Please feel free to download them. I’ll share my reflections later.

As we reassess China’s economy past the midway point of 2025, key questions remain: Where does China’s growth potential lie? How can the country reduce its reliance on exports and low-cost labor? And what will it take to pivot toward a more sustainable, consumption-driven model?

To explore these questions, 财经 Caijing, a Chinese financial media outlet, recently did an in-depth interview with Weijian Shan, the executive chairman of PAG, a leading Asia-focused private equity firm.

As an investor who has lived and worked across the Chinese and American systems, Shan brings a unique lens to China’s ongoing economic transition. Over the past few years, I’ve shared several of Shan’s insights on China’s economy—some of the most widely read and discussed pieces I’ve ever published.

Today’s newsletter features my translation of the sections from Caijing’s latest interview which was published on July 9 that focus on China’s economic challenges and opportunities. The translation is published with Mr. Shan’s kind permission.

Caijing: The issue of expanding domestic demand was actually raised quite prominently at the Central Economic Work Conference in December 2000, when Zhu Rongji was China's premier, who said that "expanding domestic demand is the long-term and fundamental foothold for China's economic development." Twenty-four or twenty-five years have passed since then. More recently, starting from when you wrote that article for Foreign Affairs, China's household consumption as a percentage of GDP was 39.25% in 2019 and 39.13% in 2023. Last year's data hasn't been released yet, but the trade surplus hit a record high last year, so the consumption rate should have declined. Why is expanding domestic demand so difficult?

Shan Weijian: China's exports as a percentage of GDP peaked at 36% in 2006. By 2018, this ratio had dropped to 18%, halving China's export dependence over 12 years. However, since 2019, this ratio has stopped declining, with exports accounting for approximately 18.4% of GDP last year.

I think the 2023 growth pattern was quite ideal: economic growth reached 5.2%, with 82.5% driven by consumption and net export negatively contributed to the growth rate by 11.4%. This shows that China can achieve economic growth by relying on domestic demand and consumption rather than exports. Following this pattern, China's economic growth would be sustainable and the growth rate could increase substantially. But in 2024, the momentum reversed—30.3% of economic growth was driven by net exports, while consumption’s contribution to growth dropped to 45%. Is there potential for consumption? I believe there's tremendous potential. As I mentioned earlier, household deposits total 160 trillion yuan (about 22.29 trillion U.S. dollars). If just 10% of that went to consumption, that would be 16 trillion yuan or $2.2 trillion. What kind of stimulus policy could compare to that?

Caijing: Even with the 2023 data, if we look at household consumption as a percentage of GDP, it's still below 40%.

Shan: But total consumption (household consumption plus government consumption) contributed 82.5% to economic growth. I completely agree that China's household consumption as a percentage of GDP is too low. My point is that household consumption has great potential for improvement. Take Japan, for example—it's difficult to increase consumption there, but China has tremendous potential because people have the purchasing power. So why has consumption been relatively sluggish over the past three years? Looking at household disposable income, from 2015 to 2019, it grew an average of 8.8% annually, while household deposits grew 10.2% annually. From 2020 to 2024, household income grew an average of 5.9% annually—a significant decline—yet the average annual growth rate of household bank deposits reached 13.4%, double the income growth rate. People's income growth has declined, but their propensity to save has increased.

Why is this happening? Mainly because household balance sheets have shrunk, especially after 2021—people feel poorer. According to the People's Bank of China's 2019 statistics, household balance sheets consist of two main components: real estate, accounting for about 59% of household wealth, and financial assets, mainly the stock market, accounting for about 19% of household wealth. In the three years after 2021, both markets continually contracted, making people feel poorer and reluctant to spend. Now the real estate market has basically stabilized, and the stock market is also relatively stable, so household balance sheets have essentially stabilized as well.

Look at Japan's 30-year recession—it was caused by the collapse of the stock and real estate markets, which led to massive household balance sheet contraction and sluggish consumption. China's conditions are much better than Japan's. China’s household balance sheet has basically stabilized now, the economy continues to grow, and with such substantial household deposits, there's a foundation for shifting toward consumption. The fundamentals can support this transition.

Caijing: This has been your view for many years—that China should transition from an investment and export-driven economy to a consumption-driven economy. You just mentioned that household balance sheets are improving, and neither the housing nor stock markets are continuing to contract. But not continuing to contract doesn't mean returning to previous growth states. Why would we think that just because household wealth has stopped shrinking, people will be willing to spend?

Shan: People won't automatically be willing to spend. What most affects consumer spending is expectations and confidence. How can we boost expectations and confidence? Government policy is crucial. For example, on September 24 last year, the government introduced a series of accommodative monetary policies, and the stock market immediately rallied. When the government introduces policies that can influence expectations and confidence, investment willingness suddenly increases. The same applies to consumption.

For instance, on March 5, the Chinese government announced this year's growth target as 5%. I think 6% would be more appropriate because if the government shows confidence in achieving a higher target, it would boost overall market expectations. Last year was 5%, this year is still 5%, so expectations won't change much. The most important thing is to influence expectations so that people are willing to spend. Here's an example: in the first four months of this year, offline retail grew faster than online retail. This hasn't been the case for the past decade or two—online growth always exceeded offline growth, and many physical stores couldn't survive. But why is offline growth higher than online growth this year? It's because of government consumption subsidy policies. These subsidies aren't issued by the central government but by local governments, which must distribute them to local merchants. Online sales are nationwide, which doesn't concern local governments much, so offline growth has been faster than online this year. This shows that government policies can have a leveraging effect and can change expectations.

Caijing: But consumption subsidies are one-time measures. Expectations about income growth have a greater impact on people's confidence. Consumption is the effect; income is the cause. Only when income increases, or when income expectations improve, can consumption be boosted.

Shan: Yes, we need to change these expectations. The pace of income growth and the stability of household balance sheets all affect consumer decisions.

Caijing: You mentioned earlier that China's fiscal policy is conservative. If fiscal policy became more proactive, besides raising the budget deficit to GDP ratio, what other measures could be taken? After the stimulus policies came out last September, many commentators said the policy intensity should be greater.

Shan: I also believe there should be stronger stimulus policies. China has significant room for both monetary and fiscal policy, which is an advantage that other major economies don't have—they either have high inflation or high debt ratios. China's central government debt is only about 21% of GDP, probably the lowest among major economies. Japan's is 260%, and the United States' is around 130%. China's local government debt, including financing platforms, totals only about 80-90% of GDP. Combined central and local government debt is around 110% of GDP.

Moreover, this only looks at the liability side of the balance sheet, not the asset side. What assets does the U.S. government have? The U.S. Postal Service, which loses money year after year, and the rail system, which also runs chronic losses—the U.S. government basically has no assets. The net asset value of China's state-owned enterprises approximately 145 trillion yuan, compared to GDP of 135 trillion yuan or $19 trillion. The market value should be higher than net asset value, exceeding liabilities, so if you look at net debt, the Chinese government's net debt is actually negative.

In fact, China’s fiscal policy is very conservative. Being conservative certainly has its merits, but the country has significant capacity to raise funds in international markets, especially by issuing offshore RMB (CNH) bonds. Without such products, there is a limited scope to invest CNH, restricting its holding. From China's perspective, the best approach is to issue CNH-denominated foreign debt, which has no credit risk (because the currency is issued by the central bank) and can increase the variety of CNH products, making it beneficial for other countries to hold offshore RMB as part of their foreign exchange reserves. With such low net government debt, appropriately increasing debt to raise capital for economic development gives fiscal policy considerable room to maneuver.

Actually, looking carefully at various stimulus policies, the amount truly used for consumption is almost a drop in the bucket. China has too many areas that need investment. As I mentioned, if household income levels don't increase, consumption will remain subdued. But it's not just income that affects consumption—there's also social security, which removes concerns about rainy days. The national social security fund has a balance of less than 10 trillion yuan, which is far from sufficient for a rapidly aging country of 1.4 billion people.

So the Chinese government should borrow more for domestic investment, especially foreign debt. China's foreign debt is too low. The central government's foreign currency-denominated foreign debt is probably less than 50 billion U.S. dollars. My firm manages 55 billion U.S. dollars. Think about it—China, a major country with a 19 trillion U.S. dollars GDP, has such minimal foreign-currency denominated debt.

Caijing: You just mentioned that income expectations affect consumption. What are your thoughts on increasing household income?

Shan: Current average wage levels in China, calculated in dollars, are about one-sixth of those in the United States, but China's manufacturing labor productivity is higher than America's measured by physical output per worker. This reminds me of Singapore's experience during its development history. Singapore faced the same problem and gradually raised minimum wage levels, forcing companies to shift toward higher value-added activities, which helped raise wage levels.

Caijing: Looking just at manufacturing, you mentioned that China's manufacturing labor productivity exceeds that of the United States, yet wages are only one-sixth of American levels. This means China's wage levels have enormous room for improvement, but why can't this be achieved in reality? Isn't it absurd that China's highly efficient workers receive low wages that essentially subsidize American consumers?

Shan: Yes, that's why we need to think about this issue. I don't have answers to all questions, but I can identify where the problems lie, and this is one of them. Again, Singapore took this path, using minimum wage increases to gradually break away from the path dependence of economic development based on cheap labor. China is also moving in this direction, just moving relatively more slowly.

Caijing: Wage growth exceeding productivity growth is harmful. Some Latin American countries have experienced this, where populist governments raised wages and benefits too high, damaging economic growth and ultimately harming the people.

Shan: China's situation is exactly the opposite. China's current problem is over-competition. Because China's production costs are relatively low, market players can push prices extremely low, with everyone competing to cut prices. For example, China has over 100 electric vehicle companies, but only two or three are profitable—nobody's making money. The same situation exists in batteries and solar panels. But raising wage levels helps prevent destructive competition among companies because they can no longer compete on low costs alone. Moreover, stopping just one company from engaging in destructive competition is ineffective—the entire industry must be prevented from doing so, which would push prices up. Take rare earth exports, for example. After the government regulated rare earth exports, prices tripled. In value-added terms, the rare earth industry's productivity suddenly tripled. So I think the issue of low wages deserves study—China can't always remain in the low-cost territory.

Caijing: Some believe China still has a long way to go in industrial upgrading and many "chokepoint" technologies to overcome, so it's premature to talk about replacing production-driven growth with consumption-driven growth. Is this argument valid?

Shan: These two things aren't in conflict. It's not that you need to become globally number one in all fields before consuming, or wait until you've produced domestic 2-nanometer chips and domestic commercial aircraft engines before consuming. There's no such logic—these two things have no necessary relationship.

Caijing: One final question. Having lived and worked extensively in both China and the United States, what do you think are the strengths of each country?

Shan: That's too big a question. But I can say that Chinese people are the most hardworking—Chinese average working hours exceed those in America.

Caijing: Americans are already considered hardworking in the Western world.

Shan: Yes, Chinese working hours are much higher compared to Europe. Where is America strong? In attracting global talent to high-tech industries. To become a global high-technology innovation center requires five conditions: first, concentration of talent; second, concentration of top-notch higher learning and research institutions; third, availability of venture capital; fourth, deep manufacturing capabilities; and fifth, a massive single domestic market.

In the 1980s and 1990s, the United States was the only country in the world that possessed all five conditions. Today, America no longer has deep manufacturing capabilities—American manufacturing has declined—but it can obtain these capabilities externally, such as through TSMC and ASML. So America's advantage today remains in high technology innovations.

On the other hand, China has now single-handedly achieved all five conditions. These five necessary conditions constitute sufficient conditions, which is why I'm very confident about China's long-term economic development.

Caijing: Is it possible for China and the United States to establish a relationship based on mutual recognition of rules and shared interests?

Shan: Yes, but there's a prerequisite: China's nominal GDP in dollar terms must exceed that of the United States. In terms of purchasing power parity, China’s GDP is now about 30% bigger than that of the U.S. Today we're at a critical juncture—China is about to surpass but hasn't yet surpassed the U.S. in nominal GDP, so America is using every means at its disposal to suppress China’s growth, whether through trade wars, technology wars, or sanctions, all to prevent China from replacing America’s as the largest economy in the world. But if China one day becomes the largest economy, American containment policy would become meaningless. Only then can bilateral relations fundamentally improve. When you're about to surpass but haven't yet surpassed them, that's when bilateral relations are most tense.

Weijian Shan

Executive Chairman and Co-Founder, PAG, Author: Out of the Gobi, Money Games, and Money Machine

Just before China holds the third Supply Chain Expo, Yang Liu sat down with Mr. Yu Jianlong, vice chairman of the China Council for the Promotion of International Trade (CCPIT), the organizer of the expo. He explained what the expo is and why it matters in the time of havoc for global supply chains. You can check the latest Got China show on YouTube or Substack. I had to miss recording this episode because of my foot surgery.

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Bloomberg and The Economist have used the term “well-connected” to describe the Harvard-educated former research assistant to Ezra Vogel. Over the past month, Rabbit Chairman has consistently offered exclusive insights into China’s position in the tariff dispute, which I’ve been closely following. I thought it would be helpful to introduce his latest article to you :

1. Current Outcome

United States:

1) Former President Trump’s “reciprocal tariffs” have been scaled back to 10%. On what he once called “Liberation Day,” he had imposed a 34% tariff hike on Chinese goods. Following the latest talks, 24% of these are suspended for the next 90 days, leaving only 10% in effect.

2) Earlier, Trump imposed a 20% tariff on Chinese goods citing fentanyl-related concerns, and that tariff remains in place. Combined with the newly retained 10%, the total now stands at 30%. （20%+10%=30%）

3) On top of this, the Trump administration’s first-term tariffs on China—largely preserved under President Biden—still apply. These vary by sector and product, averaging roughly 20% after eight years of supply chain adjustments.

A reasonable estimate is that the Trump administration’s second-term tariffs on China now amount to around 30%.

China:

1) China has reciprocated with a 10% tariff on U.S. imports—mirroring Trump’s retained 10%. Previously, China had countered Trump’s 34% hike with its own 34% retaliation, but 24% of that has now been suspended for 90 days.

2) Beijing has maintained other targeted countermeasures: 10–15% tariffs on select U.S. agricultural, meat, and dairy products; suspension of timber imports; reduced quotas for American film imports; and expanded export controls—all in response to U.S. policies.

This measured response underscores China’s pragmatic and restrained approach, a consistent strategy since the start of the trade war. However, the abrupt escalation by Trump prompted a swift, proportionate retaliation.

This time, Trump rolled back the most extreme and irrational portion of his “reciprocal tariffs,” while keeping a 10% levy in place—leaving room for further negotiations.

For now, stakeholders—U.S. consumers and businesses, Chinese exporters, capital markets, both governments, and third parties—can take a collective sigh of relief and regroup for the next phase.

2. Short-Term Impacts

United States:

1. Trump: Politically, this is a major setback. While Trump and his aides will try to spin this as a “strategic win,” the reality is evident: walking back tariffs is a clear loss, exposing his impulsiveness and undermining his authority.

2. Within the Administration: This represents a quiet victory for the pragmatic wing. From Treasury Secretary Bessent to external allies like Elon Musk and Bill Ackman, many will publicly support Trump’s “wisdom” while privately crediting moderate advisors. Having managed and guided Trump through this reversal, they now have increased leverage and a playbook for future interventions.

3. Capital Markets: A temporary de-escalation in U.S.-China trade tensions triggered an immediate rally. Wall Street has drawn several lessons:

• Trump is unpredictable and unreliable.

• The “Trump put” still holds—markets can pressure him into reversals.

• Investors must neither underestimate his resolve nor overestimate his competence.

4. Importers & Retailers: With tariffs suspended, importers will likely launch a wave of “revenge importing” to stock up for the year. Supply chain disruptions have created space for opportunistic price hikes, adding to inflationary pressure.

5. U.S. Firms Operating in China: With negotiations unresolved, uncertainty remains. But one thing is clear: Trump is capricious. Companies should avoid overreacting and instead proceed cautiously.

6. American Consumers: They’re breathing a sigh of relief and rushing to stock up at Walmart, Amazon, and Chinese cross-border e-commerce platforms.

7. Trump’s Base: Despite all the noise, Trump has achieved no real gains. His base isn’t blind—they can see the setbacks, the absence of a trade deal, and the elusive promise of manufacturing revival. The political damage is real. Republicans may pay a price in the midterm elections.

China:

China has delivered a well-calculated counterstrike—both forceful and restrained. This episode not only showcases Beijing’s measured strategy but also exposes the irrationality of Trump’s approach. Despite having imposed fewer tariffs this year than the U.S., China still appears the more rational actor, prioritizing global stability and predictability.

By de-escalating, Beijing has protected its export sector from immediate shocks and created room to focus on higher priorities.

3. The Next Phase of Trade Talks

As the initiator of this round of trade tensions, Washington is likely to shift focus to negotiations with other partners—including Japan, South Korea, and India. Trump’s advisors are expected to pursue several objectives:

1) Leverage the pause in China tensions to secure better deals elsewhere.

2) Form a coalition with allies to apply joint pressure on Beijing.

3) Relegate China to the bottom tier of a “tiered tariff” system.

4) Lay the groundwork for long-term decoupling or “de-risking” while minimizing short-term economic pain.

What unfolds within and beyond the 90-day window will depend on U.S.-China negotiations and trilateral dialogues involving third-party economies and trade blocs.

4. Medium-to-Long Term Outlook

U.S.-China economic ties are too deep to fully sever, but mutual de-risking is inevitable. Both sides seek to reduce dependency on the other.

If there is one shared strategic interest, it is ensuring a smoother, more manageable transition that avoids destabilizing global markets.

U.S. considerations:

1. American businesses have now seen how geopolitical shifts disrupt supply chains. While they may not leave China entirely, they will diversify—relocating some operations to third countries over time.

2. This won’t mean a manufacturing renaissance at home. Trump’s goal of “bringing jobs back to America” remains more illusion than reality.

3. In Washington, the political and corporate elite are converging on a more actionable, mid-to-long-term containment strategy. Trump’s role is largely functional—accelerating this process.

4. However, U.S. policymakers still lack consensus on how to revive domestic industry. From semiconductors to shipbuilding, real policy breakthroughs remain elusive.

China’s approach:

1. Reduce reliance on U.S. export markets, including expanding rerouting via third countries.

2. Deepen export diversification.

3. Strengthen broad-based cooperation with other trade blocs—particularly the EU—to reduce bilateral friction.

4. Expand domestic demand, making it a national strategy. By stimulating internal consumption—especially in services—China can absorb domestic capacity and advance structural transition.

A key pathway to resolving U.S.-China economic tensions lies in the U.S. producing more and China consuming more. While the former is a tall order, the latter is more achievable. China's institutional capacity for long-term planning gives it a strategic edge. This trade conflict may in fact accelerate China’s economic transformation.

On Oct. 29, 2024, the Hurun Research Institute released the Hurun China Rich List 2024. This is the 26th edition of the list since 1999 when British businessman Rupert Hoogewerf -- whose Chinese name is 胡润 Hu Run -- first started compiling a ranking of China's richest individuals.

ByteDance founder Zhang Yiming, 41, topped the list for the first time with 350 billion yuan (about 49.3 billion U.S. dollars) in wealth, followed by Zhong Shanshan, founder of bottled water giant Nongfu Spring (09633.HK), and Pony Ma, founder of Chinese internet giant Tencent (00700.HK).

Industrial products, consumer products, healthcare, real estate, and food & beverages were the top five contributors to the wealth of the entrants on the list. By wealth shares, consumer products replaced real estate as the top-performing sector.

“Half of the entrants were not on the list just five years ago, and 80 percent were absent a decade ago. This reflects the profound transformations occurring within China’s wealth creation landscape,” according to Rupert Hoogewerf.

Below are the highlights of the list, according to Hurun Research Institute.

• Hurun Research found 1,094 individuals with more than CNY 5 billion (equivalent to US$700 million), down 12 percent or 147 individuals from last year. The total wealth of entrepreneurs on the list was US$3tn, down 10 percent from last year.

• Number of dollar billionaires down 142 to 753. This means China has lost 432 or just over a third of its billionaires since the high water mark of 1185 in 2021. There are 132 or 21 percent more billionaires than five years ago, when there were only 621.

• ‘Short Video King’ Zhang Yiming, 41, topped the Hurun China Rich List for the first time with US$49.3bn and becoming the 18(th) Number One in China in 26 years. ByteDance's global revenue grew 30 percent last year to US$110 billion, with users in the US of its TikTok app closing in on 200 million.

• ‘Bottled Water King’ Zhong Shanshan, 70, lost his top spot for the first time in three years, dropping down to second with US$47.9bn, down 24 percent or US$15.5bn, the biggest drop of the year, after a backlash in February against his bottled water business Nongfu Spring. Zhong’s other main source of wealth, infectious disease diagnostics business Wantai BioPharm had a good year.

• Pony Ma Huateng, 53, down one place to third with US$44.4bn, up 13 percent. Tencent’s revenues rose 9.8 percent, while profits rose 36 percent on the back of a growth in its overseas games. By the end of last year, WeChat had 1.3 billion users.

• 54 new faces, the lowest in 20 years. The biggest number came from Taiwan, on the back of a good stock market performance and the boom in computing power. Others included Charlwin Mao Wenchao, 39, and Miranda Qu Fang, 39, of popular social media app Xiaohongshu with US$2.5bn and US$1.7bn, as well as Zhou Shengfu, 46, of freight logistics platform Huolala, with US$2.4bn.

• 201 dropped off this year, bringing the total number of drop-offs since the 2021 peak to 673 individuals.

• Industrial Products and Consumer Products led with 13 percent and 11 percent of the Hurun China Rich List, showing China’s manufacturing strength, followed by Healthcare with 9.7 percent.

• 127 were 40 or under, up 26, of which 32 were self-made, down 7.

• 30 were born in the 1990s, 11 more than last year, of which 3 were self-made. Seattle-based Wang Shuo of HR services platform Deel overtook Nie Yunchen of bubble tea brand Heytea to become the richest self-made Under30 with US$990mn.

• The average age is 61, two years older than last year.

• Shanghai overtook Shenzhen for the first time since 2013 to become the city with the highest concentration of entrepreneurs on the list after Beijing. Beijing was still top, but by the smallest margin since records began, only three ahead of second-placed Shanghai. Taipei jumped to 6(th) place.

• 153 live in Hong Kong, Macao or Taiwan, up 11, accounting for 14 percent of the list. Of those, 97 reside in Taiwan, 15 more than last year, and 56 in Hong Kong, 4 fewer than last year. 30 live overseas, led by the US and Singapore. Singapore jumped 6 places to 14(th) most popular city to live in for the Hurun China Rich List.

• 23.5 percent are women, similar to last year, of which 70 percent are self-made. Kelly Zong Fuli, 42, overtook Kwong Siu-ching to become China's richest woman for the first time.

• Delegates to the NPC or CPPCC up from 6.5 percent of the list last year to 7 percent this year. 39 were delegates to the CPPCC, down 3, and 36 delegates to the NPC, down 3.

• 7 from last year’s list passed away: Tang Xiao’ou of SenseTime in December at the age of 55; Xu Gang of LB in May at the age of 61; Cai Hongzhu of Hubei Daohuaxiang in December at the age of 73; Shen Wenrong of Suzhou-based Sha Steel in June at the age of 78; former Number One Zong Qinghou of Hangzhou-based Wahaha in February at the age of 79; Hui Man-Long of Chi Mei in November at the age of 96.

• Those born in the Year of the Rabbit continue to be the best wealth creators, with the most individuals on the list for an unprecedented 13(th) year. Dragons and Snakes were second and third. Those born in the Year of the Horse had a good year, whilst those born in the Year of the Rooster dropped down the most.

In 1997, Hoogewerf moved to Shanghai to work as an accountant. Two years later, Hoogewerf, founder and chief researcher of Hurun Report, released China’s first rich list, aiming to showcase to the world the economic transformations unfolding in the country.

The year after the list’s debut, he reached out to Southern Weekly and received his first interview in Chinese within China. Now, more than two decades later, Southern Weekly once again sat down with Hoogewerf to delve into the latest economic dynamics of China through the lens of his list. Below is the interview translated by GRR.

1. Significant changes in China’s wealth creation landscape

Southern Weekly: Looking back on the previous editions of the Rich List, what do you think are the key stages in China’s economic development over the past two decades?

Rupert Hoogewerf: China’s economy experienced rapid growth concurrent with its urbanization process when numerous real estate enterprises developed. That marked the first stage.

In the second stage, the internet boomed, evolving from emails and search engines to gaming and e-commerce. Today, China has entered a more advanced phase in the internet industry, marked by the rise of short video platforms.

Zhang Yiming, China’s wealthiest individual this year, epitomizes the transformative era of short videos. As the first person born after the 1980s to top the list and an entrepreneur who started from scratch, his influence is comparable to Microsoft’s in the computer sector. Short videos have fundamentally changed the way people access information and communicate. They have even influenced the presidential election in the United States.

In the third stage, the focus shifted to new energy. Zeng Yuqun, founder of lithium battery provider CATL (300750.SZ), claimed sixth place on the 2024 Rich List.

Southern Weekly: If the internet has indeed evolved to a more advanced stage, what new era might we be entering next?

Rupert Hoogewerf: We are entering a phase of emerging industries such as artificial intelligence (AI) and robotics, which feature extensive and interwoven industrial chains. For instance, AI large language models and computing power, robotics and LiDAR technology, as well as the low-altitude economy and drones are all industries that are expected to develop in tandem.

What struck me most about this year’s list is that half of the entrants were not present on the list just five years ago, and 80 percent were absent a decade prior. This reflects the profound transformations occurring within China’s wealth creation landscape. On one hand, traditional sectors such as real estate have seen a slowdown, while on the other hand, emerging industries are experiencing rapid growth.

Those changes are particularly evident in our start-up series. In addition to the Hurun Rich List and the Hurun 500, we also publish start-up series, including the Hurun Global Unicorn List, the Hurun China Under30s, the Hurun China Under35s, and the Hurun China Under40s.

The Hurun China Under35s, for example, is largely made up of individuals born in the 1990s. This year, a significant portion of entrants engage in industries like software services, healthcare, and consumer goods, with a particular focus on emerging areas such as AI, laser radar, surgical robots, and pet consumption.

It’s been just two years since the launch of ChatGPT in November 2022, yet the AI chatbot has already had a significant impact on various industries. Looking ahead 30 or 40 years from now, could AI exponentially improve business efficiency across all sectors? Might brain-machine interface technology reach a high level of sophistication? And could nanotechnology achieve near-perfection?

I find the possibilities both exciting and daunting. It raises the question: In such a future, what roles will humans play?

Southern Weekly: What sets entrepreneurs from different eras apart?

Rupert Hoogewerf: First-generation entrepreneurs, like Li Ka-shing, often started by setting up a stall or running a small business. Due to limited access to capital, they built their wealth gradually and steadily.

Second-generation entrepreneurs began to attract some investment as capital markets grew gradually, albeit not as mature as they are today.

By the time third-generation entrepreneurs emerged, capital had become a more prominent factor, with greater access to funding. At first, foreign investment might be a significant source, but now China has developed its own stock exchanges.

Chinese coffee behemoth Luckin Coffee (NASDAQ: LKNCY) is the most typical example of start-ups at this stage. It made history by achieving the world’s fastest initial public offering (IPO). Similarly, Moonshot AI, founded in March 2023, saw its valuation surpass 20 billion yuan within its first year. Their rapid growth reflects the mindset of investors eager to pour significant capital into the latest trends。

Sometimes bubbles may form, but I tend to have a relatively positive view of them. Take the electric vehicle sector, for instance. While it has faced its share of bubbles that led to the bankruptcy of many companies, there's an upside: bubbles often signal which industries are at the forefront of current trends.

The second difference is that first-generation entrepreneurs focused on the Chinese market in the early stage, whereas entrepreneurs born in the 1980s and 1990s quickly embraced globalization after starting their own businesses. Notable examples include ByteDance, Pinduoduo (NASDAQ: PDD), and international fashion e-commerce platform SHEIN, which does not even consider China its primary market.

The swift globalization of these companies can be attributed to the strategic decisions made by their founders, their talent team, and of course, the funding support they’ve received.

Another difference lies in educational backgrounds. First-generation entrepreneurs often lacked formal education, achieving success through their courage and the opportunities they seized. Today, however, many young entrepreneurs are graduates of prestigious universities.

Our start-up lists demonstrate this trend. The majority of the entrants under 35 are graduates from Tsinghua University, followed closely by Peking University, Zhejiang University, Shanghai Jiao Tong University, and The Chinese University of Hong Kong. This is not entirely accidental, I believe.

Yang Zhilin, founder of Moonshot AI, is an alumnus of Tsinghua University. While entrepreneurs from Shantou, like Li Ka-shing, are often associated with traditional industries, this 31-year-old entrepreneur from Shantou has broken the mold by venturing into the field of AI.

2. A golden era of entrepreneurship

Southern Weekly: For the first time, the number of entrepreneurs with wealth of over 5 billion yuan declined for three straight years. What’s your view on this change?

Rupert Hoogewerf: One factor to consider is the publication date of our list, which included data by the end of August, right before China’s A-share market skyrocketed. Following the stock market rally, some businesses saw their market capitalization surge back.

People often ask me, “What’s your view on the Chinese economy?” My response is this: I’m uncertain about its short-term prospects over the next one or two years, but over the long term -- say, 10 or 20 years -- I have full confidence that it will continue to thrive. I am confident in the overall development of China’s economy.

At present, China is investing heavily in industries that are the most promising ones in the world, like consumer electronics and new energy. And China also encourages the development of robotics, AI, and other emerging industries.

Without a doubt, these industries belong to the future. Some may point to the chip problem which could be challenging to address in the next year or two. However, will things improve in the long run, say in 10 years? I believe they will.

Southern Weekly: Are we still in the golden era of entrepreneurship?

Rupert Hoogewerf: Some may say no, as China’s challenging economic climate and slowing growth have dampened consumer confidence and led to consumption downgrading. However, I hold a different perspective. I believe we are currently in a golden era of entrepreneurship -- perhaps even the most opportune period ever -- for starting new ventures.

In fact, the ongoing economic slowdown, combined with technologies that are fundamentally changing our lives and consumption habits, provides unique opportunities. Bitcoin, for example, was born during the 2008 global financial crisis. Was its emergence an accident? I don’t believe so.

Today we may have doubts about the outlook of traditional industries, but at the same time we recognize that emerging industries will thrive and create numerous opportunities.

Following the introduction of ChatGPT, Chinese businesses quickly entered the field to offer chatbot-based AI solutions. Interestingly, it’s start-ups like Moonshot AI -- rather than tech giants like Tencent and ByteDance -- that have seized the opportunity to shine. In the large AI model sector, entrepreneurs under 35 are particularly prevalent.

Southern Weekly: Why did start-ups get the chance?

Rupert Hoogewerf: On average, unicorns are only nine years old. Entrepreneurs at various stages of their business focus on different sectors, depending on the stage they are in, the maturity of an industry, and the areas investors are watching closely.

Unicorns embody the vitality of the future economy. If a country lacks global conglomerates, it may experience a gradual decline. An economy is truly vibrant only when both large and small firms flourish. A country with a greater number of unicorns will enjoy sounder economic development and have brighter prospects.

Globally, the U.S. produces the most unicorns and China comes second. Together, the two countries account for 60 to 70 percent of the world’s unicorn companies.

For entrepreneurs, the key to success lies in seizing the opportunity. AI and humanoid robots, for example, exhibit promising future trends. While every entrepreneur is aware of these trends, not everyone understands how to harness them for personal success.

After the launch of ChatGPT, you may just get surprised and say, “Wow!” But what did Yang Zhilin say? “Wow! I’m going to develop the Chinese version of ChatGPT.” That’s the difference. When you have a super good idea and someone—whether it’s a friend or a friend of a friend— is willing to invest in your idea, you just might become the next richest person.

It’s been more than 25 years since our first list. And we have seen big changes in its entrants. Some have aged or passed away, others have been put behind bars, and some have seemingly vanished, possibly having fled. So we continually seek out new entrepreneurs to feature on our list and to support their endeavors.

Of course, a firm cannot exist as a unicorn forever and must graduate much like a university student one day. Recently, the capital market has welcomed few IPOs and some Chinese businesses have opted to go public overseas. The entrepreneurship ecosystem is vital. Investors typically seek returns within an average period of seven years, sometimes extending to 10 years. However, if the investment cycle lengthens beyond that, it may indicate that something is wrong.

3. “Billionaire” not a good word

Southern Weekly: What is the biggest challenge in accurately calculating the wealth of billionaires?

Rupert Hoogewerf: Lack of transparency. We can only rely on publicly reported information, and have no access to non-public information about so-called “vampire billionaires”. Terrified of daylight, they conceal their wealth through various means, such as saving their money across multiple banks and moving their assets offshore.

