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China’s dramatic shift to a digital economy

Via China Spectator : Online shopping carts are transforming the face of China’s economy, changing supply chains and putting pricing power in the hands of its 1.37 billion consumers.

China’s policymakers have promoted their policy of ‘internet-Plus’ to spearhead economic reform and foster the development of a consumption-led economy over the export-led growth of the past.

The country’s shoppers, already among the most internet savvy in the world, are using new shopping and payment gateways via Wechat, Alibaba and Taobao. This is levelling the playing field for suppliers, who now meet buyers online in an e-commerce market that has been growing rapidly.

For decades, mainland China’s economic expansion was powered by low-value-added manufacturing: cheap toys, shoes and textiles that were exported to the rest of the world. Those days are increasingly fading into the past and the focus now is on making the country’s giant economy more productive, innovative and market-oriented.

Chinese consumers have adapted to the digital world with lightning speed.

Just a decade ago, there were fewer than 100 million internet users in mainland China, and the penetration rate was just 7 per cent. Now, the penetration rate has reached nearly 50 per cent, with some 667 million internet users as of June 2015. These consumers are highly connected, mobile, digitally savvy and globally minded.

The country is now the world’s largest e-commerce market: online retail sales in mainland China totalled 3.877 trillion yuan ($US590bn) in 2015, up 33.3 per cent from a year earlier, according to official data.

On November 11, 2015, during the annual shopping bonanza on “Singles Day”, Alibaba’s online sales soared to a record 91bn yuan ($US14bn), beating expectations and easily topping the amount shoppers in the US spent during the multi-day sales spike around the thanksgiving holiday.

The shift to a digital economy is also changing customers’ use of financial tools like e-wallets, e-payment and touch-pay systems. This enhances the digital ecosystem and helps it to reach the consumer masses.

Private-sector companies have also embraced the digital age. Companies like Alibaba, Tencent, Baidu, e-tailer JD.com and travel websites Ctrip and Qunar have given rise to thriving social networks and transformed the way Chinese buy movie tickets and book hotels, exchange shopping tips and compare prices.

They have also enabled Chinese shoppers — be they in Beijing, Shanghai or rural Inner Mongolia — to spend, by putting them within a mouse-click or phone-swipe of goods from all over the world.

Crucially, this eager embrace of the internet has injected more market forces, transparency and competition into the mainland Chinese economy, ensuring that quality, price, efficiency and service are rewarded more highly than ever before.

In other words, it is helping to make China’s economy become more “digital”.

The real impact will come if these market forces take root across all parts of the economy — in particular, the massive state-owned sector.

Mainland China’s roughly 150,000 state-owned enterprises (SOEs) employ more than 30 million people, and contribute nearly a third of China’s GDP. Their actions have a big impact on the speed and direction of the economic rebalancing and upgrading that Beijing is aiming to bring about.

Not all SOEs have been quick to harness the power of the internet. However, those that do — perhaps by partnering with existing internet companies — can reap substantial benefits. Digital tools can help them improve their sourcing, sales and logistics systems; streamline their often inefficient operations; engage with customers via social media; identify and track market trends and boost their marketing, research and innovation capabilities.

China e-commerce sales are expected to top $US1.5 trillion by 2018, by which time nearly 30 per cent of all retail sales in the country will be done online, according to a recent study by eMarketer. Reaching these shoppers, and getting them to click “buy now”, will be increasingly important for private-sector and state-owned enterprises alike.

Chinese authorities have seen the successes in the private sector and are now actively encouraging change in the state-owned sector.

In March last year, Premier Li Keqiang announced the “internet Plus” initiative. This aims to encourage China’s manufacturers to deploy mobile internet, cloud computing, “Big Data” analysis and other tools, and to promote the development of internet banking, mass entrepreneurship and innovation. It also aims to support higher-tech manufacturing in agriculture, energy, finance, public services, logistics, e-commerce, traffic, biology and artificial intelligence.

China spent 430bn yuan in 2015 to beef up the nationwide internet system. Another 700bn yuan will be spent on this effort in 2016 and 2017, and an additional 140bn yuan will be invested in improving rural internet connectivity until 2020.

Putting these policies in place could help provide momentum for China in the years ahead. The internet and its related technologies will change the nature of growth, particularly as labour costs increase and the country’s population ages. They will create new markets for innovative products and services. And they will generate jobs for workers with digital and hi-tech skills.

In the long term, China’s digital economy will help its international ambitions. Some of its technology companies are now among the largest in the world. They can leverage their experiences from the dynamic home market and export their technological successes to the rest of the world.

The heavy capital investment and labour force expansion that fuelled China’s rise over the past three decades cannot be sustained indefinitely. The economy’s embrace of the internet can ultimately support China’s goal of creating a more sustainable “digital economy”. China’s policymakers, and the country’s mouse-clicking and phone-swiping shoppers, are helping to bring that change about.

Helen Wong is chief executive, Greater China, HSBC

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