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Why China is attacking its own big tech sector

Why China is attacking its own big tech sector

The market capitalisations of several of China's major tech companies have taken a severe beating in the last few weeks.

 

On the face of it, it seems strange.

A national government deliberately and effectively wiping billions of dollars of value from a group of companies that at one time had been grouped together under the banner of “national champions.” Big Tech in China has taken a pummelling on the markets in recent weeks, but not because trading conditions have turned sour, but because the government has.

But just as China is much more multifaceted than it initially appears, so too is its tech sector, and not every company is suffering the same fate.

So, while one-time darling of Chinese cheerleaders Jack Ma has now fallen from grace and the multi-billion dollar listing of his company Ant Financial has been scuppered, tech conglomerate Huawei sails on unmolested.

 

 

So what’s going on?

It’ likely part of a deliberate strategy. After all, China is not the country it once was just a couple of short decades ago, when any kind of growth was to be championed, and a sector like software, where margins are traditionally large, was given every encouragement in the name of the onward march of GDP.

Now, China has to some extent arrived. To be sure, it can’t quite challenge America properly yet. But it’s got within shouting distance, and the time has come for the government, under  Premier Xi Jin-Ping, to start to think strategically.

In fact, consumer-facing tech hasn’t had a clear run in China for some time. The collapse into scandal of various bike-sharing apps a few years ago heralded a certain souring of the public mood towards the tech sector in general, especially as there are, as in the Western world, concerns about data security.

That might seem ironic in a country that wields the most advanced surveillance systems in the world, but the difference with the consumer tech was that it wasn’t only impacting consumers’ freedoms, it was hitting them in their wallets.

So, it’s been widely held for some time that companies like food-delivery service Meituan, ride-hailing service Didi and online travel service Ctrip are engaged in what’s known locally as “big data back-stabbing”, or mining consumer data in order to manipulate prices upwards.

The Chinese consumer is at last beginning to make demands and, on this issue at least, the government is willing to take notice.

That’s because the Chinese government also has its own agenda when it comes to tech companies. Last year, President Xi made a pronouncement the significance of which was missed by many observers.

“We must recognize the fundamental importance of the real economy,” he said, “and never deindustrialize.” 

On one level that might be seen as a response to the cultural and economic conflicts now wracking the USA, where several decades of deindustrialization are now seen as root causes of many of the country’s social ills.

 

But it goes deeper than that.

The Chinese economy has always been centrally controlled, and anyone who suggests otherwise is dreaming. The periodic disappearances of the leaders of its top conglomerates serve to remind not only the industrial and economic elite but also to the rest of the population who’s in charge. The founder of Alibaba, Jack Ma, is the latest to disappear and then to reappear, chastened.

That this latest round of wing-clipping only goes to underline the point is incidental, though. The point is that the control has always been there, and those that pull the levers of that control are now seeking to take the country down a different path.

Note the parallel attack on for-profit online educational companies. This is essentially a harking back to the old days, a top-down reinforcement of equality that prevents the bourgeoisie pulling too far away from the masses.

The attack on consumer-facing big tech is similarly ideological, and runs in part in the tradition of moral regeneration programmes that have their roots back beyond the rule of the CCP to the times of Chiang Kai-Shek.

Profit is not the be-all and end-all of a communist state. That the consumer-facing tech companies were profitable was useful as long as it helped the Communist Party in enhancing its power. But if that same tech becomes merely a series of sophisticated leisure-oriented applications, then its’ utility becomes more questionable.

In and of itself, that might not matter. But there’s still the question of China’s standing and power in the world to consider. And the Chinese Communist Party is becoming increasingly aware that its hard technology rather than consumer software that will be essential in pursuing that agenda. It’s no good whatsoever if the best Chinese minds are being sucked away into consumer-facing technology by the promise of higher wages and the glamour that Jack Ma once enjoyed. Much better to set those minds to work creating the next generation of artificial intelligence, of robotics, and of electronic engineering.

That’s why Huawei, which makes hard technology is able to continue unmolested. And its no coincidence either that shares in China’s semiconductor champion, SMIC, have surged recently.

 

2020 in Review: Chinese Companies Suffer...

2020 in Review: Chinese Companies Suffer as Global Technology Tensions Intensify

2020 was not an easy year for Chinese tech companies. Officials around the world became warier of the potential national security threats posed by their growing power. A slew of bans, restrictions, and sanctions on Chinese tech companies strengthened China’s resolve to shore up indigenous innovation and self-reliance. And while the Biden administration will likely take a more measured policy approach than the Trump administration, it is unlikely that things will get much easier for Chinese tech companies in 2021.

 

The year started out with a few major wins for Huawei. In January, the United Kingdom (UK) decided to allow Huawei to play a limited role in its 5G network. Officials in Italy and South Africa also indicated they would allow Huawei network equipment in their networks. Kenya outright rejected U.S. security warnings and warmly accepted Huawei. Chancellor Angela Merkel, more in favor of tightening security requirements for all telecoms, pushed back against more hawkish German legislators aiming to ban Huawei outright and delayed Germany’s decision on 5G security standards.

