Welcome to Zooming In China Tea Time, I am Simone Gao. At the G7, member countries formed an alliance against China. Leaders from these seven countries criticized China for its human rights abuses and unfair economic practices — creating the strongest collective warning the group has sent to Beijing since Xi Jinping rose to power. However, despite America, Europe and Japan’s criticism, China still attracts the largest investments in the world. Who is pouring money into China? And will China form a powerful alliance of its own? Let’s get started.
The G7 final statement, issued on Sunday, directly mentions a number of contentious issues involving Beijing — from the crackdown in Hong Kong to harassment of Taiwan to the use of forced labor in Xinjiang. The communique also calls for another international study into the origin of the coronavirus and goes after China’s Belt and Road initiative. And, to counter China’s loan policies with developing countries, the G7 will offer a $100 billion alternative.
The communique also pledges to strengthen rules that protect against unfair practices, such as forced technology transfer, intellectual property theft, lowering of labor and environmental standards to gain competitive advantage, market-distorting actions of state-owned enterprises, and harmful industrial subsidies.
The daily beast reported that President Biden tried to persuade his colleagues to sign a joint statement calling out China directly for forced labor practices in Xinjiang province but failed.
The final communique did call out China’s name in some occasions involving Hong Kong, Taiwan and general human rights problems in Xin Jiang, but it did not name China when describing details.
Nevertheless, this is a historic convergence between America, Europe and Japan on their attitude toward Communist China.
As we know G7 accounts for close to 60% of global net wealth, 39% of global GDP and 10% of the world’s population. Most members are Great powers in global affairs and maintain close economic, military and diplomatic relations. All of them are democratic countries.
So, if such a cluster of powerful nations consider China a strategic rival rather than a partner, will the rest of the world lose confidence in China’s economic prospects?
Not very likely. In fact, as of today, China is still the hottest target for institutional investors. There are companies leaving China, but there are also companies trying to enter the Chinese market.
As an example, for the first time Apple used more suppliers from China than from Taiwan in 2020, and Apple’s Chinese suppliers increased to 51 compared to 42 last year.
Apple is the biggest tech company in the world and sold more than 300m devices in 2020. Apple needs a huge manufacturing base and skills pool, and the best place to find each is still China.
It is also still the case that Chinese suppliers offer prices that competitors find it difficult to compete with.
It is a familiar strategy from China: “They are willing to take low-margin businesses that other suppliers are reluctant to pick up,” “This way, they could gradually level-up by working with Apple and can later bid for more business the next time.”
Chinese suppliers don’t do this for every foreign company anymore, but Apple is still worth the temporary sacrifice because being an Apple contract manufacturer greatly boosts the Chinese company’s image.
Apple’s biggest manufacturer in China was Foxconn, a Taiwanese company.
But because of the uncertainty that both the trade war and the impact of the pandemic have put on the future of China’s economy, Foxconn decided to leave China and move its manufacturing facilities for Apple to India, Vietnam and America.
Apple CEO Tim Cook wanted Foxconn to be responsible for manufacturing Apple products for the non-Chinese market and to let Chinese manufacturers produce those products for the Chinese market.
But recent reports indicate that Foxconn has encountered problems in the new locations. In India, workers’ salaries are lower than that of the Chinese, but they are not willing to work overtime, a big contrast to the workers in China. The manufacturing base in Vietnam is significantly less sophisticated than that in China. And Foxconn is struggling to bring the supply chain from China to Vietnam.
The Apple example gives us a clear understanding that it is hard for these mega-corporations to leave China, let alone create a made-only-in-America manufacturing line. Not only will the production costs double or triple, America simply doesn’t have the manufacturing capabilities anymore. That is not exclusive to America. No one else in the world has the industrial manufacturing capabilities of China.
According to the World Bank, in 2010, China surpassed the United States to become the largest manufacturing country. Among the more than 500 major industrial products, the output of more than 220 of them by China ranks first in the world.
China is the only country that has all 41 major industrial categories, 207 medium industrial categories, and 666 industrial sub-categories as defined by the United Nations Industrial Classification.
China can basically make anything. No other country has that capability.
This is why it may seem hard for some mega-corporations to leave China. But we have also observed that other companies did leave China.
Since the start of the U.S.-China trade war in 2018, a large number of Japanese companies have withdrawn from China, including century-old camera giant Olympus, Omron Precision Electronics, Mitsubishi Heavy Industries, Toshiba Machinery, and more.
