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Economy

China’s Digital Silk Road: A Pathway to Post-Pandemic Economic Recovery?

Aug 19 , 2020
  • Rene Zou

    China-focused policy analyst with a dual master’s from Sciences Po, Paris and Peking University

Covid-19 has accelerated the transition toward a digital economy on a global scale, with Chinese tech firms leading the way. First unveiled in 2015, the Digital Silk Road (DSR) is a component of China’s Belt and Road Initiative (BRI), which calls on Chinese firms to expand the construction of digital infrastructure and their respective share of information communications technology (ICT) markets in countries participating in the BRI. Officially, its stated purposes are to improve access to high-speed internet, lower markets barriers to international e-commerce, and close the digital divide. Accordingly, the DSR is being touted as a powerful remedy for global economic recovery.

While profit remains the primary driver of Chinese digital firms’ overseas commercial expansion, the Chinese government aims to maintain R&D funding and support for key sectors, as it sets out to ensure technological self-reliance and achieve “cyber superpower” status by 2050. The alignment of public and private sector goals in the economic and geopolitical realm thus promises to keep the DSR at heart of China’s response to Covid-19 at home and abroad.

Projects in telecommunications, e-commerce and other forms of innovative technology applied to smart cities have clearly benefited. Premier Li Keqiang, in May, promised to accelerate the construction of “new infrastructure” such as 5G networks and data centres. A re­port from Haitong Se­cu­ri­ties predicts new in­fra­struc­ture investments will total RMB 17.5 trillion (or US$2.47 trillion) in the next five years, or roughly RMB 3 trillion on average yearly. The new infrastructure ‘frenzy’ will have spillover benefits for governments and firms along the Belt and Road, which often receive soft, low interest-rate loans from state banks to purchase Chinese tech products.

While the campaign against Chinese telecoms giant, Huawei, has gained momentum recently in the West—namely with U.S. sanctions and the UK’s reversal of its 5G decision—the door to the rest of Eurasia has not yet closed. Europe, the Middle East, and Africa represents Huawei’s largest market outside of China, followed by Asia-Pacific. To show its commitment to Europe, Huawei recently announced plans to build a US$220 million manufacturing plant in France, which will employ 500 new workers to produce 4G and 5G equipment for the European market. The plant is expected to contribute US$1.2 billion in direct annual economic activity.

Chinese telecoms companies are also busy laying fiber-optic cables to improve internet connectivity in developing countries. The second phase of the China-Pakistan Fiber Optic Project became operational in July 2020. The US$44 million project funded mostly by China EXIM bank took two years to complete, and the Pakistani government is excited to reap the economic benefits from digitization, not to mention user fees generated from the project. 

Despite increased regulatory scrutiny from the EU and elsewhere, Huawei signed 90 new contracts in the first two months of the year, over half of which were in Europe. Indeed, low-cost deployment of 5G will prioritized where security concerns are found to be manageable or few affordable alternatives are available, especially in emerging and developing markets.

Meanwhile, leading internet companies are expanding e-commerce and mobile-payment services in digitally savvy Southeast Asia and South Asia. Alibaba has been building logistic centres in key markets such as Thailand, Malaysia, Indonesia, and Singapore, while mergers and acquisitions (M&A) activity focuses on cooperation with local firms to speed-up integration. This strategy is supported by an increase in e-commerce free trade areas set up by local governments. Cross-border e-commerce is an important part of China’s “Internet Plus” strategy, which considers online sales as an effective way of boosting consumption and increasing participation in regional value chains, particularly among SMEs and farmers.

The consumer market is further helped by fintech projects driven by AliPay and Wechat Pay, China’s leading e-payment service providers. Alibaba’s subsidiary Ant Financial has followed a similar strategy as its e-commerce business, acquiring shares of fintech companies in markets such as the Philippines (Mynt), Malaysia (Touch ’n Go) and India (PayTM) to scale up. 

Another area of project activity is smart city building, which focuses on urban management, e-governance and public transport, among others. Huawei and Inspur are leading providers of smart city solutions across Africa, South Asia, and Central Asia. These projects are often funded by state loans and use big data, cloud computing and artificial intelligence technology to improve provision of services and security in urban areas. Critics say Chinese facial recognition and surveillance technology help authoritarian governments spy on political opponents and crackdown on social unrest. On the flip side, digital monitoring offers a potential source of government revenue, namely through the collection of traffic fines or implementation of smart tax systems, as is the case in Zambia

The adoption of high-tech could help developing countries leapfrog into the future, with productivity gains linked to reduced crime and corruption, improved quality of learning, and healthcare provision. Alibaba is already offering its cloud services to model regional Covid-19 outbreaks and connect health professionals to share best practices to contain the spread of coronavirus. Nevertheless, questions surrounding data privacy and control of data flows remain unaddressed. China’s 2017 national cybersecurity law does not inspire confidence in this regard. 

While the race in 5G roll-out and China’s surveillance equipment sales tend to dominate headlines, the importance of information and communications technology (ICT) to economic growth and development should not be overlooked. Investments in digital infrastructure could help achieve economic recovery by increasing demand and jobs, and economic transformation by boosting productivity and trade in goods and services. While ICT investments will have a minimal impact on overall GDP in the short-term, the multiplier effect is sizeable in the medium-to-longer term, as it unlocks emerging industries in the digital economy. The Covid-19 pandemic has only underscored the importance of digital connectivity for economic growth and resilience. Moreover, Chinese firms are not only competitive, but willing and able to finance digital development in overlooked markets. Economic potential therefore needs to be balanced with security concerns, when assessing opportunities arising from China’s Digital Silk Road. 

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