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The Neglected Sources of China’s Economic Resilience

Oct 11, 2021
  • Zhang Jun

    Dean, School of Economics, Fudan University

Over the last 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 emphasize the country’s reliance on Western technology, pointing out that its homegrown tech companies still do not compete with their American counterparts globally. But China 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. In fact, China’s capacity for learning is the secret to the country’s economic success, and it 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 government’s efforts to maintain internal economic order and mitigate financial risks, such as through increased regulation of tech companies, has 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 And some foreign manufacturing firms have reportedly withdrawn from China.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 China has a huge internal market of 1.4 billion people connected by well-developed transportation systems, advanced communication networks, and flexible and efficient supply chains. 

While many foreign firms have come and gone, this has always happened, and it 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 is a staggering number of successful small and medium-size Chinese companies. They might not be household names – in fact, they’re referred to as “invisible champions” – but they are constantly innovating in applying advanced technologies. And their ranks continue to grow. 

There is also a large number of Chinese companies serving 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 capabilities in product design and manufacturing, to bolster their competitiveness in overseas markets. 

Shein, an online fast-fashion retailer that was founded in 2008 in Nanjing, is a typical example of such a firm. It began as a cross-border e-commerce company, selling clothing via platforms like Amazon and eBay. But, in 2014, the company created its own brand and launched a bespoke website and app in markets around the world, from the US and Europe to the Middle East and India. 

By selling inexpensive clothing directly to consumers, Shein thrived. Before long, it had 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 $15 billion, Shein was not particularly well-known in China until last year, when it was listed as one of China’s top-ten “unicorns” (private companies with a valuation over $1 billion). That is because it does not serve the Chinese market. Instead, it has leveraged China’s advantages – the result of huge amounts of government investment over the last 20 years – to build its own flexible supply chain, concentrated in Guangdong, the country’s most developed manufacturing center. 

Thanks to this supply chain, Shein is reportedly able to take a product from design to production in ten 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. Shein has also started to build warehouses in some key markets. 

Shein is no anomaly. China boasts a number of other fast-fashion cross-border e-commerce platforms, and a total of 251 unicorns, 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 is partly to thank. After the SARS outbreak 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 transportation networks, mobile-payment systems, logistics and warehousing capabilities, and supply chains, while promoting linkages among sectors. These efforts have helped strengthen and sustain the economy’s base-level sources of innovative dynamism. 

To be sure, China’s super-size, fast-growing economy suffers from its 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. 

Copyright: Project Syndicate, 2021.

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