The State of China’s Automobile Sector

Amidst the uncertainty regarding the trade war’s impact on Chinese industry, the automobile sector in China will remain profitable

Bhavana Giri, Research Intern, Institute of Chinese Studies

Photo: Visual China

Automobile sector in China is the largest in the world when measured by the number of units produced. Apart from domestic production, people’s demands for all kinds of vehicles in China are met by Joint Ventures (JV). For a foreign company to establish a JV, it is required to enter into a 50-50 partnership with a Chinese company in order to start production in China; a similar arrangement is required for foreign companies to export automobiles to China.

Automobiles from the US are one of the most significant exports to China, ranking just behind aircraft and agricultural output. With a trade value of more than $10 billion, this sector is of great significance to the ongoing trade war. Currently, the automobile sector in China is witnessing a downfall in output growth when taken as whole which is driven by a drop in the production of gasoline based automobiles. However, in the long run, China’s drive to lead in global production of new energy vehicles (NEVs) is slated to offset this downturn, even if the trade war continues. Additionally, the upper hand China has in the automobile joint ventures will also help to recover from the downfall. In contrast, the resilience of China’s NEV sector will adversely impact the competitiveness of its American counterpart.

Demand side conditions are highly favourable and will continue to be so. Three decades ago bicycles were the most popular mode of transport in China and most cars needed to be imported. Today, however, Chinese car makers are producing more cars than any other country in absolute terms. As can be seen from the data, the production of automobile in China increased from 9 million units in 2007 to 23 million in 2018. To be sure, economic conditions are currently turbulent in China.

Observers predict that China’s GDP will decelerate in the near future and its leaders have urged precaution in this regard. The automobile sector, however is poised to remain buoyant, despite macroeconomic woes. The Chinese government intends to prioritise the preservation of automobile demand and supply by providing subsidies and exempting consumers from purchase tax on electric vehicles. These subsidies will ensure that there will be no significant shock to the automobile sector.

China has become the biggest giant in the production of electric cars and bikes. With Domestic Value Addition (DVA) of more than 80 per cent, and a strong grip over the production of essential inputs such as batteries, the sector enjoys a substantially strong footing. Recent falls in automobile stock prices should not obscure this fact.

To the rest of the world, it may appear that China has struggled to make progress in automobile manufacturing. However, the situation has changed drastically with recent developments. China now possesses massive potential for substituting imported automobiles with electric vehicles. With trade talks in a state of disarray and the heightened possibility that China will reapply auto tariffs, it is also likely that automakers will be incentivised further to produce in China. With the exception of the luxury segment, which is less easily substituted, China’s automobile sector is likely to withstand the headwinds it currently faces. Moreover, with the Chinese government establishing stricter norms for controlling carbon emissions and attempting to reduce pollution in cities, the scope for domestic companies to defeat automobile giants such as Toyota, BMW, etc has escalated. The Chinese government is also granting special manufacturing permits to companies which are working to develop NEVs.

The electric vehicle world sales database shows that in 2018, 2.1 million units of electric vehicles were sold which is almost 64 per cent higher than that of 2017. China has advanced its position in this particular segment and has a share of almost 56 per cent of the total sales. Although companies like Tesla, Toyota, etc. are also developing electric vehicles they lack the cost advantage China has, and are, thus unable to capture the market. Several subsidies and tax cuts provided on purchases of electric vehicles further boost demand in the highly populated cities of China. This is illustrated by the fact that profits for BYD jumped 632 per cent jump in 2019. On the other hand Tesla, which is exporting to China in an increasingly hostile trade environment, lost nearly $700 million in the first quarter in 2019, despite robust demand.

Another factor that will support China’s automobile sector is technology transfer. Most automobile production in China happens by way of Joint Ventures (JV) between Chinese and foreign companies, which allows local companies to acquire know-how. The Chinese have also acquired automobile technology by heavily investing in foreign-based automobile companies. Therefore, China’s automobile sector is unlikely to reel in the long-run. Moreover, China is less dependent on foreign value addition than it used to be – its contribution to processing and non-processing value addition process in the production of automobiles is uninterruptedly increasing.

The optimism expressed above does not apply to the American automobile industry, however. To a large extent, US-based automobile companies are dependent on revenues from the Chinese market that their JVs enjoy and are, thus, highly vulnerable to disruptions in bilateral relationship between two nations. For example, automobile giant BMW, is not introducing a new model because of the environment of uncertainty created by the trade war. US automobile companies are experiencing sluggish production while on the other hand Chinese NEV start-ups and companies are scaling up their production.

