How can China respond to the threat of disruptive technology?

How can China respond to the threat of disruptive technology?

By Michael Baxter, Chief Economics Correspondent, iDisrupted

While markets fret over a possible recession in China, and its implications for the rest of the world, one truth has not yet dawned. China faces a much greater threat from technology; that is why it has to change.

Disrupted China
Courtesy of CNN

China’s economy is rebalancing. For too long it has relied on cheap labour, and an export and investment led growth model.  This can’t continue.

China has to change because first of all its work force demands higher reward.  A country which relies on a cheap labour force cannot, by definition, afford an average wage approaching the levels enjoyed in the developed world.

Its export led model cannot continue, because quite simply the rest of the world is not big enough to keep buying China’s products ad infinitum, not unless China reciprocally buys products back from its customers.

The investment led model cannot continue, because it has created an economy bloated with too much infrastructure – gleaming shopping centres bereft of shoppers, state of the art transport links taking travellers to the back of beyond, and a country awash with buildings that hardly anyone can afford to buy, or live in.

 

Linked with all of this, China has seen an explosion of debt. They say it’s a bubble which will burst.  The bubble may indeed burst, but this does not mean China’s growth days are over. Sure, recession may beckon, but recessions are transitionary. There is a good reason to think that even if growth in China slows to a virtual standstill, it will recover. That reason lies with technology. In the longer term, however, technology poses a quite different threat to China. Its only hope is complete the transition from export/investment led to consumer led growth as quickly as possible.

Before the Japanese economic miracle went into shuddering reverse, the economy of the rising sun seemed unstoppable. Then it suffered a lost decade, the lost decade turned into two decades, and now 25 years on Japan continues to limp forward, in most years the laggard of the G7.

Many see parallels between Japan in the late 1980s and China today. There are two key differences. For one thing, China’s government is aware of the problem, which is why it is trying to enforce change and rebalance. This is important. It is much harder to change a mature economy than a developing one.

For another thing, unlike in Japan 25 years ago, China still has lots of scope for technological catch-up.  This point is even more important. A mature economy is reliant on innovating for growth. A developing economy can grow by incorporating innovations that already exist. Twenty five years ago Japan had closed the technology gap with the west, maybe it even passed the west.  Sure, like China today it had seen a debt bubble, but current Chinese debt, as a proportion of GDP, is not as great as debt in Japan in the late 1980s.  Asset prices are nowhere near as elevated. Crucially though, China can grow by continuing to catch-up with the west.

In the 19th century the US suffered from bubbles, just as China does today. It experienced a bubble in the laying down of telegraph wires, and later a railroad boom and then crash. Companies collapsed in their droves. Even so, a legacy was created which helped form the foundations of the US economy, enabling it to become a superpower. At least the over investment into China will leave a legacy which will support the economy in the decades to come.

If technology provides hope to China, it provides a potential problem too.

In an age of robotics, the production process is becoming ever less human intensive. The Internet of Things will add to this effect, creating new efficiencies, enabling producers to make more efficient use of labour.

3D printing technology, especially when combined with nanotechnology and robotics, is evolving such that we may be a decade or so away from seeing the manufacturing process become localised. We will see more and more local manufacturers catering for small markets, but producing bespoke products, made on demand. In such an environment, the more local, the better the service.

Finally, we have the emergence of the sharing economy.  Take one example: the convergence between self-driving cars and the sharing ethos, promoted by social media. Fewer of us will own cars. Fewer cars will meet our needs. The car industry is ten years or so away from facing a major shift. Car companies will go bust, the industry will contract.

In such a scenario, countries which are reliant on the export of manufactured goods will face a disruptive threat on a massive scale.

This is why China needs to become more self-sustaining, less reliant on international consumers, more reliant on its own.

This does not mean China will shut itself off from trade any more than the US has done. But, in an age when technology is accelerating at an increasing rate, China needs to learn how to move to the forefront of innovation. And it needs its consumers to open their wallets and purses.