CHINA
THE GIANT JUGGERNAUT
PART 9
2022 JANUARY ISSUE
Written by : Andrew Sia
China Under Xi Jinping
Awed by the billionaires and the financial speculations, Xi was overwhelmed for the years that he has the power, now he wants to exercise it and put everyone at bay and listen to him alone. He wants the Chinese Communist Party to permeate every area in China. Whether Xi can exercise his new realty is without question, and it is going to demonstrate to the free world what the authoritarian government can do to his people.
We will see what he has done so far:
Blocked the initial public listing offering of Ant Group, an affiliate of Alibaba, a tech giant, and with this move he wiped out $2 trillion of wealth;
Punished Didi, a ride-hailing business, for its listing of its shares in the US;
Driving the indebted Evergrande, towards default;
Banned the trading of cryptocurrency;
Banned tutoring business;
Strictly rationed gaming for children;
Mentioning male role models have to be manly;
Pushed Xi Jinping Thought to the six-year old students;
Locked one million Uyghurs in concentration camps in Xinjiang;
Applied iron fist on Hong Kong and silenced the voice there.
It is so ironic that you will find under the Communist China the seriousness of inequality and when it is compared to the capitalist countries it will make them all look pale. For instance, the top 20% of China’s households take home over 45% of the country’s disposable income, and top 1% own over 30% of household wealth.
It is like almost a sudden that Xi came to realize the tech giants have gained the power to what he accused as unfair competition, corrupting the society and unregulated access to personal data. But for the last one, it is only the state who would have that right.
In response to one of his slogan, “common prosperity” which made the tech companies to hand over cash to the state in an act to redeem themselves.
The state-owned enterprises are once again being resurrected and the entrepreneurs in China are not seen as the actual source of the country’s dynamism. But the country’s economy which has been built in its latest 40 years were based on Deng Xiaoping’s open market policy, and after the 40 years of expansion, the country is facing a decline in its infrastructure, a shrinking of workforce and a growing numbers of ageing population.
Another challenging part is Xi’s clinging to the power and he is trying to grab more power than any of the leaders since Mao Zedong. He is ready to break the protocol at Communist Party’s 20th Congress in 2022 by claiming a third five-year presidential term, and perhaps even a fourth term. With all the ideological changes, he is ready to organize a huge turnover in personnel and to make sure that he is at the helm.
Before the 20th Congress will begin, a new Central Committee will be elected and in turn a new general secretary will be chosen. The Politburo will also be reshuffled and will decide in secret before the congress. The power struggle behind the scene will not be shown and to make the whole thing appeared to have decided smoothly and peacefully is important for the power transfer to the new Central Committee.
Xi Jinping is expected to secure another five-year term and it is a break with precedent, and by the time in 2027, would make him the longest-serving party chief since Mao Zedong.
With the recent power cuts in 20 provinces, it is showing that the country is threading on thin ice. Very likely that China is going to miss their carbon-reduction target. But equally challenge is at home where the rivals are watching the country’s housing policy is about to collapse because of the financial default led by Evergrande, the country’s GDP for this year will continue to decline, and unemployment will also be increasing.
We have not even speaking about the tension over the Taiwan Strait, the border clash with India and the Wolf Warrior Diplomacy and this have all added the uneasiness of China. These are all thorns to Xi’s hands.
More Reading on Economy Under Xi Jinping’s
Nearly nine years ago when Xi took the helm of the nation as the Communist Party’s leader, that time its economy was about half the size of the United States. Today it has expanded and it is about 70% of the size. Some even estimated that within the decade it could surpass the US.
China’s gross domestic product has grown roughly 70% since 2012 in nominal dollars. The increase of the consumption is the key drive with disposable income doubling per capita since 2012. Total retail sales of consumer goods came to $4.97 trillion for the January-September period, which is up 110% from the same nine months of 2012.
National fixed-asset investment, such as those in public works, factories and other facilities increased 55%. Comparison for the January to October period of 2012 with the same period of 2021, exports increased by more than 60% and imports increased by 50%.
