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Digital Gordian Knot, Trade, 11.11: a Special Weekend Edition of Weekly Highlights
Intelligence and Insights on China's government actions, foreign policy, economy and the capital market
Letter from the Editor
This week, China has demonstrated its willingness to rein in its tech giants such as Alibaba, Tencent, and ByteDance to preserve the spirit of digital competition, vital to safeguarding innovation, one of China’s pivotal policy goals. China introduced an Antitrust Guideline draft aiming at digital and tech behemoths. Designing well-functioning guidelines, however, won’t be an easy task: the Chinese new economy is propelled by the power of technology. It has been made clear by this year’s Nov. 11 e-commerce shopping spree (Chinese equivalent of Black Friday) which is record breaking both in terms of transaction volumes and participation.
By choosing to put its digital giants in checks and balances, China sliced a Gordian knot in its development path: digital governance has been a notorious puzzle for regulators across the globe. Not only is there no existing path to follow here as China is at the forefront of digitalization and thus one of the fist countries developing a substantial legal framework for the digital era, the digital economy has disruption inscribed in its DNA.
“Governments of the Industrial World, you weary giants of flesh and steel, I come from Cyberspace, the new home of Mind. On behalf of the future, I ask you of the past to leave us alone.”
— declared John Perry Barlow in defiance in A Declaration of the Independence of Cyberspace, 1996
The monumental task is in the hands of Chinese policymakers, and sympathy for them is found even on the other side of the fence. When asked about Ant Group IPO’s unexpected overhaul, founder of $ 138 billion hedge fund, Ray Dalio commented, “almost always, I found them (Chinese regulators) to be reasonable, caring, and highly informed people, who are now in an environment changing at an extremely fast pace. ”
As we discussed in previous weekend newsletters, Socialism with Chinese characteristics remains yet to define, with the authority’s recent moves to set boundaries on digital frontier, be it the recent regulation on micro-lending, revised Data Security Law, or prevention of digital monopoly, China, in the current era, is signaling its will to place social inclusion above wealth accumulation. Let its digital flagships serve the society in exchange for years of favorable, emboldening digital competitive landscape.
With the election opening a door to possibility and uncertainty, China remains cautious and expects tensions with the US will continue to increase, although at a slower pace. This cautiousness is indeed not only found in China’s foreign policy expectations but also directly impacts its domestic policy planning: the proposal for the 14th FYP puts a strong emphasis on self-sufficiency, a theme that once more appeared in an outline on China’s goals for the coming five years presented by the renowned Chinese scholar Yao Yang.
What then remains of globalization to which China reiterated its commitment? By the time you read our newsletter, a gigantic regional integration framework is set in motion: the largest free trade bloc in the world, the Regional Comprehensive Economic Partnership (RCEP) has gone through 8 years of negotiations, and negotiating parties, China, Japan, ASEAN, Republic of Korea, Australia, New Zealand, have achieved consensus in the agreement. Furthermore, Chinese Deputy Minister of Commerce revealed China’s will to join the pact by the end of 2020, meaning that China will stay true to the spirit of free trade. Representing 45% of the world’s population, some of the youngest nonetheless, and 40% of the global trade, the world will see a stronger emergence of the Asian Century.
Amidst mounting global uncertainties with prolonged economic lockdowns in the coming months, and a US election that defines the destiny of America, China seems to be on the side of calm and resolution. It is embracing the external world in a stronger, assertive posture.
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I. National Development
Key Messages at the China Development Forum
On Agricultural Security
Han ChangFu, Minister of Agriculture and Rural Affairs,stated that “China’s agricultural security is at its best in history.”
China’s crop supply per capita is at around 470 kilograms per annum, running higher than the 400 kilograms per annum global standard for food security.
On 5G and Applications
Liu Liehong, vice minister of Ministry of Industry and IT, introduced that:
700,000 5G base stations have been established, a scale more than twice as big as the 5G stations in the rest of the world ex-China combined.
5G connections have already reached 180million in China.
