Orville Schell, the Arthur Ross Director of the Center on US-China relations at the Asia Society in New York, provides some insight into how China’s relationship with foreign business has changed over the years.

Q. How has China changed in the way that it handles foreign business, foreign companies and trade relations?

A. It all depends on where you place the starting line. One starting line was in the late 1950s or early 1960s, when we were in a deep cold war and completely separated. China was in autarky and for several decades there was no interaction of any kind going on, whether economic, trade, cultural or otherwise. The end of that period and the next possible starting line was around 1975, still during the Cultural Revolution, when Mao was alive. It was a very important time to see China, because it set a kind of a baseline against which one could measure those things which followed.

And what followed was quite momentous. Deng Xiaoping, the pragmatist, completely transformed China’s economy. And it also looked for a while like he might transform its body politic and its kind of statecraft, but, alas, that came a cropper in 1989. But curiously, his economic reforms didn’t. China had a very awkward formula of socialism with Chinese characteristics, which was marketized, privatized to a greater extent, and which had withdrawn the party from the running of enterprises in several places. It was reform that was both economic and political, so that was an enormous change. I wrote several long series for The New Yorker in the early 1980s about what was happening, and nobody could quite believe what we were seeing. And we had even less idea of where it would lead. The most profound question of all was, to what extent was China actually going to change its system, both economically and politically? And we had a temptation at that moment in the 1980s, to assume that what we were seeing would be a sort of another long-lived period, where China would be catalyzed by economic reform.

Even after 1989, Deng Xiaoping really committed himself to economic reform. And that went on for a decade under Jiang Zemin, and it kind of limped along under Hu Jintao and then suddenly we arrived at Xi Jinping. And things changed again. We got to recrudescence of many of the aspects that I was familiar with, when I first began to study China—more state control, the marketized elements being lessened, private companies having lesser standing than the state owned enterprises. And we’re not quite sure where all that will lead.

So, to say how it has changed. Well, it keeps changing like a kaleidoscope with different sort of quotients of free marketization of private enterprise merged with status control and state owned enterprises, and the kinds of forces that we now see beginning to reappear to be reapplied after this rather extraordinary period in the 1980s and 90s, when China seemed to be irrevocably molting out of its own revolutionary guise.

Q. What continuity do you see in the way that the Chinese system deals with foreign business and foreign trade today versus the Maoist era and the early years of Deng Xiaoping?

A. Well, of course, American businesses were completely shut out until the late 1970s. When Deng Xiaoping came to America and went to the White House everybody in the Congress and businessman from all over flocked to the National Gallery for a reception for him, it was quite extraordinary to see. And that was really the starting gun.

That created an incredibly heady period, where the head of the New York Stock Exchange and all of the large corporations were going over and sniffing around and forming joint ventures and there was a kind of a very reckless optimism that we imagined that at last, China’s doors were open. And in fact, it did. There were remarkable signs of China’s convergence with the rest of the world. However, it never fully abandoned its one party system. And Deng Xiaoping was very clear about that, even in 1981, when he re-articulated what he called the four basic principles, which were very clear in that they reiterated his commitment to a one party system and the Chinese Communist Party was, was the ruling party.

But, you know, it did survive, even through the end of the 1980s and into the 1990s, and American businessmen were incredibly gratified. But when the Soviet Union fell apart, the whole notion of engagement, which had so enthralled businessmen, and made them dream of this vast market opening up in China, well it needed to be re-thought. There was no longer the “bigger” enemy that had been the Soviet Union, so the US-China relationship needed to be redeveloped with new logic. And what was that logic? That logic was that if we traded, if we kept open to China, if we had cultural exchanges, academic exchanges, and a globalized joint economy, that would be the best guarantee of China continuing to evolve in a way that would be less contradictory with the liberal democratic outside world.

