Eastern Promise
By Simon Lerner
Eastern Promise
14 May 2014 - Delany & Co

It has become a cliché of foreign affairs studies that U.S unipolarity is coming to an end. We are experiencing a power shift – west to east and north to south. Above all, it is China which looks best placed to dominate a new and more diffuse global hierarchy.

New figures from the World Bank’s International Comparison Program have fuelled a spate of headlines confirming the new pacific era. According to “purchasing power parity” stats, meaning relative to what money can purchase in a particular country, China’s economy is 87% of the US. With its economy growing three times as fast, China will surpass the US this year. It is true that if exchange rate mechanism figures are employed, then China is a fair bit further off – but either way, the gap has closed.

It seems timely that in the same month, Superdata released a new report showing that China’s mobile gaming is set to overtake the $3.2 billion US market in 2015. The proliferation of smartphones in China, led by reasonably priced Android devices, has been the underlying driver, pushing monthly active users up 46% to 266 million this year and projected revenues to $3 billion.

Just as the US mobile market is showing signs of saturation, the Chinese market is growing fast. Average Revenue Per Paying User (ARPPU) in China jumped 21% to $32.46, and conversion from non-paying to paying users grew from 2.4% to 2.9%. In comparison, ARPPU rose 11% in the US to $21.60 and conversion fell by 0.2%.

The rapid spread of smartphones in China has been shaking up the Chinese Internet sector, known for being dominated by three giant conglomerates; the “BAT’s.” Baidu is the leading search engine, Alibaba leads e-commerce and Tencent leads in gaming and social media. Now no longer content with their monopolies, these companies have started to compete directly, making a spate of mobile-based acquisitions and investments, which overlap each other’s traditional dominions. The Chinese Internet market is more fiercely contested than ever.

Reflecting the new limelight of the Chinese Tech Sector, (and a backlog of companies awaiting listing in China), a series of Chinese tech companies have filed for IPO’s in the U.S this year. Most prominent has been the e-commerce giant Alibaba, which filed its prospectus last week. Analysts predict the floatation will raise will raise between $15 billion-20 billion, resulting in a valuation which exceeds $150 billion.

From humble beginnings in a Hangzou apartment near Shanghai, Alibaba now accounts for four-fifths of all e-commerce in China. If expectations are met, it will become the largest Chinese company to have launched on the U.S exchange, the largest ever tech IPO and be second only to Google in tech company size. Analysts say the company is set to become an e-commerce powerhouse if it is able to transport its success outside of China. Yet it is precisely this capability which is open to contention.

The regional nature of e-commerce markets has been a cause for doubt. Detailed knowledge of China’s consumers and its complex network of regional markets by no means guarantees success elsewhere.

Bureaucracy and censorship

For others the problem runs deeper. A longstanding accusation made at Chinese internet companies is that they have grown up in an “internet walled garden.” Major U.S Internet companies such as Facebook, Twitter and YouTube have all been blocked by the “Great Firewall”, which cuts off the world’s largest Internet population from the realities of western competition. The exception is the Shanghai Free Trade Zone, established September 2013 – a geographical pilot and by no means a reflection of China at large.

Companies have gained enormous commercial success through adapting western technology to the idiosyncrasies of the Chinese market and consumers. Read Renren and Qzone for Facebook; Baidu for Google; Tudou for Youtube and Weibo for Twitter. Few would claim that these products are likely to dominate markets outside of China.

China’s state economy has inevitably conditioned its tech sector. This is, after all, a country with in excess of 40 million civil servants and 82 million members of the communist party, which extend throughout Chinese society. Business and government are inescapably intertwined. Does the nature of China’s state mean an inability to create truly innovative technology products?

According to Anne Stevenson Yang of YSI Capital, unfair competition from protected state actors and the persistent threat of predatory regulation means groundbreaking innovators are denied due reward and incentive. Bureaucratic clout is the real recipe for business success. The reason why many of the strongest Chinese companies are diversified conglomerates is because they can apply their wide ranging political contacts for commercial opportunities, wherever they arise.

Larger companies must align themselves with state interests. The BAT’s are a case in point, each of which is said to reflect competing regional power blacks within the Chinese bureaucracy (Alibaba – Shanghai, Baidu – Beijing and Tencent – Shengzin).

Regina Abrami, William C. Kirby, F. Warren McFarlan in their article “Why China Can’t Innovate” focus on the network of party interests and constraints which hinder the “spirit of entrepreneurship” necessary for true innovation. Communist party interests cloud natural business incentives and decision-making.

Real innovators, they argue, must ultimately come “bottom up” and from the education system. Talent and intellectual ability is hardly in short supply. The country has research budgets for its universities that will soon match the West, growing state and private university enrolment and produces more PHD’s than any other country – but its education governance structures are dominated by party interests, which ultimately prevent the free flow of ideas.

Censorship should of course not be ignored – internet companies must sign up to the strictures of the “Public Pledge on Self-Regulation and Professional Ethics for China Internet Industry.” Content censorship has been well documented.

A divided outlook

As China’s tech sector has reached the news, the Chinese economy has actually begun to slow in the wake of urbanization challenges, environmental degradation, industry overcapacity, rising debt and a broadening array of vested interests competing for influence. Xi Jinping and China’s government have recognized a renewed sense of urgency for reform. At last November’s third plenum, they released a major vision for reform via a mixed public/private economy, giving markets a more decisive role and the building of an ecological society.

China faces tensions between the desire to move in a new direction and a pervasive desire for control. As Christopher K Johnson, Chair in China Studies at CFIS recently has observed, Economic issues aside, perhaps the chief threat to the ability of the Chinese government to stay in power is the proliferation of cheap smartphone technology in China.

More than anything the Chinese government fears discord spreading across social sectors and provincial boundaries. The internet can do exactly that. China may not be inclined to free it up any time soon.

This piece was featured in Social Casino Intelligence and can be found here.

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