Understanding China’s Digital Economy: Policies, Opportunities, and Challenges

Posted by Written by Yi Wu Reading Time: 8 minutes

China’s digital economy has become one of the dominant economic forces after years of exponential development. Given this, China has made the digital economy a critical part of its national development strategy and has developed a detailed roadmap and incentives to shore up the sector. Meanwhile, the country seeks to guide the healthy development of the digital economy sector through a series of regulatory efforts. In this article, we review China’s plans to develop its digital economy and look into the opportunities and challenges for foreign businesses. 

China’s digital economy is among the most vibrant in the world growing at an exponential rate that can be outcompeted by few. This sector is also gradually becoming one of the dominant forces in the national economy. At the same time, China is on the move to achieve a balance between scrutinous regulatory measures and innovation stimulation. A core factor in rebooting the sluggish economy, the digital economy presents a range of dynamic growth and investment opportunities.

China’s digital economy at a glance

China’s digital economic activities have grown exponentially in the past decade, becoming one of the country’s dominant economic forces.

The digital economy, sometimes referred to as the new economy or internet economy, is an umbrella term that describes an economy in which information and communication technologies (ICT) are used to transform traditional brick-and-motor economic activities (production, distribution, trade, and so on), products, and services into digital form. As a relatively broad concept, any economic form that directly or indirectly uses data and information technology to guide resource distribution and improve productivity can be categorized as being part of the digital economy. It goes beyond the ICT sector itself. Technologies that back the development of the digital economy mainly include big data, cloud computing, the Internet of Things, blockchain, artificial intelligence, and 5G communications, and so on.

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In 2021, the digital economy reached US$7.1 trillion (RMB 47.94 trillion), ranking second after the United States, according to a white paper issued by the China Academy of Information and Communications Technology (CAICT). Statistics also show that the digital economy’s share in the national GDP, measured by the combined value of technology products and integrated digital inputs, reached 39.8 percent in 2021, up from 20.9 percent in 2012.

The rapid growth is accompanied by the expansion of digital infrastructure construction. The number of 5G base stations in China totaled 1.43 million with more than 500 million 5G users as of early March 2022. China possesses among the world’s largest and most advanced network facilities. Additionally, the country has also accelerated the integration of big data, cloud computing, and artificial intelligence (AI). By 2025, China will account for nearly 30 percent of the world’s total data volume with the richest variety of data types in the world.

What are China’s plans to develop its digital economy?

China has made the digital economy a critical part of its national development strategy. The 14th Five-Year Plan on Digital Economy Development (the “14th FYP”)provides a detailed roadmap and incentives to shore up the sector. Under the plan, China will enhance its capabilities in “strategic areas”, such as sensors, quantum information, communications, integrated circuits, and blockchain, as well as pushing for technologies like 6G. It will also facilitate the digital transformation of the supply chain to better utilize data resources and improve the governance of the digital economy.

The 14th FYP also endorsed a target that will increase the output of core industries in the digital economy to 10 percent of the national GDP by 2025, up from 7.8 percent in 2020. This number specifically refers to the direct value-add of information transfer, software, and information technology services. Other targets include increasing the connection rate of Chinese industrial enterprises to “industrial internet platforms” to 45 percent and increasing the number of Chinese households connected to broadband with speeds of at least 1 gigabyte per second to 60 million by 2025.

In addition to the 14th FYP, other policies and initiatives are also targeting greater development in the digital sector. Below are some that we have been tracking:

What are China’s efforts to regulate the digital economy?

The 14th FYP emphasizes the importance of enhancing cybersecurity and data security, in line with China’s data regulatory efforts since 2021. To govern the energetic yet nascent sector, particularly the platform economy, China has rolled out multiple regulatory measures, addressing problems such as data abuse and monopolistic market behavior. These measures guarantee a fair market environment and improve governance while maintaining the sector’s vigor and innovation with high-speed growth.

  • In February 2021, the State Administration for Market Regulation (SAMR) published new anti-monopoly guidelines that aim to curb monopolistic behaviors by giant internet platforms and increase scrutiny of e-commerce marketplaces. The rules are meant to encourage fair competition and safeguard consumers.
  • In June 2021, the Data Security Law (DSL) came into effect as a new pillar of China’s legal framework on information security and data privacy protection. The law focuses on data localization, data export, and data protection requirements.
  • Effective from November 1, 2021, the Personal Information Protection Law (PIPL), along with the Data Security Law and Cybersecurity Law, further strengthens the legal realm of security and personal information protection.
  • In January 2022, the CAC released the revised Administrative Provisions on Mobile Internet Application Information Services, which underlined China’s commitment to regulating the privacy and security of mobile apps.

While the year-long regulatory efforts have shrunk investment and financing in the internet sector to some extent, recent easing of the tech crackdown has given a positive signal to the market. Faced with multiple economic headwinds in 2022, the Chinese government will expect tech giants to play a bigger role in helping the country maintain the growth momentum. On the other hand, the government will continue to strengthen oversight and law enforcement in the coming years in key areas, including the platform economy, sci-tech innovation, and information security.

