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China’s debt forgiveness in Africa.

China’s debt forgiveness in Africa.
China has agreed to forgive interest-free loans to 17 African countries as it seeks to dispel debt-trap allegations, but sceptics say that the days of Beijing writing off interest-bearing loans are over.
 

With African economies under severe strain from surging commodity prices and the tailwinds of Covid-19, hopes were high when Wang Yi, China’s top diplomat, took the stage for a major African debt announcement in August.

 

 

With a pomp not seen before in debt talks, Wang said Beijing had forgiven 23 interest-free loans to 17 African countries. He noted that the loans had matured, but remained tight-lipped about the total value and their recipients.

 

For cash-strapped African economies, many of whom count China as their largest bilateral creditor, the news that outstanding balances on Chinese government loans would be cancelled was well received. Around half of the continent is either in debt distress or at risk of it, with debt as a percentage of GDP worryingly high. All told, the world’s poorest countries – many of them in Africa – are facing $35bn in debt-service payments in 2022. Around 40% of that total is owed to China, according to the World Bank.

 

Interest-free loans vs interest bearing loans

However, while interest-free loan forgiveness could make a difference to Africa’s very poorest nations, it does not come as much of a surprise. In fact, no-interest loans make up a sliver of China’s lending to the continent. Some African governments even treat them as grants.

 

While the pageantry around the announcement could indicate an attempt by Beijing to tackle allegations of “debt-trap diplomacy”, analysts say it is unlikely to have an impact on China’s interest-bearing loans. And the current negotiations over Zambia’s debt obligations do not suggest Chinese banks are in a particularly forgiving mood.

 

Chinese lending to Africa peaked in 2016 at $29.5bn. By then it had already fuelled an infrastructure boom across the continent. As the leading external financier of infrastructure in Africa, Beijing built or upgraded 10,000km of railway, 100,000km of highway, 1,000 bridges and 100 ports, according to Chatham House, not to mention power plants, hospitals and schools. Kenya has Africa’s first urban expressway and a standard-gauge railway linking Nairobi and Mombasa thanks to Chinese credit.

 

 

Lauren Johnston, a professor at the University of Sydney’s China Studies Centre, says Chinese lending on the continent was initially underpinned by tumbling interest rates following the global financial crisis and a search for new markets, as well as a desire by Beijing to foster global development.

 

Today, she says, there’s a more immediate challenge in having to “manage a loan portfolio in the presence of global tensions and post-pandemic economic challenges.”

 

According to AidData, a research lab, interest-free loans account for less than 5% of the $843bn in Chinese loan commitments to 165 governments globally between 2000 and 2017. In the past two decades, China has written off at least $3.4bn of debt, almost all interest free loans to African countries, according to researchers from Johns Hopkins University.

 

They are considered part of China’s largesse in Africa, comparable to Beijing’s recent construction of Zimbabwe’s new parliament or a Lusaka’s state of the art conference centre, which came at no cost to either southern African country.

 

“Beijing has been doing debt write-offs of interest-free loans for 22 years,” says Deborah Brautigam, director of the China Africa Research Initiative at Johns Hopkins. “These interest-free loans come from China’s central government budget and have already been completely accounted for, like grants and unlike bank loans.”

 

While the write-offs are not new, experts say the pomp around the announcement is, reflecting Beijing’s frustration with allegations of debt-trap diplomacy, particularly from the US.

 

Both the Trump and Biden administrations have accused Beijing of deliberately lending to countries it knows cannot meet their obligations for political leverage, for instance to prompt a vote in China’s favour at the United Nations General Assembly or smooth the way for a well-placed Chinese port. A 2020 State Department document warned directly of China’s “predatory development programme and debt-trap diplomacy.”

 

Beijing ‘irked’ by debt-trap allegations

Harry Verhoeven, senior researcher at Columbia University in New York, says the accusation does not hold water. In Djibouti, Uganda and South Sudan, which are often touted as possible debt trap victims, there is no evidence of Beijing making any such requests, he argues.

 

That has not stopped China from pushing to change the narrative. “It’s very clear that now, being on the receiving end of this kind of language for four or five years, Beijing is really quite irked by all of this,” Verhoeven says. “There is a felt need to push back and to actually show parts of African public opinion – perhaps even globally – that China is not the bogeyman the US and some of its Western allies are trying to make it out to be.”

 

During Kenya’s tense presidential election in August, winner William Ruto made Chinese debt a political football, vowing to publish secretive government contracts with Beijing and put an end to his predecessor’s excessive borrowing. Beyond the continent, Sri Lanka’s mounting public debt, some of it owed to China, led tens of thousands of Sri Lankans to storm the presidential palace in Colombo in July, perhaps worrying indebted African governments. Sri Lanka defaulted on its $47bn external debts last year.

 

Beijing dismisses the debt-trap claims as a hollow attempt by the US to reduce Chinese influence in Africa and boost its own. In August Wang condemned America’s “zero-sum Cold War mentality”.

 

While Hannah Ryder, chief executive of Development Reimagined, an African development consultancy in Beijing, has described interest-free loans as “the lowest-hanging fruit”, interest-bearing loans, which account for the vast majority of China’s lending, are quite another story.

 

Commercial loans can be restructured or reprofiled, but are almost never considered for cancellation, analysts say. Rather than coming through the government’s foreign aid programme, they go through China’s banks, which insist on being repaid. And with the Chinese economy stagnating somewhat compared to a decade ago, due in part to Beijing’s “zero-Covid” strategy, which shut down whole cities, that is unlikely to change.

 

“Chinese banks are reluctant to cancel or reduce the principal on bank loans inside China; doing this abroad would be unpopular among Chinese citizens,” says Brautigam. “Chinese banks want to be repaid in full.” In recent years China has reorientated its economy and is paying more attention to domestic and regional affairs. The boom times for African governments seeking Chinese loans appear to be over.

 

“Given the global economic winds that we see at the moment it’s important for Chinese lending institutions to be able to recoup much of the money they have made available to others,” says Verhoeven.“There was a time when China could just write off these things and say keep the change. Those days are over.” In fact, in the last couple of years Chinese lending to Africa has decreased significantly.

 

Johnston is open-minded about long-run prospects for debt relief. “Perhaps, far down the track [China] may offer debt relief,” she says, “[but] my sense is that China will first endure a long period of re-scheduling until ideally the loans are repaid.”

 

 

Zambia debt talks: a sign of things to come?

While expectations of write-downs or haircuts on interest-carrying loans are low, many see Zambia, which became the first African country to default on its debt during the coronavirus pandemic, as a vital test of how much debt relief China will be willing to stomach.

 

Most of Africa’s debts to China are owed by five countries – Angola, Ethiopia, Kenya, Nigeria and Zambia – some of whom are seeking to reduce their reliance on Chinese loans in the future.

 

Zambia owes roughly $17bn to a combination of multilateral lenders, commercial bondholders and sovereign creditors, and a third of it to China. The country is requesting $4.8bn in debt relief over the next three years. Debt restructuring is being handled through the Common Framework for Debt Treatments, set up in 2020 by the G20 cohort of wealthy countries.

 

Restructuring got off to a slow start, with some blaming China for the delay, which Beijing denies. Yet the second meeting resulted in a breakthrough commitment, allowing the International Monetary Fund to sign off on a $1.3bn lending programme. In July, Zambia’s finance ministry announced it was cancelling $2bn of undisbursed loans from external creditors, $1.6bn of them from Chinese banks.

 

China initially wanted to eschew the Common Framework altogether, Beijing’s ambassador to Zambia said in August, before a call between President Xi Jinping of China and President Hakainde Hichilema of Zambia convinced China to join the talks. Many have been surprised by China’s willingness to negotiate in the face of its first debt crisis.

 

Still, negotiations remain tense. Analysts say China favours extending maturities over write-downs, even though Zambia’s finance minister, Situmbeko Musokotwane, told journalists in September that “the choice between haircuts and stretching the repayment period… is a matter of negotiations.” He added that some creditors “will choose to have their money faster” while others would opt for repayment over a longer period.

 

While Zambia is a useful test case, Verhoeven is wary of extrapolating it to the rest of the continent. “Zambia is pretty exceptional in terms of the composition of its debt, its important role as a copper producer, its history of defaults,” he says. “Zambia is not representative of the average African country and its debt profile, which is part of the reason I think why China has been willing to be, by Chinese standards, quite generous.”

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Source:  By Charlie Mitchell for African Business

 

 

 


 

 

Why Beijing Wants Bolsonaro to Win:...

Why Beijing Wants Bolsonaro to Win: the Brazilian president is an ally against the West.

When Jair Bolsonaro won Brazil’s last presidential election in October 2018, an editorial in the China Daily, a newspaper owned by the Chinese Communist Party, reflected Beijing’s cautious optimism about the new leader. Though Bolsonaro had sounded “less than friendly to China on the campaign trail,” the China Daily expressed “sincere hope” that he would “take an objective and rational look at the state of China-Brazil relations,” opining that the two countries were “hardly competitors.”

 

At the time, the far-right Bolsonaro had a track record of systematically attacking Beijing. Ahead of the election, he had warned that “China is not buying in Brazil; it is buying Brazil” and visited Taiwan, tweeting that he planned to break with previous Brazilian left-wing governments that had been “friendly with communist regimes.”

 

 

Bolsonaro’s decision to make anti-China rhetoric such a key element of his campaign was a first for a politician who successfully sought national office in Latin America. Prior to the Chinese-fueled commodity boom in the 2000s, the region’s ties to China had been of limited economic and political relevance. Brazil is a case in point: At the turn of the century, Beijing did not figure among its five leading trading partners. Merely nine years later, however, China overtook the United States as Brazil’s top trading partner, a position it now holds in several of the region’s countries, including Chile, Uruguay, and Peru.

 

Since then, regional actors have generally viewed China as an indispensable economic partner—as well as a useful ally to balance U.S. influence. Former Brazilian President Luiz Inácio Lula da Silva, who governed from 2003 to 2010, institutionalized the China-Brazil bilateral relationship, most critically by helping to found the BRICS grouping of Brazil, Russia, India, China, and South Africa in 2009. Lula’s successors from both left and right continued along a similar path until Bolsonaro promised to take a sledgehammer to Brazil-China relations in 2018.

 

Four years later, however, China has proved to be the biggest beneficiary of the Bolsonaro presidency. While Bolsonaro demonized China during the first two years of his administration, he also become persona non grata in the West—and began to see his fellow BRICS members in a different light. Ahead of Brazil’s presidential elections on Oct. 2, policymakers in Beijing are far less concerned about the possibility of Bolsonaro’s reelection than their counterparts in Europe, the United States, and Latin America. And, in a remarkable turn of events, China stands to benefit far more from another four years of Bolsonaro than of erstwhile ally Lula, who has launched a new bid for the Brazilian presidency and currently leads Bolsonaro in the polls.

After Bolsonaro’s inauguration in January 2019, Beijing’s hopes that he would soften his anti-China rhetoric were initially frustrated. Bolsonaro was a proud acolyte of then-U.S. President Donald Trump, and several of his key advisors regularly condemned Beijing to strengthen their proclaimed anti-communist credentials. The new president also chose as foreign minister Ernesto Araújo, a Trumpist conspiracy theorist who described the science behind climate change as a Marxist plot to benefit Beijing and warned that “Maoist China” was facilitating the emergence of socialist rule across Latin America. Though the two sides saw some rapprochement when China publicly lauded Bolsonaro’s environmental record during large fires in the Amazon in 2019, it proved only temporary.

