The secret to China’s economic success? A willingness to learn

While foreign firms might arrive in China with a slight technological advantage, it is usually short-lived, given how fast Chinese companies learn
This base-level dynamism has been strengthened by the government’s investment in the internet, communication, transport and logistics over past 20 years

Prof Zhang Jun

Published: 1:30am, 6 Oct 2021

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Over the past 20 years, a number of thriving technology companies have emerged in China. This has invited much speculation about the country’s scientific and technological prowess, and about its ability to innovate.

Some argue that China is already nipping at America’s heels in these domains, and has become a world leader in some sectors. Others believe that China is not quite as far along as it may appear, and the government’s regulatory clampdown on tech companies will impede its continued progress. Which is it?

Those who doubt China’s progress emphasise the country’s reliance on Western technology, pointing out that its home-grown tech companies still do not compete with their American counterparts globally. But optimists note that those companies continue their rapid international expansion, a reflection of China’s exceptional capacity for learning.

The latter camp has a point. China’s capacity for learning is the secret to the country’s economic success, and says much more about China’s prospects than where the country stands technologically. After all, technological innovation is less an input than an output of entrepreneur-led economic development. It is by building thriving businesses that entrepreneurs gain opportunities to develop new technologies and applications.

True, China has faced growing external challenges in recent years, including clampdowns on technology sharing by developed economies. Furthermore, the Chinese government’s efforts to maintain internal economic order and mitigate financial risks, such as through increased regulation of tech companies, have been controversial in the market. And some foreign manufacturing firms have reportedly withdrawn from China.

But the economy has not ground to a halt. On the contrary, the entrepreneurial impulse driving China’s development remains strong. It helps that the country has a huge internal market of 1.4 billion people connected by well-developed transport systems, advanced communication networks, and flexible and efficient supply chains.

Foreign firms have always come and gone, and this is not because outsiders are treated unfairly in the Chinese market. Foreign companies simply struggle to compete with local companies, which enjoy a significant advantage, including less bureaucratic red tape and deeper market knowledge.

Moreover, while foreign firms might arrive in China with a slight technological advantage, it is usually short-lived, given how fast Chinese companies learn.

Today, there are a staggering number of successful small and medium-sized Chinese companies. They might not be household names – they’re referred to as “invisible champions” – but they are constantly innovating at applying advanced technology. And their ranks continue to grow.

In addition, a large number of Chinese companies serve overseas customers, with many maintaining a far larger presence in Europe and the United States than in China. These firms leverage China’s efficient warehousing, distribution and logistics systems, as well as its superior product design and manufacturing capabilities, to bolster their competitiveness in overseas markets.

09:40

Tightened regulations among key trends shaping China’s internet in 2021

Shein, an online fast-fashion retailer that was founded in 2008 in Nanjing, is a typical example. It began as a cross-border e-commerce company, but, in 2014, created its own brand and launched a bespoke website and app in markets around the world.

By selling inexpensive clothing directly to consumers, Shein thrived. It has become the second-most-popular e-commerce site for young Americans, behind only Amazon. According to Google Trends, users in the US – Shein’s leading market – search for Shein more than three times as often as they search for Zara.

Despite being worth an estimated US$15 billion, Shein was not particularly well known in China until last year. That is because it does not serve the Chinese market.

Instead, Shein has leveraged China’s advantages – the result of huge amounts of government investment over the past 20 years – to build its own flexible supply chain, concentrated in Guangdong, the country’s most developed manufacturing centre.

Thanks to this supply chain, Shein is reportedly able to take a product from design to production in around 10 days. Its fast-fashion competitors – whose products are typically designed in Europe, manufactured in Southeast Asia and China, sent to European headquarters for warehousing, and then shipped to global markets – simply cannot keep up.

Gen Z and young millennial shoppers have propelled Shein’s rise, in thrall to the company’s never-ending, always-changing catalogue of clothes at prices that stretch even the most meagre allowance. Photo: Bloomberg

Shein is no anomaly. China boasts a number of other fast-fashion cross-border e-commerce platforms, and a total of 251 unicorns (private companies with a valuation over $1 billion), as of last year.

The list includes social-media apps such as TikTok, which has taken the world by storm. The influence of Chinese internet companies is large and still growing in the European, American and South Asian markets.

China’s government deserves part of the thanks. After the severe acute respiratory syndrome epidemic of 2003, it worked to support the expansion of e-commerce.

Then, to offset the shock of the 2008 global financial crisis, it made continuous investments in internet, communication and transport networks, mobile-payment systems, logistics and warehousing capabilities, and supply chains, while promoting linkages between sectors. These efforts have helped strengthen and sustain the economy’s base-level sources of innovative dynamism.

To be sure, China’s supersize, fast-growing economy suffers from structural problems, which seem not to correspond with its underlying dynamism. This apparent discrepancy is a reminder of the economy’s complexity.

For example, because the state-owned sector captures a disproportionate share of financial resources, it is often regarded as a source of misallocation. But recent studies find that state-owned enterprises might have served as an informal channel for alleviating the financing constraints of small and medium-size enterprises.

Those who focus excessively on surface-level phenomena will continue to underestimate China’s economic resilience. One cannot truly understand the Chinese economy and its prospects without paying attention to the irrepressible dynamism that forms its base.

Zhang Jun, dean of the School of Economics at Fudan University, is director of the China Center for Economic Studies, a Shanghai-based think tank. Copyright: Project Syndicate