December 30, 2024 • 12 mins
State Directed Business Extortion, Offshoring Concerns, the Low-altitude Sector, & US-China: Trade War 2.0
China Update provides listeners with the most up to date political, economic, and geostrategic analysis on China - so that you are on top of the world's number 2 economy. These podcasts are based on hundreds of articles, think tank reports, government statements and other resources in English and Chinese every week. The views and analysis are all my own and I produce the podcasts.
My Patreon: https://www.patreon.com/chinaupdate
Disclaimer: China Update is not a financial advisory channel. While I take great care in researching everything discussed in these podcasts, nothing I say should be taken as investment advice. Please speak to a professional before making any investment decisions. #China
China Update provides listeners with the most up to date political, economic, and geostrategic analysis on China - so that you are on top of the world's number 2 economy. These podcasts are based on hundreds of articles, think tank reports, government statements and other resources in English and Chinese every week. The views and analysis are all my own and I produce the podcasts.
My Patreon: https://www.patreon.com/chinaupdate
Disclaimer: China Update is not a financial advisory channel. While I take great care in researching everything discussed in these podcasts, nothing I say should be taken as investment advice. Please speak to a professional before making any investment decisions. #China
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Happy Monday, everybody. Welcome to another episode of China Update,
where I provide you with the most up to dated political, economic,
and geostrategic analysis on the world's number two economy. My
name is Tony. Let's jump in. The story we're being
following closely for several months now on China Update is
how China's central government is grappling with a surge and
detentions from local governments of business executives, a troubling trend
(00:24):
which even I myself was initially quite shocked with that
is stoking anxiety among entrepreneurs and threatening economic stability across
the country. It is also a troubling sign that Beijing
is losing control of many local actors. According to a
review of regulatory filings by the UK based Financial Times
published over the weekend in twenty twenty four alone, more
(00:46):
than eighty senior figures from companies listed on the Shanghai
and shun Jan stock exchanges were detained by local authorities.
Many of these detentions appear to be driven by local
authorities far removed more from the executive's business operations, a
practice which has been called by Chinese media long range fishing.
(01:08):
We recently discussed this on the Channel. In one instance,
an official report from Guangdong revealed that nearly ten thousand
companies in Guangzol, the provincial capital, had faced enforcement actions
from other regions since twenty twenty three, often with a
profit seeking motive. Premier Elitiang has pledged stronger oversight of
(01:29):
local law enforcement, emphasizing the need to address abuses of
administrative power and their adverse impact on businesses. Yet fears
persist among entrepreneurs who describe an environment where short term
profit taking and capital flight are becoming the norm. The
opaque nature of these enforcement actions compounds the issue. Families
(01:49):
and companies often received little to no information about the
status of detained executives. Jijiangwire's technology, for example, has struggled
to respond to regulators about its CEO et detention in January.
Almost a year later, year remains in custody with no
formal updates. Local governments facing declining revenues and land sales
(02:09):
and a slowing property market are under tremendous financial strain,
and US believe that this is fueled the detentions, with
authorities allegedly targeting wealthy individuals and businesses to extract fines.
As we have discussed before, If true, this would be incredible.
Bankrupt local governments are essentially cannibalizing the private sector, turning
(02:30):
to kidnapping and extortion to make ends meet. This goes
to show just how bad the situation is fiscally speaking.
In many localities. These practices are eroding trust in the
business environment and destabilizing local economies. Eugene Wong, a Suha
based lawyer, speaking to The Financial Times, expressed last week quote,
(02:51):
the sense of anxiety has gone beyond imagination. Detentions discourage
long term investments and exacerbate economic challenges, including reduced tax
revenues and rising unemployment. While some regions, such as Jejiang
have taken steps to protect businesses without significant changes, the
(03:12):
ongoing wave of detentions risks undermining China's economic recovery and
the confidence of its private sector. Johnny's financial media outlets
I send, writing on this issue over the weekend, pointed
to legal loopholes as one of the culprits. Writ While
cross regional law enforcement was necessary to address Internet financial crimes,
the current criminal procedure system lacked mechanisms to handle such cases. Effectively.