 

When Bolsonaro, his legislator sons, and several ministers mimicked Trump’s strategy of blaming China for the COVID-19 pandemic—for example by using the term “China virus” and suggesting the virus was the result of China’s “chemical warfare”—the countries’ bilateral relationship entered a profound crisis. China’s consul general in Rio de Janeiro lashed out against the president’s son Eduardo Bolsonaro and suggested he had been “brainwashed” by the United States. In the end, however, things did not escalate beyond a war of words. Beijing was able to significantly improve its standing in Brazil by providing the country with vaccines at a time when the United States and Europe still prioritized their own populations.

 

It was Trump’s tumultuous departure from the White House in January 2021, however, that forced Bolsonaro to take a permanent pragmatic turn toward Beijing. Aware that geopolitical realities had changed—and that Brazil would now face near-complete diplomatic isolation in the West—his government largely stopped attacking China. At the same time, Brazil’s politically influential agribusiness—highly dependent on China—signaled that it was losing patience with the government’s anti-China rhetoric. As a result, the Brazilian Senate announced that it would not approve Bolsonaro’s ambassadorial appointments if Araújo remained foreign minister. The president obliged and replaced Araújo with a middle-of-the-road technocrat. (Minister of Education Abraham Weintraub, another leading anti-China voice in Bolsonaro’s cabinet, had already been sacked after tweeting that COVID-19 was part of China’s “plan for world domination.”)

 

Since then, BRICS summits have become something of a diplomatic life raft for Bolsonaro. Largely shunned in Western capitals for his villainous environmental record, COVID-19 denialism, “anti-globalist” rhetoric, and increasingly explicit authoritarian ambitions, the yearly photo-ops with leaders from China, Russia, India, and South Africa have become the main pillar of the Brazilian president’s diplomatic calendar. The importance of the BRICS grouping to Bolsonaro’s global standing has become even more pronounced with the election of left-wing leaders in such countries as Chile and Colombia—which previously had conservative presidents—over the past year.

 

A reelected Bolsonaro would face unprecedented isolation in South America, where virtually all countries except Uruguay, Ecuador, and Paraguay are governed by leftists. Since Russia’s invasion of Ukraine in February, Bolsonaro has also proved a committed BRICS ally to Moscow, criticizing Western sanctions on Russia and abstaining—together with China—on highly symbolic United Nations votes.
 

As October’s presidential election approaches, decision-makers everywhere from Washington and Madrid to Paris and Berlin are doing little to hide their antipathy for Bolsonaro, and it is no exaggeration to say that Bolsonaro’s reputation in the West is largely beyond repair. This fact complicates U.S. and European efforts to defend their waning economic and political influence in Latin America as China’s role in the region grows.

 

Reelection would most likely embolden Bolsonaro to become more authoritarian and further weaken Brazil’s ties to the West; for example, both Brazil’s accession to the OECD and the ratification of a pending trade deal between the European Union and South American bloc Mercosur—stalled by Brussels to protest Brazil’s destruction of the Amazon rainforest—seem unlikely as long as Bolsonaro is president. Should Lula win, by contrast, European countries plan to relaunch environmental cooperation efforts with Brazil—such as via the Amazon Fund, financed by Norway and Germany—and otherwise resume broad multilateral cooperation that was common prior to Bolsonaro’s rise, such as the EU-Brazil Strategic Partnership.

Beijing, on the other hand, seems far better positioned to deal with another Bolsonaro term. Granted, Bolsonaro is not China’s dream candidate—and Lula is remembered fondly in Beijing for transforming bilateral ties between the two countries. Yet despite Bolsonaro’s frequent anti-Beijing rants during the Trump years, trade between Brazil and China has grown considerably throughout Bolsonaro’s first presidential term, from about $100 billion in 2019 to $135 billion in 2021—a remarkable achievement, especially during the pandemic. 2021 also saw the second-largest Chinese investments in Brazil to date, at $5.9 billion. And Bolsonaro has resisted U.S. pressure to ban Chinese telecommunications firm Huawei from providing components for Brazil’s 5G network. In short: Brazil’s economic dependence on Beijing has never been greater than under Bolsonaro.

 

 

Beyond economics, Bolsonaro’s growing isolation in the West offers a strategic opportunity for Beijing to develop a stronger foothold in Brazil and beyond, in some cases due to Bolsonaro’s neglect of his own neighbors. While Brasília and Beijing competed for influence in Latin America in decades past, Bolsonaro’s decision to turn its back on the region has facilitated China’s strategic engagement: In 2019, for example, China temporarily overtook Brazil as Argentina’s most important trading partner. Rather than seeking to find ways to retain lost influence in Argentina or contain China’s growing role, Bolsonaro was busy attacking the newly elected government in Buenos Aires as “leftist bandits.

 

This does not mean that China has soured on Lula. But if Lula were to win the Brazilian presidency, the country’s isolation in the West would end—and Beijing would face far more intense competition to consolidate its influence across Latin America. (Lula, however, is still expected to be friendly to China, as he was during his first two terms.)

 

After starting out as a presidential candidate running on an anti-China platform, Bolsonaro has now become—above all—anti-Western. That tendency will only intensify if he wins reelection. And Beijing is taking notice.

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Source: Foreign Policy

 

Gorbachev’s Other Legacy: Normali...

Gorbachev’s Other Legacy: Normalizing Sino-Soviet Ties.
Mikhail Gorbachev’s death last month unleashed numerous commentaries and evaluations of his legacy. Predictably, many of these focused on Beijing’s perception of the last Soviet leader and what his political life meant for the future of the People’s Republic of China (PRC). However, this discussion overlooks a key part of Gorbachev’s legacy within China that shapes Sino-Russian relations to this day: the normalization of relations between Moscow and Beijing that took place on his watch.
 
 

Normalization represented a major breakthrough in Sino-Soviet relations and culminated in Gorbachev’s visit to Beijing in May 1989, during which he met with Deng Xiaoping and the Chinese Communist Party (CCP) leadership. While overshadowed by the Tiananmen protests and short on immediate deliverables, the visit was a major success that represented the result of years of effort and negotiations by both sides. Gorbachev played a key role in ushering in this difficult normalization, as evidenced by the history of the period.

 

By the mid-1980s, when Gorbachev came to power in Moscow, Sino-Soviet relations had thawed slightly but were still far from normalized. Leonid Brezhnev had tentatively proposed an improvement in relations during his 1982 Tashkent speech, a proposal that was met with some interest by Chinese leaders, particularly among party elders nostalgic for the Sino-Soviet alliance of the 1950s. The larger picture seemed to favor rapprochement. Moscow’s increasingly difficult position in the context of Washington’s escalation of the Cold War under the Reagan administration, its failing economy, its costly quagmire in Afghanistan, and its need to focus on desperately needed domestic reforms favored improving relations with Beijing. So did China’s growing frustration with the United States, particularly with Washington’s policy on Taiwan, and its need for a stable international environment facilitating Deng Xiaoping’s Reform and Opening program. Nevertheless, this background did not necessarily mean full normalization. Beijing still feared Soviet encirclement and saw Moscow more as a threat than as a partner. Thus, China insisted that Moscow remove “three obstacles” to improving relations: the presence of Soviet troops on China’s northern border; Soviet support for Vietnam, particularly in Cambodia; and the Soviet occupation of Afghanistan.

 

Gorbachev played a key role in removing these three obstacles, something that his predecessors had refused, and actively pursued a rapprochement with the PRC. To this end, Gorbachev sought to resolve a fourth issue by making concessions about the alignment of the disputed Sino-Soviet border and agreeing to the resumption of negotiations on the issue. Substantial progress in resolving the Sino-Soviet territorial dispute soon followed, producing an agreement in 1991. Gorbachev also made great efforts to cultivate Beijing by promoting better economic relations (which were mostly unsuccessfully), avoiding any criticism of the Chinese government, such as by refusing to comment on the growing demonstrations in Tiananmen Square at the time of his visit, and adopting a firm stance on the Taiwan issue. Particularly amidst the Tiananmen crisis, this approach solidified the improvement in relations and built mutual trust, despite many Chinese leaders’ personal disregard for Gorbachev whose ideas and policies they partly blamed for the student protests. 

 

Against this background, Gorbachev’s legacy of normalizing relations with China has three long-term implications which continue to shape relations between Moscow and Beijing. First, Gorbachev not only put an end to more than three decades of conflict between China and the Soviet Union but also initiated a process of establishing closer ties with Beijing. A complete break with previous Soviet confrontational policies allowed the two sides to actively pursue better relations. The normalization of Sino-Soviet ties marked the beginning of a different political partnership between Moscow and Beijing. The new dynamics of this relationship were best captured in the warm but businesslike handshake between Gorbachev and Deng Xiaoping which differed from the embraces and kisses that communist leaders often used to greet one another.

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Source: National Interest

 

 

 

China’s Water Crisis Could Scramble...

China’s Water Crisis Could Scramble the Global Economic Outlook.

China’s alarming lack of freshwater resources is perhaps the single most mispriced macroeconomic risk in the world today. Hard times for China investors are set to get even harder. 

 

China is in the throes of an acute water scarcity crisis, exacerbated by a heat wave of unprecedented severity. The drought has been catastrophic for industries in China. Water is critical to power generation, industry, agriculture, and manufacturing, meaning water scarcity is not only limiting agricultural production in China but also exacerbating an acute domestic energy crisis that mirrors Europe’s, affecting virtually every economic sector, particularly manufacturing. As the rest of the world still imports roughly $3.36 trillion of Chinese economic output a year, few sectors are unexposed to supply-chain shocks emanating from China. 

 

 

As this dual water and energy crisis has unfolded over the last few months, the Chinese Communist Party has been prioritizing water and electricity for households over industry, virtually ensuring further—and substantial—curtailment of industrial production. These supply shocks will reverberate through global supply chains and financial markets, with frightening and unpredictable consequences for the global economy.

 

Despite the water crisis, as well as Beijing and Washington’s mutual desire to reduce their economic interdependence, China’s hold on key energy supply chains will likely increase. China’s share of the global polysilicon market—the crucial input to photovoltaic solar panels—recently hit 80%, and may grow even higher. China dominates the supply chain for lithium-ion batteries, graphite, nickel, and most rare-earth minerals used in clean energy, electronics, and defense manufacturing. Polysilicon market prices have nearly quadrupled since January 2021 while lithium metal prices have quintupled, indicating how little slack there is in the market, even prior to the recent heightening of the Chinese water crisis. As Covid-related and other market bottlenecks eased in spring 2022, lithium battery pack prices moderated—but market deliveries have more than doubled year on year—keeping supply quite tight and subject to disruption.  

 

Climate change has almost certainly exacerbated both the drought and heat wave. Ironically, this threatens some of the highly capitalized firms that are darlings of environmental, social, and governance investors and the sustainability crowd. In 2019 Apple had 380 suppliers in mainland China, representing a stunning 46% of its total supply chain. The company has gone to great lengths recently to reduce its supply dependence on China. But Covid-related supply-chain issues in China have caused significant production disruptions because “the vast majority of Apple devices” are still assembled there, highlighting lingering exposure. Tesla, a poster child for the clean-energy economy, in July signed long-term supply deals with two Chinese companies. The effect is to further concentrate its China supply chain for its Shanghai “gigafactory,” as Tesla calls its plant, further increasing its vulnerability to China’s drought. Tesla’s facilities have substantial water demands. Inadequate water availability delayed the opening of Tesla’s Berlin gigafactory. 

