INDIA OPPOSES CHINA'S BRI AT SCO SUMMIT

India also opposes the strategy for 2030

The recent 23rd Shanghai Cooperation Organisation (SCO) summit, virtually hosted by India, discussed some key issues including regional security, economic connectivity and trade. It also saw the inclusion of Iran as a new member and opened the chapter for Belarus’ membership. While Belarus and Mongolia were invited as observer states, Turkmenistan was invited as the guest of the chair.

The summit was joined by Indian Prime Minister Narendra Modi, Chinese President Xi Jinping, Russian President Vladimir Putin, Pakistan Prime Minister Shehbaz Sharif, and leaders from four central Asian countries.

The theme of India’s SCO presidency is “SECURE,” which stands for security, economic development, connectivity, unity, respect for sovereignty and territorial integrity, and environmental protection.

New Delhi declaration

The summit issued a joint communique New Delhi Declaration, along with two separate joint statements, one on “cooperation in countering radicalisation leading to separatism, extremism, terrorism,” and the other on “digital transformation.” The Heads of State Council approved the SCO Economic Development Strategy for 2030.

Leaders decided to forge closer ties within the expanding Eurasian bloc but stressed the group is not directed against any other states.

The joint declaration said SCO members oppose bloc, ideological and confrontational approaches to address problems and security challenges. Without referring to NATO’s expansion and Western military assistance to Ukraine, the leaders were critical of the negative impact of “unilateral and unlimited expansion of global missile defence systems by certain countries or groups of countries.”

It called for an inclusive government in Afghanistan with the participation of representatives of all ethnic, religious and political groups in Afghan society.

The SCO Heads of State Council approved the Concept of Cooperation between the member states to decarbonise transport and promote digital transformation and innovative technologies to achieve greater efficiency and sustainability.

It also adopted decisions on the Regulation of the Executive Committee of the SCO Regional Anti-Terrorist Structure and the signing of a Memorandum between the SCO Secretariat and the United Nations Environment Programme.

With the inclusion of Iran, PM Modi proposed an increase in the use of Chabahar Port, located in southeastern Iran, on the Gulf of Oman, for trade and other economic activities. India feels that the International North-South Transport Corridor can serve as a secure and efficient route for landlocked countries in Central Asia to access the Indian Ocean.

Modi said that India would be delighted to share India's AI-based language platform Bhashini with everyone to remove language barriers within SCO.

Referring to Pakistan, Modi said, "Some countries use cross-border terrorism as an instrument of their policies and provide shelter to terrorists. SCO should not hesitate to criticize such nations. There should be no place for double standards on such serious matters."

In an attempt to corner India, Pakistan PM Shehbaz Sharif said, "There can be no justification for the killing of innocent people, regardless of the cause or pretext. Similarly, religious minorities should never be demonized in the pursuit of domestic political agendas."

Sharif's statement comes at a time when there are reports of Pakistan persecuting minorities.

In May, Pakistan Foreign Minister Bilawal Bhutto Zardari visited India to attend a key multilateral meeting of the SCO in Goa, and he was the first Pakistan foreign minister to visit India since 2011.

President Xi warned against attempts to foment a new 'Cold War’. He highlighted the significance of upholding multilateralism. He called upon the leaders of Russia, Iran, and other member states to resist sanctions.

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In his first international meeting since the Wagner mutiny, Russian President Vladimir Putin asserted that sanctions imposed by US-led Western countries are making Russia stronger. He told the summit that Russia would stand up against Western pressure, sanctions and "provocations". Russia views countries such as China, India and Iran as key partners in confronting the United States and resisting what it portrays as U.S. attempts to dictate the world order.

Spat over BRI

India, which holds the presidency of SCO and the G20 this year, is walking a diplomatic tightrope as relations between the West and a Russia-China partnership have been fraught due to the Ukraine war, and Beijing's growing clout in global geopolitics.

At the summit, all members except India supported China's Belt and Road Initiative (BRI) which rebuilt the old Silk Road to connect China with Asia, Europe and beyond. Also, India did not sign the SCO Development Strategy for 2030, because the document "had too many Chinese catchphrases."

The New Delhi Declaration included a paragraph reaffirming support for China's Belt and Road Initiative (BRI), which India refused to sign. Earlier too, India had declined to sign the paragraph during the Samarkand declaration in 2022.

