Quick Take: China's NPC: 2+1 = Infrastructure

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Quick Takes

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  • Against the backdrop of heightened U.S.-China tensions and the COVID-19 pandemic, China announced new economic initiatives during the National People’s Congress meetings held May 22-28. China reoriented to focus on job creation and support for small business versus GDP growth. Policies announced reflect this focus.
  • One noteworthy program is the "Two New + One Key" effort which promotes investment in new infrastructure, new urbanization, and key strategic projects.
  • The implementation of this project could create further tensions between the U.S. and China stemming from the ongoing battle for technological dominance.


China's National People's Congress (NPC) annual meeting wrapped up in late May. While the news on the controversial Hong Kong national security law dominated the international headlines, China outlined its post-COVID economic recovery including some major economic reforms, such as the new supply-side reforms to land, labor, and data.

There was also a focus on new infrastructure and key strategic projects. During the NPC, the government unveiled its Two New + One Key initiative aimed at promoting economic growth. Experts estimate that this program could generate up to $2 trillion in investment over the next five years.

Chinese policy is full of numbered initiatives from the newly launched Six Stabilities and Six Ensures as President Xi Jinping’s commitments to the Three Represents of former President Jiang Zemin. Despite this fixation, one of the areas that they declined to use a number – for the first time – is in setting a target for GDP growth. Instead, China shifted to a focus on job creation and support to small businesses. The new focus is reflected in one of its latest initiatives, the “Two New + One Key” program.

Two New + One Key Defined

For this latest initiative:

Two New refers to:

  1. New infrastructure: China plans major investment in digital infrastructure with a significant build-out of 5G capabilities to prepare for the new online requirements of artificial intelligence.
  2. the Internet of Things, cloud computing, big data, new energy vehicles, and other emerging technologies. This includes building the new architecture, “smartening” the existing infrastructure, and investing in tech and product development.
  3. New urbanization: While urbanization has been a decade-long focus, China plans to energize efforts outside of the major cities to upgrade public facilities, public service capabilities, and renovate 39,000 old residential communities. This effort to upgrade facilities – living and working – is in line with the loosening of travel restrictions on domestic workers, who are now able to travel to Tier Two cities in search of job opportunities without losing their social benefits.

One Key is an umbrella term referring to the 165 priority strategic projects that fall under the 13thFive Year Plan (2016-2020) which are to be implemented this year. These projects include major regional initiatives, such as the build-out of the Xiongan new district outside of Beijing that will house the administrative functions of the central government, and additional funding of 100 billion RMB (US $14 billion) on national railway construction to connect city clusters, including the Sichuan-Tibet Railway and the Shanghai-Suzhou-Huzhou Railway.

2 + 1 in Context

China is using the economic recovery from the coronavirus to build for the future. New infrastructure development is a main feature of China’s post-COVID economic recovery plans and was a major theme of Premier Li Keqiang’s annual Work Report. The intention is to create the digital platform through large scale deployment of 5G to facilitate the use of artificial intelligence, smart cities and cars, IoT, and so much more. And to use this to develop world-class industries that can compete globally.

These plans are not new. “New infrastructure” was first raised during the annual Central Economic Work Conference in December 2018 in the context of using 5G, AI, and other new technologies to upgrade and transform the traditional industry. It also has elements of the Made in China 2025 plan – China’s stated industrial plan to developing leading companies in ten key emerging technology sectors. By channeling money into these new infrastructure investments, China is seeking to avoid some of the wasteful investment that came out of the stimulus – especially by local governments – after the financial crisis in 2008 and channel it into more productive means.

Currently, new infrastructure investment makes up a small portion of China’s overall investment numbers. According to Liu Shijin, Vice Chairman of the China Development Research Foundation (CDRF), new infrastructure investment was 10% of all infrastructure investment and less than 2% of all investment in 2019. One reason for the lower investment numbers is that infrastructure investment is driven by companies versus traditional infrastructure being driven by government.

Chinese firms are already on board with this new approach. Even before the NPC, Alibaba announced a 200 billion RMB ($28 billion) investment over the next three years aimed at ramping up cloud systems and data centers. On May 26, Tencent announced a 500 billion RMB ($70 billion) investment over the next five years for data centers, cloud computer, and blockchain.

While this action is understandable from China's perspective, it remains to be seen how it will play out. Some experts have claimed that this effort is a repackaging of the controversial Made in China 2025 program to support global leadership in ten key sectors. This program sparked a strong reaction from Washington, DC. More likely, this effort is aimed at building technological independence from U.S. suppliers, who have been banned from providing technology to leading Chinese firms such as Huawei. This intended investment, especially in emerging technologies, which is a main driver of the bilateral tensions and does place China in the position of a tech "hot" war with the United States, and is another move toward lowering the economic iron curtain.


Charts: https://asia.nikkei.com/Business/China-tech/China-bets-on-2tn-high-tech-infrastructure-plan-to-spark-economy

By

Basilinna

|

June 15, 2020

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