(03:36):
This gap, coupled with profit driven motives, has led to
local law agencies increasingly engaging in cross regional enforcement. If
a county level public security bureau recruits a few officials
skilled in computer networks, they could collect evidence online and
dispatch officers to economically developed areas to arrest entrepreneurs. In
(04:00):
the theory, a single criminal detention order could bring down
an internet company worth hundreds of billions next up. For decades,
China leveraged foreign capital and technology to build a dominant
manufacturing sector, fueling exports and reshaping global trade. Now the
(04:22):
tide has turned. Chinese manufacturers are offshoring at an unprecedented scale.
In the year to June, Chinese firms invested a record
one hundred seventy seven billion US dollars in overseas non
financial assets, largely in green field projects across emerging markets.
The shift mirrors Japan's nineteen eighties off shoring wave, but
(04:43):
brings unique challenges. Driving this exodus are rising domestic labour costs,
shrinking profit margins, and American tarrace, which incentivized relocating production
to duties. China's firms are targeting Southeast Asia, investing in
electric vehicle, computer chips, and other high value industries. Countries
(05:03):
like Vietnam, Indonesia, Malaysia, and Thailand have become key hubs,
benefiting from capital inflows and new infrastructure. However, these investments
have sparked tensions. Recipient nations criticized Chinese firms for limiting
technology transfer, hiring few local workers, and relying heavily on
Chinese imports. For instance, Malaysia struggles to enforce rules requiring
(05:25):
an eighty twenty split of local to foreign workers. The
imbalance extends to trade. Asian countries. That is, the Association
of Southeast Asian Nations run a one hundred and forty
four billion US dollar trade deficit with China in the
first ten months of twenty twenty four. Domestically, China fears
the so called hollowing out of its manufacturing sector. Policymakers
(05:48):
worry that offshoring could destabilize local economies, increase unemployment, and
eroad supply chain dominance, while relocating low value production might
enable China to focus on high value goods. Local governments
are resisting To mitigate these challenges. China's government is promoting
industrial relocation to its poorer interior regions. Yet the ruling
(06:10):
party remains wary of over reliance on external markets. As
global dynamic shift, balancing domestic economic priorities with international ambitions
will be critical. The stakes are very high. Though politics
pushed firms abroad, but it might also bring them back. Meanwhile,
China has established a new department to oversee its burgeoning
(06:32):
low altitude economy, signaling a significant push toward expanding this
innovative sector as a key growth driver for twenty twenty five.
The Low Altitude Economy Development Division, unveiled by the National
Development and Informed Commission over the weekend, aims to craft
long term strategies, coordinate major initiatives, and provide policy guidance
(06:53):
for the industry. This marks a rare instance of the
NDRC dedicating a division to a specific industry, emphasizing the
sector's importance to China's economic future, or at least its
importance in the eyes of top leadership. The low altitude
economy refers to crude and uncrude aerial activities below one
(07:14):
thousand meters, such as drone deliveries, air taxis, and agricultural
applications like crop spring with the potential to extend to
three thousand meters, depending on regional needs. The sector promises
to revolutionize logistics, civil aviation, and urban transportation. That is
the hope at least. Key priorities for the new division
(07:34):
include developing low altitude infrastructure, enhancing air traffic management systems,
and fostering sustainable industrial growth. The sector aligns with General
Secretary Sugimping's focus on so called new quality productive forces,
which emphasizes technological innovation and self reliance. Valued at over
five hundred billion yen seventy billion US dollars in twenty
(07:58):
twenty three, China's low edgod economy is projected to reach
two trillion yen by twenty thirty, making the next three
years critical for its development. Beijing views the sector as
pivotal to revitalizing its slowing and crisis Britain economy. Next Timple,
we have one more development to cover, but it's quickly.
