Zooming into China's ongoing equipment renewal scheme
China is launching a nationwide scheme of equipment renewals. Why is it important? How does it work? What will China achieve from it? Check out this article for the answers.
Since the beginning of this year, Chinese policymakers have repeatedly emphasized the importance of promoting "large-scale equipment renewals and trade-ins of consumer goods."
This culminated in the State Council releasing an action plan last month. Aiming for completion by 2027, the plan outlines key tasks across sectors including industry, agriculture, architecture, transport, education, tourism, and healthcare.
On April 26, a pivotal conference was held in Beijing to advance the scheme, bringing together key state agencies such as the People's Bank of China, the National Development and Reform Commission, the Ministry of Finance, and the National Administration of Financial Regulation.
This is not the first such scheme in Chinese history. As per an analysis by Cinda Securities, the country had previously conducted four rounds of equipment renewals between 1982 to 2016.
But why is this time different?
First and foremost, the scale is unprecedented this time.
Zheng Shanjie, head of the National Development and Reform Commission, has said that the latest equipment renewal scheme will create a tremendous market with an annual value of 5 trillion yuan (about 704 billion USD) considering the burgeoning demand.
The scheme, in fact, emerged amid sluggish domestic demand. The country hopes large-scale equipment renewals to unleash its potential of investment and consumption.
According to an estimate from the Bank of China, the country's total fixed-asset investment growth is expected to accelerate by 1.2-1.5 percentage points thanks to the ongoing equipment renewals, which will also increase GDP growth by 0.4 percentage points.
Furthermore, the current scheme aims to bolster both supply and demand, different from the previous equipment renewals that focused solely on demand.
In addition to driving consumption and investment, the scheme is poised to encourage sci-tech innovation, create new quality productive forces, and expedite industrial upgrades, said Zhu Keli, director of the China Institute of New Economy.
Chinese economist Hong Yong noted that the current scheme integrates digital and intelligent technologies, systemically upgrading the entire industrial chain of the country. It also raises the standards for the smart, green, and digital transformation of equipment and products.
Official data shows that China invested a total of 4.9 trillion yuan in industrial and agricultural equipment in 2023. The ownership of home appliances, including fridges, washing machines and air conditioners, has exceeded 3 billion units nationwide.
Which sectors will benefit from the scheme?
The State Council plan specifies four types of industries as top priorities for equipment renewals:
Key sectors (including: steel, non-ferrous metals, petrochemistry, construction materials, electricity, aviation, vessel, textiles, and electronics)
Construction and urban infrastructure
Transport and agricultural machinery
Education, culture and tourism, and medicare
The plan projects that by 2027, investment in equipment across the industrial, agricultural, construction, transport, education, cultural and tourism, and medical sectors is expected to expand by 25 percent compared with 2023 levels.
Additionally, among the country's major industrial firms, the adoption rate of digital tools for research, development, and design is expected to exceed 90 percent by 2027, according to the plan.
A research report by China International Capital Corporation Limited concludes that equipment renewals will particularly benefit two types of sectors:
Traditional industries that are entering a renewal phase and require technological improvements;
Advanced productive forces that align with the country's development strategy and offer long-term value.
In terms of trade-ins, the plan says that the recycling of scrapped automobiles is expected to double by 2027 compared with 2023 levels, while recycling of discarded home appliances is likely to increase by 30 percent.
In light of this, Zhu said that as China's home appliances become increasingly smarter and new energy vehicles gain a stronger foothold in the Chinese auto market, trade-ins of related consumer goods are gaining momentum.
In addition, equipment renewals are also expected to favor global investors looking to expand their presence in China. During a recent meeting with Hans Peter Schutzinger, CEO of Porsche Holding GmbH, Chinese Vice Commerce Minister Ling Ji stressed that the scheme would create vast opportunities for the growth of foreign companies.
The minister encouraged Porsche to capitalize on the prospects arising from China's green shift and consumer upgrades, further deepening its engagement with the Chinese market.
Schutzinger expressed confidence in Porsche's investment in China, underscoring that the company is poised to leverage the momentum of China's transition to green and smart automobile technologies by developing more NEV models.
What are the possible challenges lying ahead?
Luo Zhiheng, chief economist at Yuekai Securities, revealed in a recent study that there is a lack of enthusiasm among businesses and individuals for participating in the scheme.
Their reluctance is mainly due to two factors: firstly, the existing equipment can still function normally; secondly, upgrading would incur additional costs.
Therefore, he suggested that:
local governments and departments carry out the scheme in a prudent and orderly manner to avoid excessive administrative instructions that could damage market entities' expectations and prospects.
Luo called for greater reductions in tax and fees as incentives, while urging state-owned enterprises and government agencies to increase procurement, thereby maximizing their exemplary role in pushing forward equipment renewals.
He underscored:
Given the current fiscal strain on local Chinese governments, the majority of the subsidies intended for stimulating the scheme should be covered by the central budget.
How does China ensure steady progress of the scheme?
Addressing the challenges outlined above, China is stepping up fiscal, tax, and financial support to ensure smooth progress of the equipment renewal scheme.
Specifically, Ministry of Finance official Fu Jinling recently announced that the central budget will implement a variety of measures to enhance funding for the scheme.
These measures can be summarized as follows:
Subsidizing the replacement of outdated agricultural equipment; supporting the upgrades of obsolete vessels and diesel-powered commercial trucks.
Enhancing tax incentives for equipment promoting water conservation, environmental protection, and workplace safety; promoting the government procurement of eco-friendly products.
Encouraging financial institutions to increase their lending for equipment renewals and technological upgrades in key sectors.
The subsidies for trade-ins of consumer goods will be jointly funded by both central and local budgets.
The central budgets will allocate designated funds to develop cities that exemplify modern commercial circulation.
Market analysts anticipate that China's banking sector will employ designated re-lending tools, issue subsidized loans, and assist related companies in issuing green bonds and securing financing. Additionally, social capital is also encouraged to participate in the development and operations of related projects.
Looking ahead, Luo advised:
The implementation of the scheme should avoid abrupt and campaign-style government regulatory measures. Government departments at all levels must ensure that the their strategies are moderate to prevent the scheme from negatively impacting the economy.
Written by Shaun G