At the end of 2020, the Japanese government introduced a subsidy policy to compensate companies that withdraw from China. The first batch of companies that applied for relocation subsidies was nearly 90, but the second batch had nearly 1,700 as of the end of July, indicating that Japan is withdrawing its entire industrial chain from China.
American and European companies are leaving China as well. America’s Nike and Germany’s Adidas have both decided to close their only directly operated factories in China. Philips Lighting and Samsung also closed their factories in China.
Why did these companies leave China?
First, the pandemic made the world realize the danger of overreliance on Made in China products. Governments around the world are trying to move essential manufacturing, such as medical supplies, back to their own countries.
Second, China’s manufacturing, labor, property and raw material costs are all increasing, making it hard for these companies to make a profit in China.
Third, China’s favored-status policies for foreign companies are disappearing.
To sum it all up, some companies are leaving China, some companies are staying in China and some companies are trying to enter China.
What’s the ratio? I may bore you with quite a few numbers for a minute, but please bear with me. These numbers are important.
According to the Chinese official data, in 2020, foreign direct investment in China totaled $144.3 billion, marking a 4.5% increase from the previous year. Please note that in 2020, global foreign direct investment decreased 38% from the previous year, but investment in China increased 4.5%.
So, despite the trade war and the pandemic, countries are still pouring money into China.
Who are these countries and companies?
In 2019, the top ten foreign direct inventors to China were: Hong Kong, Singapore, South Korea, Taiwan, Japan, U.S., UK, Macao, Germany and Holland.
In 2020, U.S. foreign direct investment in China dropped by roughly a third, while Holland’s investment in China increased by 47.6% and the U.K.’s increased by 30.7%.
So, some European countries were much cozier to China than the U.S. in 2020. But just a few weeks ago, the EU suspended their EU-China Comprehensive Agreement on Investment that took seven years of negotiations and was finally agreed to in principle at the end of last year. The wind in Europe shifted.
Nevertheless, China is still attracting more investment than any other country in the world. This is especially true with foreign indirect investment where the money goes to the capital market.
In 2020, China attracted $254.7 billion in investment in the bond and stock markets, an increase of 72% from 2019. This is a very large investment increase compared to foreign direct investment in China. That increase was only 4.5%.
Who are those that pour money into China’s stock and bond market?
Wall Street giants are definitely expanding their China businesses as Beijing has pressed ahead in the last three years with efforts to increase foreign investment in the country’s capital markets, as well as allow foreign firms greater control of their local operations.
BlackRock announced on May 12th that it had received regulatory approval to begin asset management in China through a joint venture with a subsidiary of China Construction Bank and Singapore’s Temasek. BlackRock will own 50.1%, while Temasek will hold a 9.9% stake.
Separately, Bloomberg reported this week, citing a source, that Goldman Sachs is hiring 320 staff in mainland China and Hong Kong. There are plans for 100 more positions later this year, the report said.
The biggest move will potentially come from Citi who expects $300 billion to enter the bond market as a result of FTSE Russell officially adding China to its World Government Bond Index in October.
That said, the share of foreign investment in China’s capital market is relatively small, especially for American and European countries.
Because China doesn’t publish transparent data about its bond market, there is a myth about which companies are actually investing in China’s bond market.
Last year, China’s famous internet portal Sina Finance published a research paper that gave out the geographical composition of Chinese US dollar bond investors. Among those investors, the Asia-Pacific region accounts for about 85%, Europe and the Middle East account for about 10%, and North America accounts for just about 5%.
Although small now, Wall Street giants are definitely trying to hold a bigger share in China’s capital market.
In fact, if you look at the 600 foreign investment companies that China allows in the country, you can spot quite a few American institutions including JP Morgan, Morgan Stanley, Goldman Sachs, Black Rock, CITI Group, Yale, Harvard, Stanford, Princeton and others.
So, the institutional investors that manage your retirement money are investing those hard-earned dollars in Chinese companies that could pose a national security threat to America. At the very least, the money will boost the overall economic might of China who is the number one rival of our country.
Yet, you can hardly blame your investment manager. Next to the need to make money themselves, their biggest fiduciary duty is to make your wealth grow. And China is the world’s bright spot for investment return, at least for now.
So, despite the trade war, the pandemic, and the very real national security concerns, money is still pouring into China.
A few days ago, President Biden expanded the ban on US investment into Chinese companies that have ties to the Chinese military or help build a surveillance state. No doubt this is a step in the right direction. The U.S. government is finally casting their eyes firmly on the money. But does this strategy have real teeth, and more importantly, does it hit the real target? We will reveal those answers in upcoming episodes.
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