Analysis

China’s legislative “Two Sessions” (两会) meeting outlined the party’s agenda for the coming year. This includes targets for 5% GDP growth and a 3% deficit rate that stressed the party’s ambitions for economic continuity rather than change. Amid intense challenges for China’s economy–including deflation, a collapsing real estate market, local government debt, high youth unemployment, a steep decline in FDI from the West, and restrictions on imports of high tech components–state intervention and stimulus dominate economic policy. Part of the stimulus includes targeted state-led investments in specific industries, particularly the tech sector, as part of China’s whole-country approach. The PRC government believes technology can raise living standards, a theme encapsulated by Xi’s latest phrase: “high-quality development” (高质量发展). 

During the Two Sessions, the CCP also announced a dramatic increase in annual military spending by 7.2%, although this increase does not capture the full expansion in China’s military capabilities. In part, this is a reaction to an increasingly unstable geopolitical environment, but it also betrays an ultimate ambition to replace the US as the global military leader, at least in East Asia where the CCP maintains its eyes on Taiwan. In particular, this will mean a significant boost for the domestic arms, weaponry, and other military and national security-related industries as China’s leaders push for technological self reliance and the purging of foreign-made components in military and government supply chains. Overall, however, the dominant theme of the Two Sessions was that the CCP intends to maintain its state-interventionist and protectionist approach to the economy, particularly in the tech sector, and that foreign corporations should therefore be prepared for no dramatic easing of China’s current challenging business and legal environment. For foreign governments, it also highlights the heightened risk from Chinese tech companies operating in their territories as these entities will be increasingly funded or supported by Chinese state actors under the state-led directives underscored at the Two Sessions.

Analysis

Tik Tok became the latest casualty of US-China tensions as bipartisan attacks on the app targeted its Chinese ownership. Despite a US$1 billion move by TikTok, “Project Texas” to ensure sensitive data from US users remains separate from the rest of the company, lawmakers did not accept the company’s promises that US users’ data was sufficiently protected. After lawmakers grilled TikTok’s leadership and voted for the company to divest from its Beijing-based owners ByteDance 字节跳动, the app found itself in hot water for pushing its users to lobby on its behalf. Chinese officials’ claims that banning TikTok would account to “bullying” by the US government undermined Bytedance’s oft stated insistence that the Chinese government never pressured Bytedance and, by extension, TikTok. Adding to TikTok’s woes, an annual assessment by Office of the Director of National Intelligence (ODNI) noted that Chinese intelligence and propaganda institutions frequently use the app to spread pro-China disinformation and interfere in US elections. Furthermore, the Pentagon came under criticism for being ill-prepared to combat China’s embrace of technological innovation as a competitive advantage against the US. 

After the House vote, TikTok declared that it will not divest to a US owner (leaving aside the fact that US companies appear unwilling or unable to acquire the brand), and if anything are doubling down on their investments in China. While the future of the app in the US remains unclear, and likely must endure several court cases, the bill demonstrates that political crosshairs are increasingly focusing on tech companies with ties to China. Asides from the high likelihood that this targeting of the tech sector will continue as one of the few issues to enjoy broad bipartisan support (despite its unpopularity with young voters and Donald Trump), this also underscores how companies need strategies for handling geopolitical issues like worsening US-China relations. For Congress, while this bill may also represent a rare bipartisan win, it is also unlikely to prevent the mass leaking of sensitive US data to China, with other companies and apps like Temu and Shein aggressively mining user data.

Analysis

While Chinese leadership projects 5% GDP growth for 2024, it is important to remember that these numbers are aspirational rather than material and that Chinese “official” statistics are rarely to be trusted. To make this point, it is worth reviewing China’s reported GDP statistics for 2023. While China claimed 5.2% GDP growth in 2023, economists remain skeptical that the number was actually achieved; the Rhodium Group put the number somewhere closer to 3%, citing contracting property and export markets, among other factors. The 5.2% also reflects only one part of China’s growth statistics, namely year-on-year GDP growth between October and December. Quarter-on-quarter economic growth, by contrast, slowed from 1.5% in the third quarter to just 1% in the final quarter of 2023, suggesting sluggish prospects for the new year. Moreover, China’s ability to meet its 2023 economic targets was, in part, due to low base numbers that resulted from poor economic performance in 2022. The higher base numbers going into 2024 will mean that real growth must be significant and sustainable if China is to make its new predictions come true.

While achieving that kind of growth will be difficult, economists do not think it is impossible. it will, however, require surmounting several key challenges. Primary among them is the housing market, with China’s second largest property developer, Country Garden, failing to make another yuan bond interest payment this week. This comes after being declared in default in October 2023 for missing a dollar bond interest payment and the court-ordered liquidation of China’s largest property developer, the Evergrande Group, just months ago. While the central bank cut mortgage rates in February, it is unclear whether or not it will actually spur home-buying when the sector more broadly continues to appear so unstable. 

