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China’s Transition to an Innovation-Driven Economy

China's shift from low-cost production to innovation is key to sustaining growth amid demographic pressures and export challenges. Emphasizing openness, private sector vitality, and green technology investments.

China’s Transition to an Innovation-Driven Economy
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TLDR
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China is currently facing a critical phase in its economic development characterised by the declining advantages of low-cost production, growing challenges in export markets, and significant demographic pressures from an ageing population. To sustain its growth, China must shift from a model dependent on low-cost advantages to one driven by innovation and a robust domestic market. This transition requires an enhancement of the nation’s innovative capacity and a concerted effort to address structural economic issues.

Openness and Innovation Efficiency

A crucial factor influencing a nation's innovation efficiency is its level of openness. In today’s interconnected global landscape, maintaining openness is vital for fostering innovation, while isolation can significantly hinder technological progress. Openness not only facilitates the exchange of ideas and technologies but also enhances competitive pressures that drive further innovation. China's recent advancements in electric vehicles, lithium-ion batteries, and solar cells have attracted significant international attention. However, the imposition of restrictive measures by other nations in response to China’s exports of these technologies underscores the risks associated with reduced international engagement. Such restrictions can lead to technological stagnation and hinder China's access to cutting-edge innovations from other countries. The current global technological landscape is dominated by Western nations, which possess advanced expertise and substantial research capabilities. Therefore, reduced international engagement could impede China’s efforts to remain at the forefront of technological advancements and innovation.

The Vital Role of Private Sector and the Challenges of Overcapacity and Export Diversification

The private sector plays a crucial role in driving technological advancements and economic growth in China. Its flexibility and creativity fuel innovation, but entrepreneurs must overcome challenges to build confidence in this sector. Although China has made significant progress in emerging technologies, it faces issues such as overcapacity and limited export diversification.

Overcapacity occurs when production levels exceed demand, leading to inefficiencies and potential disruptions in international trade. China's rapid technological advancements have led to the development and export of high-tech products, drawing global attention. However, this has resulted in excess production, raising concerns about its potential impact on international trade amidst escalating geopolitical tensions and a lack of export diversification.

In the past, China's excess product exports did not provoke major international reactions. However, in today's environment of heightened geopolitical tensions, the international market is less accommodating for China. As China's economy has grown, its large-scale exports now risk disrupting global market balances, prompting concerns among other nations about potential impacts on pricing and trade dynamics. This has led to increased scrutiny of China's trade practices and calls for more balanced trade relationships.

China's limited export diversification further intensifies the issue of overcapacity. Despite advancements in technologies like electric vehicles and renewable energy, China's innovations remain relatively narrow compared to its developmental stage. Policymakers must reassess their industrial strategies, moving beyond merely replicating existing products to addressing technological bottlenecks and fostering genuine innovation. Local governments' tendency to support new-energy products, even when manufacturers underperform, underscores broader issues within China's industrial policy framework, potentially leading to inefficiencies and an overreliance on subsidies rather than encouraging substantial technological breakthroughs.

Addressing Macroeconomic Imbalances

It is important to boost domestic consumption to address macroeconomic imbalances and reduce persistent overcapacity. Historically, China has focused on investment and supply, leading to economic imbalances. While recent initiatives like trade-in programs for consumer goods have encouraged consumption, these measures may have a limited impact if consumer spending keeps declining. The government's hesitation to provide direct financial aid to households is significant. While large-scale cash transfers may not be appropriate at present due to concerns about dependency and logistical challenges, the idea deserves further consideration. Direct aid aims to improve living standards, increase aggregate demand, and consequently enhance production, employment, and economic growth. The government should explore ways to directly support consumption, whether through improved social security, enhanced urban benefits, or direct cash transfers. Implementing such measures could help reduce economic disparities and stimulate domestic demand, thereby supporting sustainable economic growth.

