China's Digital Takeoff
On Singles’ Day, Taobao and Tmall, Alibaba’s online retailing services, registered over RMB 36 billion (approximately US$6 billion) in sales overnight. The size of China’s Internet economy as a share of its GDP in 2013 is greater than those of the United States or Germany. There are over 632 million Internet users and 700 million smart device users in China today.
Just as the Internet has transformed China’s consumer landscape, Jonathan Woetzel, the Director of McKinsey & Company, Shanghai, and McKinsey Global Institute, argued that China’s production landscape is about to undergo a seismic shift. In sectors as varied as consumer electronics, automotives, chemicals, financial services and real estate, companies are on the brink of a digital revolution to reap the efficiency gains of the Internet. According to McKinsey Global Institute, the Internet’s contribution to China’s GDP growth will be at least 7% or as much as 22%, depending on how successfully the Internet penetrates China’s businesses and how effectively the government implements a fair and supportive regulatory framework. This digital transformation may mean some temporary job losses, but the Internet will also create new jobs and new markets as it creates innovative products and services.
The panel, which also included Saurabh Chopra, Vice President of Corporate Strategy at Visa; Cindy Li, the Country Manager and Senior Supervisory Analyst at the Federal Reserve Bank of San Francisco; and Richard Yorke, the Head of International Group at Wells Fargo, engaged in a lively discussion around the Internet’s potential to transform, in particular, China’s financial services sector. Alibaba and Tencent, China’s online service giants, have now introduced digital platforms to provide working capital loans to small and medium enterprises (SMEs). These trends signal an unprecedented era of competition between the traditional “Big Four” banks in China and these Internet players. Alibaba’s Yu’ebao, an on-line money market fund, is also providing better interest rates than traditional, state-owned banks to customers who deposit money with them.
The central leadership is eager to see improved financial flows to SMEs. As Richard Yorke explained, 70% of traditional bank financing currently goes to state owned enterprises (SOEs) and 30% goes to privately-owned enterprises; yet, only 50% of China’s GDP is produced by SOEs. Thus, as the central leadership in China signals its desires to deepen China’s financial markets and provide increased financing to SMEs, it has “tread lightly” upon these Internet players that are injecting competition into the banking business. The panelists also agreed, however, that the regulators are not stepping out of their intermediary roles. “They will step right back in depending on how much volatility is introduced into the financial markets.”
Regarding whether any part of Alibaba’s mobile payment and financing models are scalable globally, panel members remarked upon the growing purchasing power of Chinese consumers. Buyers can demand how they would like to be paid and in what currency, which will amplify the global reach of such players as Alibaba.
Enterprise-driven digital transformation is about to take off in China; and the experts convened for this event were bullish about the prospects.