Elon Musk is Beijing’s ideal foreign investor; Exclusive Insight: Why has Japan's Economy Failed to Transform? Three Pillars are Essential for Innovation
Wall Street gives crypto a chance; Dimon Says JPMorgan Will Be in China for Good and Bad Times; More than half of South Korea’s foreign-owned homes belong to Chinese buyers
Welcome to this issue of The China Brief. Today is May 31, 2023 . Here at The China Brief, we bring you the latest news on China's politics, economy, and society from global media sources, along with exclusive expert analysis. If you find our content helpful, please subscribe to our newsletter.
Why has Japan's Economy Failed to Transform? Three Pillars are Essential for Innovation
Xin Jisi
In my previous articles, I pointed out that the fundamental reason for the downturn of the Japanese economy since the 1990s is that the engine propelling economic growth has been slow to transition from imitating and adopting American and European technologies to independent innovation. The asset bubble that emerged in the Japanese economy post-Plaza Accord merely served as a catalyst. In this article, I will provide a brief explanation as to why Japan's economy has failed to transform.
When economic growth is driven by innovation, the most prominent characteristic is the prevalence of "creative destruction": new innovations completely supplant previous ones, completely pushing old products and enterprises out of the market.
For instance, traditional mobile phones ousted pagers, and smartphones replaced traditional mobile phones. Enterprises dealing with pagers and traditional mobile phones gradually went bankrupt, closed down, and exited the market. Consequently, employees in these old companies faced unemployment.
In essence, innovation has both pros and cons: On the positive side, new technologies and products enhance production efficiency; on the negative side, they can be "destructive," shattering some existing businesses and jobs.
There are three essential pillars for promoting innovation:
Substantial investment in universities and research institutions, ensuring academic freedom, research freedom, and financial autonomy for researchers. The rationale behind this is simple: universities and research institutions are the source of innovation. Just as no one can predict what the next generation of phones, the internet, or cars will look like, no one can know which direction innovation that propels technological frontiers "should" take. The direction of innovation should be sensed, grasped, and decided by researchers, and it may require trial and error. During the phase of imitation and technology introduction, these are not necessary, and sufficient investment in vocational education and undergraduate education will suffice.
A competitive industry structure. When economic growth is driven by imitation and technology introduction, it's sufficient for an industry to have one or a few large enterprises. The government assigns them the task of imitation and technology introduction, and rewards are set for success. However, when economic growth is driven by innovation, the direction of research is uncertain. No one knows in advance what the next generation of technology will look like, so we cannot rely on a few large enterprises in the industry to innovate, because they might all fail. The only feasible way is to encourage competition and have numerous businesses within an industry strive for innovation. Silicon Valley in the United States serves as a prime example.
A financial system that relies more on equity financing. As mentioned earlier, when imitation and introduction of technology are the goal, the tasks are specific and relatively simple. In this phase of economic development, bank loans are sufficient to support enterprise growth. Specifically, a bank loan is a relatively simple contract: regardless of the market benefits brought about by the imitation or introduction of technology, enterprises only need to repay the principal and interest on time according to the loan contract. Everything is predetermined.
However, the difficulty and risks associated with innovation are much higher; there is the risk of failure, as well as the risk of being replaced by a new innovation even if successful. Bank loans clearly cannot support such high-risk economic activities. For simple contracts like bank loans, usually with lower interest rates, the results of innovation are too uncertain and the risks too high. Investors in innovative enterprises often obtain company shares through equity investment. This ensures their investment and when the innovation is successful, they can reap substantial benefits (unlike the relatively low fixed interest of bank loans) and also ensure they have a certain degree of control over innovative enterprises. They can participate in management, obtain information in a timely manner, and steer the direction of innovation. At the same time, if they find any issues with the enterprise, they can decisively stop further investment.
Wall Street gives crypto a chance
Financial Times
In a meeting with entrepreneur Elon Musk, China said it hopes to maintain "constructive and stable" relations with the US. Analysts believe President Xi Jinping is adopting a less confrontational stance ahead of a US-China meeting scheduled for April, and the eventual easing of US import tariffs on Chinese goods. Meanwhile, Chinese tech company Huawei is reportedly building its own voice-assistant technology to rival Amazon's Alexa and Google's Assistant. Huawei's offering is expected to launch in the third quarter.