Another category of billionaires are small shareholders in large firms like ByteDance, Tencent, and Alibaba. Their personal wealth can exceed 5 billion yuan even with a stake of just tenths of a percent share in the company. However, their wealth information is not visible.

In some other cases, the personal wealth of billionaires only becomes public knowledge during divorce proceedings. Few entrepreneurs, therefore, are inclined to divorce.

This means some people may not be included in our wealth listings as we claim.

In fact, the Rich List represents merely a transient phase for entrepreneurs. There is also the Philanthropy List.

Some entrepreneurs don’t want to see their name on the list. They often reach out to me for advice. Typically, there are two approaches. First, they could experience poor stock performance, which entrepreneurs are unwilling to accept, though.

Second, they could donate their money based on the threshold of the Rich List. Let’s say, the current threshold is 5 billion yuan and their wealth amounts to 10 billion yuan. Just donate 5 billion yuan, and they would remove themselves from the Rich List and potentially appear on the Philanthropy List.

Southern Weekly: How much money does a person truly need on earth?

Rupert Hoogewerf: Five billion yuan could be more than sufficient to support several generations. For instance, if an individual has three children, each could inherit approximately 1.3 billion yuan. By the time the third generation comes along, and assuming each of them also has three children, the inheritance per grandchild would be about 400 million yuan. Moving to the fourth generation, each child of the grandchild would then inherit around 100 million yuan.

For many, 100 million yuan guarantees financial freedom. It allows one the choice to forgo traditional employment if they wish to.

Recently, an entrepreneur in his nineties passed away, leaving behind a fortune close to a hundred billion. It made me wonder: “Why did he still have so much wealth at such an advanced age? Why hadn’t he donated it?” Of course, I’m not in a position to judge such actions; I simply don’t understand it.

I really don’t like using the word “billionaire” to describe the entrants on the Rich List, since it seems to just relate to a group with high spending power. I think “super wealth creator” might be better. Why do governments across the world hope to attract these individuals to their region? Because they have the potential to stimulate local industrial growth and generate wealth for the area.

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In recent months, both during my travels in the United States and in conversations with Chinese economists in China, I've noticed a consensus that tackling the real estate challenge is crucial for forecasting the future direction of China's economy. With this context, I find Mr. Shan's insights on the issue particularly enlightening and valuable. Therefore, I've obtained permission from Mr. Shan to share his article with you.

Weijian Shan is the Executive Chairman of PAG, a leading private equity firm, and is recognized as one of the most influential figures in the Asian private equity space. His articles, addressing concerns about China's development in "Is China's economy doomed?" and analyzing China's growth potential in "Will China continue to grow? -- views from Weijian Shan," have garnered significant attention among GRR's readers. He is also the author of Out of the Gobi, Money Games and Money Machine. I've been reading Out of the Gobi recently, and I've found it to be an exceptional book. I strongly recommend it.

China’s property market is at risk of an overcorrection, not oversupply

Weijian Shan

A Chinese former official made headlines last September by saying that China had so many vacant homes that even its 1.4 billion population cannot hope to fill them all. Estimates suggested there were enough vacant properties to house as many as 3 billion people.

If true, China’s housing market is doomed. But, to paraphrase Mark Twain, reports of the market’s demise are an exaggeration.

According to the national statistics bureau, China has built 14.4 billion square meters (155 billion square feet) of saleable homes – excluding self-built homes such as in rural areas – over the past 30 years. In 2020, the per capita urban living space was 38.6 square meters, meaning that in three decades, China had built enough housing for 370 million people, just 40 percent of its urban population of 920 million. How many empty homes can there be?

There are two signs of significant oversupply in residential markets, according to economist Gao Shanwen, who based his work on data from economies including Japan and the United States.

The first is a prolonged contraction in transactions for resale homes. But in China last year, according to Beike Research Institute, resale home transactions surged, rising by 44 percent in terms of floor space sold and by 30 percent in transaction value.

The second is when investments in residential property development represent more than 7 percent of a country’s gross domestic product. In China, this ratio hit about 12 percent in 2013 but has fallen since, and is expected to be around 5.5 percent this year.

Therefore, Gao concludes, while there is a significant overcorrection in China’s residential property development sector, there is no oversupply in the housing market. The market correction has been so severe it has tipped over into an overcorrection.

China’s housing crisis isn’t over.

Even though overall home sales rose last year, by 6.3 percent in floor space and 5.8 percent in value, sales of new homes slumped by 8.2 percent in floor space and 6 percent in value. This is because developers are prohibited from selling new homes below certain prices, presumably to protect property values. Consequently, developers may not be able to offer new homes at market-clearing prices.

As of the end of last year, China’s home price index has slid 9 percent from its 2021 peak, creating a “negative wealth” effect that is dampening consumption and slowing down the economy’s transition from being investment-led to consumption-driven.

Meanwhile, many Chinese property developers are mired in financial difficulty or insolvency. Bankruptcies of property companies almost quintupled from 123 in 2022 to 590 last year. Defaults or the restructurings of offshore bonds issued by Chinese developers are more the rule than the exception.

Will China’s housing sector woes lead to a financial crisis like in the US and Europe in 2008? The answer is no, for three reasons.

First, the average loan-to-value ratio of home mortgages in China’s major cities is about 50 percent, which means that housing prices will have to fall by more than half to put mortgages at risk. That is not even remotely likely, and the ratio of non-performing housing loans among Chinese banks remains below 1 percent, according to ratings agency S&P.

Second, home loans are unlimited personal liabilities in China, so homeowners cannot simply walk away from them as one can in the US. So defaults are rare.

Third, banks’ exposure to developers represents less than 5 percent of their loan book, all of which is collateralized. Chinese banks are well-capitalized, with an average capital adequacy ratio of more than 15 percent, and an average non-performing loan ratio of about 1.6 percent.

Yes, non-performing loans have been rising in recent years. But banks are selling or writing them off quickly because the regulatory requirement for reserves to cover non-performing loans is more than 100 percent, making such debt not worth holding on to.

Indeed, China’s banking system faces a unique problem of having too much cash. Household deposits increased by 18 trillion yuan (US$2.5 trillion) in 2022 and a further 17 trillion yuan last year as consumers continue to hold back.

But the housing crisis continues to retard China’s economic recovery. The property sector’s contribution to gross domestic growth was a negative 4 percent in 2022. The good news is that this recovered to a negative 1.3 percent last year and is expected to further improve to a negative 0.9 percent this year, according to UBS.

Sources: CEIC, UBS

The prevailing view of China’s property market is that the housing crisis was inevitable, driven by the bursting of a property bubble and the immutable laws of supply and demand. In fact, it was largely policy-induced, as the government took measures to cool down the overheated sector by limiting purchases and controlling prices, mortgages and credit to developers.

The tightening in recent years has become so draconian as to choke the air out of the property market. Many of these cooling policies continue to suppress demand. For example, the Chinese can buy properties around the world but not in some major Chinese cities unless they are residents buying their primary home. Where else do policymakers handle a housing crisis by limiting home purchases?

The latent demand for housing is substantial. The Chinese have always considered residential properties the most preferred asset class to invest in. Whereas in the US, residential properties represent only about 25 percent of household wealth, this ratio is about 59 percent in China.

China is on track to increase its urbanization rate from around 65 percent now to 73 percent by 2035, which will add more than 100 million people to the urban population – all of whom require housing.

To avoid prolonged pain, it is advisable to remove all remaining restrictions on housing prices and demand, allowing the market to adjust itself and find its footing. Hong Kong set a good example by doing so in February, which immediately sparked a surge in property transactions. It is only by stabilizing the property market that public confidence can be restored, private consumption can resume and economic growth can reaccelerate.

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Allen Zhu focuses on investments in early-stage companies in the internet, mobile and new media sectors, according to the website of GSR Ventures. He has rich experience in software product development and global expansion. Prior to GSR Ventures, he co-founded eBaoTech, a leading provider of insurance core back-end systems. He has also worked for McKinsey Greater China, where he earned deep consulting and implementation experience.

In the interview, Zhu shares his perspectives of his investment experience in recent years in China. He explains why 2023 became the most comfortable year of his investor career, and why he made investment decisions more slowly than before. From his interview, you can tell the shifting focus of Chinese investors. The topics include:

• Large language models (LLM): those who invested in them in early 2023 faced losses later on

• Entrepreneurship: "less money" is a double-edged sword

• Investment in Chinese consumer market: a more prudent approach

• Going global: Chinese entrepreneurs' work ethic is unrivaled globally

Please note that the translation has not received Mr. Zhu's personal review and was edited by GRR for clarity.

When Zhu Xiaohu (Allen Zhu), managing director of venture capital firm GSR Ventures, attended a meeting in the United States in October, 2023, a limited partner (LP) was surprised that Zhu didn’t have gray hair on his head.

In fact, Zhu even thinks his hair is darker than in the past. One reason may be that he’s not so worried about how the projects he invested in fare. “I won’t lose sleep as long as the businesses can make profits,” Zhu said in an interview with China Entrepreneur in his office at GSR Ventures.

Zhu remains sensitive to profitable opportunities and new trends. In April 2022, Zhu made an investment decision shortly after a 15-minute video call with William Li, founder and chief executive officer (CEO) of Fancytech. He sensed an opportunity: AI-generated content (AIGC).

At that time, AIGC hadn’t become a hot trend yet. Fancytech specializes in helping e-commerce websites with content aggregation and brand growth with higher conversion rates. After Fancytech incorporated AIGC technology into its business and exhibited rising performance, Zhu invested more in another three funding rounds.

To some extent, however, that sensitivity comes his own way, in explicit disagreement with others. For example, when most others sought after large language models (LLMs) — advanced artificial intelligence models that uses deep learning on large data sets to understand and generate new content — in the first half of 2023, Zhu suddenly emerged from a period of silence and poured cold water on their enthusiasm. In a public speech, he mentioned that ChatGPT is not friendly to start-ups and they should let go of their funding fantasy in the next two to three years. His remark triggered an objection from Fu Sheng, a well-known Chinese entrepreneur and chairman of internet company Cheetah Mobile.

Today Zhu still sticks to the view that LLMs would prove a boon only to tech giants and start-ups should focus on vertical market segments such as sales and marketing. In his opinion, the same logic applies to investment. “I think investors must set their eyes on what they’re good at, because the market cycle keeps changing.”

AIGC and consumer market have always been the focus of Zhu. He is very familiar with the two areas, yet his investment decisions are made more slowly. In 2023, Zhu spent more time doing research before investing into a project. Quick investment has almost become a thing of a past, like the one in 2012 when Zhu decided to fund Chinese ride-hailing company Didi after only half an hour’s chat with its founder Cheng Wei. “Without much competition from other investors, I had as long as three to four months on average to consider whether a project is worth investing in.”

At such pace, 2023 became the most comfortable year of his investor career, in a shift from racing to invest in a project to investing without haste.

As of November 2023, Zhu had invested in only one third of the number of projects compared with past years, although several projects were still under consideration. “Investors find a sense of achievement in the success of the businesses they invest in, not in the amount of money they invest.”

In the interview with China Entrepreneur, Zhu repeatedly mentioned a word: discipline. In his view, disciplined investors know how to control the size and pace of investment and project valuations properly.

Large language models: Investors chasing after LLMs in the first half of 2023 mostly took a hit in the second half

China Entrepreneur: How do you see the rise of LLMs impacting technology cycle and entrepreneurship cycle?

Zhu: I think it’s a good thing. It marks the start of a new cycle. For entrepreneurs, the key is figuring out what you want to do. The era of computer and mobile internet each lasted for 10 years. The new AI era will probably last as long, 10 to 20 years.

One thing is for sure, though: it is unrealistic for entrepreneurs to develop a new iOS app of the mobile internet. Instead, they can find a lot of opportunities from applications built on LLMs. We have invested in many companies working on AIGC and they are doing very well.

China Entrepreneur: Do the changes in the cycle of entrepreneurship mean new requirements for investors? With fewer entrepreneurs and thus less demand for money, how can investors find good projects?

Zhu: In fact the key remains unchanged, that is, make your own judgment and never follow the herd. In the first half of 2023, most investors chased after LLM projects and poured massive amounts of money into them. But now they are all at a loss.

What we’re seeing now is similar to what happened when the operating systems first appeared. In the early stage, LLM companies may have no time for some minor features, leaving opportunities for start-ups. Once the LLM companies have time, however, they will be able to add them immediately. By then start-ups can get nothing.

An article online mentioned that the launch of a package of GPT-4 tools destroyed a slew of start-ups. In my opinion, start-ups should avoid directly taking part in the LLM race, or they would struggle to survive.

Today LLMs can boost programming efficiency by 50 percent. This can help companies cut labor costs from junior programmers. But to deal with the bugs created in the process, more senior programmers will be needed to check for mistakes. Many start-ups try to use AI to optimize codes or improve debug process. This is viable only in the short term. If GPT-5 is released in 2024, LLMs may be able to speed up a developer’s code generation by as much as 90 percent. By then, those start-ups will be in danger.

China Entrepreneur: You earlier had a debate with Fu Sheng on LLMs. Is there a clear result now?

Zhu: I honestly don’t think LLMs itself can create opportunities for start-ups. First, the cost is high. Second, without data and scenarios, they would not be able to optimize.

So ultimately it’s still tech giants that can benefit from LLMs. Start-ups should focus on sales, marketing and other vertical market segments they’re good at. Opportunities are huge in these areas.

China Entrepreneur: What does the commercial LLM landscape look like in China? In which stage are companies in?

Zhu: LLM companies are looking for where to use their LLM tool. To be honest, I think China’s top LLM companies can reach the level of GPT-3.5 by the end of 2023, and hopefully GPT-4 by November, 2024. But its commercial use is another thing. Since OpenAI released GPT-4, it has had limited commercial applications to date in the U.S. The situation should be similar in China.

China Entrepreneur: In which areas do you think are LLMs most commercially viable?

Zhu: For now, things like creative writing are the easiest to do. LLMs can write an advertisement, a work report, a speech, and so on, and improve them. They can also do a good job in generating images. Midjourney is a powerful image generator. In China, we feel that LLMs can be better used to generate short videos based on the large amounts of short video data. The situation is different in the U.S. Nearly all of its e-commerce websites, including Amazon, are still based on pictures. In comparison, China’s e-commerce businesses have all shifted from pictures to short videos in the past three years. All the e-commerce websites mostly use short videos, rather than pictures, to increase traffic.

Companies can use product data generated through short videos to train their own vertical models. Fancytech is a successful example of product transformation.

China Entrepreneur: Does this mean a big opportunity for investors to make money? Image and text generation is still a niche.

Zhu: We suggest investors begin with a niche market. Why? Large platforms don’t pay attention to or spend heavily on it. There will be more room as the market grows in several years.

Now is a very good time to spot cost-effective projects from non-consensus areas.

China Entrepreneur: Are leading LLM start-ups still sought after?

Zhu: They were in the first half of 2023, but investors all regretted their decision in the second half.

China Entrepreneur: So is embracing AIGC the only choice for entrepreneurs?

Zhu: Yes. And they must. In two years, any company that does not rely on AIGC would lose competitiveness. Even consumer companies and home appliance companies need to reduce costs and increase efficiency through AIGC.

And that’s very easy to do now. For example, we invested in a company with more than 1,000 employees. Four employees in its human resources department are responsible for answering questions about employee benefits; by using AIGC, the company just needs one robot to do that. How? Feed its benefit policies into the robot and train it for one week, then it will be able to answer all questions from the employees. You see, AIGC helps reduce costs and increase efficiency immediately. AIGC can also be applied in other scenarios, like image generation in games.

Entrepreneurship: Lack of money is a double-edged sword

China Entrepreneur: Recapping 2023, how many projects have you invested in?

Zhu: About one third of the number in past years. The number seems small, yet the truth is many other projects are also on my list of consideration. I’m actually optimistic about several of them and considering whether or when to invest.

If anything else has changed, it is the way I invest. In the past few years, there were times when I invested in a start-up without even meeting its founder in person. I’m unlikely to do that now. Instead, I would spend three to four months researching a project, like what I did 15 or 16 years ago. I would look at the monthly forecasts provided by the founder and compare them with the real data. I would be willing to continue only if they were consistent for three to four months.

China Entrepreneur: Have there been any changes to the pace of fundraising and investment for GSR Ventures in the past two years?

Zhu: Not much. We raised a new fund in early 2022.

Of course, there have been other changes in the past year or two. The biggest one was the share of the secondary market dropped too much, causing a serious mismatch between the primary and secondary markets. New funds will not be raised in the primary market until the situation improves in the secondary market.

Second, the U.S. risk-free rate is now 5 percent plus. When investors can get 5 percent plus current interest from their bank savings, why would they invest their money in the non-liquid primary market? This would affect the big picture, and the amount of money investors are willing to allocate to the primary market.

Last, financial liquidity. Investors who love the Chinese market most are unable to re-invest in China because their money is still locked up.

All these have restricted the flows of money. If RMB funds can’t return proceeds to their investors, known as distributed to paid-in capital (DPI), the latter will unlikely invest more. The same holds true for U.S. dollar funds. Their money will flow back to China only when they see that money flows again in the Chinese market and some excellent businesses can exit. I don’t expect a market recovery until at least 2025.

China Entrepreneur: So from this perspective, will the macro environment pose a variety of challenges to entrepreneurs?

Zhu: Yes. Lack of money is a double-edged sword. It’s a good thing for true entrepreneurs as they don’t face much noise or competition. Firms investing in VC, of course, can’t get money now.

China Entrepreneur: Throughout your investor career, did you feel any different in 2023?

Zhu: Yes. 2023 was the most comfortable year for me. I had a feeling that I was reliving a life from 15 years ago. I could just take my time to investigate a project.

China Entrepreneur: RMB LPs were active in the primary market in 2023. Has GSR Ventures considered expanding the scale of RMB funds?

Zhu: No. Discipline is very crucial. Expanding scales now is the best method of suicide.

I must control the size and pace of investment, and investment valuations properly. This is very important.

China Entrepreneur: How well did institutions do in 2023 in exits?

Zhu: It all depends on profit. During the capital winter (a significant funding slowdown and drop in fundraising activities), my hope is that every business can make a profit. Exits will happen when conditions are ripe. As long as every business can make money, there will naturally be a way to exit when the Federal Reserve starts to cut rates.

China Entrepreneur: When might be a peak time for exits?

Zhu: The key is when the Fed will cut rates. Before that, I think all large-scale exits are unrealistic.

Investment in the consumer market: Offering a PE ratio of up to 15

China Entrepreneur: What areas did GSR Ventures target in 2023? Have there been any changes?

Zhu: We have always focused on two areas, AIGC and consumer market.

China Entrepreneur: It seems difficult to spot good projects in the two areas, especially the latter, right?

Zhu: There are still good projects, of course. The problem is whether they want to raise funds now, given that valuations are too low. The chemistry between founders and investors is critical for success. When a founder is really in urgent need of money or needs an endorsement by a renowned investor, a deal will get done.

China Entrepreneur: Currently consumption potential in China’s third-tier and lower-tier cities is enormous. Many big brands are marching into those markets and some brands even focus on opening chain stores in those cities. How do you see opportunities for these brands?

Zhu: We have always been bullish about China’s overall consumer market. In the third quarter, China’s economic growth was mainly driven by consumption. During a talk with some LPs in the US a few months ago, I told them that China is the world’s second-largest consumer market, with a 1.4 billion population and 300 million middle-income earners. Every one of them is a consumer. The size of the market is unmatched by any other country.

Entrepreneurs now face less competition to win over Chinese consumers if they can offer them high-quality products at good prices. Total gross merchandise volume (GMV) on China’s e-commerce platforms has grown 30 percent so far in 2023 from a high base in 2022. A large part of that came from a 60% rise in online group discounter Pinduoduo. Some brands will definitely stand out and offer consumers better prices.

Besides, the Chinese mainland has a much lower chain store rate than regions like Japan. So opening a chain of stores in lower-tier cities is an inevitable trend.

China Entrepreneur: How do you choose a project in the consumer area?

Zhu: We look at two indicators. First, to develop a new product or brand, whether a single product can create an annual turnover of 10 billion yuan. The ceiling must be high. Second, whether the varieties of products are standardized enough to open 10,000 stores in lower-tier cities.

Profit matters too. Today all consumer companies pursue profit and seek to grow while ensuring profitability. In this case, some consumer brands may not grow as fast as we imagine, but in a healthier way.

China Entrepreneur: Is the pursuit of profit mainly caused by a lack of money they can raise?

Zhu: Yes, and that’s just one reason. Another reason is that the valuations system is completely different now. As it becomes more expensive to borrow money, companies will find it not worth their while to raise funds. They would rather pursue profit and develop with their own money.

China Entrepreneur: How has the valuations system changed?

Zhu: It reached a peak in 2021. At that time, valuations were 10 times the amount of sales for the future 12 months.

China Entrepreneur: Is the sales number an estimate?

Zhu: Yes. Usually we assume it doubles a year. So the final valuations could reach 20 times the amount of sales for 2023. But today valuations stand at 10 times the amount of profits for 2023. The difference is huge.

China Entrepreneur: How did that change happen? How was the standard set up? Did someone come up with it or is it a consensus?

Zhu: The market bubble was too big during the peak period. With everyone chasing after excellent projects, the price-to-sales (P/S) ratio reached as high as 10. At that time, you could find new opportunities from all consumer projects.

Things are different now. RMB funds are unable to exit the A-shares market and thus unable to invest in the consumer sector. So investors have no choice but to turn to profit and seek to get a dividend each year. They can only afford a price-to-earnings (P/E) ratio of 10 (We calculate PS by multiplying PE and the net profit ratio).

China Entrepreneur: Are you also more cautious toward investing in consumer projects?

Zhu: Yes. Now I can only promise founders a P/E ratio of 10, or 15 at most. If they didn’t accept that condition, I wouldn’t waste time meeting them. I may still follow truly promising projects when the founders really want to develop them, but with more caution.

Going global: Chinese entrepreneurs are the hardest working people in the world

China Entrepreneur: What’s your view on Chinese companies going global?

Zhu: Chinese companies have two advantages to go global. First, supply chains. Chinese products, especially when it comes to hardware, are at least 50 percent cheaper than what we’ll find in other places.

Second, Chinese entrepreneurs are the hardest working people in the world.

In a recent interview, Indian tech billionaire Narayana Murthy said young Indians should work for up to 70 hours a week. His suggestion prompted backlash from some Indians. Well, maybe they should look at how hard working Chinese entrepreneurs are.

When I attended the annual meeting in the US in October, I met a US dollar LP who has invested in GSR Ventures for more than a decade. We talked about China’s 996 work schedule, work 9 am to 9 pm, 6 days a week. He told me he had never heard it before. I think the hard-working spirit of Chinese entrepreneurs is a big asset for them.

Combined, the two advantages help make China’s start-ups a powerful presence on the global stage. Today global competition is becoming one between Chinese people. In social media and short video platforms, you compete with TikTok; in e-commerce, you compete with SHEIN and Temu; in games, you compete with Hoyoverse (miHoYo), Tencent, and NetEase Games. In the financial technology sector of Southeast Asia, Africa, and South America, Chinese companies are also occupying a large share.

Another example, warehousing and logistics robots exported to Indonesia are all made in China. China’s e-commerce companies deal with 300 million orders on average every day. Behind that are powerful robots, including robotic mowers and robotic pool cleaners. No other country has as many orders as China.

And Chinese people have an unrivaled ability to innovate. Take for example a shotgun sight company in Wuhan. The company exports high-tech shotgun sights to the US. Americans love to hunt. Can you imagine that this tiny gadget can bring the company an annual revenue of 2 billion yuan and a profit of 200 to 300 million yuan? The laser beam emitted by the shotgun sight can make a deer faint. All these things are made in China, and Americans could not possibly produce them.

Today we’re seeing some companies move manufacturing out of China. But what they moved out is just the lowest level of supply chains. Lululemon, a Canada-based athleisure apparel company, for example, moved some manufacturing to Bangladesh and Sri Lanka. When it comes to hardware, it will be extremely hard to move them out. They are all part of China’s supply chains. So it would be impossible to move them to Southeast Asia. I just talked about shotgun sights. The manufacturer iterates fast and launches new products every year.

China Entrepreneur: How are the companies backed by GSR Ventures doing in going global? The competition is already excessively fierce in Southeast Asia, especially for consumer brands.

Zhu: If a start-up offers enterprise services, I usually suggest that it first go to Singapore or Middle Eastern countries before marching into European and American markets. I say so for two reasons. First, Chinese products are more acceptable in Singapore and Middle Eastern countries. Second, living in these countries is a good way to improve English. You know, English is a big problem for Chinese companies. After staying in Singapore for six months or so, a founder will be able to communicate with locals in English.

As for consumer companies, I suggest entering the European and American markets directly.

China Entrepreneur: In 2023, Middle Eastern investors have been active in China’s venture capital landscape. How do you see this playing out?

Zhu: Well, they come to China with a purpose. They hope that industries could complement each other or Chinese companies could set up factories in their country to boost local employment and economic development. A company must align with their strategy to get their investment.

China Entrepreneur: Will Chinese investment institutions try appealing to their needs?

Zhu: It depends on whether your strategy suits their needs. Although we also work with LPs from the Middle East, we might not voluntarily spend more time on the Middle Eastern market. It’s not our priority right now. We focus on the Chinese market. More importantly, we want to help Chinese entrepreneurs go global, not only to the Middle East, but to the world.

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The two events are the 25th Annual Peking University Guanghua New Year Forum and the China Economic Roundtable. These discussions encompassed a range of topics including new productive forces, the digital economy, artificial intelligence, foreign investment, and foreign trade.

The 25th Annual Peking University Guanghua New Year Forum was held on Jan. 7, by Guanghua School of Management of Peking University. The theme of the forum is to explore momentum for the high quality development of the Chinese economy. The Guanghua School of Management is the business school of Peking University in Beijing. It has consistently been regarded as one of the top business schools in China. The forum lasted over eight hours. You can check the video of the forum here.

I select parts of the speeches of three speakers in the forum. They are:

• Huang Qifan 黄奇帆, former mayor of Chongqing, on "New productive forces 新质生产力"

• Jiang Xiaojuan 江小涓, former senior government official, now President of the Chinese Society of Industrial Economics and a Professor at the University of Chinese Academy of Social Sciences, on "digital economy"

• Wang Aihua 王爱华, Deputy Chief Engineer of China Academy of Information and Communications Technology, on "general artificial intelligence"

China Economic Roundtable is launched by Xinhua News Agency. The episode of the roundtable which was released on Monday focuses on foreign trade & investment.

I select parts of the speeches of three speakers in the roundtable. They are:

• Zhu Bing 朱冰, Director of the Foreign Investment Management of the Ministry of Commerce

• Zhang Wei 张威, Deputy Director of the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce

• Fang Xueyu 方雪玉, vice-president of Chinese home appliance maker Hisense Group's international marketing unit

Please kindly note that the translation has not received personal review by the speakers.

Huang Qifan 黄奇帆, former mayor of Chongqing, on "New productive forces 新质生产力"

Note: New productive forces "新质生产力" is firstly introduced by President Xi Jinping during his inspection visit to northeast China's Heilongjiang Province in September 2023:

要整合科技创新资源，引领发展战略性新兴产业和未来产业，加快形成新质生产力

Integrate the resources of technological innovation and pioneer the development of strategic emerging industries and industries of the future, so as to accelerate the formation of new quality productive forces.

New productive forces: disruptive technological innovation

My personal understanding of "new manufacturing" encompasses five domains: new energy, new materials, new pharmaceuticals, new manufacturing equipment, and new information technology. However, to be considered as the "new productive forces," it requires more than just ordinary technological progress or marginal improvements, but disruptive technological innovation. I believe at least one of the following five new standards should be met for such disruptive technological innovation:

1. New scientific discoveries. These are "zero to one" breakthroughs, creating something from nothing, leading to significant new understandings of our world. For instance, research in quantum science and neuroscience could greatly advance our knowledge of the world and our understanding of ourselves.

2. New manufacturing technologies. These are entirely different from existing technological approaches in principles and pathways, capable of replacing existing processes and technologies. An example could be future biomanufacturing, using bioreactors to produce a variety of proteins, food, materials, and energy that humans need.

3. New production tools. The evolution of tools has always played a crucial role in human development, as innovation in tools leads to increased efficiency and reduced costs. There are many examples, such as the emergence of EUV lithography machines enabling the manufacture of 7nm and 5nm chips, and integrated die-casting technologies in new energy vehicle manufacturing that significantly reduce the cost of producing new vehicles.

4. New elements of production. Traditional manufacturing relies on labor, capital, and energy, but future manufacturing will incorporate data as a new element. The introduction of this new element changes the production function, leading to new combinations and fusion fissions of economies of scale, scope economies, and learning effects.

5. New products and applications. Every era has its own set of popular household items that symbolize the technological and cultural milestones of the time. In recent decades, these items have included home appliances, mobile phones, and automobiles. Looking ahead, it's anticipated that the future household essentials could be domestic robots, head-mounted VR/AR devices, flexible displays, 3D printing equipment, and smart cars.

Productive services are increasingly important

In many countries, especially developed ones, the proportion of productive services within their GDP is increasing significantly. It is often said that services account for 80% of the United States' GDP, which might seem to be overly reliant on the service sector and raises questions about potential economic bubbles. However, it's important to note that within this 80%, approximately 70% is constituted by productive services. This means that about 56% of the US's $25 trillion GDP, or roughly $13 trillion, comes from productive services, which are highly related to manufacturing and high-tech services. In the European Union's 27 countries, the service sector's value added accounts for 78% of GDP, and within this percentage, about 50% is from productive services, making up 39% of the EU's GDP. In the United States, productive services account for more than 50% of GDP, around 40% in the EU, and between 40%-50% in other developed and G20 countries.

In contrast, these service sector indicators highlight a current shortcoming in the productive capacity of China. In 2022, manufacturing added value accounted for 27% of China’s GDP, and service sector added value was 52.8%. However, within this 52.8%, two-thirds are in the category of lifestyle services, with productive services constituting less than one-third. This means that productive services in China account for approximately 17%-18% of GDP, which is significantly lower compared to around 40% in Europe and 50% in the United States.

Therefore, to achieve Chinese modernization, there is a need to accelerate the development of productive services. To realize high-quality Chinese manufacturing, it is crucial to increase the added value of productive services that are strongly related to the manufacturing sector and have a high added value.

***

Jiang Xiaojuan 江小涓, former senior government official, now President of the Chinese Society of Industrial Economics and a Professor at the University of Chinese Academy of Social Sciences, on "digital economy"

"Digital economy" & "data elements" in 2023 China's central economic work conference

Three weeks ago, China's Central Economic Work Conference outlined a comprehensive plan for this year's work, focusing on seven key tasks and nine specific areas of work, all of which emphasized the importance of the digital economy. For instance, the first key point centered on new industrialization, specifically highlighting the digital economy. The plan calls for a robust promotion of new industrialization, the development of the digital economy, and an accelerated push for the advancement of artificial intelligence. In terms of upgrading and transforming traditional industries, two main aspects were discussed. The primary approach for the modernization of these industries involves the extensive use of digital and green technologies. This strategy is aimed at accelerating the transformation and upgrading of traditional industries

Another focus is on new growth areas in consumer spending, with digital consumption highlighted as a primary area. The meeting discussed seven points about intelligent home systems, two of which were about digital consumption. In terms of new drivers for foreign trade, four areas were stressed, including the expansion of trade in intermediate goods, service trade, and specifically digital trade and cross-border e-commerce exports, signifying a high regard for the digital economy.

In the financial support sector, traditional focuses have included inclusive finance, green finance, and finance for science and technology innovation. This year, new emphases were placed on silver finance and digital finance.

Regarding the expansion of openness to the world, there is a need to align with the international high-standard economic and trade system. This is particularly relevant in addressing the prominent issues of cross-border data flow and equal participation in government procurement, both of which are closely related to the data element and the digital economy.

Therefore, it is evident that in this year's economic work plans, the Central Government places a very high level of importance on the digital economy and data elements.

Why can China lead the global development of digital economy?