 

Indeed, China’s widespread water shortages are already affecting its supply-chain resilience, with industrial users facing severe power cuts in both 2021 and 2022. This leaves China’s economy in a perilous position, forcing the CCP to choose between continued economic growth and depleting water resources. As a result, the implicit assumption that drove much of the global economy for decades—that China can continue to manufacture low-cost goods—is more in doubt than ever. Capital markets face a painful adjustment period as the new reality gets priced in.

 

Beijing does have options to decrease water consumption or boost supplies, but all carry heavy political costs for the CCP. These include forcing consumption changes, like reduced meat eating, onto Chinese consumers; significantly raising the price of water for farmers and industry; or securing water resources from rivers that cross into neighboring countries. All would be controversial. Beijing is deploying atmospheric interventions. Techniques like cloud seeding boost rainfall, but also likely exacerbate extreme weather patterns. Beijing has long relied on transfers of water from wetter to drier regions. But signs of severe water stress in regions previously considered water abundant, like the Pearl River Delta, suggest that these transfers may soon be infeasible. Large-scale desalination is also not viable, given the massive power consumption required, and the lack of distribution networks to bring water from the coast to China’s interior.

 

That leaves Chinese policymakers in a difficult place.

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Source: Barrons.com

 


 

 

The Evolution of PRC Engagement in Mexic...

The Evolution of PRC Engagement in Mexico.

Mexico, despite its integration with the economy of the United States, as well as its historic distrust for and structural competition with the People’s Republic of China (PRC), is pursuing policies that are expanding options for that country, causing serious strategic implications for the United States and the region.

 

Mexico has always shown strategic ambiguity with respect to the PRC. It was part of the first wave of Latin American countries to establish relations with the PRC, doing so in February 1972. Mexico was also one of the first countries in the region recognized by the PRC as a strategic partner. The Chinese government recognized Mexico as a strategic partner in 2003, and the two governments established a high-level working group the following year. Enrique Pena Nieto, the president of Mexico at the time, met with his Chinese counterpart Xi Jinping three times during a six-month span in 2013, including in June 2013, when the two countries elevated their relationship to a “comprehensive strategic partnership.”

 

Despite the interest of individual Mexican businesspersons and politicians in profiting from Chinese investment and exports to the Chinese market, Mexico’s overall embrace of the PRC has been limited—mainly due to its integration with the U.S. through the North American Free Trade Agreement (NAFTA), and its close security relationship under the governments of Felipe Calderon and Enrique Pena Nieto. Mexico is currently one of a small group of countries in the Hemisphere that has not signed onto the 2013 PRC “Belt and Road” initiative.

 

 

Mexican experts consulted for this work also argue that the relationship was limited by structural competition between Chinese and Mexican industries, such as manufacturing, as well as distrust of the PRC within certain parts of Mexico’s business elite and society. There have also been difficulties within both Mexico’s business community and the Mexican government in understanding and promoting the nation’s interest toward China.

 

The relationship was also arguably impaired by the PRC’s displeasure with political actions by the Mexican government and its actions on projects displeasing the Communist Chinese government. These included then-President Felipe Calderon’s reception of Tibet’s Dalai Lama in 2011, the cancellation of the Mexico City to Queretaro rapid train project in January 2015, the stoppage of the China-focused “Dragon Mart” retail-wholesale-distribution hub in Quintana Roo in 2015, and the 2016 stoppage of the Chicoasen II hydroelectric project, in which the Chinese company Sinohydro was the principal contractor.

 

Although Mexico has continued its contradictory posture toward the PRC under the government of President Andres Manuel Lopez Obrador (AMLO), multiple factors have combined to bolster the importance of the PRC for the AMLO government. On one hand, its focus on state-led growth—including its prioritization of a state role in the petroleum, electricity, and mining sectors—have decreased the interest of market-oriented players in Mexico in those sectors. As a result, Chinese loans, tied to work by PRC-based companies, have remained as one of the few remaining options. Indeed, PRC-based companies play a key role in AMLO’s signature infrastructure project, the Maya train, as well as in the lithium, petroleum, electricity, and manufacturing sectors, as discussed in subsequent sections. At the same time, the expanded vulnerability of Mexicans due to the lingering economic effects of COVID-19, the inflationary effects of Russia’s invasion of Ukraine, and lackluster prospects for Mexican GDP growth increase the importance of Chinese demand for Mexican products in sectors such as pork and tequila, where they make such purchases.

 

The expanding possibilities for the PRC in Mexico under AMLO are reinforced by the country’s Sinophile Foreign Minister Marcelo Ebrard. In his previous role as mayor of Mexico City, Ebrard was one of the first major local-level Latin American officials to travel to the PRC and played a key role in supporting connections between Mexico City-based institutions and businesspersons with the PRC during that time. As Foreign Minister, Ebrard showed his interest in the PRC by traveling to the country in July 2019 to promote expanded economic and other forms of engagement. Ebrard also played a key role in Mexico’s engagement with the PRC in conjunction with the country’s role as President of the Community of Latin American and Caribbean States (CELAC) from 2020-2021, including the December 2021 China-CELAC forum and the associated generation of the 2022-2024 China-CELAC joint action plan.

 

Patterns of Trade

As with many other countries in Latin America, Mexico’s bilateral trade with the PRC has increased exponentially since the PRC was admitted into the World Trade Organization (WTO) in 2001. Total trade between Mexico and the PRC expanded from USD $7.3 billion in 2002, just after the PRC was admitted into the WTO, to $85.8 billion in 2020, an 11.7-fold expansion.

 

Mexico has historically run deficits with the PRC. In 2020, its imports from the PRC of $77.9 billion were ten times greater than the $8.0 billion in goods and services that it exported to the country.

 

 

It is important to note that Mexico’s trade with the PRC consistently continues to be eclipsed by its trade with the U.S. By comparison to Mexico’s previously-noted $85.8 billion in trade with the PRC in 2020, its trade with the U.S. for the same year was $516.5 billion. Moreover, in contrast to its consistent enormous deficits with the PRC, Mexico has consistently had a surplus with the United States. In 2020, for example, Mexico’s exports of $338.7 billion in goods and services to the US were almost double its $177.8 billion in imports from the country that same year.

 

Although the aggregate numbers show that the U.S. is both a much more significant and much more beneficial trade partner to Mexico than the PRC, the possibilities of doing business with the PRC continue to capture the attention of certain portions of Mexico’s political and business elites. Such sentiments reflect perceptions of the possibilities stemming from the size of the Chinese market and the resources that its banks and state-owned enterprises (SOEs) can potentially bring to bear as a partner. 

 

Despite the broader patterns, such interest also reflects the hopes of individual Mexican businesspersons and other actors of benefitting from particular projects with the PRC.

 

The subsequent sections examine major Chinese projects in particular sectors of the Mexican economy.

 

 

Petroleum

China was a relative latecomer to the Mexican petroleum sector. China National Offshore Oil Company (CNOOC) entered the Mexican market in December 2016 with its purchase of rights to exploit a deep-water block in the Perdido basin, adjacent to U.S. oil fields in the Gulf of Mexico. CNOOC reportedly paid a premium for the rights, illustrating its prioritization of securing a presence in Mexico’s oil sector, then open to private-sector participation under the Peña Nieto government, although the block’s performance has reportedly underwhelmed Chinese expectations.

 

Just as PRC-based banks offered a $10 billion loan to Brazil’s Petrobras in 2009 when they were pursuing opportunities in that nation’s oil sector, in 2014, the PRC reportedly offered Mexico’s national oil company Pemex a $5 billion line of credit to support its expansion of capabilities. This move reflected the desire of Chinese companies to establish a presence in Mexico’s oil sector. However, the Mexican government never took the PRC up on the offer. In 2020, the PRC offered $600 million to help finance the AMLO government’s signature Dos Bocas refinery, although as with the previous offer, Mexico does not appear to have pursued this offer either. Nonetheless, as the AMLO government continues to push forward with its state-led development of the petroleum sector, the PRC has shown itself to be willing to provide the funding. Up until the writing of this work, Mexico’s need for energy financing under AMLO has not grown sufficiently to agree to China’s often predatory loan terms.

 

Mining

China’s role in Mexico’s traditional mining sector has historically been relatively limited. In 2009, China’s Jinchuan group committed to invest $600 million in the Bahuerachi mine, located in the southeast region of the Mexican state of Chihuahua. Many of the Chinese projects are, however, small-scale, in areas where irregular mining is commonly tied to other illicit activities. Examples include the 11 small mining sites operated by China Unified Mining Development in the states Guerrero, Michoacan, and Colima. Similarly, the Tianjin-based company Shaanxi Dongling Group also made a modest investment of $3.4 million in the Los Vasitos mine in Sinaloa.

 

China’s most notable engagement in the Mexican and mining sector is in lithium, where, in 2021, the PRC-based firm Ganfeng spent $264 million to acquire 100% ownership in the Bacanora lithium deposit in Mexico’s Sonora desert. In April 2022, however, the Mexican Congress, dominated by AMLO’s MORENA party, passed a bill nationalizing the lithium sector and announced plans to review existing contracts, putting the status of the just-made acquisition by Ganfeng in question. In June, however, AMLO appeared to reverse his actions, declaring that previously granted lithium contracts “would be respected,” effectively ceding to Chinese pressure and negating the point of his nationalization of the sector.

 

 

Electricity

In electricity generation, Chinese progress has been mixed. Work on the $414 million, 240-megawatt Chicoasen II hydroelectric facility, awarded to a Chinese contractor Sinohydro, was halted in 2016 due to a labor dispute. Nonetheless, in 2020, the AMLO government announced that the plant would be completed, the only hydroelectric facility in Chiapas state. It is currently planned to begin operating in 2025.

 

Beyond Chicoasen II, in November 2020, the China State Power Investment Corporation (SPIC) acquired Mexico’s largest private renewable energy producer, Zuma. The Zuma acquisition gave SPIC a substantial presence in operating wind and solar power facilities across Mexico. The acquisition was surprising, mainly because it occurred at a time in which the AMLO government was publicly and controversially advancing policies and a law to prioritize electricity generation by the state entity Corporacion Federal de Electricidad (CFE).The AMLO government was also downplaying the value of renewable energy generation and blocking other firms from operating renewable electricity plants. Since the acquisition by SPIC, Zuma has maintained a relatively low profile. It is not clear whether, like Ganfeng in the lithium sector, Zuma hopes to use broader PRC leverage as a market and source of loans and investments, specifically to secure an exception for Zuma from AMLO’s broader plans to favor the state entity CFE over U.S., Canadian, and other private sector electricity providers.

 

Manufacturing

The Chinese have long had a small but important position in the Mexican manufacturing sector, partially oriented towards accessing the U.S. market through Mexico’s trade integration with it under NAFTA and subsequently through USMCA. Early investments from PRC-base firms include the construction of a garment factory by Sinatex in Ciudad Obregon, investment by Golden Dragon Precise Copper Tube Group in a plant in Coahuila for manufacturing copper tubes, and a computer manufacturing plant in Monterrey by the Chinese firm Lenovo, the firm’s largest factory in North America.

