On 24 October, a notice went around Chinese chip maker Yangtze Memory Technologies Co Ltd (YMTC): the company had terminated the contracts of all US citizens and green card holders. Just like that, a number of senior employees in core research and development positions were forced out of the company as YMTC rushed to ensure compliance with the US CHIPS and Science Act. As Foreign Policy remarked: “after four years of watching Donald Trump inflict flesh wounds on China with his ineffectual trade war, US President Joe Biden appears to have found the jugular.”  

The CHIPS and Science Act (CHIPs stands for ‘Creating Helpful Incentives to Produce Semiconductors’)  is a new US export control, effectively undermining China’s ability to import, manufacture and export the semiconductors that run the world. The legislation not only restricts foreign semiconductor manufacturers from selling specific chips to China or providing Chinese firms with the technologies required to manufacture them, but also encourages them to invest in facilities in the US through the issue of subsidies. The Act will unlock some $280 billion worth of financing provided the recipient does not build any similar facilities in China. It is a major piece of legislation that marks the most significant shift in US policy toward shipping technology to China since the 1990s, given that it suggests that President Biden now wants to contain China’s advances rather than just level the playing field. 

It is a policy that harks back to the tough regulations implemented at the height of the Cold War. And while “China isn’t going to give up on chipmaking… this will set [them] back years,” says Jim Lewis, a technology and cybersecurity expert at the Centre for Strategic and International Studies (CSIS).

Background 

In 1947, researchers at Bell Labs, a subsidiary of the telecommunications giant AT&T, invented the transistor, a switch that controls electric current and is a building block of modern electronics. Within the decade, researchers were placing several transistors on a slab of silicon to make an “integrated circuit” or chip. Today, chips are used in everything from mobiles to missiles and have become fiendishly complex. 

Prior to the Covid-induced supply chain bottlenecks brought about by port closures in various countries – including China – and a spike in shipping costs, the fact that the Taiwanese Semiconductor Manufacturing Company (TSMC) and Samsung manufacture almost all of the global supply of the most advanced chips did not seem to bother American policymakers all that much. Trump-era export controls prevented either company from manufacturing chips for firms on the government’s trade blacklist, plus it seemed inconceivable that Beijing would use military means to level the playing field with America, South Korea and Taiwan. 

Now, however, all the labs and ‘fabs’ – short for fabrication (read: manufacturing) facilities – seem far more strategically vulnerable, leading the Biden administration to try and entice some of that capability back to the US.

The race to self-sufficiency 

China has big ambitions in the chip race. Beijing currently spends more on importing semiconductors than it does on importing oil, according to a new book titled Chip Wars by Chris Miller. Since 2014, President Xi Jinping has made tens of billions in state subsidies available to improve indigenous capability. By measure of new chip companies registered, this innovation drive has been hugely successful: some 22,000 new chip companies registered in China in 2020. But China still imports most of its advanced chips, and Chinese firms continue to rely heavily on imported manufacturing technologies to produce less-advanced semiconductors. The industry has also witnessed several corruption scandals. 

The US is not hanging about either. As the White House press statement accompanying the CHIPS and Science Act points out: “America invented the semiconductor, but today produces about 10% of the world’s supply — and none of the most advanced chips.” That being so, the Biden administration matches Beijing’s sense of purpose when setting out its vision: construction of manufacturing facilities has increased 116% over the past year; total business investment in semiconductor manufacturing is at $150 billion, and US companies have announced a further $50 billion following the announcement of the policy; US semiconductor manufacturing will grow by more than 50% over the next five years; and government expenditure on R&D will return to levels not seen since NASA put a man on the moon. 

Neither China nor the US is likely to be particularly successful. Putting the rhetoric to one side, self-sufficiency, at least, will probably continue to elude the pair of them. Despite all the money the Biden administration is offering TSMC and Samsung, both companies plan to keep the bulk of their investment and know-how at home, only agreeing to build new fabs for conventional chip manufacturing in Arizona and Texas. And while China holds the upper hand in terms of its ability to leverage the advantage that scale brings to chip manufacturing, that remains negligible as long as the blueprints for advanced chip manufacturing machines remain beyond its grasp.

Technological power meets geopolitical power 

The CHIPS and Science Act represents a painful blow to China’s ambitions to rival the US in the semiconductor industry, and President Biden delivered it just as President Xi was setting out to delegates at the 20th Party Congress how China’s “great rejuvenation” would be achieved at least in part through making great technological strides. The CHIPS and Science Act demonstrates that “the US continues to hold tremendous economic and technological advantages over China, which, as Biden has signalled, Washington is becoming more willing to use against its Communist competitor,” according to long-time China watcher Michael Schumann. And whether China can retaliate in such a way that hurts US interests to the same extent without harming itself remains unclear. Beijing could, theoretically, target Apple’s manufacturing hubs in China, or rare earth materials exports to the US, but other markets (such as India and Vietnam) would jump at the chance to plug the gap at Beijing’s expense. 

Could this come back to bite the US?

Recently, German Chancellor Olaf Scholz travelled to Beijing accompanied by a delegation of German businesses, even though European leaders have jointly questioned Scholz’s decision to unilaterally meet with President Xi. US allies in the Asia-Pacific region have also demonstrated they are not always in alignment with the White House through various means. Chinese policymakers will probably be watching closely to see whether the US can corral its allies into adopting similarly tough measures designed to contain China’s technological development. US senior government officials briefed Reuters on the CHIPS and Science Act ahead of its announcement. They admitted that not only had the US not secured any promises that allied nations would implement similar measures and that discussions with those nations are ongoing, but also that the measures “risk harming US technology leadership if foreign competitors are not subject to similar controls” and can continue to collaborate with China and Chinese firms. 

The CBBC view

The race is on, and both the US and China will be eager to rally support to their sides. The US will probably find that its chip-manufacturing or exporting allies are somewhat reluctant to join in curtailing the capabilities of one of their biggest customers. It’s also hard not to detect a whiff of protectionism in the measures. That said, foreign know-how is already being forced to abandon Chinese firms, so even if the US acts unilaterally, the CHIPS and Science Act will have some effect. The measures could be fairly devastating if Washington is able to align allies with its cause. UK companies should monitor their compliance obligations vis-à-vis US-China trade tensions and watch to see if the UK government announces any similar regulatory changes.

Call +44 (0)20 7802 2000 or email enquiries@cbbc.org now to find out how CBBC’s market research services can help you build knowledge and understanding of the Chinese market prior to investment.

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Rising energy costs are probably one of the most pressing issues in current UK politics. And while the spike in electricity and heating bills is probably temporary, electricity prices might well play a much larger role in economic growth in the coming years and decades. 

The main reason for this is climate change and the global race for net zero targets and technologies. A little-known feature of the transition from fossil fuels to renewable energies and carbon neutral industries is that a lot of the changes will require more, not less electricity. 

Consequently, cheap power might well be the most important variable determining not only the success of a clean energy transition, but also which countries are best placed to benefit from the opportunities of the net zero economy. 

This brief looks at the importance of electricity for businesses in the coming decades, in particular focusing on the prospects in both China and the UK. 

Background 

The net zero goals that were adopted at last year’s COP26 Summit in Glasgow will have far-reaching consequences, the most crucial of which might well be the growing importance of electricity costs for businesses. 

Take the steel industry for instance. Reducing carbon emissions – for example by switching from blast furnaces (burning iron ore) to environmentally friendlier electric arc furnaces (which use scrap metal) – would require up to five times the amount of electricity currently used. 

