How Technology and Innovation Will Make China’s Economy Stronger

The Google [NASDAQ:GOOG] initial public offering (IPO) in 2004 raised US$1.67 billion.

The Facebook [NASDAQ:FB] IPO in 2012 raised US$16 billion.

Those are both big numbers. But there’s an even bigger number coming as part of an even bigger IPO.

Not surprisingly, the financial whiz kids are fighting over the spoils.

And while we can’t promise to help you get a piece of the action, we can help you take part in what could be the biggest economic game-changer in more than 140 years…

We’ve had our new emerging markets analyst Ken Wangdong in town for the past two days. This afternoon he heads back to his temporary base in Sydney.

With Ken in town we’ve looked for his take on where China’s economy will go over the next decade and beyond.

Over the coming weeks you’ll see Ken’s analysis for yourself here in Money Morning. We’re sure you’ll like what you read. But if you think Ken’s take on China involves blindly cheerleading for the country’s economy, you’re wrong.

China’s doing it bigger

The Chinese economy is at an interesting point. Over the past 40 years it has come from nowhere to now be on the verge of becoming the world’s biggest economy.

That’s some feat.

But it hasn’t been an easy path. And it won’t be an easy path in the future either. But the more China’s economy grows and the more it integrates with the West, the more it becomes like the West.

Importantly, it means investors will need to understand that the focus of world financial markets is slowly changing.

Two years ago the big IPO was Facebook. It had shot to the fore in just a few short years to dominate the new ‘social networking’ scene.

In a way, Facebook’s quick rise shares a common trait with China’s rise. Both came from nothing to become the dominant player. And now as technology improves and China becomes a big player in the world economy, its influence is changing too.

China isn’t just a ‘cheap labour’ economy. It’s not just about making cheap goods and exporting them. It’s also becoming a story of innovation and entrepreneurs.

A sign of that is the upcoming IPO of online mega-company Alibaba Group. As the Financial Times reports:

Alibaba’s prospectus is expected to be filed imminently, people familiar with the matter said. The company is seeking to raise anywhere between $15bn and $25bn at a valuation as high as $200bn…

A potential US$200 billion valuation is huge. To put it in perspective, Facebook has a market cap of US$157 billion. IT giant International Business Machines [NYSE:IBM], the venerable 103 year-old company, has a market cap of US$199 billion.

Who does this Alibaba upstart think it is by gate-crashing on the world’s markets?

When it needs to innovate it will innovate

This is part of the change. Get used to it. However, as we mentioned above, it won’t be an easy transition.

The Alibaba IPO is exciting. If you’re not familiar with the company, it’s an online marketplace to connect business-to-business and business-to-consumer buyers and sellers.

As a comparison, it’s a cross between eBay and Amazon.com that includes deals at a commercial level. (It also has elements of a little known Aussie firm uncovered by small-cap analyst Tim Dohrmann that’s set to make big waves in Aussie online retailing.)

And in terms of size, to put it in perspective, according to The Economist in 2012 ‘two of Alibaba’s portals together handled 1.1 trillion yuan ($170 billion) in sales, more than eBay and Amazon combined.

But as impressive as that sounds, there’s one problem — it’s not exactly an innovative business model. Alibaba has copied successful Western online business models and replicated them for the Chinese market.

It’s that ‘copycat’ approach rather than the innovative approach that we talked about in our presentation at the recent World War D conference in Melbourne. At the conference we made the point that the last innovations to come out of China were paper and gunpowder…thousands of years ago.

Having taken that view, we wondered what our new emerging markets analyst Ken Wangdong would say to that claim. It turns out he’s on the same page.

It’s not that China can’t be innovative. It’s just that it hasn’t had to be innovative. Due to China’s lower cost structure it has made more economic sense for businesses to simply ‘copy and paste’ Western business models and ideas.

Why invest millions or billions into research and development when there’s easier ways to make money? To use an old expression, China has simply taken the low-hanging fruit.

The biggest change in 142 years

The question now, as China’s cost base begins to rise, is if China can compete in other ways. Doing so it will mean innovating.

It’s crunch time for China. How does Ken see this playing out? Like your editor, he says there is an entrepreneurial and greed spirit in China. People want better things. They want a better life.

If the Chinese can innovate to create new industries and businesses then it can only be a matter of time before China takes the top spot as the world’s biggest economy.

But it’s by no means certain. And it won’t happen overnight.

The US finally took over from the UK as the world’s biggest economy in 1872. At the time the US faced many challenges. That included Reconstruction after the Civil War.

No doubt many doubted the ability of the US economy to grow at the time. In the same way, many doubt China’s ability to grow today.

But the US did do it. It has stayed there for 142 years and counting. That reign is about to end, and the odds are on China taking over the top spot…soon. As an investor and a speculator, it’s hard to think of an event over the past 14 decades that had the potential to be as big as this.

In our view it’s not a matter of if China will take the top spot, but when. And we have absolutely no intention of missing out on the extraordinary investing opportunities as this transition takes place.

Cheers,
Kris+

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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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