Private sector will drive China’s New Economy

HSBC's David Liao's picture

BUILDING China’s New Economy will require international help and expertise. Therein lies the opportunity . . .

AN EMPTY passenger plane lifted off from Shanghai’s international airport on an overcast, windy afternoon in May. Flown by five test pilots in orange jumpsuits, it coasted above the Yangtze River Delta for about an hour before landing back in Pudong.
The flight to nowhere, albeit brief, was symbolic.
As China’s first locally built large passenger aircraft, the successful test of the C919 marked a significant milestone in China’s economic transformation as it tries to upgrade its manufacturing capabilities while getting rid of overcapacity and inefficiencies.
China has been working hard to create a new version of its economy that is powered by high-end, high-tech industries that can compete with the best in the world.
Can a made-in-China aircraft challenge Boeing and Airbus in a global jet market estimated to be worth trillions of dollars over the next two decades?
There are doubters, but China often has the capacity to surprise. Witness how, coming from nowhere, it has built world-leading positions in personal computers, smartphones and civilian drones.
Now seems a conducive time for China to make an important transition.
GDP growth is stabilising after the slowdown of recent years, and private sector investment is finally recovering after falling since 2011.
There is a broad-based rebound in industries from materials to equipment, from manufacturing to services. Exports are expected to grow, thanks to increases in global demand and improvements on the supply side.
Since the beginning of 2016, China has been implementing supply-side structural reforms, driving inefficient State firms to upgrade while cutting capacity and leverage, even as it promotes new technologies, industries and products.
These efforts dovetail with the Made in China 2025 initiative for high-end manufacturing industries, and plans for an innovative New Economy to foster new growth drivers.
The definition of a New Economy can be broad. Describing the concept last year, China Premier Li Keqiang saw it as not just about emerging industries, such as e-commerce and cloud computing, but also encompassing areas like smart manufacturing, large-scale customised production, and family farms.
Such an economy will need to be propelled by a spirit of entrepreneurship and innovation. And what that means is that China’s private sector will assume a greater role as the growth engine, a change that will lead to more sustainable growth.
Entrepreneurial companies already take the lead in China in prominent ways.
In April, Wechat-creator Tencent became the world’s 10th-largest listed company, followed by e-commerce giant Alibaba in 11th place. That makes them China’s top two companies by market value, and shows how the past dominance of State-owned banks and energy companies in China’s economy is gradually fading.
These New Economy champions have plenty of room to grow.
A global survey of consumer trust in technology, released by HSBC in May, found that Chinese consumers lead the world in believing technology makes their lives easier. That gives innovative Chinese companies a huge and willing market to build on.
As of end-March, Shenzhen-based Tencent’s WeChat/Weixin messaging app had almost 940 million monthly active users, while its QQ app, targetted at younger users, had more than 860 million.
Consumers already use these apps to play online games, pay bills, and even manage finances, but we continue to see new and creative ways where these products are monetised.
Chinese tech companies are also leaping to the forefront of research into artificial intelligence, a technology predicted to someday have as much impact on our lives as the invention of electricity.
Baidu, Alibaba, and Tencent – collectively dubbed China’s “BAT” – are all investing heavily in A.I. software to power products from medical devices, to self-driving cars, to payment services.
Hardware companies in China are no laggards in innovation either.
Smartphone makers ZTE Corp and Huawei, both from Shenzhen, have become the world’s top two inventors, together filing for almost d patents last year.
After conquering China’s smartphone market, their products are gaining acceptance overseas, with manufacturers such as Huawei, Oppo and Xiaomi winning share in emerging markets in Southeast Asia and India.
There is room for more tech giants like Tencent and Huawei to emerge, especially in the Pearl River Delta, a region fast becoming known as China’s Silicon Delta.
Inspired by Silicon Valley, Shenzhen is forming an ecosystem of venture capitalists, accelerators and tech giant alumni, ready to build the next successful startup.
For example, Didi Chuxing – the ride-hailing company that famously out-competed Uber in China and is now among the world’s most valuable startups – was founded by a former Alibaba manager. Tencent was also an early investor
China’s Government this year started a 100 billion yuan fund to support Internet companies. This in addition to local efforts, such as Guangdong province’s plan to build smart manufacturing clusters for robotics and medical devices.
Options are growing for overseas investors wishing to take part in the New Economy too. Mainland connections via Hong Kong have made more Chinese equities and bonds available to overseas investors. Potential addition of local equities and bonds to global indices will bring more opportunities.
As the maiden test flight of the C919 shows, there’s still a long journey ahead in China’s economic transformation.
And just as the aircraft was assembled using some components from overseas, building the New Economy will need international help and expertise.
Therein lies the opportunity.
 
 David Liao is President and CEO of HSBC China