 

In the automotive sector, the Chinese company FOTON established a component manufacturing facility in Veracruz. PRC-based FAW began work on a final assembly auto factory in Michoacan, although the venture in the end did not prove viable. Other Chinese automakers FOTON, BAIC, JAC, Chang’an, and BYD are all present in the Mexican market. In 2020, BYD announced a contract to supply 1,000 electric taxis to the Mexican market. Chinese bus manufacturers, including Yutong, are also selling products to Mexico City and other Mexican municipalities.

 

Despite such advances, PRC-based manufacturers have been looked upon with suspicion by their Mexican competitors. As noted previously, in 2015, a large-scale project by Mexican businessman Carlos Castillo to set up a China-oriented retail wholesale distribution hub in Quintana Roo, called Dragon Mart, was stopped following an extended series of legal battles concentrating on its alleged environmental and other impacts.

 

Transportation Infrastructure

China’s role in Mexican infrastructure projects, previously characterized by high profile failures such as the cancelled Mexico City-Queretaro high speed train, has begun to take on new life under AMLO.

 

Presently, the Chinese company China Communications and Construction Corporation (CCCC) is a key partner in AMLO’s signature project to develop the south of Mexico, specifically through the $7.4 billion, 1,500 kilometer Maya train project. Not only did CCCC win the contract for the first segment of the project, but its partner Mota Engil is 30 percent owned by CCCC.

 

Beyond the Maya train, in November 2020, PRC based China Railway Road Corporation Zuzhou won a $1.6 billion contract for the renovation of Line One of the Mexico City Metro, and is reportedly also interested in bidding for a $29.4 million contract to supply rail cars to the line.

 

 

Telecommunications

In telecommunication, the Chinese company Huawei has operated in Mexico since the early 2000s, alongside its smaller PRC-based counterpart ZTE. Not only does Huawei have a strong position in the Mexican smartphone market, but 80 percent of Mexican telecommunication infrastructure currently is reportedly supplied by Huawei, including its role in Mexico’s 4G “shared network” project, begun in 2013. Mexican billionaire Carlos Slim, and his company America Movil reportedly work closely, although not exclusively, with Huawei. Huawei is also currently conducting pilot projects for the deployment of 5G in Mexico, and is reportedly strongly positioned to take a leading role in 5G in the country as it is rolled out.

 

Other Digital Technologies

Beyond telecommunication, Huawei is building substantial cloud computing capacity in Mexico, targeting new technology-oriented and other Mexican small businesses to provide services to.

 

In the surveillance technology industry, in 2021, the PRC-based company Hikvision acquired a major stake in Syscom, Mexico’s largest surveillance system company.

 

The PRC-based ride sharing company Didi Chuxing entered the Mexican market in 2018 and is growing strongly there. Indeed, Mexico and Brazil are the two countries in which the Chinese company has most successfully expanded its presence in Latin America during the pandemic.

 

 

Finance

In traditional banking, Bank of China, HSBC, ICBC, and other institutions are well established in Mexico. With the exception of HSBC, which is one of Mexico’s most important financial institutions, the activities of PRC-based banks in the country are concentrated on supporting Chinese clients operating in the country, as well as Mexican companies wishing to do business in the PRC, where the relationships of PRC-based banks in China give them a comparative advantage. In addition, the Chinese electronic payment system UnionPay is also broadly available in Mexico.

 

Although Mexico has a burgeoning non-traditional financial sector, the role of PRC-based firms in the sector has been relatively limited by comparison to their growing presence in Brazil, where Alibaba acquired a $200 million stake in Nubank in 2018.

 

Beyond the commercial and political influence that comes from China’s growing commercial presence in, and ties with Mexico, the operation of cartels and other transnational criminal organizations in Mexico creates an additional problem. 

 

Chinese criminal entities in Mexico and the PRC play an increasingly important role in helping Mexico-based criminal organizations to launder their proceeds in ways difficult to monitor for Western authorities. To this end, the expanding array of legitimate transactions and accounts by Mexico-based entities in PRC-owned banks in the country expands options for criminal organizations, which launder their money in accounts in the PRC, to gain access to those funds in Mexico.

 

Intellectual Infrastructure

Although the effectiveness of the Mexican government and business elites in engaging with China has been subject to criticism, the country has one of the most developed intellectual infrastructures in the region for studying and engaging with the PRC. This includes five PRC-sponsored Confucius Institutes across the country (two in Mexico City, and one each in Nuevo Leon, Yucatan, and Chihuahua). Mexico also has multiple private and public universities with Chinese studies programs, including Mexico’s National Autonomous University (UNAM), whose China studies center CECHIMEX is arguably one of the most capable such institutions in Latin America. Such intellectual infrastructure contributes to a cadre of Mexican diplomats and businesspersons with capabilities in Chinese language, politics, and business, but not necessarily effective business initiatives or policy which optimally serves Mexico’s national interests.

 

Conclusion

Over the last two decades, as the PRC has expanded its economic and political engagement in Latin America and the Caribbean, Mexico has represented a bulwark against that expansion. The progress that the PRC and its companies are beginning to make under the AMLO government with respect to Mexican infrastructure projects, the digital sector, and other areas of the Mexican economy has significant strategic implications for Mexico, the United States, and the region.

 

As illustrated in this work, AMLO’s increasing need for the PRC and its resources is already manifesting itself in subtle compromises that his administration has made towards Chinese companies with respect to lithium, and possibly electricity generation, among other areas. While Mexico’s linkages to the United States in terms of trade, investment, geography, and family are far greater than Mexico’s ties to the PRC, the government’s increasingly complicated economic and fiscal situation—driven in part by the populist orientation of the AMLO government—as well as the hopes and perceptions of Mexican businesspersons, should not be underestimated. A Mexico whose economic and political elites are significantly penetrated by the PRC, and whose political orientation is swayed by that leverage, would have cascading effects with respect to facilitating China’s advance in other parts of the Hemisphere as well, particularly Central America and the Caribbean, where Mexico has had some historical influence. Such an advance would significantly complicate the position of the United States in its own near abroad, particularly as the rest of the Hemisphere increases its engagement with China and its need to work with it. The result could likely be an unprecedented wave of political transitions and economic and fiscal crises that push the region in a direction ever less disposed to cooperate closely with the United States.

--------------------------------------

Source: By Dr. Evan Ellis for Global Americans

 

 

China plans US$44bn real estate fund...

China plans US$44bn real estate fund to bail out distressed sector.
China is reportedly planning to launch a real estate fund to assist property developers resolvea crippling debt crisis, with the 300 billion yuan (US$44bn) warchest aimed at restoring confidence in the industry.
 

This would be the country's first major step to save the beleaguered property sector since last year's debt troubles became public with the problems afflicting Evergrande. The People's Bank of China (PBOC) will initially support the fund with 80 billion yuan while the China Construction Bank will chip in a further 50 billion yuan, Reuters reports, though the funds will come from the PBOC's refinancing facility.

 

 

As part of the government's push to boost rental housing, the fund will reportedly bankroll the construction of unfinished home projects, which will be rented to individuals, and if the model works, other banks will follow suit with a target of raising 200 to 300 billion yuan.

 

Meanwhile, embattled Chinese real estate giant Evergrande, which has more than US$300bn in liabilities and defaulted on its debts late last year, expects to release a preliminary restructuring plan this week. An internal probe found that the developer's chief executive and finance head misappropriated around US$2bn (£1.7bn) in loans, with the company informing the Hong Kong Stock Exchange that the officials concerned had now resigned. Termed the world's most indebted property developer, Evergrande is reportedly in discussions with its property services unit about repayment terms. Evergrande has missed a crucial deadline for repaying its offshore debt as a US$2.6bn deal to sell a majority stake in the unit to a rival developer fell through in October. Over the last year, its shares have fallen by more than 75% and have been suspended from trading.

 

China's property sector has been lurching from one crisis to another and has slowed growth in the world's second-largest economy, as almost a quarter of China's gross domestic product (GDP) comes from the property market and related sectors, including construction.

 

China-US Trade Détente

China-US Trade Détente

THE US AND CHINA APPEAR TO HAVE REALISED THE CONSTRAINTS PLACED UPON THEM BY THEIR INTERDEPENDENCE AND ARE SEEKING TO EASE RELATIONS AS A RESULT, WITH HIGH-LEVEL GOVERNMENT-TO-GOVERNMENT ENGAGEMENT BETWEEN THE PAIR RAMPING UP SIGNIFICANTLY OVER THE PAST YEAR. HOWEVER, COMPANIES FROM THE US AND BEYOND WILL NEED TO CONTINUE TO TREAD CAREFULLY IN AND AROUND CHINA.

 

 

In American political circles, China is seen as both a disease and a cure. As President Biden leads the Democrats to the polls for the mid-term elections in November, detente with China could stave off inflation, which analysts expect to be the number one issue among voters. However, a China-dominated world would also be “darker and harsher for American families, and it’s one [the US] needs to stand against,” according to US Secretary of State Antony Blinken.  Meanwhile, among Democrats and Republicans alike, polling suggests that voters believe that limiting China’s power and influence is a top priority and that they feel ‘cold’ towards China, despite also considering climate change to be the number one national security threat and only solvable through compromising with China. 

 

It is an equally complex picture on the other side of the Pacific. Despite the increasing frequency of rhetoric coming out of Beijing signalling that China feels comfortable pitting itself against the US in Asia-Pacific affairs (eg, the Taiwan Strait does not constitute international waters) Beijing is discovering that it is going to need to work with Washington if it is to make the region more agreeable to China’s rise. Very tellingly, Chinese foreign minister Wang Yi recently failed to persuade 10 countries in the Pacific to sign a regional agreement on trade and security, demonstrating that Beijing’s neighbours are not about to turn their backs on the US and accept China’s worldview. What is more, as in the US, there is also the issue that domestic political concerns demand boosting trade and investment between the pair – the zero Covid strategy isn’t going to pay for itself. 

 

Finally, both countries’ respective business communities have made it clear that they would value relations easing to a more predictable and manageable level. US companies in the country’s technology sector, in particular, have lost billions of dollars’ worth of business due to the Trump administration’s decision to put Chinese technology companies with ties to the military on a ‘black list.’ Meanwhile, Chinese firms are continuing to look overseas for investment opportunities that are more stable than those on offer at home, and see the US as a key growth market, assuming the geo-political climate improves.

 

Background

For all the headlines trumpeting the prospects of a second Cold War and the tweets by American and Chinese politicians and thought leaders alike seeking to stir up their respective bases to distrust and demonise the other, US-China relations fundamentally appear to be easing. Circumstances change, and the current circumstances in which the US and China find themselves warrant both sides taking time to reflect on their respective priorities. 

 

This de-escalation comes from a high starting point, make no mistake, and will not result in US-China relations returning to a level of amicability similar to that which was maintained by both sides during the Obama administration. It’s unlikely that President Biden will be received by President Xi any time soon as a guest of honour at the Forbidden City (as was President Trump) nor will he want to be seen as accommodating China by offering a bow to his Chinese hosts (American media lambasted President Obama over this in 2012). Furthermore, hostility over topics such as Taiwan, Xinjiang and Hong Kong, as well as fair trade practices, will probably remain – but both sides appear to recognise the need to bring the rhetoric down a notch.

 

A little more conversation, a little less action, please 

Recently, both sides have become far more vocal on an apparent shared desire for more talks. Presidents Xi and Biden last spoke in March, and another call is reportedly in the works for as soon as July. The pair also spoke in November 2021, while their call in September of that year was the first in seven months, indicating that both sides see value in increasing the frequency with which they speak. And it’s not just at the president-to-president level: other senior officials, such as US Defence Secretary Lloyd Austin, Chinese Minister of National Defence Wei Fenghe, US Trade Representative Katherine Tai, US Treasury Secretary Janet Yellen, and China’s economic tsar, Vice-Premier Liu He, have all increased the frequency with which they engage with one another, too. 

