Resources

 

 

Amy Liu is unsure whether she should trade in her five-year-old electric sport utility vehicle for a newer model with a longer range or wait a bit longer. “If I place an order now, I’m afraid the price might drop next month,” said the property agent in Shenzhen. Automakers in China’s highly competitive market for new energy vehicles (NEVs), which include all-electric and hybrid models, have been aggressively cutting prices since late last year as demand softened and the government cut back on subsidies.

 

Local players in the world’s largest EV market have sounded the alarm, projecting that the number of electric-car makers in China will shrink from about 200 to between five and 10 in the coming years. The shake-up is compounded by competition from foreign automakers. Volkswagen, BMW and Nissan all plan to introduce new electric models for China, where local EV makers account for nine out of the top 10 by sales. Encouraged by government policies aimed at bolstering the emerging industry, about two-thirds of China’s existing EV makers were registered between 2018 and 2020.

 

Nio, Xpeng and Li Auto are among the poster boys competing against Tesla of the US in the medium and premium segments. Others include domestic leader BYD, as well as subsidiaries of state-controlled automakers and independent brands.

 

 

Drivers in China have embraced electrics — more than a quarter of all cars sold last year were NEVs — but experts say only EV makers with economies of scale and enough financial firepower will remain standing in the years ahead. “Those without a deep-pocketed parent company will be under the largest pressure, especially those that haven’t got access to the equity market,” Jing Yang, a Shanghai-based director at Fitch Ratings, told Nikkei Asia. “For independent EV makers, we still think their brand positioning and cost structure will make the key difference.” Some are already feeling the heat. Zhejiang Leapmotor Technology is one of the EV start-ups to go public recently. In the past four years, Leapmotor logged consecutive net losses that widened to Rmb5.1bn ($734mn) in 2022, largely due to higher selling expenses. “We will try to achieve a balance between sales volume and gross profit,” chief executive Zhu Jiangming told local media in March. “We will prioritise winning market share.” Hong Kong-listed Leapmotor sold 111,168 vehicles in 2022, a 154.1 per cent yearly growth.

 

By comparison, Tesla delivered 711,000 vehicles in the same period. Leapmotor last month reduced the price of its flagship sedan C01 by a fifth to match rivals. The price war extends to the lower segment. Ballet Cat, an electric hatchback that resembles the Volkswagen Beetle, now sells for as little as Rmb149,800 after a discount of about Rmb50,000 to meet the “market reality”, a promoter said. The model is made under the Ora brand, one of several EV marques under state-owned Great Wall Motor, itself better known for making pick-up trucks. Ora sold 103,996 vehicles in 2022, a 23 per cent dip. China’s total new-car sales grew just 2 per cent last year, while NEV sales rose 93 per cent to 6.88mn units, or 27 per cent of all cars sold, as buyers rushed to capitalise on a deadline for EV subsidies that year. Partly driven by a drop in the cost of raw materials for batteries, Tesla began slashing prices in October. Other EV players soon followed suit, and makers of traditional petrol-powered vehicles joined the fray as they tried to clear inventory ahead of new emission standards in China that will come into effect on July 1.

 

 

“These moves have led to a wait-and-see sentiment and have not helped in increasing vehicle sales,” said Phate Zhang, founder of the China auto news outlet CnEVPost. Total vehicle sales contracted 6.7 per cent in the first three months this year, while NEV sales grew 26 per cent, compared with 138 per cent in the same period last year. Even established EV start-ups are alarmed by the intensifying competition. “The elimination of players in the auto industry has just begun,” He Xiaopeng, chief executive of Xpeng, said on April 16. “Players with an annual sales of 3mn units will qualify . . . and only eight mainstream players will remain in the next 10 years.”

 

Xpeng, which is listed in New York and Hong Kong, delivered 120,757 vehicles in 2022. A more consolidated EV industry would apparently suit Beijing just fine. The government warned in 2021 of the danger of having “too many players and [being] too scattered” and stressed the need to create “big and strong” EV players. But there have been few mergers and acquisitions in the industry, though some start-ups have thrown in the towel, such as Byton, which suspended operations in China in 2020. Nio was kept afloat after securing a $1.4bn lifeline from the Anhui provincial government in 2020. “It is the Chinese culture where entrepreneurs try to maintain the independence of their business rather than merging with other companies when they are in trouble,” said CnEVPost’s Zhang.

