2019 - Insights

2019 - Insights


Author: ZhangYuge, Director, Hong Kong and Macao Research Department, CDI

Macao should take advantage of the plan to develop the Guangdong-Hong Kong-Macao Greater Bay Area to diversify its economy.

Macao has realized prosperous and stable socioeconomic development since its return to the motherland. However, moderate economic diversification is the key to better implementing the "one country, two systems" principle in the future.

Since the Macao Special Administrative Region government released policies to promote economic diversification in 2004, its economic landscape has not changed much. Macao still has a long way to go in economic diversification. Statistics published by the SAR show that the added value of gambling (including intermediary industries) accounted for 50.5 percent of Macao's GDP in 2018, 4.3 percentage points higher than 2004; in terms of tax revenue, gambling generates 113.5 billion patacas ($14.1 billion) in recurrent income and capital income, making up 80.3 percent of the SAR's total.

Moderate economic diversification is the future for Macao. But how? It will not be achieved solely on Macao's own strengths. Macao needs to ride the momentum of the plan to develop the Guangdong-Hong Kong-Macao Greater Bay Area. On the one hand, it should seek to attract resources from the Greater Bay Area to develop industries independent of gambling; on the other hand, it should develop a headquarter economy to get into the Greater Bay Area market and develop competitive industries.

In the first place, it should develop its financial industry. The traditional manufacturing industry and the service industry are not able to compete with the gambling industry with regard to profitability. The best choice for an alternative is therefore the financial industry. Monte Carlo serves as a good example for this. Macao should take into consideration its own strengths and weaknesses in positioning itself among neighboring cities such as Hong Kong, Shenzhen and Guangzhou. Macao should prioritize developing the bond, commodities and financial derivatives markets to cater to the needs of the Belt and Road Initiative and business cooperation between China and Portuguese-speaking countries. It can develop its wealth management, internet finance and green finance by following the fintech trend in finance and innovative financing. Macao is on the same starting line with other cities in the Greater Bay Area in innovative financing, but it can take advantage of its role as a free port. It should focus on selected areas and develop finance programs with rich resources and mature conditions. It should promote the pooling of financial resources, strengthen its cooperation with Portuguese-speaking countries and enhance cooperation with Hong Kong and Shenzhen as well as with technology and financing companies.

It should also develop its competitive industries such as high-end tourism by promoting education and training. And it should seek to become the tourism education and training center for the Greater Bay Area and cultivate high-end tourism professionals; develop a high-end tourism and leisure industry to cater to the needs of the residents in the Greater Bay Area; strengthen its tourism cooperation with other cities in the Greater Bay Area and develop package tourism itineraries to attract more tourists and customers.

Second, it should accelerate the development of the exhibition industry. The goal should be to establish Macao as Asia's hub for the exhibition industry and build a modern service industry with events and exhibitions at the core. Macao's exhibition industry, with conferences as the priority, should build a multi-level and complementary exhibition market for the Greater Bay Area, boosting the competitiveness of the area as a whole.

Third, it should develop its cultural and creative industry. It should seek to strengthen its position within the coordinated development of the cultural and creative industry in the Greater Bay Area, by building a cultural and creative industry chain.

Fourth, it should bolster the competitiveness of the traditional Chinese medicine industry by developing key technologies. It should develop frontier technologies of traditional Chinese medicine with the support from State Key Laboratories of Quality Research in Chinese Medicine and Shenzhen-Macao Innovation Research Institute of Traditional Chinese Medicine; expand the market of traditional Chinese medicine of Macao using the platform of Traditional Chinese Medicine Science and Technology Industrial Park of Cooperation Between Guangdong and Macao and promote the traditional Chinese medicine industry of Macao internationally, using the World Health Organization Collaborating Centre for Traditional Medicine as the platform for international exchanges.

To realize its moderate economic diversification, Macao should revise its laws and regulations to facilitate the development of new economic forms; adjust its policies for attracting and cultivating talents, which are essential for supporting its economic diversification; attract resources from the Chinese mainland to Macao, give full play to Macao's role as a free port; and enhance the relationship between Macao and Hengqin New Area in the neighboring mainland city of Zhuhai.

IMG 2555Author: ZhangGuoping, Postdoctoral Researcher, CDI

India’s sudden withdrawal has hit negotiations involving 16 countries of the Regional Comprehensive Economic Partnership treaty, which is expected to conclude this year. The RCEP is a proposed free trade agreement between the countries of the Association of Southeast Asian Nations, and six states with which ASEAN has FTAs.

China needs to remain open towel coming India to join the RCEP whenever it is ready, deepen reform and opening-up to benefit countries entering the Chinese market, and mediate among different countries to ease trade frictions to contribute to the conclusion of RCEP negotiations, which can inject fresh impetus to global trade.

With a population of about 3.5 billion, this trading bloc has a total gross domestic product of more than $21 trillion, accounting for more than 30 percent of global trade. If the RCEP is finalized, it will be the world’s largest regional FTA.

The RCEP is more accessible to developing nations. Its framework complements the World Trade Organization by covering traditional issues such as goods trade, dispute settlement and service trade as well as new ones, including investment intellectual property, digital trade, and finance and telecommunication.

It plans to cut restrictions and discriminatory measures especially in the field of service trade. The RCEP can lay the foundation for developing countries participating in the treaty to get involved in higher FTA levels in the future, which is significant for promoting free trade between member countries in the era of globalization.