According to a study by McKinsey, electricity demand in the UK could jump from the current 300 terawatt hours to 590 terawatt hours. So, while overall energy consumption would drop by 34%, electricity consumption could rise by a staggering 97%. The International Energy Agency (IEA) comes to a similar conclusion, predicting that international industrial electricity consumption will more than double between 2020 and 2050.

In a globalised world, this also means that electricity costs will be a key factor for determining where green technologies and businesses can thrive – and where they can’t. In a world where China is seen as a ‘systemic competitor’ – according to the now widely accepted notion put forward in last year’s Integrated Review — the key metric could be electrification rather than computerisation. 

China’s rise and the role of cheap electricity 

Looking back at four decades of Reform and Opening Up, the ability to provide cheap electricity to businesses and households has been one of the major reasons for China’s rapid economic rise. According to the World Bank’s 2020 Ease of Doing Business report, electricity costs as a proportion of GDP per capita were almost zero. 

Based on one estimate, Chinese electricity costs for businesses in December 2021 were £0.078 per kWh – nearly three times less than in the UK, where the cost for the same amount of electricity was £0.216. Unsurprisingly, China has emerged as a global leader not just for attracting power-intensive industries, such as aluminium, but also green technologies like EVs and renewable energies. Domestically, China is set to sell six million EVs this year, roughly the same number sold last year … worldwide.

Average electricity costs for businesses in December 2021 (£/kWh)

China has also emerged as one of the world’s largest investors in green energy. Last year, its investment in green energy projects accounted for over 30% of global spending on renewable energy sources. By comparison, both Europe and the US spent far less, according to the International Energy Agency.

But despite being a poster child for renewable energy and still having one of the lowest electricity costs among major economies, China too is worried about the increasing dependency on cheap power. As Peng Wensheng of China International Capital Corporation (CICC) – a Chinese investment financial services company – recently wrote in Caixin, the energy crisis in Europe, and especially in its industrial powerhouse Germany, has underscored the importance of stable prices for China’s own manufacturing sector.

To be fair, Chinese electricity prices have remained remarkably stable compared to Europe. Prices for businesses in Beijing were around £0.099/kWh, only 27% higher than the national average from last December, according to data aggregator CEIC. 

China’s energy imports are also more diversified than Europe’s. Australia, China’s largest source of natural gas, only accounted for 25% of its external supply in 2021; Russia for only 5%. Europe, on the other hand, imported nearly a third of its gas from Russia. 

But even so, China faces its own dilemmas. First of all, Beijing also wants to achieve net zero. In a televised speech at the UN General Assembly in 2020, Chinese President Xi Jinping declared that China wants to reach a peak in greenhouse gas emissions by 2030 and carbon neutrality by 2060. These ‘double targets’ require a fundamental transformation in the country’s energy mix. 

In 2020, 64% of the country’s electricity still came from coal-firing plants. But that is not all. The second largest source – hydropower, accounting for roughly 17% of China’s power generation in 2020 – has proven to be problematic, too. Hotter, drier summers and weaker rainfall have forced hydropower stations to curb output, leading to several power cuts in southern and central China. 

Low water levels might also affect nuclear power plants — another green energy source. These plants rely on access to fresh water to cool their reactors. But with water getting scarcer during the summer months, it’s likely that they will also need to be shut down temporarily. France, for example, had to halt several reactors due to the current high temperature in adjacent rivers. China, too, wants to expand its nuclear power sector with at least three reactors planned near crucial waterways in southern China. But with the consequences of climate change becoming ever more apparent, these plans might have to be revised.

Sources of electricity in China (2019)

Additionally, China has undertaken several steps to reform its electricity pricing system which, in the short term, could increase the cost of electricity. Obviously, the main objective of the reform – which aims to replace the current fixed tariff-based system with a market-driven one – is to make energy costs more responsive to fluctuation in demand and to create incentives to save electricity and invest in energy-saving technologies. It also wants to make polluting energy sources such as coal more costly compared to renewable alternatives such as wind and solar. 

While the reform is both necessary and well-intended, it could pose a risk to China’s own net-zero timetable. The dilemma between market driven electricity prices and the growing demand for cheap and reliable electricity might force policy makers to make difficult choices. 

The CBBC View 

As the consequences of climate change become clear, the need to provide stable and affordable electricity will be a major challenge for policymakers around the globe. Countries like China, that have managed to attract businesses with cheap electricity costs, face similar challenges as those with more expensive costs. 

Some effects of global warming, such as hotter and drier summers, have also exposed the vulnerabilities of power sources relying on sufficient water supply, notably hydro and nuclear power. Expanding water-neutral renewable energy sources and expanding grid and storage technologies which allow electricity to be delivered across long distances will be one of the top priorities for governments with large industries. 

Cheap electricity has helped China become a leader in the expansion of renewable energies and green technologies, but the extreme reliance on coal and water power poses its own risks for the country’s race towards net zero. Fixing these problems will be crucial, not just for the green transformation of the Chinese economy, but also for the chance for other industrialised economies to meet their own targets.

If you are a British company working in the energy sector, call +44 (0)20 7802 2000 or email enquiries@cbbc.org now to find out how CBBC’s market research and analysis services could help your business thrive in China.

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China’s property market accounts for around 25% of GDP. Analysts widely assumed that this, therefore, makes the sector too big to fail. They might be about to be proven wrong. The property market has contracted by as much as 7% year on year, causing real estate to have become a significant drag on the Chinese economy. Following the struggles of Evergrande, China’s second-largest property developer, late last year, more real estate companies have come to be swallowed by their ballooning debt. The co-chairwoman of Country Garden, another massive developer, has lost as much as £10 billion from her personal fortune in the last 12 months. The result is that developers are no longer building homes, buyers have started to hold off on paying their mortgages or entering the market, and the system has run out of capital. 

Background 

China’s real estate sector might be seen as a bit of a Ponzi scheme. The developers rake in hordes of cash from existing customers for properties that have not yet been built and then use that cash to fund the construction of homes for new customers, which is fine, assuming that confidence is high and all the cogs are turning. Should investors in the developer companies lose faith in their debt management, however, or the economic environment takes a turn for the worse, the model then starts to come under considerable strain. Real estate is also incredibly pro-cyclical: everything good feeds on itself in the boom, and everything bad feeds on itself in the downtime. 

Worse, there is little incentive to regulate the real estate sector in good times. High sales come with high demand and high borrowing, meaning that Chinese consumers, the banks, the developers, and, to a certain extent, the government, are all happy. Indeed, the only incentive to regulate during a boom is to reduce the damage a likely bust will bring. The Chinese government sought to introduce closer regulation last year when it implemented a “three red lines” policy to restore the real estate sector, but it has not been particularly effective — at least not yet.

More than 90% of properties sold in China in 2020 were off-plan, but the completion rate was just 60%. Predominantly middle-class mortgage holders are starting to complain. Furthermore, the real estate market is not struggling due to financial pressure on homeowners — it is the developers who are under the cosh. That is an awkward state of affairs for the Chinese government in a politically sensitive year in which President Xi will likely secure a third, unprecedented term. Middle-class mortgage holders could start to wonder whether the government, the regulators, and the state-owned banks that drive much of the country’s real estate activity, can actually deliver the better life they have promised. 

What are the options for the Chinese government?

Failure to regulate the industry sufficiently while it was booming has left regulators in an impossible position. Stepping in to pay people’s mortgages will only encourage more people to default on their loans. That could be very costly, stretching well into hundreds of billions of dollars. But bailing out the developers will only encourage them to continue the practice, which in Tibet, Qinghai and Guizhou is so severe that developers start six houses for every completed property. 

