China’s tech push likely to increase trade and security tensions with US and Europe, report reveals

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State-backed technology drive likely to prompt US, Europe to upgrade national security reviews of Chinese investment, according to China Dashboard report

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 industrial 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.

The West’s mounting scrutiny of China’s overseas deals is not likely to temper Beijing’s tech ambitions.

China’s leadership is looking to the value added from GDP-boosting innovation to help ease a potential economic slowdown as China continues to cut its massive debt load. Many scholars and financial professionals believe that while China has fuelled its growth by taking on debt, it could face a global financial crisis if it becomes heavily overleveraged.

Therefore, China has stepped up efforts to deleverage its local governments, state-owned enterprises and private companies.

The government sped up the process for its companies to go public and raise equity to reduce their debt. As many as 343 initial public offerings were issued in the 12 months through the end of September 2017, up from 137 in the same period the year before, the China Dashboard report showed.

In November, China’s central bank drafted rules to tighten oversight of the country’s US$9 trillion asset-management industry to rein in shadow-banking lending, according to news reports.

One result of the deleveraging effort, which is far from over, is a temporary slowdown in growth. Despite Beijing’s emphasis on the importance of state-owned enterprises deleveraging, leverage ratios held at around 60 per cent at the end of September 2017, according to the China Dashboard report.

Going into 2018, “Beijing must once again explain how it will realise meaningful reforms on a broad spectrum of fundamental economic policies without incurring a temporary growth slowdown,” the report said.