“Little Giants” program + Corporate sustainability standards + Fair competition reviews

In this issue of the MERICS China Industries Brief, we cover the following topics:

1. Tighter conditions for the next batch of China’s “Little Giants” 
2. Beijing unveils a corporate sustainability system with Chinese characteristics
3. New fair competition review to solve problems, except where inconvenient 
4. Better healthcare for more people at lower cost
5. Industrial policy and carbon goals intersect with green transportation plan 

1. Tighter conditions for the next batch of China’s “Little Giants” 

At a glance: China’s treasury issued a notice that a key program supporting high-tech small and medium-sized enterprises (SMEs) should, during 2024-2026, focus on key industrial chains, the industrial “six foundations” (core basic parts, core basic components, key software, advanced basic processes, key basic materials, and industrial technology foundation), and strategic emerging and future industries. The notice:

• Sets parameters for 2024 “Little Giants” requiring them to not be publicly listed at home or overseas and that they focus on ”new and innovative technology” or “strengthening the industrial chain.”
• Aims to add more than 1,000 firms in 2024 to the current total of 13,000+.
• Stipulates policy support for improving research and development (R&D) and building ties with suppliers and customers while aiming to inject capital at a rate of up to CNY six million per firm over the three-year period.

MERICS comment: Beijing believes the initiative is still worth investing in, but that greater scrutiny is needed to ensure funds are used appropriately and in ways that deliver on the technologies China needs. While semiconductors, AI, and quantum get the most public coverage in China’s tech self-reliance movement, Beijing aims for a much wider range of technologies like the industrial inputs, materials, machinery, and niche tech provided by SMEs in Europe, Japan, and the US. Simply put, it isn’t enough to master lithography to print semiconductors if the machine depends on dozens or hundreds of highly niche advanced tech inputs from small-scale, advanced producers overseas. 

China is attempting to emulate the German Mittelstand success model, albeit China seeks a top-down approach that can yield results more quickly. The initiative is also prone to opportunism from savvy firms, though some of the new evaluation systems may help weed out bad actors. We can expect standards to ratchet up steadily on the Little Giants initiative to cut back on waste, though this very venture capital-style initiative is likely to have a high rate of failure in general, as SMEs and start-ups are inherently less resilient than larger established firms. 

Beijing is increasingly frustrated by limited innovation in key areas, while also facing  budget constraints. Stricter evaluation criteria and even reclaiming of capital from firms that don’t meet all goals will impose more discipline in the initiative. It is still unclear how effective these adjustments and the overall program will be. Because of its centrality to the tech self-reliance campaign, Beijing will continue to direct support towards it. Foreign firms are wise to scan the forthcoming lists of selected firms for potential competitors.

Article: Notice on Further Support for the High-quality Development of Specialized, Refined, Special, and New Amall and Medium-sized Enterprises (关于进一步支持专精特新中小企业高质量发展的通知) (Link)
Issuing body: Ministry of Finance, MIIT
Date: June 14, 2024

2. Beijing unveils a corporate sustainability system with Chinese characteristics

At a glance: China’s Ministry of Finance called for comments on standards for Corporate Sustainability Disclosure. The draft aims to establish a nationwide basic disclosure framework providing stakeholders and investors with more standardized and reliable information on sustainable development and potential risks. 

According to the draft, basic sustainable disclosure standards and climate-related disclosure standards for Chinese enterprises will be published by 2027, and a unified system will be completed by 2030. Additional sector-specific standards and guidelines will be worked out by relevant ministries. Key elements are:

• Gradual implementation, expanding from listed companies to unlisted companies, from large enterprises to small and medium-sized enterprises, from voluntary reporting to mandatory reporting. 
• Reporting is structured around the four core elements of governance, strategy, risk and opportunity management as well as metrics and targets. This is consistent with the most common international standards such as the ISSB.