Special Year-end Edition: Top 8 Trends in China 2021
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Special Year-end Edition: Top 8 Trends in China 2021
Intelligence and Insights on China's government actions, foreign policy, economy and the capital market
As a tradition, we bring you the top 8 trends in China 2021 in anticipation of significant shifts and changes China will continue to experiment with in the domestic and international arena.
Antitrust
Antitrust probes started formally in December against the nation’s biggest tech giants, including Alibaba, Tencent, and Meituan. The Central Economic Work Conference explicitly called for the strengthening of antitrust and a halt of the disorderly capital expansion for 2021. Antitrust has appeared in key policy documents at the provincial-level and ministerial-level work plans for 2021.
Antitrust will also place under scrutiny industries traditionally understood as natural monopolies, such as transportation, telecommunications, gas, water, and natural resources.
Self-Reliance
China will continue to drive for self-reliance at the top end of the global supply chain. This includes indigenous innovations from chip productions to seed productions. Innovation will take center stage in China’s supply-side economic transformation.
Capital Flow to the Stock Market
China will deepen capital market reform to support the rise of technology companies via direct financing from the capital market. The policy to reign in highly-leveraged borrowing by real estate developers will persist. 2020 saw more than 400 real estate companies falling into bankruptcies. The Chinese top economic planning body has named the Chinese real estate market as the “ grey rhino”- a predictable systemic risk - for the first time.
The asset management industry will usher in a golden era in China.
Monetary Policy Continues to Be Accommodative.
In 2021, infrastructure development will continue to be strong. Monetary policy will need to accommodate the expansionary activities. Boost in consumption will require a strong recovery of jobs and the rise in wages, particularly wages in the bottom tiers. This requires both accommodative monetary and expansionary fiscal regimes.
A Stable and Strong RMB
For China to turn itself into the world’s largest importer over the next 3-5 years, a strong currency serves its interest. In order to attract foreign investments into China’s equity and bond markets, a strong currency is also attractive. The managed floating rate regime can enable the currency to stay at a stable yet strong level.
China at the center of the global trade and investment blocs
The Regional Comprehensive Economic Partnership ( RCEP) and the China-EU Bilateral Investment Treaty place China at the center of the greater Asia Pacific and the Eurasian Landmass, forming a cohesive trade and investment region covering over 50% of global GDP.
China continues to invest strategically in Africa, highlighted by the recent signing of the China-AU Belt and Road Initiative. China is leading the global economic growth post-COVID-19, and indeed, the next phase of global multilateral development.
China will inch closer to economic parity status with the US.
China is on economic parity with the EU in 2020. China’s GDP is coming close to about 75% of the US in 2020.
China, in its 15-year Long vision, aims to double its GDP again by 2035. Economic parity will create a new framework of major power relationships in the current decade.
Narrow the Social & Income Gap
Wealth has become a monetary phenomenon. The rich are getting richer globally. China’s 14th Five-Year Plan includes plans for more robust wealth redistribution, rural land reform to benefit the rural population, and philanthropy as the second mechanism for wealth redistribution.
On Dec. 30, we sat down with 5 distinguished guests with expertise in international relations and exchanged views on China’s exterior posture and the complex environment awaiting China in 2021.
Our guests cautioned continuous turmoil ahead for the US-China relations. However, they see windows of opportunity in areas such as climate change.
From a developing world’s perspective, the guests also stressed the Belt and Road Initiative’s importance to igniting economic dynamics for Africa. It is perhaps the most important signature program for Africa, Mr. Chatterjee said.
Here is the live stream.
Policy
1. 10 Key Economic Tasks Highlighted in the Central Government Work Conference
Task 1: Strengthen national strategic technological power.
Task 2: Strengthen industrial supply chain independence and self-reliance.
Tasks 1 & 2 are the two sides of the same economic coin. These two top priorities speak clearly about China’s economic priority for 2021 to restore supply chain security via technology.
