Circumventing the western sanctions
The Central Economic Work Conference of the Chinese Communist Party held recently stated that China aims to focus on restoring and expanding consumption and strive for "progress through stability."
The Conference admitted that China's economy faced difficulties in 2022 due to a contraction in demand, supply shocks, and a volatile environment, in the aftermath of COVID-19.
A decline in demand reflects a decrease in purchasing power, which in turn calls for financial support to people during the crisis. A supply shock occurs as a result of closed factories, resulting in the restructuring of the global supply chain and the outflow of international orders.
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In 2020, China was among the first countries in the world to resume work and reopen businesses, and registered a 2.3-percent gross domestic product (GDP) growth, making it the world's only major economy to attain positive growth.
Its GDP crossed the 100-trillion-yuan (about 14.37 trillion U.S. dollars) threshold in 2020 and further expanded to over 114 trillion yuan in 2021, contributing over 30 percent to world economic growth.
The Chinese economy advanced 3.9% YoY in Q3 of 2022, exceeding the market consensus of 3.4% and picking up from a 0.4% growth in Q2, in response to significant measures by the government. Meantime, industrial output rose the most in seven months, to 6.3% YoY, due to faster growth in the manufacturing and mining sectors.
In the first 11 months of this year, China's trade in goods expanded 8.6 percent year on year to 38.34 trillion yuan, according to the General Administration of Customs.
Foreign direct investment in the Chinese mainland, in actual use, went up 17.4 percent year on year to $168.34 billion in the first 10 months of 2022.
But, according to the National Bureau of Statistics (NBS), China's November retail sales sank by 5.9 percent YoY, showing a declining trend in domestic demand. So, the creation of a resilient domestic market is very critical.
It was against this backdrop that this year’s Central Economic Work Conference was held. The Conference is an annual meeting held by the Chinese government to review the ups and downs and set economic policy for the following year.
The first Central Economic Work Conference was held in 1978, following the launch of economic reforms. The Conference usually prepares the groundwork for the Government Work Report in March.
The key takeaways
Realising the current crisis, on social policy, the Conference emphasised the need to secure the bottom line of people's livelihood, focusing on "promoting employment for young people, especially college graduates, in a more prominent position”. The Party doesn’t want young people to protest on the streets.
The Conference stated that in 2023, it will focus on expanding domestic demand, rewarding investment, and increasing exports to "boost confidence in development, prioritise the restoration and expansion of consumption, and increase the income of urban and rural residents through various channels and encouraging more private capital to participate in the construction of key national projects”.
The conference also emphasised, "fully promoting rural revitalisation and resolutely preventing large-scale re-poverty."
In addition to expanding domestic demand, the five main tasks for next year include speeding up the construction of a modern industrial system, implementing "two unwavering" principles, more actively attracting foreign investment and effectively resolving major economic and financial risks.
The two unwavering principles are "to deepen reform of state-owned enterprises and improve the competitiveness of state-owned enterprises." The Conference pointed out that "private enterprises' property rights and entrepreneurs' rights and interests must be protected by law." So, cracking down on private enterprises will no longer be the rule.
In response to Western technology sanctions, the Conference emphasized the importance of a resilient industrial chain.
Coping with U.S. sanctions
With the announcement of sweeping fresh controls on sales of semiconductors to China in October 2022, the U.S. approach looked drawn from the Cold War playbook. A growing raft of U.S. measures now aims at slowing China’s development as a high-technology economy.
In the last eight years, China’s technology sector has faced several challenges due to sanctions imposed by the U. S. The acceleration in tech sanctions by the U.S. coincided with the rise of China’s Digital Silk Road (DSR) under the Belt and Road Initiative (BRI).
The U.S. blacklisted Hikvision, a Chinese security equipment maker, involved in DSR, in 2021. Apart from Hikvision, companies like Huawei, Alibaba, Tencent, Baidu, and ZTE are the main drivers of the DSR.
After Trump took office, several measures were taken targeting Chinese science and technology policies. These include the National Defence Authorization Act 2019, Uyghur Human Rights Policy Act 2020, and the Hong Kong Autonomy Act 2020, which have imposed sanctions on Chinese entities.
In May 2019, Huawei was added to the Commerce Department’s Entity List, leading to stricter export controls. It was unable to do business with any U.S. firm.
DSR not only facilitates the export of Chinese technology to previously untapped markets but also allows private Chinese firms to expand extensively. This enables China to carry its influence on the global tech sector, which has been dominated by the West since its inception. Chinese companies have already taken significant business away from Western companies like IBM and Cisco.
