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MetrixThe number of Chinese unicorns, or startups worth a 1 billion USD or more, has risen to 164, overtaking their counterparts in the United States by number. The firms are worth a combined 628.4 billion USD, according to a recent report by the China Torch Center, a think tank affiliated with the Ministry of Science and Technology, and a Beijing-based consultancy. Ten of them are “super unicorns” with a valuation of over 10 billion USD, including Ant financial, Didi Chuxing, Xiaomi, and among others. 80 percent of China’s unicorns are located in Bejing, Shanghai, Hangzhou and Shenzhen.

Topic of the week: Bo'ao Forum

Xi Jinping and Christine Lagarde at the Bo'ao Forum. Source: flickr via IMF.Christine Lagarde and Xi Jinping at the Bo'ao Forum. Source: flickr via IMF (CC BY-NC-ND 2.0).

Xi Jinping promises to ease trade and investment restrictions, but gives no specifics

Chinese president Xi Jinping sought to present his country as the responsible party in a tense trade stand-off with the United States, but did not offer any real solutions to prevent a potential trade war. In a speech before the regional Bo’ao economic forum on the island of Hainan, he called for “dialogue rather than confrontation.” Without providing specifics, he repeated previous promises of a further opening of China's economy to foreign investment and of better protection of investors’ intellectual property rights.

Xi’s careful promises failed to meet the high expectations he had raised at the World Economic Forum in Davos in 2017, and which his economic advisor Liu He repeated at this year’s session.

In an apparent concession to the Trump administration, Xi proposed to ease restrictions for car imports into China by the end of the year, without providing specifics. Trump had complained about China’s 25 percent tax on imported cars on Twitter. Trump thanked Xi for his “kind words” on Twitter, adding that, “We will make great progress together!”

The Trump administration’s aggressive rhetoric on trade has allowed China to play the role of an advocate for open markets and free trade. ”The Cold War mentality and zero-sum game are increasingly obsolete,” Xi said, in an apparent stab at Washington. The speech came on the same day that Beijing filed a complaint against US tariffs on steel and aluminum before the World Trade Organization (WTO).

Global financial markets reacted positively to the speech, while the response in the international business and trade policy community was much more muted. US and European companies and governments are still waiting for China to address the imbalances in mutual market access or to even acknowledge western fears of China’s “Made in China 2025” industrial policy strategy, which many view as the pursuit technological upgrading at the expense of international competitors.

The Trump administration has threatened to impose tariffs on around 1,300 Chinese products, targeting around 50 billion USD worth of trade. It was later added that this may be expanded by an additional 100 billion USD. Many of the products listed would have benefitted from the Made in China 2025 strategy. China has said it would retaliate with duties on 50 billion USD worth of US products if Trump carries out his threats. So far the situation has not escalated as the US measures would only take effect after a review period of 60 days.

MERICS analysis: Made in China 2025. The making of a high-tech superpower and consequences for industrial countries. MERICS Paper on China No. 2, December 2016.

China and the World

China tightens sanctions on “dual-use” exports to North Korea

Beijing increases sanction pressure on North Korea, despite other recent developments that point to a relaxation of tensions. On April 8, the Ministry of Commerce published a notice banning 32 items from export to North Korea that have potential “dual-use” related to weapons of mass destruction in line with a UN Security Council resolution adopted in September 2017. The announcement came one day after AP reported that China reduced its total imports from North Korea in the first two months of 2018 by 78.5 and 86.1 percent in value compared to the same months last year.

The ban of “dual-use” exports to North Korea is not the first of its kind. The most recent list merely reflects a widening of the already existing ban in line with the latest UNSC resolution. The ban is a sign that Beijing continues its ostensibly tough line with Pyongyang even as it opens channels for dialogue.

The announcement follows Kim Jong Un’s surprise visit to Beijing in late March. Kim’s brief trip, which was his first foreign visit and his first meeting with a head of state since assuming power in 2011, was officially confirmed on March 26. The meeting was read as a signal from Beijing that China was not to be sidelined in talks over the ongoing nuclear crisis. Commentators also noted that Beijing’s narrative of having less control over Pyongyang than Western observers assume needs re-evaluating.

On the day of the announcement, North Korean government officials communicated Kim Jong Un’s readiness to discuss his nuclear program with US president Donald Trump to their American counterparts. It marks the first time the United States has received word on the proposed Kim-Trump meeting from North Korea directly. Kim’s initial invitation had been conveyed through a South Korean delegation in early March.

News in brief

Politics, Society and media

China appoints key personnel to smoothen integration of party and state institutions

China’s biggest reorganization of party and state institutions in decades is progressing at full speed. In early April, the State Council appointed 63 new cadres to key positions in central government organs, many of them allies of party and state leader Xi Jinping. The reorganization is to be completed by mid-April.

The "plan on deepening reform of party and state institutions," which is based on a decision taken by the CCP Central Committee’s third plenum in February, was released on March 21 after the end of the National People’s Congress. The goal is to streamline decision-making while increasing the Communist Party’s control. Eventually, the majority of party and state offices will be integrated, ending the formal separation of party and state bureaucracies.

