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Low-productivity innovation: the new unique Chinese growth model

David Baverez
3 min readOct 4, 2024

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This « Letter from Asia » was previously published in l’Opinion on september 19th 2024

Beijing’s choices regarding the economy are being made to profit its businesses but at the expense of its population.

The Chinese love idiosyncratic patterns for development. “High-Quality Growth”, backed by Beijing and based on “new strengths in production” seems well set to be added to the list of the paradoxes that characterise China. And it has a new particularity: “low-productivity innovation”.

First, this concerns the low productivity of capital, due to Beijing having made self-sufficiency a political choice. This favours security over the economic efficiency advocated by Ricardo, obtained by means of the division of labour. The inadequacy of returns is amplified by the fact that, since the 20th Communist Party Congress in October 2022, investment comes almost exclusively from the public sector. According to the Financial Times, even the most innovatory sector, that of risk capital, now gets 80% of its finance from state funds, which are allocated with priority given to sectors that the government has designated as “strategic”. The frenzied competition between different regions is naturally leading to spectacular excess production capacity, which, in certain sectors, could meet total global demand.

It also concerns the low productivity of labour, which is about a third of what it is in the United States — a gap that could potentially widen. After online private education was forbidden in 2021, priority is currently being given to vocational training in so-called sectors of the future. These risks constrain the much-needed future creativity that only more open-minded teaching could encourage, a weakness that cannot be obscured by the official publication of a plethora of patents that, above all, serve as government propaganda.

The Chinese people are already having to bear the lion’s share of the cost of the real estate crisis, they are also being called upon to finance low-productivity growth

“Rich state, poor people”

The result of this is economic development that has never been seen before: China leads in the renewable energy and electric vehicle industries, but most of its players are hemorrhaging cash. Huawei may well have announced that it can manufacture 5-nanometer semi-conductors, but its production yields remain stationary at a fraction of these of its Taiwanese competitor TSMC.

European decision-makers should now come to two conclusions. Firstly, China will continue to be one of the main centres of innovation in the world, whether it be in robotisation or self-driving cars. This is particularly true since it spends as much on R&D as Europe, and accounts for almost 20% of global R&D expenditure. Secondly, the absence of any relative gains in productivity, which was traditionally covered by government subsidies, is now compensated for by lower salaries in local areas, which is something unprecedented in China.

It is therefore partly up to the Chinese population to finance export promotion. Far from any hope of a recovery plan as mentioned during the Third Plenary Conference in July, it is a far better bet to conclude that the slowdown in Chinese consumption is of a structural nature. The “rich state, poor people” paradox continues to apply whilst the Chinese people are already having to bear the lion’s share of the cost of the real estate crisis, they are also being called upon, through wage restraint, to finance low-productivity growth.

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David Baverez

Business angel / demon. Based in Hong Kong since 2011. Columnist, author, speaker.