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The Struggles of the Real Economy

Driving Prosperity

While there is consensus to keep the real economy thriving – the part that produces actual goods as opposed to financial markets – persuading investors to be patient enough to wait for returns remains a challenging task

By NewsChina Updated Jun.1

Seen as the most representative indicator of China’s real economy, the industrial output of Shanghai, one of the country’s manufacturing hubs as well as its financial center, decreased for two consecutive quarters against a background of global slowdown in early 2016, before a slight rebound toward the end of the year. 

The city reported a 0.2 percent decrease in industrial output in the first two quarters last year, whereas a 2 percent increase had been the norm during the same period in previous years. 

The rebound came in November when the industrial output of Pudong district, where Shanghai’s manufacturing core lies, reported its first increase for the year, by 1.2 percent to 832.1 billion yuan (US$121.2 billion). Official statistics later showed that Shanghai’s total industrial production in 2016 stood at 928.3 billion yuan (US$135 billion), achieving an increase of 2.7 percent. 

There is a causal factor to the rebound, Tang Shiqing, who’s in charge of Pudong’s economic and technology commission, told NewsChina. The third and fourth quarters of last year saw a sudden explosion in the sales of green energy and web-enabled cars. In November last year, Pudong’s car industry output increased by 38.3 percent. 

At least three types of web-connected cars and one type of hybrid electric car are currently being mass-produced by the SAIC Motor Corporation in Pudong. Among them is the Roewe RX5, a collaboration between SAIC and Internet giant Alibaba, which was branded the world’s first mass-produced smartcar. 

Car production is one of Pudong’s six pillar industries, alongside electronics, biomedicine and new energy, which according to Tang constitute a kind of risk-sharing mechanism that makes sure the district’s development doesn’t overly rely on one or two sectors. 

Pudong attracts such a large pool of companies because it provides a complete industrial chain. Many start-ups used to leave Shanghai for neighboring small cities, where land and labor cost less, and yet came back after they had grown bigger and needed to get closer to customers and sales channels, said Chen Jie, Party Secretary of Shanghai Lingang Area Development Administration.  

Economic Plateau

Despite the district’s diversity, Pudong’s manufacturing sector has reached a plateau. Global recession has taken its toll, especially on the automobile and electronics sectors in which sourcing and sales are both down globally. 

Large investment projects, which Pudong’s manufacturing largely relied on for rapid growth, take a long time to yield results. The rapid sales growth of SAIC’s new energy and connected cars late last year was in fact the result of nearly a decade of strategic arrangements. 

“We have been crowned the best employer in the country for six years in a row. But our continuous inputs have had limited profits in previous years. Our employees complained a lot, and we were under a lot of pressure,” Zhang Jia, Party secretary general of SAIC’s Lingang base, told NewsChina. 

An overall industrial output now over 900 billion yuan ($130 billion) means that projects traditionally considered large will provide increasingly smaller contributions to total growth. 
In addition to this, investment is increasingly being diverted to finance and real estate – sectors that promise a quicker return. 

“We ought to deliver this message,” said Tang Shiqing of Pudong’s economic and technology commission. “The real economy certainly takes longer to grow, but once it does, it’ll make money for the long run.” 

Tang believes limited land supply is now another factor that is causing the slowdown of Pudong’s real economy. Their current solution is to replace outmoded facilities, which consume high amounts of energy and pollute heavily, with new facilities.  

According to Tang, the district plans to eliminate over 1,000 outmoded companies in the near future. Low-end manufacturing is to be upgraded into high-end, high-tech versions. The purpose is to encourage growth without increasing industrial land supply. 

In the long run, manufacturing is likely to make up an increasingly smaller share of Shanghai’s total GDP, if the service sector is to carry on its rapid growth, said Tang. In 2016, secondary industry made up 24 percent of Shanghai’s GDP while the service sector accounted for 75 percent. 

A discussion has been running over whether Shanghai should “walk on both legs” or take the “Singapore road” that focuses on the service industry alone. The answer has been resolutely the former, as the real economy is still believed to form a solid foundation, as in Germany, for surviving future economic turbulence. 

But to tackle recession, major manufacturers in Shanghai have expanded their businesses into the service sector. China’s largest steel producer Baosteel, for example, now sees over 50 percent of its profits generated by services, such as intelligent transportation solutions and cloud computing provided by its subsidiary software company Baosight. 

Innovation as Stimulus 

While the traditional mode of growth, which relied on shrinking costs and increasing production, lost its effectiveness for the real economy, manufacturers ought to create new demand by incorporating new elements such as Internet connectivity and artificial intelligence, said Zhang Jia of SAIC. 

Zhang attributes the popularity of web-connected cars primarily to technological innovation while taking into consideration what consumers want. 

“For example, if you want to see the stars, just talk to the car and it will open the sunroof for you; if you say you feel cold, the heating will automatically turn on. You can even start the air conditioning remotely while you’re still in the house,” said Zhang. 

In Pudong, local companies will be encouraged to grow faster through innovating and by integrating into the industrial chain of national companies. 

“For example, can those small and micro businesses in China carry out the research tasks [similar to those] of international companies, instead of just manufacturing and outsourcing tasks?” said Chen Jie, Party Secretary of Shanghai Lingang Area Development Administration. 

Technological innovation will require companies to keep their strategic focus. But while the growth of industrial output remains low, it takes considerable courage to keep investing in innovation on a large scale, said Chen. “Though a noticeable increase in output value cannot be expected in the short term, they should keep walking in the right direction.” 

For the government of Pudong, the direction is equally clear: making joint use of its status as both a pilot free trade zone and technological innovation center. 

Take pharmaceutical R&D companies. Traditionally, the registration and production of medicines in China are bound together: the owner of a patent should also be the one who produces it. 

Under such a rule, pharmaceutical R&D companies had to either build a factory of their own or sell the patent. 

There was a time when, due to insufficient funding, many such companies had to transfer their technology to foreign companies. Now the Pudong government is adopting a new mechanism that separates licensing approval from that of production. Pharmaceutical companies can have their drugs produced by another company. 

Thanks to that mechanism, Boehringer Ingelheim’s new manufacturing base in Pudong’s Zhangjiang High Tech-Park, with an investment of 500 million yuan ($72.7 million), already has production scheduled for 2019 after work began earlier this year. 

Technological innovation was given even stronger strategic support last year, as the Pudong government combined the formerly separate economic and technology commissions into one. 

“The combination is expected to increase efficiency whether in government services or mobilizing social resources,” said Tang Shiqing. “Though the two voices don’t necessarily agree with each other, they can settle the claims behind the door and make sure what comes out of it is a unified policy.”