China has made known its 2030 vision for AI. However, the fight to reach those goals is far from won. How can a country, whose culture is draped in a rich history and intricate social tradition, use its economic prowess to achieve these goals? As Syrus Lohrasb, CEO of the China-Britain Business Fusion Group, reported to EE Times, when one does business in China, one will ‘come across a very ancient culture, and you’ll understand that this culture is deep-rooted. You will begin to understand that some of that culture needs to be preserved. It may be outdated … but there is a reason behind it. There is balance.’
Understanding how Chinese culture, mixed with corporate ethics, permeates Chinese business practice may be key to learning more about China’s method of achieving their 2030 goal. Rather than simply creating a society with advanced technology, China is seeking to create a harmonious relationship, rather a society augmented and strengthened by AI and technology – not merely using technology, but directly incorporating it into daily life.
AI is a key enabler of automation, business, forecasting and research development because robotics technology driven with artificial intelligence can be used solve a large range of issues, from vehicle congestion, manufacturing processes and augmenting legal process right through to autonomous military systems and medical applications in diagnosis.
AI investment is rapidly growing. McKinsey and Company estimate, in their latest report on AI, estimate tech giants, including Google and Baidu, spent between $20bn to $30bn on AI in 2016, with 90% of this spent on R&D and deployment and the remainder 10 percent on AI acquisitions. Moreover, Private investors are also contributing to the ecosystem, with estimates that venture capitalists invested $4bn to $5bn in AI and private equity firms invested $1bn to $3bn in 2016, three times as much as in 2013. Further, on company usage in general, the survey found that ‘early AI adopters that combine strong digital capability with proactive strategies have higher profit margins and expect the performance gap with other firms to widen in the future.’
Yet, ‘corporate M&A is the fastest-growing external source of funding for AI companies,’ with large giants competing to secure the specialised talent that exists. The act of ‘acqui-hiring,’ is common in Facebook, Alibaba and Google, as firms seek to lead AI innovation, will more than 100 deals being concluded since 2010, 24 of which are Google’s alone.
China’s Global Ambitions
July 20th 2017 saw China’s State Council issue the ‘Next Generation Artificial Intelligence Development Plan,’ outlining an ambitious and determined objective, for China to lead the world in AI, the premier global AI innovation centre by 2030. The agenda has a three-pronged approach, tackling key problems in research and development, pursuing a range of products and applications, and cultivating an AI industry, with each prong receiving a deadline. Accenture Plc estimated that AI could increase China’s annual growth rate by 1.6% point to 7.9% by 2035, adding over $7trn in GDP.
2020 is purported to see China’s overall tech progress match the pace of the global effort, creating an environment conducive for the next generation of AI development. At this point, the target is to exceed $22bn in value, with AI-related fields collectively valued at over $145bn. 2025 sees China progress further, ‘with AI becoming a primary driver for China’s industrial advances and economic transformation.’ Lastly, the 2030 vision sees China as a world leader in AI development, concluding the transformation with an AI industry valued at $148bn, and related fields collectively valuing at $1.48trn.
The plan is predicated on major breakthroughs occurring within the first stage to spearhead innovation in the following stages. Working on that assumption thus requires research development to occur before 2020, therefore meaning that there is some time before China can begin its period of transformation. Further, even if the plan begins on time in 2020, the period will also be burdened by social and economic change because of AI implementation.
China is, as McKinsey highlights in their Artificial Intelligence: Implications for China report (April 2017), uniquely positioned in this regard, given the nation’s unrivalled ability to create data thanks to its 700m+ smartphone users.
UK: Prime Opportunity
China’s relationship with the UK already extends past its position in the European market, from the purchase of U.K. chip designer Imagination for £550m by a Chinese private-equity firm. Lohrasb commented that the price had been impacted by Brexit, dropping the original value by £50m, a ‘big attraction for the Chinese.’ Earlier this year, the China-Britain AI Summit brought together around 100 Chinese and British representatives from tech companies, agencies, consultancies and regulators, the forum provided an environment conducive not only to improving political relations but creating endearing corporate fusions, as delegates on panels talked around bilateral investment, technological collaboration and even saw live demonstrations of robotic research. Such an event shows the hype around a UK-China business relationship in AI, regardless of Brexit.