Globally, the digital economy is a focus area, and China is among the countries with high expectations for data elements, justified by its possession of the world's largest amount of real-time data. Firstly, from the consumer data perspective, China has the highest number of online users and the longest average online duration per capita. With 1.2 billion people spending an average of nearly 7 hours per day on mobile internet, the daily consumer online duration is about 8 billion hours. However, for digital consumption, mere numbers are not enough. Real market engagement is reflected in online activities like shopping, socializing, and entertainment. China's 8 billion hours of extensive data, which exceeds the total daily active online duration of all OECD countries, undoubtedly makes China the leading nation in generating consumer data. Secondly, China boasts the largest manufacturing industry globally, not only in scale but also in terms of digitalization. Consequently, the production data generated daily by China's physical industries and manufacturing sector is the highest worldwide. Thirdly, China is the leader in smart city development, with over 600 cities engaged in such initiatives, generating vast amounts of urban activity data daily. Therefore, China is the economy producing the most urban activity data globally. Moreover, data infrastructure in China is robust, capable not only of generating data but also of aggregating, connecting, and further analyzing it. As a major data-producing nation, China's vast data resources are a crucial foundation for maximizing the potential of data.

Digital economy: 50%+ of the economic volume by 2025

The final goal is to leverage the data element to propel the growth of the digital economy. According to the National Development and Reform Commission's 14th Five-Year Plan, the digital core industry's value added is expected to increase from 7.8% of GDP to 10% by 2025. This indicates that the digital economy could account for over half of the economic volume and become the main growth driver. This target is not merely aspirational but a realistic objective, representing a major growth area and a critical new driver for the economy. This segment cannot be overlooked, as failing to accelerate its growth could significantly constrain the overall economic expansion.

***

Wang Aihua 王爱华, Deputy Chief Engineer of China Academy of Information and Communications Technology, on "general artificial intelligence"

AI for Science

It's crucial to recognize that AIGC (AI-generated content) can drive a collective breakthrough in technological innovation, especially in the realm of AI for Science. I'm particularly keen to share more about AI for Science. The introduction of new methods and tools in this area could fundamentally hasten the pace of scientific development.

The latest wave of artificial intelligence can be likened to the 17th-century discovery of microscopes and telescopes, and to the 19th-century development of journals and laboratories. It's set to transform the very nature of scientific research. Much of its utility likely stems from AI's immense capability in solving high-dimensional functions. Therefore, AI plays a pivotal role in highly precise and efficient modeling, high-throughput screening, and more targeted experimental verification. This has led to significant breakthroughs in areas like new drug development, discovery and creation of new materials, and more.

According to an OECD report, although artificial intelligence is infiltrating all fields and stages of science, its full potential is far from realized. Therefore, accelerating the productivity of research could be of utmost economic and social value.

How can AI drive economic growth？

Economically, the significance of artificial intelligence lies not only in the growth of its own industry scale but also in its role as a foundational tool and method accelerating the development of the digital economy and industry. Furthermore, the integration and penetration of AI into various sectors of the real economy, especially in advancing emerging industrialization, is invaluable.

In terms of overall business landscape, the United States and China continue to be the two most significant attractors of global investment, together accounting for 70% of the total. Of course, the U.S. is growing faster, and while China's share in global financing may see a relative decrease, it remains substantial. In the first three quarters of last year, the distribution of global AI investment showed active mutual investments among the U.S., UK, Canada, and Germany, aligning with the distribution of unicorn companies. However, domestic investment still dominates China's AI financing, which is due to several objective reasons. Therefore, a key indicator or characteristic of this new round of industrial development is the growth of unicorn companies.

***

Zhu Bing 朱冰, Director of Foreign Investment Management at the Ministry of Commerce, on foreign investment

Why do foreign investment scales fluctuate？

Fluctuations in the scale of foreign investment are due to both economic and non-economic factors. Firstly, the global pandemic of COVID-19 continues to have an impact. The pandemic has hindered offline inspections and exchanges, affecting the investment decisions of multinational companies. Since these companies have longer investment decision cycles, this has resulted in a lag in data. Secondly, geopolitical influences have caused some fluctuations in transnational capital flows. Thirdly, the overall shrinkage in the scale of global transnational investment and intensified competition for international investment have had a certain diverting effect on a macro level.

***

Zhang Wei 张威, Deputy Director of the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce, on institutional opening-up

Institutional opening-up: top priority in China's opening-up

Institutional opening-up is contrasted with factor-driven opening-up. Factor-driven growth relies primarily on changing factor inputs, which eventually face the problem of diminishing returns to scale. In recent years, China has continuously expanded its opening up, reaching the "limit" of factor opening up under current conditions. As a result, the support of factor opening-up for economic growth has weakened. Conversely, the core of institutional opening-up lies in optimizing the allocation of resources in the field of opening-up. Currently, China is in the phase of increasing returns to scale in promoting institutional opening-up. Expanding institutional opening-up can enhance China's total factor productivity and potential growth rate. Therefore, institutional opening-up is currently a top priority in the field of opening-up.

Cultivation of new drivers for foreign trade

The international market demand for some "old" products is bound to have a ceiling. With the global market generally in a state of saturation, innovation becomes increasingly crucial. The Central Economic Work Conference proposed to "accelerate the cultivation of new drivers for foreign trade," including expanding trade in intermediate goods, trade in services, digital trade, and cross-border e-commerce exports. This strategy is accurately positioned and judged, and it plays a significant role in promoting the future development of foreign trade. "We also look forward to the emergence of not only 新三样 "new three items", namely new energy vehicles, lithium batteries and photovoltaic products, but potentially "new five items" or "new six items" types of products in the future.

Note: In recent years, the export volume of China's 新三样 "new three items" - new energy vehicles, lithium batteries, and photovoltaic products - has seen rapid growth, becoming a key force in driving the increase in China's foreign trade exports. In the first ten months of this year, the export volume of these "new three" amounted to 928.5 billion yuan (about 140 billion USD), up 35.9% year-on-year, contributing 1.3 percentage points to China's export growth.

***

Fang Xueyu 方雪玉, President of Hisense International Marketing Company, on Chinese companies going global

Note: Hisense is a leading Chinese electronics manufacturer

What is the advantage for Chinese companies going global

Regarding the home appliance industry, Chinese companies no longer rely solely on the advantage of supply chain cost in international markets. Previously, the focus was more on competitive pricing, but now it has shifted to the "three highs": high technological content, high added value, and high quality. For a long time, the global presence of Chinese manufacturing depended on cost-performance ratios, even engaging in price wars. This approach, however, resulted in a narrow competitive moat and low barriers to entry. Internally, the company emphasizes that "aiming high-end is the only correct path to becoming a world-class entity." To truly become a global or world-class brand, it is essential to move beyond low-price and low-level competition and focus on developing high-end industries and products. This approach can provide a competitive edge as enterprises expand internationally.

Hisense's localization strategy

On the other hand, globalization also implies localization. The household appliance industry is one of the most fully competitive industries globally. The survival and development of enterprises highly depend on a globally integrated R&D, manufacturing, and marketing system. Whenever Hisense enters a country, it establishes a complete company, including sales, marketing, service, finance, and human resources functions. After more than a decade of continuous investment, Hisense has achieved integrated production, sales, and research in North America, Europe, South Africa, and Japan. This allows Hisense products to be delivered at the fastest speed and quickly adjust direction, optimize, and upgrade according to market changes.

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The impact of these factors on the Chinese economy is a topic perhaps best commented on by those in the capital markets. In October, GRR published the translation of 经济增长的政策空间 Policy space for economic growth by 单伟建 Weijian Shan, one of the most influential private equity figures in Asia. The article is one of the most popular pieces GRR published in October. Today, we present you a newly-released piece by Mr. Shan: Will China Continue to Grow? [Update: The Chinese version 中国能否持续增长？is now available on Mr. Shan’s WeChat Account]

In this article, Mr. Shan takes stock of, based on 22 exhibits, what China has been really going through over the past five years, both interally and externally. At the end of the article, Mr. Shan answers the question "Will China continue to grow?"

The article breaks down into the following parts:

• China's Challenges

• China's Policy Space

• Health of China's Banking System

• China's Avenues for Growth

• The U.S - China Trade War

• China's Technological Progress

• Demographic Bomb - or Bust

• The China Opportunity

Mr. Weijian Shan is the Executive Chairman and Co-Founder of PAG, a leading Asia-based and focused investment firm with more than USD 50 billion in capital under management. He is the author of Out of the Gobi, Money Games, and Money Machine.

**Below is the full text of the article**

At PAG’s 2023 Investor Conference, held in Hong Kong on November 8, Co-Founder and Executive Chairman Weijian Shan addressed investors on the state of the Chinese economy. Despite domestic challenges and broader geopolitical conflicts, China is expected to meet its GDP growth target of 5% for the year. But can this growth be sustained? Shan’s address looked at China’s ability to respond to economic challenges from both a monetary and fiscal perspective, as well as some of the emerging trends, sectors and technologies that have the potential to transform China’s economic landscape.

Below is a transcript of Shan’s remarks, edited for clarity.

The growth – or lack thereof – of the Chinese economy matters. Not only to China itself and to foreign investors, but also to the rest of the world, as China is now the largest trading partner of more than 140 nations. As a private equity investment firm focused on the Asia-Pacific region, PAG’s addressable market has a combined GDP of about USD33 trillion. China’s GDP is about USD18 trillion, which represents more than half of that. China’s GDP is about four times the size of Japan, six times the size of India, and six times the size of the 10 Association of Southeast Asian Nations (ASEAN) combined. It is 10 times the size of South Korea, and 12 times the size of Australia. Its GDP is about 80% that of the United States and is bigger than all 27 countries of the European Union put together. According to the International Monetary Fund (IMF), China’s share of the world economy, as of 2023, is about 18.5%, and it contributes to about 35% of the world’s growth.

China’s Challenges

The Chinese economy has experienced severe challenges since 2022 particularly in the real estate sector. Exhibit 1, which I borrowed from Martin Wolf of the Financial Times, shows that the real estate sector, which directly accounts for 11% of GDP (and indirectly for about 25%), has far underperformed other sectors of the economy, which have more or less resumed their pre-pandemic growth trajectory. China’s real estate sector in fact has been a negative contributor to China’s overall economic growth since 2022 and a driver of the recent economic slowdown.

While the property sector is the biggest drag on the economy, its woes may be tapering off. As Exhibit 2 shows, the sector’s negative contribution to GDP growth has narrowed from about 4% in 2022 to less than 2% in 2023.

China will meet its growth target of about 5% this year. In fact, it was reported on November 8 that the IMF has revised its forecast up to 5.4%. Forecasts by various institutions have gyrated quitewidely from month to month this year, reflecting an uneven path of economic recovery. But what’s the point of making forecast if it changes monthly? At PAG, we have not doubted the target growth number since it was first released. This is because we believe that China has “quite a bit of policyspace,” in the words of U.S. Treasury Secretary Dr. Janet Yellen, to help it achieve its economic targets when necessary. In fact, it may have more such policy space than any other major economy in the world.

China’s Policy Space

As explained in Exhibit 3, unlike many other countries in the developed world, China is experiencing no inflation. For October, its Consumer Price Index was -0.2%, while core inflation(excluding food and fuel) is 0.6%. Its Producer Price Index dropped 2.6%. However, China has comparatively high interest rates: the prevailing lending rates hover around 4-4.5%. Therefore, its real interest rate – the nominal interest rate minus the inflation rate – is still higher than in the United States and much higher than in Europe or Japan. Its Cash Reserve Ratio (CRR) – the percentage of deposits that commercial banks must park with the central bank – is around 10.5% for large banks, compared with 0-1% for western countries. Therefore, China’s monetary policy has room to ease by either cutting interest rates or CRR or both, which no other major economy can.

On the fiscal side, as shown in Exhibit 4, China is similarly in a league of its own among sizable economies: its balance sheet shows positive financial net worth, whereas others, such as the United States, Japan and Germany, are deeply in the negative territory. Much ink has been spilled by the world’s pundits about China’s government debt. In truth, Chinese central government debt represents only about 21% of GDP. Local government debt, of course, is what has been getting all the attention. But estimates for these obligations range only from 50% to 80% GDP, including hidden liabilities. If we take the highest debt-to-GDP ratio of 110% for China’s overall government debt, it still compares favorably with that of the U.S. federal government, which is about 140% of GDP, and with Japan’s central government debt of about 260% of GDP. Furthermore, the financial assets owned by the Chinese government exceed its total financial liabilities, as IMF’s study shows.

The net asset value (NAV) – total assets minus total liabilities – of China’s state-owned enterprises(SOEs) represents about 70% of GDP. The country’s privately-owned enterprises trade in the stock market at a median price-to-NAV multiple of 5.4 times. If we apply only 2 times to SOEs which are considered less efficient, the market equity value of SOEs amounts to about 140% GDP, exceeding the total debts, by their broadest measure, of the central and local governments by about 30% GDP. It should be noted that almost all of the Chinese government’s debt is in local currency. Its foreign currency denominated debt is negligible as a percentage of GDP. It should also be noted that not counted in these calculations are China’s vast land and natural resources, all of which are government-owned. Therefore, the fiscal policy of the Chinese government has plenty room to expand.

Health of China’s Banking System

Will the slump in the housing sector lead to a financial crisis as it did in the United States and Europe in 2008? Many pundits have rung the alarm by calling the troubles facing the distressed property developer Evergrande, “China’s Lehman moment” – referring to the demise of the once venerated American bank which triggered the 2008 Financial Crisis. But the answer is no.

The reasons are laid out in Exhibit 5. The average loan to value ratio of mortgages in China’s major cities is about 40%, which means that housing prices will have to fall more than half to produce negative equity for homeowners – i.e., where their house is worth less than the money they owe on it. That is not even remotely likely to happen. Moreover, Chinese homeowners cannot simply walk away from their mortgages if that happens, as homeowners can in the United States. In mainland China, as in Hong Kong and Australia, among other jurisdictions, mortgages are unlimited personal liabilities. That is why during the 1997 Asian Financial Crisis, there was plenty of negative equity in Hong Kong’s housing sector, but not a single bank failure.

In fact, the Chinese banking system has experienced an opposite problem – too much cash from prepaid mortgages and above-normal savings. Prepaid mortgages amount to 12% of all mortgages in the banking system since 2022. Household savings increased more than their normal levels by RMB18 trillion (USD2.5 trillion) in 2022 and RMB12 trillion (USD1.6 trillion) just in the first half of this year.

Residual loans to property developers represent less than 6% of the loan book in the banking system, and all of those loans are secured by collaterals. Chinese banks are well capitalized, with an average capital adequacy ratio of more than 15%, and their average non-performing loan(NPL) ratio is about 1.6%. Yes, NPLs have been rising in recent years. But banks are selling or writing them off quickly because the regulatory requirement in China for setting aside reserves to cover NPLs is more than 100%, more than any other country I know of. Therefore, it is just not worth it for Chinese banks to hold onto NPLs.

China’s Avenues for Growth

This doesn’t mean there will not be any short-term – or potentially longer-term – pain in China’sreal estate sector; I am only saying that China’s real estate issues will not infect the bankings ystem as a whole. The real estate sector still is a negative contributor to China’s growth, as I discussed earlier. So, if properties will no longer drive economic growth, what will?

Exhibit 6 is taken from KKR’s recent publication, Thoughts from the Road – Asia. It shows that in 2022, the “Green Economy” and the “Digital Economy” added 4.7% to China’s growth rate, more than offsetting the negative contribution of 3.7% by the real estate sector.

Indeed, China leads the world in the industries enabling, and enabled by, the Fourth Industrial Revolution – green energy, digitalization, industrial robots, artificial intelligence, etc. Exhibit 7 is based on a similar chart from KKR’s paper and I added a couple more sectors. These are all growth industries, dominated by the private sector (with the exception of high-speed trains and to some extent semiconductor foundries). China has surpassed Japan as the largest exporter of cars this year – and a quarter of those are electric vehicles. In lithium batteries, an essential component of electric vehicles, mobile phones and other industries on this list, China went from zero percent of the global market in 2005 to 63% – nearly two thirds – today. It has marked similar growth in wind power and industrial robot installation. I should note however that despite their large market share and rapid growth, we don’t consider most of these sectors attractive for private equity investment, because they are prone to over-competition and overcapacity, and therefore low profitability.

The U.S.-China Trade War

How much impact has the trade war had on China’s exports? Exhibit 8 shows that it has not dampened U.S.-China trade and indeed the bilateral trade reached an all-time high of about USD700 billion last year. Even then, direct trade does not tell the full story.

Take a look at Exhibit 9. On the left-hand side, since the start of the U.S.-China trade war in 2018, Vietnam’s exports to the United States have surged, but its imports from China have increased even further. The chart on the right-hand side is more striking. Vietnam’s imports of intermediate products from China far exceed its exports of final products to the United States. In effect, Vietnam can be seen as a conduit for China’s indirect exports to the U.S.

Vietnam is one of the 10 members of ASEAN. In 2020, ASEAN replaced the U.S. to become China’s largest trading partner. As shown on the left-hand side of Exhibit 10, ASEAN’s exports to the United States went up sharply since the start of U.S.-China trade war, but its imports from China grew even faster. The chart on the right-hand side shows that ASEAN’s imports of intermediate products from China far outpace its exports of final products to the United States.

The same story is repeated even in India, as shown in Exhibit 11.

So, what is going on here? Please see Exhibit 12. China’s manufacturing is deepening, i.e., it is moving up the value chain into the production of higher-value, higher-technology products and components. Its total share of the world’s manufacturing value-added keeps rising, now representing 31%.

In an article I published in 2019, I noted that China’s value-added to Apple iPhones represented only about 4% of each phone’s retail value. An article published in Foreign Affairs this year notes that value-added number has climbed to 25%. That is the best example of how fast China’s manufacturing is deepening.

That helps explain why Apple is so attached to manufacturing in China, which also now happens to be the world’s largest market for Apple’s iPhone. As the Financial Times reported, shown in Exhibit 13, Apple’s efforts to diversify manufacturing away from China will make almost no difference in the foreseeable future.

China’s Technological Progress

Alongside the long-running trade war, there is now also a technology war, as the United States has banned high-tech exports to China in areas ranging from advanced semiconductor chips to quantum computing and AI. Will the policy contain China’s technological progress?

In the short run, yes, it will dampen China’s technological capacity. But in the long run, it will not. China has a strong technological base, which export bans are unlikely to affect; it has the meansto catch up in areas it is behind, owing to its years of value-added manufacturing and innovation; and thanks to the export bans, it has a strong incentive to develop its own versions of now-unavailable technologies.

When I was a professor at the Wharton School, I studied the then-nascent biotechnology industry. I asked myself why biotechnology and Silicon Valley were such a uniquely Americanphenomenon, even though Europe and Japan were also rich developed countries. What does it take for a country to become a high technology hotbed and hub? I came up with five necessary conditions as summarized in Exhibit 14.

China now possesses all five of the conditions I outlined, which together are sufficient for it to catch up in almost any technology, and to take the lead in some. It is just a matter of time. In fact, China’s pace of innovation will only be retarded if the likes of Qualcomm and Nvidia are permittedto continue to sell to and dominate the Chinese market, because their products are currently better and cheaper. But the export bans by the U.S. open up the domestic market for Chinese firms to accelerate their technological progress.

I don’t need to dwell on those conditions that are obvious. But most notably, capital is no constraint for China as it is now a capital rich country. Its savings rate is in a category of its own among sizable economies, as pointed out by Martin Wolf of the Financial Times and shown in Exhibit 15. China is also a leading creditor nation including to the U.S. government by its holdings of U.S. Treasuries and Agency Bonds.

It should come as no surprise that the U.S. and China lead the world in R&D spending, according to the Wall Street Journal in Exhibit 16. Since the size of China’s economy is about 80% that of the U.S., its R&D spending as a percentage of GDP is about the same as, if not more than, America’s.

Furthermore, as the WSJ notes, in Exhibit 17, China has overtaken the U.S. in scientific papers published in peer-reviewed, respected international journals annually.

And the Financial Times gave us Exhibit 18, which shows that China’s patenting activity has increased “explosively” (Martin Wolf’s word). The number of patent applications in China per yearis now more than the U.S., Europe, Japan and South Korea combined.

Paradoxically, high-tech sanctions on China have induced an acceleration in technological progress. Exhibit 19 shows a few selected headlines from the global scientific journals and press on China’s technological breakthroughs in just past 3 months. All of these except the last one, the cancer drug recently approved by the U.S. Food & Drug Administration, concern areas on the US sanctions list.

Demographic Bomb – or Bust?

The accepted opinion is that China’s demographics, namely an aging and declining population, willultimately thwart its long-term growth. But the data doesn’t support it.

I outline a few reasons shown in Exhibit 20. The size of China’s labor force plateaued in 2012 and began to gradually decline. Yet its GDP has doubled in the 10 years since then. Yes, China’s productivity increase has slowed in recent years, but it has still managed to propel economic growth.

Some believe that China is primed to fall into the “middle income trap” that has mired so many developing economies, particularly those in Latin America. Yet here, China’s R&D spending and productivity increases set it apart. China is now at the forefront of industrial automation, as evidenced by having installed 50% of the world’s industrial robots. It is unlikely that China’s demographics will cause a labor shortage in the foreseeable future; in fact, its labor force is likelyto be significantly underutilized, for reasons laid down on this slide.

As one U.S. based investor pointed out to me, if the international investment community is so bullish on Japan, which has worse demographic issues, why not China?

The China Opportunity

From a private equity standpoint, PAG is long-term positive on China. As I said earlier, we avoid “hot” sectors prone to over-competition. So where are we looking to invest? The answer is in leading businesses that cater to private consumption.

It is suggested that China’s household consumption is constrained by low household disposable income as a share of gross national income. However, Exhibit 21 shows that according to data from The Economist, if you include social transfers in kind – meaning benefits like welfare, social security, and other forms of government and nonprofit assistance – China’s household disposable income as a share of gross national income is higher than in such countries as Sweden, South Korea and Demark, although still much lower than other places like the United States, the EU and Japan.

The bad news is that private consumption, even including social transfers in kind, remains too low at about 45% of GDP, compared with 72% for the United States (Exhibit 22). But the good news, particularly for investors like us, is that there is much room for growth. It does require China to rebalance its economy more in favor of private consumption and away from fixed assetinvestments. But we believe this will inevitably happen as China’s savings rate, and therefore investment rate, declines over time along with the aging of the population.

Conclusion

In conclusion, China is not without its economic challenges. There are good reasons for business and consumer sentiment to be weak and confidence low at the moment. It will take a couple of years of policy stability and concrete policy support for the private sector to fully regain confidence. The economy is underperforming its full potential. But as I have tried to illustrate here, China’s economic fundamentals are sound; its government has ample policy space to tackle its current economic slowdown; and its industrial development has positioned it well for the future. All of this is to say that China’s growth, despite the naysayers, will likely continue for the foreseeable future.

To begin with some news: on Friday, Chinese Premier Li Qiang presided over a symposium on the economic situation attended by economists and entrepreneurs. An article detailing the identities of these participants was posted on a WeChat account named 眼镜湖 “Glasses Lake,” which I believe is reliable.

As reported by Xinhua, during the symposium, Li demanded efforts to deliver macro-policy regulation more effectively, strengthen policy prediction and research, and step up nurturing new drivers and advantages for high-quality development. He also highlighted his hope that entrepreneurs will play a bigger role in promoting high-quality development, calling on economists to provide more suggestion regarding high-quality development.

On that same day, the WeChat account of Caijing magazine showcased a piece on China's economy authored by 单伟建 Weijian Shan, regarded as one of the most influential private equity figures in Asia. He is the Executive Chairman and Co-Founder of PAG, a leading Asia-based and focused investment firm with more than USD 50 billion in capital under management.

Shan's article was initially shared on what appears to be his personal WeChat account on October 6. The CEO of BigOne Lab Robert Wu's twitter thread provides a succinct summary of Shan's narrative. Our piece today is a full-text translation of Shan's piece. Within, Shan conveys his agreement with U.S. Treasury Secretary Janet Yellen on the notion that many who observe China's economy frequently neglect its policy potential. He further expounds on this policy space across several pivotal sectors.

Please note that the translation has not received Shan's personal review and should not be seen as reflecting any official standpoint. This remains a personal newsletter.

Dr. Janet Yellen, the U.S. Treasury Secretary, recently told reporters, "We see China’s growth as slowing over time. That said, China has quite a bit of policy space to address these challenges."

Such candid remarks coming from the U.S. Treasury Secretary are noteworthy, especially at a time when Western media predominantly holds a pessimistic view of China's economy. As a result, her statement has garnered attention worldwide.

Yellen is correct. China's policy space is considerably more expansive than that of other major economies, while this fact is often overlooked by many China's economy watchers.

• Monetary Policy

Compared to the Western world, China adopts a more prudent monetary policy. Currently, the West is not only out of room for monetary easing but also compelled to curb the ongoing inflation by continually tighten, primarily through raising interest rates. In contrast, China doesn't face inflation pressures; its consumer price index (CPI) remains flat, and its producer price index (PPI) consistently shows negative figure. This situation provides China ample flexibility in its monetary policy, allowing for potential cuts in interest rate and reductions in banks' reserve requirement ratios (or RRR, the percentage of deposits banks must keep with the central bank) — something the Western economies, where RRR has been around zero, can only hope for.

• Fiscal Policy

The room for fiscal policy is inversely related to government debt. In other words, the lower the debt, the greater the scope for fiscal expansion.

How much debt does the Chinese government hold? Not a substantial amount. The ratio of central government debt or sovereign debt to GDP is a mere 21 percent, the lowest among the world's major economies. According to estimates from the International Monetary Fund, even when all local government debts (with hidden liabilities included) are added, China's overall level of general government debt is only around 110 percent of GDP. In comparison, the U.S. public debt ratio is approximately 140 percent, and Japan's stands at a staggering 260 percent. Therefore, China's government has a relatively low debt ratio.

Furthermore, one's financial well-being isn't determined solely by their liabilities but also by their assets. For instance, someone who takes out a loan to buy a home may have more debt than a renter, yet the homeowner could be wealthier due to owning an asset. The same principle applies to nations – it's essential to consider both liabilities and assets. What sets China apart from other major economies is the vast ownership of state-owned enterprise (SOE) assets by the Chinese government.

According to statistics, the net asset value of SOEs (total assets minus total liabilities) is around 70 percent of GDP. The median price-to-book ratio for listed central SOEs, representing the market value to net asset value ratio, stands at 1.3 times, which is much lower than the 5.4 times ratio for private enterprises.

However, even with a price-to-book ratio of 1.3, the market equity value of SOEs accounts for over 90 percent of GDP. If calculated at twice the net asset value, it would be 140 percent. Therefore, the ratio of the government's total debts minus the market equity value of SOEs to GDP is notably low, and may even be negative.

Furthermore, all of China's natural resources, including land, minerals, rivers, forests, mountains, grasslands, and more, are state-owned and represent a massive asset.

In contrast, countries like the U.S. and Japan barely have any state-owned equity, with most resources being privately held. The portion that the government can control is rather small.

In summary, China's fiscal condition is significantly healthier than that of other major economies.

Certainly, this doesn't imply that local government debt is a non-issue. There's a significant wealth gap among local governments. Coastal cities, especially those with high-quality state-owned equity, may be overflowing with wealth; whereas remote and impoverished areas might be saddled with debt, struggling to make ends meet. Although they are all local governments, the debts and assets of the wealthier and less affluent ones cannot simply offset each other. This is why the China's Ministry of Finance says, "each family should take care of their own child" [GRR's note: 谁家的孩子谁抱 "each family should take care of their own child", means local governments cannot rely on the central government to bail them out.] If the economy falters, these disparities will become even more pronounced.

Yet, holistically, considering both assets and liabilities, the financial conditions of the Chinese government far surpass that of other major economies.

In conclusion, whether it is monetary or fiscal policy, China has vast policy space. If China decides to stimulate the economy, they have an abundance of tools at their disposal.

• Overseas RMB Sovereign Debt

Another advantage for China lies in its capacity to issue RMB-denominated bonds overseas, also known as offshore RMB (Renminbi) bonds, thanks to the internationalization of the RMB.

China has a minimal foreign currency debt, making up only a minuscule fraction of its total debts. Moreover, China's local currency debts are not limited by the capacity of foreign exchange reserves to make repayments. For sovereign nations, there's no risk of default for domestically issued government debts; in extreme cases, they can simply print more money. While China has the capacity to issue RMB-denominated bonds overseas, the current scale remains limited.

While China has the capacity to issue RMB-denominated bonds overseas, the current scale remains limited.

The U.S. dollar is the world's largest reserve currency, accounting for over 60 percent of the global total. The United States has taken this privilege to the extreme by borrowing through printing its own money. This privilege was dubbed an "exorbitant privilege" by Valéry Giscard d'Estaing, the former French Finance Minister during the presidency of Charles de Gaulle.

Issuing more offshore RMB-denominated bonds can be one stone to kill many birds. Apart from raising capital for domestic economic development, it can also enlarge the market for offshore RMB-denominated financial products, thus facilitating the internationalization of RMB. For instance, when Middle Eastern countries export oil to China and settle transactions in RMB, there's a limited availability of offshore RMB-denominated financial products that can be invested in. This limitation reduces the appeal of the RMB as a reserve currency.

Expanding the market for offshore RMB-denominated financial products naturally promotes holding and using the RMB, which will advance its further internationalization.

• The Real Estate Issue

China's policy space is not limited to monetary and fiscal policies. For example, in light of the current sluggishness in the real estate market, which is the biggest obstacle to China's economic growth and seems to be unsolvable, China does have policy tools to address the issue; it's just a matter of whether they are used or not.

Real estate is of paramount importance to the Chinese economy, making a direct contribution of around 13 percent to GDP, with an indirect contribution of 25 percent. The sluggishness in the real estate market not only affects industries upstream and downstream but also directly impacts consumer spending. This is because homes, being the largest investment for ordinary citizens in China, function as both a store of value and a source of capital appreciation, constituting two-thirds of Chinese household wealth. Consequently, a decline in property prices generates a negative wealth effect on private consumption.

In 2022, Chinese household deposits surged by nearly 18 trillion yuan (about 2.47 trillion US dollars), and this year is even more astounding, with household deposits increasing by another 12 trillion yuan (about 1.64 trillion US dollars) in the first half of the year. Moreover, from 2022 up to now, 12 percent of the total amount of bank mortgage loans in China are being repaid ahead of schedule. All of these are due to the suppression of consumption caused by the sluggish real estate market.

To unleash the spending capacity of citizens, measures should be taken to relax restrictions on the demand side of the housing market by removing home purchase limits, imposing higher taxes to deter short-term speculation, and permitting long-term property holdings.

What needs to be restrained is property developers relying on high leverage for over-development. What should be encouraged is holding real estate for long-term investment purposes. A clear distinction should be made between speculation and long-term holdings. When ordinary citizens across the nation purchase multiple properties for long-term purposes, whether for vacations or rentals, it benefits the economy, and this is so anywhere in the world.

Nowadays, Chinese citizens can purchase properties anywhere in the world. In the first half of this year, the amount spent by Chinese individuals on purchasing properties in the United States doubled from the previous year, and Chinese buyers are seen in property transactions in all major cities around the world. Yet, they are not allowed to purchase residential properties without being a resident of that specific city. And even for local residents, they can only buy a primary home in their own city. Foreigners are generally not permitted to buy properties in China. This situation has led to depressed property prices, severely impacting consumer purchasing power, and consequently, dragging down the overall economy.

The primary challenge in the Chinese economy, as assessed by the central government, is inadequate domestic demand. Further relaxing restrictions on the demand side of the property market is an imperative. The policy tool in this regard does not even require any resources: it just needs a decree to remove restrictions on home purchases.

• A Stable Financial System

In fact, even if property prices in China were to experience a significant drop, it would not lead to a financial crisis. This is one of the unique strengths of China and a cornerstone of its economy. Why?

Firstly, China's average loan-to-value ratios (LTV) for mortgages, the proportion of the home loan amount to the property's value, is quite low. In the second quarter of 2023, the average LTV in first-tier cities was 44.5 percent, and in second-tier cities, it was 60.2 percent. These figures indicate that it is nearly impossible for China to experience widespread "negative equity" (where property prices are lower than the mortgage value), thereby endangering loan security and banking stability. As is well-known, the 2008 financial crisis in the United States was caused by widespread negative equity.

Secondly, in the United States and many developed countries, mortgage loans collateralized by homes are limited liabilities for borrowers. That means, if the property value falls below the mortgage amount, borrowers can simply relinquish the property and walk away. However, in Hong Kong and the Chinese mainland, mortgage loans are unlimited personal liabilities, meaning borrowers cannot just walk away from their properties; as long as the borrower is not in personal bankruptcy, his payment obligations continues. This is the reason why, during the 1997 Asian Financial Crisis, Hong Kong's property market experienced significant amount of negative equity, but there were very few instances of mortgage defaults, and no banks went bankrupt.

For these reasons, even if a housing crisis were to occur, it would not pose a systemic risk to the banking system, let alone trigger a financial or economic crisis.

• Using Policy Space

For any country, the greatest safeguard for national security is its economy. This is especially true for China. Only by rapidly growing its economy can it reduce geopolitical risks.

