- May 23, 2023 Politics, Technology
Nanometers over GDP: Can Technocrat Leaders Improve China’s Industrial Policy?
Space is the final frontier, it is also a revolving door in Chinese politics these days. Of the 205 full members of the Chinese Communist Party (CCP) 20th Central Committee (CC), ten are aerospace industry veterans, some of whom ran major projects like the Chang’e Lunar Program.
Pride over China’s successful space program is effusive in official media. With intensifying technology competition between China and the United States, Beijing can easily tout tangible products like trains, rockets, commercial jets, and its space station as “wins” for technological self-sufficiency.
Such emphasis on technology self-sufficiency is not only manifest in the rise of this “aerospace cabal.” It is also reflected in the broader resurgence of technocrats in the top echelon of Chinese politics, as our previous analysis highlighted.
The numbers make clear that technocrats did quite well in getting promoted or retaining their seats in the 20th Party Congress political transition. Of the 205 full members of the 20th CC, more than a third (69) are STEM technocrats, a 35% increase from the 19th CC. Even at the Politburo level, 8 of the 24 members are technocrats, a doubling from the 19th Politburo.
Among this cohort of technocrats is a notable provincial bias: the majority are running provinces instead of central ministries. In fact, 36 technocrats in the 20th CC are leading provinces, compared to just 20 in the 19th CC (see Figure 1). The logic here seems to be that placing leaders with technical expertise, instead of your average politician, in provincial roles will improve the odds of ameliorating technological deficiencies vital to China’s national security.
Figure 1. Provincial Technocrats Rose 80% From the 19th to 20th CC
Note: Provincial technocrats are defined as those who served or are currently serving in top provincial leadership roles (i.e., provincial party secretary and governor). For technocrats who worked both in localities and in the center during the 19th CC, they were classified by where they spent the most time over the last five years.
Source: Authors; MacroPolo.
What’s more, as a provincial technocrat, your chances of getting promoted or keeping your seat in the 20th CC was much higher than non-technocrats. Three-quarters of provincial technocrats that were full members of the 19th CC kept their seats in the 20th CC, while only one-third of non-technocrats managed to do so.
This shift towards relying more on technocratic governance in the provinces suggests that, should they be successful in achieving technology goals, these technocrats are on a fast track for promotions in 2027 or earlier. Put another way, as far as political incentives go, the key metric that matters is no longer GDP growth but “nanometers,” or securing technologies.
But what exactly does success along this new metric mean? It essentially means doing a better job at identifying and backing winning technologies and companies. In the second installment of our technocrats series, we examine how Beijing’s reliance on technocratic governance aims to evolve its industrial policy, at least at the margins, to reduce waste and get better outcomes.
Technocrats Take the Reins
Placing technocrats in provinces seems to align with President Xi Jinping’s ardent belief that true leadership acumen is acquired by solving real-world problems in the provinces. At a minimum, so the logic goes, these provincial leaders are trained in the hard sciences and should have a better nose for discerning which technologies are viable.
At this point, 25 out of 31 provinces have at least one incumbent leader (party secretary or governor) who is a technocrat, having more than doubled from just 11 in 2017. As a cohort, these technocrats have spent more of their careers in provinces than in the central bureaucracy (see Figure 2).
Figure 2. Portion of Technocrats’ Careers Spent in Provinces Rose
Note: This is an aggregation of the career experiences of all technocrats in the 19th and 20th CC.
Source: Authors; MacroPolo.
In fact, the 20th Politburo welcomed the largest number of technocrats since Xi took the helm in 2012. This “elite technocratic eight” all have extensive experience in strategic technology sectors and come with local governance credentials (see Figure 3). Their influence on technology will certainly be felt as they will be informing the political decision-making process at the highest level.
Figure 3. Spotlight on the “Elite Technocratic Eight” Source: Authors; MacroPolo’s The Committee.
Moderating Fragmentation, Taming Irrational Exuberance
If these technocrats are supposed to solve real-world problems, then there’s no such problem more urgent to China’s economic future than overcoming technology bottlenecks. These bottlenecks rest on two intertwined dynamics: fragmented provincial industrial policies and the irrational exuberance cycle in local investment.
