Asia House speaks with Professor Sun Baohong, Dean’s Distinguished Chair Professor of Marketing at CKGSB, about the drivers of change in China’s digital economy.

China’s tech sector is expanding rapidly, with its number of unicorns – tech startups valued at more than US$1 billion – surpassing those of the US last year. And with the government emphasising the role tech can play in China’s future prosperity, it is a sector to watch.

“China’s digital economy is about one-third of total GDP,” according to Professor Sun Baohong of Cheung Kong Graduate School of Business (CKGSB) – a leading business school. “In terms of e-commerce, China already has the biggest share of global sales.”

For Prof Sun, China’s digital economy shows no sign of slowing down. “I think it will only move forward, and at full speed.”

But what’s driving this rapid growth? There are several factors at work, according to Prof Sun.

COVID-19

Much has been written about how COVID-19 has accelerated trends that already existed before the pandemic. In China, rapid adoption of new tech is most certainly one of those trends, with an unprecedented number of services being pushed online in 2020.

“Businesses that were previously totally offline are now online,” Prof Sun said. “We’ve seen the rise in virtual showrooms and there are even real estate companies doing virtual tours of homes.

“Chinese companies have been very innovative in consumer engagement and how they sell to customers during the crisis.”

The social impact of the pandemic has also played a role in China’s tech expansion, Prof Sun said. “During the lockdowns, we saw many tech-savvy young people living in first and second tier cities move home to be with their parents.” This has enabled tech platforms to enjoy greater penetration in third and fourth tier cities.

COVID-19 has also driven an expansion of the already-popular social commerce market in China, while digital innovations such as contactless payments have also been boosted by the changes in habits brought by the pandemic.

Entrepreneurs in a thriving ecosystem

A big factor in China’s rapid tech expansion is that the optimal conditions for such growth have been created in recent years through a combination of dynamic entrepreneurship and changing consumer habits.

“Unlike the UK or the US, China’s tech companies are operating in a large and complete ecosystem,” Prof Sun said. The sheer number of people using digital services in China means companies have access to large data resources, and can expand quicker than they may elsewhere.

Tech firms have also been very creative in how they approach consumers, integrating e-commerce with social elements that have resulted in multi-billion-dollar successes such as Pinduoduo.

“The ecosystem is already in place, which puts companies at an advantage.” It also enables tech firms to access lower tier cities sooner than they would in other markets, and thus expand at a faster pace, Prof Sun added.

Government-backed infrastructure

In part, that ecosystem is the result of strong support from the government, which is investing heavily in China’s future tech sectors.

“The government is investing US$1.4 trillion in digital infrastructure,” Prof Sun said, referring to the ambitions plans unveiled at the NPC in May. This investment, planned over the next six years, will see efforts to make China’s tech sector less reliant on external markets by boosting domestic capabilities in a range of areas, from Artificial Intelligence to 5G and Internet of Things innovation.

This, of course, is good for China’s digital companies, which will benefit from improved infrastructure and the possibility of greater investment.

“This has made digital retailers happy,” Prof Sun said.

Challenges ahead

However, concerns have been raised over this domestic tech push, with some commentators fearing it could lead to a more insular Chinese digital economy. For Prof Sun, the current discourse around tech decoupling between China and the US is worrying.

“China has been very strong on the application side, but it is lagging behind when it comes to fundamental research,” she said. “The skills and craftsmanship to make the high-end kit, such as microchips, are also no longer there.”

A more insular digital system would therefore be detrimental to China’s long-term tech ambitions, Prof Sun suggested. “I’m a researcher, so I understand the importance of engaging with other researchers for our collective benefit,” she said.

“The fundamental research that enables innovation relies on the free exchange of ideas.”

This article was originally published by Asia House.