2015-03-16

Made in China 2025: Good and Bad

China is aiming to dominate the global economy.
What 'Made in China 2025' is all about
The initiative, dubbed "Made in China 2025", focuses on promoting key sectors, led by railways and nuclear power plant construction, in offshore markets, in Beijing's latest move to create leading international giants.

"Without size and strength internationalization is fairly difficult," said Li Dongsheng, chief executive of Chinese mobile telephone and television set giant TCL Corp, explaining the rationale behind consolidation.

A restructuring plan, expected to be released before the end of March, will address issues ranging from the establishment of asset management companies to oversee state shareholding, to the introduction of non-state investment and performance-based compensation schemes at government-controlled firms, experts say.

Improving the efficiency at state-owned enterprises (SOEs), which dominate crucial sectors of China's economy, is critical as the country struggles to maintain the breakneck pace of growth it has delivered for two decades.

Premier Li Keqiang outlined the "2025" strategy, which also includes promoting machinery and communications equipment, automobiles, aircraft and electronics, in his address to the annual gathering of China's rubber-stamp parliament, which concludes later this week.

China's Plan to Dominate World Markets
China will consolidate state-owned enterprises (SOEs) into mammoth companies, all with the hopes of winning China more of the global market share in key sectors – and the international prestige that entails.

SOE reform is only one piece in Beijing’s larger attempt to create globally attractive Chinese brands. During his work report to the National People’s Congress, Premier Li Keqiang introduced the “Made in China 2025” initiative. That’s only the first leg of a 30-year plan to transform China “from a big manufacturing power to a strong manufacturing power,” as China Daily explained. China may be the “world’s factory,” but its own domestic products and companies are not internationally competitive. The “Made in China 2025” plan aims to fix that, by focusing on “an innovation drive, intellectual property and green development.”

Some of this goes against the prior strategy of breaking up the giant monopolies to foster domestic competition:
Other possible mergers involve China’s telecommunications sector. Beijing News points to rumors of China Mobile merging with a provincial telecoms firm and China Telecom merging with China Unicom, which would create two massive telecommunications firms monopolizing the Chinese market. Those rumors remain unconfirmed, however.

I do not expect this strategy to succeed. The world is increasingly turning towards protectionism and Chinese SOEs are going to find it much harder to compete globally because countries will protect their domestic firms from Chinese government created giants. A centrally planned strategy of building behemoth corporations has worked almost never. Furthermore, Petrobras & PetroChina. This strategy is the exact opposite the current reform zeitgeist.

The other problem for China is that the global economy increasingly means the Chinese and Indian economies. Developed market GDP will be slightly higher in a decade, either due to slow growth or a major recession. Trying to grow by taking markets away from foreign economies wouldn't work even if the foreign governments were willing to let it happen.

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