What does it mean for investors and expats?

Shanghai natives have got used to a lot in recent years: 6 million new residents since 2010, 15 new metro lines since 1999, and now drones delivering them hairy crabs – the traditional dinnertime favorite.

But while drone-driven food deliveries make it an easier job to get hold of fresh hairy crabs compared to travelling on the 90km trip to Yangcheng Lake as Shanghaiers did years ago, they also demonstrate to outsiders just what China’s tech future will look like.

And that’s a future where AI-driven technologies replace old industries, create new sectors, and transform China’s society and economy – all based on using vast amounts of data generated online.

Four forces creating China’s tech future

And the drivers behind China’s tech transformation break down into four distinct and inter-related factors:

A massive, growing base of online citizens and businesses. Numbering 829 million at the end of 2018, China has by far the biggest online userbase of any country in the world, and it still has much more room to grow.

Only 59.3% of the population had internet access at the end of 2018, and that means China still has room to catch up with the US (89.0%), Japan (93.5%), and UK (94.7%).

But for all the massive amounts of users, what’s important is what they can do online.

China’s data speeds, though slow by international comparisons, are improving and the increasing range of apps and platforms mean that more users in China are building their life around what’s happening online, whether its for shopping, gaming, or work.

A society increasingly connected by 5G technology. The US might be putting obstacles in front of Chinese TMT firms’ overseas 5G ambitions, but China’s government is actively encouraging the  development of a huge domestic network.

By mid-2018, China has installed 1.9 million 5G-enabled wireless transmitters, compared with 200,000 in the US. That breaks down as 14.1 transmitter sites per 10,000 people, compared with 4.7 in the US and 8.7 in Germany.

When used properly, it means China will have a much faster data transmission network capable of handling a much wider range of communications devices, both of which will pave the way for new innovations like autonomous driving and drone transport.

Massive amounts of data. But the product of all these networks, i.e. data, will be key. China is already the biggest producer of data globally, generating an estimated 7.6 zegabytes per year – a zegabyte is equal to one trillion GB – and is ahead of the US, which produces 6.9 zegabytes per year.

That’s forecast to grow in China to 48.6 zegabytes per year by 2025 as online users grow, services expand and connectivity improves.

While that is a bonanza for data center developers, it is also a huge resource for tech companies because these data pools are effectively huge training data resources with which to develop new online products and businesses, all of which will support the final of four drivers of China’s tech future.

The rapid development of artificial intelligence. If artificial intelligence (AI) applications are a car, then data is the gas, and the huge data flows just discussed are where China possesses a massive advantage in AI.

And China is already stretching ahead in AI applications and development, filing an estimated 30,000 public AI patents in 2018, ten times more than it filed in 2013 and two-and-a-half times the amount filed in the US during 2018, according to the most recent data update from the World Intellectual Property Organization.

Industries all over China are being disrupted

And these forces are already transforming all kinds of industries in China.

Take China’s manufacturing sector for example.

Once the home of sweatshop production, you’re more likely to find a robot-driven assembly line in China now than a human-operated one. That’s because China now leads the world in robotics, with 340,000 systems installed by the end of 2017, and that’s making Chinese companies productive and better capable of developing more advanced products.

Banking is another industry undergoing rapid change.

Chinese residents now don’t carry cash. In fact, they don’t need to because the spread of cashless payment technology has been so huge, with some RMB 2.3 trillion in cashless payments being made in 2018.

Research shows that Chinese residents carry less cash than ever – because they don’t need to – and one recent report cited a student who made her RMB 500 last four-and-a-half months, because she relied on online payments.

Chinese now do their banking online, and that’s disrupting the traditional way of doing things. Alibaba’s Yuebao – an online money management platform – became the world’s biggest money market fund with USD 170 billion in assets under management in 2017 after launching in 2013 and it now dwarfs some of the most established players in the global funds industry.

Still within financial services, insurance is another sector which being disrupted by the shift online. Days of agents doing door-to-door sales are now a thing of the past because online insurance platforms now use big data collections of applicants online behaviour to calculate the risks involved with extending cover for policies like life, auto and home insurance.

China’s rise: a golden time for investors and expats? What do they need to know?

But with all these changes going on, what’s in it for investors and expats?

You’d think it would be a golden time for investors: China’s economy will grow faster (6.3% y-o-y) than the US (2.3%), Japan (1.0%) and the European Union (1.3%) this year, according to IMF forecasts.

