Elon Musk met with Chinese Vice Premier Ding in Beijing; Exclusive Insight: The Missing Pillars of Japan's Economic Growth

Beijing calls on Arm to intensify chip co-operation with Chinese companies; Singapore, China Agree to Set Up High-Level Defense Hotline; China's Henan plans 'zero-dynamic' end to youth unemployment

Welcome to this issue of The China Brief. Today is June 1, 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.

Exclusive Insight: The Missing Pillars of Japan's Economic Growth

The three pillars could clearly greatly accelerate the pace of innovation. However, as mentioned earlier, with an accelerated pace of innovation comes increased disruptive effects on society and the economy, constantly leading to the destruction of old businesses and jobs.

It is difficult to say whether it is better for innovation to proceed at a faster or slower pace, as there are both positive and negative aspects. This is where another major pillar is needed to fully mitigate the economic and social costs triggered by the disruptive nature of innovation, allowing innovation to drive economic growth at full speed.

This pillar is a labor market characterized by flexibility and security. Flexibility refers to the relative ease with which companies can dismiss employees and control costs due to "creative destruction," where businesses are constantly disrupted, performance deteriorates, and even bankruptcy occurs.

At the same time, new businesses and successful innovative companies are constantly in need of new employees. "Flexibility" ensures that these companies can easily attract talent. Security, on the other hand, refers to the inevitable unemployment resulting from "creative destruction." The government provides a decent unemployment insurance for a certain period of time to individuals who have lost their jobs. When necessary, the government offers skill training to help unemployed individuals adapt to new industries and jobs as quickly as possible. The government can also assist the unemployed by providing job information and facilitating job placements to help them transition to new positions.

Unfortunately, these pillars have yet to be established in Japan. As a result, the prospect of innovation-driven economic growth returning to its rightful path remains elusive.

Japan's current economic and financial system is essentially designed to support the "accumulation of war power" for the comprehensive invasion of China in 1937 and the early stages of the Pacific War in the 1940s. The government encouraged national savings to support the war effort. By controlling and intervening in a limited number of banks, the government directed credit funds to large, selected monopolistic enterprises engaged in the production of various war materials, such as heavy weapons and ships. These large enterprises implemented lifetime employment for their employees.

After Japan's defeat in the war, the economic and financial system that supported the war did not change, continuing to support the "flying geese" model of Japanese-style economic growth mentioned earlier. Through direct or indirect control, the government used major banks to lend funds to a small number of large enterprises at lower interest rates, supporting their technological imitation, introduction, and export activities. These enterprises also provided lifetime employment security for their employees. It must be acknowledged that during the period of growth under the "flying geese" model, this concentrated approach to promoting growth was evidently very effective.

(From "Why Japan's Economic Growth Model Has Been Slow to Transform into an Innovation-Driven One," Part II. Written by Xin Jisi, Contributing Economist for The China Brief)

Beijing calls on Arm to intensify chip co-operation with Chinese companies

Financial Times

Chinese officials have urged Cambridge-based chip designer Arm to increase its co-operation with Chinese institutes, universities and businesses. With the overriding aim of self-sufficiency in semiconductors, the statement indicated the importance the government placed on working with the UK-based company. The statement was issued two weeks after Arm's CEO, Rena Haas, visited Beijing to build stronger ties with customers there. Although Arm has registered its transfer of shares in a Chinese joint venture to SoftBank, the Chinese authorities have declined to process the transaction in current business records.

Singapore, China Agree to Set Up High-Level Defense Hotline

Bloomberg

Singapore has agreed with China to establish a secure defence telephone line to enable high-level communication in a bid to strengthen ties between the two nations at a time when regional tensions are rising. China's Defence Minister Li Shangfu cleared the way for the hotline at a meeting in Singapore with Ng Eng Hen, his Singaporean counterpart. The announcement precedes a major defence conference taking place in Singapore that will host hundreds of delegates, including US Defence Secretary Lloyd Austin. China snubbed a US request for a meeting between its defence chiefs.

