Innovation-driven upgrades key to China's sustainable growth

Economists have voiced their opinions that China will keep innovation and industrial upgrading at the center of efforts to ensure sustainable and stable economic growth.

"During the last two years, investors worldwide have become increasingly interested in stories about innovation in China. Now that they believe the stories are real and the innovations can indeed create value, they are starting to ask more questions and to look for the next big opportunity for investment," said Zhang Zhiwei, chief economist and head of equity strategy for China at Deutsche Bank.

At a recent media briefing on Deutsche Bank's 2018 China economic outlook, Zhang highlighted automation as a key area where disruptive innovation might emerge next.

"Although we have seen quite fast growth of industrial robots in China, there is still a lot of room for improvement. The number of industrial robots for every 10,000 employees in this country is 68, smaller than the world's average of 74.

"In the next few years, the Chinese government will make greater efforts to boost the development of automation, and encourage private companies to make investments and conduct research in this area," he said.

With an aging population, China is likely to witness an accelerated reduction in its labor force after 2020, which explains why the government is devoting more resources to the development of automation, he added.

While international investors have become more positive about China's new economy－which refers to a transition from factory-led growth to a growth model driven by services and consumption－it is worth noting that innovation is also taking place in the manufacturing industry.

"Whether or not China can use innovation to drive upgrades in midstream and downstream manufacturing－which is dominated by private companies－into a sustainable trend will become a crucial factor, deciding whether China will maintain steady economic growth in spite of downward pressure this year," said Qu Hongbin, co-head of Asian economic research and chief economist for China at HSBC.

Recent polices, including the tightening regulation of financial markets and local government financing vehicles, as well as stricter rules on environmental protection, are really positive, if policymakers look at them separately, said Qu.

But, their combined economic impact could exert greater-than-expected downward pressure, he added, when sharing his opinions on China's economic outlook with reporters on Monday.

"We keep emphasizing that China's (economic and financial) policies should take supporting continued innovation and upgrading of midstream and downstream manufacturing as a starting point, rather than simply focusing on the reduction of leverage at State-owned enterprises.

"I think a truly neutral monetary policy will be most suitable for promoting such innovation," he said.

A report on Chinese corporate innovation presented by HSBC in 2017 found that the city of Shenzhen in Guangdong province has emerged as a national leader in innovation. It analyzed more than 1,200 domestically listed companies and their "innovative power", using indicators including their patents filed and investment in research and development.

According to a report published by the World Intellectual Property Organization last year, patent applications filed in the Chinese mainland increased by 21.5 percent from 2015 to around 1.34 million in 2016.