IN FOCUS6-8 min read

How China’s internet sector is leading the world

China’s internet sector is at the forefront in global innovation, and we think it will be for a long time.



Jose Pun
Equity Analyst

China’s internet sector is in the driving seat of global innovation and it’s evolving rapidly. The country may be classified as an “emerging” market in investment terms, but measured by the speed of its adoption of new technology it is anything but. There are now 904 million connected internet users who spend an average of around 31 hours a week online. This represents a penetration rate of 65% of the population, up from 34% in 2010. By comparison, connected internet users in the US number around 312 million, and market penetration is already close to 90%.

To help guide investors through this fast-moving, ever-growing sector, we take look at some of the most important trends today. And we lift the lid on the four key revenue models: e-commerce, online advertising, online gaming and subscriptions.

New trends in China’s internet landscape

While social media apps still capture the greatest proportion of user time on mobiles, the rapid increase in the use of short form videos is a major growth trend. These have gained particularly strong traction among younger demographics, and their popularity, reflected in the sharp rise in user numbers, has made them highly appealing to advertisers.

Bytedance, which owns video sharing business TikTok, or Douyin in China, is a major short video provider. The company has taken market share in advertising by leveraging its significant user traffic to tap into the growing trend. Bilibili, which is similar to YouTube, is another company which has benefited from this trend.

A new trend within e-commerce in China, and which is not seen in Western markets to the same extent, is the rise in live streaming using a ‘key opinion leader’ or KOL as a host. This concept is a blend of social media influencer and home-shopping on TV. But now, with mobile video, there are KOLs to cater for all needs, providing recommendations for a range of tastes. Major e-commerce players such as Alibaba have successfully adopted this approach.


E-commerce now accounts for 27% of total retail sales in China, on a par with South Korea as the highest penetration globally. We expect it to exceed 30% this year.

The largest e-commerce company in China, and perhaps the most familiar to most investors, is Alibaba. It operates across four main business units including core commerce, which accounts for over 85% of revenues, cloud computing, digital media & entertainment and innovation initiatives. In e-commerce, the company primarily operates a third party, or 3p, marketplace platform for businesses to sell their goods direct to consumers.

Alibaba’s 3p business, Taobao, does not hold an inventory of stock; it takes a commission on sales and other services provided. The company has built an ecosystem which connects buyers and sellers, adding value to merchants through services such as marketing and advertising. It also provides a ratings system to indicate the reliability of the merchant, as well as messaging technology to enable buyers to ask questions. In China alone, Alibaba has an e-commerce market share in excess of 60%, as measured by merchandise revenue, with 654 million active shoppers on its sites last year.


By contrast, rival operates a direct sales, or 1p model. The company sells inventory it holds in its country-wide network of warehouses, delivered by its in-house logistics capability. This enables greater oversight of the delivery process, economies of scale, and critically, provides for a more efficient distribution as the goods are typically close to the final customer. This is in contrast to Alibaba where goods are dispatched from its merchants’ warehouses. At the end of 2019 JD had 311 million active shoppers.

One interesting characteristic in China is the large number of third party merchants and sellers, far more than in the US for example. So while Alibaba has a significant market share, there is room for multiple players.

These include Pinduoduo (PDD), another 3p marketplace operator, which has grown rapidly in recent years by focusing on the “value” end of the market. At the end of last year, PDD had 443 million active shoppers on its sites, and with Covid-19 accelerating its growth in users and sales, competition for incumbents is rising.  

Another fast growing player within the market is food delivery service Meituan-Dianping; the equivalent of Grubhub or Deliveroo. The number of daily orders delivered by Meituan dwarfs that of its Western peers. Meituan has 400 million users of its app in China; by comparison Grubhub has 23 million users in the US.

Meituan Dianping is also a provider of hotel and other bookings. Indeed, the business model rests on leveraging the food delivery operation is to drive traffic to its other sales offerings, and to support growth in advertising revenues.

Online advertising

Internet search, which is driven by advertising revenues, is dominated by Baidu. Despite having a market share of around 65%, the company faces challenges from other apps. Perhaps uniquely, apps in China incorporate search functionality, negating the need for users to switch to a standalone search engine.

And for Baidu, a stagnation in users has implications for advertising revenues. The switch from PC to mobile has accelerated this effect. Baidu recognises the evolving market, however. It is investing in new businesses such as artificial intelligence and autonomous driving.