5G infrastructure has already enabled new technology applications and ecosystems, including 5G+online education systems, AR/VR education, and holographic classrooms.
On Consumption and Urbanization
Tang Dengjie, Deputy director of the NDRC briefed that:
Consumption has contributed over 60% to China’s GDP growth since 2016.
China’s urbanization has reached 60%. 850 Million people live and work in China’s urban areas.
on further financial liberalization of the factors market
Tang Dengjie, deputy director of the NDRC, explained that China explores to expand the scope of financing options for companies, including:
Supply chain financing by the large companies for its upstream and downstream suppliers;
Accounts receivable, inventory, invoice, and lease right financing;
Energy use rights, carbon emission rights, pollution emission rights, energy performance contract financing;
IP rights and trade mark financing.
II. Tech Governance
Antitrust Guideline Takes Aim at China’s Digital Giants
A day before the Chinese 11.11 Singles’ Day shopping spree, China State Administration for Market Regulation launched draft Antitrust Guidelines for the Digital and internet giants.
This is the first time the market regulator in China has attempted to define what constitutes anti-competition practices among internet companies under the law.
E-commerce, online food delivery service and ride hailing apps will be the center of the storm by the antitrust act. Alibaba, Tencent and Meituan (ATM stocks), China’s e-commerce, gaming & social media, and online food delivery giants respectively, have collectively shrunk by $100 Billion in market cap on the Hong Kong Stock Exchange on the news.
What do the Antitrust clauses address?
The Antitrust guideline focuses on monopolistic contracts, price-abusing behaviors, limitations to new market entries, and government interventions to market mechanisms.
In the Chinese context, the draft law targets specifically
internet companies who force vendors to agree to mutually exclusive platform contracts;
varied prices offered to different consumers based on their consumption patterns, big data algorithms, and data manipulations;
rebates, discounts, and subsidies that contribute to market monopoly.
The New Issues with Digital Companies
Industry monopolies have traditionally been determined by market shares or revenue. The challenge for the digital economy is that monopolies might arise from the ownership of information and data, which do not immediately translate to market share or revenue. Chinese government is now trying to update its laws for the internet era, which might be among the world’s first due to the scale of its digital economy and the massive Digital ecosystems run by dominant platforms.
The antitrust draft specifically state that companies under VIE structures must abide by China’s antitrust rules. Alibaba, Tencent, Meituan, as well as some of the biggest Chinese Internet companies have adopted a VIE structure in order to list overseas.
This is the second draft, following the data security law, that China clearly states that VIE-structured companies must comply with the same law of the land.
China’s Path to Rein in the Power of the Digital Giants
Data security draft law restricts Chinese companies from exporting technologies and data that threaten China’s national security. Many believe it was a measure to prevent TikTok’s sale of its sensitive algorithmic technologies and data contained in the technology to the US Oracle consortium.
Representatives from Alibaba, Tencent, TikTok-owner ByteDance, and 24 other tech giants attended a meeting with regulators from the antitrust and cyberspace authorities earlier this month to discuss issues ranging from unfair competition to counterfeiting. “Internet platforms are not outside the reach of antitrust laws, nor are they the breeding ground for unfair competition.” (read more)
On November 2, Chinese regulators summoned Ant Group’s controlling representatives, which led to the suspension of the record-breaking dual listing.
III. Tech Power
583,000 Orders Per Second! What Can This Year’s 11.11 Sales Tell You?
Unlike traditional Double 11 sales, this year, China’s Double 11 shopping season started on November 1 through November 11. Half way through 11.11, sales volumes have broken historic records. However, it is unclear how the day’s sales revenue compares to that of 2019, due to the calculation of this year’s double 11 sales from November 1-11. The belief is that this year, while volumes continue to hit records, price may be suppressed in order to drive volume.
Real time records this year ( by 1am on November 11)
The peak volume on Tmall, Alibaba's e-commerce platform, hit 583,000 per second, 1,457 times the volume comparing to the first Double 11 in 2009. Resource costs per 10,000 transactions fell by 80% compared to 4 years ago.