So those were glorious heydays, when nobody was imagining that there would be ever again, such a thing as decoupling. There were obviously a lot of problems, with intellectual property theft or with JV structures and all of these kinds of things. But in general everybody assumed that the relationship was a good thing that would bring us together, and that would make the likelihood of conflict much less probable, and would be good for the world. This was the heyday of the World Economic Forum in the 1990s and 2000s and of the notion that globalism is a win-win proposition. And that was the new justification for engaging China, even though it was a one party state, even though it had human rights violations, even though it had its Nobel Laureate in prison. So that was a very subtle but powerful transformation of the logic of interacting between China and American businesses and businesses elsewhere in Europe and around the world. We’re all too pleased to go into China dreaming of you know, that old 19th century dream of “if each Chinese would add an inch to their shirt, the towel of mills of Manchester would spin for a century.”

Q. There is a sense of “us versus them” between China and the US and to some extent the Western world, given the differences between the China system and the Western system, to what extent was this inevitable and what prospects do you see for a resolution?

Well, I hope there will be some prospects for resolution, but I have to say, I’m not particularly optimistic. Not because I think the United States has its problems, we’re all aware of those, but I do think Biden is open for business. He is a diplomat, he would like to work something out. I think the real challenge is that Xi Jinping has a very different view of the world. One thing that the Chinese Communist Party and its narrative of its relations with the world never got over, was that the outside world, the democratic world, was a hostile foreign force that was seeking to bring about regime change through peaceful evolution. And that’s a belief held not entirely erroneously, I might add. And with engagement over, we no longer can justify interactions. Because if you feel you’re dealing with a hostile power, rather than a power that’s in transition and reforming towards something more convergent and soluble, then, why would you trade?

Take the semiconductor industry, for instance, an incredibly important industry, and where are 92% of the semiconductors made in the world? Taiwan, and Korea. So Taiwan, is in a very adversarial state with China, but it’s selling semiconductors to China and the United States. We don’t have very many fabs in the States. So what happens there if things start getting even more hostile or if there is a clash? How do we deal with that market? And this is where the very vexing question of decoupling comes in.

And I might add that decoupling is going on. But it’s not exclusively on the American side. It’s also on China’s side, look at their refusal to allow IPOs in the New York Stock Exchange, that’s a huge decoupling. So we are in this new world, whereas for many decades of my lifetime we were coming together and imagining a horizon of closer collaboration in every realm of life. Now we have entered a world where we imagine ourselves coming apart, bit by bit, and the pandemic has certainly aided and abetted that process. But for businesses, it raises an absolutely unsolvable dilemma of: what do you do with the largest market in the world, with its incredible manufacturing base and supply chain system which we are addicted to both sell into and buy out of? What do we do if there’s more animosity, and there’s increased likelihood of war? And nobody has a ghost of an idea how to act.

Interview by Patrick Body

By George Baeder

Mounting techno-protectionism in response to China’s innovation drive seems destined to sap U.S. scientific leadership and entrepreneurial vigor, driving talent and capital to Europe and Asia. Biotech offers a compelling alternative to the current trend, creating a win-win model that other sectors may want to emulate.

China’s policies have been designed to harness cutting-edge technologies to drive growth, strengthen competitiveness and meet critical domestic challenges.

Yet in America’s echo chamber, U.S. policy makers, leading news outlets and political leaders from both parties imagine nefarious Chinese plots to steal American technology behind every U.S. lab bench and venture investment.

Protection of IP and access to global markets remain essential to any company’s competitiveness. And the U.S. does face real challenges from China, including commercial espionage.

But current American rhetoric masks the world-changing reality: Since opening and reform began in 1978, China’s legal system, regulatory frameworks, industrial standards and competitive landscape have consistently evolved for the better.

China’s steady process of domestic reform and integration within the global economy represents one of the most exciting global economic developments of the last 50 years. Its high-level policy outlines, such as those described in the 13th Five Year Plan and Made in China 2025, demonstrate an ambitious commitment to technological advancement.

The issue is whether the U.S. should see China’s technological aspirations as a threat or an opportunity.

Biotech offers an answer. As a scientific arena in which the U.S. has long been recognized as the global leader, biotech offers a concrete example of how China’s drive for innovation can create an increasingly level playing field for U.S. and European firms, and simultaneously accelerate global development of new treatments targeting unmet medical needs.

Over the last 24 months, China has radically changed its approach to drug development, regulation and reimbursement. Innovative biopharma firms outside of China have been the main beneficiaries.