Wall Street firms are building their own digital currency trading platforms in a bid to take on established crypto companies such as Coinbase and Binance. The banks aim to capitalise on their existing client relationships, and their expertise in keeping money safe. Members of the finance industry have cited regulatory hurdles as a significant obstacle to asset management firms buying digital currencies. A lack of safe, robust platforms was another reason cited for the banks' development of their own tools.
Investment funds now pose a greater risk of insider trading than single-company share purchases, according to the Financial Times. Funds' managers often buy stakes in businesses targeted for acquisition and instigate deal activity as a result. US watchdog the Securities and Exchange Commission (SEC) has expressed alarm at the potential for fund managers to receive tips before investing. Although the SEC has announced a crackdown, experts claim closeness between funds' managers and business leaders breeds an atmosphere ripe for insider trading.
Dimon Says JPMorgan Will Be in China for Good and Bad Times
Bloomberg
JPMorgan CEO Jamie Dimon has said that his firm will remain committed to doing business in China despite escalating political tensions between the US and China. Meanwhile, the world's largest economy is continuing to attract foreign investors who, after three years of strict Covid restrictions, are keen to recalibrate their approach and capitalize on President Xi Jinping beginning his unprecedented third term. The situation is prompting other global banks to have a fundamental rethink about their financial ambitions in the country.
More than half of South Korea’s foreign-owned homes belong to Chinese buyers
South China Morning Post
More than half of foreign-owned homes in South Korea are owned by Chinese buyers, according to the Land, Infrastructure and Transport Ministry, which has also revealed that there are now 83,512 homes in South Korea owned by non-citizens. The data, published for the first time and which demonstrates the extent of Chinese property ownership in Seoul's real estate market, is thought to be part of President Yoon Suk-yeol's aim to regulate foreign ownership in the country. While Chinese buyers lead the way with 54% of foreign-owned homes, US citizens account for a further 24%.
Hong Kong insurers’ sales to Chinese visitors jumped 28-fold in first quarter
South China Morning Post
Sales of life insurance policies to mainland Chinese visitors in Hong Kong rose 28-fold in Q1 2022 to $1.23bn, from $345m a year before. Leading insurers, including AIA, HSBC Life, Manulife and Prudential, benefited from pent-up demand following the full reopening of the Hong Kong-mainland border on 8 January 2022. Edward Moncreiffe, CEO for Hong Kong and Macau at HSBC Life, said sales had already surpassed pre-pandemic levels in 2019, adding that the company expected continued strong demand for low-maintenance insurance products with secure returns. Overall new life insurance sales rose 10.7% to $47bn in Q1.
China to join Indonesia's multilateral naval drills despite rising tension
Reuters
China is to send its Zhanjiang destroyer and Xuchang frigate to the 2023 Multilateral Naval Exercise Komodo in Indonesia, which is also being attended by countries such as North Korea, Russia, South Korea and the US. Statements by the Chinese and US governments suggest both nations are ramping up their military participation in the region to support allies and partners and to combat rising tension over territorial disputes. U.S., Japanese and Filipino forces are also holding a maritime exercise in the South China Sea this week, while China plans its own joint drill with the ASEAN regional grouping.
Hong Kong Insurance Sales to Chinese Visitors Soar 28-Fold
Bloomberg
Hong Kong’s Insurance Authority has said sales of insurance to visitors from mainland China surged nearly 28 times in the first quarter, recovering to HKD9.6bn ($1.2bn) or 75% of the level recorded in the same period in 2019. Mainland Chinese visitors accounted for 20.5% of individual insurance sales in the first three months, making up nearly £2bn of sales. AIA Group and Prudential reported upbeat results from their Hong Kong units, thanks in part to the return of Chinese visitors.
Elon Musk is Beijing’s ideal foreign investor
Reuters BreakingViews
Elon Musk’s recent visit to China highlights the billionaire’s key role in the country’s electric vehicle (EV) industry and his willingness to cooperate with authoritarian regimes. Musk’s decision to build the world’s largest Tesla factory in Shanghai in 2019 was crucial to developing China’s robust EV supply chain, which helped it overtake Japan to become the world’s top automobile exporter in Q1 2022. Although competition has diluted Tesla's market share, its China sales have consistently grown at triple-digit rates, touching $18 billion in 2022, up from $3 billion in 2019. Worries that Musk’s recent acquisition of Twitter would damage Tesla’s position in China were misplaced, as Musk has halted the practice of flagging Chinese state-affiliated media and has been more inclined to comply with requests to silence opposition party critics inside countries like India and Turkey. Finally, Tesla’s success in China is useful for officials battling the narrative that investing in the country has become too risky under President Xi Jinping, especially for foreign firms with valuable technology.
