‘New infrastructure’ — China’s race for 5G and networked everything has a new catchphrase

China Telecom technicians test a 5G network base station near the Yellow River in Lanzhou, Gansu Province. REUTERS/Stringer.

At the May National People’s Congress (NPC), the term “new infrastructure” (新基建 xīn jījiàn) was on everyone’s lips as they chattered away on their 5G smartphones. Their devices were connecting to part of that infrastructure, with likely access to real 5G signals, somewhere in the so-called mid-band spectrum slots that the Ministry of Industry and Information Technology assigned to the leading carriers, China Mobile, Telecom, and Unicom.

Key Chinese industrial ministries had already been talking up new infrastructure over the past year and a half, since a central Economic Work Conference meeting in late 2018. The term was also mentioned at a Politburo Standing Committee meeting in March. The powerful National Development and Reform Commission (NDRC) also laid out the framework for the government’s thinking on new infrastructure before the NPC in May.

What’s new about “new infrastructure”?

China already has massive numbers of 5G base stations operating in all first-tier cities, and will soon have more in second-tier and third-tier cities. By the end of the year, so-called stand-alone 5G networks will be rolled out in some areas. Beijing has long had a 5G next-generation strategy in place, so what is new about the infrastructure being pushed now from Beijing?

It’s complicated. The real promise of 5G and next-generation handsets, smart devices, and Internet of Things (IoT) sensors being widely deployed is actually not the infrastructure, but the applications that run over them. But as always with changeovers in wireless generations, there is a chicken-and-egg issue: There is a need for sufficient infrastructure to enable those applications, for companies that can do the innovation, and for market demand so that such companies are incentivized to build both the infrastructure and the applications. This is a messy process and it takes time: Globally, it took about five to seven years after the 2010 launch of 4G LTE networks before they were widely available enough to enable killer apps like Uber and Lyft, and for the mobile versions of popular applications and payments systems to become convenient enough to become indispensable for day-to-day use by consumers.

For 5G, the real promise — in addition to faster HD movies streaming to your new handset, and those of tens of thousands of others, say, at a soccer game — is the addition of two major components to 5G: ultra reliable low latency communications (i.e., optimized to process high volumes of data with minimal delays), and massive machine-to-machine communications. The former will enable autonomous vehicles and smart factories, the second will power applications that require large sensor deployments to be networked together — think smart cities or smart agriculture. But here there are still many unknowns about who will pay for new services, and how infrastructure companies and innovators will develop business cases that make sense and return sufficient value.

Enter new infrastructure. The plan from Beijing is to accelerate the deployment of full stand-alone 5G networks, meaning the low latency and IoT portions, particularly at the local level in Chinese provinces that are not well developed and are eager for digital transformation that will be enabled by 5G. Data centers that facilitate mobile edge computing (MEC) — basically pushing some of the cloud-based capabilities that will be required to drive smart factors and cities out to the edge of networks — are also a big part of the new infrastructure push. This also comes under the existing concept of the industrial internet and the Industrial Internet of Things (IIoT), all part of a longer-term strategy to upgrade China’s industrial base for the digital age.

In addition, the National Development and Reform Commission (NDRC) suggests that new infrastructure will include three main areas: new information infrastructure (信息基础设施 xìnxī jīchǔ shèshī), integrated/fused infrastructure (融合基础设施 rónghé jīchǔ shèshī), and innovation-related infrastructure (创新基础设施 chuàngxīn jīchǔ shèshī). This word salad means the concept of new infrastructure is more expansive than simply building out 5G. It includes new data centers, industrial internet capacity, IoT, artificial intelligence (AI), and even satellite-delivered internet services that will extend the delivery of broadband services to more remote areas. New infrastructure also includes blockchain! Blockchain has been an area where senior Chinese officials have latched on to the technology as one with low barriers to entry and one where Chinese companies can play a major role — hence, the Blockchain Services Network concept that was rolled out earlier this year.

The integrated/fused infrastructure piece includes smart transportation, infrastructure, and smart energy facilities — think more charging stations for EVs tied to China’s grid, which is getting very smart under the State Grid Corporation, one of the leading appliers for AI-related patents. And then the more traditional innovation-related infrastructure gets a nod, things like better equipment for universities and research institutes.

Will U.S restrictions hamper China’s plans?

So what is actually new about this initiative, essentially a stimulus package tied to helping get Chinese cities and industries going again as the pandemic eases? Well, this stimulus effort has a lot of geopolitics and long-term strategic pieces to it that make it different from more traditional infrastructure packages.

First, it is about making sure China will lead the world in the deployment of 5G networks and, more importantly, lead on the development of innovative applications on top of a robustly developed and ubiquitous 5G stand-alone infrastructure.

Second, a lot of this innovation will require heavy involvement of the private sector, not just lumbering state-owned enterprises (SOE). Hence, there have been huge commitments to invest in new infrastructure coming from the likes of tech giants Alibaba and Tencent, which stand to benefit handsomely from the emphasis on data centers and industrial internet, which will require cloud services and AI-driven applications, and allow them to be leaders in application innovation.