Since WTO reforms have not yet been launched, the RCEP will offer great opportunities for global trade, especially for China. Due to factors such as the unilateralism of some major countries, the number of permanent WTO judges has come down from seven to three, with the tenure of one of them concluding by the end of this year.

Participation in the RCEP will be an important approach for China to cope with Sino-US trade frictions and stabilize its foreign trade growth in the short term. In the long term, it is expected to promote China’s high-level opening-up and further its participation in regional integration.

China will further expand its economic and trade partners among the RCEP member countries and make greater contributions for maintaining the prosperity of the Asia-Pacific region.

It will also share its experiences and help RCEP member countries enhance confidence in free trade and combine the RCEP framework with the Belt and Road Initiative to produce joint results.

At present, all parties have reached consensus on more than 90 percent of the agreement text. However, the China-United States and Japan-Republic of Korea trade frictions, and India’s withdrawal, continue to pose challenges.

India has concerns about the potential negative impact of imports and lacks confidence in the competitiveness of the domestic industry. It has filed many anti-dumping cases against China, and has established a complicated non-tariff system to protect the domestic market.

In this regard, China first needs to promote to the member countries to adopt more proactive and pragmatic strategies toward the conclusion of negotiations while respecting ASEAN’s dominant role.

China needs to uphold the principle that the 15 RCEP countries can go ahead with the agreement that is open to India, which reflects China’s openness toward foreign cooperation as well as its determination to adhere to multilateralism and trade liberalization.

Second, some Southeast Asian countries are concerned that domestic markets may bear the brunt of China’s exports once the RCEP treaty is concluded. China needs to further reform and open up, show the huge potential of the Chinese market to enterprises and investors of other countries participating in the RCEP, and encourage countries to invest in China and facilitate RCEP negotiations.

The second China International Import Expo recently held in Shanghai allowed foreign enterprises to see the great returns of tapping into the Chinese market and demonstrated China’s confidence as the world’s largest market. The Foreign Investment Law will come into effect in 2020, when foreign investment and business activities in China will be more secure.

Third, China needs to further play its role as a mediator. Since Japan- ROK economic and trade frictions are showing no signs of easing in the short term, China needs to respect the dominant role of ASEAN while continuing to mediate between countries as a major power and promoting countries participating in RCEP negotiations to adopt more proactive pragmatic strategies, which can turn risks into opportunities, and lay the foundation for future negotiations for the China-Japan- ROK Free Trade Zone and the China-India trade agreement.

In the era of globalization, RCEP member countries need to remain open and inclusive, participate in negotiations proactively and promote regional integration to better cope with challenges caused by anti-globalization and trade protectionism.

As the world’s largest regional agreement, the RCEP will serve as a multilateral cooperation platform for member countries, provide a new approach for countries to address problems, advance cooperation in the Asia-Pacific region and give new impetus to global trade.

The decision by China's central leadership to lift the status of Shenzhen from a special economic zone to a pilot demonstration area has underscored the country's intention to undertake bolder economic, administrative and legal reforms and to explore a new and unique development path to foster high-quality growth, experts said.

The southern Chinese city has developed from a small fishing village into a modern metropolis, serving as a trailblazer and test bed of China's market reform and opening-up policy introduced by the late leader Deng Xiaoping four decades ago. Now the city is tasked with a new mission - to build itself into a pilot demonstration zone of socialism with Chinese characteristics guided by President Xi Jinping's thoughts.

The elevated status of Shenzhen is not only a recognition of the city's success but also a recognition of the country's development model featuring a distinctly Chinese approach that is different from the Western model, experts said.

"Socialism with Chinese characteristics is not a hollow political slogan or a vague ideological concept. Shenzhen's development and success is a concrete example and best illustration of the idea," said Guo Wanda, executive vice-president of the China Development Institute, a think tank in Shenzhen.

"People could raise questions such as whether capitalism is the only way to achieve high-quality development, or are there other models? The central leadership's decision about Shenzhen highlighted China's confidence in its own political and economic system to build a better society," Guo said.

Shenzhen is now expected to take a leading role in pushing for more reforms and to develop itself into a national model of high-quality development and a world-class city with global influence, the ambitious goals set in the guideline issued by the central government on Aug 18.

"The city's new mission is not just about exploring and experimenting. It is also about coming up with a development formula that can be replicated or borrowed by others," Guo said.

It is not a coincidence that Shenzhen was picked by the central government to be the pilot zone. Under the leadership of the Communist Party of China, Shenzhen's growth features a thriving private economy with strong entrepreneurship. The city is the innovation hub of the country and the site of the headquarters of many high-tech companies, including Huawei and Tencent.

Last year, Shenzhen's GDP rose to 2.4 trillion yuan ($337 billion), surpassing its neighbor Hong Kong.

More important, the city, after many years of double-digit growth, still manages to maintain a strong growth momentum, with its GDP growing at 7.4 percent in the first half of this year - higher than Shanghai's 5.9 percent and Beijing's 6.3 percent.

Shenzhen is also a young city, with the average age of its 13 million residents at around 32 as of the end of 2016, and it continues to draw talent and professionals from other parts of China and foreign countries.

Under the new guideline, technology and financial services will be the two main pillars that drive Shenzhen's future growth. The city will build a modern economic system driven by innovation, and a national scientific research center will be established there. It will also build a highly innovative manufacturing base for products including high-end telecommunications and medical equipment.

