Innovation flourishing in China, says UBS report

China is transforming from being the world factory to an innovation-driven nation by embracing a fresh wave of innovation, a new report said.

According to the report from Swiss financial firm UBS, China's total research and development investment registered an 18 percent compound average growth rate between 2006 and 2016. If the same momentum is maintained, China will become the world's second largest R&D investor after the United States by 2020, with such investments accounting for 2.5 percent of the total GDP by then.

The country is also home to the second-largest number of so-called unicorn companies, next only to the US. Such companies have a market value over $1 billion each and have been operating for over 10 years. About 20 percent of these Chinese companies have made technology breakthroughs while the remaining 80 percent have made innovations in business models, explained Hou Yankun, chief China strategist at UBS Investment Bank China.

The innovations have been made remarkably in five major areas: education, fintech, electric vehicles, artificial intelligence and big data computing, according to the report.

"China has been making significant progress in scientific research, given the number of patents applied in the country every year and the published Science Citation Index papers," said Hou.

In terms of fintech, Alipay is one of the best examples, as it outnumbered Visa and Master-Card in 2016 in total online transaction volumes, according to UBS. Alipay is the mobile and online payment service of e-commerce giant Alibaba Group Holding Ltd.

Meanwhile, China has taken up 40 percent of the global market share of electric vehicles, with annual sales totaling 500,000 units in 2016.

China has produced 76 percent more papers on the study of AI than the US in 2016 and 2017, also overtaking the latter in terms of the citation rate.

What is more, China has retained the world record in big data computing speed for three consecutive years since 2014, which as Hou explained, can be largely attributed to shopping carnivals such as the upcoming Singles Day on Nov 11.

"The Chinese government has provided huge support to R&D activities in recent years, like tax incentives," said Hou. "The enhanced education quality, which nurtured more graduates majoring in sciences, has also created more engineer candidates."

The flexible market ecosystem in China has created more opportunities for companies. In this sense, consumers have a higher tolerance for products at preliminary stages and companies can adopt the trial-and-error strategy, he said.

"With a rich reserve of savings, abundant foreign direct investment, as well as private equity and venture capital firms' increasing interest, innovation vibrancy can remain high in China," he added.