The storm forming around China’s tech sector

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China’s technology sector is growing so rapidly that it is pushing the United States out of its long-held position at the top of the digital food chain. At the forefront of this booming industry are companies such as Huawei, WeChat and Tencent, which have helped the Chinese economy grow at unprecedented rates. With GDP growing by 9.5% in 2018, the World Bank called it “the fastest sustained expansion by a major economy in history”.

This is a cause for concern for Trump and America since the world’s second largest economy is evolving from a clone factory to a highly innovative and booming economy. Moreover, Trump’s response to this (policies attempting to contain China), have added fuel to the fire and have actually spurred on China’s burgeoning tech sector to accelerate its design and innovation.

In the coming years, Chinese tech companies will become less dependent on US consumers as the number of people in China using tech increases. In 2012, only £24 million was spent via mobile payments, whereas in 2016 this was £9.8 trillion. Furthermore, China’s population has become one of the most digitally savvy with over 731 million people being active internet users. This has led to the growth of companies such as Tencent, which owns WeChat, a company that provides a single app which can be used for almost everything. Despite the majority of its one billion users being residents of China, Tencent is now the fifth most valuable company in the world with a valuation of $500 billion in 2018. This increase in consumption has been the catalyst in China’s economic growth over the past few years, contributing to more than 60% of its growth during eleven out of sixteen quarters between 2015 and 2018. This has helped to reduce China’s exposure to the rest of the world, with it decreasing from 0.9 in 2007 to 0.6 in 2017. To contextualise this, the average exposure of the seven largest economies in the world is 1.

However, the tides could be turning. Trump’s tariffs are now close to reaching 25%, which is eating into Chinese tech companies’ profits due to reduced demand for their products as consumers do not want to pay higher prices. Moreover, security concerns have grown against firms like Huawei due to their close links to the Chinese government. These companies have struggled as Trump has added more of their American subsidiaries to America’s blacklist. In total, 140 Chinese companies are on the blacklist, with 68 of these linked to Huawei’s supply chain. This has had a crippling effect on Chinese technology companies as they battle to source high tech equipment from alternative sources, with US manufacturers banned from trading with these companies. For example, Huawei’s latest flagship phone, the Mate 30 Pro, is not allowed to use the Android operating system and, therefore, no launch date is scheduled to take place in Europe or North America. Consequently, the size of Huawei’s potential market for future phones has greatly been reduced which will affect future years’ revenue and profits. To make matters worse, ZTE Corp, a telecommunications equipment and systems company with annual revenues exceeding $15 billion, has been forced to pay a $1.2 billion fine and replace its whole senior management team.

Ultimately, the true extent of the damage will not be visible until after Trump’s presidency, which depends on the outcome of the 2020 election and the ongoing impeachment trial. Yet it is already visibly clear that the Chinese economy is starting to slow down due to these policies which are crippling the Chinese technology sector, with annual real GDP growth declining from 14.2% in 2007 to 6.6% in 2017. It has also led to a mass exodus of tech company jobs from China to other Asian countries, such as Vietnam. For instance, Samsung completely stopped manufacturing phones in China, instead producing them in India and Vietnam, creating 200,000 jobs in Vietnam alone and likely removing a similar number in China.

Consequently, there is little doubt over the short-term impact of Trump’s directives, however, the question remains: what will be their long-term ramifications?