Industrial upgrade to inject more impetus

CAI MENG/CHINA DAILY

China's economy still faces the risk of a K-shaped recovery. Emerging industries are expanding rapidly, foreign trade remains resilient and advances in new technologies are strengthening the country's competitive standing. Yet many traditional businesses and households continue to feel that actual economic conditions are relatively lackluster.

This divergence points to a central challenge in the transition between old and new growth drivers as the strength of emerging industries has yet to spread widely across the economy. The transition should therefore be judged by whether new technologies, materials and business models lift productivity and create demand in most sectors, rather than judging affairs by the size of a few fast-growing industries alone.

For China, in its current stage of development, the modernization of traditional industries is the clearest sign that the transition has taken hold.

The real estate sector illustrates why the definition matters. For many years, property and infrastructure investment supported growth through unusually long industrial chains. They generated demand for steel, cement, glass, household appliances, furniture, home decor and a wide range of services. These activities created jobs and incomes, which in turn supported consumption.

That role depended on particular historical conditions. Housing and infrastructure had been in short supply, while market-oriented reform coincided with rapid economic and household income growth. Once supply and demand moved closer to equilibrium, property could no longer provide the same economy-wide momentum. It will remain an important sector, but it is unrealistic to expect it to become the dominant growth engine again. Nor is another single industry likely to replace it.

Strategic emerging and future industries will have a profound impact, but their present spillovers are still limited. Many have relatively short supply chains and remain modest in scale despite rapid technological progress. Research also suggests that some new industrial parks operate largely apart from the traditional businesses around them. Their automated production lines and strong exports are impressive, but they may create few local jobs or commercial opportunities outside the park.

China is also transitioning through an economic cycle different from the past ones. Its industrial system is comprehensive, manufacturing capacity is strong and material supply is abundant. Under these conditions, conventional stimulus measures may stabilize demand, but cannot by themselves restore broad growth through existing products and production methods. Many traditional industries need to change what they produce and how they produce it. Only then can saturated markets generate new investment and consumption.

Three channels can advance this process. First, traditional firms can join the supply chains of emerging industries. New energy, digital and other advanced sectors still require basic materials, finance, logistics, transport, communications, exhibitions, travel and catering. Many established firms can participate after making targeted changes to their products or services. However, this channel alone may not be impactful and comprehensive enough to reverse the downward arm of the K-shaped recovery.

Second, digital transformation remains essential. It can improve management, raise efficiency and strengthen competitiveness at the enterprise level. But in markets already marked by excess supply and intense price competition, efficiency gains can also reinforce a race to cut costs. Digitalization must therefore support product innovation and business-model change, not merely help firms produce the same goods more cheaply.

Third, traditional industries need comprehensive upgrading through new technologies, materials and production methods. Traditional does not mean obsolete. History shows that major technological advances generate growth when they create new sectors and renew existing ones at the same time. New technologies also achieve industrial scale through broad application in established industries.

The eyewear industry in Danyang, Jiangsu province, provides a useful example. Local firms have reportedly begun exploring the use of lithography equipment to manufacture lenses. The industry previously moved from grinding glass to producing resin lenses, stimulating investment in resin materials and specialized machinery. If lithography-based production succeeds, it could again reshape the industry.

The effects would extend beyond lens manufacturers. Producers would invest in new equipment, lithography technology would gain applications outside chipmaking, and demand for new lens materials could rise. Changes in production could also transform optical services and encourage consumers to replace existing products. A mature market would become a source of incremental demand on both the production and consumption sides.

This mechanism can operate across much of the economy. Upgraded traditional firms gain new room for development and stronger operating capacity. New technologies and materials reshape supply chains, turning apparent investment saturation into demand for new equipment, infrastructure and distribution. New products can renew consumption, while traditional industries provide emerging technology companies with application scenarios and commercial dividends.

The regional impact is equally important. Emerging industries are usually intensive in capital, technology and highly skilled talent, making it difficult for smaller cities and counties to build complete clusters around them. Modernized traditional industries can give these regions a more viable route into advanced supply chains and provide markets in which new technologies and materials can be commercialized.

Macroeconomic fiscal and financial support is necessary, but a broader policy package is required.

Local government evaluation systems should encourage officials to devote more resources to upgrading existing industrial strengths, while continuing to support new quality productive forces. Local authorities can shift from competing mainly to attract isolated projects toward building cross-regional platforms that connect technology suppliers with traditional firms. They should create the conditions for industrial renewal and strengthen law-based administration and government credibility.

The relationship between nationwide resource mobilization and market incentives also needs careful balance. Coordinated national efforts have helped China overcome technological bottlenecks and develop strategic industries. The modernization of millions of traditional firms, however, depends on decentralized initiatives. Laws, regulations and taxation should protect property and operating rights, preserve economic security and leave investors with reasonable opportunities to earn returns.

Private capital can play a larger role. Many entrepreneurs who emerged during more than four decades of reform and opening-up are leaving day-to-day management duties, but they retain capital, industrial knowledge and market experience. Policy could encourage industrial-investment family offices that channel these resources into tech companies and the modernization of traditional businesses. Such investors can also provide the management, market development and financial expertise that young tech firms often lack.

Agriculture should be part of the same transition. Artificial intelligence, remote sensing, aerospace, biotechnology and modern chemicals are changing agricultural production and allowing research, farming, processing, logistics and sales to become more integrated. Pilot reforms for the voluntary, compensated withdrawal from rural land-contracting and homestead rights could help suitable capital and technology reach the countryside while protecting farmers' legal interests.

Financial institutions should likewise adjust their client strategies and support both emerging sectors and traditional-industry upgrading. Strategic emerging industries may take innovation from zero to one and commercialization from one to 10. The modernization of traditional industries can carry it from 10 to 100.

The success of China's growth transition should ultimately be measured by on-the-ground results: whether innovation reaches established firms, whether investment creates better products and services, and whether regions, workers and households share in the resulting gains. If the downward arm of the K can be turned upward through broad industrial renewal, China will have laid the foundation for a new era of stronger and more balanced growth.

The writer is vice-president of the Shanghai Finance Institute and director of the Shanghai Financial Digitalization Research Center.

The views do not necessarily reflect those of China Daily.