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The BID

How China became
a technology superpower

Esta semana com a Rui Zhaco, gestor de portfólio de ações chinesas da BlackRock

De empresas como Alibaba e Tecent à inteligência artificial e ao desenvolvimento da tecnologia 5G, a China se tornou um dos centros tecnológicos mais vibrantes do mundo. O mais surpreendente é que isso tudo é muito recente. Em 2010, apenas um terço da população chinesa usava a internet, ante 71% nos EUA.

Como a China se tornou essa superpotência tecnológica e qual será o resultado dessa corrida? Neste episódio de “The BID”, Rui Zhao, gestor de portfólio de ações chinesas, discute as forças por trás do domínio tecnológico da China e por que a corrida tecnológica talvez não precise de um vencedor.

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    Oscar Pulido: It’s no secret that there is a race for technology dominance. The speed of adoption in digital technologies in China has caught the world by surprise. From superpowers like Alibaba and Tencent to artificial intelligence, to the development of 5G technology, China has become one of the most vibrant hubs for technology in the world.

    Surprisingly, it’s all pretty recent. In 2010, a little over one-third of China’s population was using the internet. And most of that was desktop based. In the U.S., it was 71 percent. So how did China become this superpower, and how will the race move forward from here?

    On this episode of The BID, we’ll speak to Rui Zhao, Portfolio Manager for Chinese equities within BlackRock’s Systematic Active Equity Group. We’ll talk about how China grew into the superpower it is today, what makes Chinese technology different and where she sees opportunities for investors. I’m your host, Oscar Pulido. We hope you enjoy.

    Rui, thank you so much for joining us today on The BID.

    Rui Zhao: Thank you so much for having me here.

    Oscar Pulido: Let’s start at the beginning: where was China five or ten years ago in terms of technology and how did it become the superpower it is today?

    Rui Zhao: China has completely evolved to a very different country as of today. And ten years ago, we don’t have much big data or machine learning going on in China, but fast forward to today, those are very widely available and very prominent in China. I would say the transition really started in 2003 after China added itself into the WTO. The whole stock market only started in 1993 and in that year, it only was six companies. And the whole purpose for the stock market is not anywhere for people to invest, it’s more about helping the SOEs, State-Owned Enterprise, to divest their shares. And the stock market really becomes investible to normal people after China entered WTO. So the number of private companies in China, growing rapidly, and also the size of those companies, also grow rapidly. A lot of the GDP growth which is generating wealth and cash flow are not cash flow generated by the publicly listed companies, rather they were generated by private companies or companies owned by the government. That’s why they can direct the usage of the cash flow generated to long term investment. The government has been directing all those cash flows to invest in future infrastructure projects, or in technology upgrade. And also in venture capital companies that help to fund a lot of the initiatives in the technology development. I think that is also part of the reason we have seen such a fast growth in China’s technology sector. But also I have been thinking about this question myself a lot as well, so I think in China, the education component really played a key role in this fast catch-up process. Back for myself when I go through my school process, we were always told math, physics, and chemistry are the key things we need to learn and I think for my generation everyone has learned a lot of hard science but very little of the liberal arts. So it’s pretty narrow knowledge but it’s really helping us to take advantage of the engineer component.

    Oscar Pulido: The government plays a role in this as well. My understanding is that President Xi’s Made in China 2025 Initiative seeks to transform China into a leader in new technologies. So how does this support actually play out?

    Rui Zhao: Yes. You’re absolutely right. The government has been a key component in driving the technology upgrade in China. The Chinese government usually set a five year plan and revisit it every year so they have expressed a key focus on the technology upgrade and recently, called five years ago, the big data usage in the whole economy. I think in the long run, the government really recognized that big data and technology can increase the speed of catching up and can increase speed of economic growth as well as stability in the society. The Made in China 2025 has been widely quoted among the media and it’s caught a lot of peoples’ focus, this time I think it’s part of the trigger for the U.S./China tension so that is why it has become a very widely quoted concept. But really when you look back in China’s history, they always have a five year plan going on, and they also have a couple times this 30 year discussion. But for 2025, the government wants to upgrade the technology platform in China, not only on the AI and machine learning, and they really want to apply technology in normal peoples’ daily lives to increase the whole productivity of the society.

