There’s a lot of misperception about China – and about the state of its technology. Contrary to general perception, China is fast becoming a technology powerhouse.
But before I get into that, I’d like to share a letter I received from one of our readers. He recently wrote me a 1000-word email calling me a “certified Trump hater” who peddles “propaganda statements against Trump”.
As you may remember, last week I made the case that the “Trump rally” in U.S. equities would start to lose steam. I highlighted that broader macroeconomic fundamentals were not encouraging. (As it happened, two days after we published that piece, the U.S. Department of Commerce published the first quarter GDP growth number, which at 0.7 percent, is the lowest first quarter figure in three years. It fell well short of the median forecast of 1 percent.)
I said that much of the rally was triggered by the prospect of pro-growth policies that Trump had campaigned on. But that he was not making much headway in turning campaign rhetoric into actual policy, particularly on tax reduction and infrastructure spending. I wrote,
A stock market can rally on promises, but it takes concrete results to keep the rally going. Right now, we are not seeing political results come out of the Washington political circus. The Trump stock market honeymoon is ending. President Trump is finding out that getting anything through Congress, even one controlled by his own party, is exceptionally difficult.
I’d like to make this clear: My personal opinions on political figures don’t matter. And I don’t think you’re interested in them. That’s why I don’t share them.
What does matter and is relevant, though, is how the words, stated policies and actions of the most powerful man on the planet have the capacity to affect financial markets, particularly in Asia. Which is exactly what I was talking about in the piece.
More to the point, the author of the email to us acknowledged that “China right now is the place to be for investment” and that “learning about China for me is necessary”.
That’s what we focus on! We want to tell you about investing in China, and Asia. We live and breathe Asia. I was born in Hong Kong and have lived here my entire life. And every day, we see – in media, in commentary, and in feedback we receive – examples of the misconceptions about China.
And just now the misperception I’m tackling is about technology.
To much of the world, China is a nation of copycats and counterfeiters. The idea that China simply churns out knock-off handbags, cheap clothes, shoddy consumer goods and toys, and crummy plastic kitchen gadgets is stubbornly persistent.
It’s also just plain wrong. This notion is indeed grounded in historical truth. But China is fast moving past that.
China’s advancement in technology involves a lot of R&D-ollars
Ascending the global technology ladder requires research and development (R&D) funding.
At a country level, China represents 13 percent of global GDP yet accounts for 20 percent of all global R&D spending. It is second behind the U.S., with 26 percent.
Chinese companies now contribute 6.9 percent of global corporate R&D spending, up from 5.8 percent in 2015.
Consulting firm PwC’s Global Innovation 1000 Study, which looks trends in the world’s largest R&D spenders at a corporate level, found that in 2016, Chinese R&D spending rose by 18.6 percent over the previous year.
These figures exclude Huawei, a private company that is the world’s largest telecommunications equipment manufacturer. It’s headquartered just over the Hong Kong-Mainland China border in Shenzhen. Huawei’s US$9.5 billion of R&D makes it China’s largest spender, and the world’s 9th largest.
This year-on-year increase reflects long-term growth in R&D spending in China. As a percentage of GDP, R&D has risen from just over 0.5 percent in 1996, to more than 2 percent in 2014.
Consider also that annual GDP growth itself over that period averaged 9.5 percent. So China is spending four times as much in percentage of GDP terms, on a GDP that is now twelve times bigger than it was in 1996.
Latest Chinese technology includes a more cutting-edge technology research, like quantum technology. In 2015, according to McKinsey, China spent US$220 million of a global estimated US$1.6 billion on non-classified quantum research.
China’s spend as a percentage of its GDP was similar to the U.S., but the key difference here is that China is still classified as a developing country. And quantum technology is as pioneering as it gets when it comes to technological research.
In the field of artificial intelligence, China is second behind the U.S. in terms of the number of companies in the space and the corresponding amount of financing received by those firms. It’s overtaken the U.S. in terms of publishing academic journal articles on deep learning, a critical sub-discipline of AI research.
And when it comes to simple brute computing power, China remains the world leader. Since mid-2013 China has held claim to the world’s fastest supercomputer.
Lots of human capital
Nearly 7 million people graduated from Chinese universities in 2015. That’s up from just 1.1 million in 2001.
By 2020, China’s college-educated workforce is forecast to be around 195 million people. That’s more than the entire U.S. labour force.
This is where China’s sheer population size creates tremendous advantages. And as Hong Kong-Apec Trade Policy Group executive David Dodwell puts it, the main difference between the U.S. and China is not that one is capitalist and the other communist. Rather, it’s that one is run by lawyers, and the other by engineers.
There’s a flipside
Despite the large amounts of human and monetary capital being poured into technology in China, there are still plenty of challenges.
China lacks any universities in the world’s top 30 when it comes to top-cited scientific publications. Much of the learning in the Chinese educational system is rote, rather than innovative or imaginative.
I’ve interviewed plenty of graduates out of universities in Hong Kong and China who have great qualifications on paper – but are unable to perform even the most basic “outside the box” thinking when pressed.
On top of this, getting research grant money in China is often less about quality ideas, and more about politicking. As two Chinese university deans wrote in a Science magazine editorial, “To obtain major grants in China, it is an open secret that doing good research is not as important as schmoozing with powerful bureaucrats and their favourite experts.”
Finally, only 4 percent of China’s R&D is allocated towards basic (or original) research compared with 17 percent in developed countries. This means that China continues to focus on adjusting existing technologies for the Chinese market, rather than towards more innovate home-made tech.
Regardless, China’s growth trajectory in terms of its technological advance is now entrenched. And it is one of the key reasons why, as our reader said, “China right now is the place to be for investment”.