Central Committee meetings of China’s Communist Party don’t make plans. They reveal plans long in maturation. The four-day Central Committee meeting that ended Tuesday only offered a sketch of a five-year plan centered on high-tech self-sufficiency and a shift toward the domestic market. But enough details of China’s economic goals are known to piece together a picture of an economy taxiing towards take-off. Call it the quantum leap forward. Embedded in the five-year plan are a web of new technologies and financial reforms designed to transform manufacturing, transportation, health care and finance, powered by a domestic semiconductor industry that will challenge American dominance in the industry. China already has launched a set of new technologies that the West hasn’t begun to
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Central Committee meetings of China’s Communist Party don’t make plans. They reveal plans long in maturation. The four-day Central Committee meeting that ended Tuesday only offered a sketch of a five-year plan centered on high-tech self-sufficiency and a shift toward the domestic market.

But enough details of China’s economic goals are known to piece together a picture of an economy taxiing towards take-off. Call it the quantum leap forward.

Embedded in the five-year plan are a web of new technologies and financial reforms designed to transform manufacturing, transportation, health care and finance, powered by a domestic semiconductor industry that will challenge American dominance in the industry. China already has launched a set of new technologies that the West hasn’t begun to deploy.

These include remote sensing of vital signs for epidemic control, predictive AI algorithms to pinpoint possible “superspreader” events, digital payments (including an official digital currency) that will replace conventional banking, and self-programming industrial robots that can design their own production processes.

China’s edge over the West, though, doesn’t come from superior technology. China’s economic takeoff stems from what Nobel Laureate economist Edmund Phelps calls “mass flourishing” – the willingness of the whole population to embrace innovation. China’s plan will push disruptive new technologies into the grassroots of the economy, transforming daily life in several ways.

The headline event of the Central Committee plenum was a call for national self-sufficiency in semiconductors and other high-tech industries, a response to Washington’s attempt to choke off China’s access to the most sophisticated computer chips and the machines that make them.

That’s more a drag on China’s growth than a boost because China was happy to let Taiwan and South Korea fabricate most of its computer chips. After Washington asserted extraterritorial privilege on any chips built with American equipment or software, China poured resources into the sector.

Otherwise, the US chip boycott against China has had a negligible impact on its plans. We broke the story Sept. 9 that Huawei had no difficulty buying older chips (with a transistor gate width of 28 nanometers or more) to power its 5G base stations.

Since then Huawei officials have announced that they have sufficient chips on hand to fulfill all of their 5G equipment orders. Huawei’s high-end handset business will suffer due to American controls on more advanced chips, which Taiwanese foundries fabricated from Huawei designs.

Other Chinese handset makers such as Xiaomi will gain market share and the net impact on the Chinese economy will be negligible.

What matters isn’t whether China uses 5-nanometer chips or 28-nanometer chips, but rather the depth and breadth of adoption of new technologies. The first big impact of the national 5G buildout will be the elimination of traffic congestion in “smart cities” and a vast increase in delivery efficiency.

E-commerce rose to 37% of total retail sales in 2019 from just 12% in 2019 and is projected to exceed 64% of the total by 2023. E-commerce represents just 16% of total sales in the US.

By 2024, China will finish building out its 5G mobile broadband network with 6 million base stations at an estimated cost of $170 billion. That’s roughly 10 times the projected capital spending of US telecom companies during the next three years, and more than half the world’s total 5G investment.

By 2022 “smart city” technology developed by Alibaba, Huawei, Tencent, Baidu and other Chinese tech giants will start matching passengers to cars (including some self-driving vehicles) and packages to delivery trucks through artificial intelligence (AI) servers.

Autonomous vehicle technology has been one of the biggest disappointments in the US venture capital arena, as existing broadband and computation crashed (in some cases literally) against the haphazard infrastructure of US cities. Chinese cities are for the most part new and designed with broad ring roads amenable to self-driving vehicles that can communicate via 5G broadband, with much higher speeds and nearly instantaneous response.

Directly or indirectly, retail sales support about 42 million jobs out of a workforce of 165 million, or one in four. Automating retail sales as well as delivery will save vast amounts of labor, a critical source of efficiency for China, whose total workforce is projected to fall to 970 million in 2025 from about 1 billion in 2020. 

The key to mass flourishing is putting capital into the hands of entrepreneurs at the grass-roots level. Two events signal a shift in China’s capital structure from a top-heavy system dominated by state-owned banks and state-owned enterprises with privileged access to them, to an entrepreneurial model.

The first came last week from the National Development and Reform Commission together with the central bank and four government ministries, labeled as a “big gift bag” with 38 measures to direct capital to private industry.

These include supply-side tax cuts and fee reductions, as well as equal access to public industrial land, guiding commercial banks to lend more to private manufacturing, easier terms for small business collateral, more time payment to small- and medium enterprises, as well as direct financing channels. China’s new STAR market in Shanghai has raised $22 billion equity offerings for smaller firms.

The second is the pending IPO of Jack Ma’s Ant Financial, a fintech giant that threatens to upend the world banking industry. With 900 million customers, Ant Financial combines digital payments with nearly-instantaneous approval of personal and small business loans. The company’s enormous database produces credit scores far more refined than Western credit agencies.

The combination of digital payments and Big Data credit scores portend a transformation of the financial industry. Individuals and businesses keep $35 trillion in checking accounts or cash as a reserve against bills. Banks hold those accounts and lend the money out. The new financial technologies will vastly reduce the need for reserves. China is already test-marketing a digital currency as legal tender.

Perhaps the most important social change brought about by new technology is in public health, where the Covid-19 pandemic turned China into an enormous national laboratory for artificial intelligence applications. On Oct. 19 I reported on Chinese government evaluations of AI startups during the pandemic. China has hot-housed medical AI firms for several years, but as Emily Weinstein of Georgetown University reports:

The emergence of Covid-19 in December 2019 has amplified these efforts, as Chinese companies of all sizes across AI-related sectors have developed and retooled AI systems for epidemic control and prevention. The State Council’s June 2020 White Paper, entitled “Fighting Covid-19: China in Action,” states that China has “fully utilized” artificial intelligence to not only research, analyze, and forecast Covid-19 trends and developments, but also to track infected persons, identify risk groups and facilitate the resumption of normal business operations.

The Chinese have learned to log their vital signs into smartphone attachments that feed the data into the cloud, where they are stored and analyzed on AI servers. In the short run that enabled the Chinese authorities to locate and preempt “superspreader” transmission of Covid-19. But the implications reach much farther.

With a database including the sequenced DNA and the digitized health records of hundreds of millions of Chinese, Beijing is incubating an entirely new kind of medical industry, including AI-based research capabilities that can speed up the development of new pharmaceuticals by an order of magnitude.