China’s growth: the trillion dollar question

Here is a trillion dollar question. Which sectors will become China’s new growth engine when it shifts the balance of its economy away from investment and import/export business models, and towards domestic consumption?

The manufacturing sector is experiencing challenging shifts, as demonstrated by the recent decision of Foxconn, the world’s largest contract electronics maker, to consider investing US$ 1 billion in low-cost plants in Indonesia rather than in China, to save money.

China’s digital strategy aims to create new economic engines from Chinese consumers’ rapidly growing appetite for  online content and services. The government has also started ambitious projects such as “Broadband China”,  to upgrade the national infrastructure for information consumption.

First, e-commerce, already a force to be reckoned with in China, will enjoy sustainable growth with broad government support. Mostly driven by the buzz among young consumers, China’s e-commerce sites last year reportedly amassed a record US$ 5.7 billion sales on 11 November (dubbed  “the Singles’ Festival”) , more than twice as much as Cyber Monday in the US.

Second, the information world is speeding up its integration with financing markets, led by the short-term deposit products offered online by China’s technology giants. Since the initial launch last June, these Internet money management products have attracted more than 81 million users with aggregate deposits at nearly 500 billion yuan (US$ 81 billion) and continue growing fast.

Why? Because of simple online procedures and easy access with smartphones and other gadgets, the money management products have high liquidity. Furthermore, unlike most wealth management products sold at banks, these Internet products do not have investment thresholds, meaning they have attracted many small “leftovers” in the financial system (in fact, the average size of those accounts is about US$ 1,000). Finally, these products currently offer higher yields than bank deposits.

Of course, the amounts held in Internet products are still small when compared to the trillion-dollar size of bank deposits. Also, new rules from banking authorities will increase the regulation of Internet financing. Still, the financing activities of Internet companies are broadly expected to play a role in making China’s financial system more efficient, improving the flow of lending to small businesses, and stimulating upgrades at traditional banks.

Third, the mobilising effect of information technology is not just transforming monetary transactions and facilitating e-commerce in China; it is also being embedded in almost every industry through the shift of commerce from traditional to mobile.  For example, specialized online sale companies in the mutual fund industry are creating powerful third-party distribution channels, Internet companies are teaming with insurance companies to explore synergies, and even in hard assets areas such as steel trade, merchants are using Internet tools to provide logistics and financing services.

On top of all these, the information push means China can potentially unlock the broad, implicit, latent value of the information around its economy and much more. In the new century, big data is a source of new economic value and innovation in itself, and it will bring profound solutions to the trillion dollar question.

Winston Ma Wenyan is a Managing Director and Head of the North America Office of the China Investment Corp (CIC). He is a Young Global Leader at the World Economic Forum.

Image: Employees and journalists take pictures and videos of a giant electronic board showing the online transaction value on Alipay, an online payment system of China’s leading e-commerce retailers Taobao.com and Tmall.com, at the parent company Alibaba’s headquarters in Hangzhou, Zhejiang province November 11, 2013. REUTERS/China Daily