Slaughter & Rees Report: What So Many Miss about China

Entrepreneurs represent a vibrant and powerful force with great potential to reshape the Chinese economy.

Say the phrase, “Chinese economy,” and in our home country of the United States—and many others—the rejoinders will be the usual suspects of large-scale, macroeconomic considerations.

State-owned enterprises. Currency manipulation. Trade deficits. Yes, these matters all remain important parts of the Chinese picture (despite the persistent, widespread misunderstanding of them, as we have written about, such as here). But what so many miss about China is one of its most inspiring and powerful forces: its hotbed of entrepreneurship.

There are about 200 Tuck alumni living and/or working in Beijing, Shanghai, and Hong Kong. The most invigorating feature of Dean Matt’s visit to these three cities was how many Tuck alumni have recently started or joined a new-business venture. Many of these entrepreneurs left Tuck at graduation with a large global technology company but before too long found themselves drawn to something newer and/or smaller in China—a move that for Chinese nationals often has entailed a move back to China as well.

One is CEO of an entertainment venture recently listed on the Shanghai stock exchange. Another is CEO of a company providing key materials to the C919, the China-built commercial airplane that flawlessly flew its maiden voyage earlier this month. Still another founded a social-media site focused on restaurant reviews and related food experiences for expatriates. And a husband-and-wife team founded a company producing and distributing air-purifying equipment, which in Beijing and other heavily polluted cities is a must for virtually everyone. The energy and passion among these Tuck entrepreneurs is both palpable and inspiring.

More broadly, entrepreneurs like these represent a powerful force with great potential to reshape the Chinese economy. Since its open-door policy reforms began in 1978, China accelerated its rate of economic growth largely through massive capital investment oriented toward expanding its export of goods for consumption around the world. This path of economic development has largely stalled out, however, for a set of interrelated economic and policy reasons. For example, one recent study by a team at the Federal Reserve Bank of New York documented that China’s share of U.S. non-oil imports climbed from just 2 percent in 1990 to 17 percent in 2010—but has since then flattened at about that level.

President Xi Jinping and other key leaders in China recognize that future Chinese growth will need to rely more on goods and services produced for consumption by Chinese households—and that entrepreneurs can help lead China to this future. In a high-profile speech to the National People’s Congress in 2015, Premier Li Keqiang exhorted China to support “mass entrepreneurship and innovation” and placed entrepreneurship at the center of the country’s latest development strategy. One analysis of this speech noted that in it, Premier Li spoke the words “innovation” and “entrepreneurship” 59 and 22 times, respectively.

The global success, reach, and potential of Chinese entrepreneurs is perhaps most visible in its three leading technology companies: Alibaba, Baidu, and Tencent. All are young. For example, NASDAQ-listed Baidu was founded just 17 years ago, in 2000. Today its search engine commands over 50 percent of all searches in China and a much larger share of China’s search revenues.

Alibaba founder Jack Ma is among the world’s most revered entrepreneurs, a former English teacher who started the online retailer out of his apartment in 1999. He is also among the world’s wealthiest entrepreneurs. Alibaba’s 2014 initial public offering that raised about $22 billion and that valued the entire company at about $168 billion was the largest IPO in U.S. history—larger than the total amount raised in the IPOs of Google, Facebook, and Twitter combined. Last year Mr. Ma stated that he expects Alibaba to reach $900 billion in transaction volumes by 2020.

Alibaba and Tencent together have a market capitalization of over $500 billion. In March, Tencent became the most valuable emerging-markets company on the planet. The company’s apps span entertainment, gaming, and social media. Its best-known app, WeChat, combines an ever-widening span of services from messaging to mobile payments—and it is used every day by, as of last fall, an estimated, mind-boggling, 768 million people. Even Dean Matt has added to that total by installing it on his mobile phone, enabling him to join multiple Tuck WeChat chat groups.

China’s fusion of technologies for cashless mobile payments exemplifies where the country is increasingly the world’s most innovative. Last week Tencent reported that its WeChat Pay now has over 600 million active users each month. Its rival platform, Alipay, is even used by beggars for collecting alms. The company iResearch estimates that 2016 mobile payments in China totaled $5.5 trillion—a staggering 50 times the similar total in the United States. Without the legacy of America’s financial instruments—like savings accounts, checking accounts, and credit and debit cards—China has been able to leapfrog so many people from cash transactions all the way to mobile payments. Spend 10 minutes in a Shanghai Starbucks and you can watch customer after customer pay with the simple swipe of a mobile phone.

Yes, macroeconomic issues like trade deficits continue to dominate news about the Chinese economy today. But don’t be fooled by what these headlines miss: the vibrant entrepreneurship that will shape so much of the Chinese—and global—economy tomorrow.