Momentum for change accelerated in 2015 following the articulation of China’s innovation agenda, driven by two imperatives: China’s need to bring higher quality, innovative medicines to its own – increasingly demanding – patient population, and its push to build a globally competitive position in an industry undergoing fundamental structural change.

The result has been a dramatic leveling of the competitive playing field and creation of new opportunities for Western firms. China’s work is far from completed, and yet the impact has already been stunning.

Its regulatory system, previously designed to block foreign innovation, today hurtles full speed in the opposite direction. Of the 41 innovative drugs approved by China in 2017, 40 came from foreign firms, clearing a long-standing backlog.

In October 2018, China National Medical Products Agency (NMPA) specifically requested foreign biopharma firms to register 48 innovative drugs that had not yet been launched in China and indicated that China would accept global clinical data to support approval, rather than insisting on local clinical trials.

China has aligned its regulatory approach with global practice, dramatically cutting the time to develop and approve innovative drugs. Clinical trial authorizations that could take two years or longer, effectively excluding China from global trials, now take 60 working days. Approval time for NDAs have been cut from more than two years to 12 months.

As a result, foreign companies today aim for regulatory approval and product launch in China within months of the same compounds being approved in the U.S. and Europe. China’s next target is to cut the time needed for approval of an NDA from 12 months to six.

China is also advancing on three other key commercial fronts: IP protection, reimbursement and import barriers.

Draft revisions to strengthen China’s patent law, initiated in 2015, have entered the final stage of public comment and will likely be enacted by the National People’s Congress this year. In parallel, guidelines on data exclusivity, another source of protection for innovative breakthroughs, are being updated and strengthened.

In mid-2017, 36 innovative medicines made by global biopharma firms were added to China’s National Reimbursed Drug List – another first. In 2018, 30 more were added while tariffs on imported cancer therapies were cut to zero.

China’s health authorities extracted steep price cuts from companies in the process, just as U.S. and European payers do. But increased sales volume for expensive oncology treatments – such as Avastin bevacizumab and Herceptin trastuzumab from Roche – more than made up for the price concessions.

China’s emerging biotechs aggressively in-license compounds that leading U.S. and European biopharma firms shelved, accelerating development of medicines abandoned by large Western firms in the face of economic and/or scientific barriers. When successful, the global firms often retain the option to license back commercial rights for markets outside of China.

In light of this, the overwhelmingly negative attitudes in the U.S. toward Chinese innovation policies are clearly at odds with current reality.

This does not mean that the industry is free from bilateral problems.

But selective examples of Chinese “mercantilist” behavior sometimes from 10-15 years ago – ancient history given the speed of change in China – appear to dominate U.S. thinking.

Biotech may be uniquely free from some threats, both real and perceived, that face other sectors.

China’s state-owned drug conglomerates have a poor record of innovation and are not credible competitors for innovative foreign firms. Instead, the drive comes from young biotechs launched by entrepreneurs from both the U.S. and China and from large established domestic private sector firms, such as Jiangsu Hengrui Medicine Co. Ltd., Shanghai Fosun Pharmaceutical Group Co. Ltd. and Luye Pharma Group Ltd.

So-called “forced technology transfers” do not apply in a sector already open to 100% foreign ownership for nearly two decades. Venture capital and public equity markets, not subsidized loans from state banks, funds biotechs’ growth.

INNOVATION UNDER THREAT

Until recently, innovative life science firms on both sides of the Pacific could ignore distracting rhetoric. Instead, they steadfastly focused on leveraging obvious synergies that flow from combining the scientific resources and market scale of the world’s two leading economies, spurring a growing number of trans-Pacific collaborations.

Now however, U.S. policies designed to block Chinese VCs from participating in financing of innovative U.S. biotechs, proposals to “ban” scientists of Chinese origin from studying or conducting research in U.S. universities, or threats to prohibit exchange of technical and scientific data between U.S. and Chinese subsidiaries within the same company seem destined to fundamentally change the global innovation landscape.

Rather than protecting U.S. technology leadership as the techno-isolationists promise, the current trajectory seems destined to erode U.S. competitiveness in biotechnology.

