China’s new digital dividend

Following its strategic ‘opening up’ almost 40 years ago, China provided an abundant source of cheap land and labour, enabling it to achieve economies of scale in consumer manufacturing.

"Rapid digitisation will allow the Chinese economy to continue moving up the value chain." - Andrew Sheng & Xiao Geng

Then, as China moved toward middle-income status, it became a major consumer market in itself.

{CF_IMAGE}

In 2012, China’s current leaders recognised the country’s ‘demographic dividend’ had run its course: the Chinese economy was reaching its ‘Lewis turning point’, the stage at which its surplus labour supply would be exhausted and wages would start to rise.

At the same time, the ‘opening-up dividend’ was also reaching maturity and encountering protectionist barriers around the world.

China can still tap new markets through efforts such as the Belt and Road Initiative but at a considerable cost.

Ultimately, sustaining rapid growth requires continuing to move up the global value chain, by implementing further economic reforms and focusing on new technologies.

Determination

The Chinese government’s 13^th five-year plan (2016-2020) reflected its commitment to market allocation of resources and lowering the costs of doing business.

In 2015, the authorities’ ‘Made in China 2025’ and “Internet Plus” initiatives signalled a determination to take the country’s manufacturing base into the Internet age.

Together, the two plans aim to integrate artificial intelligence (AI), robotics, and social media into manufacturing processes, and to digitize China’s economy and society.

Since 2015, China has taken the lead in e-commerce worldwide, with online purchases accounting for 18 per cent of total retail sales, compared to just 8 per cent in the US. 

{CF_IMAGE}

China’s three leading tech platforms – Baidu, Alibaba, and Tencent – have grown to the point they are beginning to compete with US-based global tech giants such as Amazon, Apple, Facebook, Google, and Netflix.

Moreover, according to iResearch, mobile payments in China already amount to $5.5 trillion, roughly 50 times the US. In most Chinese cities, electronic-wallet apps on mobile phones are replacing cash as the primary method of payment.

China’s leap into the digital age was facilitated by a combination of physical and digital technologies and new business models.

According to a recent study by Bruegel, China already spends more on research and development, as a percentage of GDP, than the European Union; and it now produces as many scientific publications as the US and more PhDs in natural sciences and engineering.

By streamlining the exchange of information and facilitating coordination of complex tasks, the Chinese social-media app WeChat – with 938 million users as of the first quarter of 2017 – has contributed to previously unimaginable productivity gains.

According to the Boston Consulting Group, Chinese e-commerce platforms’ business models have evolved differently from those in the West, as they have responded to Chinese consumers’ rapidly increasing spending power and enthusiasm for innovation.

Having been encouraged by the government to experiment with Internet-based business models, Chinese firms are upending traditional practices. This is happening so quickly even the government now feels pressure to catch up, by adopting new technologies such as blockchain and AI.

Key factor

E-payments are a key factor in lowering business and transaction costs in China because they improve efficiency in the retail sector, where prices can still be higher than in the US even when the products are made in China.

The emergence of fraud and the failures of some peer-to-peer (P2P) platforms point to the need for tighter regulations to maintain systemic stability.

As more activities become digitized, China’s integration into the global value chain will increasingly occur in digital spaces.

Chinese producers can use 3D printing, robotisation, and Big Data and AI applications at the local level, while still tapping into global markets and sourcing ideas and skills from abroad. 

{CF_IMAGE}

There are now endless possibilities for dividing production and consumption into separate stages. But this also implies the new digital economy’s many successes will be accompanied by many failures.

Indeed, Chinese policymakers will have to confront various ‘digital dilemmas’ in the coming years. Many public utilities in China – such as airlines, railways, ports, and telecommunications – are single-product entities administered by state-owned enterprises (SOEs).

Yet the new tech giants are multi-product, omni-channel platforms which cut across all sectors, including production, distribution, payments, and, increasingly, wealth management.

Pieces

As in a game of Go, China’s leaders need to move the country’s pieces – which is to say, effect change in the SOEs’ business models – in the right place, at the right time, and in a coordinated fashion.

Superficial complaints about the slow pace of SOE reforms ignore the strategic challenge of creating productive competition between SOEs and publicly listed tech giants in the digital space.

SOE managers can credibly argue heavy regulations place them at a competitive disadvantage, and the tech giants are eating their lunch by free-riding on state-administered telecommunication, transportation, and financial channels.

The tech giants, meanwhile, argue if they could just move faster into inefficient production and distribution areas, not least mobile payments, productivity growth would accelerate.

Another dilemma is digitization is good for consumers, but possibly bad for employment and social stability. In a ‘digital China’, there will necessarily be winners and losers. But the sooner displaced workers can adapt to new realities, the healthier the system will be.

China’s transformation into a knowledge-based economy occupying a central position in the global value chain will ultimately yield a ‘reform dividend.’

But as exciting as the transformation will be, it will also be dangerous. Never before has an economy so large undergone such far-reaching change so quickly.

Andrew Sheng is Distinguished Fellow at the Asia Global Institute at the University of Hong Kong , member of the UNEP Advisory Council on Sustainable Finance and former chairman of the Hong Kong Securities and Futures Commission. Xiao Geng, President of the Hong Kong Institution for International Finance, is a professor at the University of Hong Kong.

Andrew will be the keynote speaker at ANZ’s "Conversations that Matter" Financial Institutions Group event in Singapore on August 30. The event theme is “The Future Growth of Asia: Opportunities for Non-Bank Financial Institutions”

This article is published with permission from Project Syndicate

Copyright: Project Syndicate, 2017. www.project-syndicate.org