    Oscar Pulido: Rui, what are some of the advantages that the leaders in China have when helping with this investment in technology that perhaps leaders in the U.S. and Europe don’t have, in your opinion?

    Rui Zhao: I think in China we all recognize it’s a one party dominated system, so I think there is nothing wrong to say that out loud. That is really give the country or the government advantage to implement. So when they committed to anything or when they decide any change they want to make, they can really implement it quite efficiently. The downside is usually lacking very thoughtful discussion and deep understanding about the impact on the environment and society. But in terms of getting things done, they do have the advantage of that. And also I think the party system have a very detailed focus that is on stability. So I think the whole government agreed on the main agenda is to focus on stability, and to deliver stability, they need to deliver growth so that the public can enjoy some of the growth and improvement in daily life, and also at the same time, the employment has been a key focus of the government. So I think China has been enjoying high growth historically but the most of that agenda is really to deliver or maintain stability over the long run.

    Oscar Pulido: Let’s talk about the consumer base in China. For example, in the U.S. when I think about technology, there is a hesitancy to share personal information with tech platforms or there is worries about privacy, but in China it seems like the opposite. I just heard that at major airports in China for example, you can walk up to a kiosk that scans your face and gives you all of your boarding information: is that true?

    Rui Zhao: Yeah. I also heard about that, but I haven’t tried it myself, but I will not be surprised this is happening in China or is going to be widely available in China in the near future. I think you are right, maybe part of the culture or maybe part of the past experience of history, Chinese people are less concerned about their privacy. They are really more concerned about the growth for their wealth. So that is why they are willing to share their information in order to maybe grab a better opportunity or at least try to grab a better opportunity or try something new. But I think the next generation things might change. I already seen some dramatic difference over the current generation and the young generation, the millennials. So I think things can evolve, but it just happens to be in the past few generations people focus more on the growth and wealth perspective rather than other parts.

    Oscar Pulido: That’s interesting, people are less worried about privacy and it sounds like they’re more focused on economic advancement. And that makes me wonder, the idea of a super-app where you can do everything all in one experience — it’s not something that you typically see in the U.S. but for example, WeChat is a good example of this where you can message a friend saying you‘re on the way to dinner, you can order a car, you can play a game on your ride to the restaurant, you can order your food before you get to the restaurant; there are a number of things you can do all within a single app. Do you see this being replicated outside of China, and what do you think are some of the advantages and disadvantages of any app like this?

    Rui Zhao: Yes, I think it really helps people to manage their daily life in a higher efficient way. And I personally enjoyed it a little bit when I was traveling in China. You can use WeChat to handle everything. I think in China it’s probably the first place, this type of super-app started, especially WeChat. But I think slowly we have seen some major companies in the U.S. starting to try out and expand out of their normal business lines, and to give user a better experience to try to do things together. For example Amazon started as an online company and now they are consolidating online and offline with Whole Foods; and Apple expanded into ApplePay which is an online transaction system. So I think in the U.S., we are seeing some of the new apps or new companies being tested out but in China there was an advantage that a lot of the companies started with the same idea and each of them can go out and find a lot of the users because of the huge population. That’s usually what happens in China, it’s not just a one company coming to play. And also there are pretty decent amount of the venture capital funding available in China, either backed by the government or by large existing companies, and they have helped to fund all those trials. So that is why we have been seeing in China a lot of new ideas being tested, and on the other side, as we mentioned earlier, in China the consumers are less concerned about their privacy. They are quite excited to try out some new apps either to have a better experience or just to increase their day to day efficiency. So they are very open-minded to try those things which also help those super-apps to grow.

