What happened in China in July

“ECONOMIC SLOWDOWN”

China’s economic numbers of the second quarter in 2023 missed expectations. I wrote earlier in a previous newsletter how China seems to rebound after 3 years of covid restrictions. As much as economists were bullish back in April, they are mostly bearish now.

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GLASS HALF EMPTY:

China’s manufacturing PMI came it at 49.3 in June, for the fourth month below 50, which means China’s factories have declining orders. Export numbers in June plunged 12.4%, the biggest decline in more than 3 years. Import numbers dropped 6.8% in June as well.

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China’s property sector contracted with a total decline of 7.9% this year. The sector is under pressure and worse off than predicted in Q1. Chinese property investors did not get access to credit as before, while consumers continued to save their money instead of buying property.

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Consumer confidence remains low. In Q2, retail sales increased 8.2% YoY and GDP growth 6.3% YoY, but with the low base of 2022 when Shanghai was in full lockdown this is below target. Urban youth unemployment reached an all-time alarming high at 21.3%.

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China’s economy is in trouble.

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While the world is fighting inflation, Chinese inflation rates (CPI) fell to 0% in June. Inflation is bad, but deflation might be even worse for China as it hurts growth, production and employment – everything China needs right now to rebound. So why is the People’s Bank of China not providing massive financial stimuli into the economy?

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GLASS HALF FULL:

China’s numbers are not good, but compared to the rest of the world, China is still doing quite well. China is still expected to grow its GDP at 5% in 2023, which will contribute to about 35% of global GDP growth, adding in 2023 the GDP of a country like the Netherlands on top of China’s 18.1 trillion USD.

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China’s pandemic controls ended 6 months ago as opposed to 2 years ago in most places. In Q2, a new COVID wave infected over a hundred million Chinese. They had to survive 3 long years without any financial support from the state. It is normal that they are still cautious. The world is past the COVID trauma, but China is only half-way on its complete mental recovery.

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Beijing has also been in a three-year control cycle towards tech companies and real-estate. It did hurt the trust of businesses to invest and hire young educated people. The unemployment rate of China overall remained stable at 5,2%, so the problem feels more a ‘transitorily’ trust issue than a ‘systemic’ crisis of the overall economy.

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Beijing is more concerned about raising China’s debt levels further with new stimuli than it is about a ‘temporarily’ sluggish consumer spending and low business confidence. It’s a gamble that could pay off for China over time should China’s internal trust bounce back in 2023 still.

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Beijing trusts in the resilience of Chinese entrepreneurs and consumers much more than most foreign economists do. Consumer spending is up in the service sector which represents 55% of China’s GDP: domestic travel, restaurants, sport, entertainment, IT and financial services are growing very fast. As the world’s inflation goes down, exports should increase again as well. Chinese exports of air conditioners, heat pumps and electrical vehicles are booming – all thanks to climate change!?

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Xi Jinping and the Premier Li Qiang started creating a new story and vibe to encourage and support entrepreneurship. In Q2 Beijing entered a strong governmental support cycle towards technology platforms, risk investments, entrepreneurship, innovation, robotization, R&D, green manufacturing, IoT infrastructure and much more…

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When businesses regain trust, private enterprises will hire again, consumers will spend more, real-estate decline will slow down and China will not enter deflation, but instead disinflation – or temporary slowdown of rising price. That is Beijing’s mindset now.

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Whether the glass is half-full or half-empty is open for debate, but what is clear is that the newly released policies mid-July to boost confidence in private enterprises has not yet seen its effect in financial markets. Beijing might need to do more than interest rate cuts and pep-talk, and could still have to start distributing ‘digital’ money to consumers for them to spend.

1.     China’s solid-state battery development could be an EV game changer

Chinese scientists say they have developed a new solid-state battery technology to match today’s cutting-edge performance at just 4 per cent of the cost. Most Electrical Vehicle batteries are of a lithium variety, which all contain liquid electrolytes. Liquids have a lower energy storage density than solids, which makes them more bulky, heavy and prone for potential fire risk as we have seen in recent Fremantle Highway fire on 27th of July.

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Solid-state batteries have many advantages such as double energy density, non-flammable, non-corrosive, leakproof, faster charging speeds, and unrestricted charging temperatures. The problem is that solid electrolytes require expensive metals like lanthanum and cobalt, and the manufacturing process is very difficult. But two months ago, China’s largest lithium mining company Ganfang Lithium announced mass production of solid-state batteries using an oxide electrolyte with a solid diaphragm.

