Unicorns (Page 2)

Do n’t tell Donald Trump, but his pledge to impose 60 % tariffs on Chinese goods may help Xi Jinping’s efforts to boost the biggest economy in Asia in ways that Washington did n’t expect.

Granted, President Xi has been previewing his buzz- expression of “new excellent successful forces” since at least next September. Though mysterious and a tad confusing, Xi’s interior circle has been selling it as the solution to China’s financial future.

Little did Team Xi know that former US president Donald Trump would be assisting the Communist Party in selling the plan. In the decades since September and the National&nbsp, Women’s Congress in early March, Trump unveiled his plan to make deal war great again.

On top of crushing new import fees, Trump says he plans to withdraw China’s “most popular state” position if elected in November. These steps may produce Trump’s 2017- 2021 tenure in the White House seem calm by assessment.

Trump’s Republican Party is doing so by repeatedly reminding Xi’s celebration of the absurdity of acting consistently to encourage local demand-driven growth.

To maintain development of nearly 5 % year over year, China must encourage its customers to spend more and keep less. That entails boosting incomes and creating stronger social safety nets to stimulate spending.

Additionally, it means developing more reliable capital markets so that the typical Chinese may participate in both stocks and bonds rather than just real estate.

Yet Beijing’s intense concentrate on goosing use time and time again is destructive, some economists say. It makes China vulnerable to boom-and-bust cycles that necessitate immediate interest at the expense of reinvigorating the economy. Additionally, China’s heavy emphasis on exports makes the economy vulnerable to Trump-like trade war tics.

There’s no better option to accelerating and broadening China’s development as a large- technology powerhouse, advancement experts agree. And as 2024 draws near, there are signs that this is the hinge that Xi and Premier Li Qiang are trying to achieve.

Xi’s party stated at the NPC last month that” It’s crucial to support efforts to modernize the business system and promote the creation of new successful forces.”

According to Xinhua, the top priorities are “promoting green successful forces” throughout the country and” spurring revival of north China.” And making China a strong pioneer in semiconductors, electronic- car supply chains, clean energy, advanced infrastructure, aviation and unnatural intelligence.

Justin Yifu Lin, a former World Bank chief economist, argues that China “has enough space for ascent of technological development, business upgrade and performance level”. He cites the nation’s high savings rate, abundant investment resources and government commitment to economic development.

China, Lin says, has certain advantages that often get lost in worries about current economic challenges. As a major developing economy, Lin notes, China is” still in a process of industrial upgrade and still faces a big gap with developed countries, but this creates a latecomer’s advantage”.

During this catch- up stage, other economies including Japan, South Korea and Germany achieved a growth rate of 8 % or above. According to Lin, China has the potential to accomplish that if they can.

China “has yet another advantage in the new economy, which is characterized by artificial intelligence and the digital economy.” China is placed in the same starting position as those developed nations, but it has shown a significant advantage in developing new technologies in the process, Lin claims.

Lin also highlights China’s “abundant human capital” and its massive scale. That is, “any technological advancement or new product development can quickly enter the domestic market and benefit from economies of scale. China can outstrip developed nations in terms of scale thanks to its enormous domestic market size.

Also, China has, in Lin’s view,” the best industrial supporting capability of almost any economy globally”.

Beijing made a number of state-owned companies and conglomerates known on March 29 that it hopes will encourage China’s next big foray into future-oriented sectors and lessen US-led efforts to stop China’s rise. They include AI, neuroscience, quantum computing, nuclear fusion and other tech- driven industries.

This “pioneer” scheme is being overseen by the State- owned Assets Supervision and Administration Commission. The goal is to deputize several conglomerates in order to start a boom in startups that will foster a vibrant ecosystem for a new wave of tech “unicorns.”

According to Lin Xipeng, an analyst with China Merchants Securities, the commission “has given a clear mandate that developing emerging and future industries is a crucial task.” ” While cultivating start- ups and units within their ecosystems, SOEs will also tap external investment and merger opportunities”.

The key is to end the West’s” chokehold” on China’s tech development, says Hu Yongjun, an analyst at the State Information Center under the National Development and Reform Commission.

This, of course, raises any number of risks as the US tightens the screws. Current President Joe Biden has sharply restricted China’s access to semiconductors and other important technology while Trump imposed massive tariffs. In addition, Beijing has united allies Japan and South Korea in a close relationship with China. Additionally, he has pledged to make hundreds of billions of dollars investment to rebuild home tech.

For China, it is a clear inefficiency that has hampered Beijing’s up-tech plans by making new high-tech products with less-than-modern machinery. Even so, the quicker China puts innovation and entrepreneurship in the economy’s driver’s seat the better.

A segue of this size, according to Xi’s inner circle, will increase Chinese competitiveness to levels comparable to those of its US and European counterparts. Beijing also believes it will replace a high-wage workforce in order to raise living standards and consumption. Then, over time, China’s growth will be self- reinforcing without the need for bursts of traditional fiscal and monetary stimulus.

Not everyone is convinced it’ll work, though. According to Arthur Kroeber, an analyst at Gavekal Dragonomics,” the theory is that all of these investments in high-tech industries will ultimately lead to very successful companies that will be able to employ people at high wages and that will ultimately lead to a lot of employment growth and consumption growth in the future.”

Kroeber warns that” the issue with that is, number one, that no matter how successful they are, will be able to completely replace the lack of demand that you are having from a property sector that is probably shrinking by somewhere in the neighborhood of 30 to 40 %.”

The” second thing,” according to Kroeber, is that even if these investments in high tech pay off, and I honestly believe a lot of them will, it does n’t necessarily mean that productivity will increase across the entire economy.