If you're getting some value from today's episode of China Update,
(08:20):
I have a huge favor to ask. That is, just
to hit the like button. And if you have not
done so already and you think you'd watch another one
of these episodes, subscribing is also a big help Patreon
and buy me Coffee links are also in the description
below for those who want to help keep the channel
financially sustainable. There is also now bonus extra content for
these supporters. Indeed, one new episode for exclusive members went
(08:43):
up last night. These videos, of course, are bonuses. However,
regular episodes of China Update will continue to be open
and free for all six days a week. Thank you
so much everybody for the ongoing support, and finally for today. Yesterday,
US based The Wall Street Journal published a good piece
called China has Limited Firepower to counter U s tariffs,
(09:06):
touching on several themes we have covered in China Update
in recent weeks as it relates to how China will
respond to what will likely be a trade war two
point zero with a second Trump administration in the wake
of the recent US elections. In growing trade tensions, China
has showcased an array of potential retaliatory measures, from restricting
critical mineral exports to targeting American companies operating in the country. However,
(09:30):
analysts warn that deploying these tools to aggressively could backfire
on Beijing, accelerating efforts by the US and its allies
to reduce reliance on the Chinese economy. Beijing's export controls
on minerals like gallium and germanium, crucial for semiconductors and
solar cells, are a key part of the strategy. These
moves follows similar restrictions on parts for drones and advanced electronics,
(09:55):
seen as countermeasures to US policies limiting China's access to
memory chips and artificial intelligence technologies. Yet such actions could
raise global prices, encouraging rivals to develop alternative supply chains
and reducing China's dominance. China's investigations into US companies such
as Nvidia and its unreliable entry list targeting firms like
(10:18):
PVH highlight another approach. However, with China's sluggish economy and
its push to prioritize domestic brands, American corporations are already
scaling back operations, diminishing Beijing's leverage. China could further escalate
by weakening its currency or restricting exports of low value
goods like screws and cables, which could disrupt US supply chains.
(10:40):
Yet these moves also risk capital flight and consumer backlash.
The most extreme option, selling US treasury holdings could destabilize
financial markets, but would also leave Beijing with limited alternatives
for reinvestment. Analysts believe Beijing will likely avoid such drastic measures. Instead,
Beijing's actions may aim to force negotiations with the US,
(11:02):
particularly if President elected Donald Trump follows through on his
promise to impose steep tariffs. However, every aggressive move risks
pushing other nations to decouple further from China, threatening its
export driven economic model. Thus, next year, if the world
is pushed to more confrontation through a new trade war,
(11:23):
Beijing has limited tools in its toolbox. What's more, as
we have covered in recent weeks, China's economy is in
a far weaker position to find back than it was
during the first Trump administration. It is going to be
a complex and painful year for China's policy makers. It
is going to be an interesting one too on the
world stage, and we will be following it closely here
(11:45):
as it unfolds on China Update. So if you'd like
to follow along on the ride, make sure you're subscribed
and we will follow along together. Okay, that is today's
episode of China Update. Thank you so much much everybody
for watching. Have a good Monday, and I will see
you all tomorrow,
Happy Monday, everybody. Welcome to another episode of China Update,
where I provide you with the most up to dated political, economic,
and geostrategic analysis on the world's number two economy. My
name is Tony. Let's jump in. The story we're being
following closely for several months now on China Update is
how China's central government is grappling with a surge and
detentions from local governments of business executives, a troubling trend
(00:24):
which even I myself was initially quite shocked with that
is stoking anxiety among entrepreneurs and threatening economic stability across
the country. It is also a troubling sign that Beijing
is losing control of many local actors. According to a
review of regulatory filings by the UK based Financial Times
published over the weekend in twenty twenty four alone, more
(00:46):
than eighty senior figures from companies listed on the Shanghai
and shun Jan stock exchanges were detained by local authorities.
Many of these detentions appear to be driven by local
authorities far removed more from the executive's business operations, a
practice which has been called by Chinese media long range fishing.
(01:08):
We recently discussed this on the Channel. In one instance,
an official report from Guangdong revealed that nearly ten thousand
companies in Guangzol, the provincial capital, had faced enforcement actions
from other regions since twenty twenty three, often with a
profit seeking motive. Premier Elitiang has pledged stronger oversight of
(01:29):
local law enforcement, emphasizing the need to address abuses of
administrative power and their adverse impact on businesses. Yet fears
persist among entrepreneurs who describe an environment where short term
profit taking and capital flight are becoming the norm. The
opaque nature of these enforcement actions compounds the issue. Families
(01:49):
and companies often received little to no information about the
status of detained executives. Jijiangwire's technology, for example, has struggled
to respond to regulators about its CEO et detention in January.
