Chinese Tech Market 'Cooling Down'

 

Even as it galloped to a strong position among the world’s largest economies in the past decade, China has spent massively on technology. Today, the country has a GDP (Gross Domestic Product) estimated by the World Bank at $14 trillion, and is one of the world’s leaders in tech. What many may not be aware of, however, is the unpredictable nature of the tech business in China. Now, due to slowing government investments and the Trade War with the US, China’s tech industry is threatened.

 

 

 

Signs have been emerging of a cooldown in China over the last several years. The relentless pace of GDP growth, which China has kept up for more than two decades, has slowed. The tech sector, which has contributed significantly to the Chinese growth story, is feeling the impact.

 

According to the New York Times, the slowdown that was visible in idled factories and out of work blue collar workers has spread to areas like tech. Even white collar workers are experiencing smaller paychecks and job cuts.

 

 

 

One of the iconic signs of China’s tech success has been the emergence of Chinese “unicorn” startups. Unicorns are tech companies with a valuation of $1 billion or more in US dollar terms. 

 

The US long held the leadership in the quantity of these unicorns. However, according to the South China Morning Post, China, with over 160 unicorns, now surpasses the US count of around 130.

 

 

The rise of China’s tech industry has not been an entirely market-driven phenomena. In a slowing economy, however, funding sources for startups are harder to access than before. With the government being a significant backer of China’s tech endeavors, private players might not be available to pick up the slack if the economy continues to cool.

 

 

 

Chinese government support for the country’s tech sector comes in multiple forms. The Diplomat, for example, identifies the Chinese government’s hand in the market through the creation of a “Digital Silk Road” and promotion of “digital Leninism.” 

 

As The Diplomat explains, the government has identified areas like cyberspace and digital technology as strategically important. As a result, tech firms in China are given special treatment and incentives, including financial support, in order to further national goals as set by the government.

 

At the same time, the Chinese government continues to prefer an authoritarian approach to managing digital tools. This ensures government control over access to information and how Chinese citizens express themselves in cyberspace.

 

 

 

Besides financial support, the Chinese government has jumped on the band wagon of incubating technology startups. In this area, too, the government has played a decisive role. 

 

According to a report from the South China Morning Post, over 80,000 companies receive services from government incubators. Meanwhile, the country has over 1,500 incubators and continues to support high-tech startups under a 27-year old initiative known as the Torch Programme.

 

 

 

While China’s government has provided numerous advantages to home-grown tech companies, technology is a global business. Many Chinese businesses, including tech startups, have thrived due to investments by investors in the West. 

 

According to Reuters, US venture capitalists poured $19 billion into Chinese startups over the course of 2018. This international funding for Chinese tech innovation is now threatened by the Trade War between the US and China. 

 

 

 

The Trade War between the US and China has seen tit-for-tat moves ranging from tariffs to technology limitations. As explained by the Lawfare Blog, the Trade War has seen both nations slapping bilateral tariffs on each other’s products.

 

In addition, US President Donald Trump has targeted Chinese firms as measures to curtail the Chinese influence in technology. For example, Chinese firm ZTE came under restrictions against selling its technology products in the US. 

 

Meanwhile, another Chinese tech leader, Huawei, was added onto the export control blacklist. This means US companies are limited from selling technology to this entity and require approval to engage in certain forms of commerce with it. 

 

 

China Digging In For The Long Haul  

 

China’s growing capabilities in the tech sector might face challenges from the slowdown and the Trade War, but the Chinese are digging in. As explained by The Guardian, Chinese attempts to bypass the US include the launching of a new technology stock exchange. 

 

The Star index, styled after America’s NASDAQ (National Association of Securities Dealers Automated Quotations), will allow Chinese investors a special market to back large Chinese tech companies. It also allows Chinese tech startups to pursue IPOs much like their Western competitors. 

 

In addition, the new market envisions a lowerinf of restrictions on trading, with looser limits for how high the markets can rise or fall in a day. This is a departure from other Chinese equity markets that have heavy government control.

 

 

 

China’s slowing tech market and the Trade War around it has had an effect not just on Chinese tech companies, but beyond China’s borders as well. Among those hit include some US retailers that rely on Chinese products as well as tech companies that are tightly integrated with the Chinese ecosystem.

 

 

US retailers that have relied on sourcing some of their products from the Chinese market face problems navigating the uncertain environment. Big retailers like Walmart, Macy’s, and Target are some of those affected, according to CNN. 

 

The report from CNN indicated that Walmart sources about 26% of its goods from China. However, new US tariffs of 25% on Chinese goods mean that retailers have to raise prices or take a financial hit. 

 

Other retailers, such as Dick’s Sporting Goods, have exposure to Chinese imports as high as 50% or more of their total inventory.

 

 

 

Among the US tech players hit by the Trade War with China include chipmakers like Broadcom and Micron Technology. As reported in the New York Times, these big chipmakers relied on Huawei, the Chinese tech company, as a major customer. 

 

The limitations on trade with Huawei and other Chinese entities has eaten away a big chunk of their revenue. Even smaller companies not listed directly in the ban have cut back due to the perceived risks of sourcing from the US. 

 

 

 

Economic challenges facing the Chinese tech market indicate tough times ahead, not just for the Chinese, but other businesses as well. The reasons for the cooldown in Chinese tech can be traced back to the slowdown of the Chinese economy. 

 

Tech, a sector long immune to these challenges, faces headwinds from a growing Trade War between the US and China as well. 

 

As China’s tech sector retreats from the West, however, the loss of trade is creating other problems back in the West. Tech companies and retailers are among those facing increased difficulties.