Another thing that Xi has been focused is to lift the low-income households to end absolute poverty in order to achieve what has meant by a “moderately prosperous society”. The result has shown that the urban residents have now 160% more disposable income than those rural residents. The figure is down from 190% in 2012. In another word that the gap has narrowed.
But inequality is an issue with the cities as well and take for example the cost of an apartment in the biggest cities now cost dozens of times what many people can earn in a year. There is the shortage of good jobs that exacerbate urban inequality. At this moment, the new urban job remains below the pre-pandemic levels.
At the moment, China’s debt growing is faster than the economy, and private liabilities are now equivalent to 2.2 times GDP which is more than Japan’s record. The mounting debt is highlighted by the crisis from the property developer, Evergrande Group, and it has posed major economic risks.
Military Under Xi Jinping
Under Xi, China has become a global military power and its defense budget has doubled since 2012 to more than ¥1.35 trillion, or $210 billion for 2021. China’s arsenal of medium- and intermediate-range missiles which Beijing considers as a key deterrent against the US military power. It has expanded about 70% as of 2020.
China’s first aircraft carrier, the Liaoning which was remodeled from the ex-Soviet vessel that it bought from Ukraine before Xi’s time. This was followed by its homemade aircraft carrier, the Shandong, both vessels run on conventional nonnuclear fuel. Its another disadvantage is the takeoff of the aircraft is unassisted instead of using catapults. It is no matching to the aircraft carriers from the US.
But China is still aggressively expanding its navy and it has now more navy vessels than the US. It is trying to respond to any contingencies in nearby waters, including the East and South China Sea and the Taiwan Strait.
It has also expanded its fleet of military aircrafts—fighters, bombers and patrol aircrafts by about 50% to 3,020 between 2012 and 2020. Modern fighters nearly doubled to 1,080.
Closing of the Chinese Borders During the Covid-19
The net-zero Covid policy has been used by China since the outbreak of the coronavirus in December 2019 in Wuhan. Its strict lockdowns and tough border controls have stopped the virus from spreading. What happened lately, we would like to direct you to read our article under the title of “Coronavirus Regional Report November 2021”. We also pointed out that this will slow down the Chinese economy as the co-existence with Covid-19 has become a new normal for the developed world and this will separate China from the rest of the world.
This zero-tolerance playbook to curb the resurgence of the virus is only possible for the authoritarian state when it is using its surveillance power where immediate lockdowns, track down of close contacts, placing hundreds of thousands for covid-testing and if necessary put them into compulsory quarantine.
It was very successful and very quickly in April 2020 a bubble was created and shielded its 1.4 billion people from a raging pandemic while the world suffered and loss of million of lives around the world took place.
The pandemic drags on for nearly two years now, and in the meantime the local outbreaks in China started to flare up, it brought frustrations to the country’s mission to eliminate the virus within Chinese borders. But China has stopped the people-to-people exchanges with the rest of the world and this has led to the stop of the flow for the tourists, academic and business trips. This has been all of a man’s personal psyche—Xi Jinping who has taken the helm of the Chinese Communist Party, and stressed and exacerbated by the pandemic and the politics around it. He was riding on its first success and promoting it as evidence of the supposed superiority of its one-party system over Western democracy, especially focusing on the United States.
And many Chinese people take pride in China’s heritage—its four thousand years of history and culture, and its growing national strength from the last forty years of “reform and open” of the country’s policy. People from China are becoming progressively suspicious, critical and even turning to become outright hostile toward the Western world.
Beijing’s zero-Covid policy led to the closing of the borders have developed into a physical extension of the insular-leaning mentality taking hold in parts of China from its leaders and the Chinese nationals. It has gained overwhelming public support and whether this can sustain its support if the surge of the cases continued, as it is not just the public health but also the overall economy situation.
Earlier on the using of the decoupling between the United States and China was often discussed, but this time China has applied its self-initiated decoupling with the world. It will be until a long period of time that China will reopen itself.