The city will be a frontier to accelerate the reform of State-owned enterprises. It will be a pilot area to explore the reform of the country's foreign exchange policy and play a key role of boosting the global profile of the renminbi. It will also further open its financial market to Hong Kong and Macao to boost two-way trading of financial products.

Unlike its previous role as the special economic zone, which mainly focused on making market economy compatible with socialism, the new mission is an all-around effort that goes beyond the economic realm and holds wider significance, said Mao Yanhua, a professor of free trade at the Center for Studies on Hong Kong, Macao and Pearl River Delta at Sun Yat-sen University in Guangzhou.

Under the central government's guideline, future reforms in Shenzhen also will extend to the legal and administrative areas. Shenzhen will be given greater flexibility to carry out legal reform to improve rule of law, and the city will explore ways to improve the property ownership system in order to effectively protect property rights. The city will also create a more convenient entry and exit system at its borders and allow foreign permanent residents to launch science and technology enterprises.

"Shenzhen will be given more freedom to leverage its legislative advantage as the special economic zone to carry out the reform in the legal and administrative system and to better define the relationship between the government and the market," Mao said.

The timing of the guideline also coincided with the ongoing trade conflicts with the United States and the turmoil in Hong Kong. Mao said that it highlighted the strategic importance for the country to refine its growth model amid rising uncertainties. "It also put forward the message that external uncertainties will not derail China's growth and its development strategy," he added.

The new status of Shenzhen also helped clarify the country's Guangdong-Hong Kong-Macao Greater Bay Area initiative, as well as Shenzhen's role in the initiative and its relationship with Hong Kong and Macao, experts said.

"It is not intended to undermine Hong Kong's status. It is about drawing on the cities' strengths, pooling their resources and better integrating with one another. A better Shenzhen will help broaden Hong Kong's development prospects and vice versa," Guo said.

Rico Chan, head of global law firm Baker McKenzie's real estate group in Greater China and Asia, who also leads the firm's Greater Bay Area efforts, said the new guideline helps provide further clarity on China's policy direction and reaffirms the country's commitment to developing the Greater Bay Area into a world-class city cluster under the overall framework of one country, two systems.

"The success of the Greater Bay Area is largely reliant on the ease of cross-border flow of capital, talent, trade and investments among the eleven cities. Hence, any regulatory developments that can help foster such an intercity ecosystem will naturally be welcomed by all businesses," Chan said.

Since Shenzhen is expected to receive more favorable government policies to cement its role as the paramount technology and innovation hub of the Greater Bay Area, this will help boost foreign investors' confidence in the city while bringing more business opportunities for them, said Hannah Cassidy, a partner for financial services regulatory matters at global law firm Herbert Smith Freehills in Hong Kong.

"Bold legal reforms will continue to evolve so as to support and strengthen this overarching goal. As such, foreign investors and companies can expect a more robust commercial and legal environment in Shenzhen, with fewer restrictions on the free flow of capital and information, designed to inspire the future development of the nation," she said.

Sheena Loi, a senior consultant for technology, media and telecommunications at the same law firm, said, "Foreign investors and companies can expect many opportunities for investment in the near term as Shenzhen continues to devote more resources to spur further development in 5G, artificial intelligence, data centers, advanced communication devices and also medical instruments."

Source: https://www.chinadaily.com.cn/a/201909/10/WS5d770aa3a310cf3e3556ab64.html

Author: Liu Xiang, Executive Director, Department of Regional Development and Planning, China Development Institute

Editor’s Note: Chinese investments in Africa should promote industrialization and strengthen the continent's self-development capacity. In recent years, China-Africa cooperation has been hit by Africa's uneven development, Africa's inability to develop itself and its debt crisis since the beginning of the century.

There are clear signs Africa's debt problem needs to be addressed. Unlike the charitable assistance from Western countries, which comes with various affiliated conditions, China is able to provide "coordinated industrialization" aimed at cultivating African countries' self-development abilities. Most African countries gained their independence in the 1970s. In the early days of independence, Africa's debt problems were not serious. During the Cold War, both the Soviet Union and the West tried to draw Africa to their side and provided huge loans that led to a rapid rise in the debt ratio of African countries.

By 1980, Africa's overall debt ratio had risen to 24.22 percent. Since 2000, Africa's economy has enjoyed strong growth. From 2000 to 2015, its average annual GDP growth rate reached 5.5 percent. Western financial markets have provided a lot of capital to Africa because of their optimistic assessment of its economic prospects.

The aid provided by Western countries did not solve Africa's development and debt problems, as it did not help Africa strengthen its capacity for self-development. It ended up being charitable assistance with various conditions attached. So if China is going to really help African countries, it needs to help them find the path of industrialization, support manufacturing capacity which suits the different development stages of African countries and attach great importance to the relationship between the transformation of China's manufacturing industry and Africa's industrialization needs.

China is still a developing country; its industrialization drive is still under way. But through the implementation of the Belt and Road Initiative and its overseas development assistance, China hopes to change the predicament faced by African countries to help build a community with a shared future for all mankind.

Four things are required to advance Africa's industrialization in a coordinated way:

First, China should concentrate its investment in countries and regions with better conditions. Seen from the current debt crisis there are obvious differences among African countries, some countries are still stuck in a debt crisis, while others have been able to deal with it, and have a strong ability to maintain sustainable development and political stability. When selecting which African countries to invest in, China should opt for those with good economic conditions, stable political situations, good industrial structures and strong sustainable development capacity, such as South Africa, Nigeria, Ethiopia, Kenya, Cote d'Ivoire and Angola. African countries generally suffer from unbalanced development. After selecting the countries in which to invest, we also need to evaluate the cities. Due to the current strong demand for export-oriented industries in Africa, it is suggested that port cities on the east and west sides of the continent be the priority. Some countries and cities with large population bases and strong consumption capacity can also be considered.

