China’s new economy loses sparkle, as hi-tech and modern industries fail to deliver

New analysis of 3,000 Chinese listed companies shows the share of new economy companies is declining, as are their revenues and profits

Companies in sectors such as artificial intelligence, semiconductors and health care have been unable to usurp heavy industries like infrastructure in China’s economy

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Tourism is one of the traditional industries loosely defined within the ‘new economy’ - provided there is some element of internet empowerment involved. Photo: EPA-EFE

Published: 6:00am, 31 Dec 2019Updated: 9:57pm, 31 Dec 2019

As China battles a trade war-fuelled economic slowdown, one of its main growth engines – the “new economy” – is stalling.

The “new economy” has never been officially defined, but is a concept loosely applied to a wide range of industries from artificial intelligence and advanced manufacturing, to fintech and web-based tourism.

Beijing had hoped these would propel China from a traditional economy powered by unsustainable infrastructure investment and low-end manufacturing to a modern services-based economy, but new research suggests that this is not happening.

Compared to 2014, the share of Chinese companies concentrated in the new economy has fallen. Those companies that are in the new economy, meanwhile, have suffered worsening financial health since 2017, according to an analysis of more than 3,000 Chinese listed companies by French bank Natixis.

The economists discovered plummeting revenues and investment among new economy players, a trend which will worry Beijing as the wider economy continues to creak.

According to the study, companies in the old economy often suffer from overcapacity and inefficiency, particularly in the infrastructure, materials and real estate industries that powered China’s high-speed growth over recent decades.

However, new economy sectors, such as health care, renewable energy and semiconductors, are plagued by problems of their own, the analysis found.

“Unlike the old economy, the key problem of the new sectors is not really excessive leverage but falling revenue, a compressed profit margin and a lower return on capital,” said Natixis economists Alicia Garcia Herrero and Gary Ng.

For firms in the new economy, operating income growth went from 25 per cent in 2017 to minus 8 per cent in the first half of 2019 – even worse than old industrial producers, which have been suffering from weak factory gate prices this year. This drop has eroded new economy companies’ profits, as well as their abilities to repay debt and increase investment.