China possesses significant policy space, but so far, the measures used to stimulate the economy have been quite limited, with more talk than action.

China's economy does exhibit resilience, as seen in its third-quarter performance outpacing the second quarter. However, the downward trend in China's economic growth rate has not been reversed, and there is a general lack of confidence among both businesses and consumers. This is a critical time to employ policy measures to tap the potential for economic growth in China.

Preventing a crisis is easier than trying to recover from one once it occurs. It's like steering a ship away from a looming tempest; it's challenging when the ship is already in the midst of a storm. At this juncture, the use of policy measures can be highly effective. Any delay in action may result in reduced effectiveness. China's policy space should be put to good use, and now might be the right moment.

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In today's piece, we delve into the fascinating parallels between China's economic trajectory and Japan's rise and subsequent decline. As the world's second-largest economy, China has experienced significant growth over the years, but questions remain about its ability to sustain this momentum.

Drawing insights from the economic slowdown and debt cycle in China, as well as Japan's historical experience, the following article was originally published on 西西弗评论 Xixifu Pinglun (Sisyphus Review), a WeChat Blog focused on macroecomics and current affairs. The author of this blog is Dr. Huang Jian, Ph.D. from Tsinghua University's PBC School of Finance. Dr. Huang is primarily engaged in technology venture capital.

According to the article, beyond balance-sheets, debt figures, ratios, and margins, there lies a metaphysical force of spirituality that yields a deciding power over the economy. The "spirits" of the Chinese government, enterprises, and citizens comprise a collective state of mind that has a final say in the "swim or sink" scenario. If the "spirits" be uprising and indomitable, China has a very good chance of surpassing the United States; if the "spirits" be deflated and distressed, China will be no better than Japan after 1990, a country that desires nothing and aspires for nothing.

The underlying philosophy is very similar to the traditional Chinese concept of 气 "qi", i.e. the vital and ever-pervading spiritual energy that can be channeled into material strengths. And there is no lack of references to Chinese folklore, Chinese history, and Confucian thinking throughout the article.

Highlights:

• China's economic challenges: China’s optimization of COVID policies helped the economy rebound in the first quarter, but challenges in the second quarter raised worries about a potential slippery slope akin to Japan's experience.

• Lessons from Japan's economic recession: The author reflects on Richard Koo's concept of a balance-sheet recession and its applicability to Japan's economic decline. While some argue for proactive fiscal policies to combat recessions, the author questions whether extreme measures alone can guarantee recovery.

• The rise and fall of Japan’s economy: The 1980s witnessed Japan's remarkable economic boom, with its companies dominating global markets and even challenging the United States. However, Japan's decline after 1990, characterized by a significant contraction in various industries, raises concerns about the long-term sustainability of economic success.

• Unequal trade agreements: The author explores how unequal trade agreements, such as those between Japan and the United States, limited Japan's ability to surpass its American counterpart. This raises questions about China's own economic ambitions and its relationship with the United States.

• Ambition and growth: The article examines the role of ambition in a country's development, considering the aspirations of the government, enterprises, and individuals. While Japan lost its drive to catch up with the United States, the author explores whether China still possesses the ambitious spirit necessary to overcome obstacles and achieve global leadership.

• Industry comparisons: The article also highlights the gaps between China's leading companies and Japan's giants during the 1980s and 1990s across various sectors, such as automotive, consumer electronics, beauty, and semiconductors. These gaps represent areas of future growth for China.

• Balancing ambition and egalitarianism: Maintaining a positive and upward spirit requires finding a balance between allowing companies to thrive and ensuring social mobility for individuals. The author discusses the importance of striking this delicate equilibrium to sustain China's ambition while avoiding the pitfalls of inequality and monopoly.

• China's unique path: Unlike previous competitors like the Soviet Union and Japan, the author concludes that China is determined not to yield to the United States. While challenges lie ahead, China's unwavering ambition and refusal to succumb to external pressures set it apart, suggesting a different trajectory from that of Japan.

During the lockdown in 2022, I wrote an article to the effect that the main reason for China's economic slowdown is the debt cycle; and that it is unreasonable to expect a sudden revival after the end of zero-COVID. After China optimized its COVID policies, the economy went well in the first quarter. But the second quarter presented quite a lot of challenges, which made many people worry whether China will go down the same slippery slope as Japan.

I also recall an article titled 当资产负债表不想奋斗了 "When Balance-Sheets Quit Struggling", written by Boss Dai [an investor and influencer in the financial area] in 2022. More recently, I have seen many shares on WeChat Moments about a speech delivered at the annual meeting of Soochow Securities (HK) by Richard Koo, inventor of "Balance-Sheet Recession" and author of The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession.

No one can claim to be the soothsayer of the economy. Whether China will repeat the mistakes of Japan will not be revealed until two or three decades later. But I've always been skeptical of economists' forecasts and prescriptions for managing the economy. They always come up with the perfect explanations in hindsight, but I don't think they're very good at predicting the future.

Macroeconomists always feel that they can find some panacea for economic development, and that things are bound to turn for the better if only they were listened to. Economists, in that sense, are not unlike traditional Confucian scholars who believe that they can know the goings-on entirely by reading. And when a sagacious emperor has enough wits to rule by their ideas, it will then come a time of ideal governance.

The only example in Chinese history, where the fate of the nation was decided by a scholar is probably the reforms instigated by Shang Yang [c. 390—338 BCE, Chinese statesman and thinker whose successful military and agrarian reforms paved the way for the eventual unification of the Chinese empire]. Wang Anshi [1021—1086] and Zhang Juzheng [1525—1582] only managed to delay the death of the dynasty. Of course, there was a case where a scholar tossed the country down with his heedless ideals — Wang Mang [45 BC—AD 23] and his Confucian remodeling of society.

Is the fate of a country really subject to monetary and fiscal policies based on macroeconomic regulation and control? If the Japanese government had done everything right, could it have avoided a major recession? I don't think so. It is not a balance-sheet recession that determines where a country's heading.

2

In the 1980s and 90s, Japan was booming in top gear in a way that no other country has ever seen. Japan as Number One, written by Ezra F. Vogel and published in 1979, presented controversial predictions that unsurprisingly turned into reality during the next decade -- Japan became an economic superpower as Japanese enterprises took over the global market. In 1989, the publication of That Japan Can Say No by Akio Morita and Shintaro Ishihara was an epitome of ballooning confidence that Japan can now stand up against the United States.

The War of Chips by Yu Sheng, which I've been reading, also mentioned Japan in the good old times. In just ten years (1976-1985), Japan changed itself from the importer of 1/3 of U.S. semiconductors into an even larger producer than the United States. In March 1976, the Japanese government established the VLSI program. And in ten years, it became No.1 in the world's semiconductor industry.

Before 1990, the whole of Japan smelled of adrenaline. Everybody was energized and everything was vibrant. In 1985, the Japanese shipbuilding industry accounted for more than 50 percent of the world market share. Since 1982, when Japan's steel production surpassed that of the United States, Japan has maintained its position as the world's biggest steel production outside the Soviet Union for 14 years (the figure of steel production in the Soviet Union in 1991 is in doubt, however). In the 1980s, Japanese automobiles and home appliances were synonymous with high quality. Sony, Panasonic, Toshiba, and Toyota, these star companies were taking over the world. In 1980, nine American companies and one Dutch company (Shell) made up the top ten companies by market cap in the world. Yet in 1990, the list comprised eight Japanese companies and two American companies.

It was indeed a golden age for Japan. But it all came to an abrupt end around 1990. After 1990, Japan seemed like a completely different country, gone from the adrenaline-driven highroad to a "low-desire society".

After 1990, Japan's industries came crumbling down.

The Japanese semiconductor sector fell from 50 percent to less than 20 percent of the market share. Shipbuilding, too, fell from 50 percent to less than 20 percent. The consumer electronics sector had a total collapse. The automobile industry managed just to maintain the market share, though. In 2000, there was not one Japanese company in the world's top ten companies by market cap.

After 1990, the spirits of the entire Japanese country, from the government to the enterprises and to the people, suddenly fell to the bottom. No investment, no entrepreneurship, no expansion -- the whole people went into goblin mode.

The burst of Japan's "bubble" economy surely is a principal cause of the major societal shift. But other countries that also experienced bubble economy can manage to get back on their feet. Koo attributed this to a balance-sheet recession. I believe that balance-sheet recession is the consequence, not the cause.

Richard Koo believes that this recession could be avoided if a proactive fiscal policy was adopted. I beg to differ. In order to stimulate the economy, the Japanese government has used monetary and fiscal policies to the extreme.

The case is clear with monetary policies. Japan has maintained a long-term zero interest rate policy and is also the originator of quantitative easing. Richard Koo believes that the Japanese government's fiscal policy is not strong enough. But since 1990, Japan's government debt-to-GDP ratio has skyrocketed from a relatively healthy 60-70 percent to an unprecedented 264 percent. Extreme fiscal policies were not the cure to Japan's economic recession. What else can be done? A 500 percent debt-to-GDP ratio?

The truth is, the Japanese government had used every trick up their sleeves. And the recession still caught up with them.

3

Many countries in the world have encountered economic crises. Why is it that after three decades of bubble economy collapse, Japan is still prostrated with depression, devoid of any vitality it once had?

My opinion is, after the trade frictions with the U.S. in the 1980s and 90s, Japan fell victim to the painful realization that Japan CANNOT say no. Japan will always be tyrannized by the United States and never be allowed, even in the economic realm, to overtake the U.S. The ceiling is unbreakable. Then why work hard when there is no hope?

When Sun Wukong the Monkey King found out that he could never escape Buddha's hand, and that resistance meant imprisonment under Wuzhi Mountain, would he then ever try to rise up again? The monkey who brought back the sacred scriptures of Buddhism was not the same character as Great Sage Equal to Heaven (齐天大圣) who struck terror into the hearts of gods.

In 1984, the U.S. Congress restricted imports of all steel mill products to about 15 percent of the domestic supply. In 1977, under pressure from the United States, Japan restrained exports of color TV sets to U.S. In 1981, Japan restricted the exports of automobiles to the United States of its own accord. In 1986, the United States demanded that Japan secure 20 percent of the Japanese semiconductor market for U.S. producers. In 1994, the United States demanded that Japan buy $19 billion worth of U.S. automobile parts. On top of this was another series of open market agreements and structural entry barriers.

All of these agreements were unequal treaties that unilaterally benefited the United States, setting a cap on Japanese exports and a minimum amount on Japanese exports. Japan, however, had no choice but to submit.

Akio Morita once said with confidence, "Militarily, we can never defeat the United States. But, economically, we can overtake the United States and become the top of the world." However, after a series of trade wars, the whole of Japan finally came to admit the painful truth that Japan is a semi-colonial country both politically and militarily. How can a semi-colonial country become an economic superpower that challenges its lord and master? So that was how Japan succumbed to its fate, like the Monkey King who succumbed to the golden headband and went to the West with resignation.

Japanese leaders who dared to pursue independence and equal Japan-US relations never ended happily ever after.

Japan has always had a dream of being a great power. Before World War II, Japan attempted to become a political and military hegemon in Asia, and eventually a superpower. After three victories in the First Sino-Japanese War, Japan and Russia, and World War I, it lost a handful in World War II. Japan abandoned its political and military dreams in favor of becoming an economic superpower. Subsequently, in the trade war between Japan and the United States in 1980-1990, Japan was once again defeated.

In the end, it was clear that politically, militarily, or economically, there was no chance of Japan surpassing and replacing the United States.

You can only be second best no matter what you do. What more reasons are needed for sinking into goblin mode?

4

At that time, Japan, on the one hand, felt oppressed by the United States and believed that no matter how hard it tried, it was impossible to surpass the United States and become the number one. On the other hand, Japan felt it had done quite well already, with its economy stably ranking as the second largest in the world. It seemed to make no difference whether Japan strives or not, so its ambitions finally faded away.

So, where does China stand now?

Honestly speaking, although China's GDP, calculated by exchange rates, has reached about 70 percent of the United States', surpassing Japan's level in terms of scale, the overall position of China's leading companies in various industries globally is still not as good as Japan's between the 1980s and 1990s.

In the automotive industry, China does not have any companies that can compare with Japan's Toyota. With the trend of new energy, BYD has a good chance of becoming China's "Toyota". However, there is still a considerable gap between today's BYD and the Toyota of the 1980s and 1990s.

In the consumer electronics industry, I am skeptical whether Huawei, the most advanced Chinese company, has surpassed Sony of Japan at the height of its prime.

In the beauty industry, China still does not have any companies that can rival Shiseido of Japan. Japan is relatively weak in the pharmaceutical industry -- not one Japanese company ranks among the top ten global pharmaceutical companies. Takeda Pharmaceutical, the largest pharmaceutical company in Japan, should rank 12th with a revenue scale of 30 billion US dollars. Although China's largest pharmaceutical company, China National Pharmaceutical Group Corporation (Sinopharm), has a larger revenue scale (500 billion yuan, about 70 billion U.S. dollars), if we tease apart the irrelevant bits, its pure pharmaceutical business should be inferior to Takeda.

In the semiconductor industry, Japan once held a 50 percent global market share in the 1980s and 1990s. The Chinese mainland today is definitely far behind.

We need to acknowledge the gap, because there lies China's future growth. If China's leading companies in various industries reached the level of Japan's in the 1980s and 1990s, then without a doubt, backed by China's huge market, China's GDP will surpass that of the United States.

China currently produces the largest amount of physical goods in many categories globally. Yet when calculated per capita, not only is China's production power inferior to the United States, it also falls short of Japan. Taking the automotive industry as an example. Japan, with a population of 126 million, sells over 4 million cars annually, so that makes 3-3.5 cars sold per hundred people. In China, 23 million cars are sold annually, with less than 2 cars sold per hundred people. Even using Japan, a country with a large population but limited land, as a benchmark, China's automotive sales still have the potential to double.

5

Back then, Japan lost its ambition to catch up with the United States. Does China still have that drive today?

Such an ambitious spirit is too mysterious to grasp. However, it is truly a major driving factor for an organization to make or break. Taking the e-commerce industry as an example, the decline of Alibaba and the rise of Pinduoduo are largely due to the difference in ambition between the two companies. A country's ambitious spirit comes from the sum of the ambition of its government, enterprises, and individuals.

If asked whether China will go down the same slippery slope as Japan, I believe it depends on whether China still has the aspiring, indomitable, and ever-striving spirit. In other words, whether the country, government, enterprises, and individuals are willing to stand up against oppression and failure?

In recent years, there have been many pessimistic opinions on the internet about choosing to skate by and become a couch potato to reject the rat race. It seems like everyone has lost their ambition, but I don't see it that way.

As mentioned earlier, the ambition of a country is the sum of the ambition of the government, enterprises, and individuals. From the perspective of the government, the top level of the Chinese government definitely still has the ambition to surpass the United States and compete with them. The middle and lower levels of the government may not be as ambitious as before, but from my own observations, local government officials still have the motivation to develop the economy and strive for progress.

For the ambitious spirit of enterprises, there are three aspects to consider: 1) whether Chinese people are still aspiring to start up businesses and whether newly-developing enterprises continue to spring up; 2) whether Chinese companies can seize opportunities in emerging or reforming industries; and 3) whether Chinese companies in traditional mature industries dare to challenge the global industry leaders.

Today, China can still give a positive answer to these three questions. In the past thirty years, two new industries emerged from scratch: the internet and new energy. Chinese companies have captured the majority of the domestic market in these two fields and have also gained certain market share globally.

Recently, there has been a breakthrough in the LLM (Large Language Model) by OpenAI. Overnight, countless Chinese companies have started developing LLMs of their own, and a large number of startups have emerged. Of course, there are mixed intentions, and some are just trying to manipulate stock prices. However, Chinese companies still maintain a high sensitivity to emerging opportunities and are willing to take risks to catch up.

Chinese companies also have the determination and ability to challenge industry leaders in traditional mature industries. Emerging Chinese companies are trying to enter markets that have already been highly monopolized by global industry giants such as PCs, smartphones, home appliances, LCD panels, medical devices, daily chemicals, beverages, and sports brands.

From an individual perspective, most Chinese people still hope to change their fate through their own efforts. Compared with developing countries like India and developed countries like Japan and those in Europe, there are far fewer Chinese people who choose to go goblin mode.

There are indeed many people complaining today, but most of them do so because they can't achieve what they desire, not because they truly desire nothing。

6

It is not easy for a country to maintain a positive and upward ambition continuously.

For enterprises, an ambitious and upbeat spirit can not be maintained when you set a development ceiling over their heads. In 1990, Japanese entrepreneurs realized that the United States was an unbreakable ceiling for Japan, and they lost their spirit. Today's Chinese entrepreneurs do not necessarily see the United States as a ceiling, but in some industries, such as the internet industry, some entrepreneurs may feel that they have encountered some limits, and they are uncertain where the boundary lies between unregulated and orderly expansion.

If entrepreneurs believe that they will hit a ceiling when their business expands, their ambition will diminish. We must ensure that mainstream entrepreneurs do not feel an invisible ceiling above them. Fortunately, not all industries in China currently have an invisible ceiling. The internet industry is an exception because of its deep association with ideology. Companies like BYD and Huawei do not feel an invisible ceiling above them.

For ordinary people, maintaining a positive and upward spirit requires providing individuals with hope and the belief that they can achieve social mobility through their own abilities. Reducing wealth inequality, limiting the inheritance of wealth, promoting social mobility, and preventing the emergence of monopolistic groups are all necessary conditions for maintaining the fighting spirit of people.

Maintaining the positive spirit of the people and maintaining that of enterprises are contradictory in a sense. If companies are allowed to monopolize indefinitely and expand disorderly, it becomes challenging for ordinary people to maintain their fighting spirit. On the other hand, if an egalitarian approach is adopted, it becomes difficult for enterprises to maintain their ambition. Ultimately, a balance needs to be struck.

It is not easy to keep this balance. But no matter what, as long as China maintains a positive and upward spirit, strives for the top, and never gives up, it will not go down the same slippery slope as Japan. Although both the Soviet Union and Japan yielded to the United States by choice in their former competition, whatever the outcome, this time China will not give in.

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As both the largest automobile market and exporter, where were the Chinese cars exported to? How much is the potential of the Chinese market and car manufacturers?

Caijing Magazine, a China's economy study magazine, analyzed the latest trends in the car market and warned car manufacturers of the past mistakes made by Chinese exporters, and highlighted the significance of favorable foreign trade policies, cost-effective products, and innovative momentum in new technologies. Your Ginger River believes it is a worthwhile piece for anyone interested in the market to dive into.

Some highlights first:

• In 2022, Russia imported approximately 117,000 passenger vehicles from China, a 40 percent increase compared to the previous year. China has become the main source of imported passenger vehicles in Russia.

• Mexico's position as the second-largest buyer of Chinese automobiles among the top ten countries is surprising, since Mexico itself is a major automotive producer, ranking seventh globally in terms of production volume.

• In Australia or Southeast Asia, Chinese automobiles possess an advantage in terms of price over European brands. They are gradually capturing consumers who used to buy from Honda, Toyota, Mazda, and other manufacturers, offering them affordable vehicles.

• In Middle East countries, customized designs tailored to the local environment and affordable quality services are key factors contributing to the popularity of Chinese automobiles.

• Although China ranks first in total automobile exports globally, it cannot be simply considered an automotive export powerhouse … Chinese automobiles still face the perception of being "disorganized, weak, and small" in overseas markets, and the negative perceptions of "low quality, low price, and copying" are deeply rooted.

• In summary, stable supply chains, competitive pricing, advantages in NEV research and development, and preferential foreign trade policies are reasons for the export achievement of Chinese automobiles overseas.

• However, the obstacles currently impeding the competitors will inevitably be overcome in due course. The question of how Chinese automakers can boost their competitiveness beyond just offering cost-effectiveness remains to be answered with time.

According to data from the China Association of Automobile Manufacturers, from January to May 2023, automobile companies exported 1.76 million vehicles, an 81.5 percent year-on-year increase. The export of NEVs reached 457,000 units, a 1.6-fold increase compared to the previous year.

To the untrained eye, it may seem like a spectacle, but it is important to note that during the same period, China's domestic automobile sales also reached 11.6 million units, indicating a thriving domestic market alongside the robust export, which is not commonly seen internationally.

Generally, a major automobile exporter must meet two conditions: having a well-developed industrial structure and strong production capacity; a domestic market that is not excessively large, to avoid overwhelming the country's production capacity. The simultaneous growth in both exports and domestic sales indicates that the Chinese automobile consumer market possesses significant purchasing power and the products manufactured have a strong global influence.

Now, the question arises: who is buying all these Chinese automobiles? Can such a massive export volume be sustainable? Overseas business environments differ from the domestic market, so what factors should be taken into account?

Throughout the history of global automobile exports, in the 20th century, due to the three oil crises, Japanese and Korean automobiles dominated the import market in Europe and America. Although there have been minor fluctuations, this dominance was maintained until today. However, China's export of NEVs has the potential to disrupt this pattern.

The surge in China's automobile exports is attributed to the favorable trading environment between import and export countries, the competitive cost-effectiveness of Chinese automobile products, and the development momentum gained from early investment in new energy and intelligent connected vehicle technologies. Nevertheless, it is important to be aware that China's automobile industry still has a long way to become an export powerhouse.

Top buyers of Chinese automobiles: Russia and Mexico

From January to April 2023, the top ten importers of Chinese automobiles were Russia, Mexico, Belgium, Australia, Saudi Arabia, the United Kingdom, Thailand, Spain, the United Arab Emirates, and the Philippines.

These countries are scattered across different regions, ranging from Western Europe to Southeast Asia, from the Middle East to Latin America. They include both traditional automotive powerhouses and rapidly developing emerging automobile consumer markets. What are the reasons behind this diverse customer base?

After careful analysis, the main reasons for this pattern can be attributed to favorable foreign trade policies, cost-effective products, and innovative momentum in new technologies.

Russia's situation is particularly unique. Previously, Russia's automobile manufacturing industry relied heavily on Western investment, component supplies, and partnerships. Due to the impact of the Russia-Ukraine conflict, many multinational automakers halted exports to Russia and ceased automobile production and spare parts supply in the country.

In March, Avtovaz, Russia's largest automobile manufacturer, announced that due to a shortage of components, the factory would begin its summer vacation earlier and extend the break. As a result, the automotive market in Russia became completely seller-driven, leading to a significant increase in vehicle prices.

In this context, Chinese car manufacturers maintaining a stable supply chain reaped the benefits. In 2022, Russia imported approximately 117,000 passenger vehicles from China, a 40 percent increase compared to the previous year. China has become the main source of imported passenger vehicles in Russia.

Data shows that in the past year, Russia has added 487 Chinese automobile dealerships. Currently, for every three automotive dealerships in Russia, one sells Chinese vehicles.

The advantage of lower tariffs highlights the cost-effectiveness of Chinese automobiles. This is particularly evident in the Australian and Southeast Asian markets.

Due to the free trade agreement between Australia and China, Chinese-made automobiles face lower tariffs compared to European vehicles. Similarly, the Regional Comprehensive Economic Partnership (RCEP) provides convenience for Chinese brands entering the Southeast Asian market.

For long, the Southeast Asian market has been dominated by Japanese automakers. With the implementation of the RCEP, Chinese car manufacturers have started enjoying preferential policies for Japanese companies, allowing tariff-free circulation of components within the region. For example, Chinese automakers that have established factories in Thailand can extend their supply chain to all RCEP member countries, with zero tariffs on components.

In Australia or Southeast Asia, Chinese automobiles possess an advantage in terms of price over European brands. They are gradually capturing consumers who used to buy from Honda, Toyota, Mazda, and other manufacturers, offering them affordable vehicles.

If policies act as lubricants, then products and technologies serve as the foundation for survival. Chinese car manufacturers have taken the lead in the transformation towards new energy, aligning with the global market opportunities for green and low-carbon transportation.

Thailand, for example, has proposed the "3030 Vision," aiming to have zero-emission vehicles account for 30 percent of new car production by 2030. Based on China's automobile export data from January to April 2023, Thailand has already surpassed European countries, such as the United Kingdom and Spain, in importing new energy vehicles from China.

Thailand is not the only country in which China leverages the advantages of new energy products. China has made inroads into the European market, a region known as traditional automotive powerhouses.

Globally, Europe is one of the most proactive regions in terms of "banning vehicles burning fossil fuels" and pursuing "carbon neutrality." This is driven by the considerations of building ecological environments and the painful past experience of energy crises. Numerous European countries have given green light to the development of new energy vehicles, providing tax incentives and rights of way.

However, due to the cost of the industrial chain, new energy vehicles in Europe are relatively expensive, and the pace of electrification for domestic European car manufacturers lags behind Chinese counterparts. This has provided an opportunity for Chinese car manufacturers to expand overseas.

Based on China's automobile export data from January to April 2023, the proportion of imported Chinese NEVs in the United Kingdom and Belgium exceeds that of traditional energy vehicles.

In Europe, some Chinese car manufacturers have adopted approaches to explore the market. For example, Lynk & Co. introduced a "subscription model" in Europe, allowing consumers to have monthly usage rights for a car at a relatively low price of 550 euros. Everything is included in the package, eliminating additional concerns for the consumers. They can pay on a monthly basis and terminate the contract anytime. Currently, the number of members in Europe has exceeded 200,000.

Mexico's position as the second-largest buyer of Chinese automobiles among the top ten countries is surprising, since Mexico itself is a major automotive producer, ranking seventh globally in terms of production volume.

There are two reasons why Chinese car manufacturers expanded in Mexico. Firstly, it is a vibrant and emerging consumer market, making it suitable for early market positioning. Secondly, establishing production bases in a country neighboring the United States, the world's second-largest automotive market, offers significant advantages. Chinese car manufacturers and automotive component suppliers are expanding their presence in Mexico, not only for exporting complete vehicles but also for local production and supply chain development.

According to the North American Free Trade Agreement (NAFTA) signed by the United States, Canada, and Mexico in 1992, companies that establish factories in Mexico and meet a certain percentage of component procurement from the three North American countries are allowed to export to the United States with zero tariffs.

As the country closest to the U.S. market, Mexico has become one path for the Chinese automotive industry to enter the U.S. market. Moreover, Mexico has advantages in the automotive supply chain. In recent years, leading U.S. automotive companies have shifted some of their production capacity to Mexico, which has a complete chain of local automotive component suppliers, good industrial foundations, and low labor costs. All of these benefit Chinese car manufacturers aiming to cultivate the American market, with the need to first address issues related to localization production, logistics, and supply chain.

Chinese automobiles are gradually gaining a foothold in the Middle East due to their price advantages. Tarek Mustafa, an automotive industry analyst in Egypt, stated that Chinese vehicles are increasingly prominent in the Middle East market due to their improved product quality, timely and attentive after-sales service, progressive technological research and development, and deep understanding of customer needs and quick response.

In Middle East countries, customized designs tailored to the local environment and affordable quality services are key factors contributing to the popularity of Chinese automobiles.

Liu Xinlu, director of the Arabic School of Beijing Foreign Study Univeristy, said countries in the Middle East, producing oil or not, all consider the development of green economies and the utilization of new and renewable energy as fundamental strategies for sustainable development. In this context, NEVs have become a new hotspot and growth point in the Middle East market.

In terms of the total sales volume of Chinese brands overseas, Saudi Arabia ranks third. In 2022, Chinese brands sold a total of 100,482 vehicles in Saudi Arabia.

Chinese car manufacturers have conducted extensive research on the Middle East market and made improvements to their vehicle safety and performance based on the driving habits of local residents.

By taking Saudi Arabia's high temperatures, humid climate, and customer preferences into account, the Chinese brand Yutong has made systematic technological improvements, such as dedicated accessories for pilgrimage vehicles, optimization of cooling and refrigeration systems, and more. Their product coverage includes pilgrimage vehicles, customized school buses, high-end group vehicles, VIP business vehicles, among others.

Yutong ensures the availability of spare parts through its Dubai parts center and local parts service network. They provide reliable services to customers by deploying resident service personnel, forming professional service teams, and developing all-weather service plans during pilgrimage seasons.

In terms of export destinations, Europe, North America, Asia, and Australia account for the majority of Chinese automobile exports, and Europe is the main driving force, together with significant growth in the market share of North America. Export growth in countries such as Australia, the United Arab Emirates, Saudi Arabia, and the Philippines has been notable, while the export volume to underdeveloped regions in Africa and South America is gradually decreasing.

The glory and concerns associated with the growth

Throughout the history of China's automobile exports, it took 55 years to increase exported vehicles from 1 to 1 million units, 10 years to reach from 1 million to 2 million units, and just one year to reach from 2 million to 3 million units. This indicates that China's automobile exports are accelerating.

Currently, new energy vehicles are leading the way. China has both technological advantages and industrial chain resilience in key areas of NEV manufacturing. Combined with the advantage of manufacturing costs and intelligent manufacturing, China boasts strong competitiveness.

In the past, the oil crisis allowed Japanese and Korean automobile brands to dominate the European and American markets for decades. Now, Chinese automobile brands have the potential to replicate that history.

According to data from the China Association of Automobile Manufacturers, from January to May, among the top ten exporting companies, BYD exported 69,000 vehicles, a year-on-year increase of 14.2 times; Chery exported 319,000 vehicles, a year-on-year increase of 1.8 times; Great Wall Motor exported 99,000 vehicles, doubled the amount of one year earlier.

Currently, Chinese automobile exports are increasing in both quantity and price. "Since last year, the unit price of Chinese exported cars has been increasing, especially NEVs. As far as I know, the unit price of Chinese exported NEVs has been maintained at around $30,000 per vehicle," said Xu Haidong, deputy chief engineer of the China Association of Automobile Manufacturers.

While enjoying rapid growth, Chinese automobile exports must focus on high-quality and sustainable development.

This requires systematic support. Taking SAIC Motor Group, the top exporter in terms of volume from January to May, as an example, it has established a complete automotive industry chain covering production, research and development, sales, and after-sales services worldwide. It also has three major research and innovation centers, three design centers, four production bases, and knock-down (KD) factories. SAIC Motor Group has also opened multiple self-running international routes to build export capabilities.

Soft power is also needed. Guan Mingyu, global director and Greater China automotive sector leader at McKinsey & Company, mentioned that companies face various challenges when going abroad. The experiences gained in the Chinese market cannot be directly replicated in other places. To succeed in other countries, companies need top-level thinking and systematic design.

This requires a dual approach to strengthening internal and external capabilities, including studying destination countries' laws and regulations, industry ecosystems, partnership relationships, and business culture. Internally, companies need a comprehensive set of measures in terms of market, governance structure, organization, and talent recruitment. "The key lies in talent resources," said Wang Qian, general manager of LinkedIn China Talent Solutions, who emphasized the need to optimize the management models of headquarters and frontline departments, enhance brand reputation to attract top talent, and help talent integrate with local cultures.

It is important to be rational. Although China ranks first in total automobile exports globally, it cannot be simply considered an automotive export powerhouse.

This is because, in major automobile-producing countries, exports account for 35 percent to 50 percent of their domestic production, while in China, this proportion was only 11 percent in 2022. Additionally, the aforementioned sales volume calculation does not include the production and sales volume of Japanese and Korean brands whose factories are located in other countries.

At the same time, domestic Chinese automobile brands still need upgrading. For example, the MG brand under SAIC Motor has higher prices and sales volumes in Commonwealth countries compared to domestic sales. This is because it was originally a British brand acquired by SAIC Motor, and these countries have a favorable perception of it.

Chinese automobiles still face the perception of being "disorganized, weak, and small" in overseas markets, and the negative perceptions of "low quality, low price, and copying" are deeply rooted.

"Chinese car companies cannot adopt a ‘fisherman's approach’ when entering foreign markets, casting a wide net and catching for whatever they catch," said Li Xianjun, director of the Automotive Development Research Center at Tsinghua University, when sharing his previous research experience with journalists. More than a decade ago, he learned that a car company sold only 30,000 vehicles in a total of 67 countries, which was quite disappointing. Automobiles rely on economies of scale, and scattering resources across so many countries makes it difficult to build relationships and address post-sales issues.

"When going global, automobiles should learn from the experience and lessons of motorcycle exporters," said Zhang Hongbo, secretary-general of the China Motorcycle Association. More than 20 years ago, Chinese motorcycles were the first to go international and compete in Southeast Asian markets. However, price wars squeezed reasonable profit margins, affecting research and development, after-sales services, and product quality, allowing Japanese motorcycle brands to regain market dominance. This demonstrates that while being the "price butcher" and engaging in "internal competition" can serve as an initial strategy, winning the market relies on technology, quality, and service.

In summary, stable supply chains, competitive pricing, advantages in NEV research and development, and preferential foreign trade policies are reasons for the export achievement of Chinese automobiles overseas.

