China‘s track record for economic growth has been impressive in the last several decades, with China accounting for up to one-third of global growth in recent years.

However, China is slowly transitioning from a manufacturing-reliant economy to one focused more on services, with the service sector accounting for 46 percent of GDP in recent years, doubling its size over the last two decades.

The sharing economy has become a large part of the service sector, with China’s National Information Center projecting that the sharing economy will be worth 10 percent of China’s total GDP by 2020. Despite these growth projections, the sharing economy faces a variety of different challenges moving forward, including major litigation issues, legal regulations and social misunderstandings, among others.

How can China fully embrace the sharing economy to turn it into a fully fledged vehicle for economic growth?

The answer to this question lies in legitimizing the shared economy by building relationships with key stakeholders, bringing it under regulation (rather than litigation) and establishing its positive social impacts.

Establishment with key stakeholders

Large businesses and Western governments typically see the growth of the sharing economy as an unstable economic threat. However, large Chinese companies and the government seek to embrace the sharing economy.

With China’s economy and government undergoing restructuring and transparency reform, China is in the perfect state to grow with, rather than against, the sharing economy. These relationships with large companies and the government is crucial to establish the shared economy and maximize its potential as a powerful economic force.

Because of prior state ownership, large companies typically did not function with a strict budget. To retain steady growth numbers, production costs were often over-reported when they did not meet state guidance, and vice versa when excess was produced, creating inaccurate statistics and error-laden financial reports.

Western companies typically involve shareholders, who demand transparency when it comes to costs. With China’s businesses being relatively new entrants compared to their foreign counterparts, cooperation with shared economy providers is more feasible than in other nations.

The recently launched Commission on the Sharing Economy in China (CSEC) demonstrates this spirit of cooperation and advancement. The CSEC has the backing of major companies, such as Internet giant Tencent, Lenovo and LinkedIn, while gaining equal participation from shared-economy providers Airbnb and the ridesharing service Didi Kuaidi.

China has the potential to become a market leader in this new space of cooperation.

This spirit of cooperation is unseen in the West, with the model of companies backing individual startups to provide innovation/profits being much more common. China has the potential to become a market leader in this new space of cooperation, working in tandem with the sharing economy to provide mutual benefits for the government, businesses and consumers.

Another area that would establish the shared economy is cooperation with government. The sharing economy is facing major backlash against local Western governments who have been unable to adapt to the fast-paced environment.

However, China can set the standard for other countries to follow, as its internal infrastructure is already undergoing overhaul, transitioning from a very controlled one to one mimicking capitalist principles. In fact, local Chinese governments have even gone as far as to back certain ridesharing services, such as the Hangzhou-based Weigongjiao.

Additionally, China could be one of the first countries to establish realistic tax codes for those participating in the sharing economy. China could also create legislation for tracking and punishing abuses, such as assaults caused by ridesharing or fraud stemming from Internet financing.

Additionally, China could define rules for privacy abuse for players in the shared economy, something that is increasingly important, given the social factor of the shared economy. China has the ability to be the trendsetter in cooperation between the shared economy and government, something that has historically been very difficult for Western governments to accomplish.

Cooperation between members of the sharing economy and key stakeholders, such as large businesses and the Chinese government, is especially important in the Chinese economy. With its relatively new government and business entities, China can adapt and drive growth at a scaled pace alongside participants in the shared economy, as opposed to attempting to litigate members of the shared economy.

Establishment through regulation, not litigation

The fast-paced growth of the sharing economy contrasts directly with the methodological pace of government regulation. However, regulation is necessary to allow the sharing economy to grow, as opposed to litigation, which simply harms it. This is where China has a distinctly clear advantage: Its transitioning methods of governance allow it to quickly disseminate changes in its ever-growing marketplace. This “flexibility factor” allows its governmental systems to adapt to the sharing economy, instead of clashing with it like its Western counterparts.

In the United States, the popular rideshare service Uber has faced heavy litigation because of its perceived undercutting of the taxi industry, leading to heavy fines and strict rules being implemented by well-established local judiciaries (such as city and/or state transportation boards).

The fast-paced growth of the sharing economy contrasts directly with the methodological pace of government regulation.

China’s Ministry of Transport, established in 2008, released draft policies in late 2015 seeking to regulate ridesharing services in all of China, showing China‘s ability to quickly move to adopt legislation when dealing with the sharing economy. These policies are a specific indication by the Chinese government of their acceptance and willingness to cooperate with the booming sharing economy, as opposed to simply fighting its growth.