Prior to recent visa restrictions, the Kauffman Foundation estimated international students would account for 50% of all STEM Ph.D.s by 2020, with students from China as the largest single group, accounting for over 30% – more than twice the proportion from India. America’s techno-isolationists seem not to have reckoned with the potential impact on U.S. scientific capability.

Scientists who originally came to the U.S. from China for graduate study or postdocs – some decades ago – feel increasingly uncomfortable in their new home. Newcomers from China, many of whom aspired to stay in the U.S. for the long term, now see a bleak future.

The techno-isolationists respond with naïve assertions that this Asian science and technology cohort will be replaced by “Americans”, despite data indicating the opposite trend.

Chinese investors are already shifting their focus to Europe.

CEOs from European biotechs I met with recently say they have been inundated with meeting requests from Chinese VCs and strategic investors over the last four months, a dramatic increase in comparison with the first half of 2018.

Conversely, U.S. VCs fear bringing on Chinese limited partners will embroil them in endless paperwork that slows deal making and increases costs.

A BETTER WAY?

The ongoing progress in biotechnology offers the U.S. and China a clear alternative to erecting new barriers to global innovation: Leverage deep U.S. academic research in basic science with China’s capital, high-speed translational and preclinical skills. Then pursue clinical development designed to serve unmet medical needs across global markets.

This is precisely the model American and Chinese entrepreneurs have pioneered, laying the groundwork for faster, more economical drug discovery and development. Underpinning this progress is close collaboration between the regulatory agencies in both countries, a foundation now being eroded by US policies.

Building on the progress already made and potentially replicating this success in other sectors requires continued leadership from the innovative private sector firms in China, the U.S. and Europe, intense and sustained dialogue among companies and government regulators and a willingness to identify the path to serve the best interests of people in all the countries concerned.

George Baeder is SVP strategy and business development at dMed Biopharmaceutical Co. Ltd.

By Pippa Morgan

The latest round of trade talks between China and the United States has drawn to close. The result: warm words on both sides but no specific deal, and a salvo of presidential tweets reiterating the US’s hard March 1 deadline for “a complete deal.”

With the United States threatening to more than double tariffs on $200 billion of Chinese products from 10% to 25% unless China implements sweeping changes to its trade and industrial policies, it is worth examining how much of an outlier China is globally and historically.

In addition to its large bilateral trade surplus with the US, the key issues highlighted by Washington include China’s “lack of effective protection” of intellectual property (IP) rights, its industrial policies that aim to support domestic firms, and the Made in China 2025 strategy for promoting upgrading and innovation in high-tech industries.

On each of these issues, it is easy to see why the US would consider Chinese policy to be harmful to its interests. But there are many other examples of rising powers using a similar mix of measures to shield their domestic firms from foreign competition and promote strategic industries.

Let’s start with China’s attempts to protect local industries using foreign trade and investment barriers. The rationale for these policies was first laid out not by Xi Jinping or Deng Xiaoping, the father of China’s rapid economic growth, but by Alexander Hamilton, the US’s first Secretary to the Treasury, in 1791.

In his seminal Report on Manufactures, Hamilton argued that given poor American technology compared to Europe, American manufacturing industries could not possibly compete with more advanced foreign firms without protection.

In the case of gin, for example, Hamilton observed: “the price of some of the materials is greater here than in Holland… the price of labor considerably greater, the capitals engaged in the business there much larger.” As such, he argued, “the prejudices, in favor of imported Gin, [were] strong.”

Hamilton’s solution? “[A]n addition of two cents per Gallon… to the duty on imported spirits of the first class of proof.”

Less developed economies have been using these tactics for centuries – including the young United States as it sought to catch up with Europe. In the late 19^th century, US tariffs on imported manufactures averaged close to 50%.

Another source of US frustration is China’s attempts to secure more advanced technologies from developed nations, through mandating technology transfer by foreign companies partnering with Chinese firms, strategic foreign direct investment through acquisition of high-tech foreign firms, and allegedly outright IP theft.