The UK is primely positioned at the end of the Western leg of the B&R, being described by Britain’s Chancellor of the Exchequer Philip Hammond as a “natural” trade partner for China. Further, Prime Minister Theresa May, emphasised the importance of AI promising to invest an extra £2bn a year to help place post-Brexit Britain at the cutting edge of science and tech, primarily for emerging fields of research in which the UK excels, such as robotics, AI and biotech.
This will help the UK retain strong post-Brexit performance in AI, firmly establishing it as a keen AI partner. When considered in light of the UK’s start-up ecosystem, which continues to flourish and attract the highest quality talents and investment interests, AI development and research potential in the UK presents a very good look for China-UK business fusions. For example, December 2016 saw a record 226 companies across all stages of development in the UK, with a new AI start-up being launched in the UK every week for the past three years. In monetary value alone, this amounts to a total future contribution of £654bn to the UK economy by 2035.
Yet, it is not merely the UK representatives that believe the partnership is beneficial, Dai Jian, chairman of mechanisms and robotics at King’s College London, opines that “China and the UK are natural partners to advance the AI sector,” due to the fact that The UK is a global thought leader in technological creativity whilst also holding a prime position in cutting-edge niche-sector technology in the AI field.
On the other side of the spectrum, China’s AI sector is exposed to a large audience and enjoys huge market access, legal-enhanced research environments, like Shenzhen, large pools of available financing and great commercializing capability, without even mentioning China’s large access to homogeneous data to train AI as well as a large potential consumer base for AI technology. For Chinese companies, being able to succeed in the UK’s mature market sets a high accomplishment bar, setting the standard of international expansion, by not only showing that the products perform well enough for international adoption, but also creating a strong base for further international expansion.
Furthermore, Mark Hedley, Director of ICT Sector at China-Britain Business Council, comments that “A lot of Chinese companies are coming [to The UK] to establish R&D bases in order to access talents and technology, and [then] bring back to China.” This highlights an underlying problem. China, whilst unrivalled in data access, talent acquisition is a key strategic factor. No matter how nuanced your data is, if you have no one to process it, you will never make progress.
This leads into a further strategic priority, creating circumstances that are attractive to talent, whether that is domestic, incubated talent or overseas acquisition. To truly succeed in in its vision, China needs to have elite scientists and leaders pushing the boundaries of innovation and development, assisted by the up and coming AI thought leaders. There is no point in building a legacy if there is no one to inherit it. University programmes, promoting ties between industry and education, has long-term benefits for talent health, with Google’s and Microsoft’s investments in AI labs at the University of Montreal serving as an example. Abroad, China should seek top international experts in the field, opening itself up to adopting foreign academic practices and resilient methods of AI research. Standing on the shoulders of giants will go a long way in fulfilling the vision.
So, how can the UK help China achieve its goal?
The UK possesses 5 of the 25 2017’s best global universities, being the only EU country to appear in the ranking. Of these five world-class universities, they have each contributed to and nurtured a pool of AI expertise and entrepreneurs, thirsty for capital and investment.
For example, Bill Li, CEO of AMY Robotics, envisions future plans to set up a ‘new R&D centre in London to serve as a gateway to EU markets,’ commenting that, ‘Britain is advanced in brain-computer interface technology and medical robots.’
Some companies are already taking advantage of UK top-tier talent, Shenzhen-based drive-system maker Best Motion established a £1.2m R&D centre at the University of Nottingham in 2014, purposed on developing high-quality servo drive systems. Such a has, ‘created a high-quality cost-efficient product,’ reported Zhang He, lead at R&D centre in Nottingham.
By exporting research and talent the UK will remain a strong AI partner for China, helping to reduce the gap between research potential and actual talent acquisition. Furthermore, the mutual feedback from research projects and business partnerships will benefit the UK AI sector, as best practices will flow both ways. Ultimately, using AI diplomacy, the UK can enhance its relationship with a global economic superpower whilst maintaining its competitive edge in future technology and experimental research.