Almost a year later, year remains in custody with no
formal updates. Local governments facing declining revenues and land sales
(02:09):
and a slowing property market are under tremendous financial strain,
and US believe that this is fueled the detentions, with
authorities allegedly targeting wealthy individuals and businesses to extract fines.
As we have discussed before, If true, this would be incredible.
Bankrupt local governments are essentially cannibalizing the private sector, turning
(02:30):
to kidnapping and extortion to make ends meet. This goes
to show just how bad the situation is fiscally speaking.
In many localities. These practices are eroding trust in the
business environment and destabilizing local economies. Eugene Wong, a Suha
based lawyer, speaking to The Financial Times, expressed last week quote,
(02:51):
the sense of anxiety has gone beyond imagination. Detentions discourage
long term investments and exacerbate economic challenges, including reduced tax
revenues and rising unemployment. While some regions, such as Jejiang
have taken steps to protect businesses without significant changes, the
(03:12):
ongoing wave of detentions risks undermining China's economic recovery and
the confidence of its private sector. Johnny's financial media outlets
I send, writing on this issue over the weekend, pointed
to legal loopholes as one of the culprits. Writ While
cross regional law enforcement was necessary to address Internet financial crimes,
the current criminal procedure system lacked mechanisms to handle such cases. Effectively.
(03:36):
This gap, coupled with profit driven motives, has led to
local law agencies increasingly engaging in cross regional enforcement. If
a county level public security bureau recruits a few officials
skilled in computer networks, they could collect evidence online and
dispatch officers to economically developed areas to arrest entrepreneurs. In
(04:00):
the theory, a single criminal detention order could bring down
an internet company worth hundreds of billions next up. For decades,
China leveraged foreign capital and technology to build a dominant
manufacturing sector, fueling exports and reshaping global trade. Now the
(04:22):
tide has turned. Chinese manufacturers are offshoring at an unprecedented scale.
In the year to June, Chinese firms invested a record
one hundred seventy seven billion US dollars in overseas non
financial assets, largely in green field projects across emerging markets.
The shift mirrors Japan's nineteen eighties off shoring wave, but
(04:43):
brings unique challenges. Driving this exodus are rising domestic labour costs,
shrinking profit margins, and American tarrace, which incentivized relocating production
to duties. China's firms are targeting Southeast Asia, investing in
electric vehicle, computer chips, and other high value industries. Countries
(05:03):
like Vietnam, Indonesia, Malaysia, and Thailand have become key hubs,
benefiting from capital inflows and new infrastructure. However, these investments
have sparked tensions. Recipient nations criticized Chinese firms for limiting
technology transfer, hiring few local workers, and relying heavily on
Chinese imports. For instance, Malaysia struggles to enforce rules requiring
(05:25):
an eighty twenty split of local to foreign workers. The
imbalance extends to trade. Asian countries. That is, the Association
of Southeast Asian Nations run a one hundred and forty
four billion US dollar trade deficit with China in the
first ten months of twenty twenty four. Domestically, China fears
the so called hollowing out of its manufacturing sector. Policymakers
(05:48):
worry that offshoring could destabilize local economies, increase unemployment, and
eroad supply chain dominance, while relocating low value production might
enable China to focus on high value goods. Local governments
are resisting To mitigate these challenges. China's government is promoting
industrial relocation to its poorer interior regions. Yet the ruling
(06:10):
party remains wary of over reliance on external markets. As
global dynamic shift, balancing domestic economic priorities with international ambitions
will be critical. The stakes are very high. Though politics
pushed firms abroad, but it might also bring them back. Meanwhile,
China has established a new department to oversee its burgeoning
(06:32):
low altitude economy, signaling a significant push toward expanding this
innovative sector as a key growth driver for twenty twenty five.
