FINANCE

China’s Journey From Factory To Forerunner

Published

4 years ago

May 19, 2020

Key themes emerged from HSBC’s China Connections event in Shanghai in October, when businesses from around the world gathered to explore growth opportunities in China.

Having served as the “factory of the world” for decades, China may have yet to completely shed its image as a center for the mass production of low-end goods. But there are clear signs emerging that the era of “copycat China” is coming to an end, and that the country’s enterprises are developing technologies and consumer models that will soon be adopted by the rest of the world.

China’s shift from follower to innovation leader is taking place on multiple fronts, including government policy. The Made in China 2025 strategy, announced in 2015, has signaled the government’s intention to transform the country’s industrial sector by applying cutting-edge technologies and sustainable principles, and to claim a leadership position in next-generation industries like aerospace, information technology and advanced robotics.

This drive is already yielding results.

The country has become the global leader in patent applications, filing over 1 million in 2015 alone—nearly double the number of applications from the world’s second-biggest filer, the United States.[1]

Research and development spending, meanwhile, climbed to over 2 percent of GDP in 2016,[2] putting China virtually on par with countries like the U.S., Japan and South Korea. China has also marched steadily up the Global Innovation Index, from No. 29 in 2015, to No. 25 in 2016 and No. 22 this year—making it the only middle-income member of the index’s top 25 markets.[3]

Willingness to invest means China is also moving to the forefront of global trends in defense, which, as policy analyst and forecaster Pippa Malmgren has noted, are increasingly technology-based rather than weapons-based. In her words, “the new arms race is happening in computers.”

Malmgren, founder of DRPM Group and co-founder of H Robotics, points to a new quantum computing research facility being built in China’s Anhui province as an indication that this is a race China could win. The $11 billion project is the largest of its kind in the world, and will focus on new advances in code-breaking and stealth technology, according to media reports.[4]

People-powered change

Malmgren also believes that China offers a glimpse of the likely future of global financial infrastructure. As more countries and companies begin to explore fintech solutions such as blockchain and electronic payments, China has already developed a fully fledged digital payment ecosystem. Thanks to the prevalence and convenience of payment solutions embedded in popular social media services such as Tencent’s WeChat, total mobile payment transactions in China reached an estimated $5.5 trillion last year, versus just $112 billion in the U.S.[5]

This points to an important characteristic of innovation in China that distinguishes it from many other markets: Rather than being instituted from the top down, it is often consumer-led.

As Fran Kauzlaric, Engagement Manager at consultancy Market Gravity, notes, innovation is not limited to coming up with something completely new, but can also take the form of dramatic improvements to existing products or services.

“What we’ve seen over the last 15 years—and I’m really excited about the next 15—is China taking ideas and making them better,” he says. “The reason Chinese businesses can do that is because they’ve talked to their customers and asked them what they want, and driven, tested and iterated those solutions until they’re perfected.” WeChat is a case in point, having supplemented a core messaging platform (similar to WhatsApp or LINE) with mobile payment, e-commerce, transportation and other capabilities, evolving into a fully integrated ecosystem that’s now widely considered a social media model.[6]

Chinese enterprises are largely driven by the country’s massive and still relatively youthful population, which provides both a massive potential user base and a deep reservoir of skilled technology talent. China had 4.7 million recent science, technology, engineering or mathematics (STEM) graduates in 2016, versus 568,000 in the United States.[7] The average age in China’s southern technology boomtown of Shenzhen is under 30[8]—an age group that tends to be digitally native and open to change.

Wuxu Zhang, General Manager, International Development Department, of iFlyTek, a leading maker of translation and voice recognition software, says the mammoth user base of the company’s core artificial intelligence platform—which sees some 1.5 billion users and 4 billion data interactions per day—gives iFlyTek the power to learn and to quickly make improvements.

“The data interaction is huge, so innovation will happen faster,” he says. “That’s why our accuracy is the world’s best; there’s a competitive advantage there.”

From the ground up

Another defining feature of Chinese innovation is that it often takes place at the local or regional, rather than national, level. Peggy Liu, Chairperson of Joint U.S.—China Collaboration for Clean Energy (JUCCCE), a Shanghai-based nonprofit promoting environmental improvements, notes that the country “pilots at the city level, which is different from most administrations.”

That creates opportunities to test innovations in a local market and make any necessary adjustments before scaling up. Bike-sharing company Ofo, for example, began on a limited scale in Beijing, but now operates worldwide.

Local-level innovations have also led to the development of several unique technology clusters, from software-centric Beijing to the more hardware-focused companies of Shenzhen and the surrounding Pearl River Delta (PRD). Enterprises in the PRD area invest in R&D at double the national rate, and the region is fast becoming known as the “Silicon Delta,” proving that “China’s growth model can be innovation-led,” says Neo Wang, Head of Commercial Banking, Guangdong and PRD, HSBC.

Businesses are learning to perceive China’s companies as drivers of technological change, rather than simply contract manufacturers, and to regard its consumers as a barometer of future trends, rather than simply a massive export market. In fields from artificial intelligence to fintech, the former factory of the world is on course to soon be blazing trails for others to follow.

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FINANCE

Global debt balloons to record highs

Published

11 months ago

May 25, 2023

The San Francisco Telegraph

It’s now $45 trillion higher than its pre-pandemic level and is expected to continue growing rapidly, a top trade body has warned

The global debt pile increased by $8.3 trillion in the first quarter of the year to a near-record high of $305 trillion amid an aggressive tightening of monetary policy by central banks, the Institute of International Finance (IIF) has revealed.