Again, while it is understandable why the American government is determined to prevent China from undermining its lead in key technologies, there is a long history of competing powers displaying a cavalier attitude toward each other’s industrial secrets.

During its early history, the young United States was often criticized by the superpower of the day, the United Kingdom, for its rampant theft of British industrial designs.

The most famous example of this was the case of Samuel Slater, an English cotton worker who helped create the US textile industry. Born in the UK in 1768, the young Slater worked as an apprentice to a cotton processor in his hometown of Belper, Derbyshire.

At the time, the UK had banned cotton workers from travelling to the America because they did not want the United States to acquire British cotton technology, which at the time was world-leading.

Drawn by the rewards advertised in US newspapers for cotton processing information, Slater defied the ban, sailed to the US, and became – as he is known in his adoptive country – the “Father of American Manufactures.” In the UK, on the other hand, he was branded “Slater the traitor.”

The US was not the only country with a lax attitude to IP. During the 19^th century, the UK, Netherlands, France, Austria and Switzerland all allowed foreigners’ inventions to be patented domestically.

Some major European firms got started using other’s technology. In the 1890s, Dutch manufacturing giant Philips started out by manufacturing lightbulbs, a technology patented by the American Thomas Edison.

More recently, developing countries including Brazil, India, South Africa, Malaysia and Nigeria have used technology transfer, local content, or skills development fund requirements to ensure that foreign direct investment helps to build domestic capabilities.

Even China’s Made in China 2025 plan—an industrial policy designed to make the country a world-class player in industries including electric cars, artificial intelligence and aerospace engineering, and which the White House has described as a key part of Beijing’s “economic aggression”—is far from unique in a global context.

US allies Korea and Japan famously used similarly interventionist approaches to grow from poor, war-ravaged nations into “economic miracles” with world-leading high-tech sectors. Japan’s Ministry of Trade and Industry (MITI) guided its emergence as a global leader in cars and computers, while Korean flagship conglomerates like Hyundai and Samsung flourished under government support.

In fact, economists widely consider China’s development approach to have been less hostile to foreign direct investment and in many ways less centralized than those of Japan or Korea.

What’s more, many economies that are typically viewed as highly market-oriented continue to employ industrial policies to manage their economies, some with substantial state involvement.

Singapore, for example, has an Economic Development Board responsible for economic strategy, tax and other incentives. It also serves as a bridge between government agencies and private partners. The country’s state investment fund, meanwhile, holds a majority stake in major companies, and the majority of the population lives in government-subsidized housing.

And, while American political and economic discourse typically emphasizes free markets, in reality the US government invests heavily in research and development, laying the foundation on which major firms such as Apple have been built. The CIA even has a government-funded venture capital firm that invests in promising tech start-ups.

Of course, some mainstream economists would argue that selective state involvement is not the right way to run trade policy or develop an economy. But whatever one’s position on economic interventionism, it is clear that China is not the only country in the world to strategically interfere with the market.

Taken in historical context, the current US-China conflict is less a reflection of Communist China’s unwillingness to follow economic orthodoxy than a classic story of what happens when a new economic power challenges an old one.

By Tomoo Kikuchi  and Masaya Sakuragawa

Many have said that the 21^st century will be the “Asian Century”. Asia’s weight in the world economy will rise to account for over half of global GDP by the mid-century. The primary question is whether the Asia’s economic dominance in the world translates into the leadership in technology, institutional quality, or soft power. This article focuses on the leadership in the global financial system.

China and Japan became the second and third-largest economies in terms of GDP by benefiting from free trade and relying on the US dollar system. The current trade war between the United States and China is a result of unbalanced contribution to supplying international public goods. This is the very point at which China and Japan need cooperation to create the autonomous institutional environments in Asia.

China and Japan should pursue greater cooperation on a number of fronts, from economic development to international trade and currency internationalization. This will be no mean feat for two nations whose historical enmities still lie in fresh in their cultural memories.

While political relations have been testy to say the least, it is worth remembering that bilateral trade and investment have nevertheless kept China and Japan closely integrated in recent decades. The figures below show that Japan has been China’s second biggest trading partner for most years from 2006 to 2016, while China replaced the US to become Japan’s biggest trading partner in 2007.

