China

China’s cities are going to the metaverse — before they even know what it is

Local governments in Beijing, Shanghai and other cities are all-in on the metaverse to attract new business investments.

Person wearing VR goggles in front of Chinese flag

Even while China firmly rejects some controversial developments such as cryptocurrency, the country is openly embracing a future in the metaverse.

Image: Starkvisuals/Pixabay; Protocol

The metaverse — whatever, exactly, it may turn out to be — has already attracted an unexpected admirer: Chinese local governments. Just as mayor after mayor in the United States is embracing cryptocurrency, city after city in China is heading to the metaverse … or at least planning to, when the metaverse actually gets built.

In January, at least 10 Chinese cities and provinces started including the metaverse industry in their economic development plans or courting metaverse companies. That list of cities now includes Shanghai and Beijing, which, due to their political and economic importance, are often the trendsetters for the rest of the country. One government project in Shanghai that’s already open to the public aims to build a virtual city hall that serves both digital travelers and local residents.

While the global tech industry and the general public debate the potential merits of the metaverse, Chinese local governments seem to be feeling adventurous about this still-vague future. Local governments’ desire for new sources of economic growth may be surpassing potential caution around a new invention, analysts say — and that vagueness itself can be a good thing when it comes to government policy messaging. Since the metaverse can mean anything, local officials can interpret it in whatever way suits their needs and potentially change that interpretation if the political winds shift.

The result is a fascinating parallel: Even while China firmly rejects some controversial developments such as cryptocurrency, the country is openly embracing a future in the metaverse.

The municipal metaverse

On Dec. 21, two months after Facebook’s corporate rebranding to Meta launched “the metaverse” into everyday conversation, Shanghai Party Secretary Li Qiang became the first local Chinese government official to start talking up the metaverse. Although the word “metaverse” didn’t appear in his speech, Li, the top official of China’s most populous city, said in order to boost the local economy, Shanghai will encourage the development of “important platforms where the virtual world and the real world will interact.”

Within a month, the metaverse — the concept, and soon the word itself — would find its way into policy papers across China. Economic development officials in Beijing said the city is organizing a “consortium of metaverse innovations” while building a “metaverse industry cluster.” The eastern province of Zhejiang, right beside Shanghai, pledged a development blueprint that prioritizes the metaverse together with sectors such as artificial intelligence, semiconductors and space technology.

In most of these cases, the documents never clearly define the metaverse — maybe because even the industry can’t agree on what it is. That perhaps makes it even more remarkable that the governments are willing to endorse an abstract, unreliable concept in an era of increasingly strict tech regulation.

For now, the only sneak peek of what local governments may be up to is a project called “the metaverse city hall” in Shanghai. It is a collaboration between the local government of Fengxian, a new suburban district under intense construction, and Fengyuzhu, a Shanghai-based digital entertainment company that now calls itself “the metaverse contractor.”

The “city hall” is a virtual replica of a real performing center in the Fengxian district. The white artistic building, designed by a French architect and finished in 2019, was turned into a neon-lit, simplistic 3D model scheduled to open on the domestic metaverse platform Xirang in early February “to let local residents and tourists feel the urban development progress.” In the future, it will also become a government services portal.

Screenshots of Fengxian, Shanghai\u2019s metaverse city hall. Screenshots of Fengxian, Shanghai’s metaverse city hall.Image: Shanghai Fengxian Development Group

To Fengyuzhu, the company contracted to build the city hall, a metaverse venue for each city represents one way that the concept can be materialized. “Now that traveling is restricted by the pandemic, people can’t go anywhere they want to go. But when it comes to building the future [of traveling] with the metaverse concept, I think the Chinese government has been acting fast,” a Fengyuzhu spokesperson told Protocol.

Local officials in Shanghai have been eager to figure out what they can do about the metaverse, she added. Companies that specialize in blockchain or digital art production have been invited to government seminars. In addition to this city hall project, Fengyuzhu has also been contracted by two other cities, Deqing and Zhangjiajie, to come up with plans to move local industries to the metaverse.

Because Fengyuzhu doesn’t build the metaverse platform itself, it relies on the success of domestic platforms, such as Xirang or Honnverse, to make these “municipal metaverse” projects accessible or useful. They’re very much a work in progress: Most of the platforms are still in early development stages, and the few that have already been released were met with overwhelmingly negative reviews. In February, Jelly, a new Chinese metaverse app, briefly surged to the top of app store charts before the developer pulled down the listing, citing online attacks.

Just one more reincarnation of the digital economy

For people who have long been tracking China’s economy, there’s a periodic nature in the tech creations that are embraced by local governments en masse. Five years ago, it was semiconductors; two years ago, cloud data centers; in 2022, the metaverse may end up taking the lucky spot.