Covid is exacerbating the situation as lockdowns deter potential buyers from visiting and putting down an offer on properties, whilst mortgage payers still have to pay mortgages even if they have lost their jobs or experienced pay cuts. Unemployment is currently running at 6.1%, just shy of the 6.2% recorded at the start of the pandemic. It is plausible that the situation will improve after the Party Congress. The government could then begin to take bolder steps in rebooting the sector, which is not without risk as lots of people could lose a lot of money, or relax Covid restrictions, increasing consumer confidence. With state-owned money covering over so many cracks, not just in the real estate sector, however, it is hard to see how state intervention can be dialled down without triggering some inflation or social unrest. 

Ghost towns 

Beijing has announced plans to revive millions of stalled property developments by issuing loans worth up to £120 billion at rates of around 1.75% per year to plug the shortfall. It seems unlikely to work. Not only is such a figure a drop in the ocean, but it might also be considered a rather dubious use of public funds, taking into account that many of these unfinished apartments are in areas where people have no intention of living. The majority of potential buyers are seeking to move into the cities or generally eastward, but many of the apartments that developers have invested customer money into are located in western or northeastern China, where the local government has incentivised state-owned developers to revitalise the area, regardless of demand.

Ordos, in Inner Mongolia, is China’s most infamous ‘ghost town,’ but there are many others. Indeed, there is enough vacant housing in China to accommodate the entire population of Spain. That, in turn, puts pressure on prices, meaning that even if the government relaxed Covid restrictions and gave the property market the boost it needs, prices would probably not increase and provide the market with the greater liquidity that it needs. 

Impact on UK plc 

UK companies have already been impacted negatively by the slowdown in China’s real estate market. The oft-cited 25 to 29% of GDP that the sector contributes to the total takes into account construction, servicing, retailing, commodities and miscellaneous material inputs — all of which British companies in China are well placed to provide. Indeed, CBBC has already heard from British firms that have contracts with Chinese developers who are experiencing financial difficulty and, therefore, have had to default on payment. 

The CBBC View 

It is very likely that the regulators will get the current crisis under control; China’s property market is too big to fail. There are reports of the government instructing state-owned banks and the developers to come to some agreement under the direction of the Ministry of Housing and Urban-Rural Development. The problem is that this plan revolves around directing more state-owned money to solve the issue, which is not sustainable in the long term. Foreign creditors are not an option; they have already lost £10s of billions in Chinese real estate bonds, so, as the economist George Magnus argues, it will take a miracle to lure them back to China’s real estate market. Ambitious structural reforms concerning how the developers work with local government, state-owned banks, and their customers will be required, but the problem has become so severe that this is not without risk. A lot of people are going to have to lose a lot of money at some point in the near future. The question is who and what are the broader socio-economic repercussions of that.

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At the summit in Germany in late June, the heads of government of G7 countries announced the launch of a USD600 billion infrastructure programme – now called the Partnership for Global Infrastructure (PGII) – to boost investment in developing countries. Although this is undoubtedly a positive signal, its framing as a ‘competing offer’ to China’s Belt and Road Initiative (BRI) highlights the misunderstanding which – nearly a decade after its inception in 2013 – still plagues Western governments’ thinking about China’s engagement with third countries. 

According to the White House communique, PGII aims to mobilise USD600 billion in infrastructure investment from G7 countries by 2027, including USD200 billion from the United States alone. The programme wants to “deliver quality, sustainable infrastructure that makes a difference in people’s lives around the world, strengthens and diversifies our supply chains, creates new opportunities for American workers and businesses, and advances our national security.” 

Beijing’s reaction was rather positive. As Zhao Lijian, the spokesperson of the Chinese Ministry of Foreign Affairs, noted at a press conference, “China always welcomes initiatives that promote global infrastructure.” Zhao, of course, pointed out that PGII and BRI can be complementary and should not exclude each other based on geopolitical considerations. 

China’s response should come as no surprise to those familiar with BRI projects and developments. What’s more, a proper analysis of the strengths and shortcomings of China’s experience in overseas infrastructure projects is essential if PGII is to become a successful tool to help developing countries and Western businesses operating in them.

Understanding the drivers of BRI 

Ever since Chinese President Xi Jinping presented his idea of the ‘One Road, One Belt’ initiative at a speech in Kazakhstan in 2013, the BRI has captured the imaginations of foreign analysts. While some were fascinated by the idea of a modern ‘Silk Road,’ others saw it as a master plan for Chinese world domination. 

Seasoned China watchers were more cautious, pointing out that the new BRI label (or OBOR as it was first called) was indiscriminately attached to nearly all Chinese outbound investment and aid projects, no matter how far in advance they preceded Xi’s speech. There are, however, several factors which have pushed BRI beyond China’s traditional ‘foreign aid’ policies: 

• Overcapacity: The large stimulus following the financial crisis in 2008 created a massive surplus capacity in infrastructure and related sectors. Outbound investment and foreign construction projects thus offered an outlet for these industries.
• Commodities: China’s economic rise increased the dependency on foreign raw materials, triggering a frenzy of Chinese investments in oil fields and mines around the world.
• Regional Development: One of the major reasons for the ‘ New Silk Road’ plan was to improve the connectivity between China’s poor inland provinces to major export markets in Europe, especially via rail.
• Global ambitions: with growing affluence came growing ambitions. Using outbound investment to shore up support for China’s clout in the UN and other international bodies. 

Given that domestic overcapacity was a key driver of BRI, it is of little surprise that most BRI projects were in these sectors. According to a 2019 report by the data provider Refinitiv, the vast majority of Chinese investment — some USD500 billion — went into transport (road and rail), power plants and real estate, accounting for a staggering 85% of the total. 

But even within these three categories, there are variations. As a report on Chinese overseas port investment by the Grandview Institution – a Chinese think tank – noted, there is a vast gap between China’s port presence in Djibouti – a purely military project – and Chinese investment in ports in Piraeus or Darwin, which are purely commercial. According to Refinitiv data, only 63% of surveyed BRI projects were financed directly by the Chinese government, with 31% managed by private entities and another 5% run by public listed companies.

BRI projects by industry (left); BRI projects by main source of financing (right). Source: Refinitiv

The debt-trap myth 

Despite the large variety of BRI projects, most of the West’s thinking about BRI is still shaped by the perception of Chinese financial aid as some sort of debt trap. The idea goes back to a polemical essay by Indian professor Brahma Chellaney for whom Chinese investment – especially in Sri Lanka – was nothing short of a hideous masterplan for world domination. Despite experts such as Deborah Bräutigam of Johns Hopkins University and Lee Jones and Shahar Hameiri of Chatham House thoroughly debunking the ‘debt trap diplomacy’ myth, it seems that Western politicians were eager to embrace the framing to suit their own political agendas. 

Yet this misunderstanding by Western governments not only ignores the agency of recipient countries, but it also increases the risk for PGII to make the same painful mistakes of some of the more controversial BRI projects. As Jones and Hameiri pointed out in their lengthy report on the initiative, most loans aren’t imposed by Chinese investors on hapless developing countries, but are, instead, defined by these countries themselves.

This is, for example, the case with the controversial Hambantota Port in Sri Lanka, which was an idea of the now ousted Premier Mahinda Rajapaksa. That such a hands-off approach by Chinese investors can lead to massive misallocation and corruption, is something that the Chinese government itself had to find out the hard way. 

