CHINA
THE GIANT JUGGERNAUT
PART 12
2022 OCTOBER ISSUE
Written by : Andrew Sia
From the Desk of the Publisher
This time we talked about those debts in the African countries and already, Sri Lanka” the country in South Asia, has defaulted that caused the government to declare the bankruptcy to be followed. It was waiting for the IFM and the World Bank to bailout. But those African countries, so far there are six countries, Angola, Cameroon, Republic of Congo, Djibouti, Ethiopia and Zambia, and one by one they are going to enter into default of their repayment of debts. We understood that these were all from the result of One Belt One Road China promoted to the developing countries.
But we have to admit that China is ahead of the game in many areas because of its market policy, which not only provide the capital through direct government subsidies, tax incentives, below-market credit and state investment funds. Majority of its key-industrial players are state-owned enterprises.
It is ahead of many industries, and it has its designated “strategic emerging industries” in electric vehicle, electric-car batteries, biotechnology, artificial intelligence, semiconductors, pharmaceuticals and it is now promoting its e-CNY, which is a digital renminbi.
China is ahead of the game and it is something we can’t deny.
China’s Role as World’s Largest Bilateral Creditor
African countries’ debts with China are only a third of what they owe to those non-Chinese lenders. But their interest rates are over half. In total African countries have a total of external debts for $696 billion, and 12% of this was owed to China and 35% owed to other private creditors.
During the pandemic, China took part in the G20’s debt-suspension scheme, But there are two types of lenders, one as the Chinese national lenders, who was charging 2.7% as the interest rate, the other are known as private lenders, charging 5% on private debts.
We came to know that there were big differences between the 24 African countries that spend more than 15% of government revenue servicing debt. And six countries, Angola, Cameroon, Republic of Congo, Djibouti, Ethiopia and Zambia, sent over a third of debt payments to Chinese lenders in 2021, while other private creditors accounted for over 33% of payments in 12 countries.
China’s Capital Market
It was in 2012 when Xi Jinping revealed his first big manifesto after taking the helm of China’s communist party by telling the state-owned enterprises to make way and let the market played a decisive role. This immediately was praised by analysts at Goldman Sachs as a pro-market economy and would curb government intervention and rein in entrenched state-run businesses.
But in the years that followed, we have seen waves of volatility in Chinese stock and its currency, the threat of financial disruption is still exist. The Chinese leaders think that they know the market better than anyone else and have the upper hand. Last year we have seen the tech tycoons, one after another, been told to step aside. The off-shore listings like Didi and Ant, were told to refrain because of the breach of data security. The Chinese government started to interfere the financial market in China. More important is for Xi Jinping to rein in the fintech and make sure that it is under the communist party’s control. The crackdown resulted the loss of roughly $2 trillion off the value of listed tech groups over the past 12 months.
Today, we have seen the financial market being established after ten years, and Shanghai and Shenzhen are its financial centers. Xi Jinping can rewrite his next big manifesto and raise the market capital shaped by his broader strategy priorities. He already expressed the interest on technologies to compete with the West. This time it is going to direct by the state to avoid any outside influences.
And because of the latest political tension from the U.S. and Europe over Beijing’s refusal to condemn Russia for the invasion of Ukraine, brought result of the U.S. sanction on Chinese semiconductor and telecoms equipment. Besides China has expressed that internet companies are not genuinely innovative, but rather the microchips and quantum computing.
Beijing has designated “strategic emerging industries” ranging from electric vehicle manufacturing to biotechnology, renewable energy, artificial intelligence, semiconductors and other high-end equipment manufacturing.
China stopped almost all off-shore IPOs with large amount of user data. DiDi and Ant were the two cases that drawn the intervention.
More tensions flared over Beijing’s refusal to provide the U.S. regulators their full access to the audit reports of Chinese companies trading over Wall Street. This would lead to the forced delisting and questioning for its trading in New York Stock Exchange. For this dispute, China reacted very strongly and mentioned the IPO can take place in Hong Kong and eventually in Beijing when the time comes.
Already $35 billion in IPO fund raising by Chinese companies has been done domestically in Shanghai and Shenzhen. As the result, foreign investors were largely shut out of the Chinses IPOs, and Wall Street banks such as Goldman Sachs and Morgan Stanley have missed the opportunities of being the underwriters and collected billions of dollars as their fees.