China’s Top Trading Partners (Total Trade, USD billion)

Source: General Administration of Customs, PRC

Japan’s Top Trading Partners (Total Trade, JPY 100 billion)

Source: Ministry of Finance, Japan

Beijing’s catchphrase of the “new normal” — sacrificing rapid economic development for slower growth of a higher quality — cannot fully account for the slowdown being logged in China’s economy. China is undergoing the unfamiliar, and likely lengthy, rebalancing process from an export- to consumption-led economy, typical of many of the world’s recently-developed nations. The figures below show that China’s export growth has stagnated in recent years despite the Chinese yuan losing value against the US dollar.

China’s Export (USD billion) and US Dollar to Chinese Yuan Exchange Rate

Source: UN Comtrade Database and International Monetary Fund

Now is an opportune moment for Japan and China to accelerate economic integration, especially as the wave of anti-globalization washes over the industrialized world.  This can be best seen when we compare the foreign direct investment (FDI) in both China and Japan. The figure below shows that FDI into China has been facilitated by Hong Kong and other offshore financial centers such as the Virgin Islands, Singapore and Cayman Islands.  This reflects the closed nature of China’s capital market. Beside those offshore centers, Japan has been the largest source of capital for China and the opening of its capital market will certainly accelerate Japan’s investment in China.

Foreign Direct Investment (stock up to 2017) to China (USD billion)

Source: CEIC

On the other hand, the figure below shows the stock of FDI in Japan. China is absent from the top ten list but clearly has potential to become a major investor in Japan, especially as the US and Europe increasingly perceive China’s investment as a treat to their national security.  

Foreign Direct Investment (stock up to 2017) to Japan (JPY 100 billion)

Source: Ministry of Finance, Japan

Integration does not have to begin at the level of nations either, but on a localized scale. The ongoing euro and refugee crises, and most recently Brexit, have demonstrated that finding a definite policy direction among member states is often fraught with obstacles, says Sahoko Kaji of Keio University. Whether or not the Asian continent could even tolerate such a model of regional integration is debatable. Instead, Kaji argues, China and Japan could identify regions and cities as special zones to kickstart and experiment with the integration process, scaling up at a later stage.

One key opportunity of cooperation is infrastructure development, which the ASEAN member states have applied to great effect as they leverage their position on global value chains. The ever-increasing demand for infrastructure investment in the region is attractive for both China and Japan. China faces diminishing returns on investment at home and Japan’s market is shrinking relative to the rest of the region due to its declining and aging population. To realize the potential of infrastructure investment in the region, China is going to have to get a grip on its bloated SOEs, which risk inefficient resource use in infrastructure provision. Japanese companies, meanwhile, need to become more competitive globally.

According to Blake H. Berger, Program Officer at the Asia Society Policy Institute, effective integration of economic goals in the region would be catalyzed through a merging of the headline developments currently being pushed, namely China’s Belt and Road Initiative, the ASEAN Economic Community and the Master Plan on ASEAN Connectivity.

Although ASEAN have been the engines driving regional integration, Berger argues, the success of multilateral development programs is contingent on the involvement of China and Japan’s contribution. The Sino–Japanese rivalry and quest for regional influence was actually a catalyst for ASEAN’s institutional upgrading and expansion, including the development of the ASEAN+3 Macroeconomic Research Office and the Chiang Mai Initiative Multilateralization. Competition and cooperation in the leadership between the Asian Development Bank and the Asian Infrastructure and Investment Bank can eventually contribute to regional integration and infrastructure development.

Both China and Japan run trade surplus with the United States. The trade is predominantly invoiced in the US dollar and the surplus is invested in the US dollar denominated assets, making China and Japan dependent on the US dollar system. Currency is power. The United States could lessen its debt burden by depreciating the US dollar unilaterally, in the same way when the US dollar was depreciated against the currencies of major exporters to the United States after the Plaza accord thirty years ago.

The establishment of the common currency euro needed cooperation between Germany and France. In the same way, China and Japan need to cooperate to establish an autonomous currency area in Asia. The first step could be achieved through the establishment of a multi-currency clearing system in Asia (MSCA).