However, relying on local authorities to define investment priorities can also be beneficial. As a Carnegie report on BRI investment in Argentina shows, Chinese investment can, indeed, play a crucial role in helping third countries meet their own development goals. 

In deciding on projects, Chinese investors have long sought help from outside consultants and have also teamed up with Western institutions to improve the quality and risk management of BRI activities. For example, China collaborates with the European Bank for Reconstruction and Development (EBRD) to support green development projects in Central Asia. China has also signed so-called third-party market cooperation agreements — including with France, the Netherlands, Belgium, Spain, Austria, Japan, Singapore and Australia — to allow for foreign participation in BRI projects and to ensure that projects meet international standards. 

What can PGII contribute? 

So, given that China is already collaborating with external investors and stakeholders to make BRI projects greener and more sustainable, what exactly can PGII contribute? Pradumna B. Rana of Nanyang University, Singapore, thinks that Western infrastructure programmes can help in three particular areas:

• ‘Soft’ vs ‘hard’ infrastructure: with Chinese investment often focusing on bricks-and-mortar infrastructure projects, Western investors could concentrate more on ‘soft’ infrastructure, such as education, healthcare and gender equality projects.
• Private capital: attracting private capital has been notoriously difficult for BRI investments. PGII could alleviate this shortcoming and help ‘crowd in’ funds from private businesses
• Resource additionality: According to UN estimates, countries would have to invest USD2.6 trillion (£2.3 trillion) annually until 2030 to meet the United Nations’ Sustainable Development Goals. So, additional investment from developed countries could complement, rather replace Chinese funding.

BRI, PGII and the Global Infrastructure Gap (BRI value as of 2021, PGII value as stated by the US government)
Source: White House; World Bank

Japan’s own attempt at setting up a BRI alternative – the Quality Infrastructure Investment (QII) initiative – offers another important lesson on how PGII and BRI could create synergy rather than geopolitical friction. Initially set up within Japan’s strategic framework of the Free and Open IndoPacific (FIOP) and to promote sustainable and high-quality infrastructure investment, Japanese investors ended up cooperating rather than competing with China’s own BRI projects. As Alisher Umirdinov of Nagoya University points out, the high investment amounts required for large-scale infrastructure projects combined with the risk management imperative of diversifying funding sources made it ultimately more reasonable for both countries to pool resources and know-how rather than launching separate construction projects. 

The CBBC View

It seems that the current framing of the G7’s Partnership for Global Infrastructure (PGII) might be based on a misunderstanding of China’s BRI and ignores the participation of many Western (and Japanese) development agencies in its projects. 

What’s more, a PGII driven by geopolitical rather than practical considerations would expose investment decisions to the same risks as some of the more controversial BRI projects (e.g. those in Sri Lanka and Venezuela), namely the funding of economically unviable projects supported by ‘friendly’ but politically unstable governments.

Instead, the convergence of due diligence requirements for Chinese and Western investors increases the likelihood that PGII might follow the tracks of Japan’s own BRI competitor, QII. This would mean an increase in collaboration, more diverse funding, and higher standards for international infrastructure projects – a result that’s not only more optimistic but also more realistic.

Call +44 (0)20 7802 2000 or email enquiries@cbbc.org now to find out how CBBC’s market research services can help you build knowledge and understanding of the Chinese market prior to investment.

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Spread across roadsides the length and breadth of the country, red banners with the ubiquitous phrase ‘Party Spirit’ extol the virtues of the Chinese Communist Party (CCP). The term has become a catch-all to describe behaviours the Party considers correct and worth promoting. Most of them are fairly prosaic, for example praising filial piety. But with the economy straining under the weight of zero Covid and global inflation, the Party is starting to liven things up. It’s time to break the mould and harness the ‘animal spirits’ of venture capitalism. 

Chinese policymakers need to give the country’s private capital markets a bit of a kick because confidence is waning. In Q1 of this year, early-stage investment by venture capitalists declined by 90% year on year. Then there is the issue of ensuring that investment gets directed to where the Party wants money to be spent, preventing the “disorderly expansion of capital,” otherwise known as the platform economy growing out of control. Trillions of RMB of government funding is now pumping through China’s private capital markets, with mixed results for the country’s entrepreneurs. 

Background 

There is a new sheriff in town, and China’s private sector has had a rather rude awakening to this fact over the past two and a half years. The State Administration for Market Regulation’s (SAMR) decision to slap a record-breaking £2 billion fine on Alibaba in April 2021, in response to founder Jack Ma’s infamous speech in October 2020 criticising the government’s handling of China’s financial development, was the turning point. From then on, no entrepreneur, service, or technology could be perceived as equal to or above the government or its regulators. It has brought substantial change: consumer-internet technologies are out, replaced by artificial intelligence, biotechnologies, and advanced manufacturing. 

In short, the Chinese government is reshaping one of the world’s biggest start-up scenes — and perhaps not necessarily for the better.

What are government guidance funds?

Government funding now accounts for around 30% of private equity and venture capital funds raised in China. Between 2015 and 2021, around 2,000 “government guidance funds” were collectively responsible for almost £850 billion. Government guidance funds are public-private investment funds that aim to simultaneously produce financial returns and further the government’s industrial policy goals. Research shows that Chinese officials have set up around 1,800 guidance funds, through which the government hopes to raise as much as £1.3 trillion, although it appears that investment peaked in 2016 and the government will fall far short of that number this year. 

No matter though, as that is still potentially a very hefty war chest. Besides, it is more than enough to entrench the government as the country’s primary source of venture capital and private equity — incentivising entrepreneurs to innovate as Beijing sees fit. 

Will increased state involvement in venture capital work? 

Yes, or at least in theory. Combining patient capital from the state with the market savviness of private investors should give the Chinese government the best of both worlds while avoiding the pitfalls of conventional industrial policy along the way. 

The problem lies in the government’s willingness to let the private sector do what the private sector does, and its risk tolerance. Should the government feel that the private sector at large is not playing ball, it could be tempting simply to back a smaller pool of companies, and then these funds would turn into just another state subsidy or resemble old-school support such as state-owned enterprises (SOEs) used to enjoy. 

So far, at least, it seems that the majority of such funds have registered that, while they want to do right by their benefactor (the government), it is also possible to have too much of a good thing. Many funds have rules dictating the maximum amount one single partner can invest, usually around 25% of the total. 

Guidance funds are structured differently from conventional venture capital or buy-out funds, where the originator acts as the general partner tasked with deploying the capital. A guidance fund, by contrast, often creates sub-funds in which it is a limited partner and it invites professional asset managers to be the general partner calling the shots. 

The result is that the government can only be another limited partner and cannot decide unilaterally where the money goes, or at least that is the theory. However, there is the possibility that SOEs or other government-linked entities could collaborate with the government as additional limited partners and push investment where the government wants it to go. 

Finally, with so much government money readily available, it not only leaves private investors – that typically have more demanding lending terms – out to dry, but also risks widespread inflation of company valuations: as it becomes easier to secure government funding, companies might begin to give themselves higher valuations. It seems it might be far from a perfect solution.

The CBBC view 

Government guidance funds are an interesting idea with the potential to work well. However, they represent a powerful incentive for entrepreneurs to focus on being close to the government first and being innovative second. Depending on their management, guidance funds could quickly turn into another form of state subsidy, where only companies focused on the technologies the government wants to pursue see any investment. And while that might be an effective way of creating a cohort of competing average smartphone manufacturers, for example, it is not necessarily a recipe for technological progress: each company may do just as much or as little as the others to ensure it continues to receive funding. The Chinese technology sector behaved in such a way in the early 2010s, but those days feel long gone now – remember Meizu phones, anyone? 