 

That said, just because American and Chinese leaders are engaging more does not necessarily mean they agree on more. Indeed, the recent meeting at the Shangri-La Dialogue between Lloyd Austin and Wei Fenghe demonstrates this well, for the pair presented duelling narratives at the annual gathering of the great and good of Asia-Pacific defence and security. What’s more, the US is not always speaking to the right person, particularly on the subject of Taiwan. For example, while Wei Fenghe is nominally Lloyd Austin’s direct counterpart, Austin reports directly to President Biden, whereas Wei answers to China’s Central Military Commission, the vice-chair of which, Xu Qiliang, is seen as having the ear of President Xi.

 

Agree to disagree 

While both sides seem to place increasing value on engagement, there are issues where the two sides will continue to disagree vehemently – international free trade and Xinjiang are two prime examples. The US and China might have come to recognise the constraints of their interdependence, but that does not mean that they will not move to advance their respective agendas in matters which fall outside the fundamental areas in which they cooperate, such as the environment and growing non-sensitive bilateral trade and investment. 

 

US companies will still need to tread carefully around China, even if both countries’ officials are starting slowly to accommodate each other more at the highest levels of government. The US’ Uyghur Forced Labour Prevention Act (UFLPA) which came into effect on Tuesday 21 June, for example, requires companies that import goods from China’s Xinjiang region to provide “clear and convincing evidence” that no component was produced with slave labour; this is likely to be very difficult to do given the complexity of US firms’ supply chains. 

 

The UFLPA is a piece of legislation that, when viewed in isolation, suggests the Biden administration is continuing to take a hard line on China. Read it alongside President Biden’s recently announced plan to cut some tariffs placed on Chinese imports by the Trump administration, however, and it becomes clear that President Biden is signalling that trade with China remains important to the US, but within increasingly tightly defined parameters.

 

While the two will continue to disagree with one another on issues such as Taiwan and international free trade, both countries’ governments appear to have realised that there is room for greater pragmatism in areas such as the environment 
 

Tariffs 

One could argue that this is a more nuanced and pragmatic approach by the US towards its trade relationship with China, especially when compared with the Trump administration’s modus operandi of placing Chinese firms on sweeping blacklists imitating the various market access lists maintained by China. 

 

The US is standing up to China where their values do not align and compromising where it is in America’s interests to do so. This is further evidenced by the Biden administration’s plans to change its approach towards China over free trade, which up to this point has been to punish Beijing with tariffs. 

 

Lifting some of the tariffs on $370 billion worth of imported Chinese goods could alleviate inflation by as much as 1% over the next six months; with inflation in the US currently running at 8.5% on the year, that could be tempting.  

 

US Treasury Secretary Janet Yellen has said that some of the tariffs currently placed on Chinese imports serve “no strategic purpose,” while US Trade Representative Katherine Tai has indicated that the tariffs predominantly serve as a way of maintaining leverage over the Chinese in negotiations surrounding levelling the playing field for US firms in China and third markets. Removing some of the tariffs is in America’s interests as it will push down consumer prices and ease inflation; keeping others in place reminds China that the world’s most powerful economy takes issue with how it trades.

 

 

The CBBC view 

Though it may be hard to see, US-China relations appear to be thawing. While the two will continue to disagree with one another on issues such as Taiwan, international free trade, and human rights, both countries’ governments appear to have realised that there is room for greater pragmatism in areas such as the environment and bilateral trade and investment. Furthermore, even on those topics where they do not see eye to eye, the realisation that a conflict would not be in either country’s interests appears to be sinking in, leading to increased engagement on these sticking points. 

 

US companies will need to continue to tread carefully in and around China, and vice-versa, and their government affairs teams will have to pay even closer attention to the signals coming out of Beijing and Washington, such is the sensitivity of the relationship – but the US and China appear to have realised the constraint that is their interdependence, which is no small thing. 

 

------------------------------------

Source: China Britain Business Council


 

 

Will infrastructure investment become...

Will infrastructure investment become the key growth stabilizer in 2022?

Recent Omicron outbreak and the lockdown measures in China significantly changed the previous soft-landing
story of Chinese economy in 2022. In March and April, Shanghai and other mainland cities’ lockdown led to supply-
side stagnancy and supply-chain disruptions. Coincidentally, the recent trending-up inflation, tumbling exports and
RMB sharp depreciation etc. have shrink the authorities’ policy room for more aggressive easing measures.
Chinese authorities indeed face an “Impossible Trinity” in 2022 among “Zero Covid”, financial stability and 5.5%
growth target. Given that the authorities still stick to “Zero Covid”, there are only two possible choices of the policy
mix:

(i) if the authorities want “Zero Covid” and 5.5% growth target together, they have to conduct aggressive
easing monetary measures which are unsynchronized with the US FED, leading to financial instability such as
capital flight and sharp RMB depreciation etc.;

(ii) if they want “Zero Covid” and a synchronized monetary policy
with the US FED to circumvent financial instability, they have to accept a lower growth rate than 5.5%. The
authorities are probably trying to experiment (a) with aggressive easing measures at the current stage, although the
real-world scenario might be (b) ultimately.

 


Under this “trilemma” circumstance, Chinese authorities have already made some significant policy turnaround and
reverted to “old growth model” in the recent months to stimulate growth. The so-called “old growth model” highly
depends on real estate, exports and infrastructure investment to boost economy, the model that Chinese
authorities have always implemented during the business cycle downturn in the past decades.


Some of the recent policy moves tilting towards infrastructure investment boost include but not confined with the
following policy initiatives: In the State Council executive meeting in January 2022, the authorities prioritized the
102 infrastructure projects outlined in the 14th Five Year Plan, including new infrastructure projects, new
urbanization projects, transportation and water conservancy projects, storage and postal facilities etc. In the
Central Financial and Economic Committee Conference on April 26 2022, President Xi re-emphasized the
importance of infrastructure investment to support growth in this year and clearly signaled that China’s
infrastructure still has large potential to grow.


These high-level meetings also outlined the principles of infrastructure investment in 2022: (i) to construct the
modern infrastructure system with the balance of development and security; (ii) to comprehensively consider the
benefits of the economy, society, environment and security etc. when conducting the new infrastructure projects; (iii)
to take the equal emphasize on the “old” and “new” infrastructure investment; and (iv) to expand financial channels
and to include social capital into the infrastructure investment, such as PPP (public-private partnership).
In a bid to stimulate infrastructure investment, the authorities also recently promulgated a series of monetary and
fiscal easing measures. Regarding fiscal stimulus, the pace of special local government bond issuance reached historical high in Q1, indicating the authorities have strained every nerve to stimulate infrastructure investment. In particular, the new increase issuance in Q1 reached 36% of full-year budget of local government bond issuance (RMB 3.65 trillion) and 89% of quota for the early issuance (RMB 1.46 trillion). The Q1 issuance level is significantly higher than that of the same period of 2021 and 2020. On the front of monetary policy easing, the PBoC recently cut the 5-year LPR from 4.6% to 4.45%, the largest cut since the LPR reform in August 2019, suggesting the expansionary stance of monetary policy to support infrastructure long-term investment financing.

 

Infrastructure investment has always been an important counter-cyclical measure for China in the past decades.


Infrastructure investment constitutes a large ratio of Chinese total GDP and has been the main growth engine for
Chinese economy in the past decades. It contributes around 6.5% of the total GDP in 2021. (Figure 3 and 4)
However, these figures only consider the direct effect while ignore the indirect effect. Infrastructure investment,
whether they are “new” or “old”, has large externalities to other sectors. For example, a better infrastructure may
benefit a province or a region’s tourism, FDI, real estate investment, etc. If we consider its strong linkages to its
upstream and downstream sectors, such as construction, architecture raw materials, etc., as well as its extremities
to tourism, industrial investment, real estate and FDI etc., infrastructure is estimated to contribute around 20% of
GDP for Chinese economy for the past decades.

 

In the past two decades, infrastructure has always been the stabilizer and the main counter-cyclical measure to
stimulate growth amid business cycle downturns. Through fiscal expansionary measures particularly the issuance
of local government bond, infrastructure investment has always been the main pillar to smooth the business cycle.
During 2007-2016, infrastructure investment has remained double-digit growth in China and it is not difficult to
understand that Chinese business cycle has always been deemed to be “infrastructure cycle” in the past decades.
 

Take 2008-2009 Global Financial Crisis as an example, Chinese authorities injected RMB 4 trillion into the
economy, most of them went to the infrastructure investment, which successfully secured a soft-landing of the
economy when other countries went into recession. (Figure 6) Including the Global Financial Crisis period,
historically, there were three times of expansionary infrastructure investment policy in China, in 2008-09, 2012 and
2016, respectively. Every time, infrastructure investment expansion played a counter-cyclical role and successfully
pulled the economy out of the mud.

However, the “golden time” of China’s infrastructure investment gave way to the deleveraging campaign and
supply-side reform since 2018. Due to the tightening regulation on local government debt and the stricter scrutiny
process of infrastructure projects in a bid to fulfill the deleveraging targets, the infrastructure investment growth has
gradually dipped from 2018 to 2020. Worse still, during 2021, the post-pandemic time, due to the early exit of fiscal
policy stimulus as China “first-in, first-out” of the pandemic, infrastructure investment even plunged to as low as an
average growth of 0.4% in 2021.
 
However, history always repeats. The recent growth headwinds stemmed from Omicron outbreak and lockdown
measures again brings infrastructure investment from back to the front. Why infrastructure investment becomes
important again? Here are some important factors which determine its counter-cyclical role during the pandemic
time:

First, among the traditional “Troika” of China’s growth engine, namely exports, infrastructure investment and
consumption, infrastructure is the most controllable by the authorities. Through issuing local government bond, it is
the most efficient way which could be fully controlled by the authorities to stimulate growth during the business
cycles downturns in the past decades, while the other two engines are much more ambiguous. For instance,
consumption bears the most severe economic blow by the “zero-Covid” policy while exports are external-demand
determined which is going to experience a significant slowdown as the US and Europe is entering into recession
due to the aggressive central bank interest rate hike this year.

Second, among the three categories of the fixed asset investment (FAI), namely housing, infrastructure and
manufacturing, only the former two are domestic determined while manufacturing investment heavily depends on
the external demand due to the dominant position of China’s processing trade in the manufacturing sector. In
addition, due to the regulatory storms and housing market crackdown in 2021, it is very difficult to stimulate growth
through real estate this year, as it is difficult to alter people’s expectation on the housing price slowdown once it
was formed.

Third, infrastructure investment still has a large room to grow in China. In particular, China’s infrastructure stock per
capita is only around 20-30% of that of the developed countries. As the urbanization progresses in China, together
with the national strategy of developing the western and middle region of China, infrastructure investment has large
potential to grow. In addition, the authority’s priority to develop “new infrastructure” such as artificial intelligence,
block chain, cloud computing, big data and 5G etc. also brings about many new opportunities to infrastructure
investment.
 