India also raised the connectivity issue. "Strong connectivity is crucial for the progress of any region. Better connectivity not only enhances mutual trade but also fosters mutual trust. However, in these efforts, it is essential to uphold the basic principles of the SCO charter, particularly respecting the sovereignty and regional integrity of the Member States," Modi said.

All SCO members, barring India and Russia, are part of BRI, which India objects to, since a major part of its project in Pakistan runs through the Pakistan-Occupied Kashmir (PoK), called the China-Pakistan Economic Corridor (CPEC).

On Modi referring to the BRI, Foreign Secretary Vinay Kwatra said, "The references to sovereignty and territorial integrity came both in the context of the SCO charter and also in the context of the connectivity projects.”

However, Xi Jinping defended BRI and said, "China will hold the third 'Belt and Road' International Cooperation Summit Forum. All parties are welcome to participate in the activities of the forum and jointly pave the road to happiness that benefits the world."

Commenting on CPEC, Sharif said, "The China-Pakistan Economic Corridor, a flagship project of the BRI, can be a force multiplier not only for regional connectivity but also for regional stability, peace and prosperity."

Against the West

China’s focus at the summit, however, was the West, as was that of Russia, and India’s protest over BRI is not a worrying factor.

Hence, Xi said, “We uphold international fairness and justice, oppose hegemonic and bullying practices, expand the "circle of friends" of the organization, and build a partnership of dialogue rather than confrontation and partnership rather than alliance, strengthening the progressive force for maintaining world peace and stability.”

Both Xi and Putin pushed for switching to a system under which foreign trade could be settled in local currencies, a move that helps get around the use of the U.S. dollar, especially in the aftermath of sanctions following the Ukraine war.

India has refused to blame Russia for the war and has lifted bilateral trade largely by purchases of Russian oil to a record high, irking the West.

In his briefing, the Indian Ministry of External Affairs spokesperson Arindam Bagchi said, "The Russian president spoke of rumble-yuan exchange. We have also been supporting trading in national currencies."

Both Xi and Putin are expected to visit New Delhi in September as India hosts the G20 summit, and U. S. President Joe Biden and leaders of other member nations are also likely to be present.

The SCO summit took place barely two weeks after Modi was hosted by President Biden during a state visit, and the two countries called themselves "among the closest partners in the world".

And, China has repeatedly cautioned India, not to fall into the American trap. India is well aware that China is driving the relationship between India and the U.S. It is the only reason why Washington feted Modi. Hence, India would never throw its full weight behind Biden, if the China-U. S. confrontation escalates into a stand-off. India is just seeking to leverage its warming ties with the U.S. to its advantage. For India, camaraderie with China is precious, as a neighbour and both are civilizational nations.

Edited article in China-India Dialogue : 

http://chinaindiadialogue.com/expanding-the-sco-fostering-cooperation-and-connectivity

CHINA CUTS ITS US TREASURY HOLDINGS

Instead, it invests in Gold

China has been cutting down its holdings of U S Treasury securities gradually. But where are the China funds going from the US?

China, the second largest non- U S holder of U S Treasuries after Japan, reduced its holdings to the lowest in February 2023. China's holdings fell to $848.8B in February from $859.4B in January. The figure stood at $1.03 trillion at the same time last year. It was the seventh straight month of decline.

In January, the holding stood at $7.4 Trillion; it was $7.7 Trillion in February 2022, according to US Treasury data released in April 2023.

China ratcheted up its US Treasury bond purchases starting in 2000. Its buying spree peaked in 2014, dropping below the magic US$1 trillion mark in April 2022.

China has already trimmed its holdings by 34.1% over the past 10 years, including a 16.6% cut in 2022.

The reasons

China has three reasons for the move:

• It needs to diversify its foreign reserves, amid “external risks.” The risk is the trade war between the two countries.

• Beijing is wary of the US dollar’s dominance, as it is facing financial sanctions from Washington. 

• US Treasury yields declined following the US Federal Reserve’s progressive interest rate increases last year. The hikes resulted in a fall in the price of US treasury bonds.

De-dollarizing moves

China is trying to internationalize its currency, the yuan. For instance, the proportion of yuan in Brazil’s international reserves has reached 5.7%, while the Euro is 4.7%. Yuan is now Brazil’s second-largest reserve currency.

Yuan found a place in Brazil’s foreign-exchange reserves four years ago, as its US dollar assets fell to 80.24% at the end of 2022 from 89.93% in 2018.