Unfortunately for Huawei, the winning streak did not last long. In May, the U.S. Department of Commerce amended export controls rules on the telecom giant to close a loophole in the original sanctions that allowed it to continue designing semiconductors using U.S. technology—effectively preventing it from making the advanced chips needed to power its higher-end products. As a result of these additional sanctions, the UK’s National Cyber Security Centre determined that Huawei could be forced to use untrusted technology, raising unacceptable risks to the UK’s network. Boris Johnson’s government reversed the decision, banned purchases of Huawei network equipment, and declared that all Huawei network equipment must be removed from the UK’s network by the end of 2027. In the fall, Italy vetoed a 5G deal involving Huawei, and reports suggested that Germany, while not banning Huawei outright, could raise bureaucratic obstacles that would make it impossible for the company to participate in Germany’s 5G network.

 

The cards continued to fall as the U.S. government increased its lobbying efforts against Huawei 5G abroad. In Central Europe, the U.S. Department of State convinced several countries to sign on to its “Clean Network” initiative and reject Huawei. In September, the Czech Republic denied Huawei’s request to participate in its 5G tenders as the company failed to receive the security clearance necessary. A few weeks later, Romania came to a similar conclusion. Below the equator, U.S. officials aggressively worked to convince their Brazilian counterparts to exclude Huawei. After offering up to $1 billion in financing for Brazil to buy 5G equipment from Huawei competitors, reports suggest Brazilian President Jair Bolsonaro’s government is considering using a presidential decree to ban Huawei from Brazil’s 5G networks.

 

Despite the heavy focus on Huawei, other Chinese tech companies did not escape 2020 unscathed. In July, the U.S. Department of Defense released a list [PDF] of Chinese companies with connections to the Chinese military for the first time since initially required by the 1999 National Defense Authorization Act. The list includes SMIC and Hikvision, whose securities will be removed from U.S. stock exchanges under an executive order signed by President Trump.

 

The Trump administration also used executive orders to target popular Chinese-made apps. In August, President Trump signed executive orders banning TikTok and WeChat due to the risks posed by Chinese censorship and collection of U.S. users’ data. These efforts are being fought in the courts, and the U.S. government has not extended the now-passed deadline for ByteDance to divest from TikTok nor enforced the ban.

 

Sparked in June by skirmishes in the Ladakh region of the China-India border, India banned more than 200 Chinese apps this year, including TikTok, PUBG mobile, Baidu Maps, AliExpress, DingTalk, Taobao Live, and WeChat. The Indian government cited national security risks posed by these apps’ collection and transmission of Indian user data to servers outside of India. Chinese tech investment in India has cratered.

 

In the face of all these developments, the Chinese government has routinely criticized actions that restrict Chinese tech companies’ access to foreign markets. The Chinese Ministry of Foreign Affairs has argued that the national security justifications that foreign countries use to restrict Huawei, TikTok, WeChat, and other products are baseless and infringe on market competition principles and global trade rules. The irony that Beijing has used similar arguments to block foreign tech companies seems to be lost on them.

 

While Chinese companies have lobbied foreign officials to reverse decisions that ban or restrict them from foreign markets, many of these companies have worked to insulate themselves from geopolitics by increasing R&D investment in critical components. The Chinese government has supported these efforts, with self-reliance and dual circulation, an economic strategy that aims to reduce dependence on foreign markets, displayed prominently in a communique outlining objectives for the upcoming Fourteenth Five-Year Plan.

 

The world will not become more hospitable for Chinese tech companies in 2021. While the Biden administration will be less volatile than the Trump administration, global tech competition will remain. It is unlikely that the Biden administration will remove U.S. export controls on Huawei, raising questions about how Huawei will be able to operate after its semiconductor stockpile runs out sometime in early spring.

 

In addition, the Biden administration is poised to bolster the United States’ technological dominance by ramping up investment in basic research, reducing immigration restrictions for high-skilled workers, and working with allies on export controls, investment restrictions, and technical standards to put up a more “united front” against Chinese technology. These efforts are likely to accelerate global technology tensions and China’s pursuit of indigenous innovation.

 

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Source: Council on Foreign Relations

Preferential market access in EU-China...

Preferential market access in EU-China Investment Agreement on ratification.
Should the EU – China Investment agreement be ratified, European companies should receive preferential market access in a number of these sectors in China and Chinese companies will be permitted to push forward on their green energy and NEV investment strategies into the EU. The Key elements of the agreement are layed out below.
 

The cumulative EU foreign direct investment (FDI) flows from the EU to China over the last 20 years have reached more than €140 billion. For Chinese FDI into the EU the figure is almost €120 billion. EU FDI in China remains relatively modest with respect to the size and the potential of the Chinese economy.

 

As regards investment, the EU-China Comprehensive Agreement on Investment (CAI) will be the most ambitious agreement that China has ever concluded with a third country. In addition to rules against the forced transfer of technologies, CAI will also be the first agreement to deliver on obligations for the behavior of state-owned enterprises, comprehensive transparency rules for subsidies and commitments related to sustainable development.

 

The CAI will ensure that EU investors achieve better access to a fast growing 1.4 billion consumer market, and that they compete on a better level playing field in China. This is important for the global competitiveness and the future growth of EU industry.

