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A Study on the Changes in China’s Industrial Policies and Industrial Structures in Manufacturing Sector after China’s Reform and Opening Industrial structure, Industrial policy

Author Wonseok Choi, Pyoung Seob Yang, Jinhee Pak, Joo Hye Kim, Jiwon Choi, and Xingwang Jiao Series 20-23 Language Korean Date 2020.12.30

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   As China's recent industrial advancement has changed the trade structure between Korea and China from a complementary relationship to a more competitive one, the need for research on Chinese industrial policy has increased. This report aims to analyze and evaluate changes in major industrial policies and industrial structures following China's reform and opening, thus enabling better understanding of China's industrial policies and forecasting the direction of China's industrial policies during its 14th Five-Year Plan period. In particular, unlike previous studies, this report classified China's major manufacturing policies into four types after China's reform and opening, and proposed Korea-China industrial cooperation through policy analysis and comprehensive evaluation.
   Chapter 2 divides China’s industrial policies into four stages after the initiation of reform and opening-up, and described the trend of major industrial policies by period. The first stage is the market economy exploration stage (1978-1991), when industrial policies first began to be introduced in China, focusing on adjusting proportional relations such as imbalances between the agricultural and industrial sectors, and light and heavy industries. The second stage is the initial construction stage of the market economy (1992-2001), during this period, policies to foster key industries were implemented, direct intervention by the government in promoting industrial policies was reduced and the transition to guide-type intervention began. The third stage is the stage of full-scale and in-depth reform (2002-2012), when the government began to foster high-tech industries after declaring the path to “new industrialization” in November 2002. Since the global financial crisis of 2008, the government has also promoted strategic emerging industries as a new growth engine, while implementing 10 major industrial promotion and coordination policies in response to the issue of oversupply. From 2013 to the present, various strategies to strengthen manufacturing power, such as the China Manufacturing 2025 and Internet+ initiatives, are being pursued to further promote full-scale reform within the country. However, as competition for trade and technology hegemony between the U.S. and China intensified, new industrial policies were needed to cope with this, and the 14th Five-Year Plan presented the direction of industrial policies focused on securing core technologies through innovation.
   Chapter 3 summarizes and evaluates China's industrial development policy, industrial restructuring policy, industrial organization policy, industrial technology policy and the timing characteristics and direction of policy measures. The industrial development policy was carried out by selecting industries that did not meet market demand at each period to supply resources first, and to intensively foster industries that will lead the national economy now or in the future. In this process, the size of the industry grew and the industrial structure advanced, but indiscriminate overlapping investments in industries designated by the government resulted in oversupply or quantitative growth without yielding core technologies. To solve the problem of oversupply, the Chinese government implemented various industrial restructuring policies for each period.
   China's industrial restructuring policy changed from a uniform control of production and construction of various industries to an approach where specific targets were set for the liquidation of redundant businesses or management and support measures to make each local government and company more active in removing underdeveloped facilities. In addition, instead of determining targets based on size, comprehensive indicators such as technology and environmental pollution began to be considered as well. However, the concrete achievements of these policies still remain limited due to the sheer scale of long-term policies conducted and the protection of local governments.
   Through industrial organization policy the government engages market structures and market activities to maximize market performance. Implemented since the reform and opening of the market, the policy has focused on establishing a modern corporate system and the order of market competition. The recent rapid growth of the digital economy is expected to have a significant impact on China's industrial ecosystem and business activities, leading to the revision of the anti-trust law in 2020 for the first time in 11 years in response to the possibility of a small number of Internet (platform) conglomerates exploiting a monopoly in the market.
   Industrial technology policies are a series of policies enacted by the Chinese government to promote industrial development, enhance industrial technology innovation capabilities, and advance industrial technology. For about 40 years since the reform and opening of its market, China's industrial technology policy has evolved through the stages of simple technology introduction, to absorption and assimilation of these technologies, and then to autonomous innovation. Technology development is increasingly being led by the corporate sector, instead of directly planned and controlled by the government. Recently, policies to promote and support industrial-academic cooperation in China are expected to be implemented to drive the independent development of key technologies in response to U.S.-China technology conflicts.
   In the 1980s, China mainly used government intervention measures such as government investment, state-owned bank loans, tax revenues and plans, but after the reform to introduce a socialist market economy, direct intervention by the government has gradually been reduced and replaced with market-based means applied in the form of state guidance and economic or legal measures. The government is expected to focus more on identifying efficient industrial policies through means that utilize the market rather than direct means such as government subsidies, which run the risk of trade disputes.
   The major milestones of China's industrial policy can be summed up as its rise as the world's largest manufacturer, securing stability in industrial development through long-term policy implementation, upgrading industrial structure, and technological development. However, increasing problems with overlapping investments and oversupply, increasing dependence on state-owned companies and improving inefficiency, and international disputes over industrial policies are major policy tasks to be resolved.
   Chapter 4 analyzes changes in China's industry, trade, and Korea-China trade structure due to the effects of industrial policies after reforms and opening, as presented in Chapter 2 and 3. First, the core of China's industry has shifted from light industries to heavy industries in accordance with policies to upgrade the industrial structure. Second, due to policies to foster high-tech industries since the early 1990s, the proportion of high-tech industries has increased and the technology level of manufacturing has increased. Third, localization and domestic industrialization are proceeding in line with policies to foster domestic companies. According to these changes in China's industrial structure, Korea's exports to China have gradually advanced from labor-intensive to technology-intensive industries, while Korea's import and export dependence on China has increased. However, as Korea's coefficient of correlation between exports and investment to China is gradually increasing, the coefficient of inducement of imports and exports to China per unit of investment in China has continued to decline.
   Based on this analysis, the results of a panel regression analysis of Korea-China industrial data from 1997 to 2017 showed that Korea's exports to China increased as China's exports to the world increased. In addition, there was a trend in which Korea's exports to China increased since 1997, but this rise tapered off between 2012 and 2017, indicating that the synchronization of Korean and Chinese exports decreased. This result indicates that Korea has driven export growth to China in the past by supplying intermediate goods needed for China's heavy industry development policy and export-led growth method, but has failed to respond to changes in demand caused by the advances in China’s industrial structure and technological innovation policies centered on high-tech industries.
   Chapter 5 presented trade risks and Korea's strategies due to the impact of friction between the U.S. and China, and changes in the direction of China's industrial policy. First of all, we propose ways to cope with U.S.-China friction by diversifying export markets, analyzing changes in the Korea-China industrial cooperation environment, preparing industrial technology protection policy in Korea, diversifying global supply chains and participating in China’s value chain to target its domestic market.
   We also emphasize the need for research on industrial policies and the process of creating related industrial ecosystems as China's industrial policies gradually change from simple to comprehensive policies. In response to the expansion of China's industrial influence in state-of-the-art technology, there is a need to redefine long-term industrial policies in new industries. This was followed by a proposal of promising areas to focus cooperation efforts, identified by comparing China's industrial policies and related strategies in Korea.
   As our analysis indicates that Korea's supply capacity for China's new growth industry will become increasingly important in choosing opportunities and strategies for Korea-China economic cooperation, our study divides products in the areas of materials, parts, and equipment according to three classifications based on China's growth and Korea's trade competitiveness.
   Finally, efforts to maximize the performance of the Korea-China FTA in China's growth industry, urge China to comply with international rules and rules in promoting new industries, respond to China's independent standardization, and strengthen Korea-China cooperation in digital economy and environment.

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