Western governments are also just now creating institutions to interact with the expansion of the sharing economy. Countries in Europe and the United States currently do not have any government-backed legislative bodies with national influence that deal solely with the sharing economy. Rather, most growth in Western countries is backed by private industry, as opposed to governmental entities.

In contrast, China’s National Development and Reform Commission, formed in 2003, has already established a Department of High-Tech Industry, whose stated goals include “drafting key policies to promote the development of high-tech industry” as well as “promoting the formation of new industries” in the Chinese economy. This commission has the potential to develop an established pipeline for sharing economy participants to address the Chinese government directly, with the established and formal nature of this commission being key to this official two-way communication.

The relatively quick ability of the Chinese government to influence regulatory change showcases the Chinese desire to keep up with the sharing economy. The rapid pace of Chinese economic growth, along with the older styles of Chines authoritarian rule, have enabled regulators to draft and pass laws in a much shorter amount of time than in Western countries. This influence can allow China to be at the forefront of change in embracing the sharing economy as a resource, rather than a threat.

Establishment through positive social impacts

The fast-paced growth of the sharing economy has not come without its detractors. Individual actors in the sharing economy, as well as the notion that high-tech and the sharing economy are very closely related, has generated extremely negative publicity in recent times.

This is another area that China has the potential to shine: China’s authoritarian government has allowed it to implement programs when such a need arises. This would certainly be the case with governmental bodies focused on measuring the positive social successes of businesses in the shared economy.

Home-sharing service Airbnb has suffered in recent times, with different media outlets blaming it for skirting rent laws and taxes, and even causing gentrification in some San Francisco neighborhoods. With Airbnb being a large provider of services in the sharing economy, particularly in San Francisco, people naturally shifted the blame to the sharing economy in general. However, with its current rate of growth in the global market, the sharing economy has proven itself here to stay, particularly in the Chinese market.

The sharing economy has the potential to bring about a lot of positive social impact in China.

Tujia, a service that can be compared to Airbnb with some elements of property management, has already taken off in China, reaching a valuation of more than US$1 billion. Xiaozhu, a service that is also often compared to Airbnb, has also established a strong Chinese presence, with offices in 20 major Chinese cities and more than 30,000 listed properties.

These services are not only providing extra income for consumers, but are also driving housing prices, with Bloomberg Business citing an example of 800 apartments selling immediately at 1,500 yuan a square foot higher than expected after an association with Tujia was announced.

Besides driving housing-market pricing, these home-sharing services also generate tourism and encourage local business growth, something that is especially important in China’s transition to a more services-oriented economy. These positive, measurable social impacts only help increase the sharing economy’s legitimacy, and establishes it as a force capable of spreading economic growth.

Internet financing, another tenet of the sharing economy, involves peer-to-peer transactions to help small investors and entrepreneurs. The popularity of Internet financing has multiple social effects, most of which revolve around encouraging entrepreneurship and personal credit reporting.

According to Reuters, Chinese banks are still reluctant to lend to potentially high-risk small companies, even with the Chinese government lowering interest rates. However, Internet financing, often quicker and more likely to approve loans to entrepreneurs, fills this void, allowing increasing numbers of individuals to participate in the sharing economy.

Furthermore, the growth of Internet financing has also caused an increased interest in personal credit reporting, a concept that is more widely established in the West than in China. This move to increase Chinese awareness of personal credit reporting will allow individuals more freedom of movement, with the potential to buy homes, cars and other costly items that one would typically pay cash for in China. Internet financing is revolutionizing the way people receive credit, and is a large part of the Chinese sharing economy that is growing daily.

The sharing economy has the potential to bring about a lot of positive social impact in China. These positive social impacts must be documented and reflected upon to give the sharing economy increasing legitimacy, to the point where these statistics would be an official statistics line in China’s census/GDP. This will allow its establishment as an institutional economic growth incubator, rather than just the notion of the sharing economy as a simple “fad.”

Conclusion

The Chinese government has the strongest position to be able to truly legitimize the sharing economy. Instead of being seen as a threat or as a simple acquisition by other large businesses and governments, the Chinese have so far hastily embraced the growth the sharing economy brings to its service industry. While facing multiple challenges, the sharing economy will be able to thrive, and it must do so in China by encouraging regulation and cooperation, as opposed to litigation.

Additionally, the sharing economy must focus on the positive social benefits it brings participants, while building and maintaining relationships with key stakeholders, who, to a certain extent, are participants themselves.

The sharing economy is an indicator of strong economic growth, and can truly become a leading vehicle for change and economic prosperity as China moves into the future.