China's Henan plans 'zero-dynamic' end to youth unemployment

Reuters

China's Henan province has announced a 100-day plan to address record levels of youth unemployment, with millions more students set to graduate this year. The scheme will take place in colleges and universities from May to August, and will include promoting jobs in public institutions and state-owned enterprises, as well as second degrees and grassroots or rural employment projects. The goal is to ensure "zero-dynamic clearing" for long-term unemployment and the "smooth employment of college graduates". At the national level, youth unemployment hit a record high of 20.4% in April, driven by educated young adults competing for jobs.

US defense chief calls China’s refusal to meet unfortunate during visit to Tokyo for talks

The Toronto Star

US Secretary of Defense Lloyd Austin has spoken to Japanese Defense Minister Yasukazu Hamada during an Asian security summit in Tokyo, to discuss communication between regions and provoke adoption of open channels for communication. Austin has called for an opportunity to engage with Chinese leadership, hoping governments' defence departments will establish open channels of communication to avoid accidental encounters. Ties between Japan and South Korea have improved rapidly in recent months under Washington's pressure and are discussing real-time sharing of North Korea's missile launch data, and both countries are in talks to strengthen extended deterrence for Japan.

Taiwan’s supply chain centrality and Nvidia’s ‘rock star’ CEO

Financial Times

Taiwan’s position in the global supply chain is more significant than its production of semiconductors, according to a senior executive at Compal Electronics, a major assembler for Apple. They have claimed it underestimates Taiwan’s pivotal role, particularly due to the constraints that could come from a potential conflict in the Taiwan Strait. In a collaboration between Nikkei and the Financial Times, it has been explored how the US and China’s tension with Taiwan has deepened its vital importance, dependent on a critical interdependence between the three. The tech supply chain’s complexity was illustrated through months of ground reporting and interviews, analysing data on bilateral trade and supplier details. The supply chains’ dependency, whether on device assembly and testing or contract/ODM manufacturers, risks a systemic collapse if there is military interference with Taiwan. At Computex Taipei tech expo, Jensen Huang, Nvidia founder and CEO, spoke on generative AI and was treated like a rock star by Taiwan. Huang said that China will be nurturing its own GPU companies in response to existing US restrictions on the exports of semiconductor technology, as Nvidia works hard to remain ahead with their ultra-advanced graphic processing units.

Despite ‘no limits’ ties, China has moved carefully on Russian energy

South China Morning Post

China has kept its energy ties with Russia relatively steady since Moscow's invasion of Ukraine began in 2022, according to a new analysis conducted by the Swedish Institute of International Affairs. Whilst Russian oil and gas accounted for 14% of China's total imports of those products that year, that figure has now risen to 16%. However, China has not facilitated any new investments or transactions in Russia’s hydrocarbon sector and Beijing has generally abstained from undermining Western sanctions against the country, researchers found. The report suggested the balancing act reflected China taking caution while not wanting to become too reliant on Russian energy, and noted that Beijing’s restraint was "probably due to the threat of being slapped with secondary sanctions from the West."

Elon Musk met with Chinese Vice Premier Ding in Beijing -source

Reuters

CEO of Tesla, Elon Musk, met with Chinese Vice Premier Ding Xuexiang in Beijing, according to a source familiar with the matter. The meeting was not publicised beforehand, and no details of discussions have been provided. Tesla did not comment on the meeting, which is the first known meeting between Ding and a foreign CEO. Musk had previously met with China’s commerce and industry ministers before visiting the Shanghai factory.

Taiwan, US Cyber Teams Held Rare Meeting at California Consulate

Bloomberg

US and Taiwanese security officials have held a meeting during which Taiwan expressed an interest in adopting cyber security standards used by the US Defense Department. Washington and Taipei do not have official diplomatic ties, so Western governments have instead supported the democratic island via non-governmental organisations. During the meeting, Taipei was keen to discuss how its companies could apply a cybersecurity standard called NIST 800-171, which protects classified, non-federal data that is hired to them from the US government. It is understood the meeting also discussed 5G communications and low Earth orbit satellites.