From Beijing’s perspective, the irrational exuberance cycle goes something like this: Beijing announces industrial policy focus on sector X → enthusiastic provinces all race to create their own sector X because that’s where the money will flow → local “X companies” mushroom, a portion of which are essentially shell companies to swindle money → intense competition leads to razor-thin margins, incentivizing companies to care mainly about fighting for market share to live another day rather than pouring money into R&D → meanwhile, Beijing shouts into the wind that it wants consolidation of sector X but eventually gives up.
If this dynamic sounds familiar, it’s because it has been a feature, not bug, of the prevailing decentralized development model. Such a model induces hyper-competition and has been very good at delivering one thing: GDP growth. Take Hefei, the capital of the once-poor agricultural province Anhui. Not only has the province turned itself around economically, it has done so by transforming its capital city into the “Detroit of EVs” when it comes to supply chains. As a result, Hefei has climbed from the 80th largest urban economy to 21st over two decades.
The idea of an “entrepreneurial state” seems to apply to Hefei’s success. A forward-leaning local government created a special task force to painstakingly conduct due diligence on firms that apparently went above and beyond the usual standard for local governments. Since the mid-2000s, Hefei has ended up backing ChangXin (memory chips), NIO (electric vehicles), and BOE (advanced displays), all of which are now considered domestic champions and integral to the EV supply chain.
Local governments like Hefei were also willing to take on risks in their investments. It pumped $1 billion into NIO when the EV startup was on the brink of financial ruin in early 2020, in exchange for a minority stake in the company that it still holds today (the equivalent of the US Department of Energy’s nearly half a billion loan to save Tesla in 2010). NIO, now a leading EV brand in China, has since bought back shares from the Hefei government as a way to repay the local government loan.
But for every successful case of the entrepreneurial state in action, there are a number of prominent failures. Exhibit A would be the recent HSMC chip scandal in Wuhan and Nanjing’s memory chip project filing for bankruptcy. In HSMC’s case, Wuhan’s leadership wasted billions investing in a fraudster who posed as a veteran chip executive with links to Taiwan’s TSMC.
Beijing has long rationalized these problems as the necessary price for generating growth. But when the fixation on growth no longer holds much water, what gets emphasized are the downsides of this model, such as excessive waste, inefficiency, and failures.
Of Supply Chain Chiefs and Robotics Clusters
Indeed, the Xi administration has capitalized on these downsides to justify a more centralized approach to industrial policy that includes placing technocrats in the Politburo. But more fundamentally, such an approach is predicated on a dramatic change in local incentives. Instead of “chasing ever-higher GDP” to get promoted, local cadres’ performance is now more tied to “achieving ever-lower nanometers”—a proxy for Beijing’s technology self-reliance goals.
To do so, Xi in September 2022 touted a “New Whole National System” (新型举国体制) that aims to strengthen the Party’s leadership over scientific and tech innovation. In practice, the Party wants to have more control over where the money goes and where the talent is agglomerating. It is still very early days in the evolution of this more centralized industrial policy model, but some features of it may be taking shape in terms of supply chain coordination and tech clusters.
One initiative that bears watching is the so-called “Supply Chain Chief Mechanism” (链长制) that launched in Zhejiang province in 2019 under then-governor Yuan Jiajun, now one of the “elite technocratic eight” in the Politburo. An important purpose of the initiative seems to be pressuring provincial cadres (the “chiefs”) to better target industries that align with the provinces’ competitive advantages. For example, since unveiling its own “Made in China Action Plan” in 2016, Tianjin has significantly whittled down its priority sectors as part of this initiative. And in a telling sign that this initiative has some teeth, local cadre evaluations are incorporating assessments on their ability to secure supply chains.
Moreover, across a majority of provinces (16 out of 31 by our calculation), at least one-third of provincial standing committee seats are occupied by technocrats, further reinforcing the fact that political incentives have shifted from GDP performance to the nanometer metric.
Another illustration of where this centralized approach might be headed runs through robots. With European and Japanese manufacturers dominating nearly three-quarters of the domestic industrial robot market, China has made no secret of its desire to reduce that dependence. Yet after massive subsidies and local government competition in the sector, domestic robot manufacturers’ market share actually declined in 2017.
