The World Bank released a report on crowdfunding’s potential in the developing world. According to the Information for Development Program, China is one nation that is ready for some explosive growth in this emerging area of alternative financing. It will be interesting to see how China responds to the demand for crowdfunded innovation.
How is China’s Economy Transitioning to Take Advantage of New Investment Vehicles?
If you still think of China as a communist country, then you are not up with the latest developments taking place within the country. In fact, you have missed the last 30 years of developments. China has been shifting away from a centrally planned economy since the late 1970s and keeps moving closer to a market-based economy in many ways. A 10 percent per year growth in GDP is building a strong middle class there.
China’s population is 1.3 billion, and the country now has the second largest economy in the world—behind only the United States. But don’t let statistics fool you, of the 1.3 billion population maybe 500 million are in any way consequential to the economy, the rest, grow what they eat. That said, there are more English speaking people in China than in the United States.
Still, even with the market reforms and the explosion of the middle class, China is considered a part of the developing world. The country has the second highest number of poor in the world and there are major cultural stressors that keep the country’s aging population and labor market struggling to keep up. Nevertheless, the possibilities are staggering.
Why Crowdfunding Could Explode in China
As China’s economy continues to grow and the country continues to become an economic powerhouse globally, China’s relative strength to its neighbors will become more evident. The first crowdfunding platform was introduced in China in 2011. Instantly, there were two crowdfunding platforms that served the country—one in Hong Kong and one in China proper. By 2013, Demohour had become the largest crowdfunding site and had raised 6.5 million yuan for investment seekers (about 1 million U.S. dollars).
China’s stricter investment laws and weaker intellectual property protections mean that crowdfunding is done a little differently. In fact, the funding isn’t so much investment-centered as it is product innovation- and public welfare-centered.
The Chinese like to save. Total household deposits as a share of total deposits was 44 percent in 2012. With China’s population numbers and potential for a big percentage of income in circulation, there is a lot of potential here for innovation and economic growth by way of crowdfunding investments. That could mean peer-to-peer lending, which is also in growth mode in developing countries, or reward-based crowdfunding.
One other area with a lot of potential is equity-based crowdfunding. AngelCrunch is the largest in China, but there is room for more competition. On the other hand, weak protection for intellectual property right makes it risky for entrepreneurs to share details about their creations too early in the process.
One creative approach to crowdfunding in China has been the introduction of the country’s first virtual currency crowdfunding platform. Cryptomex can skirt China’s monetary regulations and encourage cross-currency investing in ways that the more popular rewards-based crowdfunding cannot.
Goodbye Manufacturing, Hello Investment
Just as the United States transitioned from an industrial economy in the early 20th century to an information-based economy by the end of the 20th century, China appears to be transitioning from a manufacturing-based economy to an investment-based economy. If that happens, you’ll see more entrepreneurs taking more risks and pursuing investment-backed ventures.
All of this means that China has the potential to develop into an investment-based economy if it can just get over its social and economic hurdles, which seems likely. If that happens, you can expect further economic growth, which will in turn spur more investments.