Mature Legal Sector
Outside of talent and research, the UK legal environment is also a bonus for Chinese companies, the long legal history and relatively stable economy makes business predictable and secure. Whilst China has targeted research environments and created areas for AI development through legal tools, the dispute resolution, legal clarity and flexibility is nowhere near the potential that UK law can output.
Furthermore, such a legal history of the UK will not be dampened by Brexit, perhaps even strengthened as the UK Parliament re-instates itself as the final word-bearer in the UK legal system. This goes hand in hand with the Parliamentary research groups, social projects, societies such as the Royal Society of Arts and charity-led initiatives, that all feed into the lawmaking process. What one sees as the output is a nuanced law, backed by a common law arsenal.
Why is English law a favourite? Well, business is conducted on clear terms, with certain agreements and clarity of thought and English law facilitates this perfectly, not to mention that London is a pre-eminent financial and commercial centre, home to world-leading, global law firms.
English is not only a global lingua franca, it is also the language of international business. As a common second language, hearings, proceedings, documents and other legal processes that are conducted in English are accessible to a range of parties. That means that English, and thus English law, can be used anywhere in the world to do business in any other part of the world as it is easy to access. For Chinese AI companies, having access to a legal platform that is used internationally enables them to streamline their business and internationalise their engagement, as their business partners will also be in London, conducting business on English legal terms.
Secondly, English law has a long history and strong body of case law and statutes, creating a rigid and secure structure in which to build a business. Due to the precedence in the common law system employed, parties can estimate, with great certainty, the exact legalities of their agreements and arrangements. As a result, the law can be relied upon to build executable contract clauses that both parties can be certain are going to be held up – alongside clear interpretive rules that will be applied. Furthermore, the Common law is flexible and can develop to reflect changing societal attitudes, including business trends.
Thirdly, the English legal system upholds the principle of freedom of contract. This means that courts generally give effect to the bargain between the contracting parties, thus limiting the room for implied terms or overriding public interests, reducing the capacity for courts to overwrite what has been agreed. Additionally, this principle, backed by the common law, is more flexible than many civil law systems, which find basis in a more rigid and prescriptive civil code. Consequently, English law affords parties greater freedom to develop agreements, than would be found in civil law systems. For Chinese companies in particular, this also allows unique agreements to be reached and provides a greater sense of freedom to contract on particular terms.
Thus using English law enables the use of English language and access to specialist lawyers who are qualified to advise on very technical and highly intricate business contracts, enabling parties to truly achieve business objectives.
China’s AI agenda and ambition for 2030 is a mix of patriotism, pride and hopefulness. To succeed, China will need to strategically deploy its human capital and change the legal environment to fully exploit AI talent. Alongside the One Belt, One Road, China could expand this ambition to cover other countries and organically grow a network of AI partners. This initiative has full state support, with a large capital backing, it is a colossal, ground-breaking initiative but it could suffer from over-investment and oversupply.
The UK is a natural development partner, possessing large pools of talent, in both AI and business. It provides a solid foundation for research whilst also presenting strong business opportunities for international growth. However, some will look to the mounting pressure of Brexit as a weakening force of the UK’s position in the European market. Certainly, The UK must continue to conduct business in Europe and London’s financial prowess could see some erosion as firms move to other European capitals post-Brexit.
Yet, as Lohrasb commented, ‘We [in the UK] are not anti-European; we are very much European, and the U.K., especially London, will continue to be resilient. I think my last word is, don’t believe everything you read.’ For now, China’s AI goal requires all hands on deck, the UK is a strong partner to enlist.
Google to Open Artificial Intelligence Centre in China
Google will be opening its first artificial intelligence (AI) research centre in China, despite many of its services being blocked there.
Fei-Fei Li, Chief Scientist of Google Cloud, said:
“I believe AI and its benefits have no borders. Whether a breakthrough occurs in Silicon Valley, Beijing or anywhere else, it has the potential to make everyone’s life better for the entire world. As an AI first company, this is an important part of our collective mission. And we want to work with the best AI talent, wherever that talent is, to achieve it.”