Finally, “new infrastructure” investment is in line with China’s “new growth model” which is underpinned by common
prosperity, high-tech self-sufficiency and green economy (see our recent Economic Watch: China | Understanding
China’s New Growth Model) In particular, high-tech self-sufficiency requires a large-scale “new infrastructure”
investment and China’s carbon neutrality target in 2060 also prospers green economy infrastructure investment,
such as photovoltaic infrastructure, hydroelectricity, wind power infrastructure etc.


The authorities promulgated a series of projects to construct a modern infrastructure system under the 14th Five-Year Plan.


In this section, we summarize the infrastructure projects that the recent State Council and Central Financial and
Economic Conference wanted to prioritize in a bid to construct the modern infrastructure system. These projects
are in line with the 102 strategic infrastructure projects in the 14th Five Year Plan. They are divided to four sections
of infrastructure investment: network infrastructure, industry infrastructure, urban infrastructure, rural infrastructure
and national security related infrastructure. (Figure 7) And we believe these pipeline projects will provide a large
amount of infrastructure investment projects in 2022
 
 
 

The role of New and Old Infrastructure investment.


We normally categorize China’s infrastructure investment into “new infrastructure” and “old infrastructure”. Old
infrastructure means traditional investment in airplane, high-speed road, train trail and public facilities such as
water conservancy projects, etc. New infrastructure includes but not confined with “ABCDG”, namely Artificial
Intelligence (AI), Blockchain, Cloud computing, Big data center and 5G infrastructure etc. In a more generalized
sense, new infrastructure investment also indicates the digital and intelligent transformation of the traditional
infrastructure such as energy, transportation, urban, water conservancy, agricultural infrastructure, etc.

Some statistics and estimations from Cyberspace Administration of China show that new infrastructure investment
has a much higher multiplier effect than that of old infrastructure investment. For instance, the multiplier of high-
speed railway is estimated by this institute to be around 3, while the multiplier of 5G, AI, industrial internet etc. isestimated as high as 6. Some other research such as Wang (2020) in a working paper of China Academy of Social
Sciences also has similar result in which they estimated the multiplier for traditional infrastructure investment is 1.7
in the long term and could reach 3.65 with a higher public goods spillover effect.

Although the New Infrastructure investment will have a long-term positive spill-over effect to the economy and
support China’s technology advancement, its total scale, at least at the current stage, remains much lower than the
Old Infrastructure investment. For instance, in 2021, the scale of new infrastructure investment reached RMB 1.16
trillion, only around 7.7% of total infrastructure investment. Although this ratio is expected to rise to 15-20% in 2025,
it could not wobble the role of the old infrastructure to stimulate the growth.

Regarding the capability to drive GDP growth, at the current stage, old infrastructure also has larger direct effect.
Take 2019 and 2020 as an example, based on the GDP expenditure method, old infrastructure could drive GDP
growth by 0.4% and 1.2% respectively, while new infrastructure investment could drive around 0.2% and 0.8%
respectively.

Given that the new infrastructure investment has a higher multiplier effect but old infrastructure has a larger total
scale at the current stage, fiscal expansion in 2022 needs to synergize both old and new infrastructure investment.
In addition, “new infrastructure” such as infrastructure of digitalization, AI and big data etc. could significantly
increase efficiency of “old infrastructure”, indicating a necessity of synergizing the two.
 

How to finance 2022 infrastructure investment?


The market has started to worry about fiscal burden of this year particularly at the local government level. Thus,
how to finance 2022 infrastructure investment becomes an impending issue.

These worries come from a significant dip of fiscal revenue in April (-41.3% y/y) when lockdown measures imposed
in Shanghai and other pandemic affected cities, while fiscal expenditure keeps rising, not only for large-scale
infrastructure investment but also for ever-increasing universal and regular Covid-19 PCR tests etc. (Figure 10) The
worries are also from the expansionary fiscal measures on tax cuts and fee reductions which significantly shrinks
fiscal revenue. In addition, land sales revenue amid a downward housing cycle which used to be the main pillar of
local government fiscal income also tumbled by -34.4% y/y in April and -26% ytd y/y accumulatively for Jan-May.
Combined together, the fiscal revenue for Jan-May dipped by 10% y/y, while fiscal expenditure increased by 6%
y/y for Jan-May, leading the augmented fiscal deficit in January-May 2022 reached RMB 3 trillion.

Under this circumstance, the market estimates the fiscal expenditure-revenue gap will be around RMB 1-2.8 trillion
in 2022, given the assumption that Q3 and Q4 GDP will bounce back to 5-6%. That means, it is probably difficult to
strike a fiscal balance this year with a shrinking fiscal revenue and an expansionary fiscal expenditure. If the
authorities do not want to break the fiscal budget of 2.8% which was set in the 2022 “two sessions”, the authorities
have to reduce the fiscal stimulus in 2H 2022 particularly on the infrastructure investment, which may deteriorate
economic recovery; or if the authorities want to maintain the ongoing fiscal support, more policy-oriented bond or
Covid bond needs to be issued and more unutilized fiscal budget in 2021 should be transferred to this year.

There are several options to finance infrastructure investment this year amid an expansionary fiscal gap and
dipping fiscal revenue:
First, to transfer payments of the profits gained by the PBoC and the SOEs at the central government level to
Ministry of Finance to fill in the fiscal gap. Indeed, the profits transferred from the PBoC and large SOEs to Ministry
of Finance is a usual way in China to finance the fiscal expenditure in the past decades. On March 8 2022, the
PBoC transferred RMB 1 trillion accumulated by foreign reserve management gains to Ministry of Finance to
support fiscal transferring to local government and the fiscal stimulus measures such as tax cuts and fee reduction
etc. The SOEs at the central government level, such as China Investment Corporation (CIC), China Tobacco etc.,
have also submitted their revenues to Ministry of Finance to support fiscal expansion.
 
Second, to issue special government bond to support infrastructure investment is also an option. Although the “two
sessions” in March just promulgated the fiscal budget this year to 2.8%, issuing new special government bond at
the current stage might have some procedure challenge, the market still calls for the new issuance of special
sovereign bond to fill in the fiscal gap and to break the pre-set fiscal budget amid “zero Covid” policy and economic
slowdown as the March “two session” did not anticipate the a sudden change of pandemic circumstances in China
as well as Shanghai lockdown in end-March.
 
 

Third, the transfer from 2021’s residual fiscal budget to 2022 could also help to make up for the fiscal gap of this
year. As the authorities conducted an early fiscal policy normalization in the past year, the actual utilized fiscal
budget was lower than the fiscal budget set in 2021’s “two sessions”. The amount of residual budget in 2021 was
amounted to RMB 2.5 trillion, among which, only half of it (around RMB 1.25 trillion) was transferred into the 2022
fiscal budget while the other half could still be utilized to make up for the fiscal gap in 2022 to support infrastructure
investment and other fiscal expenditure.
 
 
 

2022 Infrastructure investment growth prediction and the economic growth outlook.


Chinese authorities have already pressed ahead at least three directions of policy initiatives to stimulate
infrastructure growth in 2022, which could be summarized below:

(i) There are abundant infrastructure investment projects outlined in the recent high-level State Council and
Central Government meetings in a bid to construct modern infrastructure system, in line with the 102
projects raised in the 14th Five-Year Plan.
(ii) The authorities have pushed forward a series of monetary and fiscal easing measures to stimulate
infrastructure growth, such as the recent 5-year LPR cut, three RRR cuts, the early release of local
government bond quota to stimulate infrastructure investment in 1H 2022, etc.
(iii) The motivation of the local government officials to push forward infrastructure investment is much larger
than that of 2021. As the 5.5% growth target for 2022 amid Covid-19 flare-ups and lockdown measures is
quite challenging, while local government officials at the beginning of the year even set higher growth
target than the nationwide target, it is challenging for them to achieve the goals thus they are much more
motivated to take use of available sources to press ahead local infrastructure investment.
 
 

Under all of these pro-infrastructure investment measures, for this year, infrastructure investment growth is
predicted to be 10-13% based on the expansion of the local government bond issuance (RMB 4.73 trillion) and the
fiscal surplus transferred from 2021 to 2022 (around RMB 1.5-2 trillion). Given that infrastructure investment is
around 15% of China’s total GDP on average in the past 10 years, it is estimated that infrastructure investment will
contribute to around 1.5-2% of total real GDP growth. And it will lead the total fixed asset investment to reach 6.5%
in 2022 (manufacturing investment estimation: 7%; housing investment estimation: 0.6%).

However, we have to at the same time realize that larger-scale infrastructure investment cannot sufficiently offset
the consumption and exports plunge as well as a downward real estate cycle in 2022. The tumbling economic
activity figures particularly in March and April reflected that the authorities’ lockdown measures under “zero
tolerance” strategy significantly weighed on growth. Given that Chinese authorities will continue to stick on “zero
Covid” policy in the rest of the year, there will be “impossible trinity” for China’s policy setting in 2022: either China
needs to give up synchronized monetary policy with the US FED to continue aggressive easing in order to achieve
5.5% growth target which might lead to financial instability, or, the authorities have to give up 5.5% growth target to
accept a lower growth in a bid not to conduct aggressive easing measures to circumvent capital flights and sharp
currency depreciation.

Under the current situation, we predict the real-world case would be the latter one, as the policy room of aggressive
easing has been shrinking significantly amid a trending-up inflation, sharp RMB depreciation and capital outflows.
Look ahead, we predict GDP growth in the second half of the year will gradually recovered from the Q2 downturn
caused by the Covid flare-ups and resultant lockdowns. For 2022 as a whole, growth will reach 4.5%, lower than
the authorities’ 5.5% growth target.
 
---------------------------------------------------
 
Source: BBVA Research

 

International brand acquisition by Chine...

International brand acquisition by Chinese companies

In recent years, Chinese investors have significantly increased their foreign investment activities especially in the form of cross-border mergers and acquisitions (M&As). Chinese companies now own part or all of a number of international companies that might not be immediately apparent. Whether you’re going to the movies, washing your clothes or going for a drive there’s a good chance you're trading with a Chinese company. 

 

For many Chinese firms, foreign acquisitions are also a way to ensure access to customers or key suppliers, in particular of raw materials. The debate on Chinese foreign M&A activities, however, is mostly based on speculations and anecdotes. Despite a growing number of studies on Chinese overseas investment, there is surprisingly little systematic evidence on whether Chinese cross-border M&As differ from investment coming from other countries

 

Here’s a look at some of the bigger business names that are owned by Chinese companies:

 

 

GE Appliances

In 1982, General Electric got its start as a pretty small brand. It has since grown at an exponential rate, however. It now dabbles in many other industries from healthcare to aviation to venture capital to power. This is one of those brands that feel very homegrown, partly thanks to the “Made in America” stamp on the products. But the truth is that it has been owned by a Chinese company called Haier ever since 2016. GE was purchased for $5.4 billion, which is definitely on the high end of things. Even though the products continue to be made in the United States, the decisions are ultimately made in China.

 

AMC

For about an entire century, AMC cinemas have been giving movie lovers relaxing and fun moviegoing experiences. This company made a name for itself in this industry and even went on to be the biggest movie theatre chain on the planet. Even though the initials stand for American Multi-Cinema, the truth is that a Chinese company called Dalian Wanda Group had been the majority stakeholder from 2012 to 2018. In 2018, however, this changed a bit after Silver Lake Partners bought a $600 million stake in it. Despite this, Wanda Group is still the one who gets to call the shots in terms of executive-level decisions.

