The Digital Economy of China

The Digital Economy of China

Recently, the city of Wuhan announced that they will be opening a police station run solely by artificial intelligence (AI), no employees need apply. Although the station would be limited to vehicle and driver related administrative work, the government anticipates increasing AI use in many other areas of governance.

Automated government offices like these are just one way that new technologies are being integrated into the Chinese society. It also represents a larger trend in the Chinese economy: the growth of the digital economy. In 2016, China’s digital economy accounted for 30.3% of GDP, an 18.9% rise from 2015, according to a China Academy of Information and Communications Technology (CAICT) white paper.

The digital economy is part of the government’s vision of an economy driven by innovation – a key part of their goal of making domestic firms more competitive globally. In recent years, the Chinese government has pushed several national economic initiatives aimed at the development of the digital economy. These include the 13th Five Year Plan (March 2015), Made in China 2025 (May 2016), the Robotics Industry Development Plan (April 2016), and the Three-year Guidance for Internet Plus Artificial Intelligence Plan (May 2016).

China has shown that it has ambitious plans to upgrade its economy and industrial policy – and these efforts are accelerating going into 2018.

Digital economy is an economy that utilizes digital computing technologies, or more generally, any industry that integrates the internet into their products or services. Major examples include e-commerce, e-business, and telecommunications.

China is already poised to be the world leader in this respect; e-commerce is booming with giants like Alibaba and Tencent. Additionally, more than half of e-commerce transactions in China are made on mobile devices, and companies with existing social media platforms, like WeChat, are leveraging their customer base to enter the e-commerce business.

Foreign investment is welcome in various forms, a subsidiary company, a joint venture and more recently WFOEs. Foreign investors can apply for an internet content provider (ICP) license to conduct e-commerce businesses in FTZs and pilot zone cities.

Foreign Investment Challenges

Although sectors like AI and e-commerce are open to foreign direct investment, foreign AI firms might face trouble with the required national security reviews as these technologies are either dual-use or have implications for Internet security.

Additionally, because the Chinese market is already populated with major players like Alibaba, JD, and Xiaomi that have a monopoly on the existing customer data, the most prudent route would be for foreign investors to seek out joint ventures.

Domestic and foreign investors alike should also pay close attention to China’s new Cybersecurity Law and its potential effects on investments in the Internet Plus, AI, and digital economy fields.

Announced in November 7, 2016, the Cybersecurity Law covers data protection and “cyberspace sovereignty”. Under the law which went into effect on June 1, 2017, “critical information infrastructure” businesses and firms with access to personal information are subject to data localization requirements.

Although the government gave companies a 19-month grace period to comply with parts of the law, the data localization requirements will significantly increase data processing costs for companies, especially for those firms that are leveraging big data.

The law also poses a strange contradiction to the government’s support for a growing role of the digital economy and its use of big data. With the advent of IoT and the various applications of AI, all of which require large collection of data, there’s a potential that the law could touch on a wider variety of products and services than anticipated.

Similarly, Chinese companies can expect some difficulty expanding abroad as several countries have formed their own cybersecurity regulations. For example, the EU’s General Data Protection Regulation (GDPR) establishes specific customer consent practices as well as data localization requirements by certain member countries.

In spite of these difficulties, China’s digital economy does not seem to be slowing down. E-commerce especially has exploded in the last several years, with China taking up 40% of the global e-commerce market, and the rapid growth of mobile payment systems has transformed the way people consume. If this trend continues, China watchers should expect continuing innovation and growth in this sector.