Blockchain In China: Local Is Everything

City governments in China have invested $3.57 billion since 2016 to support blockchain startups and R&D. Here’s a guide on who’s doing what.

Earlier this month, the Chinese Communist Party (CCP) published a handbook titled “Blockchain  —  A Guide for Officials” (区块链 — — 领导干部读本 qū kuài liàn, lǐngdǎo gànbù dúběn), targeted at government officials and financial authorities to gain a deeper understanding of blockchain technology. This comes almost a year after the CCP issued a ban on initial coin offerings (ICOs) and cryptocurrency exchanges, which still remains in place as the industry waits to see what regulations the CCP will enact. Despite the ban, blockchain remains a booming industry in China.

Source: SCMP

As I wrap up a year working for NEO Blockchain’s Global Development Team while pursuing my masters in China Studies at Peking University, I often get asked what blockchain activity looks like in China despite the ban. My answer is usually along the lines of: it’s extremely active, the government is working on drafting regulations, all of the large tech companies are exploring how they can use blockchain, and many local governments have set up initiatives and funds for research on blockchain applications.

An interesting aspect of the Chinese government system is that while it is firmly governed by the CCP at the top, local and provincial governments are free to experiment with policy with a certain degree of autonomy. In place since the opening up and reforms of 1978, the practice of giving local governments the freedom to pursue, through creative measures, a certain level of productivity has been extremely successful. Blockchain activity in China showcases this dynamic.

At the top level, Xi Jinping has endorsed blockchain technology, calling it a breakthrough technology and highlighting it as a top priority for China to become the global center of science and innovation. In December 2016, blockchain technology was written into China’s 13th Five Year Plan along with artificial intelligence (AI) to build a strategic technological advantage. In response, various city governments have set up their own local initiatives through a combination of public-private-university partnerships. Each initiative operates differently and sets goals based on what works in its region.

Here is an attempt to shed light on some of the investments and blockchain promotion policies established by Chinese municipalities.

Shanghai (上海)

Shanghai began to organize and position itself as a regional hub for blockchain technology in the summer of 2016. The Shanghai Blockchain Industry Development Research Alliance (SBIDRA) was created to prepare a development plan presented at the Global Blockchain Summit, hosted in Shanghai in September 2016. This group included private and public players such as Shanghai Municipal Development, Reform Research Institute, Wanxiang Blockchain Lab, Ant Financial, Webank, and Micro Focus Bank.

Suzhou (苏州)

Suzhou, located between Shanghai and Hangzhou, is home to many factories and migrant workers. However, with rising labor costs and in the “Industry 4.0” era, Suzhou’s factories since 2012 have struggled to retain their workers and upgrade their technology. In response, in November 2016, Suzhou’s city government and Tongji University partnered to create Suzhou Tongji Institute of Financial Science and Technology to build a blockchain training base and educate 500 blockchain technicians this year. Additionally, the city is coordinating with Suzhou High-Speed New City Management Committee, which set aside $158 million to build China’s first “Digital Economic Application Demonstration City.” This fund is meant to position Suzhou as the “Blockchain Valley.”

Guiyang (贵阳)

In December 2016, Guiyang’s government published a whitepaper explaining how the city could use blockchain technology to optimize governance, boost economic growth, and enhance people’s quality of life. Some of the use cases highlighted in this whitepaper include sharing government data, supervision of power, targeted poverty alleviation, efficient transportation, supply chain finance, and credit authentication for small- and medium-sized enterprises. While Guizhou is relatively less developed compared to other cities on this list, the city is using this as a strength in embracing new technologies and attracting talent to its naturally beautiful environment with lower housing and electricity costs. Guiyang allocated $94.5 million to invest in blockchain companies. As of May 2017, Guiyang has been cooperating with the Industrial and Commercial Bank of China to use blockchain for management of a poverty alleviation fund.

Guangzhou (广州)

This famous port and transportation hub was actually the first Chinese city to issue a blockchain industry support policy, known as “Blockchain 10” (区块链10条), on December 25, 2017. The city aims to attract blockchain startups, labs, and research by providing them up to 5 million RMB ($734,000), among other rewards and incentives. The “Guangzhou Huangpu District Development Zone Promoting Blockchain Industry Development Measures” were unveiled at the 2nd Development Conference and Blockchain Industry Development Roundtable in December 2017. This is part of a larger initiative to build a blockchain digital innovation ecosystem in Guangdong, Hong Kong, Macao, and Dawan District.