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Chinese Researchers at USTC in Anhui province have now been able to develop all-solid-state batteries. The team developed a new solid electrolyte, called lithium zirconium oxychloride. Its performance was found to be comparable to that of advanced sulphide and chloride solid electrolytes but at only 4 per cent of the cost. In its application tests, the solid-state battery achieved room-temperature ionic conductivity that was more than double the standard required for real-life application, it took only 12 minutes to charge and maintained stable cycles over 2,000 times at room temperature.

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2.     China to draw up new AI regulations

On July 13th, the Cyberspace Administration of China (CAC) released their "Interim Measures for the Management of Generative Artificial Intelligence Services." In it, the Chinese government lays out its new rules to regulate those who provide generative AI capabilities to the public in China.

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China’s regulations are however still today often mistakenly dismissed as irrelevant or seen purely through the lens of a geopolitical competition to write the rules for AI. When diving deeper, one realizes Beijing is leading the way in AI regulation, releasing groundbreaking new strategies to govern algorithms, synthetically generated images and chatbots in the mold of ChatGPT, and more.

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Information control is a central goal of the policy (no surprise from China here), but they also contain many other notable provisions such as consumer and worker protection. But what is remarkable is how China gets AI algorithm developers to comply with the new regulations, and as such making bureaucrats in Beijing true experts on AI, the models and risks. Reusable regulatory tools such as algorithm registry is also a solid yet open scaffolding structure that holds lessons for policymakers abroad to build national AI laws for tomorrow. I doubt many policymakers will want to learn from Chinese governance on AI – but they should!

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If you have an interest to dive deep into China’s AI regulation, I can recommend the paper from Carnegie. It analyses three main regulations around recommendation algorithms, “deep synthesis,” and generative AI (like ChatGPT). It is quite a lengthy read, but it shows how China learns from experience and turns the nation into the biggest laboratory for experiments in governing perhaps the most impactful technology of this era that will impact the us soon.  

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3.     China now has the world’s most powerful hypersonic wind tunnel

After five years of construction, the most powerful wind tunnel on the planet has roared to life in Beijing – a facility that will be key to advancing China’s hypersonic ambitions. The JF-22 wind tunnel is 4 metres in diameter and can generate air flow speeds up to 10km per second. That makes it the largest and fastest wind tunnel in the world, capable of simulating hypersonic flight conditions up to Mach 30 (30 times the speed of sound) which is 3 times faster than NASA’s wind tunnel.

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Jiang Zonglin, the lead scientist for JF-22 project came up with a new type of “shock wave generator” model: a series of precisely timed explosions to generate a series of shock waves that converge at a single point. The innovation has paved the way for more advances by bringing more accuracy and efficiency to the study of hypersonic flight. Using explosions however does not come without danger, but it could put China years ahead of competitors. End of 2021, when China tested a hypersonic weapon system, the Pentagon experienced a Sputnik moment that is adding fuel to destabilizing the relationship between US and China.

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China is surely planning to go off with a bang!

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By 2035, Beijing hopes to deploy a fleet of hypersonic aircraft that can carry thousands of passengers into space each year, or reach anywhere on the planet within an hour. However, at this speed, air molecules around the aircraft break apart and form new chemical reactions. To study and address this phenomenon, scientist can use wind tunnels like the JF-22. Why don’t we hear about this ‘Elon Musk’-style exciting news? It must have blown over at 30 Mach…

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4.     China is giving tax incentives for R&D

China intends to become a global leader of innovation by 2030. Beijing’s plan to transform China into an innovation hi-tech powerhouse has been most ambitious, but as Washington began a more confrontational technology war with China last year, China’s aspirations have become more than a plan - and doing research and development is now a matter of survival.  

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To that extent, China is trying to attract, encourage and support researchers to spend their brainpower in China. The latest such effort offers a pre-tax deduction of 200% of R&D cost as a permanent tax-expense benefit for eligible companies – excluding companies on China’s negative list industries such as tabaco, accommodation and catering, retail, business services and entertainment.

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The R&D tax incentive is about six times higher than in the US. Talent-strapped corporations in China are now looking to hire away Chinese people overseas, because those candidates are more willing to relocate and fit in. Tax deductions are one incentive, but the reality is that Chinese scientists working in the U.S. no longer feel welcome in the country according to a recent survey. Over one third of the respondents reported feeling unwelcome in the U.S. and 72% arefeeling unsafe. One million Chinese returned to China in 2021, up from 770,000 in 2020 and 580,300 in pre-pandemic 2019. Just 134,800 went back in 2010. As for returning scientist, 900 returned in 2010, while it was 2,621 in 2021. The trend is clear.