The central government likely interpreted that as yet another indictment on the fragmented competition model. So it took matters into its own hands in 2018, when Beijing tasked the Ministry of Industry and Information Technology (MIIT), the powerful industrial policy agency, to establish a robotics-focused National Center for Manufacturing Innovation (NCMI) in Shenyang, Liaoning.
Setting up the NCMI was effectively a signal from Beijing that it has picked a winner on robotics and that other local governments should funnel resources toward it. That winner is Siasun, a leading robotics manufacturer, around which the province is hoping to develop an ecosystem of smart manufacturing enterprises. It also probably didn’t hurt that Liaoning’s party secretary at the time, Chen Qiufa, was a prominent technocrat.
Although it is murky how the NCMI works in practice, its main mission appears to be pooling funding and talent to support the winner and the ecosystem around it. For instance, a few years after the establishment of the NCMI, Siasun saw its R&D output increase and claimed to have made breakthroughs in a software platform by collaborating with research talent across provinces (see Figure 4). Moreover, now ten local governments apparently back Siasun, an increase from six in 2018, which may indicate NCMI’s effectiveness in corraling support.
Figure 4. Siasun’s R&D Efficiency Rose on the Back of Increased FundingNote: Efficiency of R&D Spending = Number of New Patents/R&D Spending. The government funding figures are sourced from Siasun’s cash flow statements, including both asset-based and income-based grants.
Source: Siasun’s annual financial reports; MacroPolo.
More than the NCMI, the clearest indication of Siasun’s importance to China’s robotics future came when Xi personally visited the company shortly before the 20th Party Congress to lavish praise on its achievements. Xi’s blessing of Siasun also had political ramifications. Zhang Guoqing, the Liaoning party secretary at the time and an ardent champion of Siasun, ended up making it into the “elite technocratic eight” in the Politburo, further validating the importance of nanometers over GDP.
The Party: “We wanted 3nm chips, instead we got corruption and waste”
Now that Zhang has been appointed vice premier with the industrial policy portfolio, it would seem that something like the Liaoning model will prevail—that is, intensified public-private partnerships and having the center, instead of local governments, lead the way in backing winners. In fact, the supply chain chief mechanism has already been replicated in 17 provinces and NCMIs have proliferated among China’s 45 prioritized tech clusters.
The culmination of a more centralized industrial policy came at the March 2023 National People’s Congress, when the new Central Commission on Science and Technology was established at the Politburo Standing Committee (PBSC) level. It is likely that Ding Xuexiang, the only technocrat on the PBSC, will take charge of the technology portfolio.
Industrial policy now is under the aegis of the CCP and managed at the highest political level. Basically, the Party wants to replicate Hefei’s outcomes with its own approach—one that encompasses taming irrational exuberance, controlling funding and accountability, and unifying national resources to overcome tech bottlenecks.
Whether this centralized model of industrial policy will succeed in securing the tech supply chains that China needs and producing the breakthroughs that Beijing wants is far from clear. For one, despite how much the current leadership may be fed up with the local competition model, it cannot be fully replaced. Local competition is as ingrained in China’s political economy DNA as free ice water is part of the American identity.
What Beijing can best hope for is to replace “unbridled” with “controlled” competition, and to compete more rationally at the local level instead of watching local governments chase every supply chain under the sun. Rather than business-as-usual, provinces need to double down on a few things that they are good at—the practical meaning of the latest emphasis on quality over quantity in growth.
Will the Party-state achieve a better batting average on picking winners than the private sector? Will this industrial policy approach end up more costly? You’ll have to wait for the final installment of our technocrats series to get the answers.
Ruihan Huang is a senior research associate at MacroPolo. You can find his work on elite politics, regulatory risk, policymaking, and other topics here.
AJ Cortese is a research associate at MacroPolo. You can find his work on industrial technology, semiconductors, the digital economy, and other topics here.
The authors would like to thank Zhanyuan (Jerry) Yin and Xuerong Shang for their excellent research assistance.
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