 

The price war is not going away anytime soon, analysts say, even as the Chinese economy rebounded from three years of zero-Covid policy with a 4.5 per cent yearly expansion in the first quarter. That growth was driven by consumption, markedly in the services sector, and infrastructure spending. “We are still concerned because under such a fierce competitive environment, some leading players and emerging brands backed by large auto groups may opt to price their products more aggressively to gain market share,” said Fitch’s Yang.

 

Demand was strong for plug-in hybrid vehicles based on first-quarter data, Yang added, and that would benefit players with such line-ups, including state-owned auto groups. For potential buyers such as Liu, however, the challenges facing the market could spell bigger savings. “I will wait it out for the best deal,” said Liu, whose existing car has lost two-thirds of its value.

 

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Source:  This article was first published by Nikkei Asia on May 5 2023.

Africa accounted for 12.3% of Chinese companies’ exploration and strategic investment budgets in 2021, up from 8.1% in 2011. Partially, this is due to the CCP wanting to reduce dependence on Australia should they choose to invade Taiwan. But it’s also worth noting that Australia is far more expensive to invest in, with the former trade-off being increased confidence in Australia’s regulatory and judicial systems.

 

For example, mine costs at Chinese titan CITIC’s iron ore mine in Australia have been high since operations began, with all-in sustaining costs over $100/dmt in 2013 and 2014 alone. These costs have only risen with time, as the ore requires a four stage milling process compared to the usual standard of two, while labour costs are also high by international standards.

 

Importantly, high operating costs came from a lack of preliminary study of the project — and this rush to achieve dominance in the project came under harsh criticism from domestic Chinese investors and the Communist Party itself, who were less than impressed with the message of incompetence sent to the global markets. Since this mistake, Chinese companies have been encouraged to take a different strategy.

 

Take copper. Of the 88 Chinese-owned copper assets abroad, 17 are owned by China Nonferrous Mining Corp — and all 17 are in the Central African Copper Belt.

 

 

One of the earliest mines it acquired was the Chambishi Project in Zambia — bought in 1998 — and the project was also subject to limited due diligence. Now it’s one of the highest-cost copper mines in the world. The Chinese learnt from their mistakes, instead preferring to become strategic investors in smaller mines such as Zambia’s Muliashi North in 2009, which is now one of the lowest-cost copper mines.

 

This approach — sometimes involving selling off higher-producing-cost stakes — leaves S&P Global data showing that African-sourced copper destined for China is now the lowest cost of all copper-producing regions. And the strategy that has worked is clear — making a strategic investment in return for security of supply and with the understanding that divestment could occur if feasibility studies come back with high-cost results.

 

But Africa is also becoming more attractive because to a large extent it’s cleared up its act with regards to regulation.

 

For example, when Blue Orca launched its short attack on Atlantic Lithium’s Ghanian operations, the accusations of bribery didn’t hold the same water as they may have in the past. And Vast Resources has been awarded those contested diamonds by the Zimbabwe High Court — partially as the country wants to project an image of investibility and judicial fairness.

 

Of course, Africa is a massive continent comprising 54 recognised countries, so this is something of a generalisation. But the trajectory of increased judicial confidence means that it is far more investible than in the past.

 

Now to specifics.

Chinese investment into African mining has been predominantly funded by state-owned enterprise, but private companies have also been hugely encouraged by Beijing’s 2014 simplified approval procedure for foreign investments in mining exploration — regulated by the China National Development and Reform Commission — for projects valued below $1 billion.

 

This little-known law — part of the Belt and Road Initiative — effectively highly encourages private companies to make small investments in dozens of African-based explorers — whether in iron, copper, lithium, or others — to reduce risk of failures and also prioritise security of supply. In the case of PREM, it’s worth noting that our offtake partner has rights to 50% of the lithium but only owns less than 13.38% of the company.

 

Now let’s look at a key case study.

Zijin Mining Group has the most foreign mining assets of any Chinese company — 47 at present (though I cannot verify this figure independently). It has completed eight deals in the past two years, and 21 acquisitions or strategic investments since 2010. The majority of these acquisitions has been in the gold sector, and overseas gold production is expected to constitute 52.7% of the company’s gold production by 2028.

 

 

But the key information is that Zijin initially prioritises security of supply by providing funding for pilot plants in exchange for some shares, and then seeks outright control once production is proven to be low-cost and economically feasible.

 

One advantage that Chinese companies — and state-owned enterprises — have is that they are less beholden to shareholders, and therefore can ignore the boom-and-bust mining supercycle when making investment decisions. Indeed, western-listed miners are actually decreasing investment in maiden resources as the world goes into recession, as investors fret over the short-term depressive effect on commodity prices, even though the longer-term supply gap means prices are only heading one way over the longer term.