“强化国家战略科技力量”、“增强产业链供应链自主可控能力”分别排在了明年重点任务的第一位和第二位。
The Conference initiated a 10-Year Action Plan to drive basic Scientific Research.
会议提出“要抓紧制定实施基础研究十年行动方案.”
China will fully exploit a “whole-of-government” approach.
The country will establish a group of basic scientific research centers on an international and regional scale.
There are currently four comprehensive national scientific development centers in Shanghai Zhangjiang, Hebei, Beijing Huairou, and Shenzhen.
There are three international science and technology centers in Beijing, Shanghai, and the Greater Bay Area (GBA).
Future sci-tech innovation centers may gravitate towards Wuhan, Nanjing, Chengdu, and Xi’an.
Task 3: Emphasize antitrust for internet giants and control the ruthless expansion of the power of capital.
The meeting proposed to strengthen antitrust and prevent the disorderly expansion of capital due to the lack of necessary legal norms, binding the duties and rights of internet companies.
The country will set up legal frameworks to identify companies who violate antitrust laws, collect and manage data, and protect consumer rights. Regulation and supervision will be strengthened to prevent antitrust and unfair competition.
强化反垄断和防止资本无序扩张……要完善平台企业垄断认定、数据收集使用管理、消费者权益保护等方面的法律规范。要加强规制，提升监管能力，坚决反对垄断和不正当竞争行为。
Task 4: Effectively solve acute housing issues in big cities.
Much of the emphasis was placed on the development of a vibrant rental market.
Detailed policies include:
The development of low-income housing;
Lower the tax burden on home rentals, supervise rental market pricing and regulate rental market behaviors.
Establish the legal framework to ensure long-term renters enjoy equal public services and benefits as homeowners.
The development effort will prioritize rental housing constructions. Land for rental housing development will be separately budgeted.
A vibrant rental market can effectively suppress the real estate market speculation to effectively guide investments from the real estate market into technological innovation and research.
Task 5: Manage seed and arable land supplies and ensure agricultural security.
To address food security, China is strengthening the protection and utilization of germplasm resources and the construction of seed banks. Seeds should be considered "chips" of modern agriculture. China is a net seed importer. It spent RMB 3.2 billion in 2018, importing 72,700 tons of seeds. China aims to achieve seed independence by key partnerships with BRI countries, considering the risks of further decoupling with the US. ”
Task 6: Actively consider joining the Comprehensive and Progressive Trans-Pacific Partnership Agreement (CPTPP).
CPTPP is the successor of the TPP, created after the US withdrew from the TPP under the Trump administration. If the US re-joins the CPTPP, this free trade mega pact will occupy nearly half of the global economy, currently leaving China out of it. China aims to match the missing requirements and actively consider joining the agreement when conditions allow.
The economic benefits the CPTPP brings to China will far surpass that of the RCEP.
The entry standards for the CPTPP, environmental standards, labor rights protection, and investor/national arbitration mechanisms, for example, are very high.
SOE’s competitive neutrality principle will require China to reduce the fiscal subsidies, preferential loans, and land treatments to SOEs.
Task 7: Firmly Combate debt evasion.
罕见强调“打击各种逃废债行为”。
Debt defaults have recently caused a massive shock to the bond market, highlighting signs of debt evasions by some leading SOEs in China.
The central government shows “zero tolerance” towards the evasions of credit obligations by SOEs. The country aims to punish all "debt evasions" by state-owned and private enterprises alike.
Before Yongmei’s default, Bloomberg data showed that an average of 4-5 bonds had been issued in Henan every week this year. But after November 10, four local SOEs were forced to cancel their bond issuance. The bond issuance market has been at a standstill for four consecutive weeks, damaging the local entities' capital raising capacity.
Task 8: Develop new energy.
China aims to achieve carbon neutrality by 2060. Green and low-carbon policies will impact the entire economic system. During the energy transition period, power rationing could occur in specific provinces.