 

Motorola

Best known for its tech products, Motorola started in Schaumburg, Illinois a long time before we were even introduced to the concept of mobile phones. After it was launched in 1928, it saw steady growth until it reached the peak of its success with flip phones and the like. Google eventually bought it, only to sell it to a Chinese company called Lenovo in 2014. This did not prove to be a profitable move for Google since it bought the company for $12.billion two years before it sold it for $2.9 billion. Even today, people are still puzzled why Google seemed to be comfortable losing $10 billion with this deal.

 

IBM (PC Division)

Ever since it was founded in IBM, this company has helped the United States stay on top when it comes to tech. In those days, it was more involved in business machines more than computers. IBM has a truly fascinating past, to say the least. In 2004, Lenovo bought its PC division for $1.75 billion. “As Lenovo’s founder, I am excited by this breakthrough in Lenovo’s journey towards becoming an international company,” shared Chuanzhi Liu, who was the CEO of Lenovo back then. On the other hand, IBM CEO Sam Palmisano shared his thoughts by saying, “Today’s announcement further strengthens IBM’s ability to capture the highest-value opportunities in a rapidly changing information technology industry.”

 

Legendary Entertainment Group

After Dalian Wanda Group bought AMC and saw great success in the movie industry, it decided to go all in by buying a movie studio in 2016. Legendary Entertainment Group turned over its ownership to the Chinese company in a deal worth $3.5 billion. At the time, Dalian Wanda Group wanted to absorb it into its existing portfolio. However, it eventually reached the decision to just operate it as it was. It has been four years since the purchase, so let us take a look at how things are going for LEG. Ever since the acquisition, it has produced movies such as Jurassic World: Fallen Kingdom, Pacific Rim: Uprising, Kong: Skull Island, and Skyscraper!

 

Hoover US

Ever since it opened its doors in 1908, Hoover has made a name for itself as a trusted American appliance brand. Named after founder William Henry Hoover, the company is now considered to be an iconic brand. Even though things remained local for the longest time, things changed after Techtronic Industries bought it for $107 million in 2006. You will still find the HQ in North Carolina, but the central office is now in Hong Kong. The Chinese company is huge with a staff of more than 30,000 members and yearly sales of more than $7.7 billion. While it is no longer an American company, it is in good hands.

 

General Motors

General Motors holds the title of the largest automobile manufacturer in the United States.  It is one of the largest companies in the industry in the whole world, so it is a very appealing and profitable business. Even though it is not completely owned by Shanghai Automotive Industry Corp, it still relies on the Chinese company to keep money coming in. The two companies started a joint venture back in 1998. Customers might not know it, but SAIC sells cars by using the General Motors name. At any rate, they are two separate companies as the SAIC HQ is in Shanghai, whereas the GM one is in Detroit.

 

MG Motors

MG Motor UK Limited (MG Motor) is a British automotive company headquartered in London, United Kingdom, and a subsidiary of SAIC Motor UK, which in turn is owned by the Shanghai-based Chinese state-owned company, SAIC Motor. MG Motor designs, develops and markets cars sold under the MG marque, while vehicle manufacturing takes place at its plants in China, Thailand, and India. Its fourth factory in China, in Ningde, Fujian Province, specialise in producing electric vehicles, with the new all-electric production sports car being produced at the factory. The design of new cars has been retained at Longbridge where Research and Development is currently undertaken

 

The Waldorf Astoria Hotel

When it comes to luxury accommodation, the Waldorf Astoria Hotel is a great choice. It is not just an institution in New York, but it is also a part of history in the United States. While Hilton Worldwide manages the hotel, Anbang Insurance Group bought it for $1.95 billion in 2014. This unbelievable price makes it the most expensive hotel in history. The Chinese company made huge changes to the hotel and turned a chunk of its rooms into condos. The insurance company is also interested in buying even more American businesses. One of the properties that it had been looking at would be Starwood Resorts.

 

Smithfield Foods

This $7.1-billion-dollar deal, completed in 2013, remains the largest purchase of an American firm by a Chinese company. Virginia-based Smithfield Foods has been an icon of the American food industry and is best known for its hams (especially its holiday ham). The deal spurred controversy and concern at the time, but Smithfield has thrived, adding jobs and hitting a sales records.

 

WeWork

WeWork took advantage of the rapid growth in shared work spaces  when it was launched a decade ago. It now manages more than 4 million sq. m. of space! However, it went through a pretty rough patch and needed more capital in 2016. That was when a Beijing-based company called Legend Holdings Corp. became a “new partner” and poured more than $430 million into the company. John Zhao of Legend Holdings Corp. even went as far as to say, “Our investment in WeWork is both strategic and obvious.”

 

Segway Inc

A few decades ago, people would have thought that the idea of whizzing around on two wheels was something straight out of a sci-fi film. Segway Inc. has proven to us that this can be done in real life as well. A Beijing-based company called Ninebot bought the transportation company for $80 million in 2015. Things have only gotten better for Segway since then because the Chinese company helped it attain a larger foothold in the world of tech and robotics. In 2018, the company announced that it was planning to move its production sector from New Hampshire to China. However, it eventually took it back to say that the majority of production was going to remain in Bedford.

 

Riot Games Inc

Anyone who plays the multiplayer online gaming phenomenon League of Legends will be familiar with Riot Games. Released in 2009, the game went on to accumulate a large following and became the best-known product of the company. Even though Riot Games has been working with Tencent for a long time already, their partnership reached its peak in 2015. The Chinese company purchased the rest of the stakes and became the parent company of Riot Games. Before this happened, it already owned 93% of the gaming company. With this in mind, we are under the impression that the new development was already a given. The value of Riot Games is said to be $6 billion.

 

And In a reverse of ownership

 

 

Volvo Cars

Volvo Cars has struck a deal to buy out parent company Zhejiang Geely Holding (GEELY.UL) from their joint ventures in China. Taking full control of the Chinese joint ventures could help smooth the way for a Volvo Cars IPO as the country's requirement for auto manufacturing to be carried out with a local joint venture partner is lifted next year.

Volvo Cars has grown significantly faster than the average market in China in recent years and will continue to invest in the country to maintain the strong growth trend. Following the transactions, Volvo Cars will have full ownership of its manufacturing plants in Chengdu and Daqing, its national sales company in China and its R&D facility in Shanghai.

Volvo Cars has seen strong growth in the Chinese market in recent years. In 2020, it sold 166,617 cars in China, an increase of 7.5 per cent versus 2019 and its eighth consecutive sales record in the market.

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Case Study: Uniqlo’s Success in China

Case Study: Uniqlo’s Success in China

Uniqlo can teach luxury brands a thing or two. Not only did the Japanese casualwear company overcome strong headwinds from the closing of operations in Russia and the weakening of Japan’s currency, but it also outclassed more established rivals and local players. 

 

The reactive risk management approach embraced by most retailers has forced many of them out of business during the pandemic. But in a market that has brought Everlane, Selected, and Urban Outfitters to their knees and canceled a giant like H&M, Uniqlo has continued to win over the young, trendy Generation Z and connect with new consumer segments.

 

 

Breaking into the Chinese fast fashion market is especially challenging for global brands. Such clothes continue to be widely available in the domestic market and homegrown direct-to-consumer e-commerce outfits like Shein have become behemoths by leveraging social media and manufacturing disposable, trendy, and cost-friendly clothing. Nevertheless, Uniqlo has appealed to consumers’ sensibilities and emotions and won the local market.

 

Currently, it operates a staggering 869 doors in China and, counter to the global trend of shop closures, the Japanese retailer has launched an aggressive store expansion plan in the country. Only this month, Uniqlo plans to inaugurate 20 new brick-and-mortars, covering Yunnan, Sichuan, Anhui, Zhejiang, and other provinces. Uniqlo will also inaugurate its first new footprints in Shengzhou, Yueqing, and Yongkang in Zhejiang, Huainan in Anhui, and Jingmen in Hubei. Two additional Shanghai stores will be opened on June 24.

 

Why does Uniqlo prosper while other fast fashion brands fail? Here’s what luxury can learn from the Japanese titan and how it works wonders in the mainland.

 

 

Vertical integration

Geopolitical conflicts and COVID have disrupted access to supply chains and served an important lesson on the importance of vertical integration. While outsourcing raw materials and moving manufacturing to workshops and ateliers in emerging markets, several brands have opened themselves up to substantial risks — reputational crisis, delays, cancellations, increased costs, and so on. Conversely, a luxury label like Hermès which is vertically integrated (having in-house tanneries, production sites, and its own crocodile ranches in Australia) has shown little wear from the pandemic.

 

In the most literal sense, Uniqlo is a vertically integrated organization having full control of supply chain processes. This gives Uniqlo a competitive advantage over its rivals, as it can reduce the per-unit cost and achieve greater quality control. Elsewhere, all the R&D processes and innovations are kept in-house; thus, Uniqlo can trademark its technical fabrics.

 

 

Prioritizing technology over retail

Tadashi Yanai, founder and chief executive of Fast Retailing, which owns Uniqlo, has said in the past, “Uniqlo is not a fashion company, it’s a technology company.” Similar to how Chow Tai Fook is more than a jewelry company, Uniqlo uses advanced technology including AI and blockchain to make the shopping experience seamless

 

Instead of manufacturing low-priced, trendy clothes like Shein or knock-offs of famous designer garments like Zara and H&M, Uniqlo offers technical garments with universal appeal. In the past, the group has developed branded sustainable, high-tech performance fabrics like HeatTech, AIRism, 3D Knit, UV Cut, and LifeWear.

 

Time and time again, technology is used to monitor production and transform supply chain management. For instance, last spring, Uniqlo announced it would bring an automated-warehouse network into China. In addition the company has experimented with tech-enabled kiosks and emphasized in-store tech like UMood: a wearable technology which suggests garments according to the consumer’s frame of mind.

 

Collaboration and personalization

Uniqlo has embraced celebrity collaborations and brand partnerships without failing into the influencer trap and constantly chasing the latest A-lister. So far it has released successful collaborative collections with Marni, Theory, JW Anderson, Ines de la Fressange Paris, and Mame Kurogouch. These design collaborations open Uniqlo to new demographics and markets, while also boosting the brand’s profile.

 

Through partnerships with brand ambassadors and advocates, Uniqlo has promoted the values of the label while engaging its audience in a credible, trustworthy way. That tennis sensation Roger Federer and three-time Olympic medalist snowboarder and Olympic skateboarder Ayumu Hirano vouch for Uniqlo is a testament to its market value and success. 

 

 

As well as commissioning clever tie-ups, Uniqlo creates memorable and immersive shopping experiences for fans: from the UTme! customization program, to leveraging data to engage customers at all touchpoints and provide personalized in-store experiences. Ultimately, the chatbot that offers personalized recommendations and the Google-powered voice assistant connected to “Uniqlo IQ” are features that help Uniqlo understand its customer base and design hyper-personalized marketing campaigns.

 

Steering clear of political controversies

Ultimately, it is walking a clever tightrope. While H&M and Nike faced backlash for their comments on Xinjiang cotton, Uniqlo avoided controversy by steering clear of politics. Despite pressure from the U.S., the Japanese firm refused to take a stand or prove its loyalty to the West. Uniqlo’s “sales continued to grow following the cotton incident, jumping 17 percent in 2021 and securing it as the biggest fast fashion brand in China,” says Bloomberg.

 

Tadashi Yanai reinforced the ethos of independence and authenticity by stating in an interview with Nikkei, “the U.S. approach is to force companies to show their allegiance. I wanted to show that I won’t play that game.” The stance is refreshing. Luxury brands need to learn how to become proactive businesses, ones that manage crises before they happen rather than after the damage has been done.