 

But Chinese companies play the long game. They know that supply is what matters most, as the lithium price will rise when the gap widens over the next decade. Arguably, CATL’s battery pricing strategy is designed to bring the lithium price down artificially — leaving a certain major shareholder able to buy shares in lithium companies cheaper than would otherwise be possible.

The Kodal Minerals deal has shown, unequivocally, that China is desperate to secure supply. The conditions of the deal are extremely favourable to the company — and PREM could be next to dictate terms.

 

China and Zimbabwean Lithium

Lithium reserves have been found all over Zimbabwe, Namibia, Ghana, the Democratic Republic of the Congo, and Mali. But while I could write a few dozen pages on how Chinese strategy works elsewhere in Africa, Premier African Minerals (PREM) is located in Zimbabwe, so I will focus here.

 

The country has been mining lithium since the 1960s, and the government thinks that thee Chinese-owned Bikita mine 300km south of the capital has circa 11 million metric tons of lithium resource. The World Trade Organisation considers that Zimbabwe will one day meet 20% of peak global lithium demand, and it is already the world’s sixth -largest producer of the silvery-alkali metal.

 

 

Of course, much has been made of December’s Base Mineral Export Control Act, which bans the export of raw lithium. Aimed at so-called ‘artisanal’ miners (which supports the livelihood of 1 million Zimbabweans), the government estimates it has already lost $2 billion in minerals smuggled across the border by artisanal mining leakage. But the law is also aimed at getting companies to invest in Zimbabwean plant building and processing capacity, and therefore is no bad law by any means. The country should benefit from its natural resources. Further, many artisanal miners are horrendously exploited, and while some may lose their means of work, others will be freed from what is effectively slave labour.

 

One key part of the law is that companies already in the process of developing mines — including giants like Zhejiang Huayou Cobalt, Sinomine Resource Group and Chengxin Lithium Group (which have collectively invested $678 million into lithium projects in the country) are exempt. Last year alone, Chinese titans including Tsingshan, China Nonferrous, and Huayou Cobalt invested nearly $1.5 billion in Zimbabwe. Meanwhile, Sinomine Resource Group has announced its plans to expand production at Bikita mine by investing $200 million into building a new lithium plant.

 

But who else is excluded from this new law? Premier African Minerals. This makes the company one of the last potential full acquisitions that China can make into Zimbabwean lithium without being constrained by the law — both Zimbabwean law limiting the export of unrefined lithium, and Chinese law making it incredibly difficult to invest more than $1 billion in any one acquisition.

 

Consider this: Sinomine acquired Bikita for $180 million in 2022 and has created a JV with Chengxin Lithium Group’s Zimbabwe unit to increase lithium projects in the country. And Chengxin itself paid $76.5 million for 51% of the Star Lithium mine blocks in 2021. Zhejiang Huayou Cobalt, meanwhile, bought the Arcadia lithium project for $422 million deal in 2021 — and plans to invest a further $300 million into a processing plant at the site.

 

These huge investments into new lithium processing plants are leaving massive extra processing capacity. And the EPO of Zulu is huge.

 

This is why, in my view, a buyout is coming and coming fast. Production is starting, so Chinese historical nervousness of investing too heavily in exploratory companies is no longer as relevant. China is already building huge amounts of infrastructure, which will significantly reduce capex costs. PREM is also not covered by restrictive new laws, so any buyer can ship out unrefined lithium — a privilege that will not be afforded to any future explorers.

 

And with a current £208 million market cap, a buyout price of 3p — or circa £600 million — leaves PREM comfortably below the $1 billion maximum investment allowed under Chinese law.

 

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Source: By Charles Archer for Investing Strategy

 

 

 

 

 

 

 

China, the world’s largest importer of corn and soybean, seems finally to accept the potential of using genetically modified (GM) feed crops. Will this be enough to reduce China’s dependency on such imports and will it meet the demands of other countries that are also experiencing an increase in demand for feed to increase production of animal meat?

 

 

Asia’s enormous appetite for meat has fuelled an equally large demand for animal feed, notably corn and soybean. Three countries which are regularly large exporters of feed corn and feed soybean – the United States (US), Argentina, and Brazil – have invested in GM technology and grown GM feed crops competitively, despite increasing evidence of safety risks to humans, animals and the environment, and despite concerns from groups opposing GM technology. China is among the last of the major agricultural countries not to plant genetically modified crops.