Russia, which has been kicked out of the US dollar system and SWIFT after the Ukraine invasion, has already increased its holdings of the yuan in foreign-exchange reserves and sovereign funds, with more than two-thirds of bilateral trade settled in yuan or rouble.

Hiding in tax havens

Along with the decline in US Treasuries, China’s Treasury holdings in the tax havens, the Cayman Islands jumped by $38.5B and Bermuda by $7B.

China may be hiding some dollar assets in there, to sidestep Western sanctions

Investing in gold

Beijing is replacing some of its US Treasury holdings with gold. China increased its gold reserves for the sixth consecutive month in April to 1893 tons, growing by about 102 tons, in the face of heightened political risks.

The largest single purchase of gold in February was by the People’s Bank of China, which added 25 tons. It added around 18 tons in March alone.

© Ramachandran 

LESSONS FOR CHINA AND INDIA FROM META CRISIS

Stale Vision Led to Crisis

The parent company of Facebook, Meta, cutting 11,000 jobs, or 13 per cent of its workforce, did not come as a surprise to the global techie world watchers, since it was waiting to happen. Though the tech giant has termed the retrenchment as an attempt to become “leaner and more efficient,” it is a well-known fact that American tech companies are in the throes of an unprecedented crisis. The “American dream” is falling into a dark abyss.

The Meta crisis is the beginning of a turbulent era in Silicon Valley, which so far stood as a gigantic bastion of economic power. The United States has always boasted that this bastion is recession-proof, but now the Fort has been breached; according to Crunchbase, 50,000 U.S. techies have been laid off this year alone. Elon Musk gave marching orders to half of Twitter’s workforce; Peloton, a maker of internet-connected exercise bikes, has more than halved its workforce, Robinhood, a popular stock-trading app, also has cut its labour force by 30 per cent, and fin-tech platform Stripe has announced layoffs. Google and Amazon have decided to lay off 10,000 employees, each.

The crisis of Meta

In the case of Meta, apart from inflation, rising interest rates, and recession, aggressive COVID-era expansion is partly to blame. Meta increased its workforce by nearly 60 percent during 2020- 2021. Facebook grew its staff by 28 per cent, to 87,314, in the 12 months ending in September.

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"At the start of COVID, the world rapidly moved online, and the surge of e-commerce led to outsized revenue growth," Mark Zuckerberg, founder of Meta and FB, wrote, announcing the layoffs. "Many people predicted this would be a permanent acceleration that would continue even after the pandemic ended. I did too, so I decided to significantly increase our investments. Unfortunately, this did not play out the way I expected. I got this wrong,” he lamented.

He got it wrong, because, he was not pursuing realistic dreams. The social-media platforms of Meta, such as Facebook, Instagram and WhatsApp, have a traditional business model that relies on advertising. It was hit hard by the recession. Several digital advertisers pulled back in the face of inflation and the instability caused by the Russia-Ukraine conflict, and customers scaled back spending. As the tech companies tightened their belts, the labour force became the first casualty.

In October, Meta posted its second-quarter revenue decline and its profit was cut in half from the prior year. Valued at more than $1 trillion in 2021, Meta's market value has since plunged to around $250 billion. It ceased to be the behemoth, once it was. Meta's stock lost more than 71 per cent of its value this year, and it became the worst performer in the S&P 500.

The gamble of the metaverse

Once a niche concept contained in the cyberpunk novel, Snow Crash (1992), the metaverse became a buzzword when Facebook rebranded itself as Meta on October 28, 2021.

The metaverse is a virtual world that exists parallel to the physical world. In the metaverse, our digital and physical lives are overlapping, in the domains of work, socialization, productivity, shopping, and entertainment. It is enabled by advanced technologies, such as VR, AR, and MR. It is the next-generation internet for businesses, investors, and developers.

The entry point for the metaverse is, Extended reality (XR), which is a combination of augmented, virtual and mixed-reality environments that are accessible and interactive in real time. It is the pioneer of inventive applications in fields such as gaming, entertainment, enterprise solutions and simulations, as well as in military and defence.

Also, blockchain technology will play a major role in building the metaverse. While the proponents o this aspirational technology are western, the global metaverse discourse is influenced by economic giants such as China and South Korea. An array of positive factors suggests that India has a prime role to play.

