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Industrial Structure Upgrading Requires Forming an “Innovation-Scale” Virtuous Cycle


Summary of a lecture given by a Tsinghua University economist in which he urges Beijing to adopt measures to break free from “international technology containment.” Among other measures, Ju Jiandong suggests “Chinese technology must have at least a 30% share of the Chinese market,” to support the development of domestic technologies. In his view, failing to achieve what he terms “industrial upgrading” could lead to the future stagnation of the Chinese economy.

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The Tsinghua People’s Bank of China School of Finance Chief Economists Forum was successfully held on May 14, 2022. The theme of the forum was “Turbulent 2022—Global & China Economy and Policy Outlook.” It entailed in-depth discussions centered on four major roundtable topics. Ju Jiandong, Unigroup Chair Professor of Finance, Tsinghua University People’s Bank of China School of Finance, and director of the Center for International Finance and Economics Research (CIFER) at the Tsinghua National Institute for Financial Research, attended the third roundtable discussion “Innovation, Finance, and S&T Competition” and gave a talk.


Ju Jiandong believes that upgrading the industrial structure necessitates the formation of an “innovation-scale” virtuous cycle. It is only by overcoming international technology constraints and monopolies, ensuring a certain amount of market share for domestic technologies, and cultivating and developing the competitiveness of domestic technologies that we can realize Chinese technological innovation and industrial upgrading. In view of this, Ju Jiandong proposed a policy of “countering international technology containment” (反国际技术遏制政策), ensuring a 30% domestic market share for Chinese technology, so as to provide the necessary market demand for Chinese technology and pave the way to Chinese technological upgrades. Ju Jiandong suggested that a two trillion RMB per year economic stimulus plan be employed over the next 10 years to promote such a full production chain policy of “countering international technology containment.” Through precise monetary injections, this would build an independent and self-reliant high-technology industrial system in an open economic environment, thus promoting Chinese technological upgrades and realizing [the aim that] “the economy must be kept stable and development must be safe.” Ju Jiandong pointed out that this stimulus plan could increase China’s GDP growth rate by 1%.


The following is a partial and accurate record of Ju Jiandong’s talk:


Everyone taking part in this roundtable discussion is an expert, and we’re all experts at the cutting edge who have long studied our country’s S&T competition. We just mentioned how, given Chinese-U.S. S&T competition, international technology constraints on industrial upgrading can be overcome. We discussed chips. Chips are a typical, gradually changing technology. In the case of the transition from 10 nanometers to 7 nanometers, technological innovations were achieved through update iterations of the old technology and a gradual accumulation. If our industrial structure cannot be upgraded, then there will be no way to promote economic growth.


How is the industrial structure to be upgraded? Thinking about it from an intellectual point of view, we find that, on the theoretical level, there is an “innovation-scale” cycle, wherein once R&D inputs have led to technological progress, technological progress wins a certain market share, and, with market share, there is finally profit; and only with profit is it possible to provide feedback on the R&D inputs. If this kind of virtuous cycle encounters an international technology constraint, such as a chip constraint, which prevents our industries from upgrading, the cycle will come to a halt.


Let us suppose that an intermediate link in our “innovation-scale” becomes stuck. For example, our market share is cut off and it becomes impossible to achieve technological progress and industrial upgrading. Whether it’s the United States’ technological containment of Japan in the 1980s or the containment of China in China-U.S. trade disputes, we find that the United States’ containment policy has two characteristics: first, it hits leading enterprises that dare, and are able, to challenge a U.S. technological monopoly, such as Huawei; second, it maintains U.S. monopolies in world (including China) core technology markets and blocks the paths to Chinese technological upgrades.


We’ve said that our industries need upgrading. Of all our chips, the best is Semiconductor Manufacturing International Corporation’s 14-nanometer. Can they rise to the next levels by progressing to 10 nanometers? 7 nanometers? I’m afraid they can’t because there’s no market. China’s chip market is dominated by the United States. So long as you don’t challenge U.S. technological hegemony, China’s mobile phone enterprises can import U.S. chips. So the upgrading path forward for China’s high-end chips is cut off because all these mobile phone enterprises in the middle use U.S. chips.


So I’ll pose this question: in the case of a civilian product, if your technology is relatively backwards such that even the Chinese domestic market won’t buy it—there’s no domestic market—how do you upgrade the technology? The United States is, on the one hand, hitting out at the lead enterprises while, on the other hand, it is realizing U.S. monopolies in technology markets. These two core tricks break our industrial upgrading cycle.


How do you break out of the containment by international giants? I’d like to offer an opinion, which you are all welcome to criticize and correct. If we don’t break international technology’s monopoly over the Chinese market to make China’s technological upgrading possible, China’s technological innovations and industrial upgrading will be impossible to achieve. As for breaking the international technology monopoly, whatever measures are taken, it will definitely be necessary to cultivate domestic technological competitiveness, and domestic technological competitiveness definitely requires ensuring a certain market share—ensuring that the market share of foreign core technologies does not exceed 70%. Chinese technology must have at least a 30% share of the Chinese market. I call this the “policy to counter international technology containment.”


I’ll give an example. Let’s say we have a brand called Little Fruit Mobile. To ensure that 30% of the chip market downstream is a domestic technology market, it is necessary to start from downstream mobile phones. If, in keeping with the requirement, 30% of the Little Fruit Mobile phones use Chinese chips, then there’s no problem. If less than 30% of the Little Fruit Mobile phones use Chinese chips as required, then there will have to be a punitive tax.


To give an example, if products using Chinese chips are less than 30%, such that the domestic chip use rate is greater than 20%, but less than 30%, a 20% punitive tax would be collected; if greater than 10%, but less than 20%, then a 50% tax would be collected; if less than 10%, then the tax would be 100%; if less than 5%, the tax would be 400%. For example, a mobile phone like Apple’s that does not use any Chinese chips would be subject to a four hundred percent tax. If they wanted to sell phones in the Chinese market, they would have to guarantee that 30% of their products were using Chinese chips. But this causes a problem. The Little Fruit phones using imported chips would be higher quality and more expensive, while the quality of phones using Chinese chips would be relatively poor, in which case one could consider lowering the price down to two thousand, for example—even lowering it below cost. In this situation, the state would have to provide a subsidy to ensure a 10% profit rate for manufacturers of phones using Chinese chips.


This is an initial suggestion. I believe that, at the moment for the upgrade of China’s industries it is especially important to break through international technology containment, which, in reality, means a 30% import substitution for core technologies. I suggest that we invest two trillion RMB annually over the next 10 years to ensure that the foreign technology share of the Chinese market does not exceed 70% to promote technological upgrading of China’s industries. In this way, we can drive the upgrading of China’s industries from the front and thereupon promote China’s GDP growth, contributing an additional 1% of growth.


I would like to look back to around the year 1988, to the U.S.-Japanese trade disputes. Japan’s growth rate was 6.8%. Four years later, Japan’s growth rate had dropped to 0.84%. If we fail to achieve industrial upgrading, it will be very hard to ensure the healthy growth of our nation’s economy. These are the opinions I have to offer. Thank you!


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Cite This Page

鞠建东 (Ju Jiandong). "Industrial Structure Upgrading Requires Forming an “Innovation-Scale” Virtuous Cycle [产业结构升级需要形成“创新-规模”的良性循环]". CSIS Interpret: China, original work published in Tsinghua People's Bank of China School of Finance (PBCSF) [清华大学五道口金融学院], May 17, 2022

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