 

 

Ambitious opening by China to European investments

Firstly, the CAI binds China's liberalisation of investments over the last 20 years and, in that way, it prevents backsliding. This makes the conditions of market access for EU companies clear and independent of China's internal policies. It also allows the EU to resort to the dispute resolution mechanism in CAI in case of breach of commitments.

 

In addition, the EU has negotiated further and new market access openings and commitments such as the elimination of quantitative restrictions, equity caps or joint venture requirements in a number of sectors. These are restrictions that severely hamper the activities of our companies in China. The overall package is far more ambitious than what China has committed to before.

 

On the EU side, the market is already open and largely committed for services sectors under the General Agreement on Trade in Services (GATS). EU sensitivities, such as in the field of energy, agriculture, fisheries, audio-visual, public services, etc. are all preserved in CAI.

 

Examples of market access commitments by China:

  • Manufacturing: China has made comprehensive commitments with only very limited exclusions (in particular, in sectors with significant overcapacity). In terms of the level of ambition, this would match the EU's openness. Roughly half of EU FDI is in the manufacturing sector (e.g. transport and telecommunication equipment, chemicals, health equipment etc.). China has not made such far-reaching market access commitments with any other partner.

 

  • Automotive sector: China has agreed to remove and phase out joint venture requirements. China will commit market access for new energy vehicles.

 

  • Financial services: China had already started the process of gradually liberalising the financial services sector and will grant and commit to keep that opening to EU investors. Joint venture requirements and foreign equity caps have been removed for banking, trading in securities and insurance (including reinsurance), as well as asset management.

 

  • Health (private hospitals): China will offer new market opening by lifting joint venture requirements for private hospitals in key Chinese cities, including Beijing, Shanghai, Tianjian, Guangzhou and Shenzhen .

 

  • R&D (biological resources): China has not previously committed openness to foreign investment in R&D in biological resources. China has agreed not to introduce new restrictions and to give to the EU any lifting of current restrictions in this area that may happen in the future.

 

  • Telecommunication/Cloud services: China has agreed to lift the investment ban for cloud services. They will now be open to EU investors subject to a 50% equity cap.

 

  • Computer services: China has agreed to bind market access for computer services - a significant improvement from the current situation. Also, China will include a ‘technology neutrality' clause, which would ensure that equity caps imposed for value-added telecom services will not be applied to other services such as financial, logistics, medical etc. if offered online.

 

  • International maritime transport: China will allow investment in the relevant land-based auxiliary activities, enabling EU companies to invest without restriction in cargo-handling, container depots and stations, maritime agencies, etc. This will allow EU companies to organise a full range of multi-modal door-to-door transport, including the domestic leg of international maritime transport.

 

  • Air transport-related services: While the CAI does not address traffic rights because they are subject to separate aviation agreements, China will open up in the key areas of computer reservation systems, ground handling and selling and marketing services. China has also removed its minimum capital requirement for rental and leasing of aircraft without crew, going beyond GATS.

 

  • Business services: China will eliminate joint venture requirements in real estate services, rental and leasing services, repair and maintenance for transport, advertising, market research, management consulting and translation services, etc.

 

  • Environmental services: China will remove joint venture requirements in environmental services such as sewage, noise abatement, solid waste disposal, cleaning of exhaust gases, nature and landscape protection, sanitations and other environmental services.  

 

  • Construction services: China will eliminate the project limitations currently reserved in their GATS commitments.

 

  • Employees of EU investors: Managers and specialists of EU companies will be allowed to work up to three years in Chinese subsidiaries, without restrictions such as labour market tests or quotas. Representatives of EU investors will be allowed to visit freely prior to making an investment.

 

Improving level playing field – making investment fairer

  • State owned enterprises (SOEs) - Chinese SOEs contribute to around 30 percent of the country's GDP. CAI seeks to discipline the behaviour of SOEs by requiring them to act in accordance with commercial considerations and not to discriminate in their purchases and sales of goods or services. Importantly, China also undertakes the obligation to provide, upon request, specific information to allow for the assessment of whether the behaviour of a specific enterprise complies with the agreed the CAI obligations. If the problem goes unresolved, we can resort to dispute resolution under the CAI.

 

  • Transparency in subsidiesThe CAI fills one important gap in the WTO rulebook by imposing transparency obligations on subsidies in the services sectors. Also, the CAI obliges China to engage in consultations in order to provide additional information on subsidies that could have a negative effect on the investment interests of the EU. China is also obliged to engage in consultations with a view to seek to address such negative effects.

 

  • Forced technology transfersThe CAI lays very clear rules against the forced transfer of technology. The provisions consist of the prohibition of several types of investment requirements that compel transfer of technology, such as requirements to transfer technology to a joint venture partner, as well as prohibitions to interfere in contractual freedom in technology licencing. These rules would also include disciplines on the protection of confidential business information collected by administrative bodies (for instance in the process of certification of a good or a service) from unauthorised disclosure. The agreed rules significantly enhance the disciplines in WTO.

 

  • Standard setting, authorisations, transparencyThis agreement covers other long-standing EU industry requests. China will provide equal access to standard setting bodies for our companies. China will also enhance transparency, predictability and fairness in authorisations. The CAI will include transparency rules for regulatory and administrative measures to enhance legal certainty and predictability, as well as for procedural fairness and the right to judicial review, including in competition case.

