Why China’s Economy Keeps Booming Even After COVID-19

By Xiaomeng Kang and Dingding Chen

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While much of the world scrambles to prevent new waves of coronavirus from stalling the fragile recovery from recession, China’s economy seems to be hitting its stride. In fact, economic recovery might not be a proper term to describe China’s economic boom, as in China’s case the pandemic caused something more like stagnation than a recession.

With society going back to normal, innovation and the pre-existing digitization are reinforcing economic growth in China. The shock of the pandemic has reinforced the trend toward digitization and innovation investment in China, and its accelerated impact has been gradually unleashed with the economy going back to normal. Here we will first analyze why China’s economy keeps booming, even after being shocked by COVID-19, and then elaborate on the new economic directions in China and challenges in the near future.

China reported third-quarter GDP growth up 4.9 percent from a year ago, bringing growth for the first three quarters of the year to 0.7 percent year-on-year, according to data released on October 20 by the National Bureau of Statistics. China’s imports and exports have grown quickly in September, with imports increasing by 13.2 percent and exports rising 9.9 percent from a year earlier. As observed in international trade, the pandemic has severely hit developed countries, causing a steep reduction in the degree of their centrality in trade networks, but has not affected the central position of China. Besides, China retains its 14th spot in the top-performing economies in the Global Innovation Index (GII) 2020 released on September 2, according to the U.N.’s World Intellectual Property Organization (WIPO). WIPO Director-General Francis Gurry said that the COVID-19 pandemic overall appeared to be spurring an “acceleration of trends that were pre-existing,” predicting one of the trends that may be accelerated by the pandemic is the movement toward Asia.

Shenzhen has been regarded as China’s reform landmark for 40 years and is now deemed as one of the world’s leading innovation hubs. Its rise is a case study for China’s continued economic boom.

First, Shenzhen’s reform is supported by the central government. At the 40th anniversary of the establishment of the Special Economic Zone in Shenzhen, President Xi Jinping announced support for the city’s pilot reform with comprehensive authorization, with requirements on comprehensively deepening reform, broadening openness, modernizing the governance system, and actively promoting the development of the Guangdong-Hong Kong-Macao Greater Bay Area.

Second, the dynamic young workforce made Shenzhen a focal point of exchange and growth for a new generation of Chinese innovators. Shenzhen has the highest proportion of “engine room” population of any city globally. Third, regional connections built up Shenzhen as the locus for China’s reform and opening up.

As a showcase of China’s economic success story, it is telling that Shenzhen is now an innovation and technology hub. Centered around digital connectivity, innovation and entrepreneurship, and tech talent exchange and development, the first Smart City Initiative (SCI) implementation committee meeting was held by Singapore and Shenzhen on June 17, 2020. COVID-19 has accelerated the pace of digitization in Singapore and Shenzhen and made the digital connectivity between two parties “even more pertinent.” The two cities have agreed on eight memoranda of understandings (MoUs) regarding greater access to market opportunities in the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) and Southeast Asia.

The Chinese government has played a significant role in increasing the research and development investment and governing the innovation market. China continued its years-long run of double-digit percentage increases in spending on R&D in 2019. Total public and private science and technology expenditures in 2019 rose 12.5 percent over the previous year to 2.21 trillion Chinese renminbi ($322 billion), amounting to 2.23 percent of GDP. For comparison, the United States spent 2.83 percent of GDP, the OECD countries collectively spent 2.38 percent of GDP, Israel and South Korea spent 4.9 percent and 4.5 percent of GDP, respectively, in 2018. The goal to spend 2.5 percent of GDP on R&D by 2020 was spelled out in China’s most recent five-year plan and in the 15-year Medium- and Long-Term Program for Science and Technology Development.

As in other East Asian economies, government intervention has been an important component of China’s evolution. As Robert Wade puts it, evidence from East Asian countries shows us that the government can, in some circumstances, guide the market to produce better industrial performance than a free market. On September 22, Xi presided over a symposium of scientists, stressing that we should advance science and technology in breadth and depth in order to meet the forefront of world science and technology, the main battlefield of economy, major national needs, and people’s lives and health. The central government puts great emphasis on the reform of the system for scientific and technological innovation and further improvement of innovation ecology.

“The core solution to choke-neck technologies is not simply a scientific question, an innovative product, but the weak link in China’s overall operation mechanism on scientific and technological innovation system and industrial development,” as Lan Xue, the director of China Center for Science and Technology Policy, told the conference of China-U.S. Physics Examination and Application on October 18. It takes time to build a modern innovation system and accumulate industrial innovation capacity, while time has always been ignored in the endless march of technology.