However, the obstacles currently impeding the competitors will inevitably be overcome in due course. The question of how Chinese automakers can boost their competitiveness beyond just offering cost-effectiveness remains to be answered with time.

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Things have changed, however, as the internet business stagnates, and the job market saturates. The drivers and couriers are not earning as much as they used to, yet are unable to see any better offers.

People within the "new forms of employment" 新就业形态, e.g. ride-hailing drivers, food delivery workers and couriers, depend heavily on the expansion of the internet industry, and the majority of them are self-employed or outsourced. As a more flexible, and indeed more precarious, part of the job market, these workers are now grappling with the unfortunate consequences of their deep involvement in the fluctuating Chinese economy.

The following article is a sharp revelation of the cause of the predicament. It was originally published by 巨潮 WAVE, a WeChat account focusing on Chinese businesses. The author predicts an impending third wave of labor migration. Decline in population growth and consumption are the primary factors behind income stagnation, the author explains, and the solution can only come from the workers themselves, by upgrading skills and entering new fields.

There was a time when migrant workers had the guts to proclaim: "It's no big deal. I'll just quit and be a DiDi (the Chinese equivalent of Uber) driver!"

And this was no tongue-in-cheek remark. The rise of China's online taxi market has contributed significantly to the country's employment rates. DiDi's financial report shows that from March 2020 to March 2021, the company had 13 million annual active drivers in China; from March 2022 to March 2023, the number rose to 19 million, an increase of nearly 50 percent in just two years.

According to data from China's Ministry of Transport, as of April 30 2023, a total of 309 ride-hailing companies had obtained operating licenses, and a total of 5.41 million ride-hailing driver licenses had been issued across the country.

In contrast, those two figures stood at merely 207 and 2.55 million, respectively, on Oct. 31 2022. That counts as an increase of 49.2 percent and 112.4 percent, respectively, in less than three years. But the surge in ride-hailing drivers is by no means good news for those who want to join the industry. Data show that the average daily number of orders received by ride-hailing drivers has now decreased from 23.3 orders per car in 2020 to less than 11 orders per car.

This means that while the overall market has barely expanded. It now has to cope with an ever-larger number of people who seek shelter in the industry, resulting in a huge drop in the average income of drivers.

In fact, it's not just ride-hailing drivers that are experiencing such embarrassment. The same thing is happening to the other two professions among the top three retreats for migrant workers: couriers and food delivery workers. They are now faced with the cruel reality of increased staffing and stagnant income growth.

What can migrant workers resort to now that there's hardly any space for a retreat?

01

The march of migrant workers

It seems that the "bottomless pit of employment" can indeed be filled up.

The term "dagong" (打工 in Chinese, referring to casual labor in the city) first appeared in Hong Kong. But the full rise of the term in China is attributed to two historical migrations of the Chinese labor force.

The first labor migration took place in 1991. According to data from the National Bureau of Statistics, the number of people employed in China's primary sector fell for the first time in 1991 since the reform and opening up, and continued to fall for more than thirty years thereafter. This marked the continued migration of agricultural labor.

China's manufacturing and construction industries grew rapidly during this period and became the main force behind employment. Large numbers of agricultural laborers turned into industrial and construction workers, and their low costs helped China gain a reputation as the "world's factory".

But dangers lie under the facade. For a start, low wages, though an advantage of China's manufacturing industries, also has a detrimental effect in terms of continuing to attract labor. Second, long hours of tedious work at the assembly lines were inhuman and depressing, the effect of which was felt most keenly in the "thirteen consecutive suicide jumps" at Foxconn.

Low-end manufacturing jobs may be acceptable for the older generation, but for people born in the 1980s and 90s, they are far from attractive.

So it came to pass that a second migration of the workforce took place.

The turning point was 2013, when the number of people employed in China's secondary sector saw a historic decline. In the following two years, the total number of people employed in China and the number of people employed in primary and secondary industries all fell, while only the tertiary sector bucked the trend and became the most dynamic part of the job market.

In 2013, DiDi and Kuaidi, two major ride-hailing companies at the time, officially opened for private car operations and launched a rain of subsidies. Uber, DiDa, Shenzhou (Ucar), and other rival companies all followed the practice, using subsidies to gain market dominance. The lure of subsidies attracted many private car owners into the game and brought into existence a formidable group of full-time ride-hailing drivers.

In 2013, Meituan triumphed the dogfight to start its takeaway services, marking the emergence of food delivery workers.

In 2013, supported by the booming e-commerce business, the annual business volume of major courier service providers exceeded 9.19 billion pieces, an increase of 61.6 percent year-on-year -- the highest growth rate on record. The year 2013 thus marked the beginning of the golden age of China's courier industry.

The Ninth National Workforce Survey released on March 26 2023 showed that the total number of employed workers in China is currently around 402 million, with 84 million classified as being in "new forms of employment." People in the "new forms of employment" mainly include truck drivers, ride-hailing drivers, couriers and food delivery workers.

These people have taken up over 20 percent of the population, which demonstrates how the new forms of employment, as a result of the Internet, are functioning like a reservoir that constantly absorbs water from other fields of the job market.

The reservoir is so huge that not until 2022 did we realize that it's not a bottomless pit. Now it is on the edge of brimming.

02

A Brimming Reservoir

The scale of the Internet economy has peaked.

Theoretically speaking, the internet platform economy is limitless to accommodate a massive workforce.

However, it is evident that the economic pool constructed by China's internet has hit its limit since 2022, mainly due to the plateauing of the population and the number of netizens:

China's population has reached its peak. By the end of 2022, the national population decreased by 850,000 compared to the previous year, a negative growth for the first time in decades. Additionally, there is little possibility of a short-term population rebound.

The number of Internet users has stretched to its limit. According to the 51st Statistical Report on Internet Development in China, published by the China Internet Network Information Center (CNNIC) in March 2023, as of December 2022, the number of netizens in China reached 1.067 billion, with an internet penetration rate of 75.6 percent.

Considering that the population aged 15-64 accounts for 81.8 percent of the total population in China, there is practically no room for the growth of Internet users.

Furthermore, the decline in purchasing power also has impacts on the scale of the Internet economy. In 2022, the national per capita consumption expenditure was 24,538 yuan (about 3,444 U.S. dollars), a nominal increase of 1.8 percent compared to the previous year, but after deducting price factors, it actually decreased by 0.2 percent. Among them, urban residents, who are the main force of consumption, had an average per capita consumption expenditure of 30,391 yuan, a nominal increase of 0.3 percent, but a real decrease of 1.7 percent after deducting price factors.

The number of consumers has reached its peak, and consumption capacity is declining. These two factors that affect market growth are forcing a slowdown in employment related to the internet economy.

A speck of dust from the era eventually weighs as a mountain on the shoulder of each ordinary individual.

According to a report by China Newsweek, as of May 16, 2023, Changsha City, capital of central China's Hunan Province, has suspended the issuance of new permits for ride-hailing. Prior to this, multiple cities including Dongguan, Sanya, Wenzhou, Jinan, and Suining had successively issued warnings of saturation in the ride-hailing market. Even in first-tier cities like Guangzhou, capital of south China's Guangdong Province, the average daily orders and revenue have been decreasing month by month from January to March this year.

Several food delivery riders in Beijing, Shanghai, Guangzhou, and Shenzhen, in an interview by Red Star News, all revealed that after the Chinese New Year, there were "more riders but fewer orders." These full-time food delivery workers now typically receive only 20 to 30 orders per day, compared to their previous peak of receiving 50 to 60 orders.

Life is also tough for couriers whose work is highly dependent on e-commerce consumption. In 2022, the volume and revenue of China's express delivery services experienced the lowest growth rate recorded, both below 3 percent. As a result, the per capita usage and expenditure on express delivery services in 2022 remained stagnant.

For many migrant workers, the so-called "employment shelter" has actually disappeared, making it unaffordable for them to lose their current jobs.

03

Is it time for the third labor migration?

Actually, the key to all kinds of labor migration is skill upgrading.

The first two waves of labor migration in China have already passed, and a third wave may be on the horizon. The author identifies three potential directions for this migration.

First, go back to rural areas.

It is worth noting that in 2022, after experiencing years of decline, the number of people employed in China's primary industry saw an increase for the first time.

This may be attributed to the impact of the COVID-19 pandemic in 2022. However, the significant outflow of rural population has led to serious hollowing out of rural areas, posing significant challenges to China's agriculture such as population aging and a shrinking farming population. To address these issues, it is essential to accelerate the process of agricultural mechanization, intensification, and intelligent production, which requires an influx of fresh and young labor to enhance agricultural productivity and stabilize output.

Technical agricultural positions will create a substantial number of employment opportunities.

Second, become skilled workers.

A significant number of laborers are leaving factories in China, driving rapid industrialization, mechanization, and automation in China's manufacturing sector. In many factories, the repetitive tasks on assembly lines can now be replaced by robots and mechanical arms. However, skilled workers cannot be immediately replaced by automation, creating a significant skill gap.

In the industrial sector, the ideal talent structure is 1 scientist, 10 engineers, and 100 skilled workers. In Japan, highly skilled technicians account for around 40 percent of the entire industrial workforce, while in Germany, the figure reaches as high as 50 percent. In China, this proportion is only about 5 percent.

Third, upgrade the service.

Throughout the development of some industries such as online ride-hailing, food delivery, and express delivery, rapid scaling has been achieved through aggressive price competition, subsidies, and even dumping. After extensive and market-share-focused strategies, the upgrade of service quality becomes necessary. This entails meeting a series of more specialized and specific market demands.

In a word, the reason why migrant workers flock to industries such as express delivery, food delivery, and online ride-hailing is simply that these jobs have low entry barriers and that they can quickly start working and earn a decent income. However, these low-skilled positions may enjoy the benefits in the early stages of industry development but will eventually be assigned market value that aligns with their skills level due to the rapid increase in labor supply.

The migrant workers also conform to the laws of supply and demand.

To maintain the "job freedom" of migrant workers, there is only one core direction in all sectors: skill upgrading.

Just as the first wave of labor migration was based on the universalization of compulsory education and the improvement of cultural literacy, the second wave of labor migration was driven by the popularization of Internet technology skills.

Overall, the challenges faced by various tertiary industry positions, represented by online ride-hailing, are actually side effects of socio-economic transformation. At the same time, they also act as a driving force for the continuous improvement of the entire labor structure.

However, not everyone can progress with the times.

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The following article was published on April 20 in China Newsweek, China's renowned periodical providing extensive reports on current affairs and political news. Based on the latest Chinese population data, it offers a window into the factors accounting for population growth and decline among various provinces.

Here are some highlights:

• So far, among the 31 provincial-level administrative regions in China (excluding Hong Kong, Macau, and Taiwan), 18 provinces in China experienced a growth in permanent resident population, while 13 provinces decreased.

• In terms of the total population of permanent residents, Guangdong, Shandong, and Henan are still the top three provinces in the country, but they all experienced a decline in 2022.

• East China's Zhejiang province has become the province with the highest increase in permanent population for the second consecutive year nationwide, while southern China's Guangdong province, which has been the leader in permanent population growth for many years, has declined in 2022.

• Many experts attribute the decrease in Guangdong's permanent resident population to the short-term impact of the COVID-19 pandemic. Researchers also analyzed that the wage gap between labor forces in inland provinces and coastal provinces is narrowing, and the return of labor force from inland areas has become an important influencing factor in population changes in various regions.

• It is analyzed that the strong population magnet of Zhejiang is closely related to the attractiveness of the Yangtze River Delta economy, and the population often follows industry migration. The emerging industries of the digital economy and the relatively relaxed household registration policy in Hangzhou (the capital of Zhejiang province) attract a large number of young people to settle down there.

• While the public tends to think of first-tier cities and southeastern coastal cities as strong population magnets, developed central and western provincial capitals such as Changsha, Hefei, Xi'an, Wuhan, and Nanchang have had a significant increase in their population inflows in 2022. Many insiders believe that the "price warp" effect of Changsha in central China's Hunan Province is kicking in. Hefei, often hailed as the "No.1 venture capital city", is not only home to leading semiconductor companies, but also collaborates with top-tier new energy automobile companies, and these emerging industries are now drawing in a large influx of migrant residents.

• Data from the Seventh National Population Census show that the fertility rate in China is higher in the south than in the north, and higher in the west than in the east, which is basically in line with the natural population growth rate, and to a certain extent reflects the difference in fertility intentions between different regions.

• Experts believed it was better to analyze fertility intentions through people's attitudes towards fertility, i.e. the culture of fertility, than to look from the economic perspective. Upon closer inspection, the eleven provinces with positive natural growth rates have more positive attitudes towards fertility in their traditional cultures, regardless of their level of economic development. As a result, the expert argued, the current fertility support policy should focus more on devising a new fertility culture other than trimming down on the economic costs of childbirth.

1) Permanent resident population: increase in 18 provinces, fall in 13 provinces

[GRR's note: The figure has been updated and completed by including data from Ningxia Hui Autonomous Region and Tibet Autonomous Region, according to Jiemian]

In 2022, 18 provinces and regions in China experienced a growth in permanent resident population, while 13 provinces and regions experienced a decline. The 18 provinces and regions with positive population growth were Zhejiang, Jiangsu, Hubei, Anhui, Fujian, Shanxi, Chongqing, Gansu, Inner Mongolia, Yunnan, Shaanxi, Guizhou, Hainan, Guangxi, Jiangxi, Qinghai, Sichuan, and Ningxia.

The 13 provinces and regions with negative population growth were Guangdong, Beijing, Shandong, Tianjin, Henan, Shanghai, Hunan, Heilongjiang, Hebei, Xinjiang, Liaoning, Jilin, and Tibet.

China's three northeastern provinces (Liaoning, Jilin and Heilongjiang) all experienced population outflow.

Data shows that in 2022, Liaoning saw a decrease of 324,000 in its permanent resident population, the largest decline among all the provinces. Jilin and Heilongjiang saw decreases of 276,800 and 260,000, respectively, resulting in a total decline of 860,800 in the three provinces' permanent resident population.

The Beijing-Tianjin-Hebei region in north China saw a drop of over 400,000 in its permanent resident population, with Beijing decreasing by 43,000 compared to the end of the previous year, Tianjin decreasing by 100,000, and Hebei decreasing by 280,000.

Unexpectedly, south China's Guangdong Province experienced an outflow of permanent resident population in 2022.

In previous years, Guangdong's permanent resident population had been increasing. In 2021, it still increased by 600,000, but in 2022 it declined by 272,000.

However, it is also worth noting that Guangdong's natural population growth rate in 2022 remained positive, with 1.052 million births and a natural population growth of 422,000, making Guangdong the only province in China with a birth population exceeding one million, earning it the title of the province with the highest birth rate in the country.

Based on this, many experts attribute the decrease in Guangdong's permanent resident population to the short-term impact of the COVID-19 pandemic.

For many years, the number of permanent residents in Guangdong has far exceeded the registered population, with 27.37 million non-local residents in Guangdong at the end of 2021. However, during the period of statistics survey on the permanent population at the end of last year, many people from other provinces who came to Guangdong for work returned to their hometowns due to the impact of the pandemic.

The Guangdong Statistical Bureau pointed out that in 2022, the floating population from other provinces to Guangdong decreased by 692,000, which was a temporary phenomenon of non-local residents returning to their hometowns under the influence of the COVID-19 pandemic prevalent in Guangdong in 2022.

And indeed, after this year's Spring Festival, a large-scale population return to Guangdong was shown according to data from China's three major telecommunications operators. In addition, real-time migration map data from Baidu showed that Guangzhou, Shenzhen, Foshan, and Dongguan (major cities in Guangdong province) were also among the top ten popular destinations for migration in the country.

It is also noteworthy that in 2022, the populous provinces of Anhui, Hubei, Jiangxi, and Sichuan, which were previously known for exporting labor, all saw positive population growth in terms of permanent residents, with increases of 140,000, 140,000, 105,800, and 20,000 respectively.

Wang Guangzhou, a researcher at the Institute of Population and Labor Economics of the Chinese Academy of Social Sciences (CASS), once wrote that this is closely related to the trend of the labor force returning to their hometowns.

Wang analyzed that the wage gap between labor forces in inland provinces and coastal provinces is narrowing, and the return of labor force from inland areas has become an important influencing factor in population changes in various regions. Moreover, he added that despite the pandemic direct influence, the decrease in the permanent resident population of Guangdong is also related to this overall trend. The younger generations born in the 1990s and 2000s now tend to choose local employment rather than long-distance interprovincial employment.

2) Zhejiang province: the strongest population magnet

In 2022, east China's Zhejiang province once again took the top spot nationwide with the largest increase in its permanent resident population.

[GRR's note: The original chart is made by Guominjinglue 国民经略 ("state strategies"), a WeChat blog with a particular focus on prefectural and provincial development in China. Then GRR edited and translated it to be updated and more readable for English readers.]

It is shown that by the end of 2022, the resident population of Zhejiang was 65.77 million, an increase of 370,000 compared to the end of 2021 with 65.40 million, according to data released by the Zhejiang Provincial Bureau of Statistics.

In 2021, Zhejiang already had the highest increase of 720,000 in its permanent population nationwide.

Considering that the natural population growth in Zhejiang in 2022 was only 3,000, the vast majority of the increase in permanent population of 370,000 came from net inflow of people from other provinces.

Then what makes Zhejiang so attractive?

Wang Guangzhou believes that this is closely related to the attractiveness of the Yangtze River Delta economy as the population often follows industry migration.

In 2022, Hangzhou, the capital of Zhejiang province, as one of the cities that passed the trillion-yuan GDP benchmark, had an incremental resident population of 172,000.

In recent years, Hangzhou, as a leading city in the digital economy, has continuously achieved cluster development in strategic emerging industries such as big data, high-end software, cloud computing, artificial intelligence, network communication, and integrated circuits.

In Wang's view, these emerging industries in Hangzhou have driven the settlement of the upstream and downstream enterprises of the industrial chain, thus attracting a large number of young people to settle and develop in Hangzhou.

In addition, Hangzhou's household registration policy is relatively relaxed among first- and second-tier cities. Recently, Hangzhou announced that graduates with a college degree under the age of 35 who are employed in Hangzhou can apply for household registration in the urban area. And the household registration conditions for urban areas in Tonglu County, Chun'an County, and Jiande City have been completely liberalized.

Along with relying on emerging industries to attract the workforce, Zhejiang also has another approach to population attraction.

"Against the background of various policies in China to attract investment and talent in high-end industries, Zhejiang as a whole, especially Jinhua, uses its own industrial and commercial system, focusing on ordinary industries and talents to attract young people for employment," said Cao Rongqing, a professor at the School of Economics and Management, Zhejiang Normal University, in an interview with China Newsweek.

In Cao's view, although this Jinhua-like model may not seem "high-end" or even relatively "low-end" to some people, it has effectively absorbed a large number of the employed population, which is of much practical significance in the current social focus on the underemployment of college graduates.

East China's Jiangsu Province, which is also part of the Yangtze River Delta region like Zhejiang, had a resident population growth of 100,000 in 2022.

It is to be noted that the natural population growth rate in Jiangsu was -1.81 per thousand, with the number of deaths exceeding the number of births in 2022. And in fact, Jiangsu had a net population inflow of 254,000 from other provinces in 2022.

3) Flying colors of Changsha and Hefei

Major cities of China have disclosed permanent resident population figures as well.

While the public tends to think of first-tier cities and southeastern coastal cities as the strongest population magnets, developed central and western provincial capitals such as Changsha, Hefei, Xi'an, Wuhan, and Nanchang have had a significant increase in their population inflows in 2022.

In 2022, Changsha ranks first among the 24 cities that have passed the trillion-yuan GDP benchmark with an incremental resident population of 181,300. In addition, Hangzhou (172,000), Hefei (169,000), Xi'an (122,900) and Wuhan (90,100) ranked second to fifth in terms of population increment respectively.

Many insiders believe that the "price warp" effect of Changsha in central China's Hunan Province is kicking in. [GRR's note: That is to say, the home prices of Changsha have been lower than the surrounding areas, creating a focal point of investment and immigration.]

Changsha, in recent years, has stood in sharp contrast with many cities that have been interviewed by the Ministry of Housing and Urban-Rural Development (MOHURD) over "housing speculation". Changsha is known as the "impossible place for housing speculators" and received public acclaim by the MOHURD's work brief, in an article titled "Changsha implements its main responsibility to steadily implement a long-term mechanism for the stable and healthy development of the real estate market", December 2020.

Changsha's home prices averaged around 10,000 yuan at the beginning of 2023, ranking outside the top 60 in the country and falling behind many ordinary counties in eastern China.

Changsha's GDP, however, was around 1.39 trillion yuan in 2022 with a 4.5 percent year-on-year increase, ranking as one of the top growers among major cities. Currently, Changsha has 85 A-share listed companies, the highest number in central China.

Apart from Changsha, the permanent resident population of Hefei in east China's Anhui Province increased by 169,000 in 2022, which is also an impressive result.

Hefei, often hailed as the "No.1 venture capital city", is not only home to leading semiconductor companies such as Changxin Memory Technologies (CXMT) and Jinghe Integrated Circuit, but also collaborates with top-tier new energy automobile companies such as BYD and NIO.

These emerging industries are now drawing in a large influx of migrant residents.

According to the 2023 Hefei government work report, in 2022, Hefei introduced 127 teams of high-level talents, attracted 55,000 highly skilled talents, and for the first time, recruited more than 300,000 university graduates.

4) The natural population growth rate: factors behind the population increase in eleven provinces

[GRR's note: The following is an excerpt from a report by Jiemian.com that dives into the demographic trends of China.]

The natural population growth rate is determined by the difference between birth and death rates. According to He Yafu, an expert in demography, data from the Seventh National Population Census show that the fertility rate in China is higher in the south than in the north, and higher in the west than in the east, which is basically in line with the natural population growth rate, and to a certain extent reflects the difference in fertility intentions between different regions.

Among the 31 provinces that had disclosed population figures at the time of writing, the three northeastern provinces have the lowest natural growth rate, with Heilongjiang (lowest of the country) at -5.75 per thousand, Liaoning at -4.96 per thousand, and Jilin at -4.07 per thousand.

The 11 provinces and regions with positive natural population growth rates are Guangdong, Zhejiang, Hainan, Fujian, Jiangxi, Guangxi, Qinghai, Ningxia, Tibet, Xinjiang and Guizhou. Tibet Autonomous Region had the highest natural growth rate at 8.76 per thousand, followed by Ningxia Autonomous Region at 4.41 per thousand. It is noteworthy that the natural population growth in Guangdong remained as high as 3.33 per thousand, despite a relatively large decrease in permanent resident population.

It is said that "development is the best contraceptive" - the higher the level of economic development, the lower the fertility intentions. Yet it doesn't seem to be entirely consistent with the reality of 2022. Nor can it explain why fertility rates are generally higher in southern China than in the north.

He Yafu said that the relationship between the level of economic development and fertility intentions is complex and cannot be simply assumed to be positively or negatively correlated. There are many factors that affect fertility, and if one were to analyze the relationship between economic level and fertility intentions, one would need to find two regions that are otherwise identical, with only different income levels, in order to conduct a reliable study. But in reality, it is difficult to find such cases.

However, he cited a 2013 case study co-authored by Dan A. Black, professor at the Harris School of Public Policy at the University of Chicago, that looks into the people living in the Appalachian coalfields of the U.S. (which include counties in Ohio, Pennsylvania, Kentucky and West Virginia) in the mid-1970s. The communities experienced an energy price surge at the time, resulting in higher earnings in males from coal-rich counties. By studying the correlation between income and fertility intentions in counties with different coal reserves, researchers found that the higher male earnings in coal-rich counties were, the higher fertility rates. The findings also show that a 10 percent increase in income led to an 8 percent increase in the birth rate. This challenges the old belief that rich people have fewer children and that the poor have more offspring.

Natural population growth rates in 30 provinces. Data unavailable for Tianjin Municipality.

He Yafu believed it was better to analyze fertility intentions through people's attitudes towards fertility, i.e. the culture of fertility, than to look from the economic perspective. Upon closer inspection, the eleven provinces with positive natural growth rates have more positive attitudes towards fertility in their traditional cultures, regardless of their level of economic development.

As a long-time resident of Zhanjiang, south China's Guangdong Province, He Yafu explained how the traditional family-focused culture that asserts "more children, more blessings" is especially preserved in Guangdong province. Ancestral halls are ubiquitous, said He, and in Zhanjiang's rural areas, the annual "Nianli Festival", which is the equivalent of a village birthday, is even more lavishly celebrated than the Chinese New Year. Almost all rural families in Zhanjiang have two children.

Compared with those living in China's inland regions, people in Guangdong have retained a higher level of fertility intentions. In 2022, 1.052 million children were born in Guangdong province, with a birth rate of 8.30 per thousand. Guangdong has been the only province with more than one million births for three consecutive years, and has been the number one province in terms of fertility for five consecutive years. The birthrate in Guangdong is still fundamentally solid.

Another demographic expert explained that Guangdong, the pioneer of reform and opening up, used to have different family-planning policies. The two-child policy had been in place in rural Guangdong until 1998, and was replaced by the one-and-a-half-child policy (i.e. a second child is allowed if the first child is a girl). Consequently, the birthrate in Guangdong has always stayed in high places. In addition, the "Chaoshan culture" peculiar to Guangdong also places greater emphasis on family and progeny.

In east China's Zhejiang province, where the private economy has been more developed than the rest of the country, the rise of the "Wenzhou Model", [Li Qiang, China's new premier, is also from Wenzhou] where the family business passes to an heir, ushers in higher fertility intentions. In other provinces, however, the traditional fertility culture of "more children, more blessings" has made a radical U-turn. As a result, the expert argued, the current fertility support policy should focus more on devising a new fertility culture other than trimming down on the economic costs of childbirth.

Demographic research has shown that the change in fertility attitudes among Chinese people is related to a variety of factors, including the age structure of the population and the urban-rural structure, said the expert, and that there are stages that regions undergo in their attitude shift. Northeast China is ten to fifteen years ahead of the whole country, and Han nationality areas are ten to fifteen years ahead of those inhabited by ethnic minorities. The available data so far is largely in line with this trend.

Data provided by the Ningxia Autonomous Region Bureau of Statistics show that the permanent resident population of Ningxia has reached 7.28 million in 2022, an increase of 30,000 over the previous year, with a natural growth rate of 4.41 per thousand. The growth rate of the past decade in the Ningxia Autonomous Region has also been higher than the national rate. According to the Seventh National Population Census, the permanent resident population of Ningxia is 7.2 million, an increase of 14.3 percent compared to the sixth census. This stands in contrast to a national growth rate of only 5.38 percent in the same time period.

In 1984, "No. 7 Central Document" of the Communist Party of China (CPC) Central Committee and State Council stipulated that for ethnic minorities with a population of less than 10 million, a couple could have two children, and in certain cases, three children. Officials from the Ningxia Autonomous Region Bureau of Statistics explained that the higher proportion of ethnic minorities, the higher proportion of people having two children during the one-child era, and the stronger willingness of people to have children are the contributing factors to the high natural population growth rate in Ningxia.

He Yafu pointed out that the high natural population growth rate in some western provinces is not the result of poverty. Mostly ethnic provinces, these regions were less subject to the one-child policy, and thus have maintained ethnic traditions that value fertility and progeny. Enditem

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However, the CPI and PPI numbers have raised concerns about possible economic deflation, casting doubts on the sustainability of this uptick in the economy.

Today's piece is a translated interview with Professor 刘元春 Liu Yuanchun, one of China's leading economic scholars. The interview was conducted by China Finance 40 Forum (CF40), a highly respected think tank in the field of finance and macroeconomics in China. Professor Liu shared his insights shortly after the release of the economic data for the first quarter, offering a valuable perspective on China's current economic landscape.

Liu Yuanchun is the President of Shanghai University of Finance and Economics, and former Vice President and Deputy Dean of the School of Economics of Renmin University of China. He has been selected as a distinguished professor of the "Changjiang Scholars Program" and a distinguished expert of the State Council.

On April 29, 2022, Professor Liu delivered a lecture on regulating and guiding the healthy development of China's capital market in accordance with the law at a group study session of the Political Bureau of the Communist Party of China (CPC) Central Committee. The readout from Xinhua says, "The political bureau members listened carefully and had discussions."

Additionally, Liu has participated in symposiums on economic development held by the premier of the State Council several times.

Liu Yuanchun (on the far right) delivered a lecture on regulating and guiding the healthy development of China's capital market in accordance with the law at the 38th group study session of the Political Bureau of the CPC Central Committee on April 29, 2022.

Summary

In the interview, Professor Liu highlights that China's overall economic performance in the first quarter was better than expected, but there is a structural discrepancy between supply and demand.

He emphasizes that while this structural divergence and asynchronous recovery may be acceptable in the short term, macroeconomic policies must pay close attention to the endogenous contraction caused by the mismatch between supply and demand. This further underscores the need to expand domestic demand and implement front-loaded policies, so that China's economy can swiftly transition from the first stage of post-epidemic recovery, which involves the normalization of social order and monetary transactions, to the second stage, which focuses on profit and balance sheet repair.

Firstly, the rhythm and strength of fiscal policy can be moderately strengthened, particularly at the central level. New methods should be implemented to provide financial support to private enterprises and protect the operations of grassroots governments.

Secondly, private enterprises are still grappling with the sustained impact of the pandemic, and all market players are facing bottlenecks. This necessitates policy readjustment and repositioning from economic reopening to achieving full recovery. At this critical juncture, it is crucial to increase financial support, particularly through subsidies for small and medium-sized enterprises, rather than solely relying on tax and fee reductions.

Thirdly, it is crucial to adopt a strategic approach towards local government debt, considering the creation of a cut-off point to differentiate between old and new debts, similar to what was done in 2014. Additionally, there is a need to increase fiscal transfers to support grassroots operations.

Fourthly, targeted measures should be implemented to address youth employment. This may include establishing a special fund for college students' employment, such as providing employment opportunities as a form of relief specifically designed for college students. It also involves improving the employment environment in middle and advanced manufacturing industries, and increasing job opportunities that align with college students' employment goals and expectations.

A translation of the full-text interview transcript

Q1: Data released by the National Bureau of Statistics (NBS) showed that China's GDP grew by 4.5 percent year-on-year (YoY) in the first quarter. However, subset data revealed both strong and weak performance in different sectors. How do you assess China's overall economic recovery in the first quarter?

Liu: The overall economic recovery in the first quarter exceeded market expectations. The reasons for this are:

First, as China optimized its COVID response, China's social orders and transactions have been restored at a faster pace compared to Europe, America, and Southeast Asia. This has laid a solid foundation for economic growth.

Second, despite pessimistic views on the external environment and the real estate market, the first quarter saw a better-than-expected performance in exports and the recovery of the real estate market. According to NBS data, China's goods exports reached 5.65 trillion yuan, a YoY increase of 8.4 percent in the first quarter. Additionally, real estate development investment declined by 5.8 percent YoY, which is a contraction of nearly half compared to the end of the previous year. The area of sold commercial housing was 299.46 million square meters, down 1.8 percent YoY, narrowing the decline further. Among the housing areas, the number of residential housing areas turned positive, increasing by 1.4 percent YoY. The sales of commercial housing reached 305.45 billion yuan, a 4.1 percent YoY increase, with residential housing sales increasing by 7.1 percent.

Third, the local government started the year with full force to "gear up the economy" for a "grand start," and the positive outcomes of the government reshuffle were evident.

However, the recovery is not homogeneous across all sectors, and there are some structural features. For example, supply-side recovery is faster than demand-side recovery, service sector recovery is faster than secondary industry recovery. Most importantly, the recovery of state-owned enterprises is significantly faster than the recovery of private enterprises, and the recovery of large and medium-sized enterprises is faster than the recovery of small and medium-sized enterprises.

Under expansionary policies, the dividends of economic recovery gradually trickle down. This structural divergence and asynchrony of recovery are normal and acceptable in the short term.

***

Q2: In the first quarter, the CPI rose by 1.3 percent YoY, and the PPI fell by 1.6 percent. Recently, there has been widespread discussion about the possibility of deflation due to the weak performance of price indicators. What is your perspective on this? What are your expectations for inflation in China in the second quarter and for the entire year?

Liu: First, it is important to clarify that low CPI and PPI do not necessarily indicate deflation in the economy.

Second, the current low prices indicate an imbalance between supply and demand, but this imbalance does not necessarily signify demand contraction. Rather, it reflects a supply recovery that has outpaced demand, which can be attributed to the time lag in expansionary policies, particularly the relatively delayed impact of domestic policies on boosting demand.

