2023 JULY ISSUE
CHINA
THE GIANT JUGGERNAUT
PART 15
Written by : Andrew Sia
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From the Desk of the Publisher
We have to admit that China is still the World Factory because it has the most complete supply chain. And because that it is so big and so powerful, we have to look at it more carefully. It is important for us to know “to give and to take” as it can’t be just one sided. That is why we wrote about what China can get from the West and things that West can get from China.
We are talking about the electric vehicle and the things that come along with it—its battery and the processing of the minerals and the rare earth. Not to forget that it is already the world’s largest manufacturer of the electric cars.
The we talk about “China Plus One” which can always be the backup under any circumstances. It is good to have an alternative. I am talking as the veteran of the industry where at one time we used to have factories outside China already. It is always good for the contingency plan.
Lastly, we hope that the region would be peaceful and it would allow the people to work and to live and to build up their livelihood.
China Is An Outlier
China spends much more on helping favored industries with state-directed funds, cheap loans and government incentives than other major economies. Its backing of its companies amounted to at least 1.73% of its gross domestic product (GDP) in 2019, before Covid-19 became a pandemic, and we believe this trend will continue. In dollar terms, this is more than $248 billion, which exceeds Chinese military spending.
By comparison, South Korea—the No. 2 spender—provides 0.67% of its GDP, and the United States—the No. 7 spender—provides 0.39% of its GDP.
This is annoying to the Western countries as the use of industrial subsidies give Chinese companies an edge over their foreign rivals. The U.S. is considering the use of Section 301 of the Trade Act, which allows the U.S. to take punitive action against their unfair practice.
Many economists and Western officials once assumed that Beijing would gradually reduce the state’s role in directing credit and other resources as its economy matured. However, over the past ten years the number of Xi Jinping government interventions has increased. Xi is using this approach as the industrial policy to reduce China’s dependence on other countries while building up China’s own independence. In other words, China’s industrial initiatives have become more ambitious in recent years, targeting its industries that lead innovation and focusing on electric vehicles and artificial intelligence.
By the end of 2020, there were 1,851 government-guided funds with a total of $1.7 trillion used for designated funding targets such as the National Integrated Circuit Industry Investment Fund, which was also dubbed as the “Big Fund” at $29 billion.
China has been hiding under the banner as a “developing country,” but in reality, it is already one of those “developed countries.”
Unless China can join the Western world by accepting the Western value, it will remain at an odd situation in the way to go.
Currently, the other cities, including Washington, DC, Brussels, Seoul and Tokyo, are all rushing out government subsidies to promote industries they deem strategic, including semiconductors, electric-car batteries and pharmaceuticals.
And now the West has one more concerns, which has to do with the development of artificial intelligence that would require more legislation and rules. Would China be coming to the negotiation table and take part as a responsible member among all the nations, or will it still continue to remain as an outlier?
China is Known for Its Cover-Up
In April 2003, Jiang Yanyong, the chief surgeon of China’s largest military hospital in Beijing, became the first pandemic whistleblower of the 21st century after he was frustrated by Beijing’s cover-up of the SARS outbreak in the same year.
It was in the late 2002 there was an unusual respiratory infection started its breaking out in southern China. Military doctors were briefed on the outbreak in early March 2003, and were told to keep silent for fear of disrupting China’s annual political congress.
In the same month, the World Health Organization issued a global alert for a severe pneumonia of unknown origin. And in April, China’s then health minister Zhang Wenkang was still playing down the outbreak and on the state television announced Beijing had only 12 cases of SARS.
Dr. Jiang wrote to the Chinese state broadcaster warning the true number of infections was far greater and in just one hospital there were 60 SARS patients and seven of them had died. But his letter was ignored by the Chinese and Hong Kong media, and someone leaked it to a foreign correspondent in Beijing.
Dr. Jiang followed by his meeting with Time magazine and he published his letter but refused to stay anonymous. Two weeks later, the government released the SARS case count almost tenfold. As the result, its health minister, Zhang Wenkang and the major of Beijing lost their jobs after Dr. Jiang’s letter was published.
The SARS outbreak was from Foshan, Guangdong in November 2002. Because of its close proximity to Hong Kong, as the result there were 1,755 infected cases that led to 299 deaths with the 17% fatality rate.
China had 5,327 cases, death of 349 and suffered from 6.6% fatality rate.
On the whole, the world recorded 8,110 cases with 811 cases of death, 10% fatality rate.
SARS peaked out in May 2003 but lingered until May 2004 before it was totally diminished.
China Plans Security Checks on Chatbot
In view of the U.S. rolling out its ChatGPT to its generative AI models like SenseTime and Baidu’s ChatGPT-like models, Beijing plans its security checks to ensure that their chatbots are in line with the socialist values. Especially when its tech giant, Alibaba, announced its interest to join its peers, China’s internet regulator released draft measures.
