China has a rising digital economy, which is equal to 30.3 per cent of GDP or 22.6 trillion yuan (US$3.35 trillion) and is driven to a large extent by leading technology companies Baidu, Alibaba and Tencent. These companies at the forefront of innovation give credence to the idea that the digital economy will soon become the economy, in the not-too-distant future.
Due to new areas of the
digital economy, including the Internet of Things, virtual currencies,
financial technology, artificial intelligence, advanced robotics, and big data
are expanding rapidly in China. The digital economy is also spreading through
traditional sectors such as education, industry, and health care, improving
efficiency and adding value in these areas.
Online customers and supportive government
A large amount of venture capital funds in China are pouring
into digital technologies, as the potential is huge. China is home to more
internet users than the United States and European Union combined, and these
users are becoming increasingly digitally savvy. Consumption-related mobile
payments amounted to US$790 billion in 2016, or 11 times that of the United States.
Last November 11th consumers spent US$38.2 billion shopping online.
However, it is not only venture capitalists and customers
driving China’s digital economy. The government has promoted growth of the
digital economy through its Internet Plus policy, which encourages firms to use
the internet in order to grow and innovate. The concept was first proposed by
Premier Li Keqiang as a means of levelling the playing field between developed
and developing countries. The government has also encouraged funding for
projects incorporating artificial intelligence, with the goal to generate a
market valued at 100 billion RMB (US$15 billion).
Baidu, Alibaba, and Tencent
Baidu, Alibaba and Tencent (BAT) have driven the digital
economy forward, providing 42 per cent of venture capital investment in China
during 2016. Integrating with traditional industries, Baidu aims to bring
autonomous driving products to market through its Apollo project and is
addressing inefficiencies in health care through the Baidu Medical Brain
project. Alibaba is purchasing retail outlets with the aim of integrating
technology to better manage inventory and raise profit margins. Alibaba has
recently invested US$2.88 billion in exchange for a major share of hypermarket
firm Sun Art.
Baidu Inc: $229.61 -0.92%
Alibaba Group Holding Ltd: $169.59 +0.37%
Tencent Holdings Limited: $46.91 -2.31%
Tencent launched the “Open Platform” strategy in 2011. The
Open Platform allows partners to make use of Tencent’s technology and WeChat’s
traffic base to digitize any industry. This has the effect of reducing time
(and therefore money) spent developing digital processes for other companies.
Tencent is also working to provide cloud computing services to create an
industrial big-data platform for Sany Group Co Ltd, a large machinery equipment
producer. Sany’s equipment will be connected to the platform to detect
malfunctions as they happen.
Digital economy is the economy
China’s digital economy is expected to reach $16 trillion by
2035, with a penetration rate throughout the overall economy of 48%, according
to expert’s report. China is in the top three in the world for venture-capital
investment in key types of digital technology, including virtual reality,
autonomous vehicles, 3-D printing, robotics, drones, and artificial
intelligence (AI). China is the world’s largest e-commerce market, accounting
for more than 40 percent of the value of worldwide e-commerce transactions, up
from less than 1 per cent over a decade ago. China has also become a major
global force in mobile payments with 11 times the transaction value of the
United States. One in three of the world’s 262 unicorns (start-ups valued at
over $1 billion) is Chinese, commanding 43 percent of the global value of these
companies.
Three—often unappreciated—factors are propelling the
expansion of digital China and suggest that there is far larger upside
potential for digital in China than many observers appreciate.
1/The bigger, younger China market is enabling rapid
commercialization of digital business models on a large scale. The sheer scale
of China’s Internet user-base encourages continuous experimentation and enables
digital players to achieve economies of scale quickly. In 2016, China had 731
million Internet users, more than the European Union and the United States
combined. Beyond scale, it is the enthusiasm for digital tools among China’s
consumers that will support growth, facilitate rapid adoption of innovation,
and make Chinese digital players and their business models competitive. Nearly
one in five Internet users in China relies on mobile only, compared with just 5
percent in the United States. The share of Internet users in China making
mobile digital payments is around 68 percent, compared with only around 15
percent in the United States.
2/ China’s three Internet giants are building a rich digital
ecosystem that is now spreading beyond them. Baidu, Alibaba, and Tencent,
collectively known as BAT, have been building dominant positions in the digital
world by taking out inefficient, fragmented, and low-quality offline markets
while driving technical performance such as computing efficiency to set new
world-class standards. The BAT companies have been developing a multifaceted
and multi-industry digital ecosystem that touches almost every aspect of
consumers’ lives. The functionality offered by their “super apps” has increased
about seven times since 2011. In 2016, BAT provided 42 percent of all venture-capital
investment in China, a far more prominent role than Amazon, Facebook, Google,
and Netflix that together contributed only 5 per cent of US venture-capital
investment in that year. Beyond China’s big three, other digital innovators
such as Xiaomi and NetEase and traditional players such as Ping An are building
their own ecosystems. China’s digital players enjoy the notable advantage of
close links to hardware manufacturers. The Pearl River Delta industrial hub is
likely to continue to be a major producer of connected devices because of its
strength in manufacturing hardware.
3/The government gave digital players space to experiment
before enacting official regulation and is now becoming an active supporter.
The Chinese government moved to regulate the digital sector only after a delay,
which gave innovators plenty of space to experiment. As the market has matured,
both the government and the private sector have gradually become more proactive
about shaping healthier digital development through regulation and enforcement.
Today, the government is playing an active role in building world-class
infrastructure to support digitization as an investor, developer, and consumer.
In combination of these three factors mean that China has an
increasingly visible presence on the global stage and rising impact on the
global economy. China runs a trade deficit in services but a trade surplus in
digital services. China’s outbound venture capital totalled US$38 billion
between 2014 and 2016, reaching 14 per cent of global venture-capital
investment outside China. Over the past two years, China’s top 3 Internet
companies made 35 overseas deals, compared with 20 by the top three US Internet
companies. Chinese digital companies are also expanding business models outside
the country’s borders, and sharing their technology with foreign partners,
enabling their expansion. China’s digital globalization is only just getting
started but is gathering momentum.
This will change the nature of the economy, replacing jobs
that carry out standardized types of processes with technology and increasing
the number of jobs for higher-skilled workers. Start-ups will continue to
arise, as entrepreneurs are provided with the capacity to use existing
technologies like Tencent Open Platform to get ahead.
The China Academy of Information and Communications
Technology has found that the ten most digitized sectors include the insurance,
broadcasting and media production, professional services, monetary finance,
capital market services, public administration, postal and logistics, general
services, education, and social security sectors.
In a speech to the IMF Statistical Forum on November 16, Seng
Yee Lau, Senior Executive Vice President, Tencent stated, “…in China, the
concept of Digital Economy is just a transition in nature, as eventually,
digital economy, will just become simply the economy.” Lau stressed that, on
the supply side, China’s “Internet Plus” policy has played a strong role in
integrating the internet and cloud computing into traditional sectors, while
digital innovations have arisen to satisfy demand in the form of fintech and
bike-sharing, etc.
Due to the strong presence of both supply and demand factors,
China’s digital economy will help to boost growth and will create diverse investment
opportunities in the coming years. Forward-thinking government policy continues
to pave the way for innovation in China’s rapidly changing digital economy.