To make government guidance funds a success, it seems that it will have to trust the animal spirits of the country’s venture capitalists far more than it has indicated it would be willing to do to date. Harnessing them too tightly could be a grave mistake.

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The dramatic weakening of China’s economic performance – caused by the lockdowns in Shanghai and other big cities – has prompted Premier Li Keqiang, who is in overall charge of China’s economic policy, to assume a far more prominent public position. While this shift in media attention has led to speculation about a potential split within the top ranks of the Communist Party (CCP), the main question lies elsewhere: will Li’s policies to revive the struggling Chinese economy actually work? 

Li Keqiang’s distinctive policy approach – often dubbed Likonomics – prefers supply-side measures and strict budgetary discipline to large-scale monetary stimuli and big-ticket infrastructure investment. Although China’s debt binge in the wake of the 2008 financial crisis and the soaring public debt levels make Li’s policy choice look reasonable, questions are being raised over whether they are the right tools to deal with the economy’s most pressing problem: weak domestic demand. 

What’s more, Li’s emphasis on tax cuts and lower social security contributions to support businesses puts further pressure on local government budgets, which have already been battered by years of debt accumulation and rising demand for social services. If one adds the increasing cost of extended lockdowns and preventive measures to the mix – which are also financed out of local coffers – then it becomes more and more apparent that Li’s policy approach might not be fit for purpose. 

Both a continuation and an abandonment of Likonomics could have important consequences for foreign businesses in China. 

Likonomics isn’t a new term. In fact, it was first coined in the early days of Li’s premiership. In June 2013, only months after his official appointment as the head of the State Council, Huang Yiping, a professor at Peking University, together with two analysts at Barclays Capital, Jian Chang and Joey Chew, published a report entitled “What to expect from Likonomics?”. 

Initially conceived as the opposite to ‘Abenomics’ – a reference to Japanese Prime Minister Shinzo Abe’s lacklustre attempt to revive Japan’s sluggish economy – Likonomics was not about stimulating growth, of which there was more than enough in China, but rather it focused on transforming it from the debt-driven model of the Wen Jiabao era into a more sustainable, long-term model able to lift China into the ranks of high-income developed economies. As Huang Yiping wrote back then: “Likonomics is about deceleration, deleveraging and improving the quality of growth.”

Yet marketing jargon aside, Likonomics isn’t a specifically Chinese affair. As the Economist noted, Li’s three ‘arrows’ – no stimulus, deleveraging, and structural reform – were surprisingly similar to the austerity measures adopted by other countries – including the UK – following the financial crisis of 2008. 

Globally, Li’s policies are in line with the Summit Declaration of the 2010 G20 meeting in Toronto, of which Li himself – then still an apprentice Vice-Premier under Wen Jiabao – was probably aware. As the declaration stated, G20 countries should be: 

“Following through on fiscal stimulus and communicating “growth friendly” fiscal consolidation plans in advanced countries that will be implemented going forward. Sound fiscal finances are essential to sustain recovery, provide flexibility to respond to new shocks, ensure the capacity to meet the challenges of ageing populations, and avoid leaving future generations with a legacy of deficits and debt.” 

Fast forward to 2022, and these words remain remarkably relevant. At the press conference following this year’s Lianghui (Two Meetings) in March, Li Keqiang stuck firmly to these twelve-year-old recommendations. Not only did Li emphasise that China’s national budget deficit had been further reduced to 2.8% last year – a number which would make a German finance minister proud – he also highlighted the positive effect of tax cuts on overall government revenue, highlighting the main argument of Western pro-austerity advocates. 

Yet, while these policies make sense in an environment where economic growth is high and wages are rising, it is less suitable when dealing with slowing growth and weak domestic demand. Yet this is exactly the problem the Chinese government is currently facing. 

GDP growth in Q2 is expected to be weaker than the already low 4.8%, recorded in the first three months of 2022. Two of China’s main growth drivers – real estate and consumption – are still in the doldrums. Residential property sales in May recorded their ninth consecutive month of decline, dropping a further 41.7%. According to Bloomberg, cumulative housing sales as measures in square metres are now at the lowest level since 2016. 

Consumption, too, is sluggish. According to the latest figures published by China’s National Bureau of Statistics, retail sales in the first five months of 2022 decreased 1.5% year-on-year. In May, overall consumption declined by 6.7% year on year, with food services alone down by more than a fifth compared to last year. And while the drop in consumer spending is less severe than at the beginning of the pandemic, the hit to consumer confidence is far more damaging. In April, China’s consumer confidence index fell – for the first time since 2016 – below the 100-mark to 87.6. As a comparison, in 2020 at the height of the first Covid wave, confidence only dropped to 112.6.

With both growth engines seemingly very suppressed, and expectations trending downwards, Li’s approach of fiscal consolidation and tax cuts might not be enough to get the economy back on track. While in late May the government announced 33 measures to support the economy, none of them supports the demand-side directly. Instead, infrastructure, manufacturing, and foreign trade remain the principal levers for Beijing. 

Paradoxically, with Likonomics unable to boost domestic demand, China’s government is thus forced to revert to exports as the country’s main growth driver. Since the beginning of the pandemic, Chinese exports have jumped from one record to the next. Even in April 2020, exports where still over 30% higher than the monthly average of 2019. And with the world economy slowly recovering, these numbers will remain high for the foreseeable future. 

What this means, however, is that China’s much-touted rebalancing away from an export-led growth model and its emphasis on ‘dual circulation’ and ‘common prosperity’ might well struggle to get off the ground without some fundamental policy change. Likonomics – as it turns out – could deepen rather than weaken China’s reliance on global trade and foreign markets.

Chinese exports since 2019

The CBBC View 

For foreign businesses, Likonomics has undoubtedly had some benefits. Lower taxes and fees, as well as supportive trade policies, have boosted manufacturing – especially in export-oriented sectors. Yet the policy’s heavy reliance on foreign markets and the lack of support for domestic demand also means that China’s internal market might struggle to replace exports as the country’s principal growth engine anytime soon. 

Yet with Li Keqiang stepping down by the end of the year, there is also a chance of a significant policy change. Xi Jinping’s commitment to ‘common prosperity’ and domestic consumption as a principal source of economic growth remains unchanged and means that – sooner or later – demand-side policies will have to take the lead. Whether China’s next Premier is ready to abandon his predecessor’s commitment to a balanced budget is therefore one of the most important questions – not only for China’s own future development, but also for global trade in general.

Call +44 (0)20 7802 2000 or email enquiries@cbbc.org now to find out how CBBC’s market research and analysis services can provide you with the information you need to succeed in China.

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In American political circles, China is seen as both a disease and a cure. As President Biden leads the Democrats to the polls for the mid-term elections in November, detente with China could stave off inflation, which analysts expect to be the number one issue among voters. However, a China-dominated world would also be “darker and harsher for American families, and it’s one [the US] needs to stand against,” according to US Secretary of State Antony Blinken.  Meanwhile, among Democrats and Republicans alike, polling suggests that voters believe that limiting China’s power and influence is a top priority and that they feel ‘cold’ towards China, despite also considering climate change to be the number one national security threat and only solvable through compromising with China. 

