Beijing’s push to build technological knowledge through overseas acquisitions is likely to drive economic growth, but it will also heighten trade tensions with the US and Europe over mounting security concerns.
The China Dashboard report published by the Asia Society Policy Institute and Rhodium Group this week said that China’s policies have continued to foster an entrepreneurial environment to encourage tech breakthroughs.
But advancing innovative technology with heavy state backing is likely to cause US and European governments to upgrade national security reviews of Chinese investment, the report said.
The report cited the government’s recent roll-out of industrial policy plans for new energy vehicles and artificial intelligence.
Such efforts show that “China’s leaders are determined to boost the innovative capability of domestic firms in promising emerging technologies,” the report said.
But these plans are “likely to accelerate trade tensions with the US and Europe, where governments are looking critically at China’s state support for domestic industry and its policy toward outbound acquisitions of foreign technology,” it said.
In November, the US-China Economic and Security Review Commission (USCC) urged Congress to step up its reviews of foreign investments, especially those by China’s state-owned enterprises and sovereign wealth funds.
At its current pace, “China will catch up to the 2011–2014 levels of US contribution” from innovative sectors to national economic growth in the quarters ahead, according to the China Dashboard report, which dissected data as of last year’s third quarter.
At the quarter’s end, about 32.2 per cent of economic growth in China came from its innovative sectors, compared to 33.6 per cent in the US.
It was “evident” that innovation was the area where China continued to make the greatest progress, according to the report.
Ann Lee, author of Will China’s Economy Collapse ? and a New York University adjunct economics and finance professor, said that if China were to “come up with an innovation equivalent to the internet the US government helped create, that could launch China’s economy with an upside surprise”.
Although such a breakthrough would be a “best-case scenario”, it remains “a possibility,” Lee said on Wednesday at a National Committee on US China Relations event.
“If the US decides to go hard core on China on security issues, it’s going to take China longer” to advance its innovative industry “despite its growing capability to develop home-grown innovations,” Lee said.
The US government’s decisions to block a number of high-profile cross-border deals showed how difficult such acquisitions may be to complete.
In January, US regulators rejected on national security grounds both phone maker Huawei’s plan to sell smartphones in the US through giant US mobile carrier AT&T and Ant Financial’s proposed acquisition of money transfer operator MoneyGram International Inc.
Ant Financial’s parent company Alibaba Group Holdings Limited owns the South China Morning Post.
Besides innovation, the China Dashboard tracks China’s progress towards its self-defined reform objectives in nine other economic policy clusters including competition, trade and cross-border investment.