Tech Companies in China
Ride-hailing, food delivery, financial services, mobile gaming, in those eyes of the Chinese entrepreneurs are only numbers, that is if they can bring the hundreds of millions together as consumers into a network of services. These may be low-margin, but the transaction volumes is what matters. The model is often referred to as a super-app or super-cluster strategy. In a very short time they become giants in the China market. If they can be successfully migrated to the foreign countries, their sizes can dwarf any local operators because of the scale of business. But the recent Chinese government’s engulfing of those tech giants have scared the business owners that they turned over their shares and management to the communist party.
But the Southeast Asian Countries are catching up in this technology industry and there are these three listed and also soon-to-be listed consumer app giants with headquarters in Singapore and Jakarta with the combined worth of $70 billion. The Southeast Asian countries are becoming a big emerging market for consumer-tech sector that could have created outside China. We would like to mention about them. We also mentioned about South Korea and even Argentina.
Southeast Asian Countries – Led by Singapore-based, Grab, which is a consumer-technology firm, was due to list on Nasdaq through a merger with a special purpose acquisition company (SPAC) to be expected to value Grab at $40 billion.
Indonesian-based, GoTo Group, formed from the merger with Indonesia’s Gojek, a ride-hailing company with Tokopedia, an e-commerce company, which will follow in the early 2020. His group had transaction of $22 billion in 2020, equivalent to 2% of Indonesia’s GDP.
Sea, the largest company amongst the three, is the parent company to the regional e-commerce Shopee which was first listed in 2017 and its market value is $145 billion—the largest firm in South-East Asia today.
The ASEAN countries, with the combined population of 670 million, is ready for the rapid economic growth. Its online retail make up 6% of retail sales in 2019, compared with the US for 15% and China for 30%. But these tech companies picked up the low-margin and high-volume sales business format in a combined land area of almost 1.75 million square miles. The ten countries have a widely differing income levels and infrastructure capacity. And none of the three companies are profitable. Take for instance, Grab and Sea, together they made a combine loss of $17 billion since the beginning of 2018.
But the world has changed. The losses do not scare the investors and they want consolidation, through mergers and acquisition in tech industry. Through consolidation to reach the scale that can lead to profit is their theory. By combining the different businesses, they can complement one another.
While we have seen the Chinese government has been trying to curb its tech giants, the Southeast Asians are expanding their businesses in East Asia. Take Shopee for instance, it is now Latin American’s most popular e-commerce app and it has only started in 2019. It launched in Spain and Poland already and also set up shops in India.
South Korea – Take players in South Korea for example, we have Kakao and Coupang with market capitalization of $50 billion for each.
Kakao was founded in 2010 with its headquarters in Seoul. Through a series of merging, it is now into games, entertainment, mobile free text and free call services. The app had 220 million registered users and 47 million active monthly users.
In 2014, it merged with one of the top Korean internet portals, Daum Communications, through a stock swap. And since 2015, Daum Kakao launched its Kakao Taxi service and obtained many taxi companies’ support, about 600,000 taxi-consumers used the ride-hailing platform every day.
Kakao also became South Korea’s internet-only bank since its launch in 2017 and constituted 40% of the total loans in all of South Korea in the same year. Its unprecedented expansion also triggered the closure of bricks and mortar banks, particularly those foreign-owned banks.
In 2020, it had a sales revenue of $3.5 billion. Its Chairman is Kim Boem-soo
Coupang, a South Korean e-commerce company based in Seoul, and incorporated in Delaware, United States. It was founded in 2010 and very quickly the company expanded to become the largest online market[lace in South Korea. It is in the video streaming distribution after they launched Coupang Play, it is referred as the “Amazon of South Korea” due to its position and corporate size in South Korea online market.
Its Rocket Delivery, attributed to the company’s expansion in the fast delivery service across the nation which provides overnight delivery. Sales of home appliances and fresh food that have drawn the customers. It is estimated that 99.3% of Coupang Rocket Delivery orders are delivered within one day. Rocket Delivery operates out of 200 warehouses, each about 20 million square feet across the country. Its logistic centers store about 5.3 million types of products and they are stored by an efficient storage system known as Random Stow Algorithm. About 1.7 million products are sent out of the logistic centers on a daily basis. About 70% of Korean citizens live within 10 minutes of a Coupang logistic center.