These concepts are now grouped under the category of “digital economy,” a new jargon for tech-related industries. “The reason why local governments are so focused on the development of the metaverse is that [they see] it as a potential form of the digital economy,” said Jiang Zhaosheng, senior analyst at a blockchain-focused research group OKLink.

As growth slows down in China’s traditional sectors, such as real estate and manufacturing, the central government is throwing its support behind these new tech-heavy sectors that it hopes to see grow rapidly. In January, the State Council set a policy goal to increase the digital economy's share of GDP from 7.8% in 2020 to 10% in 2025.

The economic growth pressure is felt more dearly by local governments because they compete for business opportunities, just as cities in the U.S. fought for Amazon’s HQ2.

The cities “need to compete with each other for all kinds of investment and employment opportunities,” said Zhang Lin, an assistant professor at the University of New Hampshire who studies China’s political economy. “Since the real estate economy no longer works out, local governments are faced with this challenge to find new growth. Some local governments are doing better than the others.”

For some second-tier cities in China, the digital economy is the best bet to win the brutal competition in an era of economic downturn. Zhang pointed out that Wuhan and Hefei, which rank 9th and 20th in terms of municipal GDP among Chinese cities, have a track record of being welcoming to new tech creations.

“The advantage of Hefei and Wuhan is that they have a concentration of talents,” Zhang said, pointing to several top universities located in the two cities. “They really want to use that to their advantage, but they aren’t historically well known as the other Chinese cities, so they quickly jump on new ideas whenever they come out.” As a result, Hefei is home to popular Chinese electric vehicle company NIO as well as AI company iFlytek, while Wuhan hosts one of China’s first tech startup incubators. This January, both cities mentioned the metaverse in their 2021 government reports as priority industries to develop.

The vagueness of the metaverse is not a bug, but a welcoming feature to local governments. Since these governments are likely already subsidizing and enticing companies in AI, gaming or IoT — things that can be part of the metaverse — announcing that they are now also metaverse fans doesn’t require turning the wheel abruptly. It’s mostly free publicity.

This is why the metaverse can look very different in different Chinese cities. In Fengxian, Shanghai, it can be e-governance; in the southern island province of Hainan, it’s more about boosting the digital entertainment industry; in Deqing, a town with only half a million residents that punched above its weight in the geographic information system industry, the metaverse means, well, more GIS.

Some digital economy investments have rapidly grown into gigantic industries in China, like ecommerce. Others, such as microlending or NFTs, have fallen out of Beijing’s favor. If the metaverse turns out to be one of the latter, all these cities need to do is quickly drop the “metaverse” mentions in their documents and adopt a different concept to attract the same tech companies.

And in case, just in case, the metaverse really blows up and becomes the next big thing? These cities will not have missed out.

How does it impact companies?

The open arms of local governments are a piece of surprising good news for China’s tech companies, and several major firms are already leaping to develop metaverse projects. ByteDance and Tencent both acquired companies to make VR headsets, and ByteDance is also testing a metaverse social app. Baidu, the Chinese search engine and AI company, released the first publicly available metaverse platform, Xirang, in December.

Despite their early planning, large tech companies are often hesitant to appear to be moving too aggressively in a new direction, spooked by what could happen if Beijing clamps down. As a result, there are already some restrictions on the metaverse in China. We may not know what it will ultimately look like, but we know what it won’t include: cryptocurrency, decentralization, financial assets … While those directions partly drive the metaverse frenzy in the west, big companies in China know to stay away from them. Regulators in Shanghai have already started searching for signs of the metaverse being used for financial scams, the Fengyuzhu representative told Protocol.

But there can be much going on under the table. For example, in a local political meeting in Shanghai this January, it was Tencent VP Zhang Lijun who explained the idea of the metaverse and suggested the local district should hold metaverse trade events and explore the interaction of metaverse and art.

And now, with all these local governments voicing their interest in the metaverse, tech companies can probably breathe a sigh of relief. “For private companies in innovative fields, what they fear the most is being called off by regulators when they are already halfway into it. Having the government intervene early on helps companies obtain more understanding and support [later],” said Jiang.

For now, the window of opportunity is open for Chinese metaverse companies. With explicit encouragement and potential financial support from the government, more and more companies are joining the race. According to Chinese company registry data, there are currently more than 500 companies with the word “metaverse” in their names — and 93% of them were registered in the last year. Many other companies are working on the concept without using the word.

“Chinese companies are very nimble and very flexible,” said Zhang Lin. “If it works in my favor, I’ll go for it; if it no longer looks good, I’ll run as fast as I can.”

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