Second, China should increase its investment in manufacturing. The last round of large-scale investment was in infrastructure construction in Africa, which did not directly bring self-development to Africa, but laid a good foundation for the development of the manufacturing industry with ports, airports, other transportation networks and energy supplies.

Third, investment projects should be located in industrial parks. At present, the investment and business environments in African countries are still unfavorable. To create conditions for the manufacturing industry to take root, industrial parks are needed as the means to create a sound business environment quickly. Developing the manufacturing industry in industrial parks can also improve the industrial chain and supporting industries, which is conducive to the agglomeration and development of manufacturing. China's establishment of overseas industrial parks in Africa over the past 10 years points the direction for this round of overseas industrial parks. Also the current situation of manufacturing transfer is much better than it was 10 years ago, so the probability of success is higher.

Fourth, the current project contracting mode has many disadvantages. Since the project contractor does not bear investment risks, it is easy to cause low investment efficiency. For example, it is easy to exaggerate the significance of the construction project, and raise the project scale and level, and there is insufficient consideration of the demand for the operation period during the construction. To improve the efficiency of investment and promote the sustainability of China-Africa infrastructure cooperation, the mode of infrastructure cooperation and investment and financing should be changed.

For example, once a project contractor participates in the investment of a contracted project, it needs to bear the corresponding investment risk, and carry out more scientific demonstration of the construction scale and standards of the project. At the same time, the loan repayment ability and economic benefits of the project need to be considered to avoid the investment being wasted, and improve the efficiency of investment and avoid a large amount of debt to the host country.

In addition, local staff in Africa, both general technical workers and local managers, should be trained in the operation process. After a long period of operation, the whole project should be transferred to the host country. Training local staff and providing long-term and stable employment opportunities for local people will create favorable public sentiment for Chinese investments and will promote cultural integration between China and Africa. Training should also be provided for management personnel in African countries. The advanced corporate governance experience and management processes of China's operating companies should be taught to local management personnel to realize the localization and sustainable operation of projects.

Source: http://www.chinadaily.com.cn/global/2019-08/06/content_37499117.htm

Author: Fan Gang, President of CDI

Editor’s Note: The US administration under President Donald Trump has resorted to bullying, hindering China's progress and suppressing Chinese companies with unreasonable excuses, one of which is that China has stolen the United States' research findings and technologies. China, which has adopted reasonable approaches to obtain technologies, finds the accusation absurd.

China's first approach has been to purchase patents. It spent $35.6 billion on intellectual property rights purchases in 2018, of which a quarter was paid to the US.

The second approach is through learning. China began to send students abroad every year for studies. A total of 360,000 Chinese students are studying in US schools and universities. China has learned about technologies through learning and following the management techniques of developed countries and multinational corporations.

Some countries in Northeast Asia have taken the lead in several fields within a short period because of proactive learning. Although China has been a late starter, it is catching up through learning. Developing countries need to reform, open up and learn from developed nations. The US, a country with advanced technologies, did similar things in its initial phase of development.

While ignoring the struggles of developing nations, the US is focused on maintaining its leading status in the world. China has made steady efforts in the past 40 years through reform and opening-up, and narrowed the gap with the US to some extent.

The third approach is through knowledge and technology, which means absorbing foreign capital and allowing foreign companies to do business in the developing countries. Many developing countries are eager to attract foreign capital and embrace foreign companies, since these companies can bring in capital, technology and different management approaches.

Through cooperation and trading with foreign companies or working in such companies, people in the developing countries can better learn about advanced production technologies and management approaches of developed countries and multinational corporations.

These companies are likewise eager to enter developing nations, applying advanced technologies across a wider area and achieving higher profit. However, such mutually beneficial cooperation has been described by some US officials as forced technology transfer to China.

Such accusations are baseless because no enterprise will transfer core technologies to other countries without an eye on profit.

Competition in China may be stiffer than those in other countries, since the market is bigger and open, with top companies from all over the world having a presence in every industry. China's market is complicated, too.

In addition, over the past few years, China has come out with stringent laws and regulations, special courts as well as administrative agencies specializing in intellectual property rights protection.

The only way China can make the US realize the absurdity of its accusations is to make efforts toward development, continue to learn, deepen reform and opening-up, promote independent innovation and maintain sustainable economic growth.

Source: http://www.chinadaily.com.cn/global/2019-08/08/content_37499851.htm

Author: Fan Gang, President of CDI

Knowledge spillover from developed countries means cheaper learning costs that can be applied to all sectors. A country's growth is not only driven by labor, savings and capital accumulation, but also by technological progress and institutional reforms.

Cheap and abundant labor is the most often-mentioned comparative advantage of developing countries. However, this has not been the only reason for the robust development of China over the past four decades. In fact, the country experienced a labor shortage about a decade ago, and its economic growth could have been stagnated like many other developing countries if China had not reformed its institutions.