 

Embedding sustainable development in our investment relationship

  • In contrast to other agreements concluded by China, the CAI binds the parties into a value-based investment relationship grounded on sustainable development principles. The relevant provisions are subject to a specifically tailored implementation mechanism to address differences with a high degree of transparency and participation of civil society.

 

  • China commits, in the areas of labour and environment, not to lower the standards of protection in order to attract investment, not to use labour and environment standards for protectionist purposes, as well as to respect its international obligations in the relevant treaties. China will support the uptake of corporate social responsibility by its companies.

 

  • Importantly, the CAI also includes commitments on environment and climate, including to effectively implement the Paris Agreement on climate.

 

  • China also commits to working towards the ratification of the outstanding ILO (International Labour Organisation) fundamental Conventions and takes specific commitments in relation to the two ILO fundamental Conventions on forced labour that it has not ratified yet.

 

Monitoring of implementation and dispute settlement

  • In the CAI, China agrees to an enforcement mechanism (state-to-state dispute settlement), as in our trade agreements.

 

  • This will be coupled with a monitoring mechanism at pre-litigation phase established at political level, which will allow us to raise problems as they arise (including via an urgency procedure).

 

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Source: European Commission.


 

China's economy has rebounded: challenge...

China's economy has rebounded: challenges ahead

China’s economy returned to growth in the second quarter after a deep slump at the start of the year, but unexpected weakness in domestic consumption underscored the need for more policy support to bolster the recovery after the shock of the coronavirus crisis.

 

 

Asian share markets and the Chinese yuan fell, partly reflecting the broad challenges facing the world's second-largest economy as it grapples with the double-whammy of the pandemic and heightened tensions with the United States over trade, technology and geopolitics.

 

 

Gross domestic product (GDP) rose 3.2% in the second-quarter from a year earlier, the National Bureau of Statistics said on Thursday, faster than the 2.5% forecast by analysts in a Reuters poll, as lockdown measures ended and policymakers ramped up stimulus to combat the virus-led downturn.

 
 

The bounce was still the weakest expansion on record, and followed a steep 6.8% slump in the first quarter, the worst downturn since at least the early 1990s. “As we previously highlighted, policy support is still needed despite recovering growth momentum,” Betty Wang, ANZ bank’s senior China economist.

 

 

“The possibility of resurgences in local COVID-19 cases, global economic uncertainty and the deteriorating China-U.S. relationship all pose downside risks to China’s H2 growth outlook,” Wang said. Those risks were partly reflected in separate retail data that showed Chinese consumers kept their wallets tightly shut, pointing to a bumpy outlook at home and overseas, as many countries continue to grapple with the COVID-19 pandemic - led by surging infections in the United States.

 

 

Though June indicators and GDP numbers largely beat expectations, Rodrigo Catril, a foreign exchange strategist at NAB in Sydney, said they also revealed “the China consumer remains behind in terms of the recovery story.”

 

 

“It’s very much a story of government stimulus-led recovery, which is very much focused on the industrial side. The consumer remains very cautious. That cautiousness is something the market is looking at in terms of countries where the consumer plays a bigger role, so that’s obviously relevant for the U.S. as well.”

 

 

Retail sales were down 1.8% on-year in June - the fifth straight month of decline and much worse than a predicted 0.3% growth, after a 2.8% drop in May. Domestic job losses have been one of the worries for consumers, as many businesses struggled to stay in the black. Wanda Film, for example, China’s largest cinema chain operator which has more than 600 cinemas, on Tuesday warned of a first half net loss of 1.5-1.6 billion yuan (£170.4-£181.6 million), after the coronavirus kept its cinemas shut for almost the entire period.

 

 

U.S. Tensions, Structural Issues

In the first half of the year, the economy contracted 1.6% from a year earlier, underscoring the sweeping impact of the virus which first emerged in China late last year and has killed over 583,000 people worldwide. The rising tensions with the United States and the pandemic have added to structural issues that China has been facing for years, including demographic changes, over-investment, low industrial productivity and high debt levels. On a quarter-on-quarter basis, GDP jumped 11.5% in April-June, the NBS said, compared with expectations for a 9.6% rise and a 10% decline in the previous quarter.

 

The IMF has forecast China to expand 1.0% for the full year.
Image: IMF

The government is expected to offer more support on top of a raft of measures already announced, including fiscal spending boost, tax relief and cuts in lending rates and banks’ reserve requirements. But debt worries have kept a leash on China’s stimulus tap. Net fiscal stimulus unveiled so this year amounted to just over 4 trillion yuan ($571.76 billion), much restrained compared the spending burst in other major economies including the United States and Japan. The Institute of International Finance estimates China’s total debt rose to 317% of gross domestic product in the first quarter of 2020, up from 300% in late 2019 and the largest quarterly increase on record.

 

 

The industrial economy offered some hope for the nation as it tries to regain its footing, with output in the vast sector rising 4.8% in June from a year earlier, the third straight month of growth, the data showed, quickening from a 4.4% rise in May. 

