Growing worries that the China Manufacturing 2025 programme may distort markets

The European Union Chamber of Commerce in China this week released a report giving its assessment of the Manufacturing 2025 programme that China announced in May 2015. The programme reflects typical Chinese industrial policy. Officials have selected ten fields with promising futures that the government commits to support. The designated fields are high-tech aerospace, shipbuilding, rail equipment, IT, electrical equipment, electric and hybrid cars, farm machinery, robotics, new materials, biopharmaceuticals and medical equipment. The EU Chamber claims that the central government and regional administrations have committed hundreds of billions of euros already to support these fields.

The EU Chamber also noted that guidance through heavy-handed industrial policy conflicts with China's efforts to continue with market reforms and grant market greater say in directing the economy. According to the EU Chamber, a strong industrial policy will likely result in the same types of problems encountered earlier. Chinese firms will overinvest in these fields creating overcapacity, which will depress price levels. As a result, firms struggle with low profitability in both China and abroad. Resources are wasted. Moreover, overcapacity may lead to protectionist measures in other countries. Manufacturing 2025 places high emphasis on domestic content and indigenous innovation. The EU Chamber fear that the position of foreign firms will be further eroded.

Instead of heavy-handed industrial policy, the EU Chamber would like to see China pursue market reforms. Markets are often much better at deciding on how economic resources should be allocated than public officials.