Another key concern is deflation, as China once more floods global markets with Chinese-made goods in an attempt to offload surplus stock. At the same time, China is not buying an equivalent number of foreign goods in return, overloading foreign markets and risking global deflation. Managing this issue will be a balancing act for Beijing, not only in economic terms but also political, as protectionist backlash looms large as another key obstacle to China’s economic recovery. The EU looks ready to impose tariffs on Chinese-made EVs that are overwhelming domestic markets, and the US has already excluded Chinese-made products from tax credits under the Inflation Reduction Act. While China has (hypocritically) decried such protectionist measures by the EU and US, it does nothing to mitigate their economic impact nor change the growing trend among the international community toward cutting off what appears to be China’s only solution to its domestic deflation. In short, don’t hold your breath waiting for China’s economic recovery.

Analysis

The Department of Commerce (DOC) continued its crusade against US chip manufacturers’ exports to China, at the same time as reports surfaced of a Chinese initiative to push US technology out of China. The DOC informed US manufacturer Advanced Micro Devices (AMD) that it would need an export license for its made-for-China chips, despite the company’s hopes that it would avoid trade restrictions. Instead, AMD is facing requirements, much like its competitors Intel and Nvidia, to produce slower chips for the Chinese market. The move underscores the Biden Administration's attempt to prevent China from catching up to US artificial intelligence and tech development by harvesting US-made chips, with AMD previously avoiding restrictions levied on other companies and maintaining its ability to export chips to China’s Huawei. 

For chip manufacturers, this latest move highlights the risk of producing chips for the Chinese market. Despite purpose-built chips that perform slower than chips intended for the US, the Biden Administration’s tightening regulations suggest that all chips will likely necessitate review and export restrictions. Chip manufacturers are also limited in their ability to restrict where their chips end up after they are exported, particularly if faster chips are exported to third or “safe” countries like South Korea or Japan before they are then ultimately re-exported to China. This poses a major challenge for both the Biden Administration and for tech companies to diversify its sources for semiconductor and chip manufacturing, while also ensuring that these faster chips do not end up in China. It also sets up a reputational risk challenge for foreign companies in the tech industry that wish to maintain a presence in China, with Sweden’s Ericsson forced to counter Chinese reports that the company is pulling out of China for fear of losing customers, all the while insisting that it is not facilitating Chinese military development.

Analysis

Google became the latest tech company to face a high profile case of corporate espionage after the Department of Justice indicted a former engineer at the company for stealing AI intellectual property on behalf of Chinese competitors. The indicted individual is a Chinese national who publicly identified himself as the Chief Technology Officer of a Chinese AI company named Beijing Rongshu Lianzhi Technology (北京融数联智科技有限公司) at the same time as working for Google. The alleged perpetrator reportedly stole hundreds of sensitive documents. The case highlights the very real threat facing tech companies from employees with nefarious intentions, particularly from those acting on behalf of the CCP. Note that China’s leaders have stressed that AI development is a national priority and put even greater pressure on Chinese companies and the CCP to compete with the US in AI development. As a sign of China’s push for AI expertise and the complexity of the players involved, the Beijing-based text-to-video generative AI startup, AIsphere, recently announced US$14 million in funding, primarily from China-based Fortune Capital, with the ambition to exceed OpenAI’s equivalent platform, Sora, within six months. 

This case produced red flags that ultimately alerted Google and the FBI. However, the challenge of identifying and isolating such cases remains a fundamental challenge to tech companies that will become even more pressing as the race for AI development continues to define the future of US-China competition and espionage. Companies and governments need to be aware that not only will AI define the future of business and intelligence work, but also that companies involved in AI innovation will be targets for corporate espionage from both hackers and employees.

Analysis

Nongfu Spring Co. 农夫山泉, a beverage giant founded by Zhong Shanshan, China’s richest man, faced attacks from online netizens in China targeting the company’s founder and brand. The attacks, catalyzed by the death of the founder of a rival brand, Hangzhou Wahaha Group Co., caused an online pile on that criticized everything from the founder’s son to the comparisons of the brand’s iconic red bottle cap to the Japanese flag. The company’s sales and stock price plummeted, wiping out US$4 billion in market capitalization, in a display of the power of China’s online nationalists to target corporations’ bottom lines, even without a particular trigger or faux pas by the company in question. Nongfu’s experience highlights two challenges for brands in China. First, that even domestic brands are at the mercy of online mob-like criticisms, particularly if they lack effective crisis communication strategies. Second, attempts by China’s leaders to reassure the private sector–which it needs to ensure its much-touted GDP growth targets–are not as effective as the CCP hopes. This underscores how the CCP’s provoking of nationalists to support the party is a double-edged sword for both foreign and domestic corporations in China.