 

 

Fixed asset investment fell a less-than-expected 3.1% in the first half from the same period in 2019, moderating from a 6.3% decline in the first five months, while real estate investment growth also quickened to 8.5% in June, thanks to the credit boost.

 

 

While the International Monetary Fund has forecast China to expand 1.0% for the full year, the only major economy expected to report growth in 2020, many analysts caution about the outlook. “Domestic demand will drive China’s recovery ahead, but external demand could be a risk to the growth outlook given the possibility of large second round of coronavirus infections overseas,” said Oshimasa Maruyama, chief market economist at SMBC Nikko Securities in Tokyo.

 

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Source: Reuters Gabriel Crossely, Kevin Yao

 

 

 

Greater Bay Area can be the sandbox...

Greater Bay Area can be the sandbox for China’s next stage of market liberalization.

By Andrew Lo, Senior Managing Director & Head of Asia Pacific, Invesco

From the launch of Stock and Bond Connect to the opening of its financial sector to more foreign investments, China has rapidly liberalized its capital markets with great results.

 

 

Yet, the sheer size of China’s capital markets and the complexity of its financial system make opening and integrating with the rest of the world a hugely challenging task. China has traditionally resorted to controlled experiments – in the form of pilot programmes to mitigate potential shocks and secure flexibility to change course as needed. But they also come at the expense of policy optimality, policy consistency and, in some cases, policy confusion and frustration.

 

 

I believe that the Greater Bay Area (GBA) – a plan encompassing Guangdong province in southern China, Hong Kong and Macao – has what it takes to be the sandbox for China’s next stage of market liberalization. The GBA has 71 million people, and a GDP per capita of USD 23,342. We can appreciate the region’s diversity by considering tech hub Shenzhen and Guangdong’s manufacturing prowess.

 

 

Connecting with Hong Kong, an established global financial centre, allows the region to immediately tap into its world-class talent pool, sound legal framework and international best practices to help accelerate China’s plans to liberalize its financial markets.

 

 

Specifically, I see several areas where the GBA could take the lead to help transform China’s economic future, namely:

 

 

  • Developing China’s pension system
  • Liberalizing cross-border financial products
  • Deepening the liquidity pool of offshore renminbi for payments

 

 

The region already offers a rich and deep pool of renminbi savings. The planned pension reform will release more retail investors’ savings into the region’s financial markets. Demand for well-designed and globally diversified investment products and services is on the rise. Investment management industry participants in both Shenzhen and Hong Kong could play a critical role.

 

 

The natural starting point is to allow GBA residents to invest in a wide range of investment and retirement products in the mainland and/ or Hong Kong. To swiftly address product and service gaps, the authorities could implement easy passporting of investment products (including cross-border products) that are already authorized in the GBA’s constituent jurisdictions.

 

 

Capital must be able to flow and convert freely within the GBA. Reinventing the wheel is unnecessary – China has already embarked on several localized schemes to liberalize its currency and markets, so we can start by broadening their scope within the GBA. If oversight of Chinese offshore accounts can be devolved to corporate fiduciaries – starting with the four largest state-owned Chinese banks, for example – I believe that funds can flow more freely within the region.

 

 

Lastly, competition must be encouraged to fuel innovations and help lower the cost of products and services to benefit consumers. The authorities in mainland China and Hong Kong could collaborate to level the playing field for existing capital market participants onshore and offshore within the GBA. This would help foster more vibrant and global institutional participation, thereby deepening China’s financial markets to pave the way for greater internationalization of the renminbi.

Download the full report here.


 

 

Shortening Supply Chains: Mexico's Gain?

Shortening Supply Chains: Mexico's Gain?

The 1990s saw a dramatic shift in manufacturing from sites in North America to sites in developing China. At that time, Chinese labor costs were minuscule, and the economy provided seemingly limitless workers. But that was then. Now, we see a shift in the reverse direction to companies that are moving manufacturing from China to Mexico. Chinese and other Asian companies seeking access to foreign markets are moving manufacturing operations to Mexico or expanding existing production facilities there in order to shorten their supply chains and be more regional.

 

 

In recent years Chinese exports have faced increasing obstacles. Tariffs on Chinese goods and an unfavourable political climate have been complicating exports to the USA. In response to this, Mexico has become an increasingly attractive place for Chinese industry to establish a foothold on the continent:  China’s Hisense Co. announced they were doubling their Mexican investment earlier this year. Foxconn (which currently has five factories in Mexico mainly making televisions and servers) and Pegatron are among companies eyeing new factories as they re-examine global supply chains.

 

 

As the value of the Chinese yuan has been rising, the cost of overseas shipping has surged, and increased competition among Chinese factories has resulted in labor shortages and longer lead times. Due to both distance and fluctuating oil prices, shipping costs are exponentially higher when manufacturing in China. In 2018, shipping a 53-foot container from China to Los Angeles cost close to $5,000. The same container from the border of Mexico (Tijuana) to Los Angeles costs about $600. Thanks to the North American Free Trade Agreement (NAFTA), goods imported from Mexico can enter duty free.