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5.     China's methane-powered rocket becomes world's first to fly into orbit

On my birthday, July 12th, China has beaten SpaceX with world’s first methane-powered rocket launch carrying a payload of six tonnes. The Zhuque-2 launch was successfully performed after the projectile blasted off from the Gobi Desert. This puts the Chinese aerospace company LandSpace in front of the Space race to liquid oxygen methane rocket technology after six years of research and development. Methane-powered engines – with their high performance, low operational costs and more environmentally friendly character – are particularly suited for the trend of reusable rockets.

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The Zhuque-2 experienced an unsuccessful launch last December, but this attempt succeeded. Earlier this year, two other liquid oxygen methane rockets – the Terran 1 from Relativity Space in the US and SpaceX’s Starship – failed in their maiden attempts to reach orbit. But as Elon Mush always says: “If things are not failing, you are not innovating enough.

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6.     5.5G: The talk of the town at MWC Shanghai 2023

GSMA’s Mobile World Congress Shanghai 2023 celebrated its 10 years. I remember the first editions in Shanghai and I was seriously unimpressed comparing it with MWC in Barcelona where telecom infrastructure professionals from around the world gather. But times have changed!

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The world is about 4 years into availability of 5G commercially with about 1,2 billion global connections, of which 676 million are in China. In the past 3 months China built more 5G base stations (600,000) than US did over the past 2 years. China right now has 3 million 5G base stations.

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Huawei’s rotating chairwomen Meng Wangzhou (who was previously imprisoned in Canada) was beating the drum at MWC Shanghai 2023 with Huawei’s plan to release 5.5G technology in the second half of 2024. 5.5G, also called “beyond 5G”, is a transitional step between 5G and 6G. International standards for 6G are expected to be set by 2030 and Huawei aims to build a track record with 5.5G now to put it in a stronger position for 2030. 6G is still a long way away, but China is getting ready for it as the government nominated 6G as one of its priority projects for 2023 with early 6G applications scenarios to be introduced by 2025.

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5.5G increases internet connectivity by a factor of 10 and allows operators to really capitalize on previous 5G infrastructure investments. For example, 3D visual computing without the need of VR glasses becomes a reality with 5.5G. Most importantly, this should put China in another league when it comes connecting billions of sensors to the internet and make China the smartest factory, logistics, mobility, cities…in the world. With a 5.5G deployment, China will soon be heading towards a complete, real-time, and more ecological digitalization of its manufacturing, retail and delivery industries. The real reason the world will NOT ‘de-risk’ from China any day soon is because China is creating an intelligent real world at high-speed.

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A commercial video here from Huawei explains why the future of communication will soon be available in China.

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7.     China is Building an Open National Chip Plan Around RISC-V

China has for years talked about building its own chips. In 2012, Beijing proposed to merge all kinds of chip architecture blueprints such as x86, MIPS, PowerPC, Alpha and SPARC into a unified design. Such efforts to make a sovereign chip around alternative architectures went nowhere and billions have been defrauded from the Chinese government in the process.

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China now bets on open-source RISC-V for chip design to minimise potential damage from ‘being cut off’ by US sanctions and reduce reliance on chips companies like Intel or ARM. RISC-V R&D in China started in 2015 mostly at the academic and startup levels but is now rapidly maturing. Chinese organizations established the China RISC-V Alliance in 2018 to build out a full open-source chip ecosystem by 2030.

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The RISC-V ecosystem in China is built on the open-source ethos, with this tech community working together to improve designs and software. China also launched its first Linux-based open-source desktop operating system called OpenKylin in July. The OS has a user interface that looks similar to Windows’, is available in Chinese and English, and has pre-installed apps such as the Firefox Web browser and a Chinese-developed office suite that works with Microsoft Word and Excel documents.

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I don’t see China taking on the world with a new OS or chip, but I do believe that China is smart to build open ecosystems instead of trying to protect and fund national high-flyer chip giants as we see today around the world. The future belongs to ecosystems as they say.  

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Recommended reading of the month:

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One of my favorite case studies I use in workshops and keynotes is the “Ren Dan Heyi” model of Haier of its founder Zhang Ruimin.

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Start-up Factory (2022) is written by Joost Minnaar and Pim de Morree, authors of the bestseller ‘corporate rebels’, describe in detail how Haier is a unique example of a very successful organization that effectively transformed their management structure based on a radically different flat, autonomy-driven collaborative ecosystem model.

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RenDanHeyi is built on three guiding principles:

1. Creating a great customer experience

2. Recognizing the entrepreneurial energy of employees

3. Sharing the created value enjoyed by the customer, received by the organization and its stakeholders.

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This newsletter article first appeared on Pascal's LinkedIn Newsletter. Read that and more here.