China’s digital economy: A leading global force

China is now a leading force in digital technology, including virtual reality, autonomous vehicles, 3-D printing, robotics, drones, and artificial intelligence. China accounts for more than 40% of the value of worldwide e-commerce transactions, up from less than 1% about a decade ago. China has also become a major global force in mobile payments with 11 times the transaction value of the United States.

Three factors are propelling the expansion of digital China and suggest that there is far larger upside potential for digital in China than many observers appreciate.

In 2016, China had 731 million Internet users, more than the European Union and the United States combined. Beyond scale, it is the enthusiasm for digital tools among China’s younger consumers that will support growth, facilitate rapid adoption of innovation and make Chinese digital players and their business models competitive. Nearly one in five Internet users in China rely on mobile only, compared with 5% in the United States. The share of the Internet users in China making mobile digital payments is 68%, compared with only around 15% in the United States.

The three Internet giants in China are Baidu, Alibaba and Tencent. They have been building dominant positions in the digital world by taking out inefficient, fragmented, and low-quality offline markers while driving technical performance such as computing efficiency to set new world-class standards. These companies have been developing a multifaceted and multi-industry digital ecosystem that touches almost every aspect of consumers’ lives. In 2016, Baidu, Alibaba and Tencent provided 42 percent of all venture-capital investment in China, a far more prominent role than Amazon, Facebook, Google and Netflix who contributed only 5 percent of US venture-capital investment in that year. Beyond China’s big three, other digital innovators such as Xiaomi and NetEase and traditional players such as Ping An are building their own ecosystems. China’s digital players enjoy the notable advantage of close links to hardware manufacturers. The Pearl River Delta industrial hub is likely to continue to be a major producer of connected devices because of its strength in manufacturing hardware.

China moved slowly to regulate the digital sector which gave innovators plenty of space to experiment. As the market has matured, both the government and the private sector have gradually become more proactive about shaping healthier digital development through regulation and enforcement. Today, the government is playing an active role in building world-class infrastructure to support digitization as an investor, developer, and consumer.

China has increased its visible presence on the global stage and is making an increasing impact on the global economy. China runs a trade deficit in services but a trade surplus in digital services. Over the past two years, China’s top 3 Internet companies made 35 overseas deals, compared with 20 by the top three US Internet companies. Chinese digital companies are also expanding business models outside the country’s borders, and sharing their technology with foreign partners. China is already more digitized than many observers appreciate and has the potential to set the world’s digital frontier in coming decades.