The Concept of a "Chinese Marshall Plan"

A strategic response to the challenges posed by trade surpluses and overcapacity could be modelled after a "Chinese Marshall Plan." A trade surplus indicates that China is selling more goods than it buys, which could threaten domestic jobs. To address these challenges, China could consider three strategies: maintaining a multilateral and open international trade and investment system, encouraging domestic companies to invest abroad to alleviate pressure on domestic exports, and collaborating with Belt and Road Initiative countries to implement a "Global South green development plan." This plan, inspired by the U.S. Marshall Plan, would leverage commercial and policy tools, or even direct aid, to support green transitions and economic development in partner countries. Such a plan could create demand for Chinese products and foster international cooperation, while also addressing global environmental challenges. By adopting a proactive approach to international trade and investment, China can mitigate the risks associated with trade surpluses and contribute to global economic stability.

The Role of Green Technology and Investment in China's Economic Transformation

China has been working to transition into an innovation-driven economy, taking significant measures to upgrade its manufacturing industry to be more high-end, environmentally friendly, intelligent, and service-oriented. This transformation represents a shift from "productivity expansion" to "productivity enhancement," reflecting China's commitment to sustainable, long-term growth. However, the country faces challenges in balancing economic growth with environmental sustainability. The strain on the environment from continued economic expansion necessitates innovative solutions to mitigate this impact. Additionally, addressing the economic development disparity between China’s eastern and western regions remains a challenge, though advancements in digital and transport technologies have facilitated more effective resource distribution.

China’s green transition is crucial in addressing these challenges and ensuring sustainable development. The focus on green technologies and investments is essential for achieving long-term economic and environmental goals. Looking ahead, China is expected to continue its trajectory toward an innovation-driven economy, supported by a rising middle class that fuels sustained economic growth. The nation is well-positioned to lead in new technologies across critical sectors such as healthcare and renewable energy.

The latest Intergovernmental Panel on Climate Change (IPCC) report underscores the urgency of addressing global greenhouse gas emissions, which have reached a record 57.4 gigatonnes of carbon dioxide equivalent, contributing to 2023 being the warmest year on record. Despite the urgent need for emission reductions, global trends continue to move in the wrong direction, however, there remains an opportunity for reversal. Key sectors responsible for over half of global emissions include food, construction, fashion, consumer goods, electronics, automotive, professional services, and freight supply chains, presenting a critical opportunity for significant emission reductions through decarbonization.

A crucial aspect of China’s green transition is the implementation of low-carbon technologies throughout value chains. These technologies require various types of financial support at different stages of development. The research and development phase depends on fiscal budget allocations and philanthropic capital, while commercially viable and near-commercial technologies need distinct forms of capital. China plays a pivotal role in bridging the finance gap for low-carbon technologies. As the largest trading partner for over 140 countries, China is uniquely positioned to influence the global green transition in supply chains. Over 800 major Chinese companies have committed to achieving carbon neutrality by 2060, with sectors such as ICT, textiles, and manufacturing aiming to meet these targets ahead of national goals.

To support this green transition, China is expected to require approximately $26 trillion in green investments by 2050. The country’s 14th Five-Year Plan allocates $6 trillion to climate-related initiatives and the digital economy. Additionally, the People’s Bank of China has established a special re-lending facility worth 500 billion yuan (approximately $70.47 billion) to support scientific and technological innovation, technical transformation, and equipment renewal, with a one-year facility interest rate of 1.75%.

Innovative Financing Mechanisms

For green technology companies, driving industrial value chains that foster technological advancements, adhere to sustainability reporting standards, and set ambitious carbon reduction targets is essential. These companies must effectively communicate with investors to secure the necessary financial backing for scaling up green technologies and avoid greenwashing. Investors must understand the technologies and associated risks to support these innovations effectively.

Innovative financing mechanisms are already in place. For instance, green procurement buying goods and services with minimal environmental impact—provides opportunities for companies with green technologies. MYbank, an internet bank incubated by Alibaba, has created a special financing platform for 6.23 million micro and small-sized enterprises. By the end of December 2022, MYbank had provided preferential loans to 420,000 of these enterprises, advancing their green development while offering inclusive financial services. The bank also developed a green and digital supply chain finance product matrix, including green procurement loans, to support these businesses.

In China, banks are expected to continue providing the majority of debt finance, primarily through green loans or sustainability-linked loans designed for green transportation projects. For example, China CITIC Bank led a domestic medium- and long-term US dollar syndicated loan for a leading battery company, ensuring the stable supply of raw materials essential for green technologies. This ten-year loan was tailored to match the terms of the raw material supply contract.

