Opportunities for growth in China now.

Strategic policies, tech convergence and the acceleration of online retail are fueling new business models, a new wave of middle-class consumers and more market opportunity in China.

When the World Economic Forum recently unveiled the companies it had picked from around the world as this year’s “new technology pioneers,” the Swiss-based body was showcasing “future headline-makers addressing global issues with cutting-edge technology.” Of the 15 companies located in Asia, seven were from China, which shows that it is producing some of the most dynamic drivers and disruptive influences that will shape our post Covid-19 future.

A new decade of growth

David Chin, China Country Head of UBS AG, says “Steady and careful liberalization and reform over the past few decades have unleashed the potential of China, and we are excited about its long-term future.”

Beyond headlines generated by the ongoing tensions between the U.S. and China, realignment of supply chains and the politics of deglobalization, a potent mix of technology convergence and data, rising consumer power and strong policies to transform the economy sets the stage for a new decade of growth in the world’s second largest economy.

UBS believes that new trends will contribute to this next decade of growth: tech convergence, China’s “new retail” revolution and biometric payments are just some of the fresh opportunities for investors and corporates as they navigate their way out of the Covid-19 crisis.

“There are new business models emerging very rapidly and these innovations and disruptions will have huge implications globally,” says Natalie Cade, Head of UBS China 360, a new thematic China research offering that leverages data from UBS Evidence Lab, an alternative data provider, and partners with analysts across the globe.

Those business models are in part being driven by the convergence of three technologies—5G, artificial intelligence (AI) and the Internet of Things (IoT)—and are impacting everything from smart manufacturing to smart logistics.

Such technologies have been a focus of policymakers since 2015, when the “Made in China 2025” strategic plan first stressed their importance to the next phase of growth.

Combined, they could drive the creation of new applications in manufacturing, healthcare, education and retail, pushing the country into a digital economic development phase after years of successfully focusing on traditional infrastructure like transportation, energy and telecommunications.

Policy backing for these technologies came as part of Beijing’s Covid-19 response in the form of a “New Infrastructure initiative,” under which around RMB1 trillion (US$140 billion) a year will be channeled into key areas including 5G, data centers, ultra-high-voltage electric grids, and charging stations for electric vehicles. A large amount has been earmarked for the development of data centers, an area where China still lags behind Western rivals.

Economic evolution

In recent years, China has sought to re-orient its economy more toward domestic consumption and services, and less on industry and investment. As a result, the share of the tertiary sector—including finance, transportation, entertainment, tourism and retail—in its gross domestic product (GDP) in 2019 was almost 10 percentage points higher than it was in 2010, at 54 percent, according to UBS figures.

While cities such as Shanghai and Shenzhen continue to offer great job prospects, second-tier cities such as Hangzhou and Chengdu have seen huge inflows of rural migrants in search of work. As millions of migrants move to large cities more of them are joining the various services sectors, rather than manufacturing or those that are export-oriented.

Yet China’s overall productivity has been falling. That may sound surprising to anyone who has watched the rise of China’s enormous manufacturing and technological prowess, but it is quite common when an economy moves from manufacturing to services, since services sectors tend to have slower productivity growth compared with manufacturing. And falling productivity is a challenge faced by even the most developed economies.

Beijing now sees that technology is part of the answer—the convergence of AI, 5G and IoT will likely be a key driver of the next decade’s growth, transforming industry and society at large. By leveraging IoT, a smart city can manage assets, operations and resources more efficiently, while merging 5G with IoT can support connected and autonomous vehicles and industrial applications.

“Tech convergence is not just about China spending more on innovation and new technology such as 5G and AI,“ says Dr. Tao Wang, Head of Asia Economic Research at UBS. “There is plenty of scope to upgrade and invest through automation and digitization and to catch up in the traditional manufacturing sector as well. China’s large market will make monetization of technological improvement and innovation easy, and its large number of scientists and engineers will help too. China will continue to converge with advanced economies technologically, even with tighter tech restrictions from the U.S.”

The rise of ‘new retail’

This points to a second, related driver of opportunities in the Chinese economy: a retail revolution that combines tech-savvy consumers with innovative ways to deliver products and services to them through connected technology in the country’s urban centers.

Before the pandemic, China’s maturing ecommerce market was already driving its online retail giants to leverage big data, AI, and advanced analytics to expand their offline ecosystems. Traditional offline retailers have been digitizing to counter the disruption and to improve operational efficiency in an ever-competitive “new retail” market.

But Covid-19 is accelerating the pace at which this is proceeding, having triggered a surge in the downloading of retail apps. Data from UBS Evidence Lab has confirmed a marked rise in online ordering of grocery staples during lockdown. Not only is this “highly accretive” to the broader new retail trend, says Ms. Cade, since groceries are only about 6 percent digitalized in China, but it has introduced a new generation of older shoppers to the digital experience. In one survey run in April, there was a 38 percent rise in those aged 45 or older shopping more online than before the outbreak.

Such enthusiasm for technology applications, and a general willingness to share data, is borne out by data, too. UBS Evidence Lab has revealed a Chinese consumer will replace his or her smartphone once every 1.9 years over the next decade—a rate significantly higher than that in the U.S., Germany and Japan. And almost half of those surveyed separately in the first quarter of this year said they were “very interested” in 5G.

What’s more, the new retail trend looks set to speed up consumption in cities, further enabling the growth of the country’s middle class.

And in spite of the ravages of Covid-19, many Chinese consumers are still willing to pay extra for premium products. In a striking finding, 77 percent of respondents in UBS’s May consumer survey said they would still pay more for higher-quality products.

“Some of the tech innovations we’re seeing in the retail space could have a huge impact in terms of speeding up the ‘premiumization’ trend and consumption generally,” says Ms. Cade.

Investors have been waking up to these trends. China’s technology sector has been the most active in terms of money raised for initial public offerings, with much of that activity now happening not in New York but in China’s domestic markets, including Hong Kong, where a flurry of mostly tech listings helped propel the city’s exchange to record profits in the first half of this year.

UBS estimates that around 45 percent of private equity investment in China in 2019 was in the technology, media and telecommunications sector.

“Despite the problems that people see—whether it be the U.S.-China relationship, the decoupling of economies, worries over debt—China still has the world’s fastest growing economy, the biggest consumer market, and it’s still pushing for openness and reform,” says Dr. Wang. “There’s a lot of market opportunity.”

Views correct as at 3 September 2020

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