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How technology saved China’s economy

China may be using technology for surveillance, but it has also created a new engine of growth

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Last Updated: Jan 23, 2020, 11.49 AM IST
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by Ruchir Sharma

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

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. In Shenzhen, we flew the same drones that are making e-commerce deliveries in rural China. Traffic flowed smoothly, guided by synced stoplights and restrained by police cameras.

Outside China, critics see these technologies as tools of “automated authoritarianism”, using video surveillance to thwart lawbreakers and a “citizen score” to monitor political reliability. But inside China, surveys show that trust in technology is high, concern about privacy low. If people fear official surveillance, they keep quiet. In our travels, many expressed pride in China’s rise as a tech power.

China’s boom began with an opening to the world, but now it is nurturing tech giants by barring outside competition. Foreign visitors cannot open Google or Facebook, a weirdly isolating experience, and the new US-China trade deal defers discussion of those barriers.

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

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

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%, it has yet to suffer its first recession.

Anchored by internet giants such as Alibaba and Tencent, the new digital economy was offsetting the decline in older industries such as steel and aluminium, and it was largely debt free. Now worth $3 trillion a year, a third of national output, the digital economy is helping China manage debts in the old economy and keep growth alive.

By 2017, tech accounted for as large a share of output in China as in Germany. A Tufts University survey ranked China the world’s most rapidly evolving digital economy. Visa’s CEO quoted a Beijing regulator saying 18 months earlier, the 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 China’s emergence as a tech power. It now spends $440 billion a year on research and development, more than Europe does. Nine of the world’s 20 largest internet companies are Chinese.

Online banking is growing fast, fuelling a consumer lending boom 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 steps on a video screen embedded in the floor, no trainer in sight.

Yet on balance, tech is probably creating more professions than it destroys, and by one estimate accounts for up to half of job growth. Small companies hosted on Alibaba created 30 million jobs in the last decade, more than China lost in old industries.

China’s tech revolution was enabled by forces that normally slow an economy. The population is ageing, but it still provides a vast market in which tech start-ups can blossom. The average income is now middle class, but in China these new consumers are propelling the rise of mobile internet services.

No other country has this combination. India has the population, not the income. Brazil has the income, not the population. These democratic societies are also more suspicious of government surveillance. Witness the controversy over biometric IDs in India. China’s relative lack of concern about personal data has helped make it the world’s largest e-commerce market by far.

To offset its shrinking work force, China needed to increase productivity. A recent IMF paper shows that after slumping for a decade productivity growth began to recover as the tech boom took off around 2015, and predicts that while the economy is bound to slow further, it will slow much less sharply if digitalisation continues at a rapid pace.

No economy can rise forever. Debts and demographics still weigh on China’s prospects, and easy access to online loans may compound the risk of financial crisis. But for now, it appears that the tech revolution came just in time to put off the reckoning and rescue China from a deeper downturn.

The writer is an author and global investor. © 2020 The New York Times (distributed by The New York Times Syndicate)

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