 

 

Mexico's wages are 40 percent higher than China's, at about $3.50 an hour. As a result, overall production costs are comparable in the countries, once you factor in Mexico's lower transport and customs cost. But Chinese factory wages are climbing 14 percent annually. Some analysts, believe that this strong trend will actually position Mexican wages to be 30% less than Chinese wages just two years from now.

 

 

Moving manufacturing from China to Mexico also means less travel expenses for executives, resulting in increased and more effective oversight into operations in similar time zones and, thus, more quality in production and increased productivity. While Mexico still relies on the US and China for inputs, its supply chain is well established. Given the high concentration of manufacturing operations in several industries, businesses can make use of established infrastructure and supply chain networks.

 

 

By bringing the goods of Chinese firms closer to the customer, Chinese firms can increase the demand for their goods. Industries such as automotive and electronics  require fast deliveries. Also delivered is the opportunity to diversify their products into not just the North American market, but also the markets of Latin America..

 

 

The two countries have recognized their mutual goals and complementing assets over the past few years, and taken noticeable steps to form a partnership. Mexico also has a strong reputation for protecting intellectual property, a valuable advantage over China where counterfeit products and IP protection remain a concern. Mexican business sees the current Covid crisis and US-China Trade War as allowing Mexico to attract more investment, lure companies and create jobs from both Chinese Companies looking to take advantage of Mexico’s location and the new North American trade deal (USMCA) and US businesses looking to relocate remote operations from China. Conversely the new government of President Andres Manuel Lopez Obrador is slashing investment in the kinds of infrastructure that manufacturers need: the proposed budget for new roads is down 45 percent, rails and ports don’t fare well and plans have been cancelled for a new world-class airport outside of Mexico City. The government’s new energy policies don’t ensure Mexico will have enough reliable and affordable electricity to support a manufacturing surge in the future. Mexico’s retreat right at the moment of a global manufacturing shakeup means it might just be losing an opportunity for significant gain in the years to come.

How China is strengthening its electric...

How China is strengthening its electric vehicle market during Covid

While COVID-19’s impact to China’s car market has been dramatic, there are already signs of a recovery. The country’s reaction to the crisis shows a commitment to new technologies, signaling how the crisis could build resiliencies moving forward.

 

 

Impact to the economy
The negative impact brought by COVID-19 is becoming more and more significant. As of 28 May, there have been 5.7 million confirmed cases of COVID-19, including 356,000 deaths, reported by the WHO. According to a forecast from International Monetary Fund in April, public health measures to prevent the spread of virus have severely disrupted business activities and international travels. As a result, the global economy is projected to contract sharply by -3% in 2020 while China sees 1.2% growth.

 

 

The automotive sector is one of the top pillar industries for China’s economy and a major employer. In 2019, for example, the automotive sector contributed 9.6% of the total retail sales of consumer goods. The sector also accounted for around 10% of total employment in China (when the entire value chain is considered).

 

 

In China, the so-called “5-6-7-8-9 Characteristics” describes the private economy, which comprises approximately 50% of tax, 60% of GDP, 70% of technology innovation, 80% of urban employment, and 90% of total companies. For light passenger vehicle market, roughly 70% of new car buyers in China come from the private economy sector, mainly small and medium sized enterprises (SMEs), according to the data from State Information Center.

 

COVID-19 placed significant burdens on small- and medium-sized enterprises, the most vulnerable group in China during this crisis. This impact was seen in China’s first quarter vehicle sales. According to the China Association of Automobile Manufacturers (CAAM), sales of passenger cars declined 42.4% year over year during that period. SAIC, one of China’s largest manufacturers, reported a 44.9% percent drop year to date in April. Its SAIC-Volkswagen and SAIC-General Motors joint ventures, which comprise the majority of its sales volumes, dropped 50.4% and 47.7% year over year in retail sales from January to April respectively.

 

 

New energy vehicle incentives and plans
To stimulate the automotive market, several government policies were launched. 10 cities released incentive schemes. For instance, Guangzhou announced a subsidy of 10,000 RMB for New Energy Vehicles sold between March and the end of December. Additionally, a State-level subsidy to New Energy Vehicles that was planned to phase out by the end of 2020 was extended until 2022. Additionally, new commitments were made to investments in infrastructure. The State Grid plans to build 78,000 charging stations at a cost of 2.7 billion RMB in 2020.

 

 

Signs of a rebound
With the gradual resuming of industry activities, auto sales are starting to recover. Retail sales of new light passenger vehicles surged ahead in March, as reported by the China Passenger Car Association (CPCA). While just 250,000 units were sold in February, March’s numbers were four times that amount. Year over year, March 2020 sales were still below 2019 levels, but 40% lower, not the 80% drop seen in February. Sales in April have begun to catch up with just a 3.6% drop year over year.

 

 

China has a 2-month lead on addressing COVID-19 and may be the recovery example for large economies able to contain the spread of the virus and get its citizens back to work.

 

 

Car ownership per 1,000 people vs. GDP per capita in 2019 for main countries
Image: Peng He, using World Bank data

Despite the significant impact of COVID-19 on China’s automotive industry, the market potential is still quite huge. China is still expected to become the largest vehicle market with around 260 million units in operation or 186 units on average per every 1,000 people. At 173 units per person now, there is room in China for more light passenger vehicle purchases. However, after COVID-19, the market will definitely not simply snap back to where it was before the pandemic. According to a forecast from IHS Markit on 21st April, light vehicle sales will decline 15.5% in China for 2020.