The Zuckerberg company, Meta's crisis came as it is taking a gamble on building the metaverse. The hiring boom at Meta has focused on building immersive digital realms accessed through virtual reality. Zuckerberg has maintained that it will be the next great computing platform after mobile phones. He expects metaverse to replace some in-person communication. Since it is a gamble based on a stale vision, the crisis was inevitable.

There seems to be little hope for Meta’s technology which Zuckerberg claims is his company’s and our future. But,  none of us or the world at large has so far viewed him as the Messiah. Also, the multipolar world has ceased to view the U.S. as the saviour, anymore. 

Renowned technologists, who study designing use behaviour in virtual worlds, had always felt that Zuckerberg’s vision is stale and the future of Meta is on the rocks. So, the stale vision is to be blamed for the current crisis, rather than the global recession. 

There are 3D multiperson chat environments that were popularized by online games, Second Life, and now Horizon Worlds. Microsoft’s V-Chat, Comic Chat and V-worlds and the tools for creating and customizing digital avatars were the initial forays into Zuckerberg’s dream world. But it was evident to Microsoft in the 1990s itself that trying to harness the potential of the metaverse amid dramatic shifts in our digital lives, was not worth the extravaganza.

The dreams seem endless, and it is like kids create and then abandon, as in Minecraft. The magical architecture of virtual worlds is possibly a critical ingredient in the user experience and hence Meta is keen on creating 3D environments for people to hang out. But techies at Microsoft had found that these “stage sets” did not play a particularly critical role in shaping user behaviour. Instead of roaming in the virtual space, one has to work one’s way into the social structure to figure out how are things happening. People don’t encounter any sense of real life while wandering around for hours in virtual life. The virtual gathering space then becomes boring and ultimately they become empty and abandoned. This is termed a “cold state problem” by former Microsoft technology expert, Robert Fabricant.

Meta's metaverse division posted a loss of $ 9.4 billion in the first nine months of 2022, but Zuckerberg pumped in $ 36 billion between January 2019 and September 2022 to prop it up in the hopes that, at some point, people will be fools to show up at the party. When the party was about to begin, the world was pushed into penury, and no one turned up!

A decade ago, when Facebook was at a critical inflexion point as a desktop web platform with a very limited HTML 5 browser-based mobile offering, the leadership failed to recognize the smartphone revolution. They didn’t shift their focus to a mobile-first product offering in time. By pursuing the metaverse, Zuckerberg is imagining that Meta is defining the next paradigm. But in doing so, Meta has forgotten the fundamental lesson of mobile computing: Only the computing experience that is with people all the time wins. Computing that accompanies people in the world will always win over computing that takes them out of the world. 

Hence, nobody is really playing Horizon Worlds, Meta's free-to-play virtual reality metaverse that lets users create and visit “worlds” with friends or strangers. WSJ reports that of all the user-created worlds in the game, only about nine per cent are visited by more than 50 players. The rest are never visited by anyone, except Zuckerberg. The end result is empty, barren digital lands.

So, Zuckerberg’s metaverse vision is just a nostalgia trip to escape a world of complex, multilateral reality and hence his metaverse has progressed very little, scripting an American tragedy. The creative imagination of a brilliant student can any time overtake Meta’s flimsy vision and invent a compelling digital world. And it is beginning to happen.

China and metaverse

China’s Fintech Development Plan for 2022-2025 mentions metaverse while discussing reshaping financial services with intelligence, as a key task. The plan proposes that “relying on the features of 5G with high bandwidth and low delay, visual technologies such as virtual reality (VR), augmented reality (AR), and mixed reality (MR) will be deeply integrated with banking scenes to promote physical branches to upgrade to multi-horizontal, immersive, and interactive smart branches.”

In a paper on metaverse in October 2021, the China Institute of Contemporary International Relations (CICIR), linked to the Ministry of State Security, warned of the need for lawmakers to deal with virtual crimes. Similarly, in November 2021, the government of Zhejiang province organized a “metaverse industry development symposium.”

On November 1, China's Ministry of Industry and Information Technology unveiled a five-year plan for 2022 to 2026, for the development of the VR industry, aiming to achieve a target exceeding 350 billion yuan ($48.1 billion) in 2026.