Third, the core CPI (deducting food and energy prices) is a more reliable indicator for measuring the macro supply and demand situation. The decline in CPI prices can be largely attributed to food and energy price fluctuations, whereas the core CPI in March actually showed a YoY increase of 0.7 percent. This increase signifies a mild rebound compared to the period from January to February, rather than a decline.

Fourth, the decline in PPI is largely influenced by international commodity price fluctuations and base effects. For example, the conflict between Russia and Ukraine last year resulted in a surge in commodity prices such as oil, but recently oil prices have rebounded significantly. This has led to a strong impact on PPI due to the increased costs of imported commodities.

In general, the current decline in price indicators is seasonal, imported, and temporary in nature.

In the second quarter, with pork and other food prices reaching the bottom price and energy prices experiencing adjustments, we believe that the expansion of domestic demand will balance supply and demand, and prices will come out of the current state.

Within the whole year, the core CPI is expected to rebound from the current 0.7 percent to about 1.0 percent, and the overall price level is likely to rebound from 1.3 percent in the first quarter and stabilize in the range of 1.5 percent - 2 percent.

It should be noted that this year will certainly see a price rebound, but the rebound is still facing strong uncertainty, including uncertainty in food prices, and geopolitical fluctuations that may also impact commodity prices.

***

Q3: How do you assess the sustainability of the subsequent recovery of our economy? What is your outlook for economic growth in the second quarter and for the whole year?

Liu: I'm cautiously optimistic. The sustained rebound in China's economic growth is expected due to the base effect, which may result in a jump in YoY economic growth in the second quarter compared to the first quarter.

From a whole-year perspective, the trend of recovery is evident, but there may be fluctuations and iterations that complicate the recovery process. One significant factor is the time it takes to emerge from the shadow of the pandemic and to repair and expand the balance sheet. The outcome of this process will depend on the government's financial strength and policy sustainability.

Currently, China's macro policy still has ample room for maneuver, but there is a significant divergence among local governments, with debt issues constraining the expansion of some local policies. Additionally, addressing risks associated with the real estate industry remains a challenge. Furthermore, the external environment, despite foreign demand showing an uptick in the first quarter, still presents uncertainties regarding the possibility of another dip in the global economy in the future.

***

Q4: Total retail sales of consumer goods grew by 5.8 percent YoY in the first quarter. How much do you think consumption has recovered compared to the pre-pandemic period? How strong will the rebound in consumption be in the first half of the year and throughout the whole year?

Liu: If we break down the post-pandemic Chinese economic recovery into three phases, namely the repair of social order and monetary transactions, the repair of profits and balance sheets, and the normalization of balance sheet expansion, we can say that consumption has now recovered to the first phase. This means that the optimization of anti-virus policies has led to the normalization of social order and monetary transactions, and we can see the post-pandemic restart in travel and food consumption. However, the recovery of durable goods, especially those related to real estate, and the recovery of services still take time.

It's important to note that for consumption to fully recover and expand throughout the year, it needs to be supported by income growth and significant improvement in residents' balance sheets. This will require robust consumption policies and identifying favorable consumption scenarios.

Policy-wise, the government can first increase support for residential consumption, especially in the area of housing renovation, which can achieve multiple objectives. Firstly, Chinese residents are currently in the second round of the housing renovation cycle (a renovation cycle usually finishes a round in 12 years. If we start the calculation from the 1998 housing reform, it has already been 24 years, around the start of the second round of renovation), with a large number of homes needing renovations that are over 12 years old, or even longer. Through renovation subsidies, the government can promote noticeable consumption improvement.

Secondly, financial subsidies for the middle and low-income groups must be increased. Currently, it appears that the impact of the pandemic on the middle and low-income groups is still significant.

Thirdly, assessment and study are required to determine the focus of policy to promote the consumption of durable goods, such as cars.

***

Q5: In terms of investment, national fixed asset YoY investment grew by 5.1 percent in the first quarter, but private investment grew by only 0.6 percent, which is lower than last year's YoY growth rate of 0.9 percent. How do you assess the current situation of private investment, and what measures can be taken to boost private investment growth?

Liu: Private investment is closely tied to the overall conditions of private enterprises and their expectations for the implementation of the "two unwavering" policies, which are the "unwavering consolidation and development of the public economy" and the "unwavering encouragement, support, and guide the development of the private economy," in the medium and long term. The main reason why private investment did not restart well in the first quarter is that, although transactions have recovered to some extent, a significant number of private enterprises are still having low profitability and have not yet restored their corporate balance sheets. As a result, private investment expectations have not been fundamentally revised, and the impact of the epidemic on small and medium-sized enterprises is still felt.

After three years of the pandemic, market players may find themselves in a bottleneck state, facing the need for readjustment and repositioning from economic restart to full recovery. Achieving a complete restart of private businesses requires a gradual driving force. Currently, we can observe that social order is returning to normal and the economic cycle is restarting, albeit at a lower level. However, existing business activities may not be sufficient for many enterprises to fully recover from past losses and address their current capital shortages. In such a situation, it is crucial to increase financial support, particularly through subsidies for small and medium-sized enterprises, rather than solely relying on tax and fee reductions.

Currently, a significant portion of expansionary policies is primarily focused on government-led projects and investments carried out by state-owned enterprises. However, there may be a time lag for these investments to be transmitted from state-owned enterprises to private enterprises. In order to enhance the support of macro policies for private enterprises, new ideas are needed. Policies should find new approaches and move away from the traditional mindset of "ditch-digging in fiscal policy, excessive easing in monetary policy," meaning the government eases fiscal policy to stimulate economic growth by increasing spending or reducing taxes while the central bank uses monetary policy to inject excessive liquidity and credit availability in the economy.

To boost private investment growth, more direct measures are needed. Firstly, the government should increase support for small and medium-sized enterprises and the restart of the service sector. Secondly, the issue of divergence in corporate financing costs should be given serious consideration.

Firstly, the government should increase tax and fee reductions for small and medium-sized enterprises. The executive meeting of the State Council emphasized the continuation and optimization of preferential fees in a staggered order, such as continuing the implementation of policies that reduce the annual taxable income of small and micro enterprises and individual entrepreneurs up to 1 million yuan, as well as decreasing the unemployment and work injury insurance premium rate until the end of 2024.

Secondly, specific promotional policies should be introduced to support the recovery of contact-based services. The service industry is labor-intensive and plays a crucial role in stabilizing employment. While some essential service industry activities have already recovered, there is a need to improve the recovery of services related to spiritual well-being and entertainment. This requires the government to allocate special funds for these services.

Thirdly, targeted support should be provided for the financing of small and medium-sized private enterprises. Currently, the financing costs for state-owned enterprises are low, which has led to some arbitrage practices by state-owned enterprises. These practices are not conducive to the recovery of private enterprises.

Fourthly, expectations of private enterprises regarding their businesses have been regained, and these expectations need to be consolidated. Various facilities should be provided for repairing private enterprises' balance sheets and strategically positioning enterprises. In this regard, there should be other measures to boost green investment and optimize the institutional system.

In addition, the current fiscal drive is still hindered by the issue of local government debt. It can be observed that there is a clear disparity in the recovery among different regions, which is closely related to the local financial situation. In other words, despite the high motivation of everyone, some regions are held back by historical issues. Even with more planning, the actual impact may not be sufficient. This requires us to have a strategic understanding of local government debt and consider whether a cutoff of old and new debts, similar to 2014, is needed, as well as whether fiscal transfers are required to support local grassroots operations.

In 2020, a special national bond was issued to support grassroots operations. However, as of now, the special national bond has only maintained relative stability in grassroots operations for 2020, without establishing mechanisms and institutional arrangements to safeguard them. This year, despite local governments being highly motivated, their capacity to expand is not enough, resulting in negative month-on-month growth in fixed asset investment in the first quarter, especially in March. According to the National Bureau of Statistics (NBS), from January to March, national fixed asset investment (excluding farmers) was 10.7 trillion yuan, showing a YoY increase of 5.1 percent. However, this data was lower compared to the 5.5 percent YoY growth observed from January to February. From this perspective, new approaches are needed to support the functioning of grassroots operations and ensure effective expansion of local finances.

***

Q6: Regarding employment, the current unemployment rate for young people aged 16-24 remains high at 19.6 percent. What are the causes, effects, and responses to this unemployment rate among young people?

Liu: Since March, a large number of graduates have begun searching for jobs, and the unemployment rate among young people aged 16-24 has rebounded significantly compared to last month. The reasons for this rebound are that measures to stabilize jobs in the past few years have lagged behind the development, and the employment supply is higher than the demand, which has been overdrawn in previous years. The cumulative effect of these reasons has made this year's employment pressure greater than ever.

We therefore suggest that the government set up a special fund for college students' employment and create projects that provide employment opportunities specifically targeted towards college students. Traditional projects have mostly focused on migrant workers, but now the issue of employment for college students is more pronounced, and special measures are needed in this regard.

In addition, there should be an acceleration in the recovery of labor-intensive industries to improve the employment environment in middle and high-end manufacturing industries. Jobs should align with the employment goals and expectations of college students.

Unemployment among young people is not only an economic and social issue, but also a political one of high importance. It was also noted during the regular meeting of the State Council held on April 14, which was focused on the optimization and adjustment of policies and measures to stabilize employment. This meeting highlights that the employment issue has become a priority for the government, and various departments of the State Council have made corresponding arrangements to address these concerns.

***

Q7: Real estate development in the first quarter fell by 5.8 percent YoY, but the rate of decline narrowed significantly, and sales figures turned positive. However, real estate developers' funds in place fell by 9 percent YoY. How do you evaluate the recovery of the real estate market? What do you think about the momentum for a sustained recovery in the real estate market?

Liu: The recovery of the real estate industry follows a specific sequence, with sales recovery being the first step, followed by capital and investment. So far, the data shows that the sales performance has exceeded expectations, although the investment data has also shown a significant rebound. However, it should be noted that new housing construction started in the first quarter was down 19.2 percent YoY at 241.21 million square meters, and land auctions and other data indicate a relative slump. These conditions suggest that the overall recovery of the real estate industry may be relatively slow and prolonged.

The real estate sales data improved significantly in the first quarter, primarily due to the concentrated release of accumulated rigid demand over the past three years. It is expected that the overall real estate industry will show a gradual recovery in the future. After improved sales growth in the first quarter and adjustments and restructurings in the second quarter, real estate investment and the land market may experience significant recovery. However, there is also the possibility of retracements and fluctuations.

On one hand, the negative YoY growth of real estate developers' funds in place by 9 percent indicates that the balance sheet improvement of real estate enterprises has not been prioritized. It is expected that real estate developers may face some debt problems in the next stage. These events could impact the expectations for industrial recovery, and the real estate industry may face external shocks in the future.

On the other hand, following the path of past recoveries may prove to be challenging, as the underlying parameters and profitability models of the entire real estate industry have undergone significant changes. With the emergence of a new business model, leading real estate developers and the industry as a whole may require a longer time to reconstruct their businesses. Therefore, the recovery of the real estate market in the second half of the year could be complex.

***

Q8: In order to facilitate the economy to return to its normal growth trajectory, could you please provide a brief summary of your suggestions for the upcoming monetary and fiscal macroeconomic policies?

Liu: We must carefully consider the endogenous contraction resulting from the asynchronous recovery of both supply and demand. To address this, we need to implement policies that boost domestic demand and moderately raise the level of front-loaded policy. This will allow China's economy to transition quickly from the first stage of post-pandemic recovery, which involves normalizing social order and monetary transactions, to the second stage of profit and balance sheet repair through the expansion of domestic demand. I believe this should be the main focus of our current macroeconomic policy.

Another important policy focus is risk prevention and control. As the market environment normalizes, deeper hidden risks that emerged during the pandemic may come to light, demanding our utmost attention.

As for discussions on monetary policy, I believe that the current monetary policy is already very accommodating, and it may not be advisable to further increase monetary easing. Instead, fiscal policy can be moderately strengthened, particularly by the central fiscal departments. At the same time, we should have strong confidence in the solid foundation of China's economic recovery and the arrangements laid out by the Central Economic Work Conference.

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The second part summarizes the highlights from the report on the European Union's business environment (2022/2023) released by the CCPIT Academy in March. The report includes the trade relations between China and the EU, the challenges faced by Chinese companies in developing their business in the EU, and recommendations made by the organization regarding the EU's business environment policies.

The two reports combined exceed 330 pages, and this piece aims to save you time by providing a concise summary. However, if you are interested in reading the original reports, you can download them here:

• China’s Business Environment Annual Report (2022) by CCPIT Academy (Chinese: P1-P66, English: P67-165)

• Business Environment of the European Union 2022/2023 by CCPIT Academy (English)

Founded in 1952, China Council for the Promotion of International Trade (CCPIT) is a national foreign trade and investment promotion agency. The aims of the CCPIT include promoting foreign trade, carrying out Sino-foreign economic and technological co-operation activities, promoting economic and trade relations between China and other countries worldwide etc.

The CCPIT Academy is a research institute directly affiliated to the CCPIT. The CCPIT Academy has a host of renowned Chinese experts in domestic and international trade, as well as a high-level research team on international trade, outbound investment, e-commerce and market circulation.

Part 1: Highlights of China’s Business Environment Annual Report (2022)

Overall Evaluation Of China's Business Environment

• The surveyed enterprises are generally satisfied with China's business environment, with 42.89% being "very satisfied" and 53.57% being "basically satisfied"; those who rated “merely fair” account for 3.49%; and only 0.05% think that China's business environment is "bad".

• 30.81% of the enterprises surveyed believe that China's business environment has "improved significantly" in the past three years; 33.19% believe that it has "somewhat improved"; 9.59% see no change; 26.4% feel that it has worsened (including "seriously worsened" and "somewhat worsened"), and this proportion is higher than that in 2021 (6.2%).

• China's business environment scores 4.38 in 2022, the same as in 2021, reaching a good level. Among the indexes, social credit gains the highest score of 4.53, while fiscal and tax service environment (4.52) and rule by law environment (4.50) are also at an excellent level. Human resources environment is rated the worst with 4.06 points, followed by financial service environment with 4.11 points.

• By region, the central region has gained the highest rating of the business environment (4.47 points), the western region is in the middle (4.32 points), and the eastern region is at the bottom (4.31 points).

• In terms of ownership, Sino-foreign joint ventures and cooperative enterprises have given the highest score of 4.51 on China's business environment, while private enterprises have given the lowest score of 4.32. The ratings of wholly foreign-owned enterprises, enterprises of other ownership and state-owned enterprises are in the middle, being 4.47, 4.41 and 4.36 points respectively.

• Among the industries, the resource industry has the highest rating on China's business environment, with a score of 4.53, followed by the construction industry, with a score of 4.46; the high-tech industry and other industries both have the lowest, 4.32 points; the ratings of traditional manufacturing and service industries are 4.36 points, which is in the middle level.

Operation and Investment Status of Enterprises

• Nearly 90% of the surveyed enterprises were negatively affected by the COVID-19 epidemic to varying degrees, among which those "greatly affected" account for 42.7%, which is the highest proportion, while those "less affected" and "seriously affected" account for 31.4% and 14.7%, respectively. In addition, 6.0% of the enterprises reflected that they had been positively affected, while 5.3% stated that they were not affected.

• Of all the surveyed enterprises, 47.0% reflected that their supply chain was most affected by the epidemic; 40.4% and 36.8% stated that production and operation and export were significantly affected; 34.9%, 31.7% and 27.3% reported that their capital chain, domestic sales and resumption of work were affected; and 6.1% gave feedback that their after-sales service was affected.

• The optimism of the surveyed enterprises towards the development prospects in the post-epidemic period has declined. Compared with 2021, the proportion of enterprises holding an "optimistic" attitude has decreased by 4.7%, and that of "pessimistic" enterprises has increased by 2.1%.

• In order to minimize the impact of the epidemic, over 60% of enterprises expect the government to provide epidemic subsidies (66.5%) and increase tax relief (63.8%); 44.0% expect financial support; over 30% expect the government to provide support in logistics (30.1%) and build an online matchmaking platform between enterprises (19.7%); and about 10% need regular guidance on epidemic prevention and control (11.9%) and epidemic prevention supplies (8.3%).

• More than half of the surveyed enterprises have taken or may take measures to reduce unnecessary expenses.

• In 2022, 76.2% of the surveyed enterprises had average revenue or above, down 13.2 % from 2021, and 35.7% maintained their revenue at the good level or above, down 3.8 % from 2021.

• Nearly 50% of the surveyed enterprises in the central region have maintained their ROI at the good level or above, while less than 30% have achieved such result in the eastern region.

• The percentage of enterprises with positive ROI growth (average and above) is 76.2% in 2022, down 6.8 % from 83.0% in 2021.

• Among different industries, the resources industry contributes 55.4% of the enterprises with good ROI or above, followed by the high-tech industry (46.8%), while the service industry ranks last (29.5%).

• Enterprises reflected that in their production and operation, rising costs and fierce market competition are the most obvious problems, accounting for 80.7% and 66.3% respectively. In addition, insufficient financial support (24.6%), excessive tax burden (14.9%), and unstable policies (12.8%) are also prominent problems.

• The policy and government administration environment is the major concern of the surveyed enterprises.

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Part 2: Highlights of the report of Business Environment of the European Union 2022/2023

China and the EU have maintained stability and progress in their economic and trade relations

• In 2022, the bilateral trade in goods between China and the EU continued to grow and the trade volume increased steadily. China was the second largest trading partner of the EU, its largest source of import and second largest market for export; the EU was China’s second largest trading partner, the second largest export market and the second largest source of import. In 2022, the total bilateral

  trade in goods between China and EU was valued at RMB 5,646.798 billion (about 821.24 billion U.S. dollars) , up 5.6% year-on-year.

• In breakdown, China exported RMB 3,743.441 billion of goods to the EU, up 11.9% year-on-year; China imported RMB 1,903.357 billion of goods from the EU, down 4.9% year-on-year.

• Chinese enterprises’ direct investment stocks in the EU remained the highest among developed economies.

• In 2021, Chinese enterprises’ direct investment flowed to the EU amounted to USD 7.86 billion, down 22.2% year-on-year, with the EU ranking third in terms of China’s ODI flows in 2021. In the same year, the stock of Chinese enterprises’ direct investment in the EU was USD95.9 billion, accounting for 33.5% of the stock of Chinese investment in developed economies, making the EU the largest FDI recipient of Chinese investment stock. As of the end of 2021, China had established over 2,700 direct investment enterprises in the EU, covering all 27 EU member states and employing nearly 270,000 foreign workers.

• By country, Germany, the Netherlands and Luxembourg stood as top recipients of Chinese direct investment flows. In 2021, Chinese enterprises’ direct investment flow to Germany reached USD2.71 billion, up 97.1% from the previous year, accounting for 34.5% of total Chinese investment flows to the EU, mainly in manufacturing, electricity/heat/gas and water production and supply, wholesale and retail, and finance. The Netherlands was next with USD1.7 billion, down 65.5% from the previous year, accounting for 21.7% of the Chinese investment flows to the EU, mainly in information transmission/ software and information technology services, mining, wholesale and retail trade, etc.; Luxembourg ranked third with USD1.5 billion direct investment flows from Chinese enterprises, up 113.9% from the previous year, accounting for 19.1%, mainly in residential services/repair and other services, manufacturing, leasing and business services.

• By industry, the main target sectors for Chinese direct investment in the EU in 2021 were manufacturing, finance and information transmission/software and IT services, with investment amounts accounting for 47%, 14.3% and 13.7% respectively.

General Issues of the Business Environment of the EU

• Trade protection and over-intervention have made the EU business environment worse. More than 30% of the surveyed enterprises believe that the business environment in the EU has deteriorated.

The three most prominent problems with the EU’s business environment as perceived by Chinese enterprises in Europe are the rising production costs, the Russian-Ukrainian conflict affecting normal operations, and the continuous increase in market access barriers, accounting for 54.36%, 51.01% and 33.56% respectively.

• How enterprises evaluate the business environment of each EU Member State differs greatly. According to the survey, 76.99% of the respondents believe Germany is the EU Member State with the best business environment. France comes next with 58.41%. Italy, the Netherlands and Spain rank third to fifth, accounting for 46.02%, 38.05% and 34.51% respectively

• The survey shows that Lithuania receives the lowest evaluation from the respondents (51.96%) for its business environment, followed by Latvia (33.33%), Bulgaria (23.53%), Estonia (22.55%) and Cyprus (21.57%) respectively.

• The EU’s “policy toolbox” has raised market access barriers across the board

1. Strengthened foreign investment review has raised market access thresholds.

2. Chinese enterprises have suffered from unfair treatment in the foreign investment review process.

3. Foreign subsidy review has made it more difficult for Chinese enterprises to invest in the EU.

4. New offensive protection tools in the field of public procurement have been added.

• Generalization of the national security concept has hindered the free flow of production factors

1. The Regulation for Export Controls of Dual-Use Items has increased barriers to technology exchange.

2. Completed acquisitions by Chinese enterprises have been annulled on national security grounds.

3. Visa processing in the EU and its member states has become more difficult and less convenient.

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In the 20th National Congress of the Communist Part of China (CPC), the Party reaffirmed its commitment to support the development of private sectors. Subsequently, leaders and officials at different levels published guidance, research, speech to boost the confidence of the private sector, and clarify the Party's stance.

The article GRR presents today is one of these publications. It is titled "Support the development and growth of private economies and private enterprises through policy and public opinion" 从政策和舆论上鼓励支持民营经济和民营企业发展壮大. This article was published on 学习时报 Xuexishibao, a newspaper ran by the Party School of the CPC Central Committee, on Feb. 22. The newspaper’s main audience tend to be cadres at different levels, and scholars in the society.

It drew GGR's attention because it further elaborated the stance, and developed the stance into policy-making tactics and strategy. It also shed light on how researchers inside the system develop thoughts on private sectors.

The article has three parts. Its first part further elaborated Xi Jinping's thought on supporting the private sector, how this thought put the private sector into the Party's overall strategic framework, helping readers better understand and internalize this thought. The second part and third parts discussed the implications of this thought on the tactical and strategic levels, respectively. Many specific measures were mentioned in the last two parts of the article.

The author, 黄卫挺 Huang Weiting, is the deputy director from the Research Center for Xi Jinping's Economic Thoughts at the National Development and Reform Commission (NDRC). The research center was founded in January 2022 as one of the research centers approved by the CPC Central Committee during 2021-2022 to research on different aspects (economic, foreign affairs, ecosystem, etc.) of Xi Jinping's thought. Part of the center's mandate was to support the development of theoretical work of the Party.

Huang worked in both research and administrative roles in the administration. Before the current post, he worked at the NDRC and the Liaison Office of the Central People's Government in the Hong Kong Special Administrative Region (HKSAR). Huang graduated from Business School of Jilin University, which claim that his work has been published on a number of official internal references, including People's Daily internal reference, Qiushi Magazine internal reference, Reform Magazine internal reference, many of which were approved by party and country leaders, and used by the General Office of the CPC Central Committee, and the General Office of the State Council. He also participated in the drafting of several Central Committee papers and national level plans. [Please note that GRR didn’t find a way to check facts of the above-mentioned information.]

Given the status of Huang, Xuexiribao, and the research center, it is likely that these more detailed proposals will be heard at different levels.

Support the development and growth of private economies and private enterprises through policy and public opinion 从政策和舆论上鼓励支持民营经济和民营企业发展壮大.

The 20th Party National Congress report proposed: "Providing an enabling environment for private enterprises, protect their property rights and the rights and interests of entrepreneurs in accordance with the law, and facilitate the growth of the private sector." The Central Economic Work Conference [in December 2022] emphasized ensuring the implementation of equitable treatment of state-owned and private enterprises through institutions and law, and encouraging and supporting the development and growth of private economies and private enterprises through policy and public opinion. This provides an important guide for deepening our understanding of the socialist market economy and optimizing our practices to develop private economies.

Part 1:

Deeply understand the significance of promoting the development and growth of the private sector

The private sector grew out of reform and opening-up. Understanding the private sector is always an important theoretical issue for deepening reform and opening up. The 20th Party National Congress report proposed to "facilitate the growth of the private sector", it once again broadened our knowledge and understanding of the relevant issues.

Deepen the understanding of the basic policy of the private sector. The "two unswervingly" principle is the institutional guarantee for the emergence and continuous development and growth of the private sector. [GRR's note: The "two unswervingly" refer to "unswervingly consolidate and develop the public sector and unswervingly encourage, support, and guide the development of the non-public sector. "]

General Secretary Xi Jinping has repeatedly reaffirmed the "two unswervingly" principles, emphasizing that 1) the status and role of the non-public sector in China's economic and social development remain unchanged, 2) that our policy of encouraging, supporting and guiding the development of the non-public sector remains unchanged, and 3) that our commitment on creating a enabling environment and providing more opportunities for the development of the non-public sector remains unchanged (i.e. "three unchanged"), and he has clearly expressed that "our Party's view on adhering to the basic economic system is clear and consistent, and it is constantly deepening and has never wavered".

The 20th Party Congress report innovatively proposed facilitating the growth of the private sector, on the basis of adhering to the "two unswervingly" and "three unchanged", expanding and deepening the theoretical connotation of the basic policy of the private sector. This is an important innovation that integrates the socialism with Chinese characteristics with market economy, highlighting our party's firm position and distinctive attitude towards the basic policy of the private sector. At present, the innovative expression on "facilitating the growth of the private sector" clarifies the matter at the core, powerfully refutes some existing misconceptions and views. The expression has great significance to further unification of thoughts, to stimulating of the vitality of all types of market entities, and to maintaining and promoting all types of economic ownership "go hand in hand".

Reinforce the important positioning of “内在要素” "intrinsic element" and “自己人” "our own people" [for the private sector]. General Secretary Xi Jinping said at a symposium on private enterprises, "the private sector is an intrinsic element of our economic system, private enterprises and private entrepreneurs are our own people.” [GRR found that Xi made this statement as early as in 2018 at a symposium on private enterprises]

The positioning of "intrinsic element" and "our own people" is an important innovation of the basic socialist economic systems, and is a theoretical achievement of Xi Jinping Thought on Socialist Economy with Chinese Characteristics and features of the times. Under the guidance of the important positioning of "intrinsic element" and "our own people", the respective departments made important arrangement on strengthening the protection of property rights, promoting the entrepreneurial spirit, optimizing the business environment, supporting the reform and development of private enterprises, cultivating a cordial and clean relationship between government and business, and other aspects.

The 20th Party National Congress report proposed to "facilitate the development of the private sector", further strengthening the important positioning of the "intrinsic element" and "our own people". On the one hand, the theoretical and practical boundaries of “the private sector” is broader, more in line with how private capital and private enterprises operates under the modern economic system, more conducive to planning policy with the private sector as a whole. On the other hand, “facilitating the growth” has a more aggressive goal, a more proactive orientation, and more proactive power. Development direction and policy guidance were further clarified.

Giving the private sector a new and important mission to play. General Secretary Xi Jinping pointed out that "Our nation’s economic development created a Chinese miracle, and the private economy has played an indispensable role!" At present, momentous changes of a like not seen in a century are accelerating across the world, the great rejuvenation of the Chinese nation entering into a critical period, we are closer, more confident, and more capable than ever of reaching the goal of rejuvenating the Chinese nation.

At the same time, we must be prepared to work even harder to get there. On the new journey, we must further utilize the effectiveness of the private sector, with closer unity, and more tenacious struggle, to contribute more private economic power to a Chinese path to modernization, to create a more solid material and technical foundation for building China into a great modern socialist country in all respects. The 20th Party National Congress report's proposal to "facilitate the growth of the private sector" has strengthened the sense of mission and ownership of the private sector, further stimulated the vitality and innovativeness of the private sector. It will definitely encourage the private sector to a broader stage of development, and contribute more as an important main player in building a new pattern of development and achieve high-quality development.

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Part 2:

Effectively ensure the required practices to promote the development of the private sector

In order to better facilitate the development of the private sector, we must adhere to the important positioning of "intrinsic element" and "our own people", and closely linking private sector’s new mission in the new journey, further optimize the environment for the development of private enterprises, protect the property rights of private enterprises and rights and interests of entrepreneurs according to the law, and create a market-oriented, rule-of-law, and international business environment.

At the same time, we must work to see the private sector play a strong role, promote the entrepreneurial spirit, and, in accordance with the "two healthy" principle [It refers to promoting the healthy development of non-public sector and the healthy growth of participants in the non-public sector] to fully promote the high-quality development of the private sector.

Optimize the development environment of private enterprises. The business environment is the soil for the survival and development of enterprises, it directly determines the vitality of market players and the momentum of economic development. We mush adhere to the direction of socialist market economy reform, respect more for the general laws of the market economy, minimize, to the largest extent, the direct allocation of market resources and direct intervention in microeconomic activities by government, and give full play to the decisive role of the market in resource allocation. Fully implement the negative list system for market access, implement the "nationwide single list" management model, and promote the universal implementation of "non-stop means open entry" principle.

We must perfect the policy framework on competition, establish a comprehensive implementation mechanism of policy on competition, create a market environment in which ownership of all form use resources and production factors equally according to law, compete openly, fairly and equitably, and are equally protected by law, strengthen the rigid constraints of fair competition review, and implement the basic status of competition policy.

We must prioritize the reform of the market allocation of production factors, accelerate the construction of a unified, open, and orderly competitive market system, implement the buildup of markets for factors, realize the market pricing, the autonomous and orderly flow, and efficient and fair allocation of factors. We must further reduce the burden of corporate taxes and fees, improve the system of financial institutions to serve private enterprises, improve the system of direct financing support for private enterprises, and improve the system of credit enhancement support for private enterprise financing.

Protecting the property rights of private enterprises and rights and interests of entrepreneurs in accordance with the law. This is an important guarantee for promoting the development of the private sector. We must vigorously promote the construction of a rule of law government, improve laws such as administrative procedure law to regulate public power and protect private rights. We must improve the mechanism for equal protection of law enforcement and judicial process on private enterprises, increase the criminal protection of private enterprises, and punish illegal criminal acts that infringe on the legitimate rights and interests of investors, managers, and employees of private enterprises in accordance with the law.

We must further regulate the law enforcement and judicial standards for handling cases involving private enterprises and the private sector, concretize the protection of the legitimate rights and interests of private enterprises and the private economy, protect the personal and property rights and interests of entrepreneurs when assisting the disciplinary inspection and supervision institutions in reviewing and investigating, and improve judicial trial and enforcement efficiency to prevent litigation delays affecting business operations.

We must resolutely prevent the use of criminal means to investigate civil cases, prevent economic disputes from being treated as crimes, and prevent civil liability from becoming criminal liability. We must reliably handle criminal cases involving private enterprises in accordance with the law, adhere to the principles of few arrests, cautious prosecution and cautious detention, and strictly and cautiously adopt measures such as sealing, seizure, and freezing in accordance with legal procedures.

We shall deepen the supervision of criminal proceedings involving enterprises, focus on solving the problem of long-term "pending cases" in enterprise-related cases, and resolutely implement the presumption of innocence. We will continue to identify and correct wrongful cases that violate the personal and property rights of private enterprises and entrepreneurs.

Letting the "two healthy" initiative lead the the high-quality development of the private sector. To promote the healthy development of private enterprises and private entrepreneurs and promote the high-quality development of the private sector, it is important to follow the requirements of "promoting the healthy development of non-public sector and the healthy growth of participants in the non-public sector" (i.e., "two healthy").

Following the important missions affirmed by the Report the 20th Party National Congress, we shall guide, support, and promote the private sector to work on establishing of a modern industrial system, achieving self-sufficiency and self-reliance in technology, initiating and developing new domains and new sectors, boosting a high-standard opening-up to the world, promoting high-quality full employment, advancing the Beautiful China initiative as well as other important areas, contributing new and important strength to solving China's development problems, enhancing development momentum, and cumulation of the development advantages.

We shall improve implementation mechanism for private enterprises participate in major national strategies, actively attract the participation of private enterprises in major planning, major projects, major activities, and other key areas. We must guide, support, and encourage private enterprises to accelerate the establishment of the modern enterprise system with reasonable governance structure, appropriate shareholder behavior, effective internal check-and-balance, and efficient and flexible operation. We must encourage private enterprises to develop standardized articles of association, improve the internal incentive and restraint system, establish a scientific and standardized labor, and income distribution system. We shall accelerate the establishment of a batch of world-class enterprises.

Part 3:

Scientifically planning strategic initiatives for the development of the private sector

Regarding the current state of development of the private sector, especially the key issues and institutional constraints faced, we should accelerate the formation of a top-level design to promote the development of the private sector, establish and improve the respective institutional system and incentive mechanisms, further stimulating private investment and vitality of the private sector.