China's proposed curbs on private securities funds spark controversy

Nikkei Asia

Draft guidelines released by the Asset Management Association of China (AMAC) have been met with concerns that regulators are interfering too much in how funds are run, thus impeding managers’ ability to execute their investment strategies. The guidelines are focused on the $2.9tn private fund sector in China and particularly those that invest in securities, including bonds and listed stocks. The AMAC recognizes the need to ensure fund managers diversify their portfolios to reduce risk, however concerns have arisen over a requirement for private funds to get pre-approval from their investors before altering investment strategies and mandatory monthly reporting requirements. Other concerns include the restriction placed on funds to invest no more than 10% of their assets in a single stock and 20% of their assets in non-standard credit assets. Critics argue that these guidelines interfere too much in the market and raise questions over a potential oversupply of assets, which may lead to declines in yields. 

Wang Yi boosts China, Germany friendship paving way for Berlin visit

South China Morning Post

Beijing has signaled an eagerness to extend its partnership with Berlin amid increasing global uncertainty and prepare for Premier Li Qiang's expected visit to Germany. “China and Germany should work together to make the seventh China-Germany intergovernmental consultation a success, and send a positive signal to Europe and the world”, said Wang Yi, China's highest diplomat. According to the Chinese foreign ministry, the Pair also “exchanged views” on the war in Ukraine. There has been criticism in Europe of China’s close relationship with Russia. Before his meeting with China’s lead diplomat, German adviser Jens Plotner held talks with Germany's foreign minister, as part of the planning for Li Qiang’s visit to Berlin.

China new home prices, sales fall on soft demand in May

Reuters

China's new home prices fell for the first time in four months in May and home sales slumped, according to a private survey. New home prices among 100 cities fell 0.01% month-on-month in May from 0.02% growth the previous month. Demand, however, remains bleak in small cities as consumers are still cautious about big ticket spending amid concerns over incomes and jobs as a post-pandemic economic recovery loses steam.

Foreigners pull more money out of China in May

Reuters

Foreign investors sold $1.71bn worth of shares via Stock Connect in May, marking a continued retreat that began in April as flagging domestic demand and weak corporate earnings weighed on Chinese shares. The selling marks a slow reversal of their heavy investment total of $20.92bn in January when China reopened its economy after three years of COVID-19 restrictions and spurred a wave of expectations for growth. Despite outflows in February, April and May, foreigners' net purchases of mainland shares still stood at $25.05bn for the first five months of 2022, compared with net buying of about $6.36bn worth in the previous year.

US defence chief warns incidents with China’s military could ‘spiral out of control’

Financial Times

US Defense Secretary Lloyd Austin has warned that dangerous incidents at sea and in the air between China and the US could "spiral out of control" if military talks are not resumed. Despite the Pentagon’s request to discuss security issues at a forum in Singapore, Beijing rejected Austin's request to meet his Chinese counterpart. The lack of dialogue means there is no effective crisis communications mechanism in the event of an accident. The US has accused China of taking unnecessarily aggressive action in international waters and airspace. Austin and his Japanese counterpart Yasukazu Hamada have agreed to work together on hypersonic missile defence capabilities, cyber security and strengthening supply chains.

China’s small and medium-sized factories post surprise growth, easing market anxiety

CNN

The Caixin manufacturing Purchasing Managers’ Index grew to 50.9 in May from April’s 49.5, marking a surprise return to expansion territory for small- and medium-sized Chinese factories, and easing market concerns over the country’s stalling growth. The Caixin data, issued in contrast to government data, has raised hopes that the economy is improving. However, China's economic growth has continued to dissipate and geopolitical tensions remain high, according to Ken Cheung, chief Asian FX strategist at Mizuho Bank. The news has boosted Asian markets, with Hong Kong's Hang Seng Index rebounding from a 2.4% decline on Wednesday, after the weaker official PMI data was issued. However, South Korea's Kospi was down 0.4%. The US's House of Representatives also passed a bill to suspend the nation’s debt limit, reducing anxiety around US debt default risks.

Ex-cop’s ‘Fox Hunt’ trial kicks off. Was he under Beijing’s orders?

The Sydney Morning Herald

Former New York City police sergeant Michael McMahon is on trial in Brooklyn, charged with acting as an illegal Chinese agent. Federal prosecutors allege that McMahon pressured a New Jersey resident to return to China to face bribery and embezzlement charges. Officials are cracking down on what they term "transnational repression" on dissidents and fugitives by adversaries such as China. The individuals on trial have pleaded not guilty.