It is important to mention about its fresh-food delivery service and it can be delivered overnight. It offers 8,500 kinds of foods. It has also a food-delivery service. It is especially successful during the Covid-19 period.
Coupang had its IPO on the New York Stock Exchange on March 11, 2021. The same year is started operation in Japan and launched in Taiwan.
Its investors are SoftBank, Greenoaks Capital, Maverick Holdings, Rose Park Advisors and BlackRock. Its CEO Bom Suk Kim holds approximately 10.2%.
As of 2020, it had a revenue of $12 billion.
Argentina’s Mercado Libre – If we go to the South American continent, in Argentina’s Buenos Aires we have MercadoLibre’s headquarters. It is incorporated in the United States that operates online marketplaces dedicated to e-commerce and online auctions. It was founded in 1999 and as of 2016 Mercado Libre had 172 million users in Latin America and it is the region’s most popular e-commerce site by number of visitors. It operates in all the Central American countries and the South American countries. In 2007, Mercado Libre became the first Latin American technology company to be listed on the NASDAQ. But it was in 2001 when eBay purchased a 19.5% stake in the company and that tells you how it became the leader in the marketplaces.
All these companies are taking advantage of the turmoil in China’s tech section and will gain more market going forward.
China Introducing the Data-Security Law
It started during the Trump administration that the US has taken moves to partially decouple the world’s two largest economies. This limits the Chinese access to American technology and research universities through trade and visa restrictions. Since September 1, a new data-security law went into effect after Chinese officials have shown concerns about the transfer of potential sensitive data with the Western world.
During the Covid year, the border closure, the week-long quarantine, and the denial of passport issuances to the Chinese nationals, the inbound and outbound flights for the first eight months of the year resulted the sharp decline of one million passengers in and out of China. Compared with the same period in 2019, where 50 million travelled.
It is no secret that the Chinese Communist Party has long been maintaining tight control over information, but this has intensified under the ruling of Xi Jinping. In the past year this has increasing opaque, even China’s presence on the world stage grows.
This new data-security law has made it harder for foreign companies and investors to obtain information, and the financial statements are the most important for study.
We want to share with you the areas that China have tightened and all these have made it harder for foreigners to understand what is happening in the country.
Investment in China – As foresaid, the release of the financial statements for the Chinese companies have become the data-security law since September 1, 2021. This leaves the partners with the Chinese companies finding it hard to mitigate the situation. It makes doing business more difficult in China. This also leaves the door close for doing due diligence and intelligence property work.
Ship Locations – China stopped to share ship locations in China water and outside the country. It is making it hard to follow the port facility there. The real-time vessel movements help the companies to accurately track their shipments and part of this information is used for to gather information on port activities to make accurate macroeconomic predictions on growth and trade.
Data on oil tankers that are providing fossil oil to China is more opaque for obtaining volume of China’s oil trade with countries that are subject to the United States or the United Nations trade sanctions. We are referring to countries like Venezuela, Iran and also North Korea.
Coal – The coal price started to increase already from last year. The privately-run commodity-pricing providers have already stopped publishing daily prices and data from China’s stockpiles. It has created a grey area and added mystery to China’s domestic short supply and the energy crisis it triggered.
In fact the power crisis in China caught everyone by surprise and the lack of information about its coal demand added a lot of doubts as it has painted the China’s situation very bleak.
The banning of satellite images to estimate the use of coal-fired power plants in China will add difficulty to calculate the carbon emissions from China and its commitment in the recent COP-26 to reduce its carbon footprint.
Documents about Political Dissent – The official judicial database has been shut down. We are not only referring to the situation in Xinjiang but also court-document database was purged for documents related to speech-related offenses, or the use of database to punish dissents on social media.
Academic Exchanges – This has also been shut down with other countries. It was looked upon as a beacon of engagement between China and the West. It has closed the Western scholars’ access to research archives. The hosting of international conferences will wind down. It is beginning to terminate cooperative programs.
