overcapacity, as was the case in the steel industry years ago.
And the leadership will not want to change this.
This model has been quite successful for China so far. However, it is increasingly causing the aforementioned global collateral damage. Beijing can no longer ignore this. Otherwise, more and more countries will protect themselves against Chinese imports with trade barriers.
We have been debating China’s overcapacity for decades. What has happened now that it has suddenly become an issue?
What is new is that China is increasingly focusing on the sectors that we in Europe and Germany specialize in or are now focusing on in the wake of the energy transition. And because its subsidies distort competition, there is no level playing field. Last year, I showed in a study that China is taking more and more of the German economy’s share of the EU market and that this shift has even accelerated recently. This affects all industrial sectors in which we specialize. I consider this a threat to our economic model, which is under pressure from many sides as it is. And now China, with its vast renewables overcapacity, is also threatening to dash our hopes that the energy transition will become an employment driver for us, because we are counting on many new jobs in renewables.
So the question is: Will we manage to create enough new jobs for the people who are losing their jobs in the combustion engine industry?
China’s unfair competitive pressure does not make this any easier, to put it mildly.
By definition, overcapacity means that capital is not being utilized profitably. Isn’t this actually the biggest problem for China?
It is true that this indicates an inefficient use of capital. However, China focuses on effectiveness, not efficiency. When dealing with overcapacity, there is a brutal selection process that may ultimately leave only a few strong players in China. This is expensive for China, but it is an even bigger problem for us. After all, China is including us in the selection process and is pampering its companies with unfair subsidies. The solar industry was a very clear example of this process.
We have a labor shortage, China has high youth unemployment. Isn’t it a good idea to manufacture in China?
If China were not distorting competition in its favor through subsidies, you would be correct. But China’s unfair competitive pressure threatens to result in unemployment here, too.
A related question: We have inflation at an uncomfortable level while deflation looms in China. So China could export a little deflation and push down prices here.
Inflation here is already on a sharp decline. Still, your thesis is partly correct. China’s integration into the global market after its accession to the World Trade Organization in 2001 has demonstrably dampened inflationary pressure in industrialized countries in the past. There is also no reason not to import cheap goods from China if there is no threat to sustainable production in your own country.
And what if there is? Are the EU Commission’s investigations against, for example, Chinese EVs and wind turbines effective?
I think the European Commission’s probes into EVs and wind generators make sense because we have an important and fundamentally competitive production base here. However, when it comes to solar modules, which are produced in a standardized way and are available virtually off the shelf, it is better to continue importing from China. We have no comparative advantages here and should not spend vast amounts of funding on an industry that has no future here without subsidies.
Juergen Matthes is Head of International Economic Policy, Financial and Real Estate Markets Research Unit at the German Economic Institute. In addition to China, his research focuses on globalization and the European and German export models.
Chancellor Olaf Scholz’s trip to China will be dominated by economic issues. But there will also be plenty of political issues to discuss when the Chancellor meets with party and state leader Xi Jinping and Premier Li Qiang in Beijing on Tuesday. Obvious topics include:
These are difficult topics that show just how much relations between Germany and China have changed. Above all, the fact that China is so firmly on Russia’s side plays an important role for Germany and Europe.
During Scholz’s previous visit to Beijing in November 2022, the Chancellor was at least able to persuade the Chinese President to openly disapprove of Putin’s nuclear threats. But that will not be enough this time. The widespread hope in the West at the time that Beijing might be able to distance itself from Moscow after all should finally be abandoned.
In fact, there is evidence that China is secretly aiding the Russian war of aggression. This involves so-called dual-use goods, items that can be used for both civilian and military purposes – including chips, drones and precision manufacturing tools.
Despite the difficult topics, however, Scholz will receive a warm welcome. The leadership in Beijing has recently launched a veritable charm offensive – at least rhetorically. Germany is increasingly taking on a pivotal role in the West, in an increasingly critical environment from the US, Canada and the UK to Japan, Korea and Australia.
And even in Germany, Chinese analysts bet on the Chancellor. They believe Scholz can ensure a balanced German China policy. Their hope is that Scholz will not be swayed by the harsh rhetoric of other politicians who call for “de-risking” Sino-German relations.
Meaning Germany’s so-called “Strategy on China.” Beijing is convinced that Annalena Baerbock’s Foreign Ministry spearheaded the drafting of the more critical China policy. The document begins with the realization that we “need to change our approach to China.”
