First off, Happy Chinese New Year / Lunar New Year to those that celebrated it last week! I hope those who celebrated it had some good dumplings and red pockets. Now quickly to some less-so-happy China news.
Last week reports came out that Xi Jinping (President of China) would not be meeting Trump for further Sino-US trade relations discussions until March 1st, which is the “Armageddon” day for when the imposed tariffs between the two largest global economies will be enacted.
Now, I am sure many of the people who read this blog know a fair amount more about America than they do about China (because most of my readers are North American), and so I’d like to shed some light on China’s current political-economic situation as well as their history.
The Chinese have been saying this for a while in terms of challenging America for the top world country: China is simply regaining their top throne. China is a rising beast and she is not one to easily look over. With over 5000 years of history, credited for inventing gun powder, paper, the printing press, and the compass, and advancing with the new modern 4 greatest innovations, China is a country rooted in rich history and populated with motivated individuals.
Economically, it wasn’t really until the turn of the century, propelled by their entrance to the WTO in 2001, did China actually begin moving out of poverty. In fact, China today, although being the world’s second largest economy, is still considered 45% rural, proving how much more potential for development (or lack thereof of current infrastructure). The majority of the cities outside of Tier 1 (Beijing, Shanghai, Shenzhen, Guangzhou, Tianjin) are still playing catch up in the game of infrastructure and technology. Just to quickly add some perspective on the geographics of China: Beijing is the political capital, and is not part of any province of China, much like how DC is not attributed to a state. Shanghai is China’s New York and financial capital, where the Shanghai composite index and stock exchange lives. Shanghai also holds the top spot for city-GDP in China. Shenzhen is China’s Silicon Valley, with massive venture capital flooding in the area to invest in technology and RND. In fact, maybe a little too much venture capital, that a lot of these investors are not doing proper due diligence on the companies they are throwing their money at. Tencent, the world’s 5th largest company, considered China’s Google+Facebook, is headquartered in Shenzhen.
Since 2001, China became even more open economically and integrated with the global economy. At the time, this was great both for China and for America for two reasons. 1) China now had better access to global markets, FDI from the developed world, and access to better technology, while 2) America now had better access to cheap manufacturing and labor from the most populous country in the world (now standing over 1.4 billion, but soon to be surpassed by India in ~5 years).
Now with “slowing growth” of 6.6% last year (America hovers around 2-3%), China’s future outlooks for point to four integral developments: technology and intellectual property (including but not limited to AI and robotics), 5G, clean energy, and The Belt and Road Initiative.
Technology and IP
One of the driving factors of Trump’s motive to declare a trade war against China was the claim that China has been continually violating international trade agreements and stealing intellectual property from America’s innovations. Albeit, Trump isn’t wrong–estimated costs range between $225-$600 billion annually. I’ve been told by my global economics professor, who has spent more years living in China/Hongkong/Taiwan than I’ve been alive, that he has seen some Chinese companies who have offices appropriately titled “Reverse-Engineering.” And you’ve probably heard enough of Huawei in the news (the CFO getting arrested in Vancouver after allegedly lying about business dealt with Iran and Huawei stealing T-Mobile trade secrets). Huawei is perhaps one of the most recognized brands in China as it is a giant technology company with currently the world’s largest market share in smartphones. Though, if we are being completely honest, Huawei did copy the iPhone, but their innovation is by no means lacking. In fact, Huawei innovated the dual-camera system AND the water-resistance hardware (both technologies integrated into the iPhones). One of the drawbacks of moving American manufacturing to China was the exchange of intellectual property. How would Chinese companies properly assemble iPhones if they weren’t informed on the inner workings of the devices? In fact, many companies probably knew of these threats but were drawn by the cheap manufacturing labor of China. Now you can get cheap know-offs of nearly any product in China through underground markets, or Alibaba’s e-commerce subsidiaries. How China manages its intellectual property relations will be integral in its future global relations. The question is: will the rest of the world allow China to continue conducting international business unfairly? The US has had enough.