Kroeber warns that these high-tech companies may end up contributing only a small percentage to the economy’s overall employment. Most employment in the last decade has come from service sectors, largely from consumer- facing industries, and there’s no particular reason for that to change.

” So”, Kroeber argues,” the idea that you are going to create an economy- wide productivity boom that will raise overall wages and consuming power from these high- tech investments, I think is a little bit fantastical, frankly. So when I add all of this up, I believe that looking ahead to the upcoming years, we can anticipate that China will continue to struggle to maintain growth.

Yet, all the more reason for China to forge a new, different path forward. One reason is to address its getting more complex demographic problems. China must act urgently to increase productivity as its 1.4 billion-person population gets older and local government debt levels swell.

According to David Mann, the Mastercard Economics Institute’s chief economist for Asia-Pacific, the mainland had” a lot of growth coming purely from just more people showing up each year” before it was able to ignore economic inefficiencies.

In that context, private sector expansion and disruption have never been more crucial. The key question, as Mann sees it, is how rapidly and reliably Xi’s team is “able to bring in those innovations and introduce them in a way that does keep growth a bit stronger, without needing to resort to, for example, residential real estate investment, which is not as productive”.

International Monetary Fund head Kristalina Georgieva made the adage that China should increase domestic demand-driven growth when she spoke in Beijing last month. She also made a compelling argument for greater productivity and innovation.

” Domestic consumption depends on income growth, which in turn relies on the productivity of capital and labor”, Georgieva explains. The allocation of capital will be improved by changes such as improving the business environment and ensuring a level playing field between private and state-owned enterprises. Higher labor productivity and higher incomes will be achieved when human capital is invested in: education, life-long training, and reskilling.

Georgieva emphasized that these changes are “particularly crucial as China attempts to capitalize on the opportunities of the AI “big bang.” The state of a country’s readiness for the artificial intelligence world is already a problem for today.

But, Georgieva said,” the transformation ahead is not easy. The remarkable development success of China has benefited hundreds of millions of people. The younger generations are going through what many countries have gone through before as economies mature and growth&nbsp, moderates, and have lived their entire lives in an environment with exceptionally high growth rates.

In recent years, Xi’s efforts to champion high- tech industries, particularly cutting- edge manufacturing and service sectors, flowed from his” Made in China 2025″ project. That plan is to lead the global charge on semiconductors, biotechnology, aerospace, renewable energy, self- driving vehicles, artificial intelligence, green infrastructure, logistics and other areas.

This 2025 vision matched efforts to establish a form of” Silicon Valley East” in southern China. Xi’s so- called Greater Bay Area enterprise has sought to group Hong Kong and Macau with Shenzhen and eight other municipalities all angling to become economic powers of their own, namely Guangzhou, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing.

Municipal leaders across the country are catching up on the innovation-first zeitgeist in a quick move.

In January, for example, the eastern city of Hefei christened the first tranche of a series of big projects in areas including new energy vehicles ( NEVs ), new- generation information technology and photovoltaics. The wave of investment totals 36.7 billion yuan ( US$ 5.1 billion ).

Hefei is on the vanguard of locales for China’s scheme to build 10 national research labs, each charged with a different area of specialization. In the case of Hefei, it’s a quantum computing lab, in Shanghai, its a lab focused on AI pursuits.

ln the eastern Xiamen city, part of Fujian Province, more than 53 billion yuan ($ 7.3 billion ) worth of productivity- enhancing projects in new energy, new materials and biomedicine have been greenlit.

In central Henan Province, contracts for cutting-edge manufacturing facilities and a number of future-oriented emerging industries have been signed for almost 600 billion yuan ($ 83 billion ).

Such efforts are important because they provide a route for local governments looking to leave the land sales industry. Municipal leaders from developing local economies were disoriented by the almost linear focus on selling and leveraging land to generate tax revenue over the years.

None of this will, to be sure, be simple in the long run. Xi’s efforts to deleverage the economy are focused on the provinces of China. Banks are being advised by regulators to repress their use of offshore bond-issuance laws by local government financing vehicles ( LGFVs ).

The$ 9 trillion&nbsp, mountain of LGFVs ‘ debt&nbsp, is a major challenge to Xi’s efforts to pivot toward more productive and sustainable tech- driven growth.

In the interim, Jeremy Zook, an analyst at Fitch Ratings, says that “economically weaker regions may face further deterioration in fiscal revenue and tighten expenditures”. He continues,” It’s quite a balancing act” at the moment when Xi wants to encourage economic growth and reduce rampant borrowing across the country.

Indeed, massive state-led economic transitions of the kind China is attempting to pull off take time and a lot of risk. The key, though, is that Xi and Li ensure that “new quality productive forces” is more than just an empty slogan.

Shifting engines in such fundamental ways&nbsp, without crashing the economy will require, at least for a time, increased foreign direct investment ( FDI), which just fell to a 23- year low of$ 42.7 billion of inflows in 2023.

Another issue that many foreign investors are concerned about is that Xi’s blueprint for a more innovative economy is full of soaring rhetoric and promises but is lacking in specific reform measures to increase investor confidence.

True, the$ 7 trillion stock market rout from a 2021 peak to January has seemingly stabilized. It’s worth noting, too, that Xi recently hosted a who’s- who of global CEOs from Apple’s Tim Cook to Blackstone’s Stephen Schwarzman to Tesla’s Elon Musk to Boeing’s Stan Deal to Pfizer’s Albert Bourla to reassure the international business establishment.

However, Beijing’s actions will speak louder than words. Trump hardly deserves praise for all of this. However, the trade war presents a chance for Trump to win the presidency, which supports the claim that China needs to change its economic stances quickly.

Follow William Pesek on X at @WilliamPesek

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