Liutang Gong^[1]

Overview

• Policy recommendations for developing new productive forces emphasize enhancing technological innovation, developing the digital economy, and modernizing industries. Key strategies include increasing and diversifying R&D investment to address regional disparities, strengthening enterprise involvement in innovation, and building a cohesive data governance system. Upgrading digital infrastructure and fostering innovative business models are essential for driving economic growth. The digitalization of primary, secondary, and tertiary industries is crucial for improving labor productivity and promoting balanced regional development. Reforms in trade, logistics, and household registration systems, along with the integration of social security systems nationwide, are necessary to support these efforts. Additionally, revitalizing rural areas, promoting urban-rural integration through improved infrastructure, and reducing resource movement costs are prioritized. Expanding high-level opening up, attracting foreign investment, enhancing cross-border e-commerce, and fostering international cooperation in the digital economy are also critical for growth. Finally, strengthening financial systems, improving income distribution, and implementing a talent-driven development strategy are vital for building a workforce capable of supporting new productive forces and ensuring sustainable economic progress.

IV. Policy Recommendations for Developing New Productive Forces (Continued)

1. Improve China's Technological Innovation Levels to Promote Total Factor Productivity and Economic Growth

Enhancing China’s technological innovation capabilities requires sustained growth in R&D investment. First, diversify R&D funding sources by increasing government contributions and encouraging societal investment to ensure a robust and varied R&D funding base. Second, address regional disparities and imbalances in R&D by restructuring government investment and increasing central government contributions, which currently account for a smaller share of total government R&D funding. Third, bolster innovation in rural technologies. Although China’s overall R&D intensity has reached 2.64%, significant disparities exist across industries. For example, R&D intensity is only 0.58% in agriculture and food processing, 0.72% in food manufacturing, and 0.40% in beverages and refined tea manufacturing.

Efforts should focus on improving the structure of R&D investment by increasing the proportion allocated to basic research. National resources and efforts should be leveraged to provide stronger support for basic research. Additionally, enterprises should be encouraged to invest in basic research. Currently, over 98% of basic research funding comes from government expenditure, with minimal contributions from enterprises. Therefore, multi-dimensional policy tools—such as fiscal subsidies, tax incentives, and credit support—should be effectively combined to encourage enterprise investment in basic research.

Moreover, improving the allocation structure of R&D funding is crucial to enhancing the spillover effects of technological innovation and accelerating the formation of innovation-driven industrial chains. In China, basic research is predominantly conducted by higher education institutions and R&D organizations, which account for 44% and 49% of basic research, respectively, while enterprises account for only 7%. To address this imbalance, it is essential to strengthen enterprise involvement in basic research, diversify the types of basic research institutions, and expand the innovation industrial chain.

2. Develop the Digital Economy to Drive Economic Growth Through Data

Capitalize on the establishment of the National Data Bureau to refine its role and accelerate the development of foundational systems of the data element market. Coordinate and streamline the construction of digital infrastructure, enhance the digitalization of governance, and implement effective regulation of data transactions and circulation. Establish a cohesive, top-down data governance ecosystem. Implement the "three rights separation" of data property rights, and improve market systems for data asset evaluation, data circulation, data security, and cross-border transmission to foster high-quality development of the data element market.

Strengthen digital infrastructure and develop internationally competitive IT industry clusters to consolidate China’s core digital technology strengths. Accelerate the construction of digital infrastructure, optimize the geographical layout of computing power, and promote complementary and coordinated efforts between regions. Guide the strategic deployment of general data centers, supercomputing centers, intelligent computing centers, and edge data centers. Additionally, improve data circulation infrastructure by encouraging participation from diverse enterprises.

Promote the development of new and innovative business models. Supervise and encourage the growth of emerging industries such as big data, AI, and algorithm development, while also supporting new employment models based on the platform and sharing economy. Implement large-scale "Data Element ×" initiatives to enhance the coordination of data with traditional production factors like labor and capital. Leverage data’s increasing returns to scale and low-cost replication to improve traditional products and services, fostering data-driven innovation and overall productivity growth.

