By Margit Molnar, Head of China Desk, OECD Economics Department and Kensuke Tanaka, Head of Asia Desk, OECD Development Centre

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Digitalisation as a way to lift growth potential

COVID-19, or the new Great Depression, is likely to have a lasting impact on economies and societies worldwide. Pandemics are shown to be followed by sustained periods with depressed investment opportunities, and/or heightened desires to save (Jorda et al., 2020), thereby reducing potential growth. To mitigate the impact of COVID-19, many governments, in addition to emergency measures to save lives and keep firms afloat, have also adopted investment stimuli. China is among those countries where the composition of stimulus is tilted towards public investment. While continuing to strike a delicate balance between keeping the pandemic under control and resuming activities, it is crucial to accelerate processes that will counter the fall in growth potential. China’s growth potential is set to decrease as the country catches up with more advanced economies and its rapid ageing also weighs on it. However, China can still reap the “reform dividend” with measures that also boost growth in the long term.

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Digitalisation is a promising candidate to lift China’s long-term growth potential. Digital technologies are shown to boost productivity (Gal et al., 2019), which is the key to sustainable growth. At the current juncture, introducing digital technologies can also help jumpstart the economy as it creates new jobs and meets new demand (OECD, 2018). Indeed, in the first quarter of the year, it was the IT and software sector growing at over 13% and the financial sector at over 6% (partly thanks to surging online payments), that held up services growth.

Business sector in the driver’s seat

The outbreak has given a new impetus to digitalisation as insatiable demand for contactless solutions to reduce the risk of infection has emerged. The government called for the use of mobile payments to avoid spreading the disease through cash circulation as the virus was identified on banknotes and coins. Mobile payment had been common even before, but the outbreak has pushed up its growth to double digits. Also, a large number of apps have been launched to meet new demand. The number of mini-programs (which are embedded in mega platforms such as WeChat and AliPay) – a useful yardstick to gauge the emergence of new apps – jumped by 700,000 while the number of daily average users rose by 120 million, over a third, in two months. The content of the programs was affected by COVID-19 with a significant increase of those related to education and health (Figure 1). E-commerce further thrived, as even deliveries became contactless thanks to delivering and picking up at neighbourhood collection points. Such demand-driven innovation will likely give a significant boost to productivity. 

Figure 1. Education-related mini programs recorded the greatest increase in daily average users

Note: 22-30 March relative to 2-10 February 2020.

Source: Aladdin Research Institute.

Jumpstarting e-government services

China has been a frontrunner in business digitalisation for a while already, but the outbreak has also accelerated the provision of e-government services. Indeed, a health QR code is instrumental in tracking the health status of individuals and determining their permitted scope of activities. For instance one can only use public transport if their health QR code is green. A major breakthrough in tax administration is the online payment of taxes in an effort to contain the spread of the virus. Pilot projects for e-taxation were introduced in four provinces and Qingdao city starting from the beginning of last year. In the very near future, it will be available in the whole country. The State Administration of Taxation has called for reducing person-to-person contact in tax administration to the minimum level. Tendering procedures in construction will also increasingly go online and so will healthcare services.  In some hospitals in Wuhan, the epicentre of the COVID-19 outbreak, robots were not only delivering medical supplies, but also helped tracking patients’ critical readings while avoiding physical contact (Lim, 2020). Shanghai and Wuhan shifted medical counselling and follow-up services online for insured patients with common and chronic illnesses.

Not all digital-based services benefit from the COVID-19 outbreak. Parts of the sharing economy, which made up 3.2% of GDP in 2019, will likely shrink due to increased wariness of physically sharing housing, cars, household machines and other objects. Given, however, the swift emergence of sharing economy services and China leapfrogging ahead of others in this area, new demand will likely create new solutions.

The government could facilitate digitalisation by creating an enabling environment, in particular a level playing field in the provision of digital services. More specifically, halting the practice of specifying providers for certain services or linking provision to specific technologies, should be avoided. A single digital market in China should be ensured, and the practice of requiring local registration halted.

Currently, there are no internationally comparable data available to measure the size of the digital economy. Hence, the size of the Information and Communications Technology (ICT) sector, which is the backbone of the digital economy, is often used as a benchmark. By this imperfect measure, China’s digital economy relative to its GDP is not particularly large (Figure 2). The current momentum should therefore be seized to catch up with digital frontrunners.

Figure 2. There is room to increase the share of ICT in value added, 2016

Source: European Commission 2019 PREDICT Dataset.

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_{Lim, T.W. (2020), “Fighting COVID-19 through Technology”, East Asia Institute Background Brief No. 1524.}