Big spending numbers are being thrown around in China, once again. This time, it’s trillions of yuan of fiscal stimulus on all things tech. The plans are bold and vague: China wants to bring technology into its mainstream infrastructure build-out and, in the process, heave the economy out of a gloom due only partly to the coronavirus.
But will this move the needle for China to achieve some kind of technological dominance? Or increase jobs, or boost favoured companies? Not as much as the numbers would suggest, and possibly very little. A country covered in 5G networks makes for a tech-savvy society; it’s less clear that this money will boost industrial innovation or even productivity.
Over the next few years, national-level plans include injecting more than 2.5-trillion yuan (US$352-billion) into over 550 000 base stations, a key building block of 5G infrastructure, and 500-billion yuan into ultra-high-voltage power.
Local governments have ideas, too. They want data centres and cloud computing projects, among other things. Jiangsu is looking for faster connectivity for smart medical care, smart transportation and, well, all things smart. Shanghai’s City Action Plan alone is supposed to total 270-billon yuan.By 2025, China will have invested an estimated $1.4-trillion.
According to a work report released on Friday in conjunction with the start of the National People’s Congress, the government plans to prioritise “new infrastructure and new urbanisation initiatives” to boost consumption and growth. Goldman Sachs Group analysts have said that new infrastructure sectors could total 2-trillion yuan ($281-billion) this year, and twice that in 2021. Funding is being secured through special bonds and big banks. The Shanghai provincial administration, for instance, plans to get more than 40% of its needs from capital markets, and the rest from central government funds and special loans. Thousands of funds have been set up in various industries since 2018, and some goals were set forth in previous plans.
Tried and true fallback
Policymakers are aggressively driving the fiscal stimulus narrative through this new infrastructure lens. Building big things is a tried and true fallback in China, from the nation’s own road-and-rail networks to its most important soft-power foreign policy, the belt-and-road initiative to connect the globe in a physical network for trade. It’s less obvious that this will work for technology. The reality is that the central government approved projects add up to only around 10% of infrastructure spending and 3% of total fixed-asset investment. The plans lack the focus or evidence of expertise to show quite how China would achieve technological dominance. Thousands more charging stations for electric cars won’t change the fact that the country has been unable to produce a top-of-the-line electric vehicle, and demand for what’s on offer has tanked without subsidies.
With their revenues barely growing, China’s telecoms giants seem reluctant to allocate capital expenditure toward the bold 5G vision. China Mobile chairman Yang Jie said on a March earnings call that capex won’t be expanding much despite the company being at the outset of a three-year peak period for 5G investments. Analysts had expected it to grow by more than 20%, compared to the actual 8.4%.
Laying this new foundation for the economy, which includes incorporating artificial intelligence into rail transit and utilities, requires time, not just pledged capital. It’s hard to see the returns any time soon, compared to investments on old infrastructure. These projects are less labour intensive, so there’s no corresponding whack at the post-virus jobless rate that would help demand. State-led firms that could boast big profits from sales of cement and machinery on the back of building projects, for instance, can’t reap money as visibly from being more connected.
Spending the old way isn’t paying off like it used to, either. Sectors such as automobiles and materials, big beneficiaries of subsidies and state funding, have seen returns on invested capital fall. The massive push over the years gave China the Shanghai maglev and a vast network of trains and roads. But much debt remains and several of those projects still don’t make money. Add in balance-sheet pressures and spending constraints, and every yuan of credit becomes less effective.
There’s also expertise to consider. Technological dominance may require research more than 5G poles. China’s problem with wide-scale innovation remains the same as it has been for years: it always comes from the top down. Beijing has determined and shaped who the players will be. Good examples are the 2006 innovative society plan and Made in China 2025, published in 2015, that intended to transform industries and manufacturing, and have had mixed results.
China is unlikely to get the boost from tech spending that it needs to solve present-day problems, especially in the flux of the post-Covid-19 era. Ultimately, the country will just fall back on what it knows best: property, cars, roads and industrial parks. The economy is still run by construction, real estate and manufacturing. Investors should think again before bringing in anything but caution. — By Anjani Trivedi, (c) 2020 Bloomberg LP