 

Most scientific studies point to increased meat demand in Asia as this region has not seen “peak consumption” of meat yet. As such, competition for feed crops will intensify in the coming years, with supply likely threatened by geopolitical and environmental factors as the world’s food security enters an era of what we would refer to as “volatile deficits”, in which the stability of food security is not assured, and countries will have to be better prepared to deal with uncertainty.

 

In China, one of the world’s most populous countries, increased meat demands from a rapidly growing middle-class mean that China will remain an important influence on the purchase of surplus corn and soybean grains on the world market.

 

In response to food insecurity concerns, particularly for animal feed, Beijing is considering the adoption of GM technology, starting with GM corn, which could decrease China’s demand on global supplies. As this could free up quantities for other corn-hungry countries, China’s adoption of GM technology may influence trade dynamics as well as the livelihoods of corn growers in exporting countries and smallholder corn farmers in developing countries.

 

Appetite for Meat

China’s demand for feed grains reflects its growing appetite for animal protein and changing diets, brought on by higher living standards and increasing household incomes. Meat consumption in China has steadily increased in recent decades, with the country having become the world’s largest meat producer, consumer, and importer.

 

In 2021, the country consumed almost 100 million metric tonnes of meat – 27 per cent of the world’s total – including 57 million tonnes of pork, 25 million metric tonnes of poultry, and 9 million metric tonnes of beef. And demand is expected to continue to rise. The country has recently established targets to produce 95 per cent of the protein domestically by 2025, including 85 per cent self-sufficiency for beef and mutton, and 70 per cent self-sufficiency for dairy.

 

Demand for Animal Feed

In 2021, China imported 100 million metric tonnes of soybean and 27 million metric tonnes of corn, mainly to grow hogs, chicken, and fish. China’s domestic feed production, which uses conventional non-GM varieties, cannot keep up with domestic demand. To supplement local output, China currently imports GM corn and soybean but disallows the planting of GM food and feed crops in its territory.

 

Despite being the world’s largest grower of corn by acreage, China’s total grain production falls short of its needs. China reportedly grew corn on about 43 million hectares in the last growing season, producing an estimated 270 million tonnes. Yet, it had to import 27 million tonnes of corn during 2021 from the US, Argentina, and Brazil. China is also the world’s largest importer of soybean, importing more than six times the tonnage imported by the second largest importer, the European Union.

 

One reason why some countries have surpluses to export is their relatively high yields per hectare. In the US, the average on-farm yield of corn is 11-12 tonnes per hectare compared to China’s average corn yield of 6.2 tonnes per hectare. Likewise, the average yield for soybean in the US is about 3.5 tonnes per hectare while it is 1.6 tonnes per hectare in China. US farmers rely more on agricultural technologies (agritech) and biotechnologies for production of these crops.

 

Growing GM Animal Feed Crops for the First Time

Despite having studied GM food crops for decades, Beijing has never permitted them to be planted due to domestic opposition to the technology, although it allows imported GM soybean and corn for use in animal feed and the planting of GMO cotton.

 

Beijing recently approved the planting of GM corn for the 2023 planting season, although GM land area will likely account for less than 1 per cent of the total corn acreage. The agriculture ministry has designated around 4 million mu (267,000 hectares) to be planted with GM corn this year, with several varieties being planted in certain counties of Inner Mongolia, Jilin, Hebei, and Yunnan provinces.

 

This is one of a number of moves in recent years which suggest that Beijing is closer to recognising the value of biotechnology crops. Earlier, in January 2022, China published new guidelines for the approval of gene-edited plants. This came amid a raft of measures to overhaul China’s seed industry, which is now seen as a weak link in biotechnology crop production. China’s Minister of Agriculture and Rural Affairs, Tang Renjian, has likened seeds to the “computer chips” of agriculture.

 

Long-Term Prospects

A Chinese idiom holds that “people regard food as their heaven” (民以食为天). This saying reflects the importance of food security in China. For thousands of years, food security has been a key priority for the Chinese authorities and remains so today.

 

China’s foray into GM crops must be viewed in the context of assuring national food security and avoiding reliance on foreign sources of means for food production, including seeds, fertilisers, and technologies. President Xi Jinping has repeatedly spoken in public of the importance of agricultural technologies and the seed sector in China, emphasising that, “To ensure that China’s seed resources are self-supporting and under better control, self-reliance must be achieved in seed technology”.