 

 

Beyond sales, the real opportunity after COVID-19 lies in the shift from internal combustion engines to cleaner, electric vehicles with the government and industry working jointly. Though oil prices have fallen, reducing the total cost of ownership for internal combustion engine vehicles, China is set to keep its long-term strategic goals for automobile electrification and meet climate change and temperature raise goals set by the Paris Agreement.

 

 

These approaches are the continuation of policies that had been part of a national strategy since the early 2010s. This tact can help the country 'leapfrog' in the automotive space while also tackling key energy and environmental issues, ensuring the country remains both resilient and competitive.

 

 

Other industry leaders could learn from this type of long-term thinking, leveraging the sectors hard times ahead to help further accelerate the development of New Energy Vehicles. That's a move that would surely represent "building back better."

 

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Source: World Economic Forum Research

 

China ushers in the era of Building...

China ushers in the era of Building Economy 3.0

The evolving context of “building” in modern real estate market
In the Chinese language, the word “building” literally refers to the combined meaning of two characters “lou” and “yu”. Chinese characters “lou yu” not only incorporate architectural structure but also the concept of functionality, and has had this interpretation since ancient times. Architecturally speaking, the term embodies different variations of floor area, structures, facades, underground and other aspects.. In terms of functionality, besides residence, the term covers a wide spectrum of functions including research, manufacturing, storage, retailing, working and other economy-related activities. Therefore, in the modern real estate context, the concept of “lou yu” is not just limited to office buildings, but also comprises retail, hotels, apartments, industrial parks, logistics and manufacturing, all of which are a part of the scope of the “building economy”.

 

 

What is the Building Economy 3.0?
Entering 2018, China transitioned its economy from pure growth orientation towards a period of industrial restructuring and upgrading, marking the beginning of a new era for China’s building economy. We define it as the Building Economy 3.0. The difference is the capability of integrating the property market and industries. During the 3.0 era, buildings and the economy will integrate in an unprecedented way, as buildings will no longer be limited to serving as hardware or real estate properties, but rather as a means to drive the economy. Moreover, impetus for the development of the building economy has shifted from being market-oriented to technology-driven.

 

 

An analytical model of the key trends of Building Economy 3.0
Enterprises and people are central to the building economy. The horizontal axis views the needs of enterprises and their people, while the vertical axis measures the economic drivers. Each quadrant demonstrates a future trend of building economy as follows.

 

 

Conclusion
The Building Economy 3.0 is almost at its most technically advanced stage, as it has strongly integrated technological implementation into the entire lifespan of real estate projects, ultimately changing their future development paths. The building economy will continue to put emphasis on the concepts of sustainability and health, collectively realizing China’s strategic goals for sustainable development. Growth of the sharing economy allows idle resources to be better utilized, increasing overall efficiency.

 

 

Investors, occupiers and third parties are all facing new opportunities amid the headwinds and challenges in today’s market. Space and amenities built by investors will continue to highlight the elements of technology and sustainability, while operations will focus on further developing the themes of sharing and inclusiveness. Occupiers will enjoy more eco-friendly, green and healthy building spaces, which should in turn stimulate productivity and work efficiency, and enhance overall enterprise competitiveness. Third parties are dedicated to integrating the latest trends into their services so that their clients will receive the most cutting-edge technology services, helping them achieve value add and promote market change. We look forward to Building Economy 3.0 as a sustained driving force for the future development of the economy and industry.

 

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Source: By Jacky Zhu, Head of Research for West China, JLL

Essential reading to understand modern...

Essential reading to understand modern China

As it is the end of the year, we thought we would share some of the best books that explain modern China from the last couple of years. Some are business focused, some political and some cultural: every topic seems important in understanding China today. The list is by no means comprehensive, but simply some of our favourites.


 

                  

 

                  

 

 

                 

 

 

                 

 

 

                   

 

Ogilvy, Globalizing in a New Economic...

Ogilvy, Globalizing in a New Economic Reality: Making Chinese Brands Matter Globally
Ogilvy China has just released a research report titled “Globalising in a New Economic Reality: Making Chinese Brands Matter Globally”, the report builds on interviews with 40 CMOs of major Chinese companies and insights from Ogilvy experts in Chinese and global brand management. It underlines key challenges currently facing their overseas expansion and presents 7 principles for building sustainable brands on the global stage.
 
 

The main motivation found for Chinese businesses to expand overseas reads the same as everywhere else: growth. About four out of five executives (79%) interviewed cited “new markets for growth” as the primary motivation for entering foreign markets, while domestic competition and the acquisition of advanced tech/skills ranked second (both 32%).

 

 

Hoping to expand overseas, half of the interviewees said they preferred building a new presence from scratch rather than acquiring an existing brand, while 30% chose a mix and match combination of both methods.
 