Fast-growing new sectors like e-commerce, retail, robotics, and biotech continue to emerge, and a seemingly endless supply of ‘unicorn’ companies, like Luckin Coffee, Qutoutiao, and Bytedance, are charging onto the scene.

But as much as China offers opportunities, it also presents huge challenges for investors.

Stock markets are notoriously volatile, corporate governance standards are weak, masses of capital are competing for the next opportunity, and China’s legal system is still developing and well behind accepted norms in global markets.

More importantly, limits on press freedom and the Chinese government’s strict censorship on information stems the flow of independent analysis that are common in more developed markets.

For expats, China presents opportunities and challenges too.

In terms of opportunities, it can be exciting to live in a fast-growing, vibrant economy that is a world away from the slow growth and stagnation found in Europe currently.

Also, China has many new, attractive sectors to work in where innovation is growing at a much faster pace than elsewhere.

On top of that, China is making it much easier for talented, experienced expats to get visas and, eventually, qualify for residency, marking a massive change from past years where the door was firmly shut on any pathway to citizenship.

On the other hand, a range of challenges make China a tough prospect for expats.

For starters, there’s pollution.

Eight China cities rank in the worst 30 cities for air pollution globally, and general levels of air pollution throughout China are well below those in the developed world. It’s not just air though, clean water is also a massive challenge and recent surveys shows dangerous levels of contamination in water supplies and treatment centers nationwide.

Online privacy in China?

More importantly, the huge leaps that China is making in terms of technology and internet services are based on one key factor – the virtually free access to personal data that the Chinese government forces citizens to provide.

That’s because the Chinese government is focused on tracking almost every aspect of citizens behaviour. Much has been made of the Chinese government’s social credit scoring system, which scores a citizen according to a range of measures like whether they pay bills on time, spend too much time playing video games, post sensitive content on social media, or overspend on ‘frivolous’ consumer products.

And China’s tech giants have to play along, making their data pools available to the government whenever required as a means to keep themselves in business, and that means expats have their every move, transaction and search tracked by apps on their phones and crunched by China’s vast armies of online observers.

Getting around China’s Great Firewall

More than that, China’s emphasis on censorship controls expats’ access to outside news sources via the Great Firewall of China, stifles the spread of free speech in the media, and limits the range of online choices for foreigners living in the country.

For expats, that means investing in a virtual private network (VPN) is more or less essential to not only get access to media taken for granted outside of China, like Netflix, Youtube, and Google, but also to protect data and privacy while in China.

VPNs can effectively work around the controls put in place by the Chinese government, opening up all kinds of access to overseas websites and online services, as well as protecting your identity and personal information from the long arm of the Chinese government.

A note of caution though – not all VPNs operating in China are equal. In such a large and fast-growing field there are considerable differences in the level of quality and security across the many VPNs you can currently find in the market – and that’s essential to bear in mind if you care about web access and your own personal privacy.

Furthermore, China’s authorities are well aware of the growing use of VPNs as a means to get round the formidable barriers they have put up to the free flow of information. With that in mind, many China-based or disreputable free VPNs are forced to leak data back to the government just to continue operating.

With these issues in mind, expats would be well served by searching out the very best VPNs on the market with an established track record of functioning in China and robust data protection standards to prevent their data and personal information from falling into the hands of the Chinese authorities.

So, as China’s tech future takes shape and China’s rise looks likely to run and run, no doubt new stories of amazing technological advances will soon replace those of flying delivery drones, cashless payments, and new AI-driven gadgets described here.

And in this tech-driven future, there is much for investors to look forward to, especially as access to China’s domestic markets opens up.  But China remains a challenge for investors because the norms taken for granted in developed markets such as the US and UK, like legal protection and strict rules on corporate behaviour, just aren’t the same.

And it’s a similar story for expats too. China’s fast-growing economy and sectors offer prospects which many other countries just can’t match, and easier visa regulations mean China could be a more hospitable place than previous years.

But the huge leaps that China is making toward creating a tech future are based on one essential factor – the unfettered access that the authorities have to the personal data about the behaviour of the people living there.

And, given the Chinese government’s obsession with gathering as much information as possible about people in China, plus the slim-to-none chance of this changing in the future, expats had better get wise to this reality and consider how best to safeguard their personal space and data.