 

However, the many problems faced by China, including especially poor soil health, polluted fresh water, and limited arable land, will mean that many years could pass before the desired results are achieved. China will need to continue relying on grain imports if domestic production fails to meet demand, or if production costs become too high, or if overseas supply becomes cheaper again.

 

Ultimately, China’s foray into GM crops is likely to have a positive impact on its own domestic needs for more corn (and soybean when it comes to this), while also making more corn (and soybean) available for other importing countries. This will be a boon to both consumers and producers.

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Source: By Paul Teng for RSiS

This report, and the Critical Technology Tracker website, fill a global gap by identifying which countries, universities and businesses are leading the effort to progress scientific and research innovation, including breakthroughs, in critical technologies. Database queries identified the relevant set of papers for each technology (2.2 million in total). The top 10% most highly cited research publications from the past five years on each of the 44 technologies were analysed. In addition, our work collecting and analysing data on the flow of researchers between countries at various career stages—undergraduate, postgraduate and employment—identifies brain drains and brain gains in each technology area.

 

 

 

China is further ahead in more areas than has been realised. It’s the leading country in 37 of the 44 technologies evaluated, often producing more than five times as much high-impact research as its closest competitor. This means that only seven of the 44 analysed technologies are currently led by a democratic country, and that country in all instances is the US.

 

The US maintains its strengths in the design and development of advanced semiconductor devices and leads in the research fields of high performance computing and advanced integrated circuit design and fabrication. It’s also in front in the crucial areas of quantum computing and vaccines (and medical countermeasures). This is consistent with analysis showing that the US holds the most Covid-19 vaccine patents and sits at the centre of this global collaboration network. Medical countermeasures provide protection (and post-exposure management) for military and civilian people against chemical, biological, radiological and nuclear material by providing rapid field-based diagnostics and therapeutics (such as antiviral medications) in addition to vaccines.

 

The race to be the next most important technological powerhouse is a close one between the UK and India, both of which claim a place in the top five countries in 29 of the 44 technologies. South Korea and Germany follow closely behind, appearing in the top five countries in 20 and 17 technologies, respectively. Australia is in the top five for nine technologies, followed closely by Italy (seven technologies), Iran (six), Japan (four) and Canada (four). Russia, Singapore, Saudi Arabia, France, Malaysia and the Netherlands are in the top five for one or two technologies. A number of other countries, including Spain and Turkey, regularly make the top 10 countries but aren’t in the top five.

 

As well as tracking which countries are in front, the Critical Technology Tracker highlights which organisations—universities, companies and labs—are leading in which technologies. For example, the Netherlands’ Delft University of Technology has supremacy in a number of quantum technologies.

 

A range of organisations shine through, including the University of California system, the Chinese Academy of Sciences, the Indian Institute of Technology, Nanyang Technological University (NTU Singapore), the University of Science and Technology China and a variety of national labs in the US (such as the Lawrence Livermore National Laboratory). The Chinese Academy of Sciences is a particularly high performer, ranking in the top 5 in 27 of the 44 technologies tracked by the Critical Technology Tracker. Comprising of 116 institutes (which gives it a unique advantage over other organisations) it excels in energy and environment technologies, advanced materials (including critical minerals extraction and processing) and in a range of quantum, defence and AI technologies including advanced data analytics, machine learning, quantum sensors, advanced robotics and small satellites. In addition, US technology companies are well represented in some areas, including in the AI category: Google (1st in natural language processing), Microsoft (6th by H-index and 10th by ‘highly cited’ in natural language processing), Facebook (14th by H-index in natural language processing), Hewlett Packard Enterprise (14th by H-index in high performance computing) and IBM (Switzerland and US arms both tying at the 11th place with other institutions by H-index in AI algorithms and hardware accelerators).

 

There’s a human dimension to technology development that should also be factored into assessments of technological capability. Innovations are ultimately the result of researchers, scientists and designers with a lifetime of training and experience that led to their breakthroughs. Understanding where those researchers started their professional journeys, where they received the training that equipped them to be leaders in their fields, and finally where they are now as they make their discoveries, paints a picture of how well countries are competing in their ability to attract and retain skilled researchers from the global pool of talent.