US and Taiwan to sign trade deal amid China tensions

BBC

The US and Taiwan are expected to sign a new trade agreement on Thursday as part of attempts to improve economic ties. The deal is set to be signed in Washington as part of the US-Taiwan Initiative on 21st Century Trade, which Beijing has criticised as part of what it sees as the US meddling in Taiwan, which China regards as a breakaway province. The deal comes just ahead of the Shangri-La Dialogue annual defence summit in Singapore, to be attended by both US Defense Secretary Lloyd Austin and his Chinese counterpart Li Shangfu.

BRICS Seize Chance to Counter US With Expansion, Common Currency

Bloomberg

The BRICS bloc, comprising Brazil, Russia, India, China and South Africa, is looking to expand by including countries such as Saudi Arabia, Kazakhstan, Egypt and the UAE at its meeting of foreign ministers in Cape Town this week. To be followed by a summit of BRICS heads of state in Johannesburg on 22 August, the talks are also a response to heightened tensions between China and the US over sanctions and trade. The group's hope is to establish itself as a major political and economic force, although Professor Robert Schrire at the University of Cape Town has warned that while existing members "precludes effective collective action based upon common interests", an expansion will make things worse. The talks are also expected to encourage Western fears that the grouping could become a counterweight to the EU and US. At least two candidates for membership, Iran and Cuba, are currently subject to US economic penalties.

China Carriers Are Worst Airline Stocks as Reopening Bet Fades

Bloomberg

Investors are becoming more cautious around Chinese assets as businesses struggle to rebound from the pandemic and tensions with the US continue. The three largest carriers in China have gone from being among the world's top performing airline stocks in Q4 2020 to the worst performers so far this year. China's domestic air travel rebounded in 2021, but recovery in the international segment has been much slower. Investors are worried about the recovery trajectory of international travel and how passenger yields will be sustained, given the competition in the market.

China accuses US of interfering in training exercise before aerial confrontation

The Toronto Star

The US has accused China of “unnecessarily aggressive” manoeuvres off the coast of the Philippines after a Chinese fighter plane flew close to a US reconnaissance plane. The incident underlines the current poor state of relations between the two nations’ military establishments. The “interference and surveillance” of the US was cited as the reason behind the incident by China's defence ministry. The Chinese claim to the bulk of the South China Sea is not recognised by the US, which opposes the country's recent militarisation of the area.

Tai­wan may tight­en res­i­den­cy for Hong Kongers amid spy­ing fears

Al Jazeera

Taiwan's Mainland Affairs Council is reportedly considering increasing the residential period for Hong Kongers to qualify for permanent residency from one to four years, according to reports from the country's associated newspaper Liberty Times. The proposed changes, which are to be assessed in light of Hong Kong's and Macau's rapid changes and national security situations, could have ramifications for at least 36,000 Hong Kongers and Macanese who have been granted or are eligible under the current framework for fast-track residency and permanent residency. The changes would also challenge Taiwan's appeal as a haven for critics and dissidents of China.

De-risking could hurt global growth: IMF chief economist

Nikkei Asia

IMF Chief Economist Pierre-Olivier Gourinchas has warned that the global economy faces the risk of fragmentation and slower growth, as some Western nations are now trying to reduce their dependence on China. At a recent summit in Japan, the Group of Seven nations agreed to diversify critical supply chains and de-risk, without fully decoupling, from China, as tensions between China and the West increase.

A Higher Tech High? Yes, But Keep Your AIs Open

Bloomberg Opinion

May 2021 saw the information technology sector beat other sectors in the S&P 500 by more than 10% for the first time in two decades. Artificial intelligence sparked a huge rally, with Nvidia Corp.’s sales of chips driving interest in AI. However, it is important for investors to also be wary of risks associated with the sector. Looking at the last thirty years, it took time for investors to understand which companies would best benefit from new technology and there were mistakes made along the way. The tech sector has also become an increasingly weighty part of the S&P, meaning it is less likely to outperform the broader index.