Third, the move is also directed at providing a huge funding pool for 5G and associated infrastructure rollout just as U.S. efforts to cut off advanced technology from Huawei and other Chinese firms are starting to bite and gaining momentum. So new infrastructure is also part of a suite of new industrial policy initiatives Beijing is rolling out in the age of the U.S.-China tech cold war. Others over the past year include fast-tracking the high-tech STAR board in Shanghai, and encouraging tech companies to delist from U.S. stock markets and come home to Hong Kong and Shanghai.

Although the NDRC has emphasized that the private sector rather than the government will spearhead the new initiative, demand for the lion’s share of the services provided by the new infrastructure — such as industrial internet — will largely be driven by the SOEs and their factories. Many of these firms may not yet be sufficiently far along with their digital transformations to take advantage of access to next-generation mobile networks. This remains a big question mark for the ultimate success of the new initiative.

In addition to the demand-side questions, another potential headwind is the U.S. Commerce Department’s implementation and enforcement of new export control regulations designed to further restrict Huawei’s access to products that incorporate U.S. technologies. The most important of these are the semiconductors made on behalf of Huawei’s chip design arm HiSilicon by Taiwan Semiconductor Manufacturing Company. If enforced starting in September, the new rules will eventually impede the Shenzhen-based company’s ability to fulfill its obligations with China’s telecom majors in building the country’s next-generation network infrastructure — Huawei already accounts for as much as 60% of mobile network infrastructure. HiSilicon’s Tiangang series of semiconductors — manufactured by TSMC using advanced 7 nm node process technology — are critical to the functioning of Huawei’s 5G base station offerings. The firm appears to have stockpiled some semiconductors, but if production at TSMC is fully cut off, it will not be able to continue producing key pieces of equipment undergirding new infrastructure very far into 2021. New infrastructure is likely to require new approaches at the equipment level, particularly if Huawei rival ZTE cannot ramp up fast enough to take up some of the slack.

And finally, the financing challenges for new infrastructure are likely to hit old obstacles, along with some new ones. At the local level, governments will be under pressure to make new infrastructure-branded projects economically viable. This will likely mean further reliance on the old financing playbook, including the use of vehicles set up by local governments to raise funds for infrastructure that has also produced a massive debt problem. This will almost certainly be a major challenge in smaller cities, where demand from both state-owned and private industry players for these technologies and services is lower — translating into fewer promising opportunities for investment. As a result, local governments will end up providing subsidies or additional financing incentives, in part through affiliated financing vehicles. This could lead to overcapacity in some regions if enough local governments push the envelope on new infrastructure-branded projects.

Local governments naturally have jumped on the bandwagon (in Chinese). As of May, at least 23 provinces, autonomous regions, and municipalities had released investment plans for new infrastructure projects this year. Eight of them pledged a total investment of 33.83 trillion renminbi ($4.8 billion), while details were lacking for another eight. This indicates uneven implementation at the provincial level. As other local governments ready their own proposals, the NDRC will have to manage increasingly complicated politics and finances at the local level to ensure projects are executed in line with recommendations. This will lead to implementation challenges at the local level and raise the probability of inefficient allocation of resources.

In addition, the economic benefits from these investments will be less immediate than in the case of traditional infrastructure. Use cases around 5G and industrial internet remain murky, and there are still small numbers of Chinese companies and SOEs that require enterprise-level services, so a chicken-and-egg period lies ahead as infrastructure is built and use cases evolve. If the increased investment in the new types of projects does not significantly boost employment levels, it is likely that Chinese officials could revert to traditionally labor-intensive options — such as roads, bridges, and buildings — in their stimulus efforts.

Looking ahead, given that China’s 13th Five-Year Plan for 2016–2020 is set to expire at the end of the year, a key watchpoint will be the evolution of new infrastructure strategy and its role in the 14th Five-Year Plan for 2021–2025. Five-Year Plans are top-level policy roadmaps that have outlined social and economic development initiatives for decades and are key tools in gauging Beijing’s policy priorities. It is likely that the focus on the digital economy and smart manufacturing will be prominent in the next Plan as well in the upcoming second Medium- and Long-Term Science and Technology Plan for 2021–2035. In the best-case scenario, the broad rollout of stand-alone 5G networks was going to be an effort of seven to 10 years. While Beijing is keen to compress this timeline, the geopolitics of 5G and the realities of the need for market-driven cases to justify major investments, even if they are in “new infrastructure,” are likely to slow this effort. But even if there is some waste and overbuilding, China still appears set to lead the world into the brave new world of next-generation mobile services at scale.

Paul Triolo works at Eurasia Group, where he leads the firm’s newest practice, focusing on global technology policy issues, cybersecurity, internet governance, ICT regulatory issues, and emerging areas such as automation, AI/Big Data, 5G, and fintech/blockchain. He is frequently quoted in the New York Times, Wall Street Journal, Wired, SCMP, the Economist, and other publications, and appears on CNN, CNBC, and other media outlets that follow global tech issues.

Allison Sherlock is a China researcher at Eurasia Group, focused on economic policy. She was a 2017 Yenching Scholar at Peking University, where she conducted research on land development and local government debt.