Another example of innovative financing is the use of sustainability-linked loans for the operational stage of green technologies. In June 2023, Societe Generale China implemented a sustainability-linked mechanism for an existing $97 million bank acceptance draft facility available to multiple Chinese subsidiaries of Forvia, a leading supplier of automotive parts. This followed the signing of a sustainability-linked term loan facility earlier in the year.

China has also developed green stock markets to streamline the verification and filing procedures for the initial public offerings of green enterprises, establishing green channels for these companies. Chinese companies are expanding overseas, as demonstrated by GEM’s successful issuance of Global Depository Receipts on the SIX Swiss Exchange, raising $381 million for projects such as nickel resources in Indonesia and power battery recycling in Europe.

Conclusion

China's journey toward a green economy is marked by early deployment of commercially viable technologies, innovative green finance products, and shifting investor preferences. The development of a common taxonomy and restructuring of capital sources through innovative financing mechanisms are likely to scale up China’s innovation chain and contribute to the global innovation ecosystem. China's emphasis on innovation, coupled with its rapid economic change, underscores its growing influence on the global stage. The country's substantial investments in research and development, increasing patent filings, and advancements in green technologies illustrate its commitment to becoming a global innovation leader. As China continues to navigate its transition to an innovation-driven economy, it is poised to play a pivotal role in global economic and technological development, shaping the future of industries and contributing to sustainable growth worldwide.

IP Round-up

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Pharma Stock Surge: The recent surge in pharma sector stocks is driven by the 'Patent Cliff,' where drug patents expire, allowing generic manufacturers to produce similar drugs at lower costs. Typically, drug patents last 20 years, during which the innovator enjoys market exclusivity and premium pricing. However, post-patent expiry, revenues for these companies drop significantly as competition increases. Notably, Pfizer's Lipitor and Eli Lilly's Zyprexa faced sharp revenue declines after losing patent protection. While this poses challenges for innovator companies, it presents substantial opportunities for Indian generic drug manufacturers. India's pharmaceutical industry, a global leader in generics, is set to benefit immensely from the upcoming patent expirations. With projected growth of 12-16% CAGR from 2024 to 2030, the Indian pharma sector is poised for substantial gains. Investors are encouraged to capitalise on this growth potential, particularly as the Nifty Pharma index shows strong performance amid ongoing global trends. (Source: Economic Times)
Image Source: Economic Times
Yusuf Dikec Viral Olympic Pose, Files for Trademark: Turkey’s Olympic pistol sharpshooter Yusuf Dikec gained global fame after his relaxed stance at the Paris Games went viral, likened to James Bond and even catching Elon Musk's attention. The pose, with his non-shooting hand casually in his pocket, sparked widespread imitation and memes. To protect this iconic image, Dikec filed a trademark application with the Turkish Patent and Trademark Office after learning of unauthorised attempts to claim it. His coach, Erdinc Bilgili, confirmed the move was to safeguard Dikec’s intellectual property and control the commercial use of his likeness, given the surge in related merchandise. (Source: Economic Times)
Yusuf Dikec Image Source: Business Times
₹50 Lakh Fine for Trademark Violation: On August 13, the Bombay High Court imposed a ₹50 lakh fine on Delhi-based Premier Stationery Industries and its associates, for violating an earlier injunction order that barred them from using trademarks similar to Pidilite Industries' Fevicol products. The court found that, despite a 2017 order prohibiting such use, the respondents continued to use the trade labels, trade dress, and colour scheme associated with Fevicol's glue products, demonstrating willful disobedience. The fine is to be paid to Pidilite Industries within four weeks, failing which the respondents would face two weeks of detention in civil prison. The court criticised the lack of remorse and non-compliance with its previous orders, rejecting the defence that the business had been sold and that the consent terms did not bind the new owners. (Source: Hindustan Times)
Image Source: Justdial
Chennai Researchers Patent AI-Powered Landing System for Drones: Researchers at the Madras Institute of Technology, Anna University, Chennai, have developed a revolutionary airborne-based intelligent autonomous landing system for mini-unmanned aerial vehicles (UAVs), which has been granted a patent by the Indian Patent Office. This innovative technology, enables precise identification of landing sites using AI and deep learning algorithms, even in challenging terrains like hills with uneven surfaces. It is particularly beneficial for Beyond Visual Line of Sight (BVLOS) applications, assisting in high-altitude logistics, defense operations, emergency relief, and rescue missions by delivering supplies such as weapons, ammunition, and medical aid. This breakthrough is also promising for civilian uses, including healthcare deliveries and e-commerce, potentially transforming traditional drone delivery systems that previously relied on airdrops from certain altitudes. (Source: The Hindu)
Image Source: The Hindu
Boroline a "well-known trademark: In the 1920s, during the Swadeshi Movement, Gour Mohan Gupta developed Boroline, an antiseptic ointment that became a household staple in India. Over a century later, GD Pharmaceuticals, the parent company of Boroline, found itself in a legal battle with Cento Products (India) over trademark infringement related to a product called 'Borobeauty.' The Delhi High Court, in a ruling on August 7, issued a permanent injunction in favor of GD Pharmaceuticals, declaring Boroline a "well-known trademark." The court prohibited Cento Products from using any similar trade dress or trademark, including the prefix 'BORO,' and ordered them to pay Rs 2 lakh to GD Pharmaceuticals for the prolonged litigation. The court highlighted Boroline's longstanding market presence, referencing a 1947 newspaper ad, and affirmed its recognition and popularity since 1929. (Source: Hindustan Times)
Image Source: Boroline.com

