China needs to grasp the fact that future sound growth now depends on making a more strategic use of the Internet, with greater use of e-commerce tools among small and medium-sized businesses a priority area.

There are immense gains in productivity and growth to be made in China through more determined use of the Internet and Web technologies – including e-commerce sites, online payment systems, etc – especially among small and medium-sized enterprises (SMEs). This is the view taken by a recent report from the McKinsey Global Institute, (MGI) entitled ‘China’s digital transformation: the Internet’s impact on productivity and growth’. To date China has succeeded in creating wealth with a low-cost large-scale production strategy. However, this cannot be sustained indefinitely and the Internet provides the country with the means to reduce the cost of access to information, leading to greater productivity and stronger competition. The MGI analysts estimate the extra growth which China could achieve through better use of Web technologies at between 0.3% and 1% per annum and calculate that new Internet applications could fuel some 7 - 22% of China’s incremental GDP growth through 2025, i.e. between 4 trillion and 14 trillion renminbi, depending on the speed and extent of industry adoption of digital tools.

Macroeconomic impact on consumption and jobs

The MGI report reveals to what extent China has already benefited from more widespread Internet access among the population, in terms of diversifying its range of consumer goods, both connected objects for the home such as the Haier group’s U-Home solution and virtual entertainment products, with for instance 70% of Chinese Internet users consuming online streaming services. The analysts point out nevertheless that the Internet is being under-used when it comes to helping companies scale up production and channel their knowhow to best effect. Chinese firms on average still spend just 2% of their revenue on information technology. However, the composition of the labour market is already undergoing considerable change and massive investment in digital tools and systems will be required in the very near future, with the number of people needing more advanced training in IT at work constantly increasing. The report underlines that the main challenge for China is to get its SMEs, two thirds of which have not yet transitioned to digital, to move into the Internet era. Reluctance to make the move to Web-based strategies is already holding back economic growth in China, which could today be very much stronger, especially if access to and handling of Big Data in such fields as healthcare and banking were driven forward.

Better information processing a must in a number of sectors

Use of the Internet in China is in many respects similar to the more developed countries. The boom in social networks (60% coverage in China compared with 73% in the United States) and smartphone penetration (54% ownership versus 69%) shows a very similar trajectory in China to the US. On the other hand, the gap which still exists between these two massive economies when it comes to using the Cloud for banking and finance purposes, especially for financing SMEs, is very striking and there are likely to be major changes in this area in China as use of Big Data flowing from the Internet increases. According to McKinsey, the more efficient allocation of capital that will result from banks knowing their customers better and improving their risk management will potentially create enormous savings, for example in insurance costs.  Meanwhile the Bank of China is keen to see the spread of online transactions as a result of the Internet boom. The MGI analysts underline that the Chinese government, which has sole power when it comes to freeing up access to data, has a key role to play in the drive to maximise productivity gains and stabilise growth on solid foundations. What China now needs are policy-makers and regulators who are “fluent in the language of technology so they can participate in (…) discussions with industry players and keep current with the latest innovations.” Moreover, government entities need to increase their own effectiveness by using Web-based tools and work to create a supportive policy framework that will help drive China’s Internet transition forward, say the MGI experts.

By Simon Guigue