The 5G Race
The rollout of 5G and its integration with more technological devices, driven by innovation and IP, will be a catalyst in the race of economic innovation. 5G will be the network that better connects devices such as AI, robotics, smart-home devices, and overall internet connectivity and speed. AT&T has already begun rolling out its 5G networks, and it seems America will be in the lead. Within the next ~2 years, developed countries will look to be fully integrated with 5G networks, and the race between the two largest economies is on. However, 5G also makes networks more susceptible to attack and espionage; another data privacy issue.
Last year Tesla built its first factory in Shanghai, and no doubt we’ll start to see Tesla knockoff brands popping up sooner or later. But clean energy is increasingly an integral issue that not only has Xi Jinping addressed, but is quite evident in the air quality of China. Many major manufacturing plants have been moved out of the large cities to rural-suburban areas, but Beijing is still a mess of air-pollution that it almost hurts to open your eyes on regular days.
China, with its often long-term prospects, is slowly transitioning to better and cleaner energy. CNN reports in 2017:
More than 2.5 million people work in the solar power sector alone in China, compared with 260,000 people in the U.S., according to the most recent annual report from the International Renewable Energy Agency.
While President Trump promises to put American coal miners back to work, China is moving in the opposite direction.
Coal still makes up the largest part of China’s energy consumption, but Beijing has been shutting coal minesand set out plans last year to cut roughly 1.3 million jobs in the industry. The Chinese government has also moved to restrict the construction of new coal power plants.
For the first time ever, China’s National Energy Administration in January established a mandatory target to reduce coal energy consumption. It also set a goal for clean energy to meet 20% of China’s energy needs by 2030.
Analysts expect China to easily meet that target. Greenpeace noted in a report earlier this year that the country’s clean energy consumption rose to 12% at the end of 2015. Renewable energy sources account for about 10% of total U.S. energy consumption, according to official statistics.
Belt and Road Initiative
Often coined as the “Modern Silk Road”, and originally One Belt One Road (OBOR), the Belt and Road Initiative was proposed by President Xi Jinping in his first year in office in 2013. The BRI’s function is to increase China’s global affairs and facilitate trade and economic growth through a series of communal routes, railroads, ports, and other transportation devices. From Beijing to London, spanning 68+ countries, the OBOR will consist of continuous routes that connect Europe, Africa, and APAC with China, affecting potentially 4.4 billion people and cover over 40% of the world’s GDP. To truly understand the massive scale that this project is on, both economic and political factors must be discussed. This is a multi-trillion and multi-year project that will shape the next century of global trade. The biggest proponent of this project seems to be China’s large commitment to Africa and helping lift countries like Kenya and Nairobi out of poverty. However, China may pose ulterior motives in this project, and they have been providing loan financing to developing countries to help prepare infrastructure for this large international project. No doubt that China will have the leverage for global issues when the situation arises.
If you’d like to read more about the BRI, I wrote a more extensive report on it last year which you can read here.
There is no doubt that China is a beast to watch. She is quickly catching up to America and is set to surpass America by 2025, a notion that many Americans currently reject, while many Chinese are betting on.
As March 1st quickly approaches, we will see how America and China’s relations will fair. Trump and Xi are not set to meet before the March 1st deadline where tariffs will be enacted, but you can surely bet that officials from both sides will continue discussing potential resolutions.
At the very least, we wish to avoid the Thucydides trap, a theory that dates bate to the Peloponnesian war between Athens and Sparta which states that when a rising party (China) threatens the established power (America), that war would ensue. Right now, China needs to fix its corruption and the constant dancing around international affairs guidelines and regulations, while America needs to figure out how to manage its position (and potential transition) as the current global power. Depreciating relations between the two largest economies is surely unsettling for global outlooks. So far we are on the brink of an economic trade war, which doesn’t seem too bad compared to straight up physical war. But let’s not forget why Japan was enticed to attack Pearl Harbor (hint: it was economic sanctions).
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