Sina, which operates Weibo, one of China’s most popular micro-blogging websites (similar to Twitter) and has about 500m active users, is another player in the advertising market. However, a trend which has seen users switch from text-based apps to short-form videos from companies such as Kuaishou and Douyin (owned by Bytedance) has reduced its significance for advertisers. Sina recently launched an Instagram-like offering called Oasis and continues to evolve its offering in order to try to attract new users.

The range of competitors in the advertising space has increased in recent years. As internet usage has become increasingly important to daily lives, the opportunities for advertising have also increased. E-commerce marketplaces such as Alibaba, and gaming companies such as Tencent, now generate significant revenues from advertising. Anywhere with high user traffic is a potential marketplace, and barriers to entry are low.

Online gaming

Video games are a major industry in the internet space China, both PC and mobile, and there are an estimated 600 million gamers in the country. Tencent, another more familiar name to many outside of China, is the dominant player with a 55% domestic share, and the company is now the world’s largest video game developer. While gaming is a key part of its business, Tencent is also behind WeChat, China’s dominant social networking app which has close to 1 billion users. Wechat has become ubiquitous with everyday life in China, commanding the largest portion of time spent online by mobile users.

With the online gaming industry in China maturing, Tencent is also looking to grow internationally. The company has deep pockets of capital and has been able to acquire other businesses and invest in the top studios across the world. In addition, it has successfully diversified its revenue streams over the past five years, via its fintech and business services unit.

Netease is another key game developer in China. With a strong  track record in launching successful games over the years, it is also looking to expand overseas markets, such as the US and Japan.

Subscription services

Companies with subscriber models include Iqiyi, an online video streaming company often viewed as China’s answer to Netflix. Music streaming is led by Tencent Music Entertainment, which has around 800 million users.

In contrast to other markets, it has been harder for online subscription models to be profitable as consumers in China had become accustomed to receiving services for free. As a result, currently only around 5% of Tencent Music Entertainment users are subscribing for paywalled content; this is in contrast to US company Spotify where the figure is close to 45%. Greater competition for disposable income spend in China also means that monthly subscription fees are materially lower in China. However, attitudes are changing and these companies have started to see a gradual uptick in paying subscriber numbers.

Can the remarkable growth continue?

The growth in e-commerce has been incredible; online sales have increased by in excess of 20% over each of the last five years. And despite a deceleration in the pace of this growth from 50% in 2014, we don’t see a major slowdown any time soon.

Understanding China, a country with over 1.4 billion people, and with 113 cities with a population over 1 million, is key to understanding how the industry is growing at such high rates.

While cities such as Beijing and Shanghai, tier one cities, may not be growing as such a fast pace, less developed tier three and four cities are still catching up. And then there is the older generation, which has typically been slower to adopt new technology, but following the pandemic are now more accepting of it.

Within the internet space, demand for various goods and services has been varied. For example, “fast moving consumer goods”, such as those low-cost items you would buy in a supermarket or pharmacy, account for 50% of total retail sales in China, but only 4% of online sales in 2019. That is now changing, in part due to the impact of the Covid-19 pandemic, which forced people to try new online services. We think this trend is likely to accelerate.


The continued growth in average incomes is a further support to increasing online spending patterns. So while the growth of the internet over the last ten years has been somewhat eye watering, there is strong foundation and the outlook remains compelling.

One point to monitor, as the sector continues to grow, is whether China follows the same path as the US market where the largest players maintain their dominance by acquiring new, high growth peers. Or whether new companies can establish themselves and continue to flourish.

The evolution in China’s internet sector is as fast paced as it is fascinating. But past performance is not a guide to future performance. And while we have reviewed the key players, investment decisions incorporate a range of considerations which are not discussed here, in particular valuation. What is clear, however, is that China’s internet sector is at the forefront in global innovation, and we think it will be for a long time.     


Any references to securities, sectors, regions and/or countries are for illustrative purposes only and not a recommendation to buy and/or sell.

Reliance should not be placed on any information contained within the article when taking individual investment and/or strategic decisions. 

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.

All data contained within this document is sourced from Cazenove Capital unless otherwise stated.


Jose Pun
Equity Analyst


The value of your investments and the income received from them can fall as well as rise. You may not get back the amount you invested.