Research and develop a high-level design to promote the development of the private sector. On the New Journey, we should, through high-level planning and promotion, improve the strategic level and policy proactiveness of our work regarding the private sector. According to the important principle of “internal component” and “our own people”, we shall research and develop policy guidance to promote the development of the private sector, coupled with the introduction of a series of promotional policies, forming a set of top-level designs and conveying the strongest supporting voice in promoting the development of private sector.

Research and construct a long-term mechanism for local government to promote, protect and enrich business. It is normal, inevitable, and necessary for leaders and cadres to socialize with contacts from the non-public sector. On top of local practices, we must, deriving from " cordial and clean government-business relations" incentive structure and specific institutional rules researched and developed at the central level, promote all levels of government to turn their perception on private capital and private entrepreneurs to turn to "our own people." , eliminating the problems of passivity, incompetence and unwillingness of the government, proactively listening to the needs of private enterprises, solving problems one step ahead, optimizing the participation mechanism of entrepreneurs in major decisions related to enterprises, eventually forming a long-term mechanism to promote, protect and enrich business.

Linkage with the reform of state-owned capital and state-owned enterprises to expand the room for development of private economic. On top of adhering to the "two unswervingly", we must release the power of the linkage effect between state capital and state-owned enterprise reform, and the development of the private economy. On the one hand, in the process of exploring multiple forms of public ownership, we shall support the reform and development of private enterprises, with standardized and orderly development of mixed ownership economies, providing more space for development to the private sector during the optimization of the landscape and structural adjustment for the state-owned economy.

On the other hand, we shall promote the collaboration between state capital and state-owned enterprises, and private capital and private enterprises, play their comparative advantages, under direction of market-oriented principles and mutually beneficial cooperation, create a number of projects with strong influence and driving force in key areas and key links, eventually accelerating the development of new sectors and new racetracks, and hand-in-hand shaping the new momentum and new advantages of China's development.

Research and promote legislative work on fostering the development the private sector. A rule of law environment is the best business environment, it provides the important values of solidifying fundamentals, stabilizing expectations, benefiting long-term practices. China's Central Economic Work Conference stressed the importance of promoting economic development on the track of the rule of law and abiding by the spirit of social contract.

We shall fully implement Civil Code of the People's Republic of China based on the development of private enterprises, and research and develop superior legislation to promote the development of the private sector based on the existing buildup of rule-of-raw practices on private sector, especially on local legislative practices.

We shall attract private entrepreneurs and private enterprises to actively participate in legislative work, fully implement the protection of the personal rights, personality rights, and property rights of private entrepreneurs, and the development of private enterprises and private sectors, achieving the codification and rule-of-law practices of promotion and incentive policies, and enhancing the level of modernization of the private economic governance system and governance capacity. Enditem

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The following article was published on Jan. 29 on Guominjinglue [国民经略, "state strategies"], a WeChat blog with a particular focus on prefectural and provincial development in China. Based on the 2022 province GDP numbers, it offers a window into how several aspects of China's economic development have performed over the previous year, which could provide them an advantage in the post-pandemic recovery.

Here are some highlights:

• South China’s Guangdong Province and east China’s Jiangsu Province still led the way, remaining as the only two major economic powerhouses with their gross domestic product (GDP) exceeding 10 trillion yuan (about 1.47 trillion U.S. dollars). Guangdong has ranked first for 34 consecutive years, while Jiangsu has come second for 30 years in a row.

• Among the top five, east China’s Shandong Province, ranking third, attained the fastest GDP growth in real terms, giving it a bigger advantage over east China’s Zhejiang Province, which fell right behind.

• East China’s Shanghai and northeast China’s Jilin Province had negative growth for the first time since reform and opening-up

• Shanghai, however, managed to turn the corner with great resilience. Its economy saw a strong rebound in the second half of 2022. That not only kept Shanghai at the top among the best-performing cities, but also gave it a bigger edge over Beijing.

• Anhui surpassed Shanghai and made to the top ten for the first time.

• The biggest change in China's economic landscape in 2022 was a further narrowing of the gap between south China and north China.

• Driven by the once-in-a-century pandemic, geopolitical conflicts and global inflation, the prices of coal, petroleum and other commodities skyrocketed. As a result, major energy provinces that had long been plagued by outdated capacity became a hot spot in the new era.

• Another trend in regional landscape in the past few years was that southwestern regions were catching up with northeastern regions.

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All eyes on economy as 2023 unfolds.

This follows years of reshuffles in regional development when the once-in-a-century pandemic, geopolitical conflicts, and trade disputes held sway over the economy.

Now, which regions will thrive in the post-pandemic era?

01 Who led the way?

Which provincial-level regions took the economic lead in 2022?

South China’s Guangdong Province and east China’s Jiangsu Province still led the way, remaining as the only two major economic powerhouses with their gross domestic product (GDP) exceeding 10 trillion yuan (about 1.47 trillion U.S. dollars). Guangdong has ranked first for 34 consecutive years, while Jiangsu has come second for 30 years in a row.

[GRR's note: Both provinces now have their eyes on the international market, with Guangdong pledging 100 “Guangdong Trade Global” overseas exhibitions and Jiangsu announcing support for enterprises in attending 206 offline fairs and exhibitions overseas. Jiangsu ranked first in the actual use of foreign capital in 2022, and is determined to keep up the momentum by leveraging its overseas economic representative offices and inviting representatives from multinational companies and foreign business associations to visit Jiangsu. Guangzhou, the capital city of Guangdong, also unveiled targeted preferential policies with up to 100 million yuan as a reward for paid-on foreign investments.]

Among the top five, east China’s Shandong Province, ranking third, attained the fastest GDP growth in real terms, giving it a bigger advantage over east China’s Zhejiang Province, which fell right behind.

[GRR's note: Shandong has released on Feb. 2 ten measures to stimulate consumption and protect consumers' rights.]

The gap between central China’s Henan Province and Shandong and Zhejiang also widened.

[GRR's note: The commerce department of Zhejiang sent a Chinese-English bilingual letter to foreign investors on the first working day after the week-long Spring Festival holiday that started on Jan. 21, demonstrating its “strong resolve, extraordinary measures, and diligent efforts” to attract global investment and cooperation. The first investment promotion group after the Spring Festival holiday is also due to leave in early February.]

Despite remaining as the top two performers, Guangdong and Jiangsu saw the lowest yearly GDP growth rate in real terms among the top ten for the first time, mirroring what huge shocks the pandemic has wrecked.

A similar impact was also felt in the year-on-year GDP growth rate (in real terms) of other provincial-level regions. East China’s Shanghai and northeast China’s Jilin Province had negative growth for the first time since reform and opening-up; south China’s Hainan Province recorded a close to zero growth rate; Beijing saw its growth rate fall below 1 percent; the figure dropped to 1 percent or so in southwest China's Guizhou Province and the Tibet Autonomous Region that had always posted high growth rates.

Shanghai, however, managed to turn the corner with great resilience. Its economy saw a strong rebound in the second half of 2022. That not only kept Shanghai at the top among the best-performing cities, but also gave it a bigger edge over Beijing.

It is worth noting that although Shanghai managed an overall triumph at the city level, at the provincial level, it was surpassed by east China’s Anhui Province, which got into the top ten for the first time.

Among the top ten, southwest China’s Sichuan Province, central China’s Hubei Province and east China’s Fujian Province were locked in an increasingly tight competition as their GDP passed the 5 trillion yuan mark.

A robust recovery in the post-pandemic era got the GDP of Hubei back into the top seven.

[GRR's note: In January, 2023, Hubei launched pilot programs for implementing export tax rebates upon departure of goods, the first of its kind in China. Exporters across the province can apply for getting the tax rebates in advance, without going through the regular procedures such as preparing relevant documents, thus speeding up fund turnover.]

But Fujian, after being overtaken by Hubei in 2021, took up the pace in 2022 and narrowed their gap to less than 100 billion yuan. It is also catching up with Sichuan.

Who will be the next front runner is now a question of not only economic fundamentals, but also the will to press ahead.

02 A reshuffle in the top 10 provinces

Anhui surpassed Shanghai and made to the top ten for the first time.

In the past decade, Guangdong, Jiangsu and Shandong have stayed at the forefront of the economic race. But there have been changes in other names on the top 10 list. Liaoning Province and Heilongjiang Province in northeast China, Hebei Province in north China and Shanghai dropped out of the list over the years, while Fujian, Hunan and Anhui rose to prominence. [Shanghai is a province-level city in China]

How did Anhui surpass Shanghai in 2022?

Leaving aside the fallout of the pandemic, the outperformance was a result of both policy support and hard work.

These years, Hefei, capital city of Anhui, came to fame for the big bets and venture investments it made.

For the past dozen years or so, the city and the entire Anhui Province have wagered on high-tech sectors including new display, integrated circuit, and new energy vehicles, in an effort that finally completed an upgrade from traditional to emerging industries. [GRR's note: Chinese electric vehicle maker Nio has two factories in Hefei.]

Apart from that, national policy also played a contributing role.

There have been three important milestones in Anhui's development, all accompanied with major policy decisions. In 2006, China implemented the “Rise of Central China plan”. In 2016, China set out a mid-to-long term plan (2016-2030) for expanding its high-speed rail network (to eight rail lines north to south, and eight lines east to west). In 2019, China issued an outline of the integrated regional development of the Yangtze River Delta that encompasses Jiangsu, Zhejiang, Anhui and Shanghai. This completely reversed the disadvantageous situation Anhui faced for its geographical location in the hinterland.

The first and the third decisions, in particular, paid huge dividends for Anhui from two adjoining economic zones.

The second policy on expanding the high-speed railway network raised Anhui from the edge of the normal train network and transformed it into a new transportation hub. Anhui's high-speed railway mileage, in the meantime, has made it to the national top.

Data showed that Anhui’s high-speed railway mileage reached 2,400 kilometers by the end of 2022, second only to Guangdong.

Of course, national policy just added to its success, which ultimately came down to its own efforts.

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03 South-north gap narrowed again

The biggest change in China's economic landscape in 2022 was a further narrowing of the gap between south China and north China.

Data showed that in 2022, the combined GDP of 16 provinces in southern China reached 77.77 trillion yuan while the figure was 42.62 trillion yuan for the 15 provinces in northern China.

Southern regions saw their contribution to national GDP fall to 64.58 percent, while northern regions witnessed their share in GDP rise to 35.42 percent. The change narrowed the south-north gap to 29.2 percentage points, the reverse of what had been happening in the past decade and more.

Does this mean the economic center of gravity no longer shifts southward?

Afraid not. There was a time when north China was able to rival south China. In the beginning of reform and opening-up, for instance, the share of north China GDP accounted for up to 46.2 percent of China’s economy . By 2020, however, the figure had dropped to a record low of 35.2 percent. Despite the slight increase to 35.4 percent, it still has a long way to go before being able to actually reverse the current trend.

In fact, economic growth in north China in the past few years relied heavily on major energy-producing provinces, yet the golden age for traditional energy would vanish at any second.

Driven by the once-in-a-century pandemic, geopolitical conflicts and global inflation, the prices of coal, petroleum and other commodities skyrocketed. As a result, major energy provinces that had long been plagued by outdated capacity became a hot spot in the new era.

It can be seen that in 2022, the nominal GDP growth rates exceeded 10 percent in northwestern provinces including Shanxi, Inner Mongolia Autonomous Region, Shaanxi Province, Xinjiang Uygur Autonomous Region and Ningxia Hui Autonomous Region.

In Shanxi, the largest coal producer in China, GDP jumped 45.26 percent in nominal terms from 1.77 trillion yuan in 2020 to 2.56 trillion yuan in 2022, sending the province back into the top 20.

Previously, such growth momentum was only seen in coastal provinces turning to foreign trade after China joined the world trade organization (WTO).

However, neither the pandemic nor the energy spree will last long. How the energy-endowed provinces can continue the glory in the post-pandemic era is definitely worth attention.

04 Southwest China overtaking northeast China?

Another trend in regional landscape in the past few years was that southwestern regions were catching up with northeastern regions.

The three northeastern provinces used to be China’s economic powerhouses around the time of reform and opening-up. They were not only way ahead of other provinces in terms of overall strength, but also laid the industrial foundation for western China through the Third Front Construction [For more details, check GRR's previous post How China prepared for potential invasion from Soviet Union with mankind’s largest doomsday project]

But times have changed. The Western Development Strategy launched in 2000 and the policy of moving industries westward in the past few years have given a huge boost to economic development in southwestern regions.

According to the latest data, the total GDP of western leader Sichuan amounted to as high as 5.67 trillion yuan, while that of its northeastern counterpart Liaoning was 2.89 trillion yuan, only half as much.

In fact, Liaoning was even overtaken by Chongqing, and its gap with Yunnan was narrowed to about 2 billion yuan, with the latter’s GDP being 2.985 trillion yuan in 2022.

At the same time, south China’s Guangxi Zhuang Autonomous Region and Guizhou got a bigger advantage over Heilongjiang and Jilin while narrowing its gap with Liaoning.

Once the late movers catch up, southwestern regions outpacing northeastern regions will become reality. [Note: Liaoning has released some new moves to grab export orders. For enterprises that attend key overseas trade fairs and exhibitions, the provincial government will cover 100 percent of the booth fee for the first six standard trade show booths (ranked from high to low) and no more than 50 percent of the booth fee for the remaining booths. Private enterprises will get a subsidy worth 100 percent of the booth fee in key overseas fairs and exhibitions.]

05 Economy is the first priority

Time waits for no one in the economic race.

On Jan. 28, the first working day after the week-long Spring Festival holiday, the Guangdong government held a conference on high-quality development. Attended by more than 25,000 people, the meeting was reported to be the largest-scale meeting held by the Guangdong government in recent years.

At the meeting, government officials called for concerted efforts to shoulder responsibility with courage and insight, the capability to promote development across the province, and a good start to the new year.

The same emphasis on economic development was seen at the first meeting of other regions like Shanghai, Jiangsu, Shandong, and Zhejiang.

Although the pandemic has not come to a complete end, it is no longer the biggest drag on the economy and Chinese people are no longer living with “health codes” after the country passed the first wave of infection.

Economic development has become the foremost priority in China, from the state to local regions, from the government to society, and from enterprises to individuals.

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[See GRR's collection of the official documents of the Congress]

Today's piece, which is a translation of Professor 郑永年 Zheng Yongnian's article, analyses the internal and external issues the Chinese economy is facing and makes recommendations for how China might address these challenges by putting the focus on reform and opening-up.

Zheng Yongnian, the Presidential Chair Professor and the Founding Director of the Advanced Institute of Global and Contemporary China Studies (GCCS), the Chinese University of Hong Kong, Shenzhen (CUHK-SZ), regards development as the principal cure for most of the problems China has faced. That is why the country must not lose sight of the big picture by dwelling on fragmentary impediments and devising stopgap solutions to the present little problems. Problems will be sorted out in the process of development, Zheng points out, and that makes "development" the rightful focus of China's blueprints.

Here are some highlights:

• Practically speaking, it is extremely difficult to restore the property sector as one of the pillars of the Chinese economy. There has been no precedent in world history for an economy to become highly-developed by means of a long-term reliance upon the property sector.

• Domestically speaking, China has three impediments ahead. The first is the impact of COVID-19. China has lifted many of its COVID-19 restrictions and had in place less stringent travel policies. It is a right decision, but it will take longer for the aftereffect of the pandemic to disappear.

• The second internal challenge concerns the private firms. Last year, China introduced sweeping reforms for the property, tech and private education industries, the three backbones of the private sector. The move has had some negative impacts on private enterprises, yet was, nevertheless, important and necessary. It was not intended as a crackdown on private businesses, as some people are apt to put it, but to consolidate and improve the institutional arrangements for their sustainable development.

• The third internal challenge comes from populism and even ultra-leftism that have permeated public opinion, especially on social media. There has been much name-calling targeting private businesses, including “capitalists”, “capitalism”, and “private ownership”. Personal attacks on private entrepreneurs are also to be seen. Such extreme populism has a deteriorating effect on the Chinese business environment as a whole.

• External challenges also come from three aspects. First, the gloomy China-US relations. The U.S. government, whether the president be Donald Trump or Joe Biden, has been intent on cutting China off cutting-edge technologies and even decoupling its tech industries from China. So far, the situation hasn’t improved. It keeps getting worse. [FM expresses strong dissatisfaction, protest against US' shooting down China's civilian airship]

• The second external challenge is the ongoing Russia-Ukraine conflict. The conflict has a negative impact not just on Chinese businesses, but also on foreign enterprises in China. This is because the "Russia-China axis" rhetoric that Western media often alludes to has a profound influence on foreign investors' views on the business environment in China.

• The third external challenge is even more severe, that is, the increasingly stronger competitors in our immediate surroundings. Some developing economies in Southeast and South Asia, such as Vietnam, Malaysia and India are developing very fast. Their rapid growth, to some extent, can be attributed to their own effective reforms. But another reason is the fact that the US and other Western countries are shaping their economies and offering aid, especially in the case of Vietnam and India.

• Changes in internal and external factors mean what China has today is not enough for the shift from a moderately prosperous society to a developed economy. In other words, the methods that have been used to sustain the Chinese economy in the past decades can no longer work in the next stage.

• In terms of the economy, China needs to build three open systems, through reform and opening-up: an open enterprise system, an open financial system, and an open science, education and talent system.

• Practically speaking, if China couldn’t take a share of the global talent market, it would struggle to rival the US, in a case where talents in the US come from across the world, while talents in China are mostly overseas Chinese or nationals studying abroad.

• Now that the US has seen China as a rival, China should really take the US seriously. The two countries should compete to get more open, not more closed. With the rise of populism and internal political split, the U.S. political system is not as open as it was before, making it harder for its political parties to launch reform. But the CPC has advantages in these two aspects.

• China’s success over the past decades hinged on institutional reform and opening-up, which also holds the key to reviving the Chinese economy in the next stage. Reform and opening-up is the only way for China to achieve its 2035 and 2050 goals on "a Chinese path to modernization", before reform and opening-up ushers in its third centenary (2078). [China announced its reform and opening-up policy in 1978]

The piece was posted on Jan. 19 on the WeChat blog of Z.H.Island, a China-based high-end O2O social networking platform for entrepreneurs around the world. The article was originally published by Great Bay Area Review, a WeChat blog founded by the Institute for International Affairs of the Chinese University of Hong Kong (CUHK), Shenzhen, and the Center for China Studies of the CUHK.

Prof. Zheng is currently the Presidential Chair Professor and the Founding Director of the Advanced Institute of Global and Contemporary China Studies (GCCS), the Chinese University of Hong Kong, Shenzhen (CUHK-SZ).

He previously served as the former Director of the East Asian Institute, National University of Singapore (2008-2019), and the former Research Director and Professor of the China Policy Institute, University of Nottingham (2005-2008).

Prof. Zheng has long been an influential voice in the Chinese mainland. For example, he was invited to speak at a meeting with the top leadership in 2020 on China’s 14th Five Year Plan (2021-2025), as reported by the prime-time news program on China Central Television (CCTV) then.

If you missed the two last GRR newsletters on Prof. Zheng's interview:

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Reviving China’s economy through reform and opening-up: Views from Prof. Zheng Yongnian

The 20th CPC National Congress introduced the concept of "Chinese path to modernization." Just as the economy constitutes the base of society [the forces and relations of production in Marxist theory that are predominant in economic development], the sustainable development of the economy is, by all means, the most essential element in the Chinese path to modernization. This new modernization concept, on the other hand, is as much a proactive driver of economic growth as the superstructure [the Marxist concept for culture, institutions, and political structures that have a powerful impact on the base] an influential force over the changes of the base.

Now that the "Chinese path to modernization" has been laid out, we may expect more specific explainers very soon to elucidate the concept, especially as to what it means regarding economic growth. At present, for all we know, the 20th CPC National Congress has created a two-stage plan, targeting 2035 and 2050. The second milestone is still a long way away, but the first is already round the corner.

The goal is, that by 2035, the GDP per capita in the Chinese mainland should at least reach the level of China's Taiwan, the lowest of the Four Asian Tigers, which stands between 28,000 and 35,000 U.S. dollars. As of today, China has no doubt achieved a phenomenal leap from less than 300 U.S. dollars in the early 1980s to almost 13,000 U.S. dollars (12,561 U.S. dollars by the end of 2021), but the road towards 28,000 U.S. dollars and even 35,000 U.S. dollars is no easier feat.

That leads to the question: how could such a goal be achieved? High-quality economic development or quality-oriented economic development is the only choice, as far as I am concerned. The problem is, modernization would be impossible without addressing directly the present economic adversities felt by us all and finding solutions to these challenges.

01 Two popular ideas

How we go about with the economic recovery is a very important question. Currently there are two main factions. One seems to be catching at straws by calling to revert to traditional means such as reviving the infrastructure or the real estate market.

Whether the traditional methods would work is a question of long-term economic development. They may work in the immediate term, but are far from enough to propel the economy forward to 2035 and beyond, to 2050. This is because infrastructure and other traditional ways can no longer offer as much room for economic development and growth as they did in the past. And as the real estate market becomes saturated, the current measures can only ease the situation, not solve the problems.

Practically speaking, it is extremely difficult to restore the property sector as one of the pillars of the Chinese economy. There has been no precedent in world history for an economy to become highly-developed by means of a long-term reliance upon the property sector.

The other faction is future-oriented but unrealistic, full of idle talk about some economic concepts. Many are used to envisaging a utopian future with fancy PowerPoint slides, without having generated one feasible and effective solution. Either idea would pose as a tangible threat to the future of the Chinese economy, should they ever be used to approach the current economic issues.

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02 Internal and external challenges facing China’s economy

We should realize that today China’s economy is met with bitter challenges, both internally and externally. Domestically speaking, China has three impediments ahead. The first is the impact of COVID-19. China has lifted many of its COVID-19 restrictions and had in place less stringent travel policies. It is a right decision, but it will take longer for the aftereffect of the pandemic to disappear.

It is evident in the US and Europe that the psychological imprints shall endure long after the lifting of COVID restrictions. In the US, for example, many people who got used to working from home during the lockdown are now unwilling to work on site. There has been an ongoing "Great Resignation" where many are quitting their jobs.

The same is happening in China. Optimists believe that the trend will be short-lived, but that does not tie in with reality. The truth is, COVID-19 is never an equivalent of the common cold, in spite of all the variants. The emotional trauma brought about by the pandemic, whether individual or population-wide, requires a very long period of healing.

Red lanterns at a shopping mall ahead of the Chinese New Year after COVID restrictions had been lifted, Yangzhou, Jiangsu Province.

The second internal challenge concerns the private firms. Last year, China introduced sweeping reforms for the property, tech and private education industries, the three backbones of the private sector. The move has had some negative impacts on private enterprises, yet was, nevertheless, important and necessary. It was not intended as a crackdown on private businesses, as some people are apt to put it, but to consolidate and improve the institutional arrangements for their sustainable development. [Note: Institutional arrangements are the policies, systems, and processes that organizations use to legislate, plan and manage their activities efficiently and to effectively coordinate with others in order to fulfill their mandate.]

The negative impacts on private enterprises, though, are admittedly detrimental and widespread due to the hasty implementation simultaneously across the three sectors. In some regions, the government was even seen to resort to campaign-style enforcement. This means an uncertain time for private businesses in China. It is highly unrealistic, complained some business owners, that they were called right back to work after such a major blow which proved fatal to certain companies.

The third internal challenge comes from populism and even ultra-leftism that have permeated public opinion, especially on social media. There has been much name-calling targeting private businesses, including “capitalists”, “capitalism”, and “private ownership”. Personal attacks on private entrepreneurs are also to be seen.

Such extreme populism has a deteriorating effect on the Chinese business environment as a whole. It is noteworthy, though, that China is not alone in having populistic trends, but in many Western countries like the US, the impact of these ideas is more or less confined to the realm of public opinion and rarely borders on the business environment. Why? Because developed economies usually have well-established legal systems to regulate the market. Operating under a law-based framework, private businesses will not be directly affected by public opinion.

But in China, where legal systems are not fully developed, populism could have a direct impact on private businesses. Our survey of private firms in the Yangtze River Delta and Pearl River Delta regions found that worsening views of private firms had significantly exacerbated the business environment.

Despite the emphasis laid on private firms by China’s top officials, including the top leader, the public has yet to undergo a fundamental change in attitude towards them. At present, populism is still deeply-rooted, especially among the low-income groups that have taken up a considerable proportion of the Chinese population. The business environment would only turn for the worse if the populism surge continued.

Social media accounts behind the rise of populism are experts in manipulation and distortion. In the name of “socialism” and “patriotism”, they are capable of wavering, maneuvering, and even weaving public opnions to suit their commercial interests.

External challenges also come from three aspects. First, the gloomy China-US relations. The U.S. government, whether the president be Donald Trump or Joe Biden, has been intent on cutting China off cutting-edge technologies and even decoupling its tech industries from China. So far, the situation hasn’t improved. It keeps getting worse.

On Nov. 14, 2022, Chinese President Xi Jinping and US President Joe Biden met in Bali on the sidelines of the 17th Group of 20 Summit and talked for more than three hours. The meeting was significant in improving the bilateral relations. But we should be keenly aware that the U.S. will not change its key policies on China just because it wants to improve bilateral ties. Biden, on the one hand, said he hoped to set up “guardrails” in the relationship with China, but on the other hand has always stressed enhancing the ability to have intense competition with China.

We should be keenly aware that the U.S. will not change its key policies on China just because it wants to improve bilateral ties

The second external challenge is the ongoing Russia-Ukraine conflict. The conflict has a negative impact not just on Chinese businesses, but also on foreign enterprises in China. This is because the "Russia-China axis" rhetoric that Western media often alludes to has a profound influence on foreign investors' views on the business environment in China.

The third external challenge is even more severe, that is, the increasingly stronger competitors in our immediate surroundings. Some developing economies in Southeast and South Asia, such as Vietnam, Malaysia and India are developing very fast. Their rapid growth, to some extent, can be attributed to their own effective reforms. But another reason is the fact that the US and other Western countries are shaping their economies and offering aid, especially in the case of Vietnam and India.

The US has shifted focus in terms of its China policy from changing the Chinese systems to reshaping its vicinity. Among China’s neighboring countries, Vietnam is a key country for the US. As a member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), Vietnam has advanced reforms in line with CPTPP standards for years. It is fair to say that Vietnam is following the footsteps of Japan and Singapore on the road to another westernised Asian country.

The pressure on China brought about by Vietnam's reshaping lies not just in the economic realm, but also in the geopolitical and more importantly, in the political ones. The so-called opening-up and reform underway in Vietnam will pose competition and influence to all aspects of China.

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03 How do we develop a new line of thought?

Having seen what we have to face, what is there that we can do?

Obviously, neither fragmented thinking nor traditional methods can solve the current internal and external challenges for China. The scope is so big and the problems so many that books may need to be compiled to tell them all. Western studies on China are speaking in a similar tone - most of them “excessively criticize” China, many constantly anticipate the collapse of China, and very few that “excessively flatter” China because they do not understand the country. Many of the problems mentioned in those studies actually exist, rather than being made up.

Since the reform and opening-up, we have indeed been coping with endless problems along the way. But just look at what we have achieved. We weren’t always deeply troubled, as we are today, by the search for solutions to our problems. In fact, quite a numbers of problems simply disappeared as time went by. So our problems, as I often put it, are “problems with development” . That is to say, development itself was the cure to most of the problems.

The same argument can be used for our current conundrum. Grappling in the ocean of problems for an immediate remedy will take us nowhere near the solution. Taking a fragmented line of thought will only make us slaves to whatever problems we face and lose sight of the bigger picture.

So we must put the focus back on development. The importance of development has been highlighted by top leaders, from “Development is the absolute principle” in Deng Xiaoping's time to “Development is the primary task” nowadays.

An intelligent factory in east China’s Zhejiang Province. Zhejiang is vigorously promoting the application of artificial intelligence and digital supply chain technologies in its factories to make them automatic, green and low-carbon. (Photo/Xinhua)

I was amazed how the Zhejiang province carried out reforms when I visited the place a while ago. Zhejiang is now the demonstration area for Chinese modernization and common prosperity. Local officials have been thinking independently and came up with this marvelous idea that it is the Chinese system that has supported us out of poverty and into a moderately prosperous society all the way since the 1980s.

However, changes in internal and external factors mean what we have today is not enough for the shift from a moderately prosperous society to a developed economy. In other words, the methods that have been used to sustain the Chinese economy in the past decades can no longer work in the next stage.

That’s why they’re now considering real institutional breakthroughs to assist the Chinese economy on its next journey. Though still at a very rudimentary level, their views are fairly thought-provoking and typical of Marxist thinking on the base-superstructure relationship.

Over these years, especially since China joined the World Trade Organization (WTO), China’s economy has been in a natural process of development without experiencing drastic reforms. We did once carry out drastic and even detrimental reforms to economic systems before the entry, but those reforms died down after that, and the economy simply took its own way. The pre-WTO reforms, I think, served as an institutional base for the following economic development.

Do we need to return to bold institutional reforms today? Over the years, we are still pushing forward reform and opening-up, but with increasing emphasis on the latter. Reform, especially institutional reform, has received little theoretical and practical attention. In this context, Zhejiang is without a doubt most forward-looking and future-oriented in its thinking about reforms to the economic system.

What else should we think about on the basis of the Zhejiang idea? How do we safeguard the economy in the next stage? In terms of the economy, at least, we need to build three open systems, through reform and opening-up.

04 Build three open systems

Globally, history shows that opening-up is the key to sustainable economic development. In the next stage, we should build three open economic systems through reform and opening-up.

1. Open enterprise system

In the US, the bigger an enterprise, the stronger it is. But in China, big enterprises are not so strong. Why? The main reason is that Chinese firms are not open enough. The U.S. economic system is open. So are its firms, where large firms are open to each other and to small and medium-sized firms. Openness is of the utmost importance.

For example, in the U.S., internet companies, new energy companies, and new energy vehicle (NEV) companies are open to each other. This mutual openness is exactly why they can create synergy, which allows them to set rules and standards for their counterparts as they grow bigger and stronger.

But in China, enterprises are not mutually open, not among state-owned enterprises or among private enterprises - let alone between the two parties. The consequence of seclusion is that they are weak, even though the total number is phenomenal.

Without mutual opening, Chinese firms don’t have standards and rules to create a unified domestic market, and it’s even harder for them to go global.

Therefore, if Chinese enterprises could advance institutional reform that encourages mutual opening, not only between state-owned enterprises and private enterprises, but also between large private enterprises and small and medium-sized enterprises, there would be healthy competition among the enterprises that eventually brings about unified rules, standards and regulations. In this way, enterprises would grow bigger and stronger, which would bode well for domestic economic flows and the creation of a unified domestic market. More importantly, the openness would help facilitate international economic flows and create an international market.

High-quality economy is built on rules and standards, which undoubtedly are the weak link for China. The largest internet companies in the world, for instance, generally base themselves in China and the US. But it’s the US that sets rules and standards for global internet companies because their internet companies are open to each other. The European Union (EU) also sets standards for internet companies by virtue of the strong EU market although none of them are globally strong.

In contrast, China has a huge number of internet companies, but they only have domestic regulatory rules. Why can’t they go global? Some non-institutional factors are at play. But the main reason is that Chinese internet enterprises are not mutually open. Viciously competing with each other, they are not able to join forces in any sense.

The same is true for the NEV sector, one of the few technology sectors where China can hope to compete with the US. [Check a previous post by GRR to know more about the key issues of China's NEV sector: Why is it more urgent for China to have a reliable operating system than chips in the automotive industry?] More than half of China’s NEV manufacturers are based in the Pearl River Delta region, and among them, more than half of the entrepreneurs graduated from the South China University of Technology. But why can’t they work together?

American firms are open to each other, but it’s not that they choose to do so. Essentially, American firms are no different from Chinese ones, as both incline to compete viciously. But the US enacted antitrust laws requiring its enterprises to be open to each other. Such mutual openness has proven very important. No large enterprise in the US can manufacture everything by themselves. Instead, they compete and cooperate with each other, thus generating strong momentum for their growth.

But Chinese firms, both state-owned and private, operate and develop mainly by their market share and monopoly status. This means that only through major institutional reforms can enterprises secure high-quality development.

More importantly, an open enterprise system can take the place of the public-private partnership (PPP) model. We should, of course, acknowledge the contribution made by the PPP projects of state-own enterprises. However, problems that ensued them call for immediate reflection. Our survey found that under the PPP model, state-owned capital is flowing into high-return projects, squeezing the profit margins for private enterprises.

Furthermore, the PPP model has begun to result in an outflow of state-owned assets, which is even more serious than the privatization of state-owned enterprises in the 1990s. Replacing the PPP model with mutual opening between enterprises may be a feasible approach, or else Chinese enterprises wouldn’t grow bigger, let alone grow stronger.