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Source: Jing Daily

 


 

 

Inflationary trends in the shipbuilding...

Inflationary trends in the shipbuilding sector push newbuild cost up, whils orders are down.
Affected by the covid-pandemic domestically, the major shipbuilding indexes of Chinese shipyards showed clear decline during January-April 2022.
 

According to the statistics released by China Association of the National Shipbuilding Industry (CANSI), the newly received shipbuilding order volume for Chinese yards was 15.39m dwt, down 44.8% year-on-year. Shipbuilding output was down 8.6% at 11.71m dwt. Orders on hand were 102.47m dwt as the end of April, an increase of 21.7% year-on-year.

 

 

Shipbuilding export volume for the first four months of the year was 10.28m dwt, declining 14.8%, while newly received export shipbuilding orders were 13.66m dwt, dropping 44.7%. Export orders on hand were 90.17m dwt as the end of April, up 20.5%.

 

Production at major yards in Shanghai have been hit the city’s lockdowns since late March although recent weeks have seen moves to get large-scale industrial production such as shipyards back into operation. Meanwhile globally newbuilding orders from shipowners have come off from last year’s peak. Shipbuilding export volume, new orders for export and export orders on hand accounted for 87.8%, 88.8% and 88% of national volume respectively. The export shipbuilding value was $5.83bn in the first four months, declined 10.2% year-on-year.

 

Chinese shipbuilding output, newly received orders and orders on hand respectively accounted for 43.8%, 54.1% and 48.5% of the global shipbuilding market share.

 

Simultaneously Inflationary trends in the shipbuilding sector have pushed new ship prices up by 25% since their November 2020 low, the steepest rate of increase since 2005.

 

Ship prices, in nominal terms, are now at their highest level since 2009. Further increases are likely, as raw material and energy prices continue to climb. Newbuilding prices vary across ship types, with container ships climbing most. A 15,500 teu vessel now costs close to 50% more than it did 15 months ago, at the beginning of 2021. Capesize bulkers are up by almost a third, MR tankers by 21%, and LNG carriers by some 18%.

 

 

The price of steel is one factor, with Chinese plate costing more than $800 a tonne, up by $250 over the last 24 months. Although  lower contracting volumes are expected this year due to higher prices, longer lead times, and uncertainty around future fuels, inflationary pressures on shipyard costs could yet push prices higher.

 

Many shipyards are now booking building slots for 2025 while the relatively small number of deepsea LNG shipbuilders are working on contracts for 2026. Sipyard forward cover is estimated at, measured in compensated gross tons, 2.9 years, up from 2.4 years in November 2019.

 

Even without today’s inflationary pressures, there is no doubt that the ships of tomorrow will cost more. That’s because they will be designed with engines that can adapt to a changing bunker backdrop while many will also be fitted with energy saving technologies.

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Source: Sea Trade Maritime News

 


 

 

Chinese LGBTQ Apps

Chinese LGBTQ Apps

With one of the world’s largest LGBTQ populations, China has many social apps to meet the varying needs of the community. Homosexuality is legal in the country, but LGBTQ people have no access to many legal rights such as marriage and discrimination protection. However, those social apps often provide a much-needed space for the community.

 

 

Blued

Launched in 2012, Blued is a dating app primarily for gay users. The app is available in 13 languages with over 60 million registered users in 2020, according to its official website.

 

Similar to Grindr, Blued helps users find interesting matches nearby. In 2016, the app introduced a live streaming feature, and within two days of launching, the feature brought in over RMB 100,000 ($14,306) in income, Chinese media outlet 36Kr reported (in Chinese). The app launched a “Community” feature in 2020, allowing users to build deeper connections through group chat functions.

 

Blued is owned by BlueCity, a Chinese tech firm that focuses on LGBTQ+ users. The firm went public on Nasdaq in 2020. However, the firm has a hard time turning a profit. Its net loss has expanded 39.5% year-on-year to RMB 309.6 million in 2021 due to local regulations and other factors, according to the company’s financial report. BlueCity is also in the process of going private, according to a company statement.

 

 

Finka (Aloha)

Finka (formerly known as Aloha) is a Tinder-like dating app for gay users. Like Tinder, users can choose to like, dislike, or pass on algorithm-generated recommendations. Matched users can chat privately. Finka also offers live streaming features. Compared to Blued, Finka focuses more on young users. The app has a youthful user interface, allowing users to upload more profile pictures than Blued.

The app is developed by Beijing Asphere Interactive Network Technology and acquired by BlueCity (in Chinese) in 2020 for RMB 240 million, 36Kr reported.

 

The app began to trend upwards from the end of 2020, as its downloads grew threefold to 47,628 in December compared to numbers from November. In May of this year, the app had 90,948 downloads in App Store’s China mainland region.

 

the L (Rela)

Launched in 2012, the L (formerly known as Rela) is a social platform for lesbian and bisexual female users. Unlike traditional dating apps, the L offers an Instagram-like social platform. Users can post and react to other users’ posts in the app, offering a deeper social experience. The app also features a public voice chatroom section, with users able to talk together about a variety of topics under labels like dating, gaming, and casual chatting, similar to the model used by social audio companies like Clubhouse.

 

Chinese startup Hangzhou Rilan Technology developed Rela, which was banned and pulled off from all app stores in June 2021 due to unknown reasons. Seven months later, the app came back online with new branding.

 

LesPark

LesPark is another dating app used by lesbians in China. It uses a model similar to Tinder and Finka. According to its official website, the app has over 12 million users globally.  The app generally has a lot of the common dating app features, like speed matching, group chat, voice chat, live streaming, and an open platform for posts. One of the standout components of LesPark is the ability for users to start a random chat with strangers.

 

Qingyuan Park Culture of Media, a Guangdong-based company established in 2017, owns the app.  It also owns another reading app called Ji Hua Le Du featuring mostly lesbian-themed writings.

 

Douban

As one of China’s most respected book and movie review platforms, people usually don’t think of Douban as a dating platform. But over the years, the site has quietly become a go-to place for many LGBTQ+ members, especially lesbians, to find friends, thanks to Douban’s openness and friendly attitude towards the community.

 

The app combines book, film, and music reviews with a Reddit-like community, offering group functions for all kinds of interests and social activities. Many Douban users often post their profiles and seek dates and friends on LGBTQ+ groups.

 

For example, the largest lesbian group on Douban has 69,151 members. Douban also has a diverse range of lesbian groups, some are location-focused, and others focus on more specific topics. The site has no English language versions, so it’s usually catered to Chinese-language users.

 

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Source: Technode.com

 

Shanghai Faces Long Road to Recover...

Shanghai Faces Long Road to Recovery as Lockdown Lifts

Shanghai faces weeks, if not months, of slow recovery until economic activity can fully bounce back from the crippling Covid lockdown that began in March. Based on the experiences of other Chinese cities like Wuhan in 2020 and Jilin earlier this year, it will take time for shops to reopen or factories to secure supplies and ramp up production. Labor shortages could emerge and the knock to business and consumer confidence will likely linger. Even though the majority of Shanghai’s 25 million people are able to move freely in the city from Wednesday and some shops are resuming, many factories and businesses are still closed or operating below capacity. The world’s largest port in the city remains backed up and truck traffic is at about a quarter of pre-pandemic levels.

 

 

In Wuhan, it took until 2021 for the economy to recover from the damage sustained from the initial Covid-19 outbreak in 2020 and the more than two month lockdown that followed. And the economy of Xi’an took months to rebound from the lockdown that ended in late January this year: retail sales in the city through the end of March were down 15% on last year and in the whole province of Shaanxi it fell 2.4% this year through April, according to official data.

 

“We’re talking about long supply chains that have been disrupted for more than 8 weeks so it will take some time to stabilize,” said Eric Zheng president of the American Chamber of Commerce in Shanghai. The shutdown has been a “huge test” for global supply chains, he said, and while the government has been working on reducing transport bottlenecks, there are still restrictions on drivers crossing into Shanghai or leaving the city to go to other provinces.

 

While the Covid-19 outbreak in Shanghai wasn’t as severe as the one in Wuhan in 2020, Shanghai’s economy is bigger and it’s more connected to global supply chains than Wuhan. Shanghai and its surrounding provinces are one of China’s industrial heartlands, with car and electronics manufacturers located there to access the port. The effects on supply chains of the two-month shutdown have rippled across the country and around the world, impacting supplies of critical components. “One of the biggest challenges is around inland logistics, in particular trucking to get goods from the factory to the port,” Heath Zarin, chief executive officer of logistics investment company EmergeVest, said in an interview with Bloomberg TV on Monday. The port is also backed up, with as many as 300,000 containers sitting on the docks, he said.

 

Long Recovery

The city’s government itself expects the recovery to take weeks at best, with Shanghai’s Vice Mayor Zong Ming saying in mid-May that authorities aimed to return to normal life and restore full production by mid-to-late June. Truck traffic in Shanghai has started to gradually pick up as the city relaxes Covid restrictions for drivers, but it’s still less than 30% of the weekly average in 2019. Nationwide, truck traffic in the week ending May 29 was 21% below the same period last year, and trucking capacity in Jilin province is still not back to normal more than a month after the lockdown there officially ended.

 

“The overall situation is still critical” although there has been a steady improvement of logistics and a slow improvement of raw material supply recently, according to Maximilian Butek, the executive director of the German Chamber of Commerce in China, Shanghai. Adding to that problem, if all companies go back into production from June 1, “everyone will want to get products shipped out but also receive the cargo they were waiting for over weeks. This will cause heavy congestion at the ports and will last for at least a couple of weeks.”

 

Usually after an outbreak it takes 2-3 weeks for local traffic to gradually return to normal, a month for production to return to the level before the outbreak and about two weeks for the short-term impact on consumption to subside, according to a report on Tuesday from Haitong Securities. A swift rebound in the economy will also depend on a recovery in consumption. Shanghai is one of the richest and most important consumer markets in the country, and the lockdown has decimated the sales of cars, luxury products, and everyday goods. Like most of the financial aid China has rolled out during the pandemic, much of Shanghai’s recovery plan is focused on businesses and the production side of the economy. Households haven’t been given the kind of direct financial support, like cash handouts, that have cushioned consumers from the blow of Covid lockdowns in other countries like the U.S. and in Europe. 

 

The city has now told the neighborhood committees to let people out of their homes, but there’s little clarity about when restaurants or shops can fully reopen and people can start working to recover the income lost since March. It will take time for movement around the city to recover as well — on Tuesday people took only 41,000 rides on the subway — well below the 9.8 million rides people took on average each day in 2021. Barricades at entrances of tunnels, bridges and overpasses were removed and more flights are planned at the city’s airports, according to local media reports. The congestion level in the city rose 6% at 8:30 a.m. local time Wednesday from the peak level registered in the past 30 days, according to data by map service provider Baidu Inc.

 

With government stimulus and overseas and domestic demand, the city is well positioned to rebound, although due to the full quarter of lost growth it will be challenging for China to meet the annual growth target of around 5.5%, according to AmCham Shanghai’s president Zheng. But any real comeback depends on what happens with the virus. With no change to the Covid Zero policy, a serious outbreak could once again plunge Shanghai or any other city in China into lockdown and decimate both the economy and people’s livelihoods.

 

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Source: Bloomberg L.P

 

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