3. Accelerate the Construction of a Modern Industrial System to Improve Labor Productivity

Refine the structure of the digital economy to promote the digitalization of primary, secondary, and tertiary industries, thereby boosting labor productivity. Elevate the level of agricultural industrialization by leveraging digital technologies to modernize agriculture and increase productivity. In 2022, the digitalization rate of China’s agriculture was only 10.5%, indicating significant room for improvement. Thus, the advantages of the digital economy should be utilized to promote agricultural modernization and enhance agricultural labor productivity. Additionally, enhance the digitalization of the secondary industry to accelerate industrial transformation and upgrading. Moreover, foster a robust digital ecosystem to support the digital transformation of small and medium-sized enterprises (SMEs). Establish industrial digitalization promotion centers led by relevant authorities, in collaboration with platform enterprises, industry associations, and experts, to guide this transformation.

Strengthen the development of modern service industries to improve productivity. First, promote the development of producer services and their deep integration with advanced manufacturing and modern agriculture. Second, optimize the structure of producer services by balancing the share of financial services with business, scientific research, and technical services. Although producer services occupy a significant portion of China’s tertiary industry, financial services hold a disproportionately larger share compared to business, research, and technical services. In contrast, professional and commercial services lead the producer services sector in the U.S. Third, accelerate the opening-up of China’s service sector to promote industrial upgrading. Despite progress, there is still substantial room for improvement in China’s service trade and productivity.

4. Build a Unified National Market to Promote Regional Balance

Further reduce trade and logistics costs between regions to promote balanced regional development. Although logistics costs as a percentage of GDP have improved in recent years, they remain significantly higher in China compared to other countries. The digital economy can help overcome trade barriers, facilitate the movement of goods and services across regions, and reduce trade costs. The resulting reduction in inventory costs can further lower goods trade costs.

Ease labor mobility across regions and industries by deepening household registration reform and ensuring secure conditions for population movement. The household registration system should be adjusted to facilitate labor inflow into developed regions and labor outflow from less developed areas. Additionally, integrate regional social and medical security systems into a unified nationwide framework to better support the welfare of migrant workers. Furthermore, provide support and social security services for populations engaged in flexible or self-employment.

Deepen regional development strategies to foster coordinated and complementary regional economies. Implement strategies such as regional coordination, major regional development, main function zones, and new-type urbanization to optimize the distribution of major productive forces.

5. Accelerate the Comprehensive Revitalization of Rural Areas to Promote Urban-Rural Integration

Advance comprehensive rural revitalization to increase agricultural productivity and narrow the urban-rural gap. Implement policies to facilitate urban-rural integration and ensure smooth resource flow between urban and rural areas. Promote the revitalization of rural industries, talent, culture, ecology, and organizations. Deepen rural land reform to ensure orderly land transfers, protect the land rights of farmers moving to cities, and encourage voluntary, lawful land transactions.

Lower the costs associated with the movement of resources and goods between urban and rural areas. Although labor movement costs have decreased, they remain higher than optimal, requiring further reductions. Similarly, reduce the high costs of capital flow between urban and rural areas to encourage rural investment.

Strengthen investment in rural and agricultural sectors by improving rural infrastructure. Given that 33.84% of China’s population still resides in rural areas, comprehensive infrastructure is crucial for boosting rural consumption and investment. Thus, efforts to bridge the urban-rural gap in infrastructure, such as internet access and new energy facilities, can effectively stimulate growth in rural investment and consumption.

6. Expand High-Level Opening-Up to Establish New Comparative Advantages

Leverage China’s vast market to stabilize import and export levels. Pursue a balanced strategy of expanding both domestic and external demand while reducing tariffs and diversifying foreign trade.

Recognize the significant role of foreign investment in driving economic growth. Therefore, prioritize attracting foreign investment by implementing favorable measures for foreign enterprises, which have historically improved China’s trade competitiveness and technological progress. Furthermore, steadily advance institutional opening-up by aligning with international economic and trade standards and deepening domestic reforms.