The Low Altitude Economy Development Division, unveiled by the National
Development and Informed Commission over the weekend, aims to craft
long term strategies, coordinate major initiatives, and provide policy guidance
(06:53):
for the industry. This marks a rare instance of the
NDRC dedicating a division to a specific industry, emphasizing the
sector's importance to China's economic future, or at least its
importance in the eyes of top leadership. The low altitude
economy refers to crude and uncrude aerial activities below one
(07:14):
thousand meters, such as drone deliveries, air taxis, and agricultural
applications like crop spring with the potential to extend to
three thousand meters, depending on regional needs. The sector promises
to revolutionize logistics, civil aviation, and urban transportation. That is
the hope at least. Key priorities for the new division
(07:34):
include developing low altitude infrastructure, enhancing air traffic management systems,
and fostering sustainable industrial growth. The sector aligns with General
Secretary Sugimping's focus on so called new quality productive forces,
which emphasizes technological innovation and self reliance. Valued at over
five hundred billion yen seventy billion US dollars in twenty
(07:58):
twenty three, China's low edgod economy is projected to reach
two trillion yen by twenty thirty, making the next three
years critical for its development. Beijing views the sector as
pivotal to revitalizing its slowing and crisis Britain economy. Next Timple,
we have one more development to cover, but it's quickly.
If you're getting some value from today's episode of China Update,
(08:20):
I have a huge favor to ask. That is, just
to hit the like button. And if you have not
done so already and you think you'd watch another one
of these episodes, subscribing is also a big help Patreon
and buy me Coffee links are also in the description
below for those who want to help keep the channel
financially sustainable. There is also now bonus extra content for
these supporters. Indeed, one new episode for exclusive members went
(08:43):
up last night. These videos, of course, are bonuses. However,
regular episodes of China Update will continue to be open
and free for all six days a week. Thank you
so much everybody for the ongoing support, and finally for today. Yesterday,
US based The Wall Street Journal published a good piece
called China has Limited Firepower to counter U s tariffs,
(09:06):
touching on several themes we have covered in China Update
in recent weeks as it relates to how China will
respond to what will likely be a trade war two
point zero with a second Trump administration in the wake
of the recent US elections. In growing trade tensions, China
has showcased an array of potential retaliatory measures, from restricting
critical mineral exports to targeting American companies operating in the country. However,
(09:30):
analysts warn that deploying these tools to aggressively could backfire
on Beijing, accelerating efforts by the US and its allies
to reduce reliance on the Chinese economy. Beijing's export controls
on minerals like gallium and germanium, crucial for semiconductors and
solar cells, are a key part of the strategy. These
moves follows similar restrictions on parts for drones and advanced electronics,
(09:55):
seen as countermeasures to US policies limiting China's access to
memory chips and artificial intelligence technologies. Yet such actions could
raise global prices, encouraging rivals to develop alternative supply chains
and reducing China's dominance. China's investigations into US companies such
as Nvidia and its unreliable entry list targeting firms like
(10:18):
PVH highlight another approach. However, with China's sluggish economy and
its push to prioritize domestic brands, American corporations are already
scaling back operations, diminishing Beijing's leverage. China could further escalate
by weakening its currency or restricting exports of low value
goods like screws and cables, which could disrupt US supply chains.
(10:40):
Yet these moves also risk capital flight and consumer backlash.
The most extreme option, selling US treasury holdings could destabilize
financial markets, but would also leave Beijing with limited alternatives
for reinvestment. Analysts believe Beijing will likely avoid such drastic measures. Instead,
Beijing's actions may aim to force negotiations with the US,
(11:02):
particularly if President elected Donald Trump follows through on his
promise to impose steep tariffs. However, every aggressive move risks
pushing other nations to decouple further from China, threatening its
export driven economic model. Thus, next year, if the world
is pushed to more confrontation through a new trade war,
(11:23):
Beijing has limited tools in its toolbox. What's more, as
we have covered in recent weeks, China's economy is in
a far weaker position to find back than it was
during the first Trump administration. It is going to be
a complex and painful year for China's policy makers. It
is going to be an interesting one too on the
world stage, and we will be following it closely here
(11:45):
as it unfolds on China Update. So if you'd like
to follow along on the ride, make sure you're subscribed
and we will follow along together. Okay, that is today's
episode of China Update. Thank you so much much everybody
for watching. Have a good Monday, and I will see
you all tomorrow,
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