Conferences

The next phase of growth

Where is the Chinese economy heading after 40 years of reform?

David-Liao-w

Greater Bay bull: David Liao, HSBC’s chief executive in China

China’s economy is on the cusp of another rapid transformation and the changes could be almost as dramatic as the period that launched the country into the modern era four decades ago.

That was one of the main messages from HSBC’s fifth annual China Conference last week, which brought together 150 companies and more than 400 investors for three days of presentations and meetings in Shenzhen, the birthplace of Deng Xiaoping’s economic reforms.

The conference began with a keynote session on how China has moved away from its ‘miracle economy’ of the 1990s and 2000s towards its more mature economy of today. Inevitably that has meant slower growth rates but it is also delivering more balanced development that depends less on exports and investment, and more on local consumption.

Now the economy needs new engines, the keynote continued, introducing one of the major themes at the conference: how technology will power the next generation of growth.

Technological change has to be backed up by innovation in the financial sector, however. A key problem for tech firms is that the banking sector is more suited to supporting traditional manufacturers. Although venture capital firms have stepped into the financing gap, they don’t always provide the patient investment that allows for long-lasting leaps in innovation and productivity. One of the likely solutions: ‘industrial guidance’ funds that mix state cash with private capital, nurturing new technologies and helping the economy innovate its way past the ‘middle-income trap’.

A panel discussion on 5G gave a glimpse of one of the more imminent innovations in tech standards, with general agreement that China will be at the forefront in making 5G commercially available by 2020.

The changes will fuel the roll out of the billions of connected devices set to underpin the Internet of Things, and the same technology is going to be even more crucial over the medium term for breakthrough sectors such as autonomous driving.

In the more immediate future, the challenge for telco operators is how to generate the new revenues needed to cover the higher costs of providing the 5G standard (the spending on towers and fibre networks could result in three times the capex invested in 4G, one panellist predicted).

Another difficulty is that regulators have to provide more spectrum before the leapfrogs in performance can be reached. The need is especially pressing in Asia, where the operators are already under pressure from customers demanding so much data.

Next the conference turned to advances in artificial intelligence, a hot topic in the press at the moment, which has been championing it as an ‘AI arms race’ between China and the US.

Panellists from two of China’s top AI firms insisted that the rivalry is being overplayed, not least because many of the advances are coming from the scientific community, which doesn’t define itself along purely national lines.

The leading academic conferences are international gatherings and the latest research papers are published, not hidden from view, a participant said.

Facial and product recognition are the current focal points of how AI is being deployed, with applications in areas such as baggage screening at airports and criminal surveillance (see the relevant story).

Another area benefiting from AI is healthcare, and the panel discussed how a hospital network in Guangdong is now using imaging algorithms to screen thousands of datasets from patients.

Questions from the audience included whether firms in China have an edge because more data (from more people) means more opportunity to refine the algorithms that power the machine-learning process.

A government with less focus on protecting data privacy was offered as another benefit for the local players in the artificial intelligence sector.

While the companies agreed that the size of China’s population brought certain advantages, they argued again for the wider good in their work. Insights from millions of medical imaging cases would help healthcare in general, and not just hospitals in China, for instance.

A third theme in the headlines is driverless cars and participants in the conference session on autonomous vehicles predicted that commercialisation of the sector is no more than 5-10 years away.

Cities in the United States will probably lead the charge, especially places where the traffic conditions are a better fit. But urban districts of China are set to gain from reductions in pollution and congestion as well. Factors that could favour the sector include policy support from forward-thinking local governments, public enthusiasm for ‘shared mobility’ services (glimpsed in the popularity of bike-sharing schemes) and the likelihood that fewer Chinese drivers will mind giving up the wheel, because driving conditions are grim in so many cities.

Imagining a driverless world still requires a leap of faith, however. But one of the speakers at the session highlighted how his firm sees industry models being upended. For instance, he predicted that his vehicles are going to generate 25 times more revenues from digital content – advertising, entertainment and e-commerce – than traditional cars.

Other sessions at the three-day event looked at the progress of one of China’s most prominent foreign policies: the multi-pronged Belt and Road Initiative.

Discussion of the plan looked at how the programme has evolved from an early emphasis on transplanting Chinese expertise at large-scale infrastructure construction into other countries. Not all of these road, rail and port projects have been successful, it was acknowledged, in part because the construction firms haven’t enjoyed the conditions they do at home in China. Lessons have been learned and future investment is likely to be ‘smarter’ and more targeted.

Another key objective is to make Belt and Road more inclusive in its approach, bringing in companies and capital from other countries. Some were cautious about how much inclusiveness was on offer, with one contributor citing statistics that nine in every ten of the construction projects have been awarded to state enterprises from China. Another called for two-way trade flows if the plan is going to reach its full potential. That means Beijing needs to deliver policies that create demand from Chinese consumers for goods that other Belt and Road economies produce.

Nonetheless, even the critics refuted notions that Belt and Road was something to be feared. Think of it more as a brand than a blueprint, it was argued – there is no centrally controlled masterplan.

Another topic for debate was the push for a connected economy across the Greater Bay Area of Guangdong. A large part of the Pearl River Delta is already incorporated within the plan, which is promoting deeper integration in transport and trade between the nine cities and two special administrative regions in the Greater Bay Area. Guangdong’s GDP is already the size of Russia’s, another contributor pointed out, suggesting that boosting connectivity in the Bay Area would have a faster impact than investment in the more sparsely populated regions of the old Silk Road.

In fact, the debate was coming full circle from the opening remarks at the conference made by David Liao, HSBC’s chief executive in China. His speech touched on how much Shenzhen had changed in the four decades since the country’s economy began to ‘open up’.

Sometimes the scale of that transformation gets forgotten, Liao suggested, pointing out that Silicon Valley in 1978 was already the headquarters for pioneering firms like Apple.

In that same year, Shenzhen was home to fisherman and rice farmers – there was no modern industry whatsoever.

But despite the incredible changes since then, the Pearl River Delta is preparing to reinvent itself once again. Much of that makeover will be supercharged by the Greater Bay Area’s urban clusters, Liao said, with Shenzhen as the innovation capital, Hong Kong as the financial hub, and Guangzhou as a trading centre.


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