The growth of China over the past two decades can be explained by its late-development advantages. As a latecomer, it could avoid the pitfalls, take some shortcuts, and learn from the best practices and experience of other nations. Late-development advantages have a broader scope than comparative advantages. While comparative advantages focus on cheaper labor to develop a labor-intensive economy, the late-development advantage is about the cheaper learning costs that can be applied to all sectors, even to institutional reforms. For instance, opening-up enabled China to acquire and learn advanced mechanisms and frontier technologies much faster than before.

Paul Romer, a co-recipient of the 2018 Nobel Memorial Prize in Economic Sciences, attributed the continual growth of developed nations to knowledge spillovers. Knowledge spillover is a late-development advantage. If developing countries learn, imitate and grasp the knowledge that spills over from the developed countries, they can boost their domestic growth.

And while there is no denying that there is infringement of intellectual rights in the developing world, attributing China's breakthroughs to intellectual property theft is both unfair and untrue. Every year the country spends more than $30 billion purchasing IP or licensing rights; and it voraciously learns and imitates unprotected knowledge. As a late-bloomer, it can access such knowledge faster and cheaper. And imitation is not shameful.

China has opened its doors to foreign investment and also to international communication. People-to-people exchanges also help the spillover of knowledge from developed nation to developing nation. Paul Romer’s' knowledge spillover model is applicable to explain the knowledge stock creating knowledge increment and the transfer of knowledge stock to developing countries.

The Chinese economic growth of the past four decades boils down to right strategy: Attracting foreign investment, encouraging exchanges of people and benefiting from spillover effects. Now the US government is trying to pull the carpet out from under China's feet, rolling out more vigorous vetting measures for Chinese students and visiting scholars.

Late-development advantages help China and she will never waver in its pursuit of knowledge.

At the beginning of a letter to its employees, Huawei, the beleaguered Chinese tech giant caught in the crossfire of the ongoing China-US trade war, explicitly said: "We shall keep learning from the US and we shall remain undistracted when the wave of anti-American sentiment is sweeping China."

Developing countries usually go through several stages of development. The first stage: Relying on comparative advantages. The second stage: Tapping both comparative advantage and late-development advantages. In this phase, they start to learn and imitate, trying to get some knowledge spillover. In the third stage, they keep learning and imitating as they step up innovation. For a more advanced stage of development, they hope to defend an open world and a system of knowledge transfer. In the era of globalization, when international cooperation and connectivity prevail, no country or corporation can be a lone wolf. All have a stake in each other. For instance, Huawei does not walk alone; it cooperates with its international partners to offer its clients a solution.

China is at the third stage, the critical phase of innovation. Government subsidies cannot deliver innovation, but a good institution can. So, if it aspires to successfully make the transition to the next stage, it has to further reform its institutions. For instance, it should establish an IP-centered investment mechanism that encourages innovation.

Naturally and logically, China and any other developing countries must encounter some hurdles on their development paths, and the national interests of countries are not aligned most of the time. But, if China can better deal with the bumps on the road, it will be a force for peace, globalization and multilateralism in the international community, creating a better environment for the development of all developing nations.



Author: Fan Gang, President of CDI

Editor’s Note: The Guangdong-Hong Kong-Macao Greater Bay Area (GBA), an effort to usher in new stage of urbanization, has great potentials because of the special roles of HK and Macao and its innovation-driven development.

China’s major strategic plans in recent years include the Guangdong-Hong Kong-Macao Greater Bay Area (GBA), the integration of Yangtze River Delta cities, the coordinated development of Beijing Tianjin and Hebei, and Xiong’an New Area. These plans all demonstrate the importance of urbanization for China’s development.

It is true that China’s urbanization has taken some detours, mainly reflected in soaring housing prices in big cities and excess supply of houses in small cities. Despite people flooding into big cities, far more land grants have been given to small cities rather than big ones. As a result, many houses in small cities are left without buyers. In recent years, a series of policies have been introduced, including the increased land supply for large cities and the intensive development of urban clusters, all of which show the effort to correct past errors and usher in urbanization 2.0.

In the near future, the GBA will become the world’s largest bay area. Compared with other urban clusters, it is unique in two ways.

First, the development of Hong Kong and Macao. From a national perspective, GBA takes it into consideration that the development of Hong Kong and Macao are well integrated with that of the mainland. The GBA will provide space for the development of Hong Kong and Macao and solve a series of problems faced by the two cities.

Second, the GBA occupies a key position in China’s science and technology industry. A key element of urbanization 2.0 is the high-tech industry. One advantage of the Guangdong-Hong Kong-Macao Greater Bay Area that Guangdong, Hong Kong and Macao are complementary to each other. Hong Kong has world-class universities and strong research capabilities. It is also a global financial hub, which means better access to financing for technology firms. In Guangdong province, Guangzhou boasts many universities and strong research capabilities; Shenzhen is a leader in the technology industry; Dongguan, Zhongshan and Huizhou have production bases. All of that are essential to the development of science and technology.

Author: Zhang guoping, Postdoctoral Researcher, CDI

As a key strategic partner of China, ASEAN is an important participant in the development of the Belt and Road Initiative (BRI). ASEAN has made a commitment to link its Master Plan on ASEAN Connectivity 2025 with the BRI and accelerate its infrastructure development on the great momentum brought about by the BRI. At present, the BRI has achieved general strategic alignment with ASEAN countries.

  1. Implementation of BRI Projects in ASEAN

China and ASEAN countries have launched a number of cooperation projects ranging from trade and investment, energy, infrastructure and industrial parks.

