China’s new economy is divided into “two decades preceding and following.”
The first two decades are from 2000 to 2019. The largest industrial chain and second-largest consumer market in the world have been created during this time thanks to China’s GDP, which has multiplied nine times. The launch of China’s new economy was enabled by the mega-scale market and industry.
The rise of consumer Internet platforms was the most significant result of China’s new economy in the first two decades. Because China has such a large market, a platform simply uses financial capital to support its continuous expansion, eventually achieving a monopoly position, aiming for a future monopoly, discounting it into a huge net present value (NPV) in the present, and then using this NPV as a valuation to help it achieve a monopoly. This is the closed-loop financial development model of consumer Internet platforms, and as a result, China has produced a number of world-class Internet giants.
However, in terms of technological development, a foreign think tank scholar conducted a study to determine each country’s position on the “smile curve.” According to her research, from 2000 to 2019, China’s economic industry, although the scale has increased significantly, has remained in the middle position, that is, manufacturing, assembly, compared to the two ends of the R&D, sales, the value added is relatively low.
However, China has achieved industrial upgrading in a few areas, including high-speed rail, new energy, 5G, and so on. Even so, these high-tech industries with high R&D investment are led by government departments, and the government is either an investor or a major customer. The venture capital and startups are not heavily involved.
So, in his speech last year, General Secretary Xi Jinping stated that the new round of scientific and technological revolutions and industrial change has provided a strong impetus to economic development, but has also had a profound impact on employment and income distribution, including some negative consequences that must be effectively addressed and resolved.
The first two decades of China’s new economy were essentially “capital leveraged the country“.
The consumer Internet is primarily based on business model innovation, with little technical content. The QR code, for example, which we commonly scan, was actually invented in the 1990s. It has grown so fast because it can capitalize on the maximum positive external benefits generated by the country during the development process, such as increased disposable income for our residents, improved logistics and transportation, and popularization of information technology, all of which are done by the state rather than venture capitalists and entrepreneurs.
However, the state bears the negative externalities of this capital-driven, winner-take-all development model, resulting in the emergence of “Gilded Age” problems throughout society, such as the widening income gap, the lack of social security for delivery riders, and the socio-economic problems caused by these monopolies, all of which must be paid for by the state.
As a result, the central government has proposed “high-quality development”, “common prosperity” to promote healthy economic growth, optimize the distribution structure, create opportunities for more people to become wealthy, and avoid “in-rolling” and “lying flat. This is a significant turnaround and an important opportunity for China’s new economy, as well as the start of China’s new economy’s next twenty years.
It should be “country leverages capital” in the next 20 years of China’s new economy.
Under the leadership of the national strategy, China’s economy will be able to transition from large-scale development to high-quality development through capital-driven and industrial upgrading.
China should not only be large-scale, but also continue to move to the upper left of the smile curve. Moving up means increasing the industry’s value-added, which will result in more high-skilled jobs and higher per capita income, while empowering with technology to achieve cost reduction and efficiency and maintain Chinese manufacturing’s global competitiveness. At the same time, China’s position must shift to the left, that is, it must improve its R&D capabilities in order to solve strangleholds problem of key technologies.
Our investment in the new development stage should be heavily focused on “high-quality development and shared benefits“. Our company focuses on three main lines:
The first, the transformation and optimization of the supply chain. China has the world’s largest industrial supply chain, but it is still relatively fragmented and generally lacks the ability to transform technology and information technology, leaving a massive value space to be explored.
The second is hard technology import substitution. For example, chips are China’s largest annual import amount of products because, following an epidemic global shortage of semiconductors and a significant drop in oil prices, China imported 350 billion worth of chips in 2020, more than doubling the second place of crude oil. Another example is medical equipment; China has a lot of drugs and medical devices that are dependent on high-priced imports; the space for domestic substitution is very large, and once localization is achieved, it can greatly reduce the burden of people going to the doctor.
The third is sustainable development. Now the world is trying to achieve carbon neutrality, China is very early in this layout, the investment is also the most. For example, photovoltaic power generation used to cost $100 per unit in foreign countries, but thanks to the continuous development of Chinese enterprises, the cost has now dropped to a few cents per unit, enabling for large-scale application. Similarly, Chinese-made electric vehicle (EV) batteries have significantly reduced the cost of EV production, explaining why EVs have grown so rapidly in recent years.
What kinds of businesses will thrive in China’s new economy over the next two decades?
Baibu, Daxiongxingzuo, BaiAoHeng, All of these companies have one thing in common:
they are all entrepreneurial, but through a key technology, they have leveraged a large scale industry and have quickly grown into leaders in their niche industries. Such a phenomenon is also found in other developed countries, a large-scale industrial chain, able to support hundreds of so-called “invisible champions”. China is the world’s largest producer, there must also be hundreds of “invisible champions”. Therefore, in the latter two decades of the new economy with high quality development, investors should not blindly pursue the financial-driven scale as before, but should focus on quality and develop a deeper understanding of the industrial chain and supply chain.
The preceding is my interpretation of China’s new economy, as well as some thoughts on future high-quality development. Finally, I’d like to share two guidelines with you that we should always keep in mind when making future investments.
The first point is to focus on the direction of common prosperity. The essential requirement of socialism with Chinese characteristics is common prosperity, and we should look for entrepreneurial opportunities that create universal value in our investments.
The second point is the General Secretary’s discussion of capital. Marx and Engels did not face the problem of large-scale capital at the time, and the Communist Party of China explored the establishment of a socialist market economy, leading the country to “cross the river by feeling the stones.” The pursuit of profit, the pursuit of return, which is engraved in the DNA of capital, is the most essential characteristic of capital. However, capital in China must consider two principles.
First, it should carefully balance its own investment return interests with national interests, and it should actively play the role of production factors.
Second, it must not pursue its own interests in ways that are detrimental to the country’s and people’s long-term interests.