Money advice: A tale of two Chinas

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To become rich is glorious said the late Chinese Statesman Deng Xiao Ping in 1978. The Chinese certainly keep on going for it. Not only are they producing ever more high tech products themselves, like Huawei Smartphones for example, they are embracing digital to the fullest and disrupting existing concepts, sales channels and companies all the time.

MONEY ADVICEJack Ma’s Alibaba is the largest store on earth without inventory. It has also developed Alipay, its own online payment system. Baidu is the top Chinese search engine that also has a Wikipedia-copy and is challenging Apple Music.
Tencent moved from instant messaging to online media, interactive entertainment, (wireless) value added services, e-commerce and web advertising.

Of course many things still get invented in Silicon Valley, but the Chinese entrepreneurs are copying very fast and have, with a population of almost 1.4 billion Chinese, a bigger leverage for their products or services. Or have they?
Here indeed we need to pause and check on the more than half of the Chinese population not living in the coastal region, but in the hinterland of the country’s countryside.

To stimulate development there, the Government has built giant cities and industrial zonings to also grow that part of China. Chengdu and Xian are two good examples of such cities. Still, there has been an important brain drain from the countryside to the coast of China. This trend has left many smaller cities and towns in the hinterland with older peasants and the less bright, less entrepreneurial, more conservative young people. It will not be enough to raise the price of rice and other agricultural products to stop that migration.

This is a country developing at two very different speeds.

It is true that ‘digital’ almost knows no borders, but if the people on the countryside do not create enough economical value they won’t have the money to buy all those fancy products or services they see on the internet or in the shops.

On technological development side of things, R&D, including basic research and long-term research, is increasing substantially. It will take many years before China will be able to truly challenge the US there, but smaller rival countries have been surpassed already or will soon be. The quality of research is also improving. The days of quantity over quality in research in China appear to be long-gone, and short-term, quick gain research has given way to long-term, fundamental research. The government is doing its best to steer the R&D ship in the right direction and with notable results.

The profitability of the Chinese juggernauts is still low though, but that was also the case at Google or Facebook in their early years. Chinese leading tech companies will have to learn to be more profitable or face stock market hardship. And that is something Alibaba and others have felt from late last year into middle this year. Indeed, these Chinese companies were non-existent and so did not experience the dot.com bubble bursting around the year 2000 in western countries. Yet if their profitability does not increase, they will have to learn the hard way. The key is to make sure that their Chinese consumers become ready to pay for all the services that were for free until now. Or that these large Chinese digital groups create new added value services that generate extra revenue at better margins.

In conclusion, it is premature to say that China has overtaken the world in digitalization. Still at the speed at which it is copying overseas inventions and transforming its R&D, there is no time for complacency. Beat them or join them. And if that does not work, keep on being different in a good way. May the best man win, but on a level playing field please!