1.1 Cooperation on trade and investment

The trade volume between China and ASEAN was USD 587.87 billion in 2018, up by 14.1% year-on-year, reaching a historical high. China has been ASEAN’s largest trading partner for 10 consecutive years, while ASEAN has been China’s third largest trading partner for 8 consecutive years.

By the end of 2018, the accumulated investment by China to ASEAN reached USD 89.01 billion, and that by ASEAN to China reached USD 116.7 billion. By far, China has established over 4,000 enterprises in ASEAN countries through direct investment with investment areas expanding from manufacturing, mining, retailing to electric power, water supply, and telecommunications etc.

1.2 Cooperation on energy

In the power sector, China has gained a foothold in the ASEAN market by capitalizing on large state-owned enterprises and striving to meet emerging needs for power development in the region. State Power Investment Corporation Limited (SPIC) has business in Malaysia, Indonesia, Myanmar, Laos, Cambodia, Vietnam and the Philippines. China has successfully transmitted power from China’s Yunnan province to Vietnam and Laos, while incorporating a portion of Myanmar’s hydroelectric power into Yunnan’s grid.

In the field of renewable energy, China and Vietnam, Myanmar and Laos have signed multiple agreements on technology transfer in solar power through the China-ASEAN Technology Transfer Center (CATTC). China General Nuclear Power Corporation (CGN) has also signed cooperation agreement with ASEAN Centre for Energy.

1.3 Cooperation on infrastructure

First, the establishment of financing platforms has helped infrastructure connectivity. The Asian Infrastructure Investment Bank and the Silk Road Fund, with an initial capital of USD 50 billion and USD 40 billion respectively, provide long-term and low-cost funding for connectivity of road, rail, shipping, oil and gas pipelines between China and ASEAN.

Second, connectivity of transport infrastructure has made initial progress. The joint venture consortia of China and ASEAN have undertaken a number of major infrastructure projects, such as Indonesia’s Jakarta-Bandung High-speed Railway, the China-Laos Railway, and China-Thailand Railway, etc. The Trans-Asian Railway (TAR) going through Vietnam, Laos, Myanmar and Singapore is also expected to go operational before 2020.

Third, the first phase of the China-ASEAN Investment Cooperation Fund (CAF), with a total investment of USD 10 billion, has been launched. In Cambodia, CAF helps companies with Chinese background adopt Chinese technologies, equipment and management personnel to build optical fiber backbone network and digital television networks for the region. In addition, CAF also partners with domestic enterprises and Cambodian state television to invest in Cambodia’s smart TV project.

1.4 Cooperation on industrial parks

By far, China has set up overseas industrial parks in ASEAN countries, which represents a new model of cooperation between China and ASEAN. A total of 8 overseas parks have been established in ASEAN, as confirmed by China’s Ministry of Commerce (MOFCOM), including Qinzhou Industrial Park in Guangxi, China and the Kuantan Industrial Park in Malaysia (Two Countries, Twin Parks), Sinothaizone, Sihanoukville Special Economic Zone (SSEZ), Vientiane Saysettha Development Zone (SCDZ), China-Indonesia Economic and Trade Cooperation Zone, Long Jiang Industrial Park in Vietnam, China-Indonesia Morowali Industrial Park, and the China-Indonesia JuLong Agricultural Industry Cooperation Zone.

Established in 2006, Sinothaizone is a modern industrial park developed by Holley Group Co., Ltd. of China and Amata Corp. PCL of Thailand. By the end of 2016, more than 60 companies from China operating in sectors including electronics, machinery, auto parts and home appliances, had settled in, with an output value of USD 3.75 billion and a cumulative tax payment of over USD 70 million to the local government. While Chinese companies have successfully leveraged the advantages of Sinothaizone in transport, policy preferences and infrastructure, Thailand has benefited from job creation, talent cultivation and technology transfer.

  1. Mechanism of BRI projects in ASEAN

Chinese governments, state-owned enterprises and private sectors are involved in BRI projects.

2.1 Participation of Chinese government in BRI projects in ASEAN

The Chinese government’s participation in the BRI in ASEAN mainly aims to build a China-ASEAN regional international cooperation mechanism, provide regional “public goods”, and facilitate partnership on overseas projects.

China is one of ASEAN’s partners that have established some cooperation mechanisms with ASEAN, including the leaders’ meeting, 12 ministerial meetings, and 5 working-level dialogues. These arrangements, along with the China-ASEAN Exposition (CAEXPO) and the China-ASEAN Center, fully demonstrate a comprehensive and multi-level strategic partnership.

The Chinese government has established the China International Development Cooperation Agency (CIDCA) as a direct agency under the State Council, integrating functions related to foreign assistance projects. On the one hand, the new top design is conducive to the funding of overseas projects in line with the implementation of projects under the BRI; on the other, it can facilitate understanding of the development bottlenecks and needs of ASEAN countries, thus creating customized development plans for each of them.

The Chinese government has advocated the Indo-China Economic Corridor and the Bangladesh-China-India-Myanmar Economic Corridor and constructed cross-border economic cooperation zones with Vietnam, Laos, and Myanmar to explore a new model of integrated development of border economy. The Chinese government has also transplanted its own experience of establishing special economic zones and international trade and economic cooperation parks to ASEAN countries. At the same time, the Chinese government proposed to set up the “China-ASEAN special loan for infrastructure development” with a total sum of USD 10 billion. In 2015, the Chinese government proposed to add another USD 10 billion to the “China-ASEAN special loan for infrastructure development” in its second phase at the “China-ASEAN (10+1) Leaders’ Meeting”.