In 2021, the listings of those “strategic emerging industries” were accounted for $110 billion and investment opportunities in Chinese stocks will become more concentrate in high-end manufacturers and AI companies to avoid the impact from the U.S. sanctions. Also the renewable energy and electric vehicle can provide leadership to the future global economy.
Whether this specific purpose-driven vision for China’s equity capital market will work, or a lot of those capital will be wasted either by companies that do not perform well or even entered into some kind of fraud.
China market has already demonstrated how official approval projects do not guarantee successful IPO. In 2019, Xi Jinping launched in Shanghai a science and technology-focused Star Market. Since its launch, the Star 50 Index of the board’s largest and most liquid stocks has shed a quarter of its value.
China has entered into another era in history. Unlike 2012, today it is a strong country and it is carrying a bigger stick. It is no longer the China we know and the latest we read that even in the United Nations when 47 countries condemned the human right situations in Xinjiang, Tibet and Hong Kong, there were 69 countries who ended up supporting China.
It brings us back to our world which is in the midst of a global ideological conflict between liberal democracy and authoritarianism. Unfortunately, I don’t see any way out except the world is only becoming more and more dangerous.
What the World Needs Now in This Digital Age
Like I said earlier that our world is in the midst of a global ideological conflict between liberal democracy and authoritarianism. Amicable democracies between all nations are needed, and to come together to establish a new economic agreement which can base on the liberal values of free trade, fair competition and freedom. We have to look upon this to ensure continuous growth and failure to come to an agreement would risk the future of the global economic governance to China and it model of authoritarian capitalism.
China is pursuing a digital currency—a digital renminbi, or e-CNY. Domestically, it will allow China the control and hide its undesirable outcomes. It will give China the power to control its financial transactions. This will endanger the Western countries doing business in China and face the risk of potential disruption should China fall out with their trading partners.
China already expressed their desire to use their e-CNY to replace the dollar’s role as a reserve currency. Their goal is to challenge the dominance of the U.S. dollar in international trade settlement. It is a development to undermine the world’s reliance on the dollar would reduce the U.S. global influence and its ability to impose sanctions. But this is also very dangerous when the global economy is not steady and a confidence is needed more than ever.
China has sought to bide its time and hide its capabilities during Deng Xiaoping when he opened the country in the early 1980s. But after thirty years, Xi Jinping can’t wait and push on an effort that will remake the global order in a manner that favors its values and approach. The e-CNY is an overall push to redefine the global economy and introduce its financial rules.
China has already taken part in a series of international forums and introduced its patterns in its own long-term interest and already behaved that it is unnecessary to follow the global economy. It has undermined international norms by provoking diplomatically inspired trade disputes. Typical examples are its confrontation with Australia over duties on barley imports, fossil oils while dumping goods on to the market.
Previously when China devalued its renminbi would give Chinese companies market advantage, although it was unfair. This reduced cost of their exports to the U.S. and accelerated existing trade deficits with the U.S. and EU.
In recent years, the emerging of the fintech, cryptocurrencies and other financial instruments added to the complexity for the policy that the Western world is trying to regulate them in real time. A new set of rules to guide the international cooperation is underway. All nations must retain the ability to manage their own economic and fiscal policy. It is about creating a set of norms to be adopted by the liberal democratic values that will facilitate the next evolution of the global economy, and most important to protect the principles that gave birth to the modern world.
A future global economic order, and the rules to govern it, must be based on liberal democratic values, such as privacy policy and fair competition. The world is not looking for an authoritarian regime with hegemonic ambitions.
U.S. Penalize on Forced Labor in Xinjiang is Not Thoroughly Mapped Out
The Uyghur Forced Labor Prevention Act, which was signed last December came into effect in the middle of June, requires the U.S. importers to show that items from Xinjiang weren’t produced by forced labor. It is difficult to enforce as Western audit firms are restricted to visit the sites and many of the importers have avoided to take the risk and stopped totally in using the cotton from Xinjiang.