The Cyberspace Administration of China proposes to the providers to submit their products for security reviews before their public release. It stresses the importance to avoid any contents that may undermines the state power, incites the split of the nation or its national unity.
It was on April 10 SenseTime unveiled its SenseChat with a live demonstration. Beidu who unveiled its chatbot Ernie in March of this year. And Alibaba announced its launching of Tongyi Qianwen which would be incorporated as an AI bot with DingTalk and Tmall’s Genie smart speaker who can integrated into all its products going in the future.
At the moment, none of these can write code like OpenAI’s GPT-4.
De-Coupling Can be a Rhetorical Flourish
The world has been talking about de-risking with China and this had been raised by Ursula von der Leyen, President of the European Commission during her visit in China. At the same time, Emmanuel Macron, the French President was visiting China as well. Afterwards, it was quoted by Joe Biden, the U.S. President, and lately endorsed during the G7 summit in Japan.
Why all of a sudden “de-risking” has been embraced by the Western leaders is because the previous “decoupling” often considered as something impossible and extreme. De-risking seemed to be more practical and practicable as the Western world can still trade with China, although some safeguards are needed.
There are the two critical measures that can lead to the risks, things that China can get from the West and things the West can get from China.
Things that China can get from the West are the advanced technology with potential military uses is on the top of the list. It is already announced by the U.S. that the restrictions on semiconductor exports which is also followed by Japan.
Then there is the dependence of China for the battery technology where EU is importing 97% of its lithium from China is crucial in the production of batteries.
The West is also aware that more than 90% of the advanced semiconductors are coming from Taiwan where the island is vulnerable to an invasion from China. That is why the U.S. are calling for the CHIP Act and seek to provide $52 billion for immediate funding to boost the manufacturing of chips in the U.S.
But we have realized the three big difficulties. First, the conflict and crash between the interests of the countries. Second, the difficulty and the expansion of lessening our dependence on China. Third, the ambiguity about the nature of the risk. We have to ask ourselves if we are concerned about the political coercion by China, or we are really worrying about going to war with China. I think that answer here is quite clear and acute, we are seriously concerned about both outcomes.
We can see that the globalization that the world has been boosting is no longer the case as we have so many considerations that have led to restrictions. And the restrictions for doing business with China have caused the private sectors the disgruntlement.
World leaders are showing that for the green transition without China will be impossible. It is now the world’s top priority to address to the challenge of the climate change. Our world is already deflated with all the climate challenges that we have faced since last year. The world has to be totally immersed if we want to save our planet although the Green Party could have exaggerated with some of the issues.
We cannot deny that China is the largest producer of solar panels, batteries and the critical minerals that are used in these technologies. We have to realize that since China became a member of the World Trade Organization on December 11, 2001, it took them twenty years to become the second largest economy of the world. In this twenty years China is indispensable to us in many areas, not to forget that for the rare earths and the critical minerals are most crucial to our need. I double how we can unwind this and become self-independent.
Right now the Western world’s approach is trying to de-risk with China in these three areas:
Reduce dependencies on China;
Restrict technology export;
Continue to trade with China because of its vast market.
In my view that this won’t help and would not bring us peace but create a very doubtful mind. After all, “de-risking” is only a play with words.
China is Suffering From a Slow Recovery
Tensions between Washington and Beijing upended the international order, making it more complex for business than during the Cold War. The world’s second-largest economy faltering as it has not shown any sight of recovery.
China is struggling to revive growth after their abandon of its zero-COVID policy on December 8, 2022. The manufacturing purchasing managers’ index fell to 48.8 in May from 49.2 in April. Already the PMI remained below 50 for three months indicated a contraction and the Chinese government would consider some stimulus policies. High hopes for the business reopening have been undermined by a lack of investor confidence and geopolitical tension after the U.S. shot down a suspected Chinese spy balloon and increased sanctions on semiconductors. These are not helping China to revive their growth.
But the raids of Beijing on foreign companies, such as Bain, Capvision and Mintz, have not helped the situation and have in fact added the tension.
Although China’s services demand has remained resilient, the sales of consumer durables have been poor and it is largely due to the lack of car sales. Fix asset investment only grow by 4.7% in April 2023 which is lower than 2022’s average. The real estate investment is shrinking which has been normal now.
Because of the dropping of the KPI the industrial profit has plummeted, with close to 20% negative growth in April. And the poor performance in manufacturing is a global problem as its global manufacturing export share is more than 20%. One can always argue that China’s poor performance is affected by the world’s demand, especially from the U.S. and Europe. However, the country’s trade data showed China’s export rose 8.5% in April and its import plummeted by 8%.
