China bets on 'new infrastructure' to pull the economy out of post-Covid doldrums
Discussions among China’s technology industry and policymakers have been awash since the beginning of March with mentions of one buzzword: Beijing has positioned ‘new infrastructure’ construction as a key policy pillar of its post-pandemic economic recovery. Caroline Meinhardt explains the details.
Beijing wants to see big investments in the building blocks of China’s digital future – everything from 5G and data centers to artificial intelligence (AI) and electric vehicle (EV) charging stations.
Of course, China has been building digital infrastructure for years as part of a series of next-generation technology strategies and plans. But by giving China’s extensive web of technology initiatives a new rallying slogan, and mobilizing government and industry players to invest in projects that could propel the commercialization of emerging technologies, China’s leadership hopes to stimulate economic growth both in the short and long term.
The difficulty is that, unlike the stimulus package in the wake of the Global Financial Crisis, which centered on state-led investment in traditional infrastructure, this time the government is more dependent on market forces. Beijing not only has to convince private technology companies to play along - it also has to hope that the boost in supply of new digital applications is met with a corresponding boost in demand.
Defining ‘new infrastructure’ as a key economic growth driver
Nevertheless, there can be no doubt about the seriousness of China’s intentions. Premier Li Keqiang himself announced on May 22, presenting the 2020 government work report at the opening of the National People’s Congress, that China would “step up” the construction of new types of infrastructure. This followed several pledges, made for example on March 4 by China’s Politburo Standing Committee, that it would accelerate the construction of ‘new infrastructure’ (新型基础 or新基建 for short) as part of government efforts to offset the economic impact of the novel coronavirus outbreak. Analysts at a government-affiliated think tank and a securities firm – also quoted in state media – have said they expect the investments associated with ‘new infrastructure’ projects to total 10 trillion to 17.5 trillion yuan for the six-year period until 2025.
While the term ‘new infrastructure’ is not itself new – it first appeared during the Central Economic Work Conference in December 2018 – these high-level announcements represent an elevation of the initiative as a key policy priority. The road to economic recovery will be an uphill one, and digital infrastructure is seen as an economic multiplier that will drive industrial upgrading through the application of advanced technologies across various sectors.
The government’s official definition of the term reveals how wide the scope is. It stretches from information infrastructure such as 5G telecommunication networks, big data and intelligent computing centers, AI and the industrial internet to integration infrastructure that integrates next-generation technologies across traditional industries, including smart transportation and smart energy infrastructure like EV charging stations. It also encompasses innovation infrastructure that supports scientific research and technology development, such as science and education infrastructure including tech parks and R&D centers.
The government’s goals are thus two-fold. In the short term, the hope is that a new burst of targeted investments will create jobs and boost much-needed economic growth. In the long term, the projects are to help China create a world-class digital infrastructure that will strengthen its international competitiveness and support ongoing industrial upgrading efforts.
China's digital future lies in the hands of private tech companies
Unlike previous, more conventional, infrastructure investment programs, this new economic stimulus will rely on a more diverse set of players. Whereas state-owned enterprises (SOEs) play the predominant role in bridge or railway construction projects, the construction of digital infrastructure will, at least in part, have to be driven by private Chinese technology companies. Indeed, Premier Li Keqiang has insisted that private investment will be key and that the market will have the biggest say in creating new digital applications.
Success will therefore depend to a large extent on the willingness of private technology companies to align their goals with government directives and to form partnerships with state-owned players. In some areas this is already happening. China’s coronavirus response has seen technology companies work more closely than ever with the government to develop tools to fight the virus spread. If the media hype is anything to go by, they seem just as eager to join in the government’s ‘new infrastructure’ program. Tencent has already announced it will invest 500 billion yuan over the next five years in ‘new infrastructure’ including cloud computing, AI and cybersecurity. Smaller companies will likely also be vying to get their hands on government support for ‘new infrastructure’ projects – or ones they can pass off as such.
However, whether and how these companies will turn the government’s wishes into action still depends on how exactly government funding will be distributed and what supportive policies they can benefit from. Private technology companies will only jump on the bandwagon if there are long-term financial gains to be made. China’s leading tech companies with global ambitions may also not want to be perceived as state-directed companies. As some Chinese commentators have suggested, involvement in these projects could turn them into a “new generation of SOEs”.
Productive investments or digital bridges to nowhere?
But there is a further problem, too. Longer term, Beijing clearly hopes these investments will bring higher returns while boosting China’s competitiveness on the world stage. It remains to be seen, however, whether China’s ‘new infrastructure’ push can avoid the mistakes of its infrastructure spending spree following the global financial crisis, which landed local governments and state-owned enterprises in massive debt for projects with minimal or negative returns.
The leadership’s high-level calls to action have set off a frenzy of local government announcements across the country. As of early March, 25 provincial-level regions had already included ‘new infrastructure’ projects in their government work reports, and by May several had pledged to spend hundreds of billions of yuan on them. With such eye-watering sums of money on the table, it looks likely that a lack of regional coordination and over-spending in areas where demand is lagging could create inefficiencies and overcapacities. Hundreds of thousands of new 5G base stations or EV charging points will bring minimal returns if 5G phone and EV demand do not increase at the same rate. Second guessing future demand is always a high-risk venture, and nowhere more so than in the area of new technology.