According to its Global Debt Monitor report on Wednesday, the reading is the highest since the first quarter of last year and the second-highest quarterly reading ever.

The IIF warned that the combination of such high debt levels and rising interest rates had pushed up the cost of servicing that debt, prompting concerns about leverage in the financial system.

“With financial conditions at their most restrictive levels since the 2008-09 financial crisis, a credit crunch would prompt higher default rates and result in more ‘zombie firms’ – already approaching an estimated 14% of US-listed firms,” the IIF said.

Despite concerns over a potential credit crunch following recent turmoil in the banking sectors of the United States and Switzerland, government borrowing needs to remain elevated, the finance industry body stressed.

According to the report, aging populations and rising healthcare costs continue putting strain on government balance sheets, while “heightened geopolitical tensions are also expected to drive further increases in national defense spending over the medium term,” which would potentially affect the credit profile of both governments and corporate borrowers.

“If this trend continues, it will have significant implications for international debt markets, particularly if interest rates remain higher for longer,” the IIF cautioned.

The report showed that total debt in emerging markets hit a new record high of more than $100 trillion, around 250% of GDP, up from $75 trillion in 2019. China, Mexico, Brazil, India and Türkiye were the biggest upward contributors, according to the IIF.

As for the developed markets, Japan, the US, France and the UK posted the sharpest increases over the quarter, it said.

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FINANCE

Nigeria takes step to combat fuel shortages

Published

11 months ago

May 24, 2023

The San Francisco Telegraph

The West African country has built a giant oil refinery to cover domestic demand

Nigeria will commission its new Dangote Petroleum Refinery on Monday in hope of alleviating the chronic fuel shortages that have turned Africa’s biggest oil producer into a fuel importer.

The processing plant, which has capacity of 650,000 barrels per day, is expected to cover all of the country’s fuel demand, according to Nigerian media.

Built by Dangote Group, a conglomerate owned by billionaire industrialist and Africa’s richest man Aliko Dangote, at the Lekki free trade zone near the city of Lagos, the refinery is being touted as a way to end the country’s reliance on imports for nearly all of its refined petroleum products.

The giant complex is one of Nigeria’s single largest investments. It comprises a 435-megawatt power station, a deep seaport and a fertilizer unit. Initially, $12 billion was earmarked to build the refinery, but the project ended up costing $19 billion after years of delay.

Crude processing is scheduled to begin in June, although the research consultancy firm Energy Aspects said that commissioning was an intricate process and that the facility may only start operating later this year. It is expected to reach about 50-70% of processing capacity next year and full capacity by 2025.

The refinery will produce Euro-V quality gasoline and diesel, as well as jet fuel and polypropylene, the company said, adding that the facility was “designed to process a large variety of crudes including many of the African crudes, some of the Middle Eastern crudes and the US Light Tight Oil.”

Despite being Africa’s biggest oil producer, Nigeria imports petrol, diesel, and processed petroleum products because many of its own refineries have dilapidated over the years.

Russia accounts for lion’s share of India’s oil imports – Reuters

Dangote expects the new plant to cover Nigeria’s domestic fuel needs and produce extra volumes for export. It is also expected to boost the market for Nigerian crude to $21 billion per year, the company added.

The Nigerian National Petroleum Corporation has a contract with Dangote to supply some 300,000 barrels of crude per day. However, theft, pipeline vandalism, and underinvestment poses a threat to achieving full output, economist Kelvin Emmanuel told Reuters.

In April, Nigerian oil production slumped under 1 million bpd, below Angola’s output, data showed.

According to Emmanuel, Dangote might be importing oil from international trading companies such as Trifigura and Vitol, as the refinery has not yet signed agreements with oil majors in Nigeria.

Meanwhile, Energy Aspects expects the Dangote refinery to not only solve Nigeria’s fuel shortages but also to reshape the gasoline market in the Atlantic basin.

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FINANCE

US will default if debt deal fails – treasury secretary

Published

11 months ago

May 24, 2023

The San Francisco Telegraph

The current borrowing limit is a constraint on Washington’s ability to meet its obligations, Janet Yellen insists

America’s chances of paying its bills after June 1 are “quite low,” US Treasury Secretary Janet Yellen warned on Sunday in an interview with NBC’s ‘Meet the Press’.

According to Yellen, if Congress fails to reach an agreement on raising the country’s $31.4 trillion borrowing limit by that time, it will be forced to default on “some bills” shortly after.

“There’s always uncertainty about tax receipts and spending. And so it’s hard to be absolutely certain about this, but my assessment is that the odds of reaching June 15, while being able to pay all of our bills, is quite low… My assumption is that if the debt ceiling isn’t raised, there will be hard choices to make about what bills go unpaid,” Yellen said.

The treasury secretary did not say which ‘bills’ she had in mind, but noted that the government’s most immediate obligations range from paying interest on outstanding debt to “obligations to seniors who count on social security, military, contractors who’ve provided services to the government.”

She added that “there can be no acceptable outcomes if the debt ceiling isn’t raised.”

The administration of US President Joe Biden and Republicans led by House Speaker Kevin McCarthy have been at an impasse over raising the debt ceiling for several months, despite warnings that the US could face its first-ever default unless it is raised by June 1.

Republicans are refusing to agree to the move unless Biden agrees to government spending cuts and curbs on social programs.

Some lawmakers have called on Biden to invoke his powers under the 14th Amendment to the Constitution and bypass Congress and unilaterally raise the debt ceiling. However, Biden told reporters on Sunday that while he has considered doing so, there is likely not enough time before the deadline.

Biden and McCarthy are scheduled to meet again on Monday to discuss the matter.

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