Promote the development of cross-border e-commerce through structural improvements and expand the use of RMB in transactions. First, focus on growing the B2C segment, which currently accounts for only 24.4% of China’s total cross-border e-commerce trade. Second, expand the scale of imports, as the current size and growth of e-commerce imports remain low compared to exports. Third, promote the internationalization of RMB through e-commerce to mitigate exchange rate risks.

Strengthen international cooperation to build an open, cooperative, and innovative industrial chain. Enhance intellectual property protection and trade to facilitate the import and export of intellectual property. Additionally, foster international collaboration in the digital economy by promoting agreements such as the Digital Economy Partnership Agreement (DEPA), which facilitate cross-border e-commerce, secure international data transfer, and encourage cooperation in AI and fintech. Finally, accelerate the opening up of China’s financial markets, as high-level openness necessitates high-level financial services.

7. Strengthen Financial Systems and Address Enterprise Financing Challenges

Accelerate financial market reforms to build a stratified financial system and expand direct financing. Financial institutions at various levels should cater to enterprises of different sizes and types, addressing their specific financing needs and difficulties. For example, small and medium-sized financial institutions can support the financing needs of small and medium-sized enterprises. In addition, broaden financing channels to resolve enterprise financing difficulties and improve stock market reforms to facilitate listed companies’ financing needs.

Advance interest rate marketization to unleash the full potential of the loan prime rate (LPR) reform. Moreover, enhance regulation of deposit rates to support market-driven adjustments and reduce control over the fluctuation range of benchmark rates, thereby promoting stable and healthy financial markets.

Regulate the capital market to ensure residents receive appropriate returns. In recent years, returns from wealth management products have significantly declined, from about 5% in 2018 to 2.09% in 2022, close to the average interest rate of one-year deposits (2.059%), and lower than the average interest rates of two-year and three-year deposits (2.561% and 3.118%, respectively). However, in 2023, returns slightly recovered to 2.94%, which is just at the average interest rate level of three-year deposits.

Leverage big data and systems science to improve risk assessment and early warning systems for capital markets. Currently, there is a lack of effective and comprehensive theories and techniques for risk assessment in the capital market. Thus, the integration of big data technology is urgently needed to develop key theoretical models for detecting linkages between related institutions, abnormal market behavior, and assessing the risk and health status of financial markets, thereby ensuring their healthy development.

8. Enhance Residents’ Income Growth to Increase Disposable Income as a Share of GDP

Prioritize the growth of residents' income, ensuring it keeps pace with GDP growth. While rural resident income has grown at relatively fast rates in the past few years, attention should be given to the income growth of urban residents, which has lagged behind GDP growth.

Improve the distribution mechanism in factor markets to increase labor compensation as a share of GDP. Maintain the alignment of labor compensation growth with GDP and ensure that wage growth keeps pace with economic growth.

Enhance the structure of residents' income by increasing property income, especially for rural residents. Strengthen capital market systems to enable residents to grow their property income. Encourage the development of the wealth management industry and guide residents in making informed asset allocations. Finally, accelerate rural land reforms to allow farmers to earn income through the transfer of land and agricultural products.

9. Implement Talent-Driven Development Strategy to Build a Workforce compatible with New Productive Forces

Develop a workforce that includes strategic talents capable of driving new productive forces and application-oriented talents proficient in modern production technologies. Integrate courses on AI and robotics into basic education, enhance R&D in AI and other key digital technologies in higher education, and promote interdisciplinary talent cultivation to ensure national self-sufficiency in critical technologies and talent.

Improve academic programs and launch degrees in AI and digital technology. Additionally, increase the training of application-oriented talents, particularly in regional universities, to meet local industrial needs. Moreover, expand on-the-job training in manufacturing and other key industries, and enhance the training of migrant workers to advance the digitalization of agriculture.

Promote equitable education to elevate human capital across the country. Continuously improve educational standards to support the upgrading of traditional industries. Additionally, advance balanced educational development nationwide, optimize the geographic distribution of human resources, and enhance the flow and allocation of talent across regions through effective labor market information systems, with particular emphasis on reallocating talent to remote and underdeveloped areas.