Manufacturers Have Hedged Their Production in Other Countries
It was as early as 2021, we have heard about “China Plus One” for our contingency planning, although at the time China was already the most cost-effective and competitive. We would never know if we rely too much on one country for doing all our production even when it was ten years ago. But now, it is the trend for manufacturers to have another production option outside China, and in fact it already happened some years ago and no one was mentioning about it.
We can see already Apple is rapidly expanding in Vietnam and India. In fact, Vietnam is already an emerging smartphone production hub as Samsung started to move there already five years ago.
Crocs, the casual slip-on shoe maker, is in Vietnam and Indonesia. And lately we have been told that it has set up small production units in Bosnia and Herzegovina. In Vietnam, already half of the production is coming from there.
Universal Electronics, an U.S. company making security-sensor products and home-entertainment devices, expanded its Mexican factory and open a new facility in Hanoi, Vietnam.
We have to admit that there is no single country that can accommodate all the production made in China. Probably Vietnam has benefitted the most, but it doesn’t have enough skilled workers although it is business friendly. India has a large labor force but its infrastructure in sporadic. Mexico is closed to the U.S. but it is a long way from China for its raw material supply.
We have to understand that spreading out production doesn’t come cheap, and invest in training workers and getting to know local government is a teething problem. Also the learning curve is very long and there is no assurance of success.
Since the Trump administration imposed the import tariffs on China in 2018 for certain categories, China became bitter and reacted unpredictable toward foreign businesses.
Russia’s war in Ukraine has sent a very strong signal that anything can happen and more geopolitical turmoil can be around the corner. We are looking close at the situation in the South China Sea where the nations are taking side already. It is not a good sign for businessmen like us.
Cold War for Semiconductor in Brewing Between China and the U.S.
Yangtze Memory Technologies Co., a memory chip producer in China has been labelled as a Chinese “national champion” on its “entity list”. This means the U.S. companies are barred from exporting American technology to any rivals of Micron without a hard-to-obtain license.
Now China is threatening to ban the Idaho-based Micron from selling chips to China. It has launched a national security review into Micron, one of the three dominant players in the global DRam memory chip market, together with South Korea’s Samsung Electronics and SK Hynix
This is a high stake game for China as for last year, Mainland China and Hong Kong generated 25% of its $30.8 billion in revenue.
In case Beijing stop the business with Micron, the U.S. would urge both Samsung and SK Hynix to enlist for joint action.
This time the memory chip manufacturers are already under pressure due to an overstock situation in the industry and the price for DRam chips are down by 25% . The DRam chips are used in everything from TV to phones.
Belt & Road Initiative and the Recent C5 Summit
China’s overseas loans went sour due to the COVID-19 pandemic and global inflation took a tool on emerging economies in Beijing’s involvement in the Belt & Road infrastructure initiative. From 2020 to 2022, a total of $76.8 billion in debt was renegotiated, This figure is more than four times the $17 billion in those problematic debts for the preceding three years.
Beijing has backed the construction of ports, roads, railways and other infrastructure from Asia to Africa and Europe for ten years under President Xi Jinping’s initiative. It is a vast undertaking but now the problematic debts are piling up.
A yearly investment of $100 billion until 2019 and falling to roughly 60-70 $billion a year from 2020 onward.
During the loan renegotiation, financial assistance came in place. Over $240 billion in aid China provided to over 20 emerging markets between 2008 and 2021. Around 70% of the aid came through currency swapping, giving countries with low foreign exchange reserves access to yuan to repay debts.
Now this financial risk is not just for the borrowers, but also for China. Although Beijing has the world’s largest foreign exchange reserve, topping $3.2 trillion at the end of April, much of this is tied up with those developing countries. It is also the second straight quarter in the three months through March, China saw the net outflows from overseas transactions amid a slump in exports and foreign investments. China would have found the lack of foreign exchange to support their lending spree.
Having said that, Xi Jinping just pledged $3.7 billion fresh loans and grants to five Central Asian neighboring countries in the recent C5 countries summit hosted in Xi’an in May. It was Xi’s showcase as Japanese prime minister Fumio Kishida was hosting the G7 Summit in Hiroshima in the same period of time.
China’s trade with the five Central Asian countries totaled $70.2 billion last year. Nearly 80% of China-Europe freight trains passed through the region. Those five countries were former Soviet republics—Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan and Turkmenistan. Xi is trying to build both the hard power and soft power during the summit. He is seeking co-operations with Tajikistan to prevent militants, weapons and drugs from crossing border into Xinjiang.
China is the biggest buyer of Central Asian gas and the region also has reserves of rare earth metals, especially in Kazakhstan.
China has not announced their total investment in the Belt & Road Investment and I recalled sometime ago $800 billion was mentioned. China also mentioned that they are ready to put in $1 trillion in the whole project to enhance connectivity and promote economic cooperation across Asia, Europe, Africa, South America and beyond. It encompasses a wide range of projects, including mega infrastructure development, trade facilitation, and even people-to-people exchange.