When some of China’s leading entrepreneurs met Xi Jinping last week, state television showed only the back of their heads, and its 45-second clip included none of their words. But the meeting itself, the first of its kind for seven years, and the presence of Alibaba founder Jack Ma sent a powerful signal to the financial markets.
Once China’s most prominent tech entrepreneur, Ma has stayed out of public view for most of the past five years after he upset the authorities in Beijing with a speech critical of the country’s regulators. But he remains an iconic figure and his return to the fold was interpreted by the markets as a sign that Xi’s campaign to clip the wings of China’s technology giants is over.
Chinese equities traded in Hong Kong gained after the meeting, accelerating a rally that started in mid-January and has returned the MSCI China index almost to the peak it reached last October. Last year’s rally was driven by Beijing’s announcement of measures to stimulate the economy, which is teetering on the edge of deflation.
Consumer prices barely rose at all in 2024 while factory gate prices fell for the second successive year, according to official statistics. The unemployment rate of 5 per cent, which rises to 16 per cent among those under 25, may understate the problem because anyone who works at least one hour a week for pay is counted as employed.
“We’re facing some of the most challenging economic times in the last 20 years right now. The government, I’m glad to see, has recognised the need to push greater consumption,” said Adam Dunnett, secretary general of the European Union Chamber of Commerce in China.
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“But is it enough to really get the economy going? Consumption of the share of GDP is still roughly in the mid 40s. That needs to move a lot more than where it is right now for it to have an economic share of GDP similar to that of other economies around the world that would allow for a more sustained economic growth period.”
Among the business leaders who met Xi on Monday were Huawei chief executive Ren Zhengfei; Wang Chuanfu, chairman of electric vehicle manufacturer BYD; and Liang Wenfeng, founder of DeepSeek, the artificial intelligence start-up whose models upended expectations about AI last month.
The line-up was dominated by the tech sector, underscoring Xi’s belief that advanced technology must replace housing and infrastructure as the main driver of China’s economic growth.
The launch of DeepSeek R1, the company’s latest AI model, caused tech shares in the United States to tumble last month as it appeared to offer technology comparable to that of ChatGPT’s creator OpenAI at a fraction of the price. Venture capitalist Marc Andreesen described the launch as “AI’s Sputnik moment”, referring to the moment the Soviet Union appeared to pull ahead in the space race when it launched the Sputnik satellite in 1957.
DeepSeek’s achievement was all the more impressive because it came despite a ban by the US and its allies on the sale of the most advanced semiconductors to China. DeepSeek used older and less sophisticated microchips for its model, which cost $6 million to train, compared to more than $100 million spent by OpenAI on its GPT-4 model.
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DeepSeek’s success suggests that China’s approach to AI could follow its playbook in other technologies such as green energy and electric vehicles. China was not the innovator of these technologies but was first to produce them on a scale and at a cost to make them available to everyone.
The last time China surprised the world with its technology was almost two years ago at the Shanghai Auto Show when, a few months after the end of the zero-Covid policy, foreign visitors returned for the first time in almost three years. What they found in Shanghai was that Chinese electric vehicle manufacturers were producing cars that were as advanced as anything in Europe or the US but at a much lower price.
“In the past, when people think of premium cars, it’s very likely that it will be related to European brands, which may be still the case right now. But with this changing technological advantage of China in EV versus the traditional internal combustion engine car, China is able to overcome a very difficult point that it could not tackle in the past, which is making China products always at the low-end price range,” said Gary Ng, a Hong Kong-based senior economist at the French investment bank Natixis.
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“Some of the new technologies such as the rise of the pure battery electric vehicles, all this software, all the capability that China is able to bring to its cars in the EV ecosystem has really put it in a stronger position versus the past which has indeed eroded some of the western premium car makers’ market share.”
Chinese carmakers’ share of the domestic market has jumped from around 40 per cent five years ago to 65 per cent today and Ng expects it to stabilise at around 70 per cent. Fierce competition has generated a price war and market leader BYD this month announced that its God’s Eye driver-assistance system will be included in most of its models at no extra cost.
With domestic demand sluggish, exports have driven China’s economic growth since the end of the pandemic, enabling the economy to achieve the government’s target of 5 per cent GDP growth last year. But with Donald Trump threatening to impose a 60 per cent tariff on all imports from China, the EU fears that Chinese exporters will seek to divert goods to Europe.
[ US and China teeter on edge of trade war as tariff deadline loomsOpens in new window ]
Brussels has long complained to Beijing about the trade imbalance, with China’s more than €500 billion in exports to the EU worth more than twice as much as Europe sells to China.
China promised a number of actions to address the trade imbalance in a Comprehensive Agreement on Investment (CAI), which was agreed in December 2020 but put on ice by the EU a few months later.
The European Commission is ready to revive the deal if China unilaterally lifts sanctions it imposed on a number of Europeans in 2021, including some MEPs. There is no guarantee that the agreement will be ratified by the European Parliament even if it does return but Dunnett believes it has some potential to level the playing field.
“I think the original CAI had a number of mechanisms to deal with trade and investment irritants. Of course, with everything in China, what’s written on paper and then how it’s actually implemented are two different stories,” he said.
I see stronger signs than ever before of China’s commitment to continuing to welcome foreign investment. We have greater engagement from municipal, provincial, and central level authorities than we’ve ever had before
— Adam Dunnett
“Our primary focus is the investment environment here in China. For us, the big ticket items are access to government and public procurement. Our members feel they’re still not given treatment on a level playing field. Cross-border data transfer issues over the last year are also a hot topic concern.”
China’s commerce ministry this week promised to ease restrictions on foreign companies after inward investment fell last year to its lowest level since the 1990s. The ministry said it would remove all market access restrictions for manufacturers, improve access to credit and guarantee equal treatment of goods produced by foreign firms.
Next month’s Two Sessions, China’s annual parliamentary meeting, is expected to pass legislation to promote the private sector, which complains that it faces unfair competition from state-owned enterprises. State-owned companies can borrow at cheaper rates and often favour other state-owned enterprises over the private sector when procuring goods and services.
Dunnett said that the fact that Xi so publicly endorsed the private sector’s role in the economy this week is important but that it remained to be seen how much of the promised change is implemented.
“These statements are important signals, and we look at them, and the higher the level that the signal comes from, the more importance we obviously attach to it. But what’s written and what’s said and what’s actually implemented are all different things. It’s extremely important to monitor what actually happens in practice,” he said.
“For example, with government and public procurement, there have been very similar statements mentioned about the level playing field and the foreign investment law highlights these things as well. But our members have not seen an improvement in that area. If anything, it was a deterioration.
“But I would say that I see stronger signs than ever before of China’s commitment to continuing to welcome foreign investment. We have greater engagement from municipal, provincial, and central level authorities than we’ve ever had before. It feels that we’re close to getting to something where companies can really act upon. But ultimately, the real judge of that will be the investments that they make themselves and whether they’re approved and whether they’re successful.”