U.S. sanctions also emerged in the context of Chinese policies like Made in China 2025 (MIC 2025), emphasizing technological self-reliance. Instituted in 2015, MIC 2025 aims to help China skip the middle-income trap by installing technology-powered production as opposed to labour-intensive production and ultimately aid in the development of an “Internet Superpower”.
China’s 14th Five-Year Plan, covering the years 2021 to 2025, also emphasizes the strategic importance of the development of science and technology and is further complemented by policies such as the Internet+ and the New Generation Artificial Intelligence Development Plan.
Distressed by China’s technical prowess, Biden in June 2021 signed an order prohibiting U. S. investments in Chinese surveillance technology companies that “facilitate serious human rights abuses” or “undermine the security or democratic values of the United States”, adding 59 entities to its new Chinese Military-Industrial Complex Companies List.
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But, U.S. chip sales to China surged as demand for Chinese-made laptop computers, video games, and other home technology soared during COVID-19. In 2022, U.S. sales plummeted, from a combination of expanded controls and a slowdown in the Chinese economy; chip sales to China are down 25 percent, and semiconductor equipment sales have fallen 15 percent. Boston Consulting Group has estimated that a complete ban on U.S. chip sales to China would cost U.S. semiconductor firms 18 percent of their global market share and 37 percent of their revenues.
The U.S. strategy is to contain China’s ability to make or acquire logic chips below the 14-nanometer node, well above the current leading-edge capabilities of 5 nanometers or less. The smaller the node, the more advanced the chip.
But the Semiconductor Manufacturing International Corporation (SMIC), China’s largest chipmaker, announced in August 2022 that it had started shipping 7-nanometer semiconductors, just one generation behind the most advanced chips made in Taiwan and South Korea. It has done so, using production techniques less efficient than the current standard since U.S. controls have blocked the SMIC from acquiring the most advanced lithography equipment.
Thus, China has proved that it is easy to circumvent the U.S. sanctions.
And the Economic Work Conference strategy assures that the Western sanctions would be futile since China is much more integrated into the global economy and supply chain than Russia. China has been gradually showcasing domestic alternatives.
Chinese technology has a far-reaching impact on the developing world because the BRI exports domestic technology globally. Since the Chinese tech ecosystem has extensive footprints globally, the U.S. sanctions will not achieve the goal of technologically isolating China. The impact of the sanctions would be minimal, as most of the Silicon Valley giants have already been banned in China.
Hence, the Work Conference has mentioned that China's science and technology industry should be self-reliant and "must effectively coordinate education, science and technology, and talent work to improve the quality and ability of independent talent cultivation."
This means China's high-tech industrial chain cannot be decoupled from the global economy.
China has been working to develop its technological capabilities and become less reliant on the U.S. for a long time. This includes efforts to produce its chips, solar energy, artificial intelligence, and electric vehicles.
Boost to platform technology
Quite a few sectors would benefit from next year's Chinese policies, as hinted at by the Work Conference. New-energy car and elderly services will enjoy preferential policies.
At the same time, policies will be tilted to support research and production of technology services and products. This relates to the Work Conference's emphasis on protecting private enterprises' legal rights. Combining the two policies implies that platform technology companies may get a boost in China, in 2023.
What is platform technology?
The platform business model is created by digital communities and marketplaces that allow different groups to interact and transact. Seven of the 10 most valuable companies are now based on this model. Companies like Apple, Google, Amazon and Alibaba have used the model to grow enormously, grabbing significant market share from established firms.
A McKinsey report in 2020 said that more than 30% of global economic activity — some $60 trillion — could be mediated by digital platforms in six years, and yet only 3% of established companies have adopted an effective platform strategy.
The platform economy is reshaping global trade. Global platforms such as Alibaba, allow much smaller enterprises to participate in global trade, without the need to invest in their supply chains. In a world dominated by platform companies that offer ways for customers and companies to connect, countries that want to act as global trade hubs must think like a platform nation.
In China, an example of a traditional corporation transforming its business model is PingAn, an insurance company, based in Shenzhen. They have created a portfolio of platform businesses that are directly related to insurance: in healthcare, connecting patients with doctors; in automotive for buying and selling cars; and it dabbles even in entertainment. PingAn is now the most valuable insurance company in the world.