Japanese economist Masaya Sakuragawa believes that previous attempts for Asian monetary integration have not gone far enough. The current Asian Bond Markets Initiative is not very effective because it does not facilitate currency clearing. An MCSA would eliminate settlement risk for securities and currencies and increase cross-border financial transactions, says Sakurgawa. With China and Japan’s enormous foreign reserves as a liquidity backstop in multiple currencies, an MSCA could pave the way to full monetary integration in Asia. Savings in the region that are still predominantly channeled to purchase government bonds and equities in the US and Europe could then be cycled into investment in Asia.

Whether or not we are at the start of an Asian century, the outsized role of East Asian economies in coming decades is beyond question. At the center of this emerging might, guiding its direction and determining its impact on the global economy, will be the incumbent market leaders China and Japan. It is in the world’s interest, therefore, to support closer ties between these two nations.

Tomoo Kikuchi is Associate Editor of the Journal of Asian Economics, and Visiting Senior Fellow at the S. Rajaratnam School of International Studies. Masaya Sakuragawa is Professor of Economics at Keio University. Their book, ‘China and Japan in the Global Economy‘, is a comprehensive treatise on this relevant and dynamic field.

by Ashley Galina Dudarenok. Additional research by Jackie Chen and Maureen Lea.

In an increasingly digital world, traditional media such as print, radio and TV are losing ground, while the Internet takes an ever-larger role. The web, and in particular the mobile web, allows information to spread rapidly and opens the door for anyone who proves capable and trustworthy to enlarge their influence.

Nowhere is this truer than in China, where people are wary of official information outlets, weary of standard media advertising and carry wide suspicions of business following repeated food and product safety scandals.

Influencers are also crucial to marketing efforts in the middle kingdom, because WeChat, unlike Facebook and Google, doesn’t offer data to advertisers allowing them to micro-target very specific demographics.  

Given these factors, brands and advertisers increasingly seek collaborations with influential online personalities who have large, loyal followings.

These influencers, known as key opinion leaders, or KOLs for short, can be bloggers, online personalities or internet celebrities whose primary communication channel is social media. Because of the factors mentioned earlier, they have a stronger influence in China than they do in the West. These influencers usually have a considerable follower base that sees their opinions and suggestions as credible. They promote attitudes and approaches that can affect the buying decisions of their followers and readers. Moreover, many of them also excel in driving online sales, while others even have their own brands and engage in direct sales themselves. Social commerce has been a success in China and is considered normal, which dovetails perfectly with influencer marketing.

Local consultancy Analysys International projected that the China influencer economy will be worth over $15.5 billion this year and digital marketing company AdMaster estimated that over 70% of marketers will increase their budgets in digital marketing in 2019. About two thirds of them will put more emphasis on influencer marketing.

For marketers operating in China, collaborating with influencers has become one of the key components of their overall marketing strategy. It’s no longer a question of whether or not to collaborate with influencers, but how and when.

Influencer marketing is essential in China

To understand why influencer marketing is an indispensable part of marketing strategy for so many brands in China, it’s important to understand Chinese consumers.

First, China is a large country but not a single market. Consumers in different regions and different groups don’t share the same needs or experience the same trends. A one-size-fits-all approach simply won’t work and it’s time consuming and expensive to develop customized strategies for each sub-market. So, working with KOLs who are in touch with their target audience helps marketers reach them quickly and easily.

On top of that, Chinese consumers, especially those born in the digital era, pay less and less attention to mass media and traditional advertising. Instead, they’re spending more time online and on mobile, checking their feeds on social media, following influencers and joining niche online communities. Information from eMarketer, predicted that in 2018, adults in China will spend an average of 6 hours and 23 minutes consuming media every day, of which 55.5% will go to digital media, including 47.1% to internet connected activities. The number of monthly active users of the two largest social media platforms, WeChat and Weibo, are still growing. As of September 2018, the number of monthly active users on Weibo reached 446 million – 93% of them log on through their mobile devices.

