How Technology Is Saving China's Economy

Despite coronavirus (the latest of a series of health scares going back years), a serious trade war with the US, increasingly intrusive surveillance and an aging population, China's pivot to technology as an engine of growth has staved off recession and provided a domestic source of jobs and higher income. JL


Ruchir Sharma reports in the New York Times:

China is creating a consumer culture behind protectionist walls as a tool of political control and an engine of economic growth. While China’s growth has slowed, it has yet to suffer its first recession (due to) the rise of a digital economy, now more than $3 trillion, or a third of national output. Anchored by internet giants such as Alibaba and Tencent, tech (is) counterbalancing the decline in steel and aluminum but is also debt free. The bigger the digital economy, the greater China’s capacity to manage debts and keep growth alive. Tech accounts for as large a share of output in China as in Germany.

Landing in Shanghai recently, I found myself in the middle of a tech revolution remarkable in its sweep. The passport scanner automatically addresses visitors in their native tongues. Digital payment apps have replaced cash. Outsiders trying to use paper money get blank stares from store clerks.

Nearby in the city of Hangzhou a prototype hotel called FlyZoo uses facial recognition to open doors, no keys required. Robots mix cocktails and provide room service. Farther south in Shenzhen, we flew the same drones that are already making e-commerce deliveries in rural China. Downtown traffic flowed smoothly, guided by synced stoplights and restrained by police cameras.

Outside China, these technologies are seen as harbingers of an “automated authoritarianism,” using video cameras and facial recognition systems to thwart lawbreakers and a “citizen score” to rank citizens for political reliability. An advanced version has been deployed to counter unrest among Muslim Uighurs in the inland region of Xinjiang. But in China as a whole, surveys show that trust in technology is high, concern about privacy low. If people fear Big Brother, they keep it to themselves. In our travels along the coast, many expressed pride in China’s sudden rise as a tech power.

China initiated its economic miracle by opening to the outside world, but now it is nurturing domestic tech giants by barring outside competition. Foreign visitors cannot open Google or Facebook, a weirdly isolating experience, and the trade deal announced Wednesday by President Trump defers discussion of those barriers.

But unlike the Soviet Union, which failed in a similar strategy, China is effectively creating a new consumer culture behind protectionist walls as a tool of political control and an engine of economic growth.

It comes at a crucial moment. Flash back to 2015, when China appeared to be on the verge of the first recession since it began reforming the economy, four decades ago. China’s average income had reached the middle-class phase when developing economies often stagnate. Its working-age population had just started to shrink. Runaway lending, unleashed by Beijing to fight off the global recession of 2008, had pushed private debts to 230 percent of gross domestic product, up from 150 percent.

This was the largest borrowing spree ever in the emerging world, and binges that size had always led to major downturns. But while China’s growth has slowed, according to official numbers, from double digits in 2010 to barely 6 percent, it has yet to suffer its first recession.

What changed was the unexpectedly rapid rise of a new digital economy, now estimated at more than $3 trillion, or a third of national output. Anchored by internet giants such as Alibaba and Tencent, the tech sector was not only counterbalancing the decline in older industries such as steel and aluminum but was also largely debt free. So the bigger the digital economy, the greater China’s capacity to manage mounting debts in the old economy and keep growth alive.

By 2017, tech already accounted for as large a share of output in China as in Germany. A Tufts University survey ranked China the most rapidly evolving digital economy in the world. And the chief executive of Visa quoted a Beijing regulator saying that some 18 months earlier, the nation’s tech giants “were way too small to worry about, and now they’re way too big to do anything about.”

The available studies rely on data at least two years old and probably understate how rapidly China is leapfrogging into the developed world as a tech power. It has more than tripled research and development over the past decade to $440 billion a year, more than in all of Europe. Today nine of the 20 largest internet companies in the world are Chinese (alongside 10 from the United States and one from Canada).

Explosive growth in online banking is helping to fuel 20 percent annual growth in consumer lending and an overdue shift from export manufacturing to domestic consumption as the main driver of economic growth. Set up in 2015, Alibaba’s MYbank has extended loans to 16 million customers, including “3-1-0” microloans that require three minutes to apply, one second to approve and zero humans involved.

Automation is killing off jobs. At Hema grocery stores, owned by Alibaba, little white robots work the lunch counter in place of waiters. Gym patrons follow the steps on a giant video screen embedded in the floor, no trainer required. Shenzhen residents say criminals have been driven off the streets by the surveillance cameras.

Yet on balance, tech is probably creating more professions than it destroys. A recent International Monetary Fund paper estimates that after subtracting the jobs it eliminates, digitalization accounts for up to half of all job growth. Alibaba platforms alone host millions of small companies, which over the past decade have added 30 million jobs — more than China has lost in heavy industry.

China’s tech revolution was made possible by two of the forces that were expected to slow the economy. The population may be aging, but it still provides a vast market in which tech start-ups can blossom. And though growth normally slows when countries attain a middle-class income, in China the new middle class provides the main customers for new mobile internet services.

No other country has this combination. India has the population, not the income. Brazil has the income, not the population. And these democratic societies are also far more suspicious of government surveillance than China is. Witness the widespread controversy over the rollout of biometric IDs in India.

In China, at least outside Xinjiang, the relatively mild concern about personal data has helped fuel the boom in digital payments and e-commerce. China is the world’s largest e-commerce market by far, and fleets of motorbikes painted in the colors of online delivery companies park five to six rows deep outside malls and office towers.

To offset the shrinking of its work force, China needed to increase the productivity of the workers who remain. And as the tech boom took off around 2015, productivity growth began to recover after flatlining for nearly a decade. The I.M.F. paper argues that the economy is bound to slow in coming years, but will slow much more sharply if digitalization stalls than if it continues at the current rapid pace.

No economy can rise in an unbroken line forever, and mounting debts and a declining labor force still weigh on China. By making online loans so readily available to Chinese households, tech may compound the risk of financial crisis.

But for now, it looks as though the tech revolution came along just in time to put off the day of reckoning and rescue the Chinese economy from a deeper downturn.