    Oscar Pulido: Do you think that Tencent which owns WeChat and Alibaba and perhaps others, would they have been as successful if they weren’t trying to launch their businesses in China? Or do you think they’ll have equal success abroad?

    Rui Zhao: That’s a great question. Honestly, I think Tencent can only exist in China. And also, I think they take advantage of China being semi closed on the economy and market. One big advantage that they had was Google was not available in China. So I think if it’s in the U.S., Google will probably become a dominant player in the whole market, however, while they are not in a hurry to enter the other fields, like banking, like investing, or for food delivery, for example. So they are really taking it slowly and more carefully plan their business trajectory, versus in China, a lot of things are moving super-fast.

    Oscar Pulido: So it’s interesting now you’re comparing and contrasting Chinese companies versus non-Chinese companies and what each other do well. So in what way do you see China learning from some of these other global players—you mentioned Google for example—and what way do you see China setting the bar for some of these global companies?

    Rui Zhao: I think in China, it’s only been 15 years in this decent high growth regime, so they have a lot to learn. The U.S. is a very mature market and developed market, and there are a lot of the cutting-edge technique available here. But I think on the other side, China is really good at executing. So when they have the idea, when they see the opportunity, they tend to move very fast and also because of the competition in the industry, usually there will be multiple companies to start, so they tend to have really push to move faster compared to the U.S. peers. And also the government did help the companies by supporting this technology upgrade, and also big data availability agenda. So the data has really become more available in China compared to the U.S. For example, in the U.S., I think a lot of companies who try to use data will be varied about the legal consequence, versus in China, consumers are less concerned about the privacy. So those type of data tend to be more easily available.

    Oscar Pulido: You mentioned the competition going on between companies in the U.S. and China. I want to talk more about the race for technology dominance between these two countries. We’ve heard so much about this in the headlines: what started the race and where do we stand today?

    Rui Zhao: When China stared to upgrade into the higher tech of industry on the sector of the economy, some of the competition naturally happened. And the way I think about China 20 years ago is mainly being labeled as a big industry of manufacturer and assembly. Versus today, they are entering this higher value added sub-industry sector of the market, of the economy. Some areas have been traditionally dominated by the U.S. players, so some of the competition happened naturally, but at the same time, because China moved so fast in the past 15 years, a lot of those things are not really done very carefully. For example, regulation set up for a potential data breach risk or even the consumer privacy. Even though people don’t care about it today, that doesn’t mean they won’t care about it in the future. So a lot of regulations haven’t been really thought about very carefully. Versus the U.S., things tend to be moving in the more careful fashion. So the conflict will naturally start. I think this is a good opportunity for China and also for the U.S.—the U.S. has been helping China in terms of the past fast growth, but in China’s case, I think it is a good time to take a pause and think about what is the best way to set up regulation for the long term growth.

    Oscar Pulido: It seems to me like there are a couple of areas in particular where this race in technology is most prevalent: 5G comes to mind, as does artificial intelligence. And I want to start with artificial intelligence since that seems like the basis for a lot of the most recent and rapid advancements in Chinese technology. How competitive are the U.S. and China when it comes to artificial intelligence?

    Rui Zhao: I think for artificial intelligence, it’s a very broad topic and it can be applied to anywhere. But in the end of the day, if you want to teach the machine anything or you want the machine to learn anything out of itself, you have to have the data. And that is one of the advantage of China because data availability is huge and is really lack of constraint. So a lot of the AI can be trained and applied to this vast amount of data. Versus in the U.S., I think regulations already followed up quite quickly, so some of the data becomes not easy to access. So that might make the speed of the development different.

    Oscar Pulido: What about 5G: it seems like there is the U.S. versus China when it comes to this topic that this is where there’s another tension between the two countries and their advancement in this technology. Does there have to be a winner and loser when it comes to 5G?