This action plan is China’s first national-level policy that supports metaverse development. The document bats for creating fundamental technologies that support immersive AR, VR, and mixed-reality experiences. The policy calls for innovation in fields like full-body motion capture, gesture, eye, expression tracking, and technologies for rendering graphics.  

In China, so far over 16,000 metaverse-related trademark applications have been filed. Six of China’s tech giants – including Baidu Inc, Alibaba Group Holding Ltd, and Tencent Holdings Ltd (collectively known as BAT) – made it to the top 10 firms globally, that filed the most VR/AR patent applications in the past two years. In 2019, most of these developments happened in the fields of retail shopping, education, gaming, marketing, information display, and industrial manufacturing.

China’s VR industry accounted for about 44 per cent or US$8 billion of the global market, by the end of 2020. Big Chinese firms lack the expertise to develop VR devices, and they are investing in startups. China has over 900 million smartphone users, making VR accessible through smartphones, a priority.  AR generates less revenue than VR, and AR revenues reached RMB 21.3 billion (US$3.09 billion) in 2021. Virtual reality and virtual idols are booming, comprising an industry that is worth RMB 51 billion (US$8 billion) and RMB 3.5 billion (US$548 million) respectively.

Deloitte-China estimates that the metaverse market in China will hit 40 trillion yuan ($5.79 trillion) by 2030, equivalent to 20 per cent of China's GDP, and the electronic products and wearable devices in the metaverse will be worth $100 billion. 

According to a report by Morgan Stanley, leading Chinese tech firms have already begun to invest in a metaverse market that may be worth up to US$8 trillion in the future. J P Morgan, in a September report, suggested that the metaverse could triple China’s online-gaming market to $131 billion from $44 billion. The Bank estimates a $4 trillion total addressable market (TAM) for the metaverse in China from “converting offline consumption across physical goods and services.”

The metaverse development will have a notable impact on the entire technology, media and telecom (TMT) ecosystem. Tencent, NetEase, Bilibili, Sea, Krafton and Bandai Namco stocks could benefit from the metaverse.

Software and service vendors, such as Sight Plus, Hisense, and Mayitegong, have entered the AR market. Baidu launched a metaverse app on Chinese history, in December 2021, called “Land of Hope.” Tencent, the creator of WeChat, launched on the QQ platform, a new feature called Super QQ Show, which introduced a 3D interactive space where users can interact and play games together. 

A new app called Jelly, launched this year and developed and owned by Beijing Yidian Entertainment Technology, allows users to create online avatars of themselves and engage with up to 50 pals. It surpassed WeChat to become the most downloaded app in China’s iOS store. Byte Dance, the parent firm of TikTok, has designed two metaverse apps: Party Island for the Chinese market, and Pixsoul for the Southeast Asian one.

Metaverse was a key theme of the 5th World Artificial Intelligence Conference (WAIC2022), in Shanghai in September. Chinese internet platforms offered a "metaverse-like" viewing experience enabled by 5G and virtual reality (VR), during the Qatar World Cup soccer carnival.

Metaverse in India

China’s neighbour India is in the vanguard to build the metaverse. With the Government trying to foster a digital economy worth up to $1 trillion, the market of video streaming and gaming is seeing fresh heights. Reports project that the Indian gaming market will more than triple to $7 billion by 2026. 

 

India released its National Blockchain Strategy in December 2021. The pilot of the blockchain-backed Digital Rupee will be issued by the Reserve Bank of India, in December. The spectrum auctions to the rollout of 5G mobile services, would accelerate demand for cloud applications – including those for gaming and the metaverse. 

 

The operational challenge of building the metaverse remains, and if India is to take a leading role, investments in the private sector need to accelerate. The 18 months to August 2021 saw over $1bn of capital infused into the local video games ecosystem – more than the preceding five years combined.

 

Deloitte has predicted that the metaverse industry in India could have an economic impact worth between $79 billion and $148 billion by 2035. 

The report notes that India is among the pacesetters in the industry and that India was one of the first jurisdictions to include the metaverse in its policy considerations on cyberbullying and sexual abuse. With the country inching toward unveiling the Digital India Act, it is expected that a proper framework will be established to prevent the crimes of inciting violence and spreading misinformation on the metaverse.

India has stated that it will provide an enabling environment for Web 3 firms to experiment with new offerings for consumers in the industry. Union Minister of State for Skill Development and Entrepreneurship Rajeev Chandrasekhar announced that nothing prevents firms from exploring metaverse or non-fungible tokens (NFTs).