Robert Habeck’s Ministry of Economic Affairs is also viewed very critically in this context – in stark contrast to the Federal Chancellery. According to Cui Hongjian, Professor at the Academy of Regional and Global Governance at Beijing Foreign Studies University, Scholz is trying to prevent Germany from being completely hijacked by negative voices or political measures from the Foreign Ministry and the Ministry of Economic Affairs.
The normally critical Global Times writes: “Scholz’s upcoming visit to China signifies Germany’s willingness to maintain pragmatic cooperation with China.” The Chancellor’s efforts are “crucial in preventing strategic misunderstandings between China and Germany.” Following his visit in November 2022, the Chinese press already praised the German Chancellor, saying that Xi and Scholz agreed to strengthen cooperation, maintain dialog and reject decoupling and bloc confrontation.
It is right and important that Scholz is returning to China a year and a half later. But he should not be blinded by Chinese charm. The Chancellor will face a confident Chinese leadership. Despite the weakening economy, Xi Jinping’s leadership role is undisputed. Under Xi, China once again focuses more on ideology. The CCP’s control reaches deep into private companies – even at the expense of economic momentum.
Xi Jinping and Li Qiang will both promise Scholz further opening and reforms. However, Beijing does not define “reforms” as liberalization and opening up. What they mean is the strengthening and adaptation of their own system to new realities. These new realities also include a new, realistic German view of China – including on political issues such as Russia and Taiwan.
According to a media report, the German development bank KfW is largely withdrawing from China. Jochen Flasbarth, State Secretary in the German Development Ministry (BMZ), announced in Beijing on Thursday that the financial cooperation between the development bank and China was largely ending, according to a report by the German newspaper Süddeutsche Zeitung on Thursday evening. Negotiations with Chinese authorities on the last three projects worth 370 million euros, for which the German government assumes liability, will be finalized within a year. Accordingly, China will no longer receive new subsidized loans, but only loans at standard market conditions.
In light of geopolitical developments and changes in China, the German government has been discussing how to deal with the instrument of loans for some time. Traditional bilateral development cooperation was already discontinued in 2009 due to China’s strong economic power. However, China continues to receive subsidized and state-backed loans from KfW. According to calculations by the Federal Ministry for Economic Affairs, China was granted preferential loans worth around three billion euros between 2013 and 2020; in 2021, KfW loans for the People’s Republic totaled around 81 million euros, according to the Ministry of Development Aid. According to OECD criteria, the People’s Republic is still categorized as a developing country. ari
The Chinese economy is in a phase of structural weakness in which various challenges need to be overcome simultaneously:
Against this backdrop, the “Two Sessions” (两汇lianghui) of the Chinese People’s Political Consultative Conference and the National People’s Congress held in Beijing from 4 to 11 March were eagerly awaited. Comments from Western observers focused primarily on Xi Jinping’s displays of power and then the – surprising – realization that no significant fiscal or monetary stimulus to revitalize the economy was on the agenda.
Chinese media reports, on the other hand, focused – no doubt in line with state interests and guidelines – on the presentation of the concept of “new productive forces” (新质生产力 xinzhi shengchanli; actually “new types of productive forces” or those of “new quality”) as a new economic policy model. Chinese state television noted that Xi first used this concept in the fall of 2023 during an inspection visit to China’s northeast, where he stressed the need to shape local structural change by unleashing new productive forces based on innovative technologies and industrial transformation.
Such a statement holds little surprise or even revolutionary novelty for the economically educated observer. So, what exactly is this concept of “new productive forces?” The quasi-official ideological organ Qiushi explains that the concept is closely related to the concept of “high-quality development,” which, in turn, is closely interlinked with high technology and innovation. Other Chinese media and propaganda organs specify that it is about mobilizing “modern, advanced productive forces,” which are to be gained through revolutionary (disruptive) technological breakthroughs, an innovative allocation of production factors, and a profound transformation and modernization of industries.
Innovative technologies should not only be used more frequently, but processes should also be optimized and the institutional structure of the system revised. Success should be measurable through increases in total factor productivity. However, the definition and operationalization of the “new productive forces” policy have by no means been finalized and are still in a state of exploration and consolidation in a larger context.
This ambivalent situation appears to be entirely intentional. For as colorful as many formulations in connection with the “new productive forces” may sound, it would be rash to dismiss them simply as a speech bubble or a rhetorical cover-up of the actual economic difficulties. The current discourse surrounding the concept of the “new productive forces” is similar in process to earlier ideological innovations and fundamental political decisions: After being first mentioned by Xi Jinping in the fall of 2023, the concept initially disappeared into the CCP’s internal discussions.