The worldwide spread of COVID-19 has resulted in much debate about whether emerging markets continue to be useful classifications and who should be included. Indexing giant MSCI currently effectively controls emerging markets, with its MSCI Emerging Markets index having $1.3tn in assets under management benchmarked to it. However, countries such as South Korea look and feel developed, leading some to question whether they should technically be classed as emerging markets. In anticipation of MSCI’s annual review, Korean regulators have launched market reforms in an effort to revamp the country’s capital markets and make its assessment assets more accessible. Hopes are that MSCI will confirm Korea’s upgrade to developed market status in June 2022, with full ascension to take place in 2025 at the earliest.

Elon Musk Goes Silent on Twitter After Arriving In China

Bloomberg

Elon Musk has been off Twitter since arriving in China, marking one of the billionaire’s longest absences from the platform. Musk has tweeted every day this year, sometimes multiple times a day. He is thought to have met government officials and business people living in the country and has said that he opposes any form of decoupling from China. China bans social media sites including Twitter and Facebook, although virtual private networks can be used to bypass this. While the use of VPNs for personal reasons is illegal in China, many people still use them. While some Twitter users wondered why Musk hadn’t set up a VPN in China, he has been busy during his time in the country, including meeting staff working at Tesla’s Shanghai plant.

US-China tensions expected to dominate Asia security meeting

Reuters

Asia's top security meeting, the Shangri-La Dialogue in Singapore, is expected to address rising friction between China and the US. China's defence minister has refused a bilateral meeting with the US defence secretary, starting the event on an inauspicious note, according to National University of Singapore academic Drew Thompson, but he added that the two sides could still come into contact. Tensions created by Russia's conflict with Ukraine, North Korea's weapons programmes, and China's tensions with Taiwan will also be on the agenda.

Chinese developer Languang forced to delist, with peers to follow

South China Morning Post

Sichuan Languang Development will lose its listing status on the Shanghai stock market on 6 June, according to a filing. Eventually facing delisting, the developer recorded more than CNY100bn ($15.4bn) in sales in 2020, but this decreased significantly in 2021 due to Beijing's "three red lines” policy. E-house China Research and Development Institute's Yan Yuejin suggested a wave of delistings has been expected after the liquidity crisis over the past two years, adding news of delistings will dampen home-buying sentiment and may also affect sales.

China's CNOOC begins production at new offshore well in Brazil

Reuters

China National Offshore Oil Corporation (CNOOC) has begun production from the Buzios5 well offshore in Brazil, according to reports. The well represents the fifth phase of the Buzios oilfield off Brazil’s south-east coast and is the world’s largest deepwater pre-salt oil field with daily production of 600,000 barrels. CNOOC will hold a 7.34% stake in the shared reservoir, with 88.99% owned by Brazilian state-owned outfit Petrobras. CNOOC paid $1.9bn for a 5% stake in a production-sharing agreement. CNOOC is aiming for 6% average annual production growth by 2025 with output forecast to hit 2 million barrels of oil equivalent a day.

Global investors scale back bets on China's state-owned companies

Nikkei Asia

Foreign investors turned to state-owned enterprises in China as the economy faltered this year due to Covid-19. However, this strategy has lost momentum in recent weeks as economic news from China has worsened, including a report that factory activity fell in May.

Wall Street faces life in China’s second tier

Reuters BreakingViews

Major US investment banks are having to accept they are unlikely to achieve more than second-tier status in the lucrative Chinese market, as tensions between Beijing and Washington and a slow recovery put the squeeze on expansion. JPMorgan's CEO, Jamie Dimon, is expected to reveal the bank's growing interest in China later this week at the latest of its annual conferences, which have become heavily oversubscribed. Private equity firms are also said to be shifting their approach due to limited partners being more wary of investment focused on China. Last year, Goldman Sachs made only $80m in China, compared to the local industry's $56bn in revenue.

China’s Swoop on Cheap Global Coal Set to Drive Record Imports

Bloomberg

China’s decision to up coal imports as a result of falling prices could push imports to their highest levels ever, with the nation's purchases expected to reach 360 million to 380 million tons in 2023, compared with record of 327 million tons in 2013. This development comes as a result of the EU experiencing easing energy prices after last year's hike following Russia's invasion of Ukraine. While China's boosting fuel stocks in the run up to the summer, additional volume will only exacerbate a saturated market already struggling with low industrial consumption. 

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