On April 3, Chen Xi, widely seen as a close ally of Xi, became president of the Chinese Academy of Governance (CAG). Formerly an independent organization under the State Council, the country’s leading center for training high-ranking officials was merged with the Central Party School, which is also headed by Chen, last month.

A number of other Xi confidants can be found in charge of issues ranging from public security and immigration to media oversight. By entrusting his allies with the leadership of newly merged institutions, Xi Jinping minimizes the risk of rivalry between the previous heads of the separate state and party bodies.

News in brief

Economy, Finance and Technology

China cuts taxes for chipmakers to boost domestic industry

China’s Ministry of Finance (MoF) has introduced tax breaks for domestic chipmakers amid rising trade tensions with the United States. Manufacturers of very basic up to cutting-edge chips used in smartphones, computers and other devices will be exempt from corporate taxes for two to five years, the ministry said in a notice on March 30. After that, they will only need to pay half of the current 25 percent tax rate for up to another five years. The new measures are effective from January 1, 2018.

China is the world’s biggest semiconductor market, with an estimated 90 percent of chips stemming from imports or foreign companies producing in China. For now, imports remain a vital source for China’s semiconductor industry. At the same time, the Chinese government supports the domestic chip industry to become internationally competitive and reduce China’s import dependency in the long run. Recent attempts to turn abroad and bring key technologies into China through the acquisition of foreign semiconductor companies have been forestalled.

Tax reliefs now represent a different approach to spur China’s chip industry. They are in line with China’s increasingly assertive efforts to boost domestic self-sufficiency in critical industries as set forth in its Made in China 2025 strategy. Chips and the entire semiconductor industry are important drivers for the achievement of an all-round industrial upgrade of China’s economy, which also entails the positioning of Chinese companies higher up the global value chain.

Chinese top ten imports by trade value

Ministry of Finance stops local government loans

Receiving loans will become more difficult for local governments in the future. The Ministry of Finance instructed state-owned banks to cease issuing loans to local governments in a notice published on the ministries website. In a statement released on April 2 the Central Financial and Economic Affairs Commission, which is chaired by president Xi Jinping, called on local governments and the corporate sector to lower their leverage ratio. Projects in public-private partnerships worth 2.39 trillion RMB (308 billion EUR) have been shelved as well. The banks are still allowed to buy local government bonds.

This policy is part of the central government's campaign of against leveraging and represents a major step towards tackling local government debt. Loans are often used by local governments to finance infrastructure projects with cash flows that make repayment unlikely. They have become a major contributor to China’s total debt burden. As a reaction to the new regulation the government of Xinjiang has halted all government-funded investment projects pending the completion of a review process.

The shift to bond financing will make local government financing more transparent. Compared to bank loans, which can be negotiated behind closed doors, bonds are often sold publicly at auctions. Defaulting on a bond is, furthermore, a much more public event.

News in brief

The European View

East of Vienna, west of Vienna: Austria seeks middle ground in relations with China

Geographically, historically, and culturally, Austria has always straddled East and West, even though in post-war history, it has been firmly integrated in the Western camp. Its new chancellor Sebastian Kurz and his right-wing government now seem determined to expand Vienna’s options by courting Moscow and Beijing – and by seeking middle ground among Western and Eastern EU members in dealing with China.

This week’s high profile trip to China was an opportunity for Kurz to present himself as a bridge-builder between East and West in an interview with the Chinese Xinhua news agency. He and president Alexander Van der Bellen led a 250-strong delegation, the largest an Austrian government has ever taken abroad. It included four ministers, 170 Austrian company representatives – and a seven year-old girl who played on Mozart’s childhood violin at a state banquet hosted by Chinese president Xi Jinping. They signed 1.5 billion EUR worth of deals and attended the Bo’ao economic forum in Hainan.

Kurz had previously raised eyebrows in EU capitals when he did not join many other EU states in expelling Russian diplomats as a reaction to the poison attack on the double agent Sergej Skripal and his daughter in the UK. Kurz and his foreign minister Katrin Kneissl described Austria as a “neutral” country in a press release, raising questions about Vienna’s commitment to European solidarity.

When it comes to China, Kurz is juggling between Eastern and Western Europe. The Visegrád Group, i.e. the Czech Republic, Hungary, Poland and Slovakia, have also courted Beijing, with Hungarian premier Victor Orban flouting Chinese capital as a viable alternative to EU funds. On the other hand, Western European countries have lately been alarmed by China’s growing influence in Central and Eastern Europe with the help of investment promises connected to China’s Belt and Road Initiative (BRI).

Kurz emphasized the great potential for cooperation between Austria and China under the BRI framework, but unlike several other central European states, Austria refused to sign an MoU formally endorsing cooperation with Beijing within the BRI framework. According to the Austrian daily newspaper “Der Standard,” his foreign minister Kneissl told her Chinese counterpart that the country would not seek to join the 16+1 format, the controversial dialogue platform between China and Central and Eastern Europe.

The balancing act seems to be appreciated in Beijing. The Chinese party-state newspaper “Global Times” wrote  that while Austria were considered part of the Western camp it could also act as a bridge given its “traditional close connections” with Central and Eastern Europe. There is a whiff of Habsburg in the air these days.

MERICS analysis: China seems to tone down its 16+1 engagement: three possible explanations, blogpost by Lucrezia Poggetti and Jan Weidenfeld.