Xi met CEOs and Allison, Xiaomi's EV, Macao, UAE "prince", bonds, Week in Review #14

Hi folks, welcome to #14 of my weekly review of things happening in China that I think will have a lasting impact beyond news cycles. Again, for who I am and why I write, please check here. For what unique things I can bring to the table, check here.

Let’s dive straight into today’s topics.

The Profound

#1 Xi met CEOs and delegates from the US

It is not a secret that China is really, really thirsty for foreign capital, culminating in Xi personally meeting some of the business leader delegates to the much-advertised China Development Forum this week.

Zichen Wang

did an excellent analysis and summary for this meeting at

Pekingnology

. The most notable guest for that meeting, I think, was Graham Allison, who famously coined the concept “Thucydides Trap”, a theory that "when one great power threatens to displace another, war is almost always the result". In the meeting, Xi explicitly told delegates that the "Thucydides Trap" is not inevitable. (Interestingly, a few days earlier, Professor Allison also gave a speech at the Center for China and Globalization, a Track-2 diplomacy powerhouse where Zichen works. Zichen’s team later published the speech here.)

When I read commentaries abroad, I have the feeling that many people still doubt the sincerity of this new round of foreign outreach drive. For them, it is as if visa-free policies, the rapid improvement in mobile payment experience for foreign visitors (CNBC), a much revised cross-border transfer rule (Freshfields), and another top-level document on “high-level opening up and making greater efforts to attract and utilize foreign investment” (Xinhua), all don’t count for them.

That’s fine. If they can’t see the writing on the wall by now, they will never.

The Interesting

#2 Xiaomi’s fantastic (but problematic) debut in EV market

In a highly anticipated event, Lei Jun, legendary founder and CEO of smartphone and home appliance maker Xiaomi finally announced the price of Xiaomi’s first electric vehicle, the Xiaomi SU7. The entry price tag of as low as 219,500 RMB (a mere $30K) for a fancy-looking and high-spec product, threw everyone off the table.

This is what you can buy for $30K from Xiaomi:

This event is both shocking, and emotional. Mr. Lei, a serial entrepreneur who claims this will be the last “startup project” he will ever work on, is an inspiration for many Chinese entrepreneurs, including myself. We are awed that Mr. Lei has managed to pull this off, that he dares to charge into this over-competitive field and still deliver it, and poetically see EVs as the final leg of his illustrious career.

At the same time, I am also concerned. The EV space in China is really over-competitive now. There are EV behemoths like Tesla and BYD. There is the formidable Huawei. There are younger companies like Li Auto, Nio, and Xiaopeng. Then there are a whole bunch of traditional OEMs that are rapidly pivoting to EVs. Into this crowd, Mr. Lei is throwing the whole weight of Xiaomi's supply chain with a seemingly blockbuster product at an irresistible price tag. In the end, what we get will be meager profits for the entire industry, more over-capacity, more “internal competition 内卷”, and less R&D money for further innovation. Eventually, all of them will be forced to export this over-capacity elsewhere in the world, raising the risk of protectionism even higher.

Also, although I admire Mr. Lei as a person, I don’t really like the fundamental business model that his generation of Chinese founders is familiar with. Chinese businesses, so far, are really good at improving and scaling up things that already exist. But we are still bad at creating truly innovative products.

It’s Tesla who made everyone believe that EV is a thing, and Chinese entrepreneurs saw that, got that, and jumped in for massive scale-up. It’s the same thing with Xiaomi. If Steve Jobs’ and his team hadn’t created iPhones, there would be no Xiaomi.

While I am not the kind of person who thinks copying existing models and making competitive adaptations to them is a bad thing, I still long for a future when Chinese tech titans pin their lives’ mission on creating a truly inspiring future for all of mankind, rather than joining an already crowded space with a moderately better product.

The Under-Reported

#3 The Hengqin-Macao “Cooperation Zone” started official operation

Talking about China’s innovative future, there is one piece of news that I see minimal coverage by Western media. It happened a few weeks ago, but I will still highlight it today. There is this place called “Hengqin Cooperation Zone” that recently started operation. For those who are not familiar, this is my understanding of it.

As shown in the map above, Hengqin is this outlying island of the city of Zhuhai, which is a mainland city of Guangdong Province bordering Macau. The former Portuguese colony/casino paradise has the same political status as Hong Kong, under the same “1C2S” formula. But Macau is tiny and has no space to grow non-casino sectors, so a decision was made in 2021 by China to basically “carve out” a piece of land in Zhuhai, which is Hengqin, to operate under similar rules that Macao has, thereby tripling the size of land under Macao’s semi-jurisdiction in one stroke.