However, the country has signalled to use its G20 presidency to push for global digital asset regulations. The government has been relying on distributed ledger technologies (DLT) in recent months, using them for its central bank digital currency (CBDC) and streamlining local land registries’ operations.

The future of the metaverse can likewise be a big contributing factor to the development of the virtual economy. 

The ethical questions on meta-governance

India is debating the regulation of the technologies that will underpin the metaverse. The budget levies a 30% tax on income from transfers of Virtual Digital Assets (VDAs). Owning and trading non-fungible tokens (NFTs) is a pathway towards a new digital economy and this will impact the development of the metaverse. 

Beyond crypto, the metaverse raises ethical questions on privacy and security. Online risks may worsen the metaverse, through pervasive, intrusive and unwanted contacts. Pioneering efforts to find governance mechanisms for virtual worlds have to be in place and should be supported with digital literacy, safety, security and privacy which guarantee meaningful participation for participants in online communities while navigating through harmful content and behaviours.

Within the tech ecosystem, several standards have been proposed for the metaverse, but the incentives for adopting them are governed by the self-interests of a few western companies in taking control. It will not be possible for a single metaverse to exist if laws for monetising and moderating the metaverse are made and enforced differently around the world. Until recently, the western policy agenda has dominated companies, products, and rules.

The European Commission has suggested that plans to create an all-encompassing virtual reality environment would pose new challenges for antitrust regulators in the EU and has demanded further scrutiny of the development of the economic models of the metaverse. 

South Korea recently created a ‘metaverse alliance’ to facilitate the development of virtual and augmented reality platforms. In China, a metaverse industry group, the Metaverse Industry Committee, formed under the state-supervised China Mobile Communications Association in December 2021, has the stated objectives of strengthening innovation and integration among metaverse builders, organizing the training of professionals, and promoting new thinking.

India always has espoused the doctrine, of Vasudhaiva Kutumbakam, a Sanskrit phrase found in ancient texts such as Maha Upanishad, which means “The world is one family”. This expression is a constant refrain in Prime Minister Narendra Modi’s speeches. During his speech at the Davos Agenda 2022, he indicated that a collective and synchronized, global approach is needed towards addressing challenges with cryptocurrencies. 

This policy of oneness should be applicable, in the case of the metaverse, too. All the Indian scriptures expound on the victory of good over evil, and in a war between reality and virtual reality, in a conflict between reality and metaverse, reality has to be victorious and spread its wings even in the mythical and mysterious horizons.

© Ramachandran 

TWO SESSIONS AND CHINA'S GROWTH TRAJECTORY

What to Expect in China's Economy

China's Two Sessions or lianghui of the NPC and CPCC in 2023 have lifted hope to new levels by designing a blueprint for sustainable development, with the true essence of socialism with Chinese characteristics, as envisaged by the 20th National Congress of CPC.

The Two Sessions refer to the annual meetings of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC), which preside over the main economic agenda for 2023, as well as significant governmental restructuring. The CPPCC is a consultative body that includes over 2172 members from various segments of Chinese society. The NPC with 2977 deputies is China’s top legislative body. The Two Sessions are the only fixed annual meetings of these two political bodies.

The annual Government Work Report (GWR) presented at the session contained both the achievements and challenges of 2022 and the country’s socioeconomic development agenda for the year.

The goal for China is to realize socialist modernization by 2035; This rejuvenation is also part of achieving the Party's second centenary goals.

China Rebounds

In the first year of re-opening after the pandemic, China is emerging from its bruises; The lifting of COVID-19 restrictions in late 2022 has already boosted economic sectors.

China’s factory activity for February 2023 bounced further into expansion territory, according to data from the National Bureau of Statistics, released on March 1. The official manufacturing Purchasing Manager's Index (PMI) reached the highest level in nearly 11 years in February – 52.6, proving China’s factory activity has expanded at the fastest pace in more than a decade. The world’s second-largest economy staged what economists are calling a very rapid rebound after reopening from zero-Covid. It is the highest level since April 2012. In January, the reading was 50.1, a sharp increase from 47 in December, as the pandemic restrictions were starting to fade. A reading below 50 indicates contraction, while anything above that shows expansion.

The PMI for large enterprises rose by 1.4 points to 53.7, while the reading for small enterprises increased by 4 points to 51.2. The PMI for small businesses was back in expansion territory for the first time since May 2021.