 

Who are the individuals publishing the high-impact research that’s propelled China to an impressive lead? Where did they study and train? In advanced aircraft engines (including hypersonics), in which China is publishing more than four times as much high-impact research as the US (2nd place), there are two key insights. First, the majority (68.6%) of high-impact authors trained at Chinese universities and now work in Chinese research institutions. Second, China is also attracting talent to the workplace from democratic countries: 21.6% of high-impact authors completed their postgraduate training in a Five-Eyes country (US = 9.8%, UK = 7.8%, Canada = 3.9%, Australia = none, New Zealand = none), 2% trained in the EU, and 2% trained in Japan. Although not quantified in this work, this is very likely to be a combination of Chinese nationals who went abroad for training and brought their newly acquired expertise back to China, and foreign nationals moving to China to work at a research institution or company.

 

World-leading research institutes typically also provide training for the next generation of innovators through high-quality undergraduates, masters and PhDs, and employment opportunities in which junior researchers are mentored by experts. As China claims seven of the world’s top 10 research institutions for advanced aircraft engines (including hypersonics), its training system is largely decoupled, as there’s a sufficient critical mass of domestic expertise to train the next generation of top scientists. However, a steady supply of new ideas and techniques is also provided by individuals trained overseas who are attracted to work in Chinese institutions.

 

A crucial question to ask is whether expertise in high-impact research translates into (sticking with the same example) the manufacture of world-leading jet engines. What of reports of reliability problems experienced with Chinese-manufactured jet engines? The skill set required for leading-edge engine research differs from the expertise, tacit knowledge and human capital needed to manufacture jet engines to extreme reliability requirements. This is an important caveat that readers should keep in mind, and it’s one we point out in multiple places throughout the report. As one external reviewer put it, ‘If you’re good at origami but don’t yet excel at making decent paper, are you really good at origami?’ Naturally, manufacturing capability lags research breakthroughs. However, in the example of jet-engine manufacturing, China appears to be making strides and has recognised the ‘choke-point’ of being entirely reliant on US and Swedish companies for the precision-grade stainless steel required for bearings in high performance aircraft engines. China’s excellent research performance in this area most likely reflects the prioritisation and investment by the CCP to overcome the reliability, and choke-point, hurdles of previous years.

 

But whether the focus is jet engines or advanced robotics, actualising research performance, no matter how impressive, into major technological gains can be a difficult and complicated step that requires other inputs (in addition to high quality research). However, what ASPI’s new Critical Technology Tracker gives us - beyond datasets showing research performance - are unique insights into strategy, intent and potential future capabilities. It also provides valuable insights into the spread, and concentrations of, global expertise across a range of critical areas.

 

There are many ways in which countries (governments, businesses and civil society) can use the new datasets available in the Critical Technology Tracker. It can be used to support strategic planning, enable more targeted investment, or facilitate the establishment of new global partnerships (to name just a few possibilities). For example, Australia has one of the world’s biggest lithium reserves and has all the critical minerals for making lithium batteries. As an established leader in photovoltaics technology, Australia has the potential to guarantee its energy security by focusing on electric batteries, critical minerals extraction and processing and photovoltaics technologies while locally capitalising on its onshore critical-minerals resources. As the world’s second largest producer of aluminium, Australia can reduce its greenhouse emissions by using both hydrogen and electricity generated from renewable sources in its aluminium production. Strategic funding in these interconnected critical technology could reduce the current tech monopoly risks revealed by the Critical Technology Tracker and support new tech industries with job creation.

 

These findings should be a wake-up call for democratic nations. It has become imperative, now more than ever, that political leaders, policymakers, businesses and civil society use empirical open-source data to inform decision-making across different technological areas so that, in the years and decades to come, they can reap the benefits of new policies and investments they must make now. Urgent policy changes, increased investment and global collaboration are required from many countries to close the enormous and widening gap. The costs of catching up will be significant, but the costs of inaction could be far greater.

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Source: Australian Strategic Policy Institute

Since AI has become essential to national interest, China may not be willing to leave its development in the hands of private companies.

 

With the recent releases of large-language models, such as ChatGPT, artificial intelligence (AI) capability has leapfrogged, attracting intense attention around the globe. Inspired by the success of ChatGPT, many Chinese technology companies, such as Baidu, rushed to announce their own plans for developing a Chinese version of ChatGPT. However, to everyone’s surprise, the Chinese government recently banned tech companies from offering ChatGPT-like services and will potentially impose more regulations on the development of AI.

 

 

Since AI has gradually evolved into a foundational part of societal infrastructure essential to national interests, China may create a new state-owned enterprise (SOE) to monopolize AI foundation in China, similar to how SOEs monopolize the energy and telecommunication sectors.

