By  on March 23, 2010

BEIJING — China has started to regain momentum in manufacturing and exports this year, both of which were dealt heavy blows by the global financial meltdown.

But the longer-term damage of the world economic crash may lie in disrupting the central government’s ambitious plans to transform China’s economy into one based on innovation by 2020.

The first two months of this year show a fledgling recovery taking root in China’s manufacturing sector, with renewed growth in exports, according to recent government statistics. The index used to measure manufacturing output held steady, while China’s exports during January and February soared 46 percent from the same months last year.

Yet, as Premier Wen Jiabao warned in his annual state of the union address on March 5, the future is littered with mine fields. Amid its drive to balance exports and imports and rebalance the entire economic structure, China faces an uphill road in improving the content and quality of its exported goods. The central government, Wen said, will commit special efforts to 10 key industries in 2010, including textiles. But there’s no denying the downturn somewhat derailed China’s detailed economic development plans, which could mean more of the same in manufacturing.

“The shock of the global economic crisis on the Chinese economy in some degree imposed on our development model, which cannot be changed in a short time and needs our constant efforts,” Wen said in a news conference closing the National People’s Congress on March 14.

Economists and analysts in China say the central government will focus on bolstering core work in basic manufacturing, shoring up industries like textiles and apparel that took the biggest hit during the crisis. Meanwhile, manufacturers will be encouraged to improve their quality and customer satisfaction points to stay competitive. A decade down the road, China’s manufacturing landscape is likely to change somewhat, but earlier government targets to be a primarily innovation-based economy simply are not practical, experts said.

Instead, manufacturing will likely become more sophisticated, catering to pickier consumers in the Western world and relying more on homegrown demand as China’s incomes and domestic consumption continue to grow. While analysts expect technological innovation to rise, not every textile factory is going to shift to making solar panels.

The question of manufacturing versus innovation as an economic pillar has stirred debate in Beijing’s policy circles.

“Some people think China should take the innovation road…while others think the economy in China will stay dependent on exports of lower-end manufacturing products, with low costs that keep them powerful and competitive on the international market,” said Yuan Gangming, a senior researcher with the Chinese Academy of Social Sciences. “I think the result will be somewhere in the middle.”

Yuan said the shift toward innovation will be hampered in part by competing pressures between private and state-owned companies. The government cannot give large subsidies for state-owned companies to innovate, he said, but private industry has so far seen great success in basic manufacturing. Hence, there is not enough necessary incentive for companies to innovate and basic manufacturing will remain an economic backbone.

But there will be some shift in what the country makes, argued Yu Jianguo, a researcher with the National Development & Reform Commission. Yu said with labor and other costs rising, manufacturers will look for sectors that offer higher profit margins.

“I think there is no doubt the manufacturing industry will change from labor-intensive to high technological content,” said Yu.

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