The role of the digital yuan in developing China’s digital economy

China’s digital currency, the digital yuan or E-CNY, is the first state-led effort to implement a digitized payment mechanism. Its implementation in China will consolidate infrastructure for the long-term development of the country’s digital economy and have a profound impact on business.

Online or mobile payments, which save on transaction costs and improve the efficiency of the financial system, is not a novel concept to the Chinese public, as the country has advanced rapidly with the advent of “super apps”, dominated by Tencent’s WeChat and Alibaba’s Alipay. According to a recent PBOC survey, 66 percent of transactions in the country were done via mobile phone, with cash accounting for 23 percent and bank cards only seven percent. China is pushing the boundaries of mobile payments faster than any other country.

So why does China still want to develop the digital yuan when it already has such a well-developed mobile payment system?

On the one hand, although large technology enterprises have completed the early development of digital ecosystems and realized the digitalization of individual payments in various day-to-day consumption scenarios, consumers can only make online payments on the platforms owned by the corresponding payment platform’s parent company or other specific channels that the digital payment platform supports. Due to competition between different payment platforms and their parent companies, there is no single digital payment method that can support all scenarios – not even the super apps. In comparison, the digital yuan enjoys the same legal status as physical yuan and provides the public with a universal payment tool that can be used in all commercial scenarios. By integrating data held by different entities, the digital yuan can break the monopoly that large technology companies have on data, while providing an open environment for the smooth operation of the digital economy and better satisfy users’ needs.

On the other hand, in some public scenarios, the payment between enterprises and government departments needs to rely on bank accounts to ensure their security and stability. As a currency endorsed by the state and issued by the central bank, the digital yuan can be smoothly adopted in all public payment scenarios, which can further break down the limitations of the digital economy.

Since its debut in 2020, digital yuan pilot projects have been expanded to 23 areas across 15 provinces nationwide. 2022 marks a major step forward for the digital yuan as the beta version of the digital yuan app was officially launched for iOS and Android on Chinese app stores. This is the first time the app is openly available for anybody to download and use in any of the chosen trial cities. The formation of a digital yuan ecosystem may take time as technology advances and the digital economy penetrates all areas of life.

China seeks greater international cooperation in digital technology

China has been active in seeking cooperation with the international community to promote digital trade and governance.

Last November, China filed an application to join the Digital Economy Partnership Agreement (DEPA), a new type of trade partnership agreement signed by Chile, New Zealand, and Singapore, which seeks to bolster digital trade. This application is in line with China’s direction of further deepening domestic reform and opening –up further to strengthen digital economic cooperation with other countries.

On another front, the country has also been actively sharing its digital knowledge by offering technology, equipment, and services to less developed countries. Chinese companies have participated in a number of submarine cable projects connecting Africa and Eurasia. In total, more than 200,000 km of optical fiber has been laid, giving broadband internet access to 6 million households in Africa, according to official data. More than half of Africa’s wireless sites and high-speed mobile broadband networks were built by Chinese companies.

What are the opportunities and challenges for foreign companies?

The digital economy is not only reshaping the Chinese economy but also creating business opportunities for foreign companies.

China’s large domestic market offers powerful scale advantages that enable the rapid commercialization of digital technologies. Accounting for more than 40 percent of the value of worldwide transactions, China has the world’s largest e-commerce market. The sheer size of the Chinese internet user base encourages continuous experimentation and enables digital players to achieve economies of scale quickly.

The strength of China’s digital consumption goes beyond the advantages of scale. Nowadays, almost every aspect of people’s lives is inseparable from digital technology, including education, health, information services, entertainment, finance, and e-commerce. This strong basis has enabled the expansion of services provided to consumers and has accelerated the commercialization of new products. Foreign companies can explore new and innovative services that can be incorporated into the existing digital ecosystem.

Nonetheless, it has also been observed that foreign companies, particularly those in the tech sector, have been pulling out of China. Reputed global firms, such as Amazon, Uber, and Airbnb have gradually left the country, while their native counterparts – JD, Meituan, and Ctrip – continue to thrive. Analysis attributes the lack of localization as part of the reason why certain companies are leaving. In addition, new legal measures also raise costs of compliance and add to uncertainty for western companies operating in China. Facing both the regulatory measures and competition from local companies, foreign tech firms encounter more challenges to expand operations and gain more customers.

This is not to say that foreign companies should avoid investing in tech in China. Given the vast scope and size of China’s digital economy, business opportunities still exist for foreign technology solution providers and are actively encouraged in areas such as industrial digital transformation, services, solutions for sustainable development, consumer products, and more, according to the Catalogue of Industries for Encouraging Foreign Investment (2020 Version). Potential industries for foreign investment include software development, information technology support management, and the maintenance of modern high-end equipment. In addition, the application of information technology also brings opportunities in other sectors, including healthcare, vehicle manufacturing, and energy transition. Doors are open for foreign investors in the research and exploration of new technologies to add to China’s burgeoning digital sector.

 

About Us

China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com. Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.