 

Traditionally, China’s SOEs have controlled industries that are deemed essential to national interest and China’s economy. It has been estimated that the share of SOEs in China’s GDP is at least 23 percent. Particularly, as China is transitioning from an investment-driven export economy to an innovation-driven economy reliant on domestic consumption, the role of SOEs has become increasingly more important, as these state-owned firms are driving China’s economic transition. Furthermore, one study indicated that Chinese SOEs form an integrated system to not only economically benefit the state but also to guarantee that the whole country stays within the state’s control.

 

Returning to AI, the field is estimated to completely revolutionize the world’s economy with an estimated $15.7 trillion contribution to the global economy by 2030. Along the way, AI will become pervasive in people’s daily lives. Hence, AI will not only impose a significant economic impact but also become essential to the state’s control, satisfying both key factors for the creation of an SOE.

AI has gradually become an essential part of societal infrastructure in recent years. For instance, the Estonian government launched a new AI-based virtual assistant to provide Estonians with a voice-based way to navigate key services provided by the state, such as renewing a passport or applying for benefits. In Finland, a similar AI platform can offer medical services to help citizens renew prescriptions and notify them of potential health risks. With AI being able to access, aggregate, and analyze sensitive personal information of the whole Chinese population, I have a hard time believing that the Chinese government will leave this capability to companies in the private sector.

 

Besides the fact that AI is essential to the national interest, large AI models such as ChatGPT are also extremely expensive to develop and maintain. It has been estimated that each training of a large language model could cost millions of U.S. dollars. Racing to become the leading suppliers of AI technologies in China, venture capitalists and technology companies could easily pour tens of billions of dollars into developing large language models that are very similar to each other, leading to overprovisioning of similar AI technologies.

 

In the view of the Chinese national government, overprovisioning, which has happened in the intelligent electric vehicle industry, is not an efficient utilization of China’s financial resources, and thus should not be encouraged. Instead, China may centralize financial and computing resources to one or a selected few institutions to develop AI foundation models.

 

Going forward, the AI ecosystem will be divided into development of foundation models and specialty fine-tuning.  For national security and cost efficiency reasons, I foresee that China’s foundation models would be trained by only one or a few SOEs with substantial financial and computing resources, and most applications will be achieved via lightweight fine-tuning of these foundation models toward specialized uses, such as education, healthcare consulting, legal assistance, customer services, and many more.

 

Hence, technology companies in China should focus on leveraging their vertical expertise and know-how, as well as user data, to fine-tune the foundation models for commercialization in different business verticals, instead of investing an enormous amount of resources in developing foundation models.

 

The creation of a new AI-focused SOE may incentive the rapid growth and development of the Chinese semiconductor industry, particularly Chinese Graphic Processing Units (GPUs). GPUs are essential in large-language model training, but the United States has imposed a ban on exports to China of Nvidia and AMD’s flagship artificial intelligence chips. If AI foundation models were to be developed by one or more Chinese SOEs, I foresee further tightening up of export control of AI processors, and SOEs would have no other alternatives but to rely solely on domestic semiconductor suppliers. This could bring short-term pains but long-term benefits to the whole Chinese AI ecosystem.

 

Lastly, just to illustrate the intelligence delivered by models like ChatGPT, I asked ChatGPT the same question addressed in this piece. Below is the insightful and thorough analysis it provided. Reading this answer, I become even more convinced that China will create a new SOE to provide basic AI capabilities fueling the development of various sectors in China.

 

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By Shaoshan Liu for The Diplomat

 

 

• China’s economic growth profile in 2023 will be characterised by a weaker first six months and a stronger second half. As in other Asian economies that lifted zero-covid policies, re‑opening will not result in an immediate acceleration of growth, as a surging viral caseload causes disruption to supply chains and consumption. However, after a difficult first quarter, China’s economic momentum will probably build in the second quarter, before a strong recovery sets in during the second half of the year, when the public health situation will be manageable. We also expect global demand for Chinese exports to recover in the second half of 2023. The lagged effect of pro‑growth policies (to be announced) will underpin stronger economic performance in 2024.

   

  China’s growth pattern over the next two years will differ in important ways from the post-pandemic recovery in other major economies. In the US, for example, strong and prolonged private consumption—stemming from stimulus-backed savings—supported growth. China will also experience an initial rebound in consumption, driven by pent-up demand, but the recovery will be relatively mild, owing to the negative impact of zero-covid on personal incomes and the absence of household-focused stimulus. Similar to consumption, private investment will also take time to rebound. To lift sentiment, we expect the government to announce expansionary fiscal measures—supported mostly by bond insurance and a wider fiscal deficit—and to front-load its spending in 2023, stimulating the economy and financing treatment for covid‑19. 

