Universities and research institutes are most directly at risk from China’s slowing economy as local government funding comes under increased pressure. Although China’s science and technology (S&T) spending is likely to become more thinly spread in the future, not all areas of research and not all provinces will be equally affected, according to a report by a China-focused think tank.
While science and technology is still a key priority for the Chinese leadership, “scarcer resources will likely force the government to channel funding more strategically toward a narrower core of national security-relevant technologies and companies”. This is according to the report by the Rhodium Group titled Spread Thin: China’s Science and Technology Spending in an Economic Slowdown.
Weakening fiscal conditions pose a high risk of disruption, the report said. Local governments, many of them facing fiscal crunches, which were responsible for about two-thirds of total government S&T spending in 2022, including funding to universities, have been hard hit by China’s slowdown.
After years of high growth of around 7% to 10% a year, growth is expected to barely register 5% in 2024, according to various economic estimates.
Local government responsibilities
Research spending is mostly – and increasingly – shouldered by local governments, which accounted for 68% of government support to universities and research institutes in 2022. Local governments have also become heavily indebted.
Other sources of funding for S&T, including commercial financing, will also face pressure from slowing economic growth, the report, released on 15 December said, noting: “In contrast to other large and technologically advanced economies, government-related sources play a dominant role in China, representing around 60% of all financing flowing into the country’s S&T ecosystem.”
China’s 3,000 provincial-level universities, plus local government-funded research institutes, laboratories, and research projects, are most directly at risk. These account for 85% of China’s basic research spending, largely supported through government funding, the report said.
In 2022, they received an estimated CNY438 billion (US$65.1 billion) of budgetary spending for R&D activities, representing about 70% of their overall S&T budget and a 34% increase from 2018.
Focus on strategic sectors
Camille Boullenois, one of the report’s authors, told University World News that it was important to see the report as representing a longer-term view. “We don’t think that there will be less funding for research, just that the rate of growth of available funding will decrease,” said Boullenois.
Research funding has grown very quickly in the past decade. “That has allowed a lot of the innovation programmes and the rapid growth of innovation funding to happen, and that’s not necessarily going to happen at the same pace in the future,” she said.
“More contradictions are going to emerge, and so they’re going to have to make a hard choice between different things they want to fund,” she said, pointing to “a contradiction between the will to invest massively in basic research and the urgency right now to develop hi-tech products” that China would like, if it is cut off from foreign technologies in a range of sectors in which it is still dependent.
Boullenois was referring to United States-China technology tensions, in particular, which have led to the curbing of semiconductor and other advanced technology exports to China.
“Beyond semiconductors, technological choke points that create national security vulnerabilities and disruptive future technologies crucial to the long-term race for technological primacy are likely to be prioritised,” the report said, referring to the government’s priority of investing in strategic sectors such as artificial intelligence, quantum computing, space and other areas where global rivalry has emerged.
“Overall lower S&T spending will not necessarily impede China’s ability to develop as a global leader in these strategic sectors. It could, however, slow China’s development of a well-rounded innovation ecosystem – the kind that facilitates spillovers between technologies, fosters the emergence of next-generation innovation, and keeps talent and resources mobilised, even in less critical fields,” the report said.
“These sectors will likely continue to receive significant government funding, even under the conditions of an economic slowdown. But basic research will be hard to expand without a rapid growth in government budgetary support. And focusing resources on a limited set of government-picked technologies and firms runs the risk that China’s wider innovation ecosystem will suffer,” it stated.
“One of the things that we are starting to see happening is that more and more funding is going to hard sciences and hi-tech rather than social sciences or humanities, for example,” Boullenois noted.
Some provinces more at risk than others
Local government revenues have been consistently falling as a share of GDP, from about 12% in 2015 to 9% in 2022, according to the report, and an ongoing crunch will affect provincial universities.
Tax revenues, which fund 70% of local governments’ general budgets, also fell in absolute terms in 2020 and 2022 due to tax breaks during the COVID-19 pandemic, as well as smaller corporate income tax and value-added tax revenues from a slowing business sector.
The effects of a local government fiscal crunch will not be equal across provinces. About half of China’s direct local government S&T funding comes from five wealthy provinces that generally have more stable finances.
But even they are not immune to fiscal constraints, the report noted. In 2022, the average general budget revenues of these provinces declined by 4%, compared with 8% on average for all provinces.
“Poor provinces are right now under very major fiscal constraints. And so that’s going to be the case, especially for those provincial universities,” said Boullenois. “Central level universities are going to be less affected, and especially those at the top level are still going to receive a lot of funding and are not going to be in difficulty,” she explained.
“Last year, we saw that a lot of universities had to increase tuition fees. That’s just one sign of the difficulty – they have to increase other kinds of funding because they don’t get enough from the government,” Boullenois added.
Hard choices
Apart from fiscal reforms, or encouraging more commercial input into S&T, one way out of the likely S&T crunch would be increased central government fiscal transfers to local governments, as was the case just over a decade ago when local governments and universities fell into debt.
This time, more of the transfers could be tied to S&T funding.
The report said: “Filling in for local governments’ S&T contribution would however require significant new fund allocation from the central level, as well as an expansion of China’s central budget deficit.
“But much like local governments, Beijing is also facing hard choices between different funding priorities, and under financial constraints, it could well decide to prioritise securing social, economic and financial stability.”
University World News
