Why China Is Becoming More Innovative Than The West

MobileInternet

By John Richardson

THE data is quite staggering. Last year, mobile payments in China totalled $5.5 trillion versus compared with just a $112 billion. This means that on  a per capita or person basis, mobile internet payments totalled $3,900 in China in 2016 versus just $345 in the US.

In the space of just a few years China has travelled a long way towards its vision of creating a new economy based on the mobile internet. Last year, payments by mobile phones more than tripled in China compared with 2015.

Visit the richer areas of any big first or second-tier city in China and you will see for yourself the impact. It is seamless, getting towards a cashless society, as you can buy everything from mutual funds to your weekly shopping via your smartphone. Some stores in the big cities now only accept payments via smartphone apps such as WeChat Pay and Alipay.

Condominiums in China’s big cities even employ people to take delivery of goods bought over the internet, so when the buyers return from work they don’t find that their goods have been returned to the post office.

Similar to how many people in the emerging world went straight to mobile phones because they never got to own a landline, the same applies to mobile payments. Unlike the US, there was no entrenched credit card culture in China before the mobile-payment boom came along. The reluctance to switch from your flexible, plastic friend isn’t there.

Now let’s imagine this in another area of the new economy – autonomous driving. A senior economic adviser to the Chinese government told me two years ago:

In some of China’s smaller cities, its fourth and fifth-tier cities, people don’t own many cars as they still travel around mainly by public transport, motor scooters or bicycles.

This makes it perfectly possible, and it is being considered, that one of these cities will serve as an experiment in autonomous driving. People will simply be told that they cannot buy their own car and will instead have to rely on computer-driven cars that they hire, when they need them, via their Chinese-made smartphones.

This will allow local Chinese companies, with government funding, to develop technologies for autonomous driving that will keep-out overseas competition. And one day, China might sell its autonomous-driving technologies overseas.

This would obviously never work in the US because of a.) The culture of the car that has been entrenched for more than a 100 years and b.) The belief amongst many Americans that the Federal government already plays too big a role in people’s lives.

China catches up on innovation in general

As The Economist writes in this article, just a few years ago the perception of Chinese innovation was that it was all about counterfeiting and copying. But now China’s unicorns (start-ups valued at $1bn or more) are worth over $350 billion, which is approaching the level in America.

And you can argue that the future looks brighter for Chinese innovators than for those in the West in general for five reasons:

  1. The vast scale of the Chinese market means that if a Chinese company succeeds at home it will have a huge revenue base to then expand overseas, with fellow One Belt, One Road (OBOR) countries the easiest target for overseas sales. China is busy building the world’s biggest free-trade zone as a key element of the OBOR. In so doing it can protect itself against the kind of new trade barriers being threatened by the US, which is not a member of the OBOR.
  2. The many billions of dollars that China has spent on infrastructure over the last two decades and some trillion dollars more it intends to spend as part of the OBOR. Chinese start-ups have access to world-class new road and rail links within China itself and to other OBOR countries. Greatly improved maritime links are another key element of the OBOR. Compare this with the failure in the US to agree on much-needed infrastructure spending.
  3. Chinese shoppers seem to be very adventurous in trying out new brands. There is less of a legacy than in the West of established brands of automobiles, washing machines, TVs, refrigerators and many other consumer durables.
  4. As The Economist writes: State-dominated industries ranging from telecommunications and banking to healthcare are woefully inefficient and even hostile to consumers. This allows agile newcomers to leap ahead of incumbents more quickly than would be the case in developed markets.
  5. The government’s willingness to support new industries through both preferential financing, via the state-owned banks, and supportive legislation – for example, the possibility that one of China’s smaller cities might end up being use as a laboratory for developing autonomous driving. And as The Economist again writes, one reason why Chinese electric-vehicle (EV) registrations are way ahead of the US is the number of government-mandated charging facilities. The Chinese EV sector has also been given further support by the recent announcement that the production sale of new gasoline and diesel cars is going to be banned, probably after 2030.

But this is far from perfect

One-dimensional China analysts would have you believe that the rise of the new, innovative China guarantees that will escape from its middle-income trap. Maybe, but maybe not. China has yet to producer the world-class goods and services on a scale and of a quality it needs to escape its middle-income trap.

The difficulty it faces is that it is having to rush development of a higher-value economy because the One Child Policy has resulted in a more rapid ageing of its population than would have otherwise been the case. Without the policy, it would probably have had another ten years of surplus migrant labour that would have kept its labour costs down. When any economic development like this is rushed, mistakes are bound to be made.

The other problem is that there are still essentially two very different Chinas – the developed southern and eastern coastal provinces, where the mobile internet and new tech boom in general is concentrated, and the less-developed northern and western provinces.

The seamless mobile internet society I described above is a million miles away from the life of out-of-work coal and steel workers in northeast China. In the case of coal alone, China needs to find 2.3m new jobs by 2020 to replace the jobs being lost as inefficient, highly polluting and dangerous coalmines are shut down.

Can China avoid a financial-sector crisis? We simply don’t know the answer to this question. In a historical context, China’s debt levels suggest a substantial risk of a crisis. No country has in the past seen this level of leverage and avoided a crisis. And even if China can get away with it, economic growth might have to slow very substantially as debts are reduced.

There is a link here to the mobile internet boom. Online banking has taken off with, as I said, even mutual funds being sold over the phone. Fifty percent of last year’s mutual fund sales in China were via mobile phones, according to the same FT article I linked to above. How well are these sales being regulated? Not particularly well, it seems, as the government is increasing oversight of online financing.

And perhaps the biggest economic threat of all is the environment. There isn’t enough money in the world to deal with China’s soil-pollution problems. Cleaning up the air will be a lot easier. But soil  and also water pollution may remain major drags on the economy over the long term.

When measured against the West, though, China at least has a long-term and very coherent economic vision.

But this does not have to be a zero-sum game of China winning and the West losing out or vice versa. I believe that working with rather than against China is instead the answer.

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