China may miss out on $5.5 trillion in growth if it doesn't take data privacy more seriously

Evelyn Cheng

Updated Fri, Mar 22, 2019, 1:12 AM

Growth in digital trade, especially in the consumer and retail business, could contribute 37 trillion yuan ($5.5 trillion) in value to China's economy, the Hinrich Foundation says, citing research from economics consulting firm AlphaBeta.
That's conditional on China taking action on issues such as data privacy and intellectual property protection, the analysts say.
"To sustain China's growth momentum into 2030 and beyond, China would need to hone competitive strategies beyond the low-cost advantage that has traditionally propelled its economic growth," the report says.

If China doesn't step up its efforts on issues such as data privacy and intellectual property protection, the country could lose out on a 37 trillion yuan ($5.5 trillion) growth opportunity in the decade ahead, according to new analysis.

Based on research from economics consulting firm AlphaBeta, the report published Thursday by the nonprofit Hinrich Foundation found that China's 2017 flows of digital data contributed 3.2 trillion yuan of value to the domestic economy, and 1.6 trillion overseas. By 2030, the analysts expect growth in such digital trade, especially in the consumer and retail business, to contribute 37 trillion yuan to China's economy.

That would be about one-fifth of Beijing's projected gross domestic product, the report noted.

"That estimate relies on free cross-border data flows for those opportunities," Konstantin Matthies, engagement manager at AlphaBeta, told CNBC on Thursday. "If you put in place things that will impede that, that number is going to shrink."

The report laid out "priorities for action" for China, such as adopting the Asia-Pacific Economic Cooperation (APEC) Privacy Framework and guidelines for protecting personal information as put out by the International Organization for Standardization (ISO).

Other changes which could help China realize its growth potential from digital trade include clearer definitions of what content is illegal, and balanced rules protecting intellectual property rights, the report said. It noted that restricting access to some online material can raise costs, or make business impossible, for some Chinese digital companies.

China is infamous for an internet firewall that blocks domestic access to websites Beijing considers a threat to its control, such as The New York Times, Facebook, Twitter and YouTube. Google search is also unusable. Chinese internet censors also scour social media to delete content deemed sensitive. The blocks can lower business productivity, and create an atmosphere of fear for businesses that worry they could be shut down overnight. On intellectual property protection, foreign businesses say Beijing has made some progress, especially with new laws such as the recently announced foreign investment law . But questions remain about enforcement.

The report's suggestions are rather general, Zhou Nianli, professor at The University of International Business and Economics' WTO research institute, said Thursday. Zhou was speaking at media event in Beijing hosted by the think tank Center for China and Globalization, which provided CNBC with a Mandarin-language transcript.

The issue of cross-border data flows is complex and needs to be addressed urgently, but it's a question of finding a balance between China and the U.S. rather than something black and white, Zhou said.

Part of the U.S. complaint in the latest trade dispute with China is that foreign companies are forced to transfer valuable technology when wanting to work in the Asian country. Beijing's made such transfers illegal with its latest foreign investment law — still, it remains to be seen what happens in practice.

Helped by China's population of well over 1 billion people, the country's technology companies have grown rapidly into global giants. Two of the three largest start-ups in the world are Chinese ( Bytedance and Didi ), according to CB Insights. These and other companies generate and collect masses of data, especially as consumers enjoy the conveniences of mobile pay and rapid delivery of goods ordered online.

The widespread distribution of such information raises concerns about data privacy. Beijing has been taking some steps toward limiting excessive data collection by the private sector, and increasing intellectual property protection. But critics say the efforts are not enough. With quicker implementation of appropriate policy, the Hinrich report indicated, digital data flows could add value to China's economy just as it is slowing down.

"To sustain China's growth momentum into 2030 and beyond, China would need to hone competitive strategies beyond the low-cost advantage that has traditionally propelled its economic growth," the report said. "Digital technologies are pertinent to this, by driving labor productivity and quality improvements."

China became the world's second-largest economy in just a few decades, but many questions remain about whether the growth is sustainable. Last year's GDP rate was the country's slowest since 1990, and Beijing expects a further slowdown in the growth rate this year.

The economic potential from digital trade is a global one as well, making concerns about relevant policy an international issue. In 2016, McKinsey Global Institute said in a report that digital flows had grown so rapidly since the turn of the century that they now had a greater impact on gross domestic product growth than trade in goods.

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