It is an equally complex picture on the other side of the Pacific. Despite the increasing frequency of rhetoric coming out of Beijing signalling that China feels comfortable pitting itself against the US in Asia-Pacific affairs (eg, the Taiwan Strait does not constitute international waters) Beijing is discovering that it is going to need to work with Washington if it is to make the region more agreeable to China’s rise. Very tellingly, Chinese foreign minister Wang Yi recently failed to persuade 10 countries in the Pacific to sign a regional agreement on trade and security, demonstrating that Beijing’s neighbours are not about to turn their backs on the US and accept China’s worldview. What is more, as in the US, there is also the issue that domestic political concerns demand boosting trade and investment between the pair – the zero Covid strategy isn’t going to pay for itself. 

Finally, both countries’ respective business communities have made it clear that they would value relations easing to a more predictable and manageable level. US companies in the country’s technology sector, in particular, have lost billions of dollars’ worth of business due to the Trump administration’s decision to put Chinese technology companies with ties to the military on a ‘black list.’ Meanwhile, Chinese firms are continuing to look overseas for investment opportunities that are more stable than those on offer at home, and see the US as a key growth market, assuming the geo-political climate improves.

Background

For all the headlines trumpeting the prospects of a second Cold War and the tweets by American and Chinese politicians and thought leaders alike seeking to stir up their respective bases to distrust and demonise the other, US-China relations fundamentally appear to be easing. Circumstances change, and the current circumstances in which the US and China find themselves warrant both sides taking time to reflect on their respective priorities. 

This de-escalation comes from a high starting point, make no mistake, and will not result in US-China relations returning to a level of amicability similar to that which was maintained by both sides during the Obama administration. It’s unlikely that President Biden will be received by President Xi any time soon as a guest of honour at the Forbidden City (as was President Trump) nor will he want to be seen as accommodating China by offering a bow to his Chinese hosts (American media lambasted President Obama over this in 2012). Furthermore, hostility over topics such as Taiwan, Xinjiang and Hong Kong, as well as fair trade practices, will probably remain – but both sides appear to recognise the need to bring the rhetoric down a notch.

A little more conversation, a little less action, please 

Recently, both sides have become far more vocal on an apparent shared desire for more talks. Presidents Xi and Biden last spoke in March, and another call is reportedly in the works for as soon as July. The pair also spoke in November 2021, while their call in September of that year was the first in seven months, indicating that both sides see value in increasing the frequency with which they speak. And it’s not just at the president-to-president level: other senior officials, such as US Defence Secretary Lloyd Austin, Chinese Minister of National Defence Wei Fenghe, US Trade Representative Katherine Tai, US Treasury Secretary Janet Yellen, and China’s economic tsar, Vice-Premier Liu He, have all increased the frequency with which they engage with one another, too. 

That said, just because American and Chinese leaders are engaging more does not necessarily mean they agree on more. Indeed, the recent meeting at the Shangri-La Dialogue between Lloyd Austin and Wei Fenghe demonstrates this well, for the pair presented duelling narratives at the annual gathering of the great and good of Asia-Pacific defence and security. What’s more, the US is not always speaking to the right person, particularly on the subject of Taiwan. For example, while Wei Fenghe is nominally Lloyd Austin’s direct counterpart, Austin reports directly to President Biden, whereas Wei answers to China’s Central Military Commission, the vice-chair of which, Xu Qiliang, is seen as having the ear of President Xi.

Agree to disagree 

While both sides seem to place increasing value on engagement, there are issues where the two sides will continue to disagree vehemently – international free trade and Xinjiang are two prime examples. The US and China might have come to recognise the constraints of their interdependence, but that does not mean that they will not move to advance their respective agendas in matters which fall outside the fundamental areas in which they cooperate, such as the environment and growing non-sensitive bilateral trade and investment. 

US companies will still need to tread carefully around China, even if both countries’ officials are starting slowly to accommodate each other more at the highest levels of government. The US’ Uyghur Forced Labour Prevention Act (UFLPA) which came into effect on Tuesday 21 June, for example, requires companies that import goods from China’s Xinjiang region to provide “clear and convincing evidence” that no component was produced with slave labour; this is likely to be very difficult to do given the complexity of US firms’ supply chains. 

The UFLPA is a piece of legislation that, when viewed in isolation, suggests the Biden administration is continuing to take a hard line on China. Read it alongside President Biden’s recently announced plan to cut some tariffs placed on Chinese imports by the Trump administration, however, and it becomes clear that President Biden is signalling that trade with China remains important to the US, but within increasingly tightly defined parameters.

While the two will continue to disagree with one another on issues such as Taiwan and international free trade, both countries’ governments appear to have realised that there is room for greater pragmatism in areas such as the environment 

Tariffs 

One could argue that this is a more nuanced and pragmatic approach by the US towards its trade relationship with China, especially when compared with the Trump administration’s modus operandi of placing Chinese firms on sweeping blacklists imitating the various market access lists maintained by China. 

The US is standing up to China where their values do not align and compromising where it is in America’s interests to do so. This is further evidenced by the Biden administration’s plans to change its approach towards China over free trade, which up to this point has been to punish Beijing with tariffs. 

Lifting some of the tariffs on $370 billion worth of imported Chinese goods could alleviate inflation by as much as 1% over the next six months; with inflation in the US currently running at 8.5% on the year, that could be tempting.  

US Treasury Secretary Janet Yellen has said that some of the tariffs currently placed on Chinese imports serve “no strategic purpose,” while US Trade Representative Katherine Tai has indicated that the tariffs predominantly serve as a way of maintaining leverage over the Chinese in negotiations surrounding levelling the playing field for US firms in China and third markets. Removing some of the tariffs is in America’s interests as it will push down consumer prices and ease inflation; keeping others in place reminds China that the world’s most powerful economy takes issue with how it trades.

The CBBC view 

Though it may be hard to see, US-China relations appear to be thawing. While the two will continue to disagree with one another on issues such as Taiwan, international free trade, and human rights, both countries’ governments appear to have realised that there is room for greater pragmatism in areas such as the environment and bilateral trade and investment. Furthermore, even on those topics where they do not see eye to eye, the realisation that a conflict would not be in either country’s interests appears to be sinking in, leading to increased engagement on these sticking points. 

US companies will need to continue to tread carefully in and around China, and vice-versa, and their government affairs teams will have to pay even closer attention to the signals coming out of Beijing and Washington, such is the sensitivity of the relationship – but the US and China appear to have realised the constraint that is their interdependence, which is no small thing. 

It’s good news for UK plc in China, too. With the US government adopting a far more clearly defined approach towards China, British companies dealing with both the US and China should anticipate the regulatory uncertainty that has significantly impacted companies trading between the two to ease significantly.

Entering China is a key decision for businesses of all sizes. Call +44 (0)20 7802 2000 or email enquiries@cbbc.org now to find out how CBBC can provide you with the platform to unlock your potential.

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“The world is not waiting for China to resolve its Covid challenge… [foreign companies] move on, and China runs the risk of falling behind and losing the competitive advantage [it] had.” So says Joerg Wuttke, President of the European Chamber of Commerce in China, who is just one of at least a dozen prominent businesspeople in China to have expressed concern at the country’s about-face to foreign investors in the name of Covid. Indeed, while publicly adamant that they are ‘in China, for China,’ as so many executives in the market like to say, behind the scenes, multinational companies are beginning to get a bit tetchy. 

Questions abound. Did MNCs get the wrong end of the stick? Is China finished with foreign investors, and have the tens of thousands of business people who’ve been coming to China determined to cultivate the country’s 1.4 billion consumers been reading the room wrong? For example, was the announcement of the ‘Dual Circulation Strategy’ in fact Beijing giving foreign investors notice that it planned to become self-sufficient rather than another opportunity for foreign firms to ‘contribute to China’s rise?’ Some 30 years after opening its doors to the international business community, China now appears to be reconsidering the relationship. 