An intelligent production base of the Great Wall Motors (GWM) in Yongchuan District of Chongqing, southwest China (Photo/Xinhua)

2. Open financial system

Both basic scientific research for universities and R&D for enterprises require support from the financial system. But China’s financial system is as far from US one as it gets. Nevertheless, we could take advantage of the status of Hong Kong as an international financial hub. The future of Hong Kong’s financial development lies in the Chinese mainland, which also needs Hong Kong to go global.

Recently, we have been calling for building dual financial centers in China. The first financial center, with Shanghai at its core, serves the real economy of China and its financial stability. The second, the Greater Bay Area financial center with Hong Kong at its core, is expected to become a rival to Wall Street.

Build dual financial centers in China: a financial center, with Shanghai at its core, that serves the real economy of China and its financial stability; Greater Bay Area financial center with Hong Kong at its core.

If a country wants to become a real economic powerhouse in the world, it must have a powerful financial center. That’s what happened to the United Kingdom (UK) in the 19th century and the US in the 20th century. Germany and Japan used to try to become economic powerhouses too, but their attempt ended with suppression of the US. With their security systems integral to that of the US, the two countries will have no hope of success as long as the US says no.

Now that China has been regarded by the US as the only country that has the ability and the will to compete with it globally, and that the US has been suppressing China for the exact reason, we must take on the competition. We can compete with Wall Street by building the Greater Bay Area financial center. Without such a financial center, China’s financial economy would struggle to grow. And without support from the financial economy, the real economy and economy in other areas would not enjoy effective development.

We oppose the financialization of the real economy or virtualization of finance, but that does not mean we don’t need the financial economy. Quite the contrary, developing the financial economy has become more important given the current situation. We need an open financial system to support an open economic system.

3. Open science, education and talent system

The Report to the 20th CPC National Congress emphasized the importance of science and education at great length, which, as I see it, is the root of the problem. China’s high-quality development ultimately relies on science and education, scientific innovation, and technological advances. Although the middle-income trap is no longer a problem in developed areas such as the Yangtze River Delta and Pearl River Delta regions, it still needs solving nationwide, judging from the economic development levels across the country.

The crux of the middle-income trap is the middle-technology trap. If we want to escape the middle-income trap and turn China into a developed economy, we must first overcome the middle-technology trap.

How do we overcome the middle-technology trap? A look at the development history of world economy shows that science, education, and especially talent system are the most crucial elements. But we are facing huge bottlenecks in attracting talent. And the biggest competitor in that regard is the US.

We have got to admit that the US is a platform that gathers talent from across the world. After all, the US is, through and through, a country of immigrants. After World War I and World War II, the US attracted a huge number of scientists from Europe. Albert Einstein, for example, emigrated to the US after having first moved to the UK from Germany. Basic scientific studies in the US were mostly brought in by European scientists in the post-war period.

The US started working on basic research after Word War II, with the publication of Science: the Endless Frontier, a report by Vannevar Bush, as a starting point. At the same time, the country also paid attention to commercialization of technologies, creating a scientific research system that integrates industries, universities, and research institutes, which led to the strong country it is today.

During the Cold War, the US used talent from across the world, including those from the Soviet Union and Eastern Europe, to compete with the Soviet Union. Finally, the war ended with the collapse of its opponent. Today we’re facing a similar reality, as the US is using talent from across the world, including Chinese immigrants to the US, to compete with China.

After reform and opening-up, China exported millions of skilled people to the US. Many of them have returned to China, of course, but a lot of scholars and scientists are still staying in the US for various reasons and making contribution to the U.S. development. Practically speaking, if China couldn’t take a share of the global talent market, it would struggle to rival the US, in a case where talents in the US come from across the world, while talents in China are mostly overseas Chinese or nationals studying abroad.

If it is difficult to attract European and U.S. scientists to China, how about bringing in scientists and technical professionals from India or Eastern European countries such as Russia and Ukraine? The San Francisco, New York, Tokyo, and Guangdong-Hong Kong-Macao Bay areas are called the four largest bay areas in the world. The proportion of foreigners stands at 40 percent in the first two areas, and is also very high in the Tokyo Bay area of Japan, which adopts the most conservative immigration policy among Asian countries. But in the Guangdong-Hong Kong-Macao Bay area, the figure is negligible.

Shenzhen calls itself China’s Silicon Valley. But in the Silicon Valley of the US, foreigners account for 60 percent of the population. Our research found that about two-thirds of the unicorn companies there were created by the first or second-generation immigrants instead of generation-old Americans. The point is not that China must have such a high proportion of foreigners to become a powerhouse in scientific innovation, but the figures could at least reveal its weakness.

In 2018, China established the National Immigration Administration (NIA). But so far no policy has been unveiled about the immigration of skilled labor, the most important indicator. [NIA says on Jan. 28, 2023 that it will implement more active, open, and effective policies and push forward institutional opening up in immigration management.] In this respect, we really should learn from Singapore, another Asian country which has no resources but establishes itself as a global hub for foreign talent.

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05 Strong enterprises, powerful economy

Enterprises, from state-owned to private enterprises, play the principal role in economic development. But to grow bigger and stronger, enterprises, which are just a link in the economy, need a sound environment. Globally, it is empirically established that a country must meet three conditions, i.e., the aforesaid three open systems, to become a real economic powerhouse.

First, universities and research institutes that are able to engage in basic scientific research; second, enterprises or institutes that can transform basic science into applicable technologies; third, a financial system that can support basic scientific research and technology commercialization.

In the US, the financial system supports enterprises primarily in the form of venture investments. As mentioned above, China’s financial system doesn’t allow that form of investments. In cities like Shenzhen and Guangzhou, municipal state-owned assets supervision and administration commissions also engage in venture investments, which, however, are not real venture investments. In China, the investment cycle depends on the term of the commission director, lasting three to five years at most, but real venture investments have a term of eight to fifteen years.

Can we make institutional breakthroughs in these three aspects? The answer is yes. China has the institutional foundation, especially in the Greater Bay Area. In terms of basic scientific research, all the universities in the Bay area combined can basically be on a par with those in the New York Bay area, in both scale and capacity. With regards to the financial center, Hong Kong, as part of the Greater Bay Area, can play a part. Besides, the Greater Bay Area is also home to enterprises with the world’s strongest capability in technology commercialization, which has made the area a global manufacturing hub in the past two to three decades.

At present, we’re truly facing some economic difficulties. We need a new way to look at the economy. We can’t just take measures on a small scale - if we do that, we will only be going backwards, not moving ahead. The small-scale approach might help solve some problems gradually, but would create more trouble in the end. We are in urgent need of new reform, new opening-up, and new innovation.

Now that the US has seen China as a rival, China should really take the US seriously. The two countries should compete to get more open, not more closed. With the rise of populism and internal political split, the U.S. political system is not as open as it was before, making it harder for its political parties to launch reform. But the CPC has advantages in these two aspects.

For a start, the CPC, the governing party of China, has always been stressing opening-up and globalization. From the perspective of institutional advantages, China has what it needs to carry out institutional reform. Without being tied to any vested interest, the CPC will go for it as long as the direction is set. All in all, we need to regain the spirit of reform and opening-up since Deng's time. Only in that way can we achieve the 2035 and 2050 goals on "a Chinese path to modernization", before reform and opening-up ushers in its third centenary (2078).

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"Tough challenges remain, but the light of hope is right in front of us," said Chinese President Xi Jinping when he made video calls to people across the country to extend festive greetings a day earlier. The lunar new year is only two days away, and the whole country is ready to start a pandemic-free life.

Some decide to spend the holiday on trips. According to CCAonline.cn, there are more than 128,000 bookings for outbound flights during the Spring Festival, up 90 percent from last year. Compared with shopping, young people prefer paying for "experiences," including travel, live performances, and gym memberships.

Today's newsletter is from Kaiboluocaijing 开菠萝财经, and the article was first published on WeChat on Jan. 6 under the title of Young people "hoard" tickets while waiting for holidays 等放假的年轻人，开始疯狂“囤票” . The blog interviewed a bunch of youngsters to find out how the pandemic influenced consumer behaviors and the shift of people's attitudes toward life. The following is a full translation.

Chinese young people go on a spending spree after recovering from COVID.

But they are not spending on goods or investments. What empties their wallets and makes them pay in advance, are three types of experiences —— travel, performances, and fitness.

With domestic tourism rebounding and outbound travel restrictions to be lifted, some young people spent 35,000 yuan (about 5,220 U.S. dollars) on 12 plane tickets to the US and Southeast Asia, and seven reservations at resort hotels in China. As live performances and large-scale concerts are under preparation, some have got their "special fund" ready to make up for the lost joy of the past three years. After testing positive for COVID, some realize that workouts are necessary. So they are ready to pay for gyms. Some even spent more than 10,000 yuan on 30 Pilates sessions.

In short, the relaxation of COVID measures, coupled with COVID recoveries, and the beginning of a new year, prompted young people to take a sharp turn in their consumption pattern.

In 2023, more business opportunities may emerge in tourism, in-person entertainment, and the greater health industry. For young people that shore up consumption, the purpose of hoarding tickets, getting VIP memberships at gyms, and paying for sports classes, is to "live in the moment" and "enjoy life to the full."

Go travel: Some spent 35,000 yuan on 12 air tickets and seven reservations at resort hotels in China

On the tenth day Zhang Yue recovered from COVID, she took a high-speed train from Beijing to Weihai, a coastal city in east China's Shandong Province.

It was her first trip outside of Beijing in 2022. Although the New Year holiday only lasted three days, and the destination is not so popular, the thought of going out still enthralled her. "I just want to go to the sea, enjoy local delicacies, and stroll in a strange city," she said.

Ruoruo from Guangzhou in south China's Guangdong Province decided to celebrate the New Year with friends in Quanzhou, a city in east China's Fujian Province. They have all just recovered from COVID. "Actually, we live in the same city and often hang out together. But we haven't been on a trip for so long, so we must go out as soon as we can," she said.

Meanwhile, she also booked tickets and hotel rooms for her Spring Festival vacation in south China's Guangxi Zhuang Autonomous Region. "I plan to travel to Liuzhou. Staying at a brand new luxury hotel in a tier three city only costs 500 yuan a night, which is less than half of the price in Guangzhou. I think I got a good deal," said Ruoruo in the interview.

[Note: Liuzhou is a prefecture-level city in north-central Guangxi.]

A media survey showed that about 58 percent of young people choose to "go travel" when asked about what they would do after recovering from COVID.

Even if they can't go on a trip for the moment, they are willing to do some "retaliatory consumption" first. Bingqing is from southwest China's Chongqing municipality. She bought digital coupons for hotel rooms in almost all popular tourist attractions in southwest China. "For example, Dali, Lijiang, Xichang, and other places in Guizhou Province and Hainan Province. It cost me 11,775 yuan in total," said Bingqing.

Reservations for resort hotels in different places (Photos are provided by the interviewee)

What excites youngsters more, is long-waited trips abroad

China's authorities have rolled out a set of measures for cross-border travel recently, including "starting from Jan. 8, inbound travelers no longer need mass nucleic testing and quarantines," "resume acceptance and approval of Chinese citizens' applications for ordinary passports for the purposes of tourism and visiting friends abroad," and "reopen the exit-entry permit applications for China's mainland residents to visit the Hong Kong Special Administrative Region for tourism and business purposes."

During the Double 11 and Double 12 online shopping festivals in 2022, some travel service platforms and airlines jointly sold "future flights." Users could purchase a card that includes a round-trip flight ticket to a specific destination abroad. Once the government cancels quarantine requirements for inbound visitors, customers must exchange cards for plane tickets in six months.

"I bought it purely for the wish that we could soon travel freely as we did before the pandemic," Bingqing said, adding that her tickets are mainly to Southeast Asia and the US. These are places she has always wanted to go to or somewhere she has visited before but would love to visit again.

Air tickets alone cost her nearly 20,000 yuan. "That includes 1,999 yuan for two round-trip cards with Cambodia Airways, 3,998 yuan for a two-person round-trip to Southeast Asia with Sichuan Airlines, and 5,400 yuan for two round-trip cards to the US with Etihad Airways," she said.

Air tickets for outbound travel (Photo provided by the interviewee)

Bingqing estimated that she had spent about 35,000 yuan on flights and hotel rooms, but she may only use some of the coupons, about one-third of the total money spent. "I paid with Huabei (a cash advance service provided by Ant Group) instead of my own savings. After I redeem the coupons, I repay the loan with money in my bank account. So I'm still free to use money in my bank account now. The bookings are very flexible," she explained.

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At the end of December, China Southern Airlines also launched an event called "international trips for early birds," offering round-trip flights from Guangzhou to destinations including Phu Quoc Island and Nha Trang in Vietnam, Chiang Mai, and Phuket Island in Thailand, Bali Island in Indonesia, and Maldives. The price ranged from 840 yuan to 2,240 yuan, not including tax. So far, all the tickets have sold out, though there are more than 80 days before the event ends.

Li Ang lives in Guangzhou. When he saw the notification, he booked the round-trip flight package to Phu Quoc Island, Nha Trang, Phuket Island, and Maldives, respectively. The total expenses were 5,560 yuan. "I may not use all of them, but buying some discounted tickets in advance must be worthwhile, because I will definitely take a trip to some overseas island this year," he said.

Go to live performances: 20,000 yuan for concerts absent in the past three years.

Other than travel, young people will have their beloved live performances back.

In addition to flights and hotel rooms, Bingqing also booked tickets for many live houses, including S53 Super Live, DUI, and Dreamland Music in Chongqing. "I will hang out at live houses and buy beers whether there are performances or not. But I think there will be many performances this year," she said.

[Note: A live house is a venue featuring live music. Compared with a concert in a stadium, the scale is generally much smaller for a live house, with an audience of 200 to 300 people.]

In the past year, live houses in Beijing held few performances. Now they are filled with young people recovering from COVID.

According to Showstart 秀动, a ticket service platform, there are nearly 30 live performances scheduled in Beijing in January. Most tickets have already sold out. Live house performances used to be a night event. But to meet the skyrocketing demand, some places schedule performances in the afternoon at weekends.

Tickets for multiple performances in Beijing have sold out in January (Photo/Showstart APP)

"Pre-sale tickets sold out in moments, and tickets for popular bands are harder to get," said rock 'n' roll fan Zhang Xu. He has been paying close attention to live house tickets in Beijing since last month, including MAO, OMNI SPACE 疆进酒, YUE SPACE 乐空间.

In early January alone, he bought five live performance tickets. "Spring Roses 春日玫瑰 on Jan. 3, Brain Failure 脑浊 on Jan. 6, Zuoxiao Zuzhou 左小祖咒 on Jan. 8, Lost Train 丢火车 on Jan. 9, and Island Mood 岛屿心情 on Jan. 11. The tickets cost me 980 yuan in total," he said. In Zhang's view, those tickets are not that expensive, and live performances are rare, so he has to "seize the opportunity."

Zhouzhou started hoarding tickets for plays and live house performances in 2021. But most shows got canceled due to COVID. Therefore, she was cautious about ticket hoarding. "But for blockbusters, I still set an alarm and fight for a ticket no matter what."

What she wants more, is annual passes to Universal Beijing Resort and Shanghai Disneyland. "Universal Studios Beijing Annual Pass (Preferred) costs 2,288 yuan, and Shanghai Disneyland Sapphire Annual Pass costs 2,399 yuan. A few visits will be enough to cover the cost, and annual passes give me benefits, like discounts at the gift shop and early park entry."

Universal Beijing Resort annual passes

(Photo/Universal Beijing Resort WeChat Mini Program)

Concerts on a larger scale have yet to return, but young people have their wallets ready.

Xiaohan works in Guangzhou. She prepared 15,000 yuan for her idol's concert. "Ever since the tour began six months ago, I've been planning for it. The ticket costs 5,000 to 6,000 yuan from the official channel. But if I can't get it, I will buy the ticket from a scalper, which costs over 10,000 yuan."

"The Taiwanese band I like hasn't been to the mainland for concerts in the past three years. Every time fans asked the lead singer on Weibo (China's Twitter-like platform) when they would resume live concerts in the mainland, he always sidestepped the question. But last December, he gave us a clear answer for the first time: "on it." When Doudou, a girl living in Beijing, saw the reply, she was excited to tears.

For the new year, she set up a "performance fund" for herself. "I saved 20,000 yuan, which would cover concert tickets, transportation fees, and accommodation when I travel to other cities for concerts," said Doudou, adding firmly that in 2023, she would go to all the shows she likes.

Keep fit:

12,000 yuan for 30 Pilates sessions that are the best for "rehabilitation."

After a head-to-head "battle" with the virus, many young people put exercises on their to-do lists. Although most of them are still recovering and yet to return to intense workouts, they don't hold back on buying classes and getting memberships in gyms.

Zhouzhou, a fitness enthusiast, has a habit of exercising, attending at least three SUPERMONKY group classes every week. "I topped up 2,000 yuan during the last Double 11 shopping festival, and topped up 500 yuan several times."

[Note: SUPERMONKY is a Chinese gym chain that opens stores in tier-one cities.]

Balance of a SUPERRMONKY membership account

(Photo provided by the interviewee)

In the new year, she plans to set aside some money for "Tieguan," a small gym for more seasoned fitness enthusiasts. "Unlike commercial fitness centers, "Tieguan" has no personal trainers selling services, buy a membership card and the equipment is all yours," explained Zhouzhou. The purpose of lifting weights is to build muscles and improve workout performance, which is different from building muscle endurance and doing cardio in group classes with emotional values. These two types of exercises complement each other.

However, a "Tieguan" membership annual card costs at least 10,000 yuan, and as so many gyms went out of business without giving refunds, she plans to find a gym that allows monthly cards.

Xiaohan invested 2,280 yuan in a half-year card with unlimited classes at a dance studio with the highest ranking [on review platforms] near her home. "Compared to workouts, dancing is more fun and gives me a sense of achievement in learning a skill."

Some people's first "rehabilitation" program after COVID was Pilates.

Pilates is a physical exercise that stretches muscles while controlling breathing. It was originally designed for the recovery of the injured. Many Pilates studios state that Pilates doesn't excessively increase the heart rate, and is the most effective exercise for improving the lymphatic and respiratory systems. Generally, professional Pilates coaches provide one-on-one guidance, monitor the physical conditions of trainees, and adjust workout intensity as needed.

For those who want to improve physical fitness but worry about sports safety after recovering from COVID, Pilates is a perfect choice.

Shanshan lives in Changsha, the capital of central China's Hunan Province. The Pilates studio near her company held a promotion at the end of the year. So she spent 12,000 yuan for 30 personal training lessons there.

"As the fees are nonrefundable, I will be more motivated to go to class," she said half-jokingly.

However, in megacities such as Beijing and Shanghai, a private Pilates session costs 500 to 800 yuan, which is not affordable for white collars. But young people know how to take advantage of the information gap.

Doudou began to do Pilates in the second half of 2022. According to her experience, she can take a trial session at a local Pilates studio when she goes to another city for travel or business. "It basically costs less than 200 yuan," she added.

Recently, she learned that a new Pilates studio opened in her hometown, a tier-three city. So she bought a few sessions through group purchase. She planned to go to the studio when she returns to her hometown for the Spring Festival holiday. The average price of each class is less than half of that in Beijing.

Why are young people who previously proclaimed belt-tightening beginning to spend in advance?

Travel restrictions were not lifted yet, youngsters had air tickets ready. Concerts haven't started selling tickets, they prepared the money first. Workouts have become an essential need, and they get a membership card before going to fitness sessions.

Young people's high enthusiasm for offline experiences in 2023 contrasts sharply with the trend of "consumption downgrade" and "refraining from buying or buying less" which we heard a lot in the past year.

But when it comes to material consumption, they are still as rational and pragmatic as they were in the previous year.

Despite her extravagant spending on air tickets and hotels, Bingqing becomes more economical and cautious about spending on daily necessities than before the pandemic. "When I buy something, I think twice about whether it suits me. If not, I won't buy it. And I return goods not suitable even if they only cost dozens of yuan.

"In the past three years, it was hard to travel far, and there were few offline performances. Shopping was like seeking joy amid hardship. However, things are different now. There are more ways to find joy. Buying goods is less important," said Zhouzhou, adding that she always reminds herself not to fall into the trap of consumerism.

There is the factor of "revenge-buying" when youngsters lavish money on travel, entertainment, and fitness. So they are spending in advance. But more importantly, it's the relaxation of COVID measures, recovery from COVID, and the advent of a new year that brought hope to young people, and now they have a fresh view on consumption.

"If I buy one less piece of clothes, I will have the money for an air ticket; one less makeup product is a step closer to live performances. My heart tells me that going to the beach is more exciting than a new lululemon vest," said Zhouzhou.

Behind paying for the experience, almost every young person we interviewed gave their answers about how they view life after three special years: "Live in the moment," "seize the day," "carpe diem," and "happiness matters the most."

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In a previous post, we explained how China's VCs have systematically drifted away from their Western counterparts in terms of investment strategies. But this great divergence is never supposed to be easy. [You can read that in GRR, which by the way was recently recommended as one of the good China newsletters on Semafor.]

What is less understood are the realities on the ground. Who are China's PE/VC investors? What actual challenges and constraints are they facing in this "sinicization" of PE/VC industry? How are they adapting to Chinese characteristics? Within this context, Ginger River believes the following account gives a fascinating insider view of the industry. It was first published on Wechat at the end of 2022 by Chinaventure.com.cn, a Chinese internet platform that provides economic information.

One month ago (On November 20, 2022), I published an article called The secrets behind DPI. The article analyzed why DPI (Distributed to Paid-In Capital) is widely used in assessing fund performance, how different people use the metric, what factors influence DPI, and how the metric reflects limited partners' (LPs) anxiety toward uncertainty in investment. I put in a lot of effort to explain the ins and outs of DPI, but the concept itself and the game behind DPI are just too complex to be covered in a single article.

Kevin, a partner at a leading investment institution, read my article. He contacted me and shared his views on the article. Kevin believed that the article was written mostly from the perspective of LPs and investor relations (IR). And he suggested that I seek opinions from investment managers, (aka general partners, GPs), which will also help enhance mutual understanding among industry insiders.

I agree with Kevin. In an increasingly divided industry, media should promote communication. We have been bombarded with articles that talk about the sharp conflicts between GPs and LPs. However, constantly restating one side of the view would only deepen the rift. The key to understanding lies in giving both sides a chance to communicate and talk about their own predicaments.

Kevin works in the healthcare business in a big fund. He has witnessed the ups and downs of the industry, and is now also in charge of the fundraising work for new funds. So he has a deep understanding of the industry. In his opinion, there is a context for all the discussions, that is, both GPs and LPs in China are not very mature. For GPs, they are fettered by many realistic constraints in many cases, which means their choices get distorted sometimes.

For example, domestic investors flocked to new energy in 2022, and they dived into semiconductors in 2021. Before that, investors rushed to the consumer market. The dismal results are evident to all. However, why did these smart people still take a leap when they knew prosperity in those industries was in a bubble? No one has discussed it so far.

Kevin shrugged and explained the logic to me, "As investors, how can we not know that the new energy sector is at a high point? The bubble is very likely to burst in 2023. But it doesn't keep us from investing in new energy this year. The truth is, we could only attract customers through chasing the investment trend. When other investors talk about their investments in new energy and the projects that will start operation, how would you raise funds, if you say, I don't invest in the sector because the risk is too high?"

Therefore, we come back to the problem I have mentioned before. Even if people know the right thing to do, realistic constraints will force them to go other directions. So it would be hard to stick to the right thing.

During the conversation, I also realized that GPs are not well understood today. Kevin is in a strange position. LPs would be dissatisfied with fund returns and fund exits. At the same time, being a GP requires Kevin to continuously invest. After all these years, he invested more than he earned. With responsibility for both fund management and supporting the family, Kevin turns out to be the one that wants an exit the most.

The following is a transcript of Kevin's views, edited by Chinaventure.com.cn:

When I read your article, every paragraph makes sense from the LP standpoint. But if you think about it from the perspective of GPs, you might find that we just did what we had to.

First, in theory, MOC (Multiple on Invested Capital), IRR (Internal Rate or Return), and DPI or TVPI (Total Value to Paid In), are the impossible triangle in investment.

For certain projects, they could perform well in all the indices. For example, a project may create a revenue that is ten times of the principal. The company may go public and its shares are sold at proper times. In this way, the MOC, IRR, and DPI would be high at the same time. But for mature funds with settled strategies, it's impossible to have high MOC, IRR, and DPI simultaneously. For instance, a fund in its early stage can generate a very high MOC and a very high IRR in the first few years, but the DPI would be low. For funds focusing on Pre-IPO investments, the DPI can reach 1 very easily, but the MOC will not be high.

Second, the capital exit strategies in China are different from those of the Western markets, and China's equity market is still developing, which means it's not mature yet. A few years ago, a leader in M&A (mergers and acquisitions) started her own business in China. She wanted to focus on M&A funds. But now she becomes an investor in the PE/VC market along with everyone else. Is she incapable? Definitely not. Is it that she didn't want to do M&A? But that's the reason that she started her own business in the first place. In the end, she gave in to the market reality. Or to put it another way, the market forced her to make some changes.

So excluding share transfer, then we are only left with IPOs. In the US, no matter the Nasdaq or the New York Stock Exchange, normally only set very limited listing requirements. Even Hong Kong stock market has higher standards for listings. In other words, a company gets listed (there) if it wants. It may have a smaller market cap, but it's still a solid capital exit strategy.

In comparison, although Hong Kong stock market has finally started to align with international standards, the situation is not satisfying due to the influence of the dim macro environment. Moreover, Chinese stock exchanges are lowering the threshold for listing, but the pace, extent, and new standards have fallen short of expectations. Companies seeking IPO used to suffer from a traffic jam in China's stock exchanges. Though a set of measures have been introduced to the STAR market in Shanghai, China's stock market still has requirements about companies' profits and the development stage when they IPO. Sometimes, there exist even more barriers in practice. Some companies cannot IPO even if they meet open standards. This is a problem unique to China.

These are the realistic constraints in China. For one thing, buy-outs and acquisitions are not available in China. For another, IPOs are under strict supervision. In fact, a lot of VC investors also want to exit, but the environment is different from the west. They can't force companies into liquidation either. Because if they do so, people will reprimand investors for being cold-blooded. They will say those investors don't care about companies at all.

Furthermore, in terms of life cycle, we invest in both RMB funds and U.S. dollar funds, so we know the differences between Chinese limited partners and their foreign counterparts. When managers tell LPs who want to invest in dollar funds that the life cycle of the project is ten years, they are fine with the arrangement. Because they understand that equity investments are a long-term business. But LPs of RMB funds expect three years of investment period and three years of harvest period, or five years of investment period plus two years of harvest period. I work in a leading institution, and we are barely able to get four years of investment period and four years of harvest period, which is another difference between China's capital market and foreign ones.

Third, though our roles are general partners, only few of us are full-time general partners living on management fees. In most cases, general partners are also limited partners. [Note: differences between general partnership and limited partnership] Take the fund I work in as an example. I am a general partner now, and partners must also invest when the fund invests. I have been working for the fund for nearly a decade. For the money I make, one third goes into my pocket, and I have to invest the rest back into the fund. This is why my family are not happy about my job. To them, it's as if I've been working for the company for free.

Therefore, GPs understand LPs. After all, GPs also invest their own money into their funds. The two percent management fees are only divided among top partners. As low as five GPs in a fund can receive the fees in some cases. The rest of the partners rely on their work performance and dividends. Under these circumstances, we certainly hope projects go well, because only in this way can us managers get our money back.

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Fourth, your article mentioned that some LPs manage investments themselves. In my opinion, managing investments is not as easy as it seems. To put it in a simple way, it looks like investment is about simply putting money into a project, and everything is done. But the truth is, you have to pick projects and do background research first. After the money is in place, you may need to spend years managing the investment, including finding the right exit time, and getting the money back. Nowadays, some LPs think that GPs did a bad job and they themselves can do much better. But when LPs truly get their hands on investment, they find out that the situation is even worse. However, since they themselves are the decision makers, they have to swallow the bitter pill.

Many LPs say they prefer pre-identified funds over blind-pools. Because they want to know where their money goes. At the beginning, LPs would be like, it's okay, I root for the project, I want to invest my money, and I will take the risk with GPs. But according to my observation over the years, once the project goes south, LPs will always blame GPs for the investment decision.。

Fifth, both China's GPs and LPs don't have much experience. My fund has been in this business for over a decade, and witnessed major economic cycles of China, so we know how to live through good times and bad times. In good times, we will not invest too aggressively, and in bad times, we'll try to find some bottom fishing opportunities instead of tying our hands.

In my decades of experience in investing, I have taken part in multiple rounds of fundraising. During these years, RMB fund LPs come and goe, but U.S. dollar fund LPs basically stay the same. We even had a 100 percent reinvestment rate in a U.S. dollar fund.

Years ago, many RMB fund LPs belonged to the "three types of shareholders" (asset management plans, contractual funds and trust plans), and some were insurance companies. But when we tried to raise the next round, regulators banned "three types of shareholders" and insurance companies from investing in funds, so we turned to social capital and state-owned enterprises. Now as we launch another round of fundraising, it seems that local government-guided funds will dominate. And insurance companies are back in the game again.

Amid changes, there is always a group of high-net-worth LPs. Of course, the individuals in the group are no longer the same, so are other LPs. Therefore, both parties are underexperienced, and even professional LPs do not have much experience coping with economic cycles. Many became LPs only after China opened up the capital market, or after the capital market flourished around 2015. The same is true for GPs. In my memory, nearly 18,000 investment funds sprang up in 2018 and 2019, which means most GPs only experienced the upward cycle.

This is the current situation in China's PE/VC market: both LPs and GPs are newcomers who have only been through the good days. However, now we are in a downward period while both sides have little experience. If you accuse anyone of doing a bad job, he will feel wronged. In fact, this is inevitable after the market underwent expansion, a process that ensures the fittest players survive.

Sixth, as I said before, GPs' income is related to their work performance. In China, GPs' work performance also has something to do with the general atmosphere in the industry. For example, if the industry a GP focusing on performs well, some LPs may ask, why not invest in more projects in this industry? But this is not how things work. For one thing, domestic funds generally are divided among partners. In comparison, foreign funds have a more developed benefit sharing mechanism, which means if a GP invest in a good project, other partners can also get dividends, so no one would interfere with the project considering everyone wants to make more money. For another, each partner has limitations. For example, I only focus on the healthcare industry and I can seize opportunities in the area I'm familiar with. However, every industry has a life cycle. The healthcare industry is pivoting [downwards] this year, so I put my focus on fundraising [instead of investing]. Indeed, I still invest in some projects, but the total number is down by half compared with last year.

Moreover, I had to make investments in low profile. LPs wants our company to invest in star projects, like those in the new energy sector, especially when money from state owned enterprises accounts for more than 50 percent of the fund. Think about this, what do LPs from state owned enterprises want when they report to their leaders? Of course, they want to present investments in new energy projects. What should they do if GPs didn't invest in any of those projects?

Therefore, investing in semiconductors in 2021 and new energy in 2022 become inevitable. If a GP didn't follow the trend, LPs would question GPs' decisions. As investors, how can we not know that the new energy sector is at a high point? The bubble is very likely to burst in 2023. But it doesn't keep us from investing in new energy this year. The truth is, we could only attract customers by chasing the investment trend. When other investors talk about their investments in new energy and the projects that will start operation, how would you raise funds, if you say, I don't invest in the sector because the risk is too high?

In such context, fund performance will absolutely suffer. This also reflects a difference between China's investment ecosystem and foreign ones. In China, sometimes the focus of GPs' work is not about making wise investment, which is rarely the case for foreign GPs. For U.S. dollar fund LPs I have known over these years, they are the silent investors that don't involved in investment decisions, including reinvestments. The only requirement they have is to meet ESG (environmental, social, and corporate governance) goals. If I explain to them why we don't invest in certain areas. As long as the decision makes sense, LPs will agree with us. They understand that chasing the investment trend is not wise.

In conclusion, multiple factors contributed to the current dilemma between LPs and GPs. For GPs, they are fettered by many realistic constraints in many cases, which means their choices get distorted sometimes. But we have to make compromises to make money.

The PE/VC market is an ecosystem that relies on different participants to cooperate with one another, no matter the market works in the U.S. way or the Chinese way. In the past, I used to spend a lot of time explaining valuation adjustment mechanism to entrepreneurs, and brief U.S. investors about the situation in China. Because I believe understanding is the premise to make the right choice. If you don't want to make long-term investments, you should choose a Pre-IPO fund. But in that case, the multiple won't be high. It is unrealistic to want it all.

(Kevin is the pseudonym required by the interviewee)

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