The "dual-energy control" and "pollution prevention and control" measures have not yet been relaxed, indicating the consistent path to long-term environmental targets.
Task 9: Stability of fiscal and monetary policies.
A prudent yet flexible monetary policy stance is expected to continue in 2021 to ensure the stability of recovery and economic growth. China's GDP is widely expected to rebound with an 8% growth in 2021.
Therefore, the macro policy tone is to “maintain continuity, stability, and sustainability, continue to implement proactive fiscal policies and prudent monetary policies, and maintain the necessary support for economic recovery."
China aims to improve the quality, efficiency, and sustainability of proactive fiscal policy. This year, China’s fiscal deficit rate exceeded 3% for the first time, to an estimated 3.6%, equivalent to a fiscal deficit of RMB 3.76 trillion. The fiscal deficit is expected to reduce in 2021.
Task 10: The change of phrase from "Demand-Side Reform" to "Demand-Side Management."
A Politburo meeting a week ago highlighted the need for “demand-side reform.” In the Central Economic Work Conference, the phrase is adjusted to “demand-side management.”
The central economic work conference confirmed that the primary economic reform continues on the supply side, not the demand side. However, given the economic reality in 2020, severe demand shock requires more active demand-side management. (read more)
2. Rural & Agricultural Conference Names Rural Revitalization China’s Foundation
The foundation of China’s modernization (socialist modernity) lies in the revitalization of China’s rural region. President Xi Jinping spoke at China’s annual Agricultural and Rural Work Conference on the 28th.
Below messages were highlighted:
Rural and agricultural development is the key to all tasks over the 14th FYP.
Use a whole-of-the-Party, whole-of-society approach to revitalize the rural region.
Improve agricultural efficiency and agricultural quality;
Create appealing working and living conditions for the rural population;
Ensure wealth and affluence for the rural population.
坚持把解决好“三农”问题作为全党工作重中之重，举全党全社会之力推动乡村振兴，促进农业高质高效、乡村宜居宜业、农民富裕富足。
What do the messages imply?
Further investment in industrial upgrade and technological enhancement in agricultural production will be further deployed;
Income disparity will be addressed by lifting the income levels of the rural population;
Rather than creating working opportunities in urban areas, China will drive the creation of local non-agricultural jobs in rural regions.
3. Antitrust Features Prominently in China’s Policy in 2021
China is moving swiftly and firmly into antitrust probes and regulations in technology, finance, data-related sectors, and industry concerning people’s livelihoods.
In their respective annual conferences for 2021, ministers and provincial governments have placed “antitrust” prominently as a key government initiative in 2021.
Zhejiang, Sichuan, and Anhui provinces have all featured “antitrust” prominently in their provincial annual economic work documents for 2021.
The antitrust probes extend beyond internet companies.
The State Council has issued antitrust guidelines for the automobile industry.
Gas, water, raw materials sectors are also under antitrust scrutiny.
The Ministry of Transportation announced its plan to enforce antitrust in the transportation industry in 2021 on December 24.
The Antitrust phase has already started.
China imposed the first three fines on antitrust grounds on Alibaba, China Literature Ltd., and a Tencent-invested entity on December 14. The central investigative team has just completed antitrust investigations at Alibaba.
4. Alibaba and Ant Group Came under Regulatory Crossfire
Alibaba Group Holdings Ltd has been subject to an investigation by the State Administration for Market Regulation over suspicions of monopolistic practices. The central regulatory investigative teams were in Alibaba's Hangzhou headquarter over the weekend and have completed all investigations.
It is believed that the central government investigative envoys also arrived at Tencent and Meituan headquarters concurrently.
The Investigation
The State Administration of Market Regulation, the antitrust watchdog agency, said in a statement that it recently commenced investigations into Alibaba for suspected monopolistic conduct such as “forced exclusivity.”