At the important Central Economic and Financial Work Conferences in the winter of 2023/24, Xi Jinping reiterated his call for theoretical substantiation, which sparked a large number of internal proposals from Chinese think tanks and universities. After rigorous internal selection, these proposals were fed into the decision-making process at the top of the state and party. This process of internal conceptual development is ongoing.
In the process, various policies – from tourism and pilot zones to space projects and security policy – are being tied to the new term. The “new productive forces” thus become an important framework for domestic economic policy discussions in China. The parallelism between this development and other core concerns of Xi Jinping, such as the genesis of the New Silk Road Initiative, is significant.
From an external perspective, the concept of the “new productive forces” also appears to have little revolutionary substance. Ultimately, the aim is to achieve nothing more and nothing less than increasing the productivity of economic activity through the rapid introduction of innovative knowledge and modern technologies into economic activity. The prominent characteristic of the “new productive forces” can primarily be seen in the (planned) consistent implementation of the concept in all areas of economic performance and interaction and the idea of a systematic interweaving of the innovation system, industry, and the security apparatus.
The latter follows the logic of a mission-driven policy of strengthening the innovation system to promote overall economic crisis resilience and strengthen the country’s military and security policy capacities in an increasingly perceived hostile global environment.
The state strives to transform new knowledge from the innovation sector into economically usable (“marketable”) products as quickly as possible. This addresses a crucial intersection between the innovation system and industry, which was considered a weakness of the Chinese economy in the past. The “artificial intelligence computing centers” (人工智能计算中心 rengong zhineng jisuan zhongxin) set up in almost all provinces last year provide a blueprint for how this can be achieved: Government-funded but operationally managed by Huawei, these centers aim to provide AI services for companies and scientific institutions that do not have their own capacity for using artificial intelligence.
Equally important is that the state’s “new productive forces” policy creates a very substantial demand for innovative “future” technologies. In doing so, it reduces economic risks in these highly uncertain fields of innovation and generates incentives for investment and entrepreneurial initiatives on a broad scale.
Regardless of the existing conceptual ambiguities and the media propaganda dazzle, the political guideline of the “new productive forces” seems quite substantial and suitable for providing a positive impetus for economic development in the People’s Republic of China. However, the extent to which this endeavor can succeed remains uncertain. In the past, large-scale hopes for macroeconomic productivity increases through the introduction of new technologies have been bitterly disappointed.
In this context, the “Solow Paradox” is perhaps best known. It states that although the computer age had obviously dawned in the 1970s/80s, the expected acceleration in overall economic productivity development failed to materialize. It remains to be seen what the Chinese ” new productive forces” initiative can achieve.
Germany and Europe should pay close attention to the developments concerning China’s “new productive forces.” Not only because these future technologies, which are also of fundamental significance for the European economies, are taking center stage. At least equally important is the fact that this new political guideline also has a strong security political dimension.
For example, Xi Jinping personally used the Central Economic Work Conference in December 2023 to reiterate the close relationship between “high-quality development” and “high-level security.” On the other hand, the Chinese leadership is well aware of the friction between promoting innovation in the sense of traditional cooperation between the state, companies and research institutions (including the involvement of selected foreign players) and the aspiration to promote national sovereignty and security through innovation.
The search for a new program will not be easy here. That is why foreign observers should focus less on finding out which sectors will be associated with the “new productive forces” in the coming months. There will be many. What is probably more important is understanding the dynamics of the Chinese debate and influencing how European players can gain access to China’s emerging “new productive forces” innovation and industrial complex.
Joern-Carsten Gottwald is Professor for East Asian Politics at Ruhr University Bochum since 2011. His previous assignments included the Centre for Chinese and East Asian Politics at Free University Berlin, the Chair in Government and Politics: Politics and Economy of China, University of Trier and the Irish Institute of Chinese Studies, National University of Ireland Cork.
Prof. Dr. Markus Taube holds the Chair for East Asian Economic Studies / China as a faculty member of the Mercator School of Management. He is also the Director of the IN-EAST School of Advanced Studies at the University of Duisburg-Essen and a founding partner of THINK!DESK China Research & Consulting.
Lang Lang – the “Leonardo da Vinci of the piano”? The Chinese star pianist was certainly celebrated as such when he was honored on Hollywood’s “Walk of Fame.” The 41-year-old received the 2778th star plaque on Hollywood Boulevard. In his acceptance speech, the world-famous musician said it was his dream come true. Lang started playing at the age of two. He moved with his family to the United States at 14. Performances in China included the opening ceremony of the 2008 Olympic Games in Beijing.
