How does China promote the development of the digital economy?

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China is on a path to strike a balance between strict regulation and stimulating innovation. The digital economy is seen as a key factor in escaping economic stagnation, creating investment opportunities and dynamic growth.

China’s digital economy has become one of the dominant economic forces after years of exponential growth. As a result, China has made the digital economy a key part of its national development strategy and has developed a detailed roadmap and incentives to strengthen the sector. In addition, the country is also seeking to guide the healthy development of the digital economy through a series of regulatory efforts.

An Overview of China's Digital Economy

The digital economy is an economy that operates primarily on digital technology, especially electronic transactions conducted via the Internet. The digital economy is understood as all economic activities based on digital platforms and digital economic development is the use of digital technology and data to create new business cooperation models.

Technologies supporting the development of the digital economy mainly include big data, cloud computing, Internet of Things (IoT), blockchain, artificial intelligence (AI) and 5G mobile networks, etc.

According to a white paper released by the China Academy of Information and Communications Technology (CAICT), China's digital economy reached $7.1 trillion in 2021, ranking second after the United States. Statistics also showed that the share of the digital economy in the country's GDP, measured by the combined value of integrated technology products and digital inputs, reached 39.8% in 2021, up from 20.9% in 2012.

The rapid growth of China's digital economy is accompanied by the expansion of digital infrastructure construction. Accordingly, China has policies to promote the rapid development of 5G technology. By the end of 2022, the country had a total of 2.31 million 5G base stations and more than 1 billion 5G users.

China is also considered to have one of the largest and most advanced network infrastructures in the world. In addition, the country has also promoted the integration of big data, cloud computing and artificial intelligence. By 2025, China is expected to account for nearly 30% of the world's total data volume with a wide variety of data types.

According to the International Data Corporation (IDC), at least 80% of new business applications in China by 2025 will use AI technologies. The Chinese government's direction is to focus on digital technology areas that require moderate technology such as e-commerce, then move towards developing more difficult digital technology areas such as AI and robotics. China is investing billions of dollars to support AI developers, including a $2 billion AI development park in Beijing. IDC predicts that about 51.3% of China's GDP by 2030 will be related to digital trends as Chinese enterprises accelerate the digitization of business operations.

What has China done to develop the digital economy?

China has made the digital economy a key part of its national development strategy. The 14th Five-Year Plan for Digital Economy Development has laid out a detailed roadmap and incentives to strengthen the sector. Under the plan, China will enhance its capabilities in strategic areas such as sensors, quantum information, communications, integrated circuits and blockchain, as well as promote research and development of next-generation technologies such as 6G. The plan will also facilitate the digital transformation of supply chains to better utilize data resources and improve governance of the country’s digital economy.

China’s 14th Five-Year Plan for Digital Economy Development also adopted a target of increasing the output of core industries in the digital economy to 10% of the country’s GDP by 2025, up from 7.8% in 2020. This figure refers specifically to the direct value added of communications, software, and information technology services. Other targets include increasing the connection rate of Chinese industrial enterprises to the “industrial internet platform” to 45% and increasing the number of Chinese households connected to broadband with speeds of at least 1 gigabyte per second to 60 million by 2025.

In addition to issuing the 14th Five-Year Plan for Digital Economy Development, the Chinese Government has also issued many policies and initiatives to promote the vigorous development of the digital sector, specifically:

* In January 2022, the People's Bank of China (PBOC) released the Financial Technology Development Plan for 2022-2025, aiming to promote digital transformation in the financial sector over the next four years.

This is the second fintech development plan released by the PBOC following the 2019-2021 fintech development plan released in 2019. The plan outlines fintech expansion opportunities, the government's key regulatory goals, and China's ambitions for advanced fintech applications and the comprehensive development of the country's fintech sector.

* In February 2022, China announced a plan called “Eastern Data, Western Computing”. The plan aims to expand the scope of data centers to improve China's data processing, storage and computing capabilities.

Accordingly, the plan will consider building eight computing centers and 10 data center clusters in key areas in the east and west of China, with the ultimate goal of transferring data from China's densely populated and economically developed regions to the resource-rich and sparsely populated western regions. Through this, China hopes to address the imbalance in supply and demand for computing power, create greener and more energy-efficient data centers, and enhance the country's overall computing power to support the country's digital transformation and technological development.

* In July 2022, the Cyberspace Administration of China (CAC) released a document titled “Security Assessment Measures,” which details security assessment requirements for cross-border data transfers by companies.

The document outlines specific requirements, steps and procedures for companies to conduct security assessments to transfer personal data or information overseas, a mandatory requirement for companies that process large volumes of data from Chinese users or have data classified as critical or sensitive.

