As Chinese firms position themselves as innovative leaders on the global stage, Gary Greenberg, Head of Emerging Markets at Hermes Investment Management, assesses the impact on the country’s political structure.
There has been a continual debate on whether China moving to a more open market would spell the end of the Chinese Communist Party’s hold on the economy and population. The Party’s recent move to formalise its role in major state-owned enterprises has cast doubt on views that Beijing would loosen its grip on the market. The 19th Party Congress in autumn will be a key indicator as to whether President Xi Jinping will again espouse the “decisive” influence the market is to have on the economy. But the impressive growth of the internet and ecommerce may have unexpected effects on China’s policy.
For those of us in the West who grew up with the epithet ‘Made in China’ as shorthand for a cheap facsimile of the real thing, the concept of China as a hub of innovation is challenging. However, we would do well to remind ourselves this is the culture which invented gunpowder, moveable type and rockets.
Chinese innovation is now returning to the fore, as the government ramps up funding for research and patent awards rapidly outpace the rest of the world. China graduates far more students in the STEM (Science, Technology, Engineering and Mathematics) fields than the US, and now ranks as the most influential country in four of eight core scientific fields.
Asia’s powerhouse is also catching up in physics, with projects including plans to build the world’s largest particle accelerator. Chinese teams working on quantum computers report steady progress, setting a world record of 10 photon entanglements in 2016 and stating aspirations to reach 50 in 2020, a level at which a real quantum supercomputer could be created.
Despite their well-established rivals, Chinese firms are determined to be at the forefront of the next wave of telecoms technology. In November 2016, China Mobile beat foreign rivals to lead the global 5G system architecture project, which will establish the structure of 5G networks.
Prominent Silicon Valley venture-capital firm Andreessen Horowitz points to signs of a role reversal, with many Chinese models being replicated in the US. The firm highlights LimeBike, a California startup which has adapted the dockless bike-sharing model first rolled out by China’s Ofo and Beijing Mobike Technology for US consumers. Similarly, Apple recently added payment services to its iMessage chat application, taking a page from Tencent's playbook.
New tech evangelists
Meanwhile, Alibaba founder Jack Ma’s goal is to create a global platform for small businesses everywhere to access consumers. By 2036, Alibaba hopes to serve 2bn consumers, with a gross merchandise value equivalent to the GDP of the UK. The transition to a technology-led economy, which has happened in the US and other western economies largely without government intervention, has become an urgent matter of national policy in China.
For the ‘Old China’ of state-owned heavy industry to transmute into ‘New China’ of innovative tech firms and services, fresh capital must be channelled to the new economy. Today, however, national policies for channelling capital appear more focused on supporting the old economy, with meagre government funds having little impact at a macro level.
Giving the authorities the benefit of the doubt, one could conclude that the government recognises the risk of crowding out and expects successful new economy businesses to attract capital by themselves. Thus given banks’ risk aversion and top-down control, the most likely delivery system is through IPOs and tax incentives.
At a municipal and provincial level, policies to aid new economy companies are having notable success. For example, Shenzhen has aggressive targets for take up of electric vehicles; Shenzhen law requires that 20% of new license plates be issued to electric vehicles, a move clearly designed to help companies like BYD (China’s largest electric-vehicle manufacturer).
Fostering long-term innovation
US-style university funding for innovation is a longer-term goal in China, but the current approach to fostering growth in the new economy seems to be working. Companies now seeing meaningful growth are those with entrepreneurial founders, real technology and potential to build sustainable competitive advantages.
The threat of central government restricting these companies through burdensome regulation is also low compared to the prospects for Facebook or Google in the US and Europe – as long as the entrepreneurs play by the Party rules. Amid all these positive signs, it should be remembered that while the transition to a technology-led economy is a step forward, the centralisation of power in Beijing is likely to persist for at least the next five-to-10 years.
Capitalism: the Party machine?
Unwilling to wait for authorities to clear the way for market forces, Alibaba and Tencent have moved to the forefront of innovation in the global ecommerce and social media sectors respectively. And as they expand, exploring and exploiting the opportunities provided by big data, they are contributing to the disruption that is not only reshaping the business world but could also influence political and economic models.
In Friedrich Hayek’s post-war classic, “The Road to Serfdom”, Hayek argued that centrally planned economies could not succeed without instantaneous insights into the preferences of consumers. Well, the data that Alibaba gleans on a daily basis from hundreds of millions of transactions is beginning to resemble this crucial input.
Whether the authorities grasp the significance of Jack Ma’s market-information machine – or if they are drawing information from it – is unknown. However, this situation implies that capitalism, which was harnessed by the government to modernise the economy and lift millions out of poverty, can continue to support the objectives of the Chinese Communist Party rather than threaten its dominance. China’s political structure isn’t going to change anytime soon.