China says it took 'appropriate' action after its journalists lost Indian visas
Reuters
China's foreign ministry has stated that it took "appropriate action" in response to India's treatment of Chinese journalists following reports that Beijing denied visas to Indian reporters. The Wall Street Journal reported on Tuesday that both China and India have ousted nearly all of each other's journalists over recent weeks, escalating the divide between the nations.
Chinese battery cash will fuel Europe’s EV drive
Reuters BreakingViews
Investments from China into foreign plants and projects that power electric cars has quadrupled to $15bn, with most of the investment going to the EU, particularly into battery makers such as CATL, Envision, and EVE Energy. According to Rhodium data, global investments in batteries from China quadrupled to €14.2bn last year from the year before. In addition, investments in projects to construct plants in Europe amounted to €4.5bn, surpassing spending on mergers and acquisitions. The cheaper costs of batteries and China’s dominance in the lithium industry, with the country responsible for 40% of deals over the last five years, could make the market tough for European battery makers such as Northvolt to compete, while batterymakers such as CATL can expect greater scrutiny from regulators over subsidies after new rules came into force in January.
JPMorgan's Dimon says US, China need to have 'real engagement'
Reuters
JPMorgan CEO Jamie Dimon has called for "real engagement" between the US and China during his first visit to the country since he sparked a backlash with comments about the bank outliving China's ruling party in 2021. Speaking on the sidelines of the three-day JPMorgan Global China Summit in Shanghai, Dimon said the nations' disputes over security and free and fair trade are "resolvable" and he favours "derisking" instead of decoupling. The US bank has expanded its presence in China through newly acquired licences and increased stakes.
HSBC’s US$3 billion fund targets China’s start-ups as new economy’s role grows
South China Morning Post
HSBC is set to boost its lending scheme for start-ups with the creation of the HSBC New Economy Fund. Taking advantage of Hong Kong's play as a hub for tech and innovation firms, the bank will combine existing schemes and more than double its lending capacity to $3bn, focusing on technology firms, healthcare, life sciences, and climate, consumer and industrial start-ups. Analysts predict it will not only expand the bank's business opportunities, developing relationships with emerging entrepreneurs, but also increase the size of its clientele for the future, as start-ups become bigger and more established.
Xiaomi Adds Indian Assembler to Revive Local Smartphone Push
Bloomberg
Chinese smartphone manufacturer Xiaomi is to begin outsourcing some of its smartphone production to Indian firm Dixon Technologies, according to Rajeev Chandrasekhar, a technology minister in India. The move follows heightened regulatory scrutiny of Chinese firms operating in India and intense competition, and builds on the relationship Xiaomi already has with Indian contract manufacturers, such as Dixon and Optiemus Electronics. Dixon already produces smart televisions for Xiaomi, with Optiemus recently selected to make the smartphone manufacturer's Bluetooth neckband earphones. Xiaomi aims to source more components from India.
China's Baidu launches $145 million venture capital AI fund
Reuters
Baidu is establishing a venture capital fund worth ¥1bn ($145m) to support start-ups developing content generated by artificial intelligence (AI) applications. At the same time, it has announced a competition for developers to build applications or integrate its ERNIE (Enhanced Representation through kNowledge IntEgration) model into their existing output. Baidu revealed its own AI-powered LLM (large language model) in March, after which e-commerce firm Alibaba followed suit. According to a report this week, 80 Chinese organisations have launched their own LLMs since the start of last year, with releases from the country this year slightly ahead of the US.
ASML Sees Impact From China Chip Curbs Offset by AI-Driven Demand
Bloomberg
Dutch chip manufacturer ASM International has said that export controls on semiconductor sales to China will not have an impact on sales. ASM's CEO, Benjamin Loh, said that the company had been unaffected by US export restrictions and is still able to sell to Chinese customers. He went on to say that demand for data will grow eightfold over the next decade, leading to demand for large amounts of memory that ASM could supply, while doubts remain that the US and China would be able to successfully decouple due to the level of complexity within the chip industry.
China's Geely in early talks to enter Thailand EV market -sources
Reuters
China’s Geely is considering entering Thailand’s EV market, and is currently assessing both imported models and local manufacturing types, including an electric mode pickup truck, according to industry insiders familiar with its plans. Thailand’s Board of Investment has already spoken to Geely as well as four other major Chinese EV manufacturers in April during a roadshow. The others are even more interested in Thailand’s policy of developing home EV production and supply chains. Thailand has set a 30% goal to convert its annual production of 2.5 million vehicles into EVs by 2030.
