Where does China’s digital economy go from here? Part 1 – The New Real Economy

Original image by geralt

After last year’s tidal wave of regulations and fines for the internet industry, many people are wondering where the digital economy goes from here? The answer is in government documents and speeches by prominent government officials, which we will unpack in a series of articles.

On the 12th of January, China’s State Council issued a plan for the development of the country’s digital economy and set targets to increase its share of GDP from 7.8% in 2020 to 10% in 2025. To understand this, we need to make a clear distinction between digital economy as a whole and the internet platform industry. Recent regulations in the digital economy mainly focussed on fintech and platform companies like Ant Group, Alibaba Group and Meituan. But the digital economy is much bigger than that and the party has clear plans for the direction it should head into, as we will see in a speech by Xi Jinping himself and an article by prominent economist Liu Shijin.

What Xi wants

On January 15th 2022, communist party publication Qiushi released an essay based on a speech by Xi Jinping at the 34th collective study session of the 19th Politburo on 18 October 2021 (original text, translation by Digichina). In the essay, titled ‘Increasingly Make Our Country’s Digital Economy Stronger, Better, and Bigger’, Xi claims that for a long time he has ‘attached great importance to developing digital technology and the digital economy’. As if to say ‘and if you don’t believe me’ he continues by running through a list of eight national and international occasions and projects in which he personally stressed the importance of developing a strong digital economy. 

Xi says the development of the digital economy ‘is becoming a critical force in reorganising global factor resources, reshaping global economic structures, and changing global competition structures’. China’s digital economy has, partially influenced by the pandemic, developed fast in recent years and is ranking second in the world (according to the 2021 Global Digital Economy Conference). But Xi acknowledges that China’s digital economy might be big and fast but is not strong and superior. It has shown ‘unhealthy and unregulated symptoms and trends in its rapid development; these problems not only influence the healthy development of the digital economy, but also violate laws and regulations; they constitute threats against the country’s economic and financial security and must be firmly corrected and dealt with.’ Here Xi clearly refers to the platform businesses that were rectified and fined in the past 14 months.

Xi notes that developing the digital economy is ‘a strategic choice to grasp a new round of scientific and technological revolutions and a new opportunity for industrial reform’. It has domestic and international importance because it supports ‘transforming and upgrading traditional industries’, ‘may become an important driver of building modernised economic systems’ and is ‘the focus for a new round of international competition’. 

The pleasant thing about government speeches and essays is that they often come with clearly numbered lists of goals (while not detailing how these should be reached). In this case Xi mentioned seven:

  1. ‘Strengthen key advances in critical and core technologies’. Here Xi mentions things like ‘indigenous innovation’, ‘high-level self-reliance and self-strengthening’ and ‘digital economic autonomy’. Once again, the government clearly stresses the need to reduce China’s dependence on other countries in areas like semiconductors. 
  2. ‘Accelerate the building of new infrastructure’. New infrastructure (link in Dutch) has been a priority for some years now and refers to high-speed 5G networks, data centres and industrial internet. Xi mentions the need to ‘focus on making breakthroughs in critical software’ and ‘foster large-scale software enterprises with international competitiveness’.
  3. ‘Promote the integrated development of the digital economy and the real economy’. This goal focuses on promoting ‘the digitization of industries such as manufacturing, the services sector, and agriculture’ to raise productivity and help economic growth. Xi specifically mentions integrating the Internet, big data, and artificial intelligence to create new manufacturing ‘champions’. I will get back to this when discussing an essay by Liu Shijin.
  4. ‘Advance digital industry development in priority areas’. Here Xi once again calls for building ‘indigenous (..) industrial ecosystems’ and focus on ‘integrated circuits, new display forms, telecommunications equipment, and smart hardware’.
  5. ‘Regulate digital economy development’. Xi stresses that digital development should come with matching regulations and oversight. He specifically mentions fair competition and repeats the needs to ‘prevent the expansion of platform monopolies and the disorderly expansion of capital’, ‘protect the lawful interests of platform employees and consumers’ and ‘strengthen tax oversight and tax inspections’. These are all clear references to last year’s rectifications in antitrust, abuse of gig-economy workers and tax evasion (e.g. among live-streaming hosts like Viya).
  6. ‘Perfect digital economy governance systems’. Legal, regulatory and policy structures (departments, oversight technologies, etc) should be modernised. Again, Xi specifically mentions the platform companies: ‘We must clarify the dominant responsibilities and duties of platform enterprises and build sectoral self-disciplinary mechanisms.’ He also mentions the need for joint social + media + public supervision, perfecting national security systems and improving theoretical research into development of the digital economy.
  7. ‘Vigorously participate in international cooperation on the digital economy’. Xi wants China to play a (pro)active role in the international world of digital economy governance. China’s recent regulations on algorithms and deepfakes are signs that the country is getting ahead of the rest of the world already.

Xi calls on ‘leading cadres at all levels’ to ‘raise the quality of their digital economy thinking capabilities and specialisations’ and ‘raise the digital accomplishments and skills of the entire population and the entire society and lay a firm social basis for the development of our country’s digital economy.’ In other words, comrades, get smart on digital tech!

‘New real economy’

One of the key points in Xi’s speech was the need to ‘stimulate the (..) integration of the digital economy and the real economy’.

In January 2022, top economist Liu Shijin, deputy director of the CPPCC National Committee on Economic Affairs, published an article on the ‘effective integration of the digital economy and the real economy’. In the article Liu explains that despite some problems that the financial and digital economies have caused, it does not mean they shouldn’t be further developed. ‘The real question is how finance can serve the real economy and how digital technology can effectively integrate with the traditional real economy.’ According to Liu, finance and digital technology should improve productivity in the real economy, in sectors like manufacturing and distribution. 

Liu sees two different forms of real economy:

  1. Traditional real economy, which is facing overcapacity
  2. New real economy, which is digitally empowered and has significantly increased productivity

Liu stresses that focus on the development of the real economy concerns the transformation of the first category into the second one. He mentions 3 aspects that should be paid attention to:

  1. While the digital economy has focussed on how manufactured products reach the consumer through retail and wholesale, the next step should focus on the manufacturing process itself and improving quality, efficiency, and sustainability. 
  2. The use of artificial intelligence can optimise the allocation of production capacity and resources, improving the stability of economic operations.
  3. Government should set the rules for digitization (e.g., fair competition), keeping pace with developments in digital technology. It should also provide infrastructure, guiding expectations, etc. But it should not intervene too much and let market competition and industrial development run their course.

Continuing on the path already taken

Digitisation of the traditional economies isn’t something completely new. And it’s not like China has given up on consumer facing internet platforms and all a sudden changed course. In 2015 premier Li Keqiang proposed the concept and strategy of ‘Internet Plus’, being the application of the internet and other information technology in conventional industries, among which manufacturing.

As Xi mentioned in his speech, promoting the integration of the internet, big data and AI into the real economy was already proposed during the 19th Party Congress in 2017. During the 5th Plenum in October 2020 the party proposed ‘developing the digital economy, enhancing digital industrialization and industrial digitization, promoting the profound integration of the digital economy and the real economy, and forging digital industry clusters with international competitiveness.’ 

So, there you have it. The digital economy is essential for upgrading industries and improving productivity in order to compete globally. This is a continuation of a direction previously taken with policies like Internet Plus, Made in China 2025 and Dual Circulation. In the meantime, China is not getting rid of its platform industries, which are important for the domestic consumption economy. But excesses in the platform industry will continue to be rectified. More on that in a future article.