This practice refers to the commercial clause TMall engages that requires vendors to commit to platform exclusivity when signing up for Tmall’s services. Mutual exclusively ( “二选一”) is the term used in the commercial clause.
“Alibaba will actively cooperate with the regulators on the investigation,” the company, which owns the South China Morning Post, said in a statement. “Company business operations remain normal.”
The Future of Alibaba
This is a test of whether Alibaba has been thriving due to its competitive advantage or due to its close marriage with capital and its monopolistic position in the market.
South China Morning Post, a newspaper owned by Alibaba, writes that Alibaba can retain most of its present market share rather than lose it, [even if] growth will slow down.
In the long run, the investigation is good for the e-commerce industry and will prevent some big players from sprawling quickly.”
We have seen precedence that when capital acted irresponsibly to the extent that it jeopardizes financial stability, these market players have either fallen under or significantly deleveraged. HNA Group, Anbang Insurance, and Wanda are all previous examples.
This wave of the government crackdown on internet monopolies will likely reduce the balance sheets of some of China’s leading tech companies and their market shares in key digital areas.
5. Fintech Companies Remove Deposit Products as Regulation Looms
This is the central government's second clear gesture to put a firm red line to confine China’s fintech development under central regulatory watch, following the sudden halt of the record-breaking Ant Group dual-listings in November.
In a matter of days, Alibaba’s Alipay, followed by at least 8 large fintech firms in China, has removed their Internet deposit products, including Tencent’s Licaitong (腾讯理财通), JD Digits (京东金融), Baidu’s Du Xiaoman Financial (度小满金融), Ping’An’s Lufax (陆金所App), Tianxing Finance (天星金融), Ctrip Finance App (携程金融), Didi Finance App (滴滴金融), and 360 You Wealth (360你财富).
Big tech companies created their fintech arms and offer high-yield deposit products in partnerships with regional commercial banks through their apps. However, most online financial products fail to comply with current financial regulations, and some of them even fall into "gray areas," according to Lou Jiwei, former Finance Minister. (read more)
On December 18, Ant Group removed all deposit product offerings on its Alipay platform to comply with tightened regulations. The three-year and five-year deposit products on the platform pay a typical rate of 4.125% and 4.875%, respectively, near the upper threshold of the central bank’s guidelines. (read more）
Alipay’s Yu’e Bao Is the World's 3rd Largest Money Market Fund.
Yu’e Bao, a money market product offering by Alibaba’s Alipay, quickly ascended to become the largest money market fund in the world in 2017, described by Bloomberg as the “blood-sucking vampire.”
Yu’e Bao (pronounced “Yoo Uh Bow”) took the global lead for assets under management in 2017, but has recently fallen behind money market funds managed by JPMorgan and Fidelity, according to data from Fitch Ratings. (The Chinese fund was launched by Tianhong Asset Management, which is 51% owned by Ant Financial.) The fund has $157 billion in assets under management as of December, compared with around $268 billion in March 2018. (read more)
The current wave of product removal does not concern Alipay’s money market products. The removal only affects the deposit products in partnership with third-party banks. However, this shows China’s fintech companies' ubiquity in Chinese financial lives and its capacity to drain cash from the traditional banking institutions that are not in partnerships with fintech.
What’s Next?
The regulatory body aims for standardization and regulation of the fintech market. The goal is not to “kill” the market. Once industry standards are established, products will be offered again.
While regulatory authorities have formally banned sales of Internet deposit products, analysts anticipate the arrival of some formal announcements soon.
This move echos the recent antitrust sentiments towards China’s internet companies. The action will aim to remove the monopoly by some of the largest fintech giants to allow a more competitive market to emerge.
At the China Wealth Management 50 Forum, former finance minister Lou Jiwei stressed, "We should try to avoid making financial platforms from becoming too-big-to-fail beasts, and prevent financial monopoly and winner-takes-all scenario." (read more)
China Financial Stability Report (2020)(中国金融稳定报告（2020）) released by the PBOC on 6 November, said that China’s financial regulators would “comprehensively upgrade regulatory capabilities” by marking clear red lines for innovation, balance safety, and efficiency.