Non-manufacturing PMI in February also grew further to 56.3 from January’s 54.4, when it saw a sharp improvement backed by a recovery in services and construction activity. It recorded its best level in two years. The Caixin/Markit manufacturing PMI, a private gauge of the country’s factory activity, jumped to 51.6 in February from 49.2 in January. It was the first expansion in seven months.

The official PMIs mainly cover larger businesses and state-owned companies, while the Caixin readings are more focused on smaller businesses and private companies.

The rapid expansion came amid the accelerated resumption of factory output after the Chinese New Year holidays.

The broad-based improvements for both Manufacturing and non-Manufacturing PMIs reflect the solid momentum of post-reopening recovery. While stimulus policies are expected, the People’s Bank of China would be mindful of inflation risks and may tilt to a natural policy once the economy is back on track.

Buoyed by the Two Session's outcome, there will be further improvement in consumption later this year. To further expand domestic demand in 2023, Two Sessions has proposed that 3.8 trillion yuan ($550 billion) be allocated for special-purpose bonds for local governments, compared to 3.65 trillion yuan in 2022.

But there remains a range of challenges, including sluggish domestic demand, persistent problems in the housing market, and unequal development across the country. The economic and legislative decisions made at the Two Sessions are of high importance to business leaders and foreign investors in China; they serve as a valuable window into China’s politics and reveal Beijing’s priorities and policy direction for the future.

GDP to Grow

Shortly after China’s factory activity data was released, Moody’s announced that it expects China’s economy to grow by 5% in 2023, an upgrade from its previous outlook of 4%. They expect pent-up demand for non-traded services to support a consumption rebound starting this spring.

After the data became public, Julian Evans-Pritchard, head of China economics at Capital Economics, wrote in a research note, "They underscore just how quickly activity has bounced back following the reopening wave of infections," adding that his firm's 5.5% growth forecast for China this year may be too conservative. The IMF recently forecast GDP growth of 5.2 percent for China this year and 2.9 percent for global growth.

Hence, the Two Sessions has set a realistic annual GDP growth target of 5 percent. In 2022, the GDP growth target was set at “around 5.5 percent”. However, China missed the target, growing 3 percent year-on-year, due mainly to the large outbreaks of COVID-19. But, China's GDP exceeded 100 trillion yuan ($14.55 trillion) for the third consecutive year in 2022 despite complex external challenges. It is expected to exceed 130 trillion yuan ($18.84 trillion) in 2023, an increase of about 10 trillion yuan from the previous year.

In reflection of the buoyant sentiment in China, provincial and municipal governments have announced ambitious local GDP growth targets for 2023: At the higher end, the provinces of Hainan, Tibet, Xinjiang, and Jiangxi have set targets of between 7 and 9.5 percent. At the lowest end, Beijing, Tianjin, Shanghai, and Guangdong have set targets of between 4 and 5.5 percent. The average of all the regional growth targets is around 5.9 percent.

An ambitious growth target means more effort into short-term growth, which could come in the form of more infrastructure investment, incentive policies, and consumption vouchers. A lower target allows the formulation of longer-term development plans to address systemic issues.

Two Sessions has set the deficit-to-GDP ratio at 3 percent for 2023, which is 0.2 percent higher than last year. It is a reliable indicator of a country paying its debts. Generally, a low debt-to-GDP ratio measures a healthy economy that doesn’t accumulate future debts.

FDI to Increase

China's Central Economic Working Conference (CEWC), held in December, has highlighted the need to increase foreign trade and investment cooperation to stimulate growth and proposed expanding market access.

Foreign direct investment into China grew by 14.5 percent from a year earlier to CNY 127.69 billion in January 2023. In dollar terms, FDI increased 10 percent to USD 19.02 billion in January. Manufacturing and high-tech industries continued to attract high levels of foreign investment despite the economic slowdown, and some regions, such as the EU, increased investment in China significantly.
Certain industries saw above-average rates of investment growth in 2022. Actual use of foreign capital in manufacturing reached RMB 323.7 billion (approx. US$47.8 billion), a year-on-year increase of 46.1 percent. This accounted for 26.3 percent of all foreign capital used in the country in 2022, a proportional increase of 7.8 percentage points from 2021.