Hangzhou (杭州)

The entrance to China Hangzhou Blockchain Industrial Park. Source: Bitsonline

Hangzhou, the home of Alibaba, pioneered the first blockchain fund of any Chinese city in early April 2018. The Xiong’An Global Blockchain Innovation Fund, a $1.6 billion fund, was co-established by the local government of Yuhang District, a suburb of Hangzhou, Hangzhou Future Science Town, and Hangzhou-based venture capital firm Tunlan Investment. Hangzhou also established a blockchain industrial park as an incubation center for start-ups and a research institute. Hangzhou-based Zhongchao Blockchain Research Institute, under the People’s Bank of China (PBOC), launched the first central bank blockchain platform in China. So far, this has worked in Hangzhou’s favor. Of the top 100 blockchain patents of 2017, five companies are located in Hangzhou.

Shenzhen (深圳)

China’s “Silicon Valley of Hardware” held a Blockchain Expo and announced a $79.2 million blockchain venture capital fund on April 23, 2018. Home to Tencent, Huawei, and ZTE, Shenzhen became the second Chinese city to launch a blockchain fund, following in the footsteps of Hangzhou. The fund is co-managed by Donghai and Star Capital, two investment funds controlled by the state-owned Assets Supervision and Administration Commission of the State Council (SASAC). This blockchain initiative, in conjunction with the Chinese Academy of Sciences and the Shenzhen Institute of Innovation and Development, will invest in and incubate more than 100 blockchain projects.

Nanjing (南京)

China’s Southern Capital launched a $1.48 billion blockchain fund and the very first Industrial Public Chain Summit (IPCS) on May 23, 2018. This fund is in conjunction with Yuandao Capital and the Jolmo investment management. The funds will be distributed in the following matter: 30% for the development of early-stage blockchain startups and innovation projects undertaken by academic institutions, 40% for traditional companies looking to adopt blockchain technology, and the remaining for upcoming cryptocurrency projects.

Xiong’An (雄安)

Xiong’An New Area, located 100 kilometers southwest of Beijing, was designated as the newest state-level area by Xi Jinping in April 2017 with the goal of converting it into a dream city. Xiong’An will be a hub for research, education, and high-tech R&D — including blockchain, of course. In July, Consensys, the blockchain software company founded by one of Ethereum’s founders, and Xiong’An signed an agreement for Consensys to advise the Xiong’An government on how to use blockchain solutions for the city. Xiong’An has agreements with various Chinese tech companies for blockchain integration, including Tencent and Qihoo 360, but this is the first known agreement of this kind with an overseas organization. Xiong’An will also use a blockchain-powered fund management platform to fight misappropriation and interception of project money.

From municipal to national  —  what this all means

The municipal-level funds on this list add up to $3.57 billion invested by city governments in China to support blockchain startups and R&D. Keep in mind that this amount does not include national budget or private VC funding for Chinese blockchain companies. These policies have definitely worked in encouraging the establishment of blockchain companies. The South China Morning Post reported that a total of 16,600 companies established in China between July 2017 and July 2018 listed blockchain as part of their business. Over 3,800 of these firms each had a registered capital of more than 10 million yuan ($1.5 million). By comparison, the United States had 817 companies, and the United Kingdom had 335 companies, registered with blockchain in the name, according to data from OpenCorporates.

Many have called 2018 “the year of blockchain,” and China is definitely on top of this wave. Yet the China Academy of Information and Communications Technology (CAICT) reported that the average lifespan of a blockchain project is 1.22 years, or about 15 months, and 92% of projects fail. While there is clearly a lot of hype, the fast rate of project failures indicates that blockchain companies have a short lifespan to build a quality product, find investors, and build the right partnerships in the ultra-competitive Chinese market. Even if only a handful of projects from these local hubs succeed, China’s advantages — a larger ecosystem of consumers who are faster to adapt to technology, and easy access to government support — position it to become a global leader of blockchain technology.

The central government’s encouragement of blockchain innovation through its local governments shows China’s continuing emphasis on innovation, startups, and, of course, blockchain. Through the cryptocurrency ban, the CCP has clearly distinguished between blockchain and cryptocurrency, showing authority and centralization over the types of projects that can be developed on blockchain. “Blockchain  —  A Guide for Officials” is the CCP’s latest move as the blockchain community awaits more guidance and national policy. In the coming months we will see how the China model comes to play as learnings from local initiatives are consolidated into much awaited blockchain and cryptocurrency regulations.