“打造包容审慎的创新监管机制。针对金融科技创新发展新形势，我国金融管理部门积极探索符合新事物内在发展规律、高度适配我国国情的金融科技监管路径，全面提升监管效能。一是划定刚性底线。以现有法律法规、部门规章、基础性标准规则等为准绳，明确创新红线。二是设置柔性边界。平衡好安全与效率的关系，运用信息披露、公众监督等方式，让人民群众参与金融科技治理，为金融科技创新营造良好的发展环境。三是预留创新空间。在固守安全底线基础上包容合理创新，使持牌金融机构享有平等参与创新的机会。”
Technology
1. China’s AI Infrastructure Development
The scale of China’s AI infrastructure market will reach $3.93 billion in 2020, representing a YoY increase of 26.8%. This is according to an evaluation report on China's AI computing power development.
The market will reach $7.80 billion, nearly doubling its current size, in 2024.
China will account for 15.6% of the global AI market scale by 2024, compared with 12.5% by 2020.
China's AI sector will maintain a compound annual growth rate of 30.4% through 2024.
China in comparison to the US
China's total expenditure in the IT sector is about 40% that of the US, while the computing power of servers is about 60% that of the US, and spending in AI computing power is about 80% of the US.
China’s AI servers account for about 1/3 of the global total in 2020.
AI applications in China
The internet industry has the highest AI application penetration. AI applications advanced quickly in the medical industry in the first half of this year. AI application development will expand massively in manufacturing, telecom, retail, healthcare, and education in the next 5 to 10 years.
Below is China’s AI industry focus over time.
Before 2020: biological identifications ( voice, facial recognition, public opinions, smart cities)
2020-2025: Smart manufacturing, smart telecom, smart retail
2025 and beyond: smart healthcare, autonomous driving, smart education.
Top 10 Cities for AI Infrastructure
The top cities in AI developments are Beijing, Shenzhen, Hangzhou, Shanghai, and Chongqing, followed by Guangzhou, Hefei, Suzhou, Xi’an, and Nanjing.
Shenzhen surpassed Hangzhou in 2020.
Chongqing becomes a tier 1 AI city.
Dongguan is advanced in Smart manufacturing.
Wuhan is known for smart healthcare.
Hebei is known for smart agriculture.
International Relations
China and the EU Edge Closer to the Comprehensive Agreement on Investment
In a video conference on Wednesday, the European leaders and Chinese president Xi finalized the 7-year-long negotiation on the Comprehensive Agreement on Investment (CAI), granting “unprecedented level of market access for EU investors”, and the European Commission foresees already that “EU companies will henceforth benefit from fairer treatment when competing in the Chinese market”.
The EU has pledged to sign, ratify the agreement.
Upon the signing of the CAI, two sides will engage in two years of additional negotiations on investment protection.
In an attempt to assuage concerns by Parliament members, the Commission sent the Parliament a memo on Tuesday, attempting to galvanize support for the deal. The memo, seen by the South China Morning Post, states that:
“The negotiated result is the most ambitious outcome that China has ever agreed with a third country.”
The deal will be the first agreement made on the behavior of state-owned enterprises. With China agreeing to increase the transparency of subsidies, the deal would help EU companies increase market access and level the playing field in China. A failure to seal the agreement would prolong the competitive disadvantage of EU companies.
China has made “continued and sustained efforts” to ratify International Labour Organisation conventions on forced labor.
Concerns that the deal will affect transatlantic cooperation with China are “understandable but not justified.”
The investment agreement is “not a panacea to address all the challenges linked to China.” It emphasizes that China relations are too complex and cannot be addressed with one single instrument. (read more)
The China-EU bilateral investment treaty brings enormous uncertainty to the Transatlantic alliance the Biden transition team has called for.