   

  The first sectors to benefit from China’s exit from zero-covid will be healthcare and pharmaceuticals, followed by offline consumption such as catering, transport and tourism. We expect increased spending by both the government and households, in preparation for the near-term and repeat waves of coronavirus cases. The property sector will also benefit from supportive policies and improving income expectations.

   

   

• After an uneven growth performance this year, China’s economy is projected to recover in 2023. Activity in China has followed the ups and downs of the pandemic—outbreaks and economic slowdowns have been followed by uneven recoveries. Despite policy support, real GDP growth is expected to slow to 2.7 percent in 2022, before recovering to between 4.3-5.2 percent in 2023 (World bank and Economist Intelligence Unit estimates) amid a reopening of the economy.

 

• The growth outlook is subject to significant risks. Recurrent COVID-19 outbreaks, the possibility of renewed mobility restrictions and precautionary behavior to slow the spread of the virus could lead to longer-than-expected disruption in economic activity. Continued adaptation of China’s COVID-19 policy will be crucial, both to mitigate public health risks and to minimize further economic disruption. Persistent stress in the real estate sector could also have wider macroeconomic and financial spillovers. China’s economy is also vulnerable to climate change, highly uncertain world growth prospects, greater-than-expected tightening in global financial conditions and heightened geopolitical tensions.

 

• The continued adaptation of China’s public health policies will be crucial to mitigate public health risks and also minimize further economic disruption. Accelerated efforts on public health preparedness now could enable a safer and less disruptive re-opening. Public health measures could include focused efforts to increase vaccination rates among vulnerable groups, rollout of a booster campaign, increased access to effective COVID-19 treatments, and efficient use of limited hospital capacity for severe cases.

 

• Continued macroeconomic policy support will be needed in the near term, as the economy remains below potential and the global environment is weakening. China has adequate fiscal policy space, especially at the central level, that could be deployed to bolster a stronger recovery. Directing these fiscal efforts toward social spending and green investment rather than traditional infrastructure would not only support short-term demand but also contribute to more inclusive and sustainable growth in the medium-term.

 

• Deeper structural reforms, put on hold by the pandemic, will have to be restarted to successfully achieve more balanced, inclusive, and sustainable growth. Reform priorities include creating a level playing field for the private sector by ensuring a predictable regulatory environment and addressing distortions in the access to credit. Such measures could be complemented with reforms to strengthen social security and reduce inequalities in access to quality healthcare and education. At the same time stronger efforts are needed to accelerate the transition to a low carbon economy through more market-based instruments and investment in climate-smart infrastructure.

 

• Increasing youth unemployment rates have highlighted the emergence of another pressing challenge for policymakers. Employment subsidies and public works programs have provided near-term support to youth employment. The special topic of this report argues that these short-term measures could be complemented with structural measures to strengthen the skillset of the youth, improve labor market mobility, address information asymmetries, and strengthen labor market statistics.

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Source: World Bank & Economist Intelligence Unit

The Hurun Research Institute released the Hurun Largest Foreign & HK/Macao/Taiwan Companies in China 2022, a list of those 100 foreign & HK/Macao/Taiwan companies with the greatest contribution to China's economy, based on their sales and the number of employees in China. This is the second year of the list.

 

 

 

Between them, the 100 Hurun Largest Foreign & HK/Macao/Taiwan Companies in China had sales of US$1tn in China last year, equivalent to 7% of China's annual GDP, with an average annual sales of US&10.6bn per company. They had just under 3 million employees in China, with an average of 30,000 employees per company. 59% are direct-to-consumer and 41% are B2B businesses. 81% sold physical products and 19% sold software or services. The automobile, consumer goods, healthcare and consumer electronics sectors led the list, accounting for nearly half of the top 100. The average age of the 100 companies is 92, and they have a history with China of 55 years on average.

 

 

These 100 foreign & HK/Macao/Taiwan companies have made a significant contribution to the China economy, with sales last year totaling US$1tn in China, equivalent to 7% of China's GDP. They had just under 3 million employees in China. In particular, the four major industries - automobiles, consumer goods, healthcare and consumer electronics - contributed the most. Europe (44%) and the US (36%) continue to dominate the list with 80% of the companies listed. The sector composition is relatively steady but with notable movements in chemicals (+2 companies), semiconductors (+2), healthcare (-2), and consumer (-2).