Xiaomi partners with Dixon Technologies to make mobile phones in India
Reuters
Indian contract manufacturer Dixon Technologies has teamed up with Xiaomi India to manufacture mobile phones for export from the country. The move comes in the wake of Xiaomi's decision to start producing wireless audio products in India with support from electronics manufacturer Optiemus. Dixon Technologies' shares climbed by 4% on the back of news of the Xiaomi partnership.
Exclusive: Credit Suisse drops China bank plan to avoid regulatory conflict under UBS-sources
Reuters
Credit Suisse has abandoned plans to set up a locally incorporated bank in China to avoid potential regulatory conflicts from its merger with the UBS Group. Credit Suisse planned to set up a wholly-owned local bank in China to boost its presence in the country with a branch network to draw deposits and expand its onshore wealth management business. Credit Suisse's decision to abandon and cancel its China local bank plan could be a precursor to similar moves it and UBS make on other businesses where they both have operating units.
UN says concerned about lack of women in China's top government
Reuters
The United Nations has recommended that China introduce statutory quotas and a gender parity system to quicken the equal representation of women in government. The UN Committee on the Elimination of Discrimination against Women’s report found that the number of women in politics and elite government roles has declined during President Xi Jinping’s decade as the Communist Party’s general secretary. China currently has no women among the 24 members of the politburo of the Communist party of China, and 26.54% of the members of the 14th National People’s Congress are women. The UN also urged China to repeal “disproportionate restrictions” on NGO registration and to protect women human rights defenders.
China's Wanda may offload malls, hotels as share sale prospects dim
Nikkei Asia
Dalian Wanda Group is considering selling off some of its hotel and shopping mall assets to free up liquidity. The move follows the failure of the company's Dalian Wanda Commercial Properties unit to proceed with a $1bn initial public offering on the Hong Kong Stock Exchange. Subsidiary Dalian Wanda Commercial Management Group is said to be planning the sale of various properties, including a hotel and multiple shopping malls in Shanghai.
US sanctions Chinese and Mexican firms over fentanyl making equipment
CNN
The US Treasury Department has sanctioned more than a dozen Chinese and Mexican companies for shipping or selling equipment used to make counterfeit pills containing lethal opioids. The sanctions were directed at seven entities and six people based in China and one entity and three people based in Mexico. They are involved in the sale of pill press machines and other equipment used to produce counterfeit trade markings on pills laced with fentanyl, which are frequently destined for US markets. Nearly 70,000 people in the US died of drug overdoses involving fentanyl in 2021, a nearly four-fold increase over five years.
Top Hong Kong-listed firms boost share buy-backs as bear market sets in
South China Morning Post
Many Hong Kong-listed firms, including Tencent Holdings, AIA Group and Xiaomi, have increased share buybacks as the Hang Seng China Enterprises Index (HSCEI) approaches bear-market conditions. On Tuesday, insurers AIA, with an 8.1% weighting, bought back 1.73 million shares for HKX132m ($16.8m) and second-ranked Tencent bought back 1.12 million shares for HKX352m for a sixth straight day of repurchases. Chinese smartphone maker Xiaomi picked up 2.2 million shares for HKX23.2m after buying back the same amount the previous day.
Chinese factory activity contracts as economic recovery stumbles
Financial Times
China's factory activity has contracted for the second consecutive month, while growth in its service sector has slowed, adding to signs of a slackening post-pandemic recovery in the world’s second-largest economy. The official manufacturing purchasing managers’ index came in at 48.8 for May, compared to 49.2 in April, according to the National Bureau of Statistics. These readings under 50 indicate contraction and economists have said it would lead the government to consider stimulus policies to support the economy.
Chinese scientists say their new gene-editing tool is precise and safe
South China Morning Post
Chinese researchers have developed an ultra-precise, safe gene editing tool that has the potential to treat or cure some genetic diseases. The tool, known as “base editors” is different from well-known gene-editing tool CRISPR-Cas9, which relies on the cell’s self-healing mechanism to repair, as the new tool fixes specific sites in the genome without cutting the double helix. Base editors could correct the four most common types of misspellings that occur in DNA, accounting for about 30% of all known disease-causing DNA errors. CRISPR-Cas9 has shortcomings causing safety concerns, especially involving off-target effects.
