Understand China’s Pursuit in Emerging Technologies

BSN LONG STORY SHORT SERIES #5

This latest episode of BSN’s Long Story Short series invites Winston Ma, chairman of the advisory board at Threefold and author of “The Digital War: How China’s Tech Power Shapes the Future of AI, Blockchain, and Cyberspace” and Paul Schulte, founder of Schulte Research and author of “The Digital Transformation of Property in China”, to join Red Date CEO Yifan He to discuss China’s pursuits with regards to emerging technologies — not limited to blockchain — and how they play differently to the U.S.

The evolution of tech policies in China

Today, China’s tech policies are at the front and center of its economic model. As explained by Winston Ma, however, this is a new phenomenon which began at the start of President Xi’s term, whereby the newly coined term, “information consumption”, became paramount in steering the country away from an import/export-driven model into a consumption and innovation driven one.

This change in direction resulted in the spread of smartphones, internet connectivity, mobile payments, and a rise in online user traffic which culminated in China’s now powerful data infrastructure which brings us to the present. “All of the data from the initial mobile internet economy will become this precious oil for the future digital economy built upon AI, blockchain, cloud, and more digital technologies,” says Ma.

Yifan He pinpoints the perceived value of technology in China beginning only after the country’s 1978 modern reform. “China was far behind other countries. The country’s place on the world tech stage was in its competency building applications, which is something the U.S. liked,” he says. “My understanding of how the U.S. saw it was ‘We’ll do all of the research, hold all the IP, and China will build applications for us. They’ll capture the least value and we’ll capture the most.’ The iPhone is a great example of this; What kind of profit can China make from it even today? Probably only 1% of the value. The value China captures is no longer acceptable.”

With China’s focus on fundamental research hitting an all-time high, He believes the U.S. is now feeling the pressure. “They are not only building applications for us but are trying to compete in underlying research, which is why they’ve become a lot more defensive. The U.S. isn’t comfortable with the strength of China’s technological development and that’s how I believe this whole thing started.”

Are China’s tech strategies succeeding and what areas do they perform well in?

China’s strategy, as Ma puts it, can be summarised in two terms, “major vision” and “government funding.” The Chinese saying, “Aggregate national resources to focus on major tasks” is the Chinese strategy overall. “In some areas, this is quite successful. In the last few years we’ve seen China putting resources into AI research and related industries and there are a good number of AI startups that have emerged which can compete with those in the U.S.,” says Ma. However, some areas may be less successful, such as the dedicated investment fund for semiconductor R&D set up by the Chinese central government. There has been some progress made in chip design but still work ahead given the complex global supply chain.

What China really wants from technology, according to He, is to generate the most value from its technology output, and in order to do that, it needs to act now. “All technology starts from research, theories, and prototyping; these components feed into a final product,” He explains. “China needs to look 50 to 100 years into the future and move backwards from a final product to the R&D required now so we can avoid being a source of labor for Western countries.”

According to Paul Schulte, China has taken to adopting the public-private partnerships as the U.S. had done from the Reagan administration onwards which lasted throughout the 1990s. “The CIA’s In-Q-Tel private equity funded Google and many of the top people at Intel were from the CIA. These facts are indisputable,” he says.

Geopolitics: How does China’s strategy compare to the U.S. policy in tech?

Schulte’s forward from his latest book, written by David Lee, states that China’s recent rise to prominence in the technological space was due to its emergence from civil war and colonial occupation. “David’s warning to the U.S. is basically not to get involved in a civil war because when you do, you miss out on technological revolutions,” says Schulte. “China missed the first, second, and third technological revolutions. The second and third were clearly due to civil war and unrest and now the U.S. is embroiled in its own, low-grade, civil war. When you get involved in domestic turmoil, you can miss out. Right now, China has a lot of great technology and terrible soft power whereas the U.S. has great soft power and is behind in technology. So now we’re seeing these two, an immovable force and an irresistible object, coming at each other.”