Since the start of the shopping spree on November 1, sales hit 372.3 billion yuan ($56.3 billion) by 12:30am on November 11, about 1.4 times of the sales recorded on Double 11 2019.
Unlike previous years, Tmall did not display real-time transaction data.
250,000 brands and 5 million merchants participated in this year’s Double 11, including more than 2 million offline merchants. The number of items on discount totaled 14 million, 1.4 times that of last year.
Other e-commerce platforms:
Suning Tesco reported a 72% increase in online orders in the first hour.
In 9 minutes, total transactions exceeded 200 billion RMB on JD.com.
In 7 seconds, Huawei Mate40 series exceeded 100 million RMB ($15.4M) in sales on JD.com.
In 50 minutes, Xiaomi announced total sales of over 2 billion RMB.
Longer shopping season
This year’s shopping season spans over two periods, the first is from November 1 to 3, and the second on November 11. It is understood that
this is to accommodate an estimated 800 million shoppers for the Season, compared to 500 million shoppers in 2019.
this offers the flexibility to further stimulate consumption following COVID-19.
this also relieves the pressure on merchandising supply chain and logistics. (read more in Chinese)
Shanghai, Zhejiang, Beijing, Jiangsu and Guangdong saw highest growths in tourism-related services sales (旅游（产品）目的地成交额). (read more in Chinese)
Beijing ranks the highest on per capita consumption today. (read more in Chinese)
According to Tmall data, from 0:00 am on November 1st to 0:35 am on November 11th, 342 brands have achieved over 100 million RMB in total transactions. Among which, 13 brands have exceeded 1 billion RMB, including consumer electronics brands Apple, Huawei, Midea and Haier.
Top 5 sales categories: (read more in Chinese)
Electronics: Haier, Midea, Siemens, Gree and Xiaomi.
Beauty: Estee Lauder, Lancome, L 'Oreal, Empress, Olay.
Mobile phones: Apple, Xiaomi, Huawei, Honor, Vivo.
Home appliances: Midea, Dyson, Coworth, Supor, Joyoung.
Digital: Apple, Lenovo, Huawei, Xiaomi, Asus.
III. International Relations
China Aims at Sealing the RCEP by Year End
Deputy Minister of Commerce, Qian Keming, confirmed that China aims to complete the RCEP signing by year end.
Assistant Minister of Commerce Li confirmed further that all negotiations leading to the signing of the RCEP have been completed. All legal review of the draft agreement is also complete. The current plan is to complete the RCEP signing in the upcoming RCEP/East Asia Leadership Conference.
The Regional Comprehensive Economic Partnership was initiated as a regional free trade agreement by the 10 ASEAN countries in 2012. 6 other regional economies, Australia, India, China, Japan, ROK, New Zealand, also received invitations to join the RCEP.
Timing for the Signing
The hope is that the RCEP will be formally signed at the 4th RCEP Leadership Summit on November 15.
China’s relationship with ASEAN
Chinese Premier Li Keqiang’s key messages at the 23rd ASEAN-China Summit.
China-ASEAN trade and investment continue to rise in 2020. ASEAN has already surpassed the EU to become China’s largest trading partner in 2020.
China sees ASEAN as the regional diplomatic priority, and supports the key role ASEAN holds in the region.
Yao Yang on China’s Economy and Geopolitics
Yao Yang, a renowned Chinese policy scholar and dean of Peking University’s National School of Development, has outlined a number of policy priorities for China in the coming 5 years.
“Double Circulation” is not new to China.
The "double circulation" economic model began to emerge since China acceded in the World Trade Organization in 2001. From 2001 to 2008, the international economic cycle took off. China’s exports increased five-fold with an average annual growth rate of 29%, while foreign exchange reserves also surged.
Following the 2008 Global Financial Crisis, China has gone through significant structural changes in its economy. Net exports contributed less to overall GDP, even negligible in some years, whereas consumption took up a larger proportion in GDP.
