Can Gazelles and Unicorns Outperform Black Swans and Gray Rhinos in China?

Can Gazelles and Unicorns Outperform Black Swans and Gray Rhinos in China?

In a comprehensive document from the latest meeting of the Politburo of the Communist Party of China at the end of July, two terms caught my attention: gazelle companies and unicorns. The decision-making body expressed its strong commitment to supporting the development of these entities, reflecting a strategic focus on fostering high-growth and innovation-driven firms in China’s economy.

Gazelle companies, defined as start-ups founded in the 2000s, with a value exceeding US$500 million, are most likely to achieve ‘unicorn’ status within three years. On the other hand, unicorns typically refer to private companies with a valuation surpassing $1 billion. Both terms are commonly used to describe high-growth and innovation-driven firms that represent the most advanced force in a country’s economy. They embody the “new quality productive forces” China has been promoting in its transition from the old growth model to high-quality development.

At the recent Third Plenum of the 20th CPC Central Committee, which lays out the blueprint of China’s future development, all policies aim to achieve high-quality development in the pursuit of modernization with Chinese characteristics. Nevertheless, there are daunting challenges ahead. China has been endeavoring for many years to shift its growth engine from investment and exports to consumption, and from low-value-added businesses and sectors to the middle and upper streams of the global value chain.

The task of achieving high-quality development in China has become even more challenging due to rising protectionism and geopolitical tensions. The external environment is now rife with headwinds and uncertainties, adding to the complexity of the situation.

In other policy documents by Beijing, the terms “Black Swan” and “Gray Rhino” have also been mentioned, highlighting the harsh internal and external environment that China is facing. Domestically, the real estate sector, along with its related industries, which collectively represent over 20 percent of China’s GDP, is still not showing clear signs of decisive recovery. The complexity and large amount of local debt further complicate the situation. According to IMF calculations, China’s central government and explicit local government debt accounted for 55 percent of GDP by the end of 2023, which is deemed relatively safe. However, when factoring in local government financing vehicles and other government funds, the debt level is an alarming 116 percent of GDP. On the global stage, the decoupling campaign led by the United States has presented challenges for crucial technology access, accelerated relocation of industrial chains out of China, and a decline in exports.

But can emerging new technologies, sectors, and business models effectively fill the void left by the traditional model in China’s economy? Can gazelles and unicorns prevail over black swans and gray rhinos?

To understand this, let us look at the abundance of gazelles and unicorns in China. China boasts the second-highest number of gazelle companies globally, with 218, trailing only behind the U.S. with 247, as per the Hurun Future Unicorns in the World 2023 report. Additionally, another report by the same organization reveals that among the top 10 unicorns in the world, 5 originate from China, 3 from the U.S., and 1 each from the UK and UAE.

A recent report from Bloomberg Economics forecasts that China’s high-tech sector will contribute to 19 percent of the country’s GDP by 2026, a significant increase from 11 percent in 2018. The combined exports of EVs, batteries, and solar panels could potentially elevate this proportion to 23 percent, effectively compensating for the anticipated decline in the property sector from 24 percent to 16 percent of China’s GDP.

Recent economic figures indicate a slowdown in growth to 4.7 percent in the second quarter. Despite this overall deceleration, the high-tech sector outperformed traditional elements of the economy. Industrial output of high-tech manufacturing surged by 8.7 percent year-on-year in the first half, compared to the overall growth rate of 6 percent. Investment in high-tech sectors also exhibited robust growth, increasing by 10.6 percent, significantly surpassing the 3.9 percent growth in overall investment. These factors, alongside the downturn in the property sector with sales down by 25 percent and investment down by 10 percent in the first half, suggest that other forces, including gazelles and unicorns, are offsetting the downturn and contributing to maintaining relatively stable growth.

Gazelles and unicorns enjoy full support from Beijing, which is also making concerted efforts to mitigate the impact of black swans and gray rhinos. Beijing aims to bring local debts out of the shadows and transform them into explicit local government debt for better monitoring. Simultaneously, it seeks to replace short-term, high-interest debt with long-term, lower-rate debt, adopting a “time for space” approach.

To revitalize the real estate sector, down payments and mortgage rates have been reduced multiple times, and local governments are encouraged to purchase unsold apartments to complement welfare housing, supported by a 300-billion-yuan re-lending loan facility from the central bank.

In this context, the strategic decisions of global companies and investors in the Chinese market will be pivotal, as an erroneous choice could prove to be costly.