A New Economic Paradigm
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A New Economic Paradigm

China's emerging innovative industries are shaping the country into a major research nation.

Over the past 15 years, China has made significant strides to catch up with its counterparts, in terms of investment into research and development (R&D). According to official data, China's Gross Development Expenditure on Research and Development (GERD) totaled 228 billion dollars in 2015 (373 billion dollars when adjusted for purchasing power parity), but this is still 25 percent below that of the US.

This trend is set to continue. The Chinese government plans to drive innovation to open up new horizons for the economy: It has set an R&D spending target of 2.5 percent of GDP by 2020, up from 2 percent in 2015. A 0.5 percentage point increase may sound small, but in the context of an economy that is in excess of 11 trillion dollars in GDP, it is significant. Credit Suisse estimates this would translate into an increase in the country's R&D spending by 73 percent from 2015, likely surpassing the US in PPP terms.

Promising Sectors

Substantial levels of R&D investment over the past two decades have allowed China to make successful inroads into several sectors; telecom equipment and internet are two that stand out. The leaders in these two industries not only invest 10 percent or more of their sales revenues in R&D, but are also among the top-25 R&D spenders in China.

Growth of Major Technology Areas 2015-2020E

Growth Estimates of Major Technology Areas 2015-2020

Source: CEIC, MIIT, IMS, 36Kr, iResearch, IDC, Credit Suisse estimates 

"China has 'leapfrogged' other countries in terms of technology development over the past 15 years, transforming itself from an adaptor to an innovator and producing many of today's global leaders in the sector," according to Vincent Chan, Head of China Macro Research. "The potentially disruptive implications of China's innovative drive should not be underestimated," he notes.

Forging Ahead

Amidst concerns over the stagnation of state sector reforms in China, the internet has opened up new dimensions of growth and propelled the private sector to a level of strategic importance previously unseen in China. The Chinese government now recognizes new Chinese entrepreneurs as the drivers behind innovation and technology development.

Total R&D of China vs OECD

Total Research and Development of China vs OECD 

Source: OECD, "2016 Global R&D Funding Forecast" published by US IRI and R&D Magazine

This is demonstrated by the fact that China has the second highest number of unicorns (start-ups with a valuation of over 1 billion dollars) in the world (31 out of the 163 globally1, as of 16 May 2016), with a combined valuation of 154 billion dollars, or 26 percent of the global total. Among these 163 companies, only 12 are non-internet, eight out of which are from the US and two from China.

Over 90 percent2 of Chinese unicorn start-ups in 2014 were in the internet & online-to-offline sector, including e-commerce, media, games, social networking, fintech and lifestyle. The only two sectors that were not related, or were less related, to the internet were hardware and healthcare.

1)CBInsights, 05/16/2016; 2)36Kr