These new assessment measures are based on three laws related to data and information protection: the Cyber ​​Security Law (CSL), which came into effect on June 1, 2017; the Data Security Law (DSL), which came into effect on September 1, 2021; and the Personal Information Protection Law (PIPL), which was recently passed and will come into effect on November 1, 2021. The security assessment measures will aim to standardize data export from China, protect personal information, and safeguard national security and public interests.

What are China's efforts to regulate the digital economy?

China’s 14th Five-Year Plan for Digital Economy Development emphasizes the importance of strengthening cybersecurity and data security, in line with China’s data management efforts from 2021. To manage the dynamic but nascent sector, especially the economy in which economic and social activities take place on digital platforms, also known as the Platform Economy, China has implemented a series of regulatory measures, addressing issues such as data abuse and market monopolies to create a fair and innovative market.

* In February 2021, China's State Administration for Market Regulation (SAMR) announced new anti-monopoly principles to curb monopolistic practices by giant internet platforms and strengthen supervision of e-commerce markets. The rules are aimed at promoting fair competition and protecting consumers.

* In September 2021, the Data Security Law came into effect as a new pillar in China's legal framework for information security and data privacy protection. The law focuses on data localization, data export, and data protection requirements.

* Effective from November 1, 2021, the Personal Information Protection Law, together with the Cybersecurity Law and the Data Security Law, further strengthens the legal framework for personal information security and protection.

* In January 2022, the Cyberspace Administration of China released the revised Administrative Provisions on Mobile Internet Application Information Services, which underscores China's commitment to regulating mobile application privacy and security.

Facing economic headwinds in 2022, the Chinese government expects tech giants to play a bigger role in helping the country maintain its growth momentum. On the other hand, the government will continue to strengthen supervision and law enforcement in key areas, including the platform economy, technological innovation, and information security in the coming years.

The Role of Digital Yuan in Developing China's Digital Economy

The rollout of China’s digital currency, or digital yuan, is the government’s first attempt at a cash-substitute payment mechanism, or digital payment. The rollout of digital yuan in China will strengthen the infrastructure for the long-term development of the country’s digital economy and have a profound impact on business operations.

Online payments or mobile payments, which help reduce transaction costs and improve the efficiency of the financial system, are not a new concept to the Chinese people, as the country has rapidly developed “super apps” such as Tencent’s WeChat and Alibaba’s Alipay.

According to a recent survey by the People's Bank of China, 66% of domestic transactions are conducted via mobile phones, with cash accounting for 23% and bank cards only 7%. China is seen as a country that is promoting the development of mobile payments faster than any other country in the world.

Although large technology companies have completed the initial development stage of the digital ecosystem and digitized individual payments, consumers can only make online payments on platforms owned by the parent company of the respective payment platform or other specific channels supported by the digital payment platform.

Due to competition between different payment platforms and no single digital payment method that can support all scenarios including super apps. The digital yuan has the same legal status as the physical yuan and provides people with a universal payment tool that can be used in all commercial situations.

On the other hand, in some situations, payments between enterprises and government agencies need to rely on bank accounts to ensure security and stability. As a state-endorsed currency issued by the central bank, the digital yuan can be smoothly applied in all public payment situations, which can break the limitations of the digital economy.

Since its launch in 2020, digital yuan pilot projects have been expanded to 23 regions across 15 provinces nationwide. 2022 marked a major step forward for the digital yuan when the beta test version of the digital yuan app was officially launched for iOS and Android operating systems on app stores in China.

This is the first time the app has been made publicly available for anyone to download and use in any of the cities where the trial is taking place. The emergence of a digital yuan ecosystem will likely happen gradually as technology develops and the digital economy permeates every aspect of life.

China strengthens international cooperation in digital technology

China has actively sought cooperation with the international community to promote digital trade and governance.

Last November, China applied to join the Digital Economy Partnership Agreement (DEPA), a new type of trade partnership agreement signed by Chile, New Zealand and Singapore to promote digital trade. The agreement is in line with China’s direction of deepening domestic reforms and further opening up to enhance digital economic cooperation with other countries.

On the other hand, the country is also actively sharing its digital know-how by providing technology, equipment and services to less developed countries. Chinese companies have been involved in several submarine cable projects connecting Africa and Eurasia. According to official data, a total of more than 200,000 km of fiber optic cables have been laid, bringing broadband internet access to 6 million households in Africa. More than half of Africa’s mobile base stations and high-speed mobile broadband networks have been built by Chinese companies.

The digital economy is not only reshaping the Chinese economy, but also creating business opportunities for foreign companies. China's vast domestic market provides powerful economies of scale that enable rapid commercialization of digital technologies. Accounting for more than 40% of global transaction value, China is the world's largest e-commerce market.

Today, almost every aspect of human life is inseparable from digital technology, including education, healthcare, information services, entertainment, finance and e-commerce. This solid foundation has enabled the expansion of services offered to consumers and accelerated commercialization of new products. Foreign companies can explore new and innovative services to integrate into China's existing digital ecosystem.