 

The full report can be downloaded here

China-Pakistan Economic Corridor

China-Pakistan Economic Corridor

China-Pakistan Economic Corridor is a framework of regional connectivity. CPEC will not only benefit China and Pakistan but will have positive impact on Iran, Afghanistan, India, Central Asian Republic, and the region in general. Under CPEC, Pak and China have initiated projects of 17,045 MW of electricity, national level modernization of roads and rail infrastructure, new optical fiber connect with China, development and commercialization of Gwadar port and smart port city, 4 urban mass transit projects in major cities and 9 SEZs. The impact on GDP growth rate is expected to rise to 7% by 2020 from 5.2% in 2017.

 

 

China-Pakistan Economic Corridor has Significance for the development of the region including:

  • Integrated Transport & IT systems including Road, Rail, Port, Air and Data Communication Channels
  • Energy Cooperatio
  • Spatial Layout, Functional Zones, Industries and Industrial Parks
  • Agricultural Development
  • Socio-Economic Development (Poverty Alleviation, Medical Treatment, Education, Water Supply, Vocational Training)
  • Tourism Cooperation & People to People Communication
  • Cooperation in Livelihood Areas
  • Financial Cooperation
  • Human Resource Development
  • Enhance Security and stability of the region

 

 

CPEC Projects

Energy

 

 

Infrastructure

 

 

Gwader Port Area

 

 

Other Projects

 

 

Mass Transit Projects

 

 

Provincial Projects

 

 

Proposed Special Economic Zones

 

 

 

 

 

 

The Digital Silk Road

The Digital Silk Road

Over the past few years, the world has been abuzz with talk of China’s enormously ambitious $1trn Belt and Road Initiative (BRI) - also known as the New Silk Road - that seeks to expand its transportation and energy infrastructure around the world to improve connectivity with the rest of the globe, and perhaps extend both its soft and hard power capabilities.

 

 

One of the most important aspects of the strategy, however, has nothing to do with highways, ports or energy. It’s digital and remains relatively unknown. While the New Silk Road refers to a tangible, physical infrastructure network on land and sea across the Eurasian landmass, the Digital Silk Road deals with a largely unseen and in some ways much more abstract infrastructure which goes along with this.

 

 

The Digital Silk round will play a substantial role in making infrastructure development more viable and efficient. It will also bring advanced IT infrastructure to the BRI countries such as broadband networks, 4/5G mobile networks, e-commerce hubs and smart cities. The upgrade in infrastructure will allow businesses evolve into digital ones, away from traditional industry. The resulting connectivity will allow SME’s to tap directly into global trading markets, including cross boarder logistics systems.

 

 

Chinese companies make their mark

At the forefront of the Chinese digital push are its various telecom companies, who hope to gain global access while at the same time help advance China’s overarching strategic goals. China has also created digital policy frameworks such as the recent Cyber Security Law and Data Protection framework to promote its standards internationally and in particular to countries along BRI.

 

 

The Chinese mobile economy is expanding fast as consumers move away from PCs, landline phones and credit cards, and into a smartphone age, including shopping. The five giants of the Chinese internet age – Tencent, Alibaba, Baidu, Xiaomi and Didi – are incredible companies, their sheer scale and access to capital means the smallest movements from any one of them move trends. 

 

 

China’s rival to GPS

China also intends to extend its coverage of the home grown satellite navigation system (BeiDou) to the 60 plus countries along the BRI by 20220. Currently accurate to around 10m or so (used extensively in China for smartphones, fishing vessels and shared bicycles), the expansion of the satellites network will bring it much closer to the 1m achieved by GPS. Significantly, under military control, the company will allow China to end its dependence on the US GPS network. With BeiDou navigation promising to connect communities currently in a void, many countries have already signed up to embed the technology in infrastructure: Chinese tech giants are no strangers to surmounting the logistical challenges this will bring in installing around developing countries

 

 

Security concerns – or not?

Around the world, the expansion of China’s digital footprint has been accompanied by concerns over whether the connections could be used to expand Chinese intelligence efforts or lead to compromises over the privacy of data.

 

 

In a world in which connectivity is at an all-time high and trust at an all-time low when Chinese companies enter into a market, it should not be viewed as pure market expansion. These internet giants and telecom companies need to ensure proper data protection and economic data sharing.

 

 

The Digital Silk Road is critically important for the sustainable growth of the global economy since it addresses one of the fundamental issues of the 4th Industrial revolution: high speed internet access. Increased connectivity will allow emerging markets to generate data from their businesses, which could potentially become big data in the future. In particular it will be the SME’s along the bath of BRI that will be able to access global markets and improve their operations. What’s clear is that the BRI bridgeheads penetrating its path are digital as well as physical and this will bring larger cyber markets to entrepreneurs allowing them to test and commercialise ideas that originated in small, isolated areas along the route.

 

 

Pictorial: Bound Feet Women of China...

Pictorial: Bound Feet Women of China.

A Living History: Bound Feet Women in China

By Jo Farrel,

 

A selection of images from this long-term project documenting some of the last remaining women in China with bound feet. A tradition that started during the Song Dynasty, foot binding was banned in 1911 but carried on through 1939 when women had the bandages forcibly removed. Although considered just for the elite, the majority of women in this documentation were farm workers from peasant families living in rural areas. Once unbound the feet are disfigured for life with toes broken beneath the souls of the feet.

 

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