A host of second-tier urban centres house the creative energy of millions who will continue to set the global pace in innovation and technology for decades
The city of Hangzhou, 100 miles south of Shanghai and the end point of the 1,100-mile Grand Canal that dates back two millennia, plays a privileged role in Chinese tradition. It’s the place Marco Polo called “the city of heaven”. On the ground meanwhile, Hangzhou has become the world’s first cashless city, a hyper-connected place where you can pay for hawker noodles – and even a bit of good fortune at a Buddhist temple – with the swipe of a phone.
Hangzhou and other second-tier urban centres in China such as Chengdu and Ningbo are not household names in the West. But they are crucial components of a compelling economic narrative that focuses on the country’s significant untapped investment potential in spite of recent macroeconomic warning signs.
These cities embody the dynamism, hunger and creative energy of millions of young professionals who are redefining city life as spaces of urban experimentation that can be models for future smart cities.
Dream Town, Hangzhou’s tech district, boasts more than 700 start-ups in an area that was farmland a decade ago. It’s one of the reasons why the city, home-to e-commerce giant Alibaba, has China’s highest start-up concentration after Shanghai and Beijing. They range from Goji – an app that matches Chinese students to native English speakers (capitalising on China’s education boom) – to Sigom Labs, which is developing a technology wirelessly to transmit electricity to devices.
One of Hangzhou’s most successful ventures is BeiBei, an e-commerce platform aimed at young mothers seeking reliable, high-quality products for their kids. The company is harnessing perfectly the demographic changes in China that are leading the rising middle class to more demanding expectations of safety and quality.
These and other activities make Hangzhou a test-bed of many of the trends that will drive China’s economy for decades to come: fintech, e-commerce, clean energy, precision healthcare, agtech, electric vehicles and the exploding sector of eSports, in which gamers compete for multi-million dollar stakes.
These are all growth areas that will have transformative effects beyond China’s borders.
“The new China has an energy to it,” says Ray Dalio, founder of Bridgewater Associates, the world’s biggest hedge fund. “In terms of entrepreneurship and energy, it’s a very exciting place.”
On the face of it, this hardly seems a propitious time to contemplate a bet on China. Last year, China’s main stock index lost nearly a quarter of its value, and its economy grew at its slowest pace in three decades as worries over a trade war with the US and China’s crackdown on corporate debt took their toll. Trade turmoil threatens China’s export engine and high-tech development and the country also faces significant demographic headwinds as its birth rate plummets and the population ages. Meanwhile, public and private debt currently stands at $34 trillion, roughly three times GDP, raising questions about the funding of future growth.
These are real challenges without doubt, but it pays to take a closer look at the pervasive gloom. A more sober assessment might classify slowing GDP growth as part of a maturing economy moving steadily to high-income status.
China’s Vice-President Wang Qishan told the World Economic Forum in Davos that China’s growth last year of 6.6 per cent was “not low at all” and it is hard to argue considering projected global economic expansion of 3.7 per cent. Morgan Stanley argued in a report preceding last year’s deceleration that China is entering a phase of “slower but better growth” – an ascent built upon more sustainable foundations higher up the value chain, and focused on services such as healthcare, education, green energy and digital communications.
Crucially, more than 75 per cent of last year’s growth was driven by domestic consumption, including healthcare, e-commerce and entertainment, with net exports in negative territory, notes Andrew Rothman, an investment strategist at Matthews Asia – “making clear that China is no longer an export-led economy”.
Seen another way, China’s GDP performance, amid unpredictable trade shocks, demonstrates both resilience and dynamism, especially since China is expanding from a much larger base than a decade ago. “The economy has become so large, and growth rates were so fast for so long, that this deceleration is inevitable,” according to Rothman, who forecast improving sentiment in the second half of this year.
Fidelity is another organisation that thinks the gloom may be overdone. It says Chinese stock valuations look “very, very attractive right now”. The bigger picture is that the recent falls in Chinese equities might provide an opportunity to harness China’s long-term growth prospects.
In any society, the drivers of economic growth can be broken down into labour, capital, technological progress and efficiency improvements. One of the keys to China’s future, then, considering the demographic and debt challenges, is how strongly it can rise to the challenge of inventing the technologies of tomorrow. The popular view that China needs to poach technology in order to succeed is not supported by the evidence. On the contrary: data show Chinese R&D to be a driver of the solutions that will transform our world, from robotics to biotech, AI to self-driving cars.
A recent study published by Dutch research firm Elsevier and the Nikkei showed China ranking first globally in most-cited research papers in three-quarters of the 30 most important technology fields – ranging from semiconductor efficiency to genetic sequencing. China has at times been accused of flooding the academic market with mediocre papers, but citation volume – in which it excels today – is viewed as a key indicator of research calibre.
One of China’s most promising research fields is biotech, a strategic sector for a society bracing for a population of 300 million elderly within a decade. Companies such as Nanjing Legend Biotech and Beigene are becoming leaders in experimental cancer treatments that provoke the immune system to attack tumours.
“Genetic engineering, the search for dark matter, quantum computing and communications, artificial intelligence, brain science—the list of potentially disruptive research goes on,” Richard Suttmeier, Professor Emeritus of Political Science at the University of Oregon, wrote in an essay published in Scientific American. “Increasingly, the notable achievements in these fields are coming not from the great centers of science in the West, but Beijing, Shanghai, Hefei, Shenzhen and a number of other Chinese cities that make up China’s extensive research system.”
US research firm CB Insights reported that Chinese AI startups surged past the US in attracting venture capital in 2017, winning 48 per cent of the total (up from only 11.6 per cent in 2016) compared with 38 per cent for US companies. CB Insights also showed China to have vastly outpaced the US in AI-related IP accumulation, with patent publications surging to 1,293 in 2017, compared with 231 for America.
To be sure, China will need continued access to advanced semiconductors to fuel its transformation, but there is ample evidence that China has emerged as a genuine leader in the high-tech arena.
It is Hangzhou and other up-and-coming cities that are fast becoming China’s laboratories of the future. That means near unlimited potential for China to grow in fields that will define its path as a tech power. The sheer variety of these future cities – each competing to become China’s Silicon Valley yet also carving out unique niches (Hefei for driverless cars, Chengdu for AI, Wuhan for robotics) – represents a wealth of investment opportunity.
Meanwhile, China’s emerging cities are also inventing healthier, more human, less chaotic urban experiences, unburdened by entrenched infrastructure and business legacies of cities such as Beijing and Shanghai. Hangzhou, for example, topped PwC’s ranking of tier-2 cities of opportunity based not only on technological readiness, but also factors such as sustainability, healthcare, innovation and quality of life.
Today Hangzhou is also forging a new identity as the world capital of eSports. Its futuristic eSports town, as large as 60 football pitches, is dedicated to an endeavour that reaches 360 million people around the planet and will soon be worth billions of dollars.
It’s an example of how fast China has become at spotting opportunity. Investors and business people in the West should take notice too: the prospects for Made-in-China are going to be bright for a long time yet.