The lockdown has also stopped visits for academic engagements and create obstacles to personnel and academic exchanges between educational institutes.
Supplies for Rare Metals – We are referring to metals like cobalt and lithium, which are used in electronics. The countries are reluctant to share information with any of their customers especially China. It is considering the availability of those metals to be sensitive information, so that not only the production is hard to plan, but also to deal with the compliance with environmental rules.
Digital Yuan
Earlier on we mentioned about the Chinese government is promoting its digital yuan and it is now being heavily promoted ahead of Beijing Winter Olympics. Knowing that the digital currency can present an opportunity to democratize payment system, but on the other hand it can pose a threat. That was what in the middle of the year the Chinese Communist Party begins to rein in those consumers using mobile apps like Alipay, WeChat Pay, the two being the most popular and starts to promote its digital yuan.
But the West look at this differently as it can be used as a tool to surveil users and exerts control over global currency transactions. If this is used in any hostile state, it gives the state the ability to control any transaction through the using of the digital currency. Its ability to learn how the people work, shop, socialize and travel.
The treat is pointed out by the National Cyber Security Center, which is under the GCHQ with its headquarters in London, when we are at the time when warfare is moving increasingly into cyber space. In this domain, they offer both the protection for country that may face the attacks and apply offensive operations against adversaries.
China is known for exporting technology to exert a web of authoritarian control around the world and has set up “data traps” with countries who fall into their victims.
This digital yuan can be one such trap as already there are 140 million individuals and businesses who have signed up for it. This is according to the People’s Bank of China. At the Winter Olympic, it is hoping that the foreign visitors would sign up and use it in the same way as its domestic visitors.
Conclusion
One would have thought that if China is descending in the spiral, it will drag the world with it. But lately from all the signs that we have seen, this it is unlikely to happen. Perhaps before the pandemic the world was depending too much on China for its supply of products and services,
In this year we have seen Beijing continuing to lockdown to contain the pandemic and cracking down its economic in the most critical sectors. It is reining in its tech industry and try to tame them to rely on the party’s doctrine. The latest we have noticed that they forced Didi, the ride-hailing group to delist from the New York Stock Exchange. Didi launched its $4.4 billion public listing in New York on June 2021, making it the biggest listing by a Chinese company in the US since Alibaba in 2014. It was only days later that the regulators from China ordered Didi to take off its app from the Chinese app stores due to concerns of its cyber security practice which was deemed sensitive by Beijing.
Earlier during the year, Xi Jinping announced to turn the economy inward and have it replaced by an economical model which was driven by export. By turning the economy inward would means a model that is driven by domestic consumers. And effectively the share for export which was above 35% of its GDP in 2010 to less than 20% today.
The United States have shifted the import from China to Vietnam, Indonesia and Mexico. But China’s global GDP growth has drop from 35% before the pandemic to 25% now and it is still leading the growth from other emerging markets. We must admit the gap has narrowed. In the coming years, China will grow slower but the emerging markets will grow faster and the gap will come closer.
With the global growth in the semiconductors and other high-tech products, it has benefitted suppliers in Taiwan and South Korea. In this area China doesn’t have the niche.
It started during the Trump administration that the US has taken moves to partially decouple the world’s two largest economies. This limits the Chinese access to American technology and research universities through trade and visa restrictions. Since September 1, a new data-security law went into effect after Chinese officials have shown concerns about the transfer of potential sensitive data with the Western world.
Are we really heading for the new cold war? This is a good question. But in my opinion that the stack is too high. Before September of this year, among the world’s 20 largest tech giants, we can find that out of the 20, there are eight companies that are from China.
No. 6 – Alibaba
No. 7 – Tencent
No. 9 – Ant Financial
No. 13 – Baidu
No. 15 – JD.com
No. 16 – Didi Chuxing
No. 17 – Xiaomi
No. 20 – Meituan Dianping
There are opportunities for everyone if the policy can be more open and more ready to cooperate with one another.
What has happened inside China should be the last resort for the Chinese Communist Party, and what is happening now in the world, is the last resort for everyone as this is a zero-sum game and there is no winner.