From the time of the Trump administration, the U.S. mostly focussed on the “defensive” without thinking about its own innovation strategy, according to Ma. “Most of the focus was to tighten up national security law review for cross-border investments from China capital,” he says. “We’re just starting to see a focus on R&D in the U.S. tech space from the Biden administration now but frankly, it’s still far from what’s being done in China.

In terms of blockchain technology, in 2019, President Xi made a statement that blockchain is critical tech and called for Chinese industries to grasp the opportunity to become a global leader in this space. This marked the first time a major global economy endorsed blockchain, which was a much-hyped but yet unproven technology. “Most Western leadership is conservative about blockchain. We’ve not seen much effort on this technology compared to what China is doing so it’s just a different level of focus on the future digital economy,” continues Ma.

What is the view of the Biden administration on technology policy in the U.S. in relation to China?

Ma explains that at the time of the Trump-Biden transition, people expected that Biden would remove all of the policies placed against China and terminate executive orders that President Trump implemented. However, that did not occur. “I think that’s because, within the U.S, there has been this consensus that China and the U.S. are in a tech war or at least, in some fierce competition. So what we see is the two innovation centers becoming increasingly similar, which is really interesting,” he says. “What we’re seeing today is these [countries] at the same starting line to compete for the same technology leadership in AI, blockchain, cloud, and more…the Biden administration will not easily transition away from the Trump administration; instead, it will accelerate the efforts within the US to compete with China.”

He’s perspective is that it’s impossible for the U.S. to change their outlook on China’s position in the technology space but this works in the latter’s favor. The pressure to establish self-reliance through tech innovation today will set the groundwork for China to flourish over the course of the next century. “The Chinese government is trying to move into underlying technology, not just the building of applications. There are two strategies here: One looks at existing technology and the other on new technology where everyone is at the same starting line” says He. “I think that’s why China chose blockchain as one of the national strategies because everyone is at the same starting point. China has moved forward quickly within blockchain technology; while cryptocurrencies are illegal in China, the government has an understanding of the value behind blockchain’s underlying technology and what it can do besides that. Whatever new technology emerges over the next ten years, China will be paying attention to it.”

A point of emphasis He makes is that on a fundamental level, China and the U.S. do things differently due to their social structures and governments. The U.S. remains at the forefront of technology and while its public policy is one thing, the American private sector and its universities specialising in technology are still the best in the world. However, the market orientated nature of the U.S. as a whole means that if revenue or profit is not made from new technology, things can’t move forward. An example of this can be found in IBM and Microsoft having shut down its blockchain teams. “That’s like shutting down the internet in 1995 because it didn’t make any money,” says He. “In China, because of partnerships between the government, SOE, and the private sector, the technology market is not 100% profit orientated, which means if policy states it is an area of interest, we can still invest and push forward to develop a product.”

What are the implications of current tech policies on the future?

For Schulte, the next phase is proptech, which he sees China becoming an expert in over the next year. There are two areas of cooperation between the U.S. and China which he sees as powerful: “Look at JP Morgan and Blackrock; the largest fund manager and the largest bank in the U.S. are jumping into China with both feet. Wall Street is not going to decouple from China even if Washington D.C. does and that’s the kind of thing that’s always been done with adversaries,” he says.

From Ma’s perspective, the technology war between the U.S. and China is accelerating and and as a result, there will indeed be a decoupling in many areas. “TikTok needs to be handled by the U.S. and Tesla’s data collected by the cars in China needs to be stored in China,” he explains. “Here in the blockchain world, there is some hope that maybe there will be another version of the internet to continue global connectivity. I think there would be at least one area China and the U.S. are looking at eye to eye and that’s big technology regulations. Big technology companies are becoming so big, profitable, and powerful that they almost become a challenge to the overall innovation in these economies. This is one area that China and the U.S. can collaborate on.”

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