In fact, Hengqin has always slowly integrated with Macao (notice it’s Hengqin integrated with Macao, not Macao integrated with Hengqin). For instance, the University of Macao has a campus in Hengqin, which falls under the Macao government’s jurisdiction. Macao law has also applied at the Port of Hengqin. But the move is much more dramatic this time. The whole area of Hengqin has been effectively “merged” with Macao from a customs territory perspective, which makes it necessary to set up a new “border” between Hengqin and the rest of Zhuhai, a “border” that was put into operation a few weeks ago.

The new “border” between Hengqin and the rest of China

So now, when Macao residents go to Hengqin, they still need to go through passport checkpoints. It’s just that the products they bring will not be inspected. So it’s not a complete integration just yet. But at this rate, who knows? Since the hardest job of putting down a new border has been done, it’s not inconceivable that sometime in the future, Hengqin may be completely incorporated into Macao.

This event is significant in many ways. First, it shows that the “1C2S” formula works in creative ways. Much of the discussion is about whether the “2 systems” in that formula can still work, and whether the SARs can preserve their unique identities and systems. But surprisingly, “1C2S” not only can work, it can even expand, and China can even “cede” more territories to be put under the “1C2S” formula.

Second, it shows the importance of having political trust backed by national security legislation. Why this can be done to Macao, but there is no similar project yet done to Hong Kong? Because China trusts Macao more. Unlike Hong Kong, where so much drama was put into enacting the NSL, Macao enacted its own national security legislation as early as 2009. An easy piece of deal, no drama. Having those guardrails against national security concerns paves the way for more openness. This is also the main thesis of Part 1 of my “Hong Kong is NOT over” series.

Third, I like the significance this type of trial confirms for the “liberal enclave” or “land of experiments” idea I imagined for Hong Kong. As I painstakingly point out, China needs Hong Kong to stay what it is. It is a perfect place where all sorts of innovation can be allowed and flourish. If done well, they can even incorporate more space into it. If Macao can do this, so can Hong Kong.

The Honourable Mentions

#4 The Dubai sheik’s no-show letdown

There was a mini-drama this week about a mysterious “Dubai prince” who pledged to invest a sizable chunk of money in Hong Kong, got everyone excited, and scheduled for a highly anticipated office launch event, but eventually turned into a “no-show” event pissing off everyone.

What happened? Is it something serious or just a tiny hiccup in an otherwise stable trend of Middle East money piling into the “Middle Kingdom”? I don’t know yet.

On a separate note, just when writing this newsletter on Saturday, I received news that ADIA and Mubadala, two sovereign wealth vehicles of Abu Dhabi, officially have joined the investor consortium led by PAG to invest in the previously embattled Wanda Commercial Properties, one of the largest commercial property companies in China. The total deal size is ~$8.5b. This is some serious money we are talking about here, in a supposedly gloomy sector called China real estate. I may write more about this next week.

The signing ceremony published on PAG’s WeChat account

#5 Bond-purchasing rumours

In the middle of the week, there were rumors that China’s central bank may start directly buying bonds, a highly controversial policy measure. These rumours were ignited by disclosures of Xi Jinping’s speech at the CFWC a few months ago. According to SCMP:

With the world’s second-largest economy at a critical juncture of fuelling growth in its bid to become a global financial superpower, a new book details some of Xi’s thoughts on finance, dating back to late 2012.

Of particular note are comments that Xi made to financial cadres during China’s twice-a-decade central financial work conference on October 30.

“It is necessary to enrich the monetary policy toolbox,” the snippet reads in Excerpts of Xi Jinping’s Speeches on Finance Work. “The People’s Bank of China must gradually increase the trading of treasury bonds in its open market operations.”

Okay, here is my take. I don’t think any direct bond purchases by PBoC are imminent. In any case, more than 5 months have passed since the CFWC, and there have been no signs of PBoC directly monetizing sovereign bonds, which means that although these central bankers were privy to this speech 5 months ago, they didn’t work on it right away. And so will they not buy it just because it is disclosed to the public.

This is yet another example of how cartoonish portrayal of the Chinese government system shrouds judgment. Xi is a powerful guy, but he is not a dictator in the way you imagine. It’s not that he can make a speech, and then his minions just leave the room and work on his errands.

The actual significance of this kind of speech is this: from now on, it is confirmed that the radical idea of debt monetization is allowed by the top guy. There will be no political penalty if such an option is entertained. Central bankers will act when they think it’s necessary, but that does not mean they will just act mindlessly. The mandate is ready, whether to materialize the mandate will depend on a lot of factors.

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