Technology – it’s all the buzz

Technology – it’s all the buzz
Contributors: Chin Ping Chia, Kevin Chen, Weilun Soon, Chris Liu, Yingying Su

China’s technology sector is challenging the world order.

We see three major catalysts that are propelling China’s technology companies rise to prominence.

1.    New infrastructure paving the way for future technology gains

Beijing has elevated the need to sharpen China’s technological eminence to a national level with a focus on high-tech infrastructure, for example, 5G, charging stations for new-energy vehicles, data centres and Internet of Things.

These are areas where China already has clear technological advantages and are crucial drivers for the economy as projects in these sectors are likely to bring positive multiple effects to the economy. We believe that Chinese tech companies are well placed to benefit further from these developments.

2.    Import substitution accelerating technology upgrade

Import substitution is another major trend, initially driven by China’s desire to reduce foreign technology reliance and to spur product innovation. While China still has gaps to fill in terms of cutting-edge technological capabilities, intensifying geopolitical tensions and the US’ restrictions on chip sales to Chinese only reinforce China’s determination to be more self-sufficient.

For example, it was reported in the Global Times that Beijing was thinking of raising investment in the integrated-circuit sector and speed up import substitution of chips in a bid to achieve the goal of mass-producing 7-nanometer semiconductors in two years, which could motivate Chinese companies to replace imported chips with domestic ones earlier than planned.

From a domestic consumption angle, a rising wave of nationalism and patriotism is also stoking domestic demand for homegrown products.

We see this import substitution as a combination of rising innovation and quality of Chinese products, trade tensions, rising nationalism and patriotism to reduce foreign exports.

3.    Heavy investment in research and development

Deep funding into research and development (R&D) and bringing products to the market more quickly are key to China’s technological advancement. Already China is ahead of the US in filing patents in areas such as telecommunications, optics, electrical machinery and energy.

Increasing investment into R&D is also expanding its talent pool in technology. A study by the World Economic Forum reported that China had 4.7 million new STEM (science, technology, engineering and mathematics) graduates in 2016 while the US had only 568,000. 

Figure 1: Research and development gaining more prominence in China
Figure 1: Research and development gaining more prominence in China
Source: China’s National Bureau of Statistics as at 31 December 2018. 2005 = 100 Past performance is not a guide to future returns.

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