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Postcard from China: Trade War Set to End, Tech War Here to Stay

Key points

  • The trade war is set to end soon but the tech war is here to stay.
  • China’s rise and the relative decline of the US are set to create friction in years to come.
  • China’s tech rise is moving fast but the country still depends on US tech in key areas.
  • We witnessed China’s rapid development within artificial intelligence close up in a ‘Dream Town’ in Hangzhou.
  • We do not expect China to hit a debt crisis but credit availability for the private sector is a big challenge

A week ago, we came back from a trip in China, which took us to Shanghai, Hangzhou and Hong Kong. We talked to a wide range of people at companies, research houses, academics, institutions and visited an ‘Artificial Intelligence Dream Town’. Below are the main takeaways from our trip.

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From trade war to tech war

Not surprisingly, the trade war is currently at the forefront of all discussions in China. There is now broad consensus that a trade deal is coming but views differ on what kind of deal it will be. A sceptical camp dominates, which sees a ‘weak deal’ that the US hawks are not going to like and that could lead the trade issue to flare up again later. However, Donald Trump now wants a deal, as he will be setting out on the campaign trail soon and wants a deal with China in the package that carries gifts to key voters, as well as a strong economy and rallying equity markets.

However, the consensus view is that trade deal or not, the ongoing tech war between the US and China is set to continue. This implies (a) very strict investment restrictions on Chinese companies in the US, (b) more export controls on technology, (c) targeting specific Chinese tech companies (such as Huawei) and (d) aiming to build an alliance with other western countries to limit Chinese access to western technology.

It is clear that sentiment among US observers of China has taken a sharp turn to a more critical stance. There are few ‘panda huggers’ left in Washington as well as among Americans in China. The negative view is bipartisan and widespread and includes the media and academics as well. Trust between the US, the sole super power since the end of the cold war in 1991, and the rising power of China, is at a low point. Almost everyone expects the friction to continue as China grows bigger and more confident and the US defends its position as the world’s super power and aims to contain the rise of Chinese influence in the world.

The change in US sentiment has happened rapidly in recent years and is a consequence of many things. Over the past five years, under Xi Jinping, it became clear that China is not moving towards a system of western democracy. Instead, it plans to stick to a one-party system based on old Chinese traditions, with a very strong state. The removal of the two-term limit on the presidency in 2018 underlines this. In addition, China has increased its presence on the global stage with the Belt and Road Initiative, initiating the AIIB and the BRICS bank, and increasing its military role in the South China Sea. The time when China kept a low profile (Deng Xiaoping’s ‘hide your strength, bide your time’) on the global stage is over. Finally, an increase in control and surveillance, combined with human rights issues, has hardened the stance towards China in the US.

Most people doubt that we are entering a new ‘cold war’ in the old sense that we will get two separate blocks. The world is much too integrated for this today and the economic cost for the west would be substantially higher (missing out on Chinese growth) compared with what was the case in the Cold War with the Soviet Union. For most countries, it is set to be a balancing act, with one foot in each camp but further in one than in the other.

Geopolitical tensions are likely to continue with further conflicts in the South China Sea, friction regarding Taiwan and the US looking to offer an alternative to the Belt and Road Initiative and warning other countries not to join it. We are already seeing the US and China using both carrot and stick approaches with other countries to get them on ‘their side’ or at least not to oppose them. However, the US is gradually losing relative power and we may see more countries catering to China in order to reap the economic benefits of a good relationship with China, not least the other emerging markets and developing countries.

China’s tech rise is rapid but it is still behind in some key areas

Another issue that is high on the agenda in China is the very rapid rise within tech. China has already moved to the frontier in areas such as mobile phones, 5G networks, super computers, e-commerce, mobile pay, high-speed trains and drone technology and is moving very fast within artificial intelligence. China is still lacking behind within semiconductors, robots, manufacturing technology and aviation. It is still highly dependent on the US within semiconductors and the whole ecosystem needed to catch up in this area implies that it will take at least five to 10 years. However, China is set to double its investments to speed this up, as the trade war has made it clear that China is very dependent on the US in this field and thus vulnerable.

Within artificial intelligence, China has some clear advantages in a very large population providing significant amounts of data. China’s tech development also benefits from millions of engineers being educated every year and a very strong work ethic among start-ups, which involves working ‘996’ (09:00 to 21:00 six days a week) and in some cases ‘997’.

On our visit to Hangzhou (a city one hour from Shanghai, with 9 million people), we had a tour of an Artificial Intelligence Dream Town, which was a spectacle of China’s speed within the tech area. The Dream Town hosts 2,000 people working in start-ups, who focus on artificial intelligence. Each month 30 start-ups compete for four places in the Dream Town. Here they are affiliated with incubator funds and have free accommodation for three years, sponsored by the government. There is a close co-operation with universities nearby and the tech giant Alibaba, whi