How Taiwan became the indispensable economy
Nikkei Asia
Suppliers to U.S. tech giants Apple, Google, Meta and Amazon in Taiwan received numerous requests from their customers following 2020's visit by former U.S. House Speaker, Nancy Pelosi. Customers were looking to secure supplies in case of war with China over Taiwan. Pelosi's visit was controversial and triggered a diplomatic spat between the U.S. and China that led to unexpected military exercises around Taiwan. These exercises added to the already strained technology supply chain, which is now under threat.
Nato foreign ministers to debate Ukraine’s alliance accession
Financial Times
The subject of whether and when to promise Ukraine a road map to join NATO will be addressed at a two-day meeting of foreign ministers in Oslo. Disagreements exist between countries over how soon Ukraine should join, with some Eastern European states pushing for a swift integration, and others wanting to move more cautiously. While Nato Secretary-General Jens Stoltenberg concedes allies differ on the timetable, there is a general unity on providing Ukraine with military and economic support now. NATO’s full summit will take place in Vilnius from 11 to 12 July.
China Is Drilling a 10,000-Meter Deep Hole Into Earth’s Crust
Bloomberg
Chinese scientists have begun drilling a 10,000-meter borehole in the country's oil-rich Xinjiang region, which could be China’s deepest ever borehole. The project is part of plans to advance deep Earth exploration in search of mineral and energy resources as well as to assess environmental disaster risks. President Xi Jinping called for greater progress in deep Earth exploration in a speech to China’s leading scientists last year. The Russian Kola Superdeep Borehole, which was drilled over 20 years and reached 12,262 meters, is still the deepest man-made hole.
China Telecom establishes quantum technology group
Reuters
China Telecom has created the China Telecom Quantum Information Technology Group in a bid to develop the country's use of quantum technology. The new unit will aim to develop quantum technology as well as bolster the technology's product offerings and promote the sector across China, according to a statement. The firm has invested CNY2.98bn ($434m) in the unit, the latest move toward quantum technology use from a Chinese telecoms firm and a reflection of China's ambition to dominate the global race to use quantum computing.
How HSBC’s China battle threatens to ‘heat right back up’
Financial Times
HSBC has emerged victorious from its annual general meeting, with Chinese insurer Ping An failing to gain support to split the 158-year-old bank in two. Investors are "guessing in the dark" on whether there is Beijing involvement in the dispute, said Hugh Young, Asia-Pacific chair of HSBC shareholder Abrdn. While Ping An has appeared to soften its stance with a statement saying it respected "shareholders' choices", there are signs it is awaiting HSBC's results before deciding whether to push ahead with another attempt at a break-up. The bank's executives have long been reassured the row is commercial rather than political, and had meetings with various vice-premiers and ministers this year.
Wanda Weighs Selling Payments Permit for About $141 Million
Bloomberg
Dalian Wanda, a Chinese tourism-to-retail conglomerate, is reportedly considering selling its digital payments license for roughly CN¥1bn ($142m) in an effort to shore up its liquidity. Although ByteDance's Douyin Group is believed to have expressed interest, the negotiations are still preliminary, according to anonymous insiders. ByteDance has already acquired a similar license as part of an acquisition in 2020. Digital payments permits are tightly regulated in China as they provide access to a large user base.
Seoul retracts evacuation order after failed North Korean satellite launch
Financial Times
South Korea issued a “wartime alert” on its citizens’ phones to prepare to evacuate Seoul, triggering air raid sirens, upon the announcement that rival North Korea has attempted to send a satellite into space. An evacuation order was called off just ten minutes later, after South Korean authorities admitted it was a “false alarm.” Japan also issued a missile alert for the southern island of Okinawa, which was also retracted after the projectile did not drop within Japanese territory. Pyongyang had signalled this week that it was preparing to fire its first spy satellite into space: North Korea’s Sohae Satellite Launching Station in the western province of North Pyongan fired the rocket towards the Yellow Sea (which separates the Korean peninsula from China), but it was a “crash” failure, according to North Korean state media.
Chinese island shows the way to an all-electric future by 2030
Japan Times
The tropical island of Hainan has over 75,000 charging points for electric vehicles and aims to end the sale of fossil fuel cars by 2030. Electric and hybrid vehicles account for 42% of new cars sales in Hainan, where the local government has provided significant financial incentives for their adoption. More electric vehicles are being used in Hainan due to the island’s small size, temperate climate and significant investment in electric transport. Hainan is encouraging other Chinese provinces to follow this blueprint to enable China to greatly increase the number of all-electric vehicles.
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