Reference:

Chen, L. (2024, June 28). Why China Is Making Innovation the New Engine of Growth. World Economic Forum. Retrieved from https://www.weforum.org/agenda/2024/06/why-china-is-making-innovation-the-new-engine-of-growth/#:~:text=Expanding%20innovation%20footprint,%25%20year%2Don%2Dyear.

China's New Innovation Advantage. (2021, May). Harvard Business Review. Retrieved from https://hbr.org/2021/05/chinas-new-innovation-advantage

Economic Times. (2024, September 3). Turkish star Yusuf Dikec wants to trademark his viral Olympic shooting stance: What it means. Economic Times - Panache. Retrieved from https://economictimes.indiatimes.com/magazines/panache/turkish-star-yusuf-dikec-wants-to-trademark-his-viral-olympic-shooting-stance-what-it-means/articleshow/113009495.cms?from=mdr

Hindustan Times. (2024, September 1). HC slaps ₹50L fine on Delhi firm for Fevicol trademark violation. Retrieved from https://www.hindustantimes.com/cities/mumbai-news/hc-slaps-50l-fine-on-delhi-firm-for-fevicol-trademark-violation-101725131765837.html

Huang, Y. (2024, August 24). Weekend Long Read: As China Exhausts Low-Cost Advantage, Urgent Shift to Innovation Needed. Caixin Global. Retrieved from https://www.caixinglobal.com/2024-08-24/weekend-long-read-as-china-exhausts-low-cost-advantage-urgent-shift-to-innovation-needed-102228297.html

Indian Express. (2024, August 28). Boroline vs Borobeauty: Delhi HC rules in favour of popular antiseptic cream in trademark case. Retrieved from https://indianexpress.com/article/cities/delhi/boroline-vs-borobeauty-delhi-hc-rules-in-favour-of-popular-antiseptic-cream-in-trademark-case-9536882/

Kumar, S. V. (2024, September 2). Anna University gets patent for path-breaking drone technology. The Hindu. Retrieved from https://www.thehindu.com/news/national/tamil-nadu/anna-university-gets-patent-for-path-breaking-drone-technology/article68593780.ece

Min, L. Innovation Proves Driving Force for China. The Wall Street Journal, China Daily. Retrieved from https://partners.wsj.com/chinadaily/chinawatch/innovation-proves-driving-force-china/

Modi, J. (2024, August 31). Patent cliff can turn Indian pharma stocks into investor's goldmine. The Economic Times. Retrieved from https://economictimes.indiatimes.com/markets/stocks/news/patent-cliff-can-turn-indian-pharma-stocks-into-investors-goldmine/articleshow/112941051.cms

Song, S. (2024, May 8). How China Is Financing Its Green Transition. World Economic Forum. Retrieved from https://www.weforum.org/agenda/2024/05/china-financing-green-transition/

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Written By Shivani, Technical Assistance for Audio Generation By Raghav and Image Generation by Khushi


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