China is also over-supplied and consumers are overwhelmed with choice. Since the economic reforms of the late 1970s, Western brands have been trying to sell their products to Chinese consumers. Together with domestic brands, which have exploded in the past decade, a wide array of products is on offer. Today, Chinese consumers prefer domestic brands in more categories than before. According to research by Bain & Company in 2017, domestic brands managed to gain share over their foreign competitors in most categories, while foreign brands only captured market share in four of the 26 categories studied.

Despite being inundated by ads and having so much choice, or maybe because of these factors, prudent Chinese consumers generally don’t make buying decisions easily. They’re afraid of making the wrong choice and need assurances of quality, safety and brand authority before taking action. It is therefore standard for them to conduct exhaustive research before making purchases, particularly for big ticket items. They do most of their research directly on e-commerce platforms. A PwC survey conducted in 2017 showed that 61% of respondents started their product research on Tmall, one of the biggest B2C e-commerce platforms in China, and 58% of them said they check prices directly on that platform as well.

Word of mouth is so important that many value it over incentives such as product discounts and giveaways. A survey conducted by KPMG in 2016 found that around 60.8% of respondents in China searched online for reviews and recommendations when they researched products, a much higher percentage than consumers in UK (48.6%) and the U.S. (39.4%). This kind of consumer behaviour creates room for influencers to play a role in affecting the buying decisions of Chinese consumers. A 2018 study by marketing consulting firm Westwin found that KOL recommendations were the most influential purchasing factor with a whopping 67% of Chinese cross-border consumers saying their purchases were influenced by KOLs. Recommendations from KOLs are more important than product discounts (65%) and e-commerce platform recommendations (58%).

Working with influencers in China

Since working with influencers is now a necessary part of a marketing strategy in China, there are some key things marketers should understand in advance.

First, influencer marketing requires a significant budget. In China, influencers expect marketers to pay them outright, because product links in posts are restricted on most social media channels and affiliate marketing and profit share models are not as common as in the West. So for an effective influencer marketing strategy, brands need to provide sufficient funding and allocate more of their marketing budget to KOL marketing. Otherwise, they’ll flounder and fail to gain traction.

While costs are higher, the return on investment (ROI) is often lower than marketers expect. Rather than applying Western standards and key performance indicators (KPIs) to the China market, marketers should be aware that China is a much more competitive and expensive market so standards and KPIs need to be adjusted so that realistic goals can be established based on the actual situation in China.

Influencer marketing needs to be done strategically. Working with a few KOLs on a one-off campaign won’t create significant impact. It’s best to collaborate with a variety of influencers who have large and small follower bases. Establishing long-term collaborations with high-quality influencers is also a good way to strengthen a working relationship.

Mistakes to avoid

Due to a lack of knowledge of the Chinese influencer landscape and the difficulties of researching this area, brands and marketers sometimes make mistakes and end up with subpar results.

One common mistake is that brands and marketers end up cooperating with people who are not true influencers. Some Internet celebrities may be popular, but are not trusted sources of information and don’t have much influence in this regard. There are also KOLs that purchase fake followers and fabricate interactions to make their accounts look more popular. It’s meaningless to work with them and any effort put into content and campaigns is wasted.

In addition, some marketers may interfere in the content production process and require the influencers to add more information or highlight the brand or product in their posts. However, Chinese consumers are increasingly sensitive to such overly promotional sponsored content. Instead, brands need to work with influencers who are fans of their products and grant them creative freedom. They know best what kind of content appeals to their audience and will receive the best reaction.

To sum it up, influencer marketing will continue to grow and be a key component of marketing strategies in China. For the foreseeable future, it will remain one of the best promotional methods in China. Meanwhile, brands and marketers should keep a close eye on the changing influencer market and novel approaches when developing their influencer marketing strategy.

Ashley Galina Dudarenok is an entrepreneur, professional speaker, bestselling author, vlogger, podcaster, media contributor and female entrepreneurship spokesperson. She is the founder of several startups, including social media agency Alarice and training company ChoZan. She runs the world’s largest vlog about China market, consumers and social media on YouTube and AshleyTalks.com. Her new book Digital China: Working with Bloggers, Influencers and KOL is now available on Amazon.