China cannot afford further crackdown on its high-tech companies

This report is from CNBC’s The China Connection newsletter this week, delivering insights and analysis on the powerhouse of the world’s second-largest economy. You can subscribe here.

Instead of touting China’s technological progress, Premier Li Qiang took an uncharacteristically gloomy tone in his national address on policy planning.

I have heard him speak in person several times over the years, including at his first and only press conference as prime minister in 2023, and he is as motivated as a Chinese politician can be. But his frank depiction of his challenges and technical goals on Thursday had a much more measured tone.

This suggests that no matter the geopolitical situation or the state of the economy, China sees technology as key to its future.

Getting there will require a break from China’s state-driven economic priorities. Businesses and investors need encouragement, too, since it wasn’t long ago that the Chinese government stepped up its scrutiny of tech companies.

But change is happening. A senior government official told reporters over the weekend that companies need to take more control in helping policymakers understand which technological challenges are worth solving and evaluating research results.

This is a stark shift from the Chinese government’s top-down industrial policy, and the model is starting to gain supporters. This approach has caused anxiety in Washington, which is seeking to pursue its own version in CHIPS and science law.

But a report released last week by Scott Kennedy of the US-based Center for Strategic and International Studies think tank says that too much state participation is bad for China’s aviation ambitions.

Rather, China’s private sector is taking the lead, including in electric vehicles, and rapid advances are strengthening China’s global position as a technology powerhouse, he said.

National organizational infrastructure remains important. Government-built charging stations helped bring electric vehicles to the mass market.

China is currently rolling out computing power for its own AI companies as part of its 15th Five-Year Development Plan, which began in January.

But innovation is already happening in the private sector. Last week, just before Li’s speech, I stopped by the offices of Beijing-based startup Linkerbot. For the past year, the company has been building mechanical hands for humanoid robots that have attracted worldwide attention.

The company pushed back on the idea that it would benefit from specific policy support. Instead, the startup said industry-wide developments have enabled its technology to move quickly from the lab to real-world business use.

Linkerbot says its robot hands are sold not only to China, but also to customers in Europe, Japan, and South Korea. And a refrain I often hear is that Linkerbot claims to be at least one-sixth the production time and one-tenth the price of its international competitors.

The Chinese government’s shift in policy to give more freedom to the private sector dates back to February last year, when President Xi Jinping met with technology entrepreneurs.

But change at a deeper level takes time and resources, which governments don’t always have.

Liqian Ren of Wisdom Tree summed up the Chinese government’s attitude as follows: “We don’t have much money to help you, so you’re pretty much self-sufficient, but we’re not going to police you.”

Investors are also becoming more aware of where the Chinese government’s red lines lie, such as monopolistic behavior or excessive competitive behavior. At the same time, private enterprises still have their own profit-driven incentives and remain an important source of employment in China.

Ironically, the push for electric vehicles is also forcing traditional state-owned giants to adapt, or risk further erosion of their market leadership by BYD and other startups.

National government Changan Automobile responded by collaborating with Huawei on in-vehicle technology. Thanks to this partnership, the company rose to third place in China’s new energy vehicle rankings in terms of domestic sales last year, ahead of Tesla.

Technological advances are attracting international attention.

Chang’an, which is based in the southwestern metropolis of Chongqing, said it has hosted numerous government delegations, industry partners and customers from Europe, Southeast Asia, the Middle East and Latin America over the past year.

Chen Wei, chairman of Chongqing-based fintech company Yumura Keji, said a U.S. delegation of more than 100 young science and technology experts is scheduled to visit the city in about a month.

Mr. Chen, who will be attending the US delegation, is also one of Chongqing’s representatives to the National People’s Congress, as is Chang’an President Zhu Huarong.

It’s a state-versus-private-market dance that Chinese companies have had to navigate for years.

But this year, the stakes are even higher. Tariffs, wars abroad and slowing growth at home have increased the national responsibility of China’s high-tech companies. This is something the Chinese government does not want to prevent.

March 12: China’s National People’s Congress concludes eight-day session

March 16: China retail sales, industrial production and investment data for January and February