    Rui Zhao: I hope the answer is no, because I do think there will be a big benefit for both countries to collaborate in this area. As I mentioned, the U.S. really has the thought leadership and the cutting-edge innovation, and in China, it’s pretty good at executing the ideas or has been executing ideas. And also because of the amount of data, you can see whether it’s successful or failure idea, quite quickly. So I think if we can really combine the two country’s strengths, that could benefit everybody in the world. But I think going forward, there could be different focus between the U.S. and China in terms of the 5G technology and AI.

    Oscar Pulido: So let’s talk about some of the investment implications, I want to take advantage of your background as a portfolio manager looking at markets. What does all of this mean for investing in technology? We had heard from Kate Moore on a recent episode that in her opinion, it felt like you needed to invest in U.S. and Chinese tech independently just given the difference in the two ecosystems. I’d be curious to hear your view as to the investment opportunities based on everything you’ve mentioned.

    Rui Zhao: I totally agree with her view. I think she has a good point that as an investor, you might want to own both U.S. and China in terms of technology development because they might be going so different paths. This competition might become long term, and the advantage of the two countries are also quite different. China is good at implementing testing and finding data for the test, and the U.S. has cutting-edge innovation. And also I think in China, the technology or the use of internet, use of the mobile app has rooted deeply into peoples’ daily lives. From consumer day-to-day life, to investing, you can also buy mutual funds with the Tencent WeChat app, or to healthcare, you can see doctor on your phone either through a VC or through just a text chat or through picture. So a lot of the development in China are focused on the usage perspective which helps to improve humans’ daily lives, versus the U.S., it could be more focused on a different aspect. So I think owning both sides of the company can probably provide investors a more comprehensive view of the technology upgrade or growth.

    Oscar Pulido: Another one of the differences you mentioned between these two countries is the willingness of individuals to give up data about their social media usage. So how do you use this when you’re making investment decisions?

    Rui Zhao: Yeah. That’s a great question. So I’ll focus on China first, so we can get a lot of information from internet, including social media, but also including a lot of these disclosures that companies are required to broadcast to everybody. So we combine data from different data sources together to give us a more comprehensive view about a company. One example I will use is back 30 years ago, even in the U.S., an investor can only get information by reading through the financial statement the company put up, or talking to the management team through one-on-one meeting, But fast forward to today, we can get a lot of information about a company though their online activity because we know how many people click their website every day, or we know how many people opened up their app and look at the company how long they spent lingering around in the app. We can read through social media and see which brand people like and which brand people complain. So just overall by leveraging the data, it answers a lot of the questions we always wanted to answer before, but we couldn’t. And today with the data and technology, it’s just helps our human being to answer this question. 

    Oscar Pulido: Well, it’s apparent we’re going to be talking more about China particularly in the context of our portfolios based on everything you’ve just shared. Rui, I want to end with a rapid fire round where we’re going to predict the future a bit, or at least we’re going to try. I’d like you to tell me whether you see the following things happening in five, ten, thirty years, or never. Are you ready?

    Rui Zhao: Yes.

    Oscar Pulido: Okay. Household robots.

    Rui Zhao: Within five.

    Oscar Pulido: A cure for cancer.

    Rui Zhao: Five years.

    Oscar Pulido: I sure hope you’re right on that one—there are a lot of people rooting for you on that answer. Personal jetpacks.

    Rui Zhao: Ten years.

    Oscar Pulido: That’ll be a good way to get to work I suppose if that works out. One world currency.

    Rui Zhao: I would say somewhere between 30 years and never.

    Oscar Pulido: Commercial space travel.

    Rui Zhao: Ten to thirty years, and I’m actually looking forward to this. I’ve already been talking to my kids that someday I’m going to take them to the moon. But they didn’t show any interest so far.

    Oscar Pulido: It’ll be a great way to earn accelerated airline miles for sure. Rui, thank you so much for joining us today. It was a pleasure having you on The BID.

    Rui Zhao: Thank you so much for your time and thank you for having me here.