Coronavirus: How the pandemic has reinforced China’s tech ambition
The COVID-19 pandemic is likely to be one of the most important watershed events of our time. Some industries will likely suffer permanent impairments, leading to painful adjustments ahead, but others could potentially benefit from the tailwinds created by the shock.
For instance, high-tech industries in China could fall into the latter category, given the critical role technology has played in helping the country weather the storm. We believe the pandemic has reinforced Beijing’s commitment to indigenize technology and accelerate the growth of related industries that will ultimately present appealing investment opportunities in the post-COVID world.
As one of the first countries that brought the virus under control, China’s success would not have been possible without its existing infrastructure of multiple state-of-the-art technologies, including artificial intelligence, big data and surveillance technology, e-commerce, 5G and online services, Fintech and Robotics.
The SARS pandemic in 2003 had catalyzed China’s taking off in digital payments and e-commerce. During the coronavirus crisis, digital payments have been keeping the economy running, helping people reduce contact and keeping small business afloat.
At the same time, China is also using online payments to put stimulus funds into consumers’ hands more efficiently. The People’s Bank of China started its digital currency pilot program in four cities. Some local authorities have experimented with delivering shopping vouchers, for example through mobile wallet group WeChat Pay, to encourage immediate spending, which delivered significantly better results than physical coupons.
There have been more than enough examples of how modern technology has been applied to greatly reduce the impact of the pandemic on the economy and society in the past few months in China. We believe such an experience would demonstrate again to Beijing the importance of having technology at the centre of China’s future economic development amidst diminishing demographic dividend and slower fixed asset investment.
Meanwhile, in addition to the pandemic, the ongoing tussle between the US and China in areas of technology transfers, is a constant reminder to Beijing that excessive reliance on foreign technology would create vulnerability. The US Department of Commerce recently expanded its authority to require licenses for sales of semiconductors made abroad with US technology. This amplified intent to halt exports of the essential prowess in building advanced semiconductor, which is currently only available in US, is putting China’s high-tech manufacturing under strain and its technology ambition to test. Denied access to advanced chips as well as equipment to develop their own chip design and manufacturing capability, China is now under pressure to be self-reliant in a short time to support its growth strategy.
Hence, an urgency for technology independence, particularly in areas of national security (e.g. cyber-technology) and where global leadership could bring significant commercial and geopolitical advantages (e.g. 5G), will likely elicit favorable policy changes and drive substantial resources to the related industries soon.
Our view is that the US/China tech struggle will only strengthen China’s desire to grow its own capability and become self-sufficient in critical technology. This could be a key strategic priority as China steps up investment in new infrastructure.
Indeed, at this year’s National People’s Congress meetings, Premier Li Keqiang announced a multitude of stimulus measures to help the economy cope with stiff headwinds. Infrastructure investment has again become an important tool to support growth at a time when other engines of growth are struggling to fire. But different from previous easing, where investment was concentrated in building traditional infrastructure, such as roads and bridges, a growing share of resources will now be channeled to constructing new infrastructure that supports the roll out of 5G stations, accelerates developments in big data and AI, digitizes industrial and manufacturing operations, and connects existing transportation and energy networks.
Besides new infrastructure investment, Beijing will also maintain, or provide additional, incentives to spur private-sector investment in high-tech industries by granting tax relief for R&D research, subsidizing patient applications and co-investing in scientific projects. We expect the upcoming stimulus package to provide strong impulse for China’s high-tech development in the coming years.
On the investment side, one of our key focuses has been on the continued digitalization in China. The enabler of this is the upgrade in technology infrastructure and rising adoption of cloud and software. We believe this will occur in phases whereby the hardware companies will likely be the beneficiaries in the initial stage, followed by Infrastructure-as-a-Service companies – such as Alibaba and Kingsoft Cloud – and lastly software vendors offering various Software-as-a-Service products to drive enterprise productivity. In terms of sectors, we believe this will playout across many industries such as healthcare, education, retail and even the financials.
Coming out of the COVID-19 crisis, it is clear China’s success in handling the outbreak is largely the result of its ability to effectively utilize technology at its finger tips. This realization will lay the foundation for China’s tech development story in the years to come. As the economy continues to migrate online, we can envision a China that is nimbler and more competitive on the global stage, and importantly, less restricted by physical/offline limitations.