2.2 Participation of state-owned enterprises in BRI projects in ASEAN

State-owned enterprises, particularly central enterprises, are the main force of BRI projects in ASEAN countries. Many competitive central enterprises have engaged in the projects in the form of engineering contracting, equity investment and joint ventures.

First, many Chinese central enterprises started contracting overseas engineering projects many years ago and have rather mature cooperation model. Construction is usually carried out by a single enterprise and its subsidiaries at home or abroad, or by a consortium formed by several domestic central enterprises, or jointly contracted by domestic and foreign enterprises. Usually, the central enterprises that have won the bid will be responsible for project financing, deliver the project and get return on investment. The Sumsel-1 2 × 350 MW Coal-fired Power Generation Project in Indonesia is an exemplary project of the BRI, with SPIC in charge of general EPC contracting and construction.

Second, in the equity investment mode, central enterprises and their subsidiaries will usually invest in relevant businesses and projects in ASEAN countries through equity investment. Generally, the central enterprises buy the shares of relevant projects or businesses through their head offices, domestic and foreign subsidiaries or equity investment funds. The projects are mostly financed by the main investors themselves, and the income will be distributed according to the proportion of shares held. The China-ASEAN Investment Cooperation Fund is a large equity investment fund and is funded by central enterprises including the Export-Import Bank of China, China Investment Corporation, Bank of China, International Finance Corporation, and China Communications Construction Company Ltd.

Third, single central enterprises or a consortium formed by a number of central enterprises may establish joint ventures with ASEAN countries to carry out investment and cooperation. The advantage of setting up a joint venture is that it can improve adaptability and reduce transaction costs operating in foreign countries. The Chinese consortium led by China Railway Corp. established a Sino-Indonesian Joint Venture with Indonesia’s SOE Consortium to undertake the construction and operation of the Jakarta-Bandung High-speed Railway Project, with 60% of shares held by Indonesia and 40% by China.

2.3 Participation of private enterprises in BRI projects in ASEAN

The operation mode of private enterprises participating in BRI projects in ASEAN countries mainly includes project contracting, labor cooperation and collective investment in overseas projects through establishing industrial parks.

Private enterprises may cooperate with domestic enterprises to carry out equity investment in projects, set up overseas engineering companies through consortium, or establish joint ventures with overseas enterprises. One of the most popular ways for private enterprises to participate in BRI projects in ASEAN countries is to set up industrial parks, so as to support their collective “going out” efforts. By 2017, Chinese companies had built 23 overseas cooperation parks in ASEAN countries, attracting 421 Chinese enterprises to settle in, with a total investment of about USD 21.3 billion.

  1. Challenges for BRI projects

The major challenges for BRI projects in ASEAN countries mainly include political concerns, inconsistent standards and difference in business environment.

3.1 Political concerns

Some ASEAN countries are ambivalent about the BRI and China’s opening-up in general. On the one hand, they look forward to China’s continued effort in opening-up, affirming its positive impact and hoping to obtain more funding and technology from China and export their domestic products to huge Chinese market. On the other hand, they worry that the purpose of China’s BRI is to export domestic excess capacity and to translate economic clout into political dominance, thus harming their own interests.

3.2 Inconsistent standards

Current inconsistencies in technical standards and norms in infrastructure construction under the framework of the BRI in ASEAN countries can obstruct infrastructure connectivity among ASEAN countries. Therefore, technical standards and norms to some extent are even more important than physical connectivity.

China and many ASEAN countries have adopted markedly different transport technology standards and management systems, which constitutes a major issue in fostering infrastructure connectivity. This has increased the technical difficulty and construction cost of the Trans-Asian Railway in Southeast Asia. At the same time, freight transportation across areas with different gauge standards must go through track adjustment, considerably increasing the time cost.

3.3 Differences in business environment

Currently, there are great disparities among ASEAN countries in economic development and industrial structure, as well as in investment environment and management system. There are also large and various inconsistencies among countries in legislation, market access rules and standards. Certain countries do not have a sound and stable legal system and have relatively high logistics cost, all of which have led to relative unstable business environment and high risks for project development. The situation is further complicated by different languages, customs and religions in ASEAN member states, all presenting difficulties for the investment and operation Chinese businesses.

  1. Suggestions

To promote the BRI cooperation between China and ASEAN countries, here are some suggestions:

4.1 To enhance mutual trust

China and ASEAN countries should improve policy communication and strategic alignment, enhance bilateral mutual trust, and bring together main stakeholders to move these projects forward.

In response to the concerns of some ASEAN countries about the BRI, we shall promote in-depth alignment between the BRI and the development strategies of ASEAN countries, such as Vietnam’s “Two Corridors and One Ring”, Cambodia’s “Quadrangle-Development Strategy”, Indonesia’s vision for “Global Maritime Fulcrum”, among others.

At the same time, the role of dialogues between think tanks should be leveraged as an important complement to official diplomacy. Research outputs of think tanks tend to be more convincing in objectivity and accuracy, and can help make policy communication more effective. Thus, dialogue mechanisms of think tanks can help both sides understand each other better, conducive to building mutual trust between China and ASEAN countries regarding the implementation of BRI projects.

4.2 To align technological standards for infrastructure projects

Regarding the differences in technological standards for infrastructure projects between China and ASEAN countries, both sides should sign bilateral agreements in the fields of rail, road and aviation, etc., and create key demonstration projects towards achieving “connectivity”. China should vigorously advocate the adoption of international standards.

