The Future of China’s Economy is Digital

Winston Wenyan Ma, a managing director of China Investment Corp. and author of a book on China’s mobile economy, says the country’s fast-growing tech sector will make up for slowing growth in other areas.

China’s economy hurtling towards digitization — and the lines between its real and virtual economies will increasingly blur in the years ahead, says a senior investment officer with the nation’s sovereign wealth fund and author of a new book examining the digital transformation of the world’s second-largest economy.

“In the future, the entire Chinese economy will be a digital economy,” predicts Winston Wenyan Ma, the author of China’s Mobile Economy: Opportunities in the Largest and Fastest Information Consumption Boom and a managing director for China Investment Corp., the nation’s $814 billion sovereign wealth fund. The book, published by John Wiley & Sons in December 2016, details how China’s mobile economy may well power the nation’s growth for decades to come, becoming an engine that will more than make up for the slowdown of the country’s traditional growth engines, such as manufacturing and exports.

“China’s mobile economy, in fact, already has surpassed the U.S. in many aspects,” Ma tells Institutional Investor.

His statement is in line with a recent McKinsey Global Institute study released in August.

“Over the past decade, China has become a leading global force in several areas of the digital economy,” stated the report, “China’s Digital Economy: a Leading Global Force,” published by McKinsey & Co.’s think tank. “In e-commerce, for instance, China accounted for less than 1 percent value of worldwide transactions only about a decade ago, but that share is now more than 40 percent.”

The value of China’s e-commerce transactions is today estimated to be larger than that of France, Germany, Japan, the United Kingdom, and the United States combined, the McKinsey report found, while the use of mobile payments by China’s internet users has grown rapidly from just 25 percent in 2013 to 68 percent in 2016.

China boasts 700 million smartphone users, and these consumers — though earning on average only a sixth of the annual income of their counterparts in the U.S. — spend enough online to create Chinese e-commerce giants that increasingly are offering new online services, forming alliances with high-technology manufacturers, and investing in some of their offline rivals.

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Alibaba Group, for instance, is launching its own self-help Hema supermarkets, which operate with far fewer staff than traditional supermarkets. The chain, which consists of only 13 outlets so far — 10 in Shanghai, two in Beijing, and one in the coastal city of Ningbo — will likely become a national chain, where shoppers can pay for groceries online without using any cash. All they need is to download an app that allows them to check out by paying via their Alipay e-commerce accounts.

The move follows Alibaba’s foray into home appliance outlets two years ago, when it invested $4.6 billion for a 20 percent stake in Suning Commerce Group, the nation’s largest home appliance retailer. Alibaba rival Jingdong, known as JD.com, also entered into physical store retailing by investing $700 million for a 10 percent stake in Yonghui Superstores, which has 450 outlets and is China’s fourth-largest supermarket chain.

Meanwhile, Ping An Insurance Company of China, which has 1.3 million sales agents and is the nation’s second-largest life insurer, is now also the nation’s leading online wealth products distributor. Its Shanghai Lujiazui International Financial Asset Exchange Co. sold 6 trillion yuan worth of investment and wealth management products last year to 7.4 million investors via the Lu.com website.

“The key in the future is seamless integration,” Ma says. “In the past people separated sales channels, but in the future the channels will merge. You buy online but go to store for service or support, or first try out the products in outlets before arranging online for delivery. Ultimately, the goal is to offer consumers seamless shopping experiences across all channels online and offline.”

Ma also wrote the book in part to help global investors to better understand the innovation, and the opportunities, currently coming out of China at a time when many people still compare Chinese internet companies to their Western counterparts.

Many global investors, for instance, think of NYSE-listed Alibaba as China’s version of eBay and social media company SINA Weibo as China’s version of Twitter, when in reality such comparisions no longer are appropriate, says Ma. He adds that these firms have transformed their business models. Now Alibaba is more like a mix of Amazon, eBay, PayPal, and Netflix, whereas Sino Weibo is like a media platform combining Twitter, Instagram and YouTube, he says. He further notes many of their smaller rivals are using mobile internet to challenge inefficient domestic incumbents in a plethora of other industries, including banking and finance. As a result, says Ma, the business models of many Chinese Internet companies can no longer be simply described as the Chinese versions of Silicon Valley firms.

“Many in the West lack understanding how China’s digital companies have developed their own models that are highly innovative and are far different than their original models,” says Ma. “Most notably, from the application side, China’s market has evolved in a very different way from the Western world, moving more aggressively into mobile commerce. The Western world still remembers China and enterprises there as copycats and are now only beginning to realize they are now innovating on their own.”