This Policy Update aims to shed light on the numerous calculations that currently might be taking place in Zhongnanhai concerning the international business community and explain why it will not be business as usual once China does decide to reopen to the world.

Background 

First, it is important to define how China views its place in the global economy and how, as a result, it engages with foreign firms. 

Despite what some commentators have suggested, China is not about to become a larger, more tech-savvy North Korea. But the country is also not about to become a free-trade loving, rules obeying, Westward-leaning trade partner, either. Instead, China will most likely up the ante in competing for economic dominance, underpinned by greater financialisation and promotion of Chinese law. It wants to be able to play by its own rules — and that will bring with it seismic changes to the global economy. Foreign firms may become far more dispensable, for a start. 

What is more, China has been laying the foundations for such a shift for years, meaning that one should view more recent factors, such as Covid-19 and the war in Ukraine, as catalysts rather than causes in terms of the country’s new coolness in the face of trade partners and foreign firms.

So, is China finished with foreign investors? 

The short answer is: no. But has China come to see foreign investors differently, particularly post-Covid and Ukraine? Yes, by making international travel nigh on impossible for foreign business people, shuttering factories in city after city, and being generally apathetic to the fact that its current economic malaise could put the global economy into a recession, all in the name of zero Covid, it is clear that the Chinese government now looks at the world through red-tinted glasses. 

Foreign firms have been pushed to the periphery of the Chinese government’s worldview. And the once irreproachable annual GDP target is no longer the lynchpin of Chinese policymaking that it was before. In this ‘new era’, it’s zero Covid and ‘adherence to the Party and President XI Jinping at its core’ that drive policy. 

But are foreign investors finished with China? 

Not quite, which is good because China will need to attract lots more to continue its zero Covid strategy. Local governments are reportedly beginning to grumble over who’s going to foot the bill for the mass testing, and with tax hikes or handouts and commercial subsidies all unpopular or ineffective options – China has one of the highest saving rates in the world, meaning consumers would likely elect to save the money rather than re-inject it into the economy – the government has suggested foreign investors could pay. 

Multinational companies within China have made it clear to the Chinese government that if the country does not become more welcoming, they could become less inclined to be ‘in China, for China’ and start moving their non-China facing business out of the country. While MNCs have refrained from announcing plans to exit the market entirely, India and several markets in Southeast Asia have seen a surge in FDI from Chinese and foreign firms alike who are gradually adopting a ‘China Plus One’ strategy. 

China’s trade data also suggests that foreign businesses and investors are growing weary of the country’s economic struggles. As it became apparent that the government was determined to pursue its zero Covid strategy as Shanghai went into lockdown in February, and continued over the course of March, foreign investors pulled out of RMB 193 billion (£23.3 billion) worth of Chinese bonds – the greatest outflows since the beginning of China’s bond market – while early-stage investment by venture capitalists declined by 90% year-on-year.

Such a state of affairs is tricky for Beijing, as foreign firms could be key to affording the country’s short-term political endeavours, including maintaining a costly zero Covid strategy. What is more, China does not want to lose investors to the United States, where rising yields spurred by Federal Reserve monetary policy are turning heads. Ergo, somewhat paradoxically, Beijing is now trying to win foreign investors back. On 27 May, the People’s Bank of China announced it would open up the last 10% of its onshore bond market to try and reignite global interest in RMB-denominated debt. However, analysts do not anticipate the move will improve China’s fortunes much, considering that the foreign investors are already in China, they have their doubts, and having access to more does not necessitate investing more. 

Which foreign investors does China want? 

Those that are ‘in China, for China’ – but not in the way Western businesses often profess to be. While demand for foreign technologies and know-how that can assist China with its development remains, a new type of investor is beginning to find itself more welcome in China: those from the BRICS nations or developing states. Such economies are more likely to take Beijing’s side in questions of global governance as well as in advancing Chinese law and capital on the world stage. 

The CBBC View 

There’s a chance Wuttke got it wrong: China is indifferent to whether the world is waiting for it. The country has designs to be far more assertive in the international political economy, whilst domestic politics give cause to further insulate the economy at home. That said, China is not ready or interested in dispensing with foreign investors entirely. The country’s zero Covid strategy, for a start, could come to depend on them. But Beijing does appear to be more bullish with regard to how its trade partners engage with it economically and who those trade partners are in the first place. As a result, foreign investors can expect their interactions with China to increasingly happen on its terms, most tangibly through increased pressure to accept Chinese law (both domestically and in third markets) and participate in RMB financing overseas.

If you are a British company in China concerned about how the country’s latest policies affect you, call +44 (0)20 7802 2000 or email enquiries@cbbc.org to find out how CBBC can help.

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Escaping the dreaded ‘middle-income trap’ has long been a major concern for Chinese policymakers. Improving education levels is therefore a key policy goal. But while academic enrolment has surged over the last two decades, a more important measure to increase both productivity and income could lie less in top-ranked universities and more in the country’s vocational schools. 

Scholars like Stanford’s Scott Rozelle have long pointed out the importance of education for China’s further economic development, and the country’s persistently high unemployment rate for young workers (aged between 16 and 24 years old) creates further pressure to equip young people with essential skills. Furthermore, China’s dramatic demographic decline requires a well-educated workforce which can master next-generation technologies while caring for a growing number of the elderly. 

With higher academic collaboration under geopolitical fire and online teaching heavily curtailed, vocational training offers a rare opportunity for UK educational institutions to expand their footprint in China

The Chinese government has therefore sped up its drive to improve the quality of its vocational education system, which has long been plagued by high dropout rates and low public prestige. It also revised the country’s Vocational Education Law, raising both its legal status, and encouraging international cooperation and exchange. With higher academic collaboration under geopolitical fire and online teaching heavily curtailed, vocational training offers a rare opportunity for UK educational institutions to expand their footprint in China and participate in one of the world’s fastest-growing education markets.

The state of vocational education in China

Technical and vocational education (TVE) — which accounts for 41% of total enrolment at upper secondary schools in China — has long suffered from poor quality and political neglect. It wasn’t until the Chinese government’s ambitious Made in China 2025 Strategy (MIC25) in 2014 that Chinese leaders began to pay greater attention to technical education. After all, MIC25 was modelled closely on Germany’s Industrie 4.0 strategy for the country’s ‘Mittelstand,’ which traditionally relies on vocational schools rather than universities. 

Concomitantly, China’s Belt and Road Initiative (BRI), launched in 2013, also saw vocational education as a potent field for global cooperation, including with the UK. In 2018, the National Skills Academy for Rail (NSAR) and the UK Skills Federation — aided by DIT — set up a UK Sectors’ Centre for Excellence in collaboration with the Chinese Ministry of Education to promote exchanges between vocational schools in both countries. Several British universities, such as London South Bank University, have also launched exchange programmes with their Chinese counterparts.

Removing the social stigma around vocational education

Furthermore, the Chinese government has increased efforts to improve the attractiveness of the domestic vocational education sector. A new Vocational Education Law — which came into effect in 2020 — was revised in April 2022. The revision addresses one of the key weaknesses of TVE in China — its poor social acceptance. 

Previously, Chinese pupils, upon finishing their junior high school, were separated between general senior high schools and vocational secondary schools, with the latter usually receiving those with poorer grades. The distinction was reinforced further by the legal restrictions banning graduates from vocational high schools from enrolling at universities. This has led to the widespread perception of TVE as a dead-end venture with minimal social upward mobility. 