Article in China-India Dialogue

The countries that saw a relatively high increase in investment in China included South Korea, Germany, and the UK, with investments increasing 64.2 percent, 52.9 percent, and 40.7 percent year-on-year, respectively. Investment from the EU also saw rapid growth, with investment from the bloc increasing by 92.2 percent year-on-year, a significant reversal from the 10.4 percent year-on-year decrease seen in 2021.

Investment from Belt and Road countries grew 17.2 percent, and from the nine ASEAN countries grew 8.2 percent.

It is likely that the government will introduce new incentives and beneficial policies for foreign investors in 2023. These could potentially target key development zones and emerging and high-tech industries.

The total amount of investment that has been made public by 18 provinces and regions for domestic projects reached nearly 10 trillion yuan recently. The Ministry of Finance will further expand the issuance of local government special-purpose bonds to support the construction of major domestic projects. New issues exceeding 4 trillion yuan in 2022 supported more than 30,000 projects.

In February, the New Export Orders Index was up 6.3 points to 52.4, ending 21 months of contraction and supporting domestic demand and the recovery of small firms.

Structural Changes

The approval of small structural changes to the government is a regular occurrence in China. They have a significant impact on how policy is formulated and implemented over the next five years. The structural changes made in 2018, when the 13th NPC convened for the first time, were wider and saw the creation of new ministries and branches of government, including the National Supervisory Commission, an anti-corruption agency.

This time, there was a focus on restructuring the Ministry of Science and Technology (MST) and establishing a National Financial Regulatory Administration. Directly under the State Council, China's cabinet, the new administration will replace the China Banking and Insurance Regulatory Commission (CBIRC) and be in charge of supervising the financial industry except for the securities sector. The new administration will also transfer certain functions of China's central bank and the securities watchdog China Securities Regulatory Commission (CSRC).

The new set-up is on the lines of the Central Financial Work Commission (CFWC), a financial supervisory body set up in 1998 in the wake of the Asian Financial Crisis, which was dissolved in 2003.

China will also establish a national data bureau, to boost the digital economy. It will be administered by the National Development and Reform Commission (NDRC).

Policy Changes

Since economic growth and recovery are at the forefront of the 2023 agenda, the legislative changes and policies mooted by the Two Sessions focused on areas such as advancing industry development, production, and consumption. Policies aimed at propping up strategic industries - healthcare, semiconductors, green technology, and agriculture to improve food security and self-sufficiency, will get priority.

In January 2022, China released the Opinions on Promoting Standardized, Healthy, and Sustainable Development of Platform Economy, which endorsed the international expansion of tech companies. China has reassured tech companies that the government would support them in going public on domestic and overseas stock exchanges.

Considering the Western sanctions on Chinese tech companies, one major change is the passing of revision to China’s Legislation Law. A major part of the latest revision involves giving the NPC exclusive legislative authority over the "establishment, organization, functions, and powers" of supervision commissions.
It clarifies that the National Commission of Supervision can formulate supervisory laws and regulations in line with the Constitution, law and the decision of the NPC Standing Committee. 

Last year, China unveiled its Anti-Foreign Sanctions Law to respond to reckless sanctions imposed by certain foreign countries. It is a basic foreign policy law, to make provisions for countermeasures. For acts that undermine China’s sovereignty, the law contains relevant provisions to firmly counter such acts.

China has already taken a series of moves to counter foreign sanctions. In 2021, the NPC passed an anti-sanctions law, providing legal backing for sweeping retaliation against any individuals, their families and organisations responsible for imposing sanctions against the country. Those steps include denying visas and freezing an individual’s assets.

The amended Law will further devolve certain legislative powers to provincial and municipal governments, to draft regulations on matters such as urban and rural construction and management, environmental protection, and historical and cultural protection.

Thus, the outcome of the Two Sessions is pro-growth. It means more support for industry, possibly through further tax incentives, more market access, and measures to boost consumption, in a robust environment of multilateralism.

Article in China-India Dialogue: http://chinaindiadialogue.com/chinas-economy-what-to-expect

In China Pictorial: http://china-pictorial.com.cn/chinas-economy-what-to-expect

CHINA TO STRIVE FOR PROGRESS THROUGH STABILITY

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. 

My article

Despite pandemic disruptions, China's economic output is likely to exceed $17.2 trillion in 2022. Over the past three years, China's GDP growth rate averaged 4.5 percent, higher than the global average.

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.

Yangpu container terminal

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