China’s rich experience in and strong record of delivering construction projects of railways, airports and ports prove the feasibility of China’s technological standards. The technological planning and standards for infrastructure construction under the BRI, such as railways and roads, should be jointly discussed and formulated by the governments of ASEAN countries and China, and enterprises before the signature of bilateral agreements. It is recommended that the two sides establish a BRI railway or aviation company to serve multinationals operating under the BRI and to jointly plan and coordinate the operation of railways, roads, air routes and other infrastructures.

4.3 To respect national conditions of host countries

The disparities among ASEAN countries in economic development, industrial structure, investment environment, culture and religions have led to different types of risks for doing business in the region. China needs to be aware of the different endowments of ASEAN countries, and optimize project cooperation and “going out” strategies for its enterprises by taking account of industrial complementarities and the development needs of the host country. At the same time, full respect shall be given to the national culture and religious beliefs of the host country in specific projects.

The focus of cooperation with ASEAN countries in the early stage of industrialization is to ensure that China’s technological advantages synergize with local production factors, such as cheap labor and land, and to help ASEAN countries industrialize; China can import from these countries much-needed energies and primary products. In contrast, cooperation with countries in their late stage of industrialization, such as Singapore, should focus on research and development, design and management of high-tech products.

Author: Fan Gang, President of CDI

Editor’s Note: Development is a long and arduous process. Regardless of the external environment, the most important thing for China is to do its own job well, including deepening institutional reforms, adhering to opening-up, and continuing to learn from advanced economies and bringing in new technologies. With the incidents of ZTE and Huawei, China must start independent innovation as soon as possible.

Development will encounter resistance as well as competition and conflicts. In a global market that has been taken by major countries and multinational corporations, China will inevitably encounter problems and difficulties as it gradually works its way to the frontier of economic and technological development, with the China-US trade war being one example.

Growth theory now entails a total of four factors, namely technology, institution, labor and capital. Developed economies usually enjoy advantage in all the four aspects. The development of less developed economies is not merely a result of population and capital accumulation, but is increasingly affected by technological advances and institutional reform.

The key to doing its own job well for China is pushing ahead with institutional reform. A more sophisticated economic structure and truly sustainable growth are only achievable with improved structure of factor endowments. This means it should identify its relative advantages in optimizing the structure of factor endowments. China’s advantages can be summarized as the following: first, comparative advantage — China is able to benefit from cheap and abundant labor; second, late-mover advantage — as a latecomer, China can benefit from the knowledge and technology accumulated by forerunners to avoid detours; third, local advantage — local competitors enjoy some advantage over foreign counterparts within a certain period of time.

The last two decades of China’s high growth rate has been increasingly dependent on late-mover advantage, that is, China is able to approach the frontier of technologies and know-how through learning and imitation as it opens wider to the world. It is not a shame for less developed and developing countries to imitate. There are some that regard China’s entire technological progress as a result of theft. However, it is important to note that China spends over USD 30 billion yearly on purchasing IPR while learning knowledge not protected by IPR.

China’s future development requires more independent innovation. In terms of scientific and technological innovation, it is crucial to have an investment and incentive mechanism centered on intellectual property. This will decide whether China can achieve continued development in the next stage.

The difficulties encountered by developing countries are natural and inevitable. They must be dealt with reasonably to create an enabling environment for further development.

Author: Cao Zhongxiong, Executive Director of New Economy Research Department of CDI

Editor’s Note: Among the latest trends of innovation-driven development in today’s world, digitalization has become one powerful driver of global development and has profoundly affected the way of production and the way of life. In the digital age, China’s economy and society are also moving towards high-quality development, embracing crucial strategic opportunities for its digitalization drive.

It is important to accelerate the development of the digital economy, use information technology to improve governance and government services for a securer society and better life, and further stimulate innovation and entrepreneurship to create new growth drivers, so as to enhance the growth momentum and application of information technology toward building China into a global digital power.

  1. Fast development of digital government and technology-driven institutional reform

Digital government represents a historic test of the government’s ability to reform itself. The continued development of digital technologies will facilitate “Internet + government services”. Over the past year, government departments have broken down information barriers, benefiting citizens with improved efficiency and reduced red tape. Digital government is now a reality in many provinces and cities, including Guangdong, Jiangsu, Zhejiang, Guizhou, Shanghai, and Anhui, creating a more enabling environment for businesses and people alike.

  1. Digital factory leading the way towards an advanced manufacturing power

It is important to apply new technologies such as big data, Artificial Intelligence, Internet of Things, and Industrial Internet to the entire manufacturing process, and use digital tools to facilitate product development and industrial chain upgrade. By introducing new technologies and models such as industrial robots, digital management platforms, and industrial Internet of Things, we will be able to build advanced digital and intelligent factories. Starting with digital factories followed by a gradual shift to digital supply chain, digital quality management, and digital marketing, we will be able to digitalize the whole process from manufacturing to sales. Digital manufacturing will become the hallmark of an advanced manufacturing power.

  1. 5G opening up new prospects for global commercial operations

Europe, Americas, Japan, South Korea, among others, have all sought to promote the application of 5G in vertical industries, which is seen as a main area of global competition in Internet and information technology. China has accelerated 5G deployment and is working to develop 5G technology to provide network support for the successful application of artificial intelligence, ensure protection for cloud computing, and empower the digital transformation of society.

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