The 2022 revision addresses this by removing the formal distinction between the two secondary school types. Thus, Article 3 of the revised law states that ‘vocational education is a type of education that has the same important status as general education.’ 

Enrolment and graduation at Chinese TVE schools and institutes (2012-2020)

Article 13 goes on: “The state encourages foreign exchanges and cooperation in the field of vocational education, supports the introduction of overseas high-quality resources to develop vocational education, encourages qualified vocational education institutions to run schools abroad, and supports the development of various forms of mutual recognition of vocational education learning outcomes.”

The law follows the 2021 Guidelines on Promoting the High-Quality Development of Modern Vocational Education, which called for a closer alignment between general and vocational educational institutions. It is also in line with the Vocational Education Quality Improvement Action Plan (2020-2023) and its aim to establish a uniform credit and standards system, which improve both employability and make it easier for students to transfer between different institutions. 

The sector certainly needs a boost. Although there was a recent slight recovery to 12.7 million students in 2020, official statistics show that overall enrolment numbers for secondary vocational education has shrunk over the last ten years — in 2012, there were 16.9 million students. More worryingly, graduate figures — both for secondary and tertiary TVE — are far below enrolment figures, pointing to a massive dropout rate. Even Chinese media has acknowledged the problem, noting that between 2017 and 2019, 600,000 students dropped out of secondary TVE schools, a number which actually appears to be a rather conservative estimate.

The CBBC View 

While there is still a long way to go for China’s TVE levels to reach global standards, the sector is likely to see considerable growth in the coming decade. The main reason for this is the surge in investment in ‘new infrastructure’ (e.g. EV charging stations, renewable energies, IoT applications) and industrial automation. Most of these technological upgrades require advanced maintenance skills and a larger workforce of well-trained technicians. 

International cooperation in the TVE sector could therefore not only provide UK institutions with an opportunity to promote the advantages of the British educational system, but also offer a chance to be at the forefront of the next technological revolution.

Get immediate access to the China market with Launchpad, CBBC’s flagship market entry service. Call +44 (0)20 7802 2000 or email enquiries@cbbc.org now to find out more.

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Reining in industry’s contribution to carbon emissions will be key to fulfilling China’s carbon neutrality policy. The 230 national economic and technological development zones (NETDZs) that the Ministry of Commerce (MofCom) has approved to date are responsible for 11% of China’s GDP despite only occupying 0.32% of its geography. Targeted and localised action aimed at making the country’s economic zones more environmentally friendly, therefore, holds enormous potential in terms of making Chinese industry greener more broadly.

While numerous economic zones have been quick to adopt green principles when considering their development, further funding is required to realise a green transition of such magnitude. Analysts estimate that China will need to invest over RMB 100 trillion over the next 30 years to reach its goal of carbon neutrality. While extraordinarily high, that number is not an impossible target given that China manufactures much of the technology and equipment necessary for decarbonisation. And the country should expect to continue to receive significant investment – both foreign and domestic – in its green industries as a result.

But a sophisticated policy framework will be required, too. Unfortunately, that is something that is lacking at present. China’s 14th Five-Year Plan simply commits to reducing the carbon and energy intensity of China’s GDP growth. It lacks specific targets. Thankfully, local governments are taking the initiative to formalise their province’s contributions to achieving carbon neutrality. The Hainan Free Trade Port initiative, for example, has put green finance, ecologically-friendly tourism and research and development into green technologies at the centre of its development agenda. Beijing has followed suit in the pursuit of its new professional services pilot free trade zone, and the same negative list for trade and services in Hainan will also be applied in the nation’s capital.

According to MofCom, 36 NETDZs have made “outstanding achievements in green development and upgrading”, but that means there is a still long way to go in terms of harnessing these areas so that they can drive China’s green transition.

Firstly, as industrial clusters, NETDZs have high energy consumption and carbon emissions, the latter of which accounts for 10% of the entire country’s carbon emissions. With various industries and complexities found within the zones, a green transition will be more difficult than it would be for other areas. Secondly, coal still dominates the power supply; transitioning to 100% clean energy within the zones will be a difficult undertaking. Thirdly, the imbalance and mismatch in energy supply and storage between China’s eastern and western regions pose additional challenges. Lastly, there will be no ‘one size fits all’ green technology, strategy, or solution for industries located within the NETDZs, as they have various different technical requirements for carbon reduction.

China’s economic zones have become key to China’s efforts to pursue a green transition and industrial upgrading, and we welcome the growing UK-China collaboration in this field – Andrew Seaton, Chief Executive, China-Britain Business Council

Opportunities for UK-China collaboration as NETDZs go green

COP26 made it clear that international cooperation will be crucial if the goals of emissions reduction and environmental protection are to be achieved. As two of the largest economies, the UK and China not only have important roles to play, but they also have much to benefit from mutual cooperation in green development and technology.

There is great potential for cooperation between the UK and China if both countries play on their strengths to mutually work towards sustainability. UK manufacturing’s strengths, for example, lie in early-stage R&D and technology as well as later-stage servitisation, end-of-life innovation, and high-value manufacturing. On the other hand, China’s strength in manufacturing lies in the medium stage, where production and distribution take place. By taking manufacturing as an example, both countries’ strengths are found at different stages, and thus cooperation between the two will allow for both countries to fill in where they are least proficient and achieve a win-win scenario.

China needs assistance in pursuing structural reform so that it has the policies and institutions in place to support green development and innovation, not only within its various specialist zones, but across the economy at large. UK-China collaboration to this end has been successful so far. The Sino-UK Innovation Industry Park in the coastal city of Qingdao is one example, and hosts several British companies at the cutting edge of R&D in areas such as green and intelligent manufacturing, marine conservation, and AI and big data processing for manufacturing systems.

In the future, when investing in NETDZs, UK companies should pay attention to the NETDZs’ entry requirements, local industry preferences and green technologies, among others. More specifically, foreign investors should:

• Do research and verify whether their own line of business could fit within the industries currently being promoted.
• Evaluate the green, scientific and technological attributes of their own industries and ensure that they meet the green development requirements of NETDZs, so as to achieve more synergy and high-quality development.
• Create a proactive dialogue with the local government of the intended investment areas and explore the availability of potential policies and financial support provided by local government so as to achieve optimal performance by aggregating their own advantages with external facilitation.

Conclusion

Achieving carbon neutrality across China’s NETDZs will be key to hitting the country’s target of net zero by 2060. Given that there are only 230 of these zones and that they are collectively responsible for 11% of GDP, targeted action within these areas will have a disproportionate effect on the country’s ability to go green as a whole. In short, the NETDZs are an easy and effective place to start in terms of improving Chinese industry’s green credentials. “China’s economic zones have become key to China’s efforts to pursue a green transition and industrial upgrading. We welcome the growing UK-China collaboration in this field, and building on our Net Zero Report released at COP26, and believe that the UK and China working together offers great potential in tackling the critical environmental challenges we face,” says Andrew Seaton, Chief Executive, China-Britain Business Council.

While the green transition is an area where the UK has enjoyed a fruitful collaboration with China to date and will continue to do so into the future, whether China hits its target will require the implementation of a sophisticated policy framework that comes from the top. Local leaders in Beijing, Shanghai and Hainan should be commended for taking steps to draft policies that will make their own industrial areas more environmentally friendly, but their locales remain the exception and not the rule. There remain 200 NETDZs in need of reform if China is to rise to the enormous challenge its president has set. The clock is ticking.

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