The research centre will focus on basic AI research, and will consist of a team in Beijing, who will be supported by Google China’s engineering teams.
Google’s search engine and its Gmail are banned in China. However, the country has 730 million internet users, making the market too large to ignore.
Google is not the only tech giant facing restrictions in China. Facebook is also banned, while Apple’ App Store has been subject to censorship. In order to comply with government requests, Apple removed many popular messaging and virtual private network (VPN) apps from its App Store in China earlier on this year.
China has recently announced plans to develop artificial intelligence, and wants to catch up with the US. However, human rights groups are concerned by China’s use of artificial intelligence to monitor its own citizens.
Jack Ma Backs China’s Government
The Alibaba founder said that China’s one-party system benefitted the nation.
Speaking onstage at Fortune magazine’s Guangzhou conference, the Chinese billionaire contrasted the Chinese one-party system with the relative instability of the US political system. Ma said that the Chinese system is one of the reasons that he is optimistic about his nation’s prospects for economic growth, commenting that in America the Democrats and Republicans are polarised on many major issues. Earlier last week, Ma also said that foreign companies seeking to do business in China must “follow the rules”, which was interpreted as meaning western tech giants must comply with local censorship laws
Chinese Yuan Bear Market: Is It Coming?
As pessimism towards the Chinese economy reached bearish extremes last year, shorting the Chinese yuan became a favourite trade for many notable hedge funds.
The most famous bear, Kyle Bass, famously predicted that the yuan was set to fall by at least 30% as China’s credit problems kept ‘metastasizing’. His fund, Hayman Capital Management, raised a dedicated vehicle in order to take advantage of a slowdown in China.
Given that Chinese stock markets remain fairly underdeveloped, buying or selling Chinese equities is a poor way to express a view towards the country’s economy. Instead, hedge funds zeroed in on the currency as capital flight began accelerating in 2014. Yet, few noticed that the country had launched a new cycle of credit growth in early 2016.
Given China’s reliance on debt funding and investments to drive economic growth, looking at aggregate new financing is one of the best leading indicators for economic conditions.
Another good way of measuring onshore sentiment is to look at national house prices in rate-of-change terms. Given the huge gains in real estate over the past decade, local Chinese investors are watching house prices carefully. This is illustrated by the graph below:
Source: CEIC data
This marked the bottom for many assets with a high sensitivity to Chinese demand such as industrial metals and commodity currencies.
As house prices took off across China in 2016, Chinese residents regained confidence in the economy, and capital flight fell as a result. As of Q1 2017, Chinese house price growth has peaked and is now on a decelerating trend. Given the sharp rise of credit growth in 2016 and 2017, new credit growth is also likely to slow in 2018.
Another Bear Market on the Horizon
While the bull market that began in early 2016 has been great for assets that benefit from accelerating Chinese growth, the future outlook looks considerably cloudier. Our favourite indicator of the health of China’s economy is the Australian dollar.
Since the conclusion of China’s 19th Party Congress in October, the Australian dollar has been selling off sharply. Trending indicators for both the short-term and medium-term time frames on the Australian dollar have been bearish since that time.
This week, the currency has experienced another significant bout of weakness following poor GDP growth data. Earlier today, the currency sold off after export volumes missed expectations due to a sharp fall in iron ore exports (primarily destined for China). As the Australian dollar has historically served as a reliable front-runner to the Chinese yuan, the growing divergence between the two currencies is important to watch. This is shown below:
As can be seen from a recent history of AUD/USD versus CNH/USD (inversed), the Australian dollar tends to foreshadow the future of the Chinese yuan.
While AUD weakened materially in late 2014 and 2015, the Chinese yuan did not follow suit until mid-2015. Similarly, once the Australian dollar began strengthening in 2016, the yuan eventually followed in 2017.
Lately, the Australian dollar has been far weaker relative to the Chinese yuan. Given slowing credit growth and decelerating new house prices, there are reasons to be concerned about the outlook for China’s economy. As the Australian dollar is now also falling, all signs suggest a weaker Chinese yuan in the near future.
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