Medium- and Long-term Trends of China's Economic Development (full speech)
Key technology self-reliance will be the top priority.
On the goal of 70% self-sufficiency in chip production outlined in Made in China 2025, China will likely achieve chip production self-sufficiency in 40nm chips, which will equate to about 80% of the total chip demand in China.
From this point of view, China’s 70% goal in chip independence, as laid out in Made in China 2025, is obtainable, but its obtainment is unbalanced. It does not address China’s high-end chip insufficiency.
Urbanization over the 14th FYP
China’s official urbanization rate of 60% includes the migrant population who work in the cities without a proper city residency status. If migrant population are excluded from urbanization statistics, China’s urbanization rate would be less than 45%.
Rural labor force accounts for only 28% of China’s labor force.
China’s goal is to reach 75%-80% urbanization rate by 2035. In order to reach this goal, urbanization rate should grow at 1.3% per annum during the 14th FYP. This will far exceed the average urbanization growth rate around 1% over the past 40 years.
Based on statistical evidence, urbanization is far from saturation, and the speed of urbanization required in order to reach China’s socialist modernity by 2035 remains challenging.
Regional development rebalance over the 14th FYP
Wuhan, XI’an, Xian’yang, Chengdu and Chongqing will be the growth drivers of Western economic development.
during the 2018-2019 era, deleverage has “harmed” the western region more than the coastal region, which exacerbated the regional development gap.
Rebalancing the regional development during the 14th FYP will be a key task.
Belt and Road Initiative (BRI) should be Institutionalized with a physical organizational presence.
BRI should perform the counterpart role of the “OECD” for the developing countries or South-South cooperation.
“While many countries in Europe have been active partners in China’s BRI, why not follow the trend and establish the headquarter of the BRI in Europe? BRI will be an open multilateral organization. A European headquarter will give China more power in defending its global open architectural agenda.”
“Many worry that this will be an overtly high profile move. Today, China must realize that it is no longer feasible for China to go back to “hide your brightness and bide your time.” (read more in Chinese)
U.S. Marines Training in Taiwan for the 1st time
On November 9, U.S. Marines officially arrived at the invitation of Taiwan’s military and will provide training for the Taiwanese military in assault and infiltration missions. This is the first U.S. Marines training in Taiwan since 1979. (read more)
The training was hosted at the Tsoying Naval Base in Kaohsiung. The Navy Command said that “this is a routine Taiwan-U.S. military exchange and cooperation training,” aiming at maintaining regional peace and stability. The training would improve the combat capabilities of the troops. (read more)
This was the first public acknowledgment of U.S. Marines training in Taiwan, though the U.S. sent small units of elite troops to Taiwan for joint training on an annual basis without any public announcement. (read more)
The U.S. approved several arms sales to Taiwan in the past two months, which has already provoked China. The training might further deteriorate the relations between the two countries.
A US$600 million arms sales including MQ-9B Reaper drones, anti-ship missiles, and associated equipment and program support. (read more)
More than US$13 billion sales including F-16 fighter jets, M1A2T Abrams tanks, Stinger anti-aircraft missiles and MK-48 Mod6. (read more)
On October 13, the sales of three advanced weapons systems to Taiwan, including the Lockheed Martin-made High Mobility Artillery Rocket System, a truck-mounted rocket launcher; the Boeing-made precision strike missile Standoff Land Attack Missile-Expanded Response, and external sensor pods for Taiwan’s F-16 jets. (read more)
On October 22, more than $1Billion sales of advanced weaponry for Taiwan. (read more)
On October 26, US$2.4 billion more potential arm sales including 100 Boeing-made Harpoon Coastal Defense Systems. The Harpoon Coastal Defense Systems comprise 400 RGM-84L-4 Harpoon Block II Surface Launched Missiles to service as coastal defense cruise missiles. (read more)
However, it is expected that a possible Biden presidency will usher in “a balanced strategy” to handle the tension along the Taiwan Straits, and would not provoke China by crossing a red line. (read more)
There is no official comment from Beijing on the Marines training at this moment.