In South Africa, a 100-year-old company, Naspers, got transformed from being a printer of newspapers to a digital and platform company. It took a stake early on in Chinese Internet giant Tencent and is now worth more than the whole of all their companies combined, built up a global online classified business called OLX.
Platform technology shows that sanctions are absurd and China will march forward.
The recovery ahead
Amid multiple domestic and external headwinds, China’s GDP growth is expected to slow sharply to 3.3 percent in 2022, from 8.1 per cent in 2021.
According to CEIC data, Chinese households are limiting their spending on non-essential items, and industries such as catering, accommodation and aviation are suffering the most. Industrial production has hitherto shown a stronger trend than retail sales, thanks to overseas demand.
Industrial production, measured by the added value of industries above the designated size, increased by 3.6% YoY in the first eight months of 2022, up from 3.4% in June 2022. The slow recovery of industrial production was broad-based among state-owned enterprises and private sectors.
Retail sales of consumer goods increased by 0.5% YoY in the first eight months of 2022, mainly dragged down by the COVID-19 lockdown in Q3.
By product type, automobiles sales, accounting for 29% of all retail sales in the first eight months of 2022, declined by 1.3% YoY, down from the record high of 56.6% YoY in March 2021, but still much better than in the corresponding period of 2020 when the COVID-19 led to a decline of 8.8% YoY. The lifting of lockdowns in provinces such as Guizhou, Xizang Inner Mongolia, Xinjiang, Sichuan, Guangdong, Gansu, and Ningxia may lead to a recovery in retail sales.
Online retail sales of goods increased by 5.8% YoY in the first eight months of 2022, much faster than the overall retail sales growth rate as it was less affected by the lockdown.
Government revenue was RMB 13.8tn and decreased by 8% YoY in the first eight months of 2022, while expenditure was RMB 16.5tn, an increase of 6.3% YoY, resulting in a deficit of RMB 2.7tn. Central government revenue of RMB 6.4tn accounted for 46% of total government revenues, and local government revenue of RMB 7.4tn the remainder.
Foreign trade growth was slower in Q3 2022 than in Q2 2022, but it remained resilient compared with domestic demand, with merchandise (goods) exports rising by 18% YoY and 7.1% YoY in July and August 2022, respectively, in USD terms. Merchandise imports growth improved from 0% YoY in April 2022 to 0.3% YoY in August 2022 but was still much below the 19.8% YoY in January and 19.5% YoY in December 2021, affected by the lockdowns in large Chinese cities, such as Shanghai, Shenzhen and Chengdu.
In response to critical headwinds, China has stepped up macroeconomic policy easing with higher public infrastructure spending, tax rebates, policy interest rate cuts, and a relaxation in local purchase restrictions in the property sector. However, resurgent COVID-19 outbreaks and associated measures have limited the push of the policy stimulus.
To face these challenges, macroeconomic policies need to be carefully calibrated not to exacerbate financial risks. Structural reforms are needed to reinvigorate the shift to more balanced high-quality growth.
The government measures are paying off, as shown by the China Ports Data. China's trade turnover improved in November 2022, after three months of sluggish growth in both exports and imports. Real-time port statistics provided by Elane Inc., reveal that China's top 20 ports have been handling an ever-increasing number of arriving and departing ships in November 2022, despite the lockdowns.
The total number of arrived ships in November reached 147,054, while the departures stood at 163,182, both recording all-time highs. Not only the absolute numbers, the YoY growth rate for both arrived and departed ships have also jumped in November, expanding by 29% and 44% respectively, levels that have not been observed in more than a year and a half.
The improvement in terms of volume, measured in deadweight tonnage, is even more pronounced.
Also, after the Work Conference called for an overall improvement in economic operations in 2023, there is growing confidence in a rapid recovery of the Chinese economy, with room for a robust GDP growth rate in 2023.
The Conference has assured that China will further step up policy support for economic growth in 2023, with the intensity of fiscal and monetary policy to further intensify, compared with 2022, and stepped-up support is expected to boost consumption and other areas that have been hit hard.
China is definitely poised for an accelerated economic recovery in the first half of 2023 and overall recovery and improvement are expected in the country's economic performance in 2024.
It is also expected that life and production will recover at a faster pace releasing vitality into the economy. The force of China's fiscal policy for 2023 will be at least equal to or more intensified than in 2022, with targeted efforts to the key and weak links in the economy.
This commentary was published in the China-India Dialogue
http://chinaindiadialogue.com/progress-through-stability
© Ramachandran
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