China produces a quarter of the world’s cotton, and about 90% of that is coming from Xinjiang. For the past decades it is the world’s priciest but for the first time since 2016 it traded below the futures in New York. Year-to-date sales of ginned Xinjiang cotton through mid-June 2020 have fallen 41% from the same period of 2021. It resulted the high cotton inventory of 3.3 million metric tons at the end of May, 1.2 million metric tons more than the same period last year.
Obviously sanctions and import ban have been effective.
But situation in polysilicon, which is the energy-intensive building block for solar panels is experiencing a totally different scenario. Many of the Chinese producers are located in Xinjiang and because of the abundant coal, wind and solar power, have come to dominate the industry.
China is by far the largest market for solar panels, and in 2020, 80% of the world’s polysilicon production was in China, but on average less than 2% of China’s photovoltaic are export to the U.S.
Instead, U.S. is importing solar panels from four Southeast Asian countries using polysilicon from Xinjiang. The U.S. is desperate to secure the supply of the solar panels, and in June Biden administration granted a two-year exemption from any possible tariffs levied on the importation.
This shows the weakness of the U.S. in those industries that it has not been paying attention. It resulted that its sanction on products from Xinjiang isn’t thoroughly executed.
China’s Industrial Subsidies
China is found to be the highest in helping its favored industries and it is accounted to at least 1.73% of its gross domestic product in 2019. In dollar terms, it is more than $248 billion and it is exceeding China’s military spending.
It is significantly higher than seven other economies including South Korea, France, Japan, Germany, Taiwan, the United States and Brazil. Take for instance, the U.S., the largest economy, only spent 0.39% of its gross domestic product, and the country whose spending come after China is South Korea, who spent 0.67% of its gross domestic product.
The U.S. government has been looking for ways to confront China with its use of industrial subsidies that give Chinese companies an edge over their foreign rivals. Once they can generate the evidence, the U.S. can decide whether to launch a new investigation into Chinese subsidies and trigger the Section 301 of the Trade Act to take punitive action against certain practices of a trading partner.
This is part of the industrial policy that has to do with the pandemic-driven disruptions to supply chains as well as the competition with China.
Many economists from the Western world have once assumed that Beijing would gradually reduce the state’s role in directing credit and other resources as the Chinese economy matured. But under President Xi Jinping‘s direction, Beijing sees industrial policy as vital to reduce China’s economic dependence on other countries but to increase their dependence on China alone.
Beijing’s industrial initiatives have become more ambitious in recent years, and it is shifting from “catch up” to targeting industries at the frontier of innovation, especially in the fields of semiconductors, electric vehicles, electric-car batteries, pharmaceuticals and artificial intelligence.
To quantify Chinese spending, the analysts made estimates based on data such as direct government subsidies, tax incentives, below-market credit and state investment funds. Also China’s state-owned enterprises (SOE) gives Beijing capabilities to direct finance in a way that other economies can’t.
By the end of 2020, some 1,851 government-guided funds had been established in China with a total designated funding target of $1.7 trillion. The actual funds that were raised were around $820 billion and one of them is the semiconductor-focused National Integrated Circuit Industry Investment Fund, dubbed as the “Big Fund” that raised more than $29 billion.
China provided an estimated $58 billion to its EV makers between 2009 and 2017. In this industry sector, it is ahead of many other countries.
That made us recalled for “Made in China 2025” which were said to cover:
Medicine and medical devices
Information technology
Aerospace equipment
Railway equipment
Ocean engineering and high-tech ships
New materials
Power equipment
Agricultural machinery, robotics
Green energy and green vehicles
“Made in China 2025” was a national strategic plan and industrial policy raised by the Chinese Communist Party (CCP) to further develop the manufacturing sector. It was issued by Premier Li Keqiang and his cabinet in May 2015 as part of the Thirteen and Fourteen Five-Year Plans. The aim was to move away from being the “World Factory” as the producer of cheap low-tech goods facilitated by low-labor costs and supply chain advantages and upgrade to become a more technology-intensive powerhouse.
Since 2018, following the backlash from the U.S. and Europe, the “Made in China 2015” has been de-emphasized in government and other official communications, but the program remains in place. With Beijing’s policy of industrial subsidies, it continues to move in the directions of the EV and the electric-car batteries, and the semiconductors.
