A reality check for China's tech-fueled new economy
New analysis shows companies in sectors such as artificial intelligence and semiconductors are slowing down
As China battles a trade war-fuelled economic slowdown, one of its main growth engines – the “new economy” – is stalling.
The “new economy” has never been officially defined, but is a concept loosely applied to a wide range of industries from artificial intelligence and advanced manufacturing, to fintech and web-based tourism.
Beijing had hoped these would propel China from a traditional economy powered by unsustainable infrastructure investment and low-end manufacturing to a modern services-based economy, but new research suggests that this is not happening.
Compared to 2014, the share of Chinese companies concentrated in the new economy has fallen. Those companies that are in the new economy, meanwhile, have suffered worsening financial health since 2017, according to an analysis of more than 3,000 Chinese listed companies by French bank Natixis.
The economists discovered plummeting revenues and investment among new economy players, a trend which will worry Beijing as the wider economy continues to creak.
According to the study, companies in the old economy often suffer from overcapacity and inefficiency, particularly in the infrastructure, materials and real estate industries that powered China’s high-speed growth over recent decades.
However, new economy sectors, such as health care, renewable energy and semiconductors, are plagued by problems of their own, the analysis found.
“Unlike the old economy, the key problem of the new sectors is not really excessive leverage but falling revenue, a compressed profit margin and a lower return on capital,” said Natixis economists Alicia Garcia Herrero and Gary Ng.
For firms in the new economy, operating income growth went from 25% in 2017 to minus 8% in the first half of 2019 – even worse than old industrial producers, which have been suffering from weak factory gate prices this year. This drop has eroded new economy companies’ profits, as well as their abilities to repay debt and increase investment.
The idea of the new economy was officially raised by Chinese Premier Li Keqiang in 2016, referring to new types of businesses empowered by the internet, from online shopping to shared bikes. The concept also came in the context of declining productivity and a shrinking labor force, requiring a transition from a labor intensive economy to one reliant on innovation.
However, the stalling growth in the new economy correlates with findings from an index endorsed by Li to measure the sector back in 2016. The Caixin-BBD new economy index shows that the new economy’s share of overall investment in China shrank from 31% at the beginning of 2017 to 29% last month.
The weighted index measures inputs from high-end labor, capital, and technology, and draws from a wide pool of data, including recruitment websites, stock markets, and government agencies.
It has 10 industrial categories, from high-end equipment manufacturing to culture, sports and entertainment. These types of industry are also more likely to win policy support from the government.
But since 2017, the index shows, overall investment in labor – measured by hi-tech employees’ average incomes and new economy job vacancies versus the rest of the economy – has been steadily dropping.
While capital investment rose this year, inputs from research and development in technology have fallen for six of the 11 months in 2019 for which data is available.
“The sparkle in China’s new economy seems to be dimming measured by the stagnant relative size and the worsening corporate financial health,” Natixis said in its report.
“Although leverage is not a problem, lower revenue and return on capital are weighing down the financial health. Together with the broader picture of slower consumption and household income, this raises questions to China’s ability to solely rely on new sectors in the grand economic transition.”