Unlike others, the automobile sector in China will likely remain profitable irrespective of ongoing trade contestations and tensions, due to the Chinese government’s encouragement to develop NEVs. China’s NEV companies are poised to emerge as leaders in markets all around the world, as they race ahead their counterparts from the US, Japan, and Germany.

China, Global Capitalism and the Future World Order

How reflections on Marxism, history and contemporary politics envision the future of the capitalist world order.

Vidushi R Singh, Research Intern, Institute of Chinese Studies

The reform and opening up of China in 1978 paved the way for the transformation of China from a planned to a socialist market economy. The decision to open up the economy was criticized by many leftist academics and economists. The reforms led to major disagreements between the government and the bourgeois elites.

Today, under Xi Jinping’s rule, the CPC is debating the direction of growth which China should continue pursuing. In light of the US-China trade war, the calls for China to become a true market economy have reached a crescendo. Despite that, the rest of the world is shifting away from free market operations towards protectionism, with the Nordic model[1] of state-market balancing gaining immense appreciation. At a time like this, Lin Chun’s book, China and Global Capitalism: Reflections on Marxism, History and Contemporary Politics,[2] provides a critical perspective on how one can interpret the changing global scenario while considering the domestic realities of China.

The main thesis of the book questions the sustainability and moral desirability of capitalism in China and the world with regard to the evolving world order. Lin Chun attempts to decipher the past and present of the global capitalist order and its interactions with China, with a continuous call for China to revert to the pre-reform era. She ends the book by predicting the eventual and inevitable transformation of the global order into a ‘moral socialist economy’ (p. 152) with China as the leader.

Chun divides the book into three sections – a history of China and the global capitalist ideology, the present interplay between the two, and her predictions regarding the future of the world socioeconomic order.

In the first section, she emphasizes the dynamic nature of China, claiming that this has resulted in a secular, independent and socialist state with a commitment to the centrality of the people (p. 8). Chun also goes on to vehemently refute the Marxist claim of Asian societies being passive and as awaiting capitalist integration, claiming that this idea creates a tendency to ignore all possibilities of progress via other non-capitalist socio-economic models.

In the next section, Lin Chun discusses China’s shift from being a socialist bastion to a capitalist economy, and how it has impacted the nation and its people. She claims that the changing face of Chinese socialism has undermined the improvements that the socialist revolution had brought about, with the new reforms being the key drivers of this ‘peaceful evolution’ towards capitalist integration (p. 56). The fading boons of socialism, in her perspective, have created financial and structural deficiencies in the Chinese state, and have led to China becoming a vital part of the global ‘race to the bottom’[3] (p. 61). Her commentaries on the revolution carry a strong rosy note that seems to ignore the bleaker sides of the revolution and only focus on the positives. She attributes the current welfare and labour issues in China to the monopolization of decision making power in the country. This ‘proletarianization’[4] of the population, she declares, is against the Chinese vision and creates a need for ‘regime legitimization’ by the government by returning to its social commitments as stated in the Chinese constitution (p. 66-69). Throughout her narrative, there is a call for China to return to the pre-reform era. However, the author’s call to undo reforms in China trivializes several important arguments she makes against capitalism by taking away focus from them and pinning it to an impossible aspiration. It is not only impractical for China to undo years’ worth of reforms but also undesirable – it is because of the reforms that China has been able to capture the global power it enjoys today, and for a country that is highly dependent on trade, closing borders would be unreasonable.

On the topic of the existence and the need for a ‘Chinese model’ (p. 81), Lin Chun claims that any model that the government chooses to adopt will serve Chinese interests if it fulfills four prerequisites: a robust socialist state, a resourceful public sector, a focus on collective growth and development, and voluntary social organization, participation and power. She advocates the adoption of a sustainable approach to progress where urbanization, modernization and privatization are not standardized measures of development and instead there is a focus on achieving Minsheng.[5] She ends this section by asserting that the Chinese goal is ‘capitalization without proletarianization’ (p. 156) and the only way to achieve that is by creating a balance between the industrial and agricultural resources in the country, and by focusing on the ‘local’ needs of the people.

The last section of the book delves into the future she envisions for China and the world order. She declares that growing global sensitivity to human rights and ecological sustainability will inevitably result in an anti-capitalist world order. She highlights the insufficiency of the current Eurocentric worldview as a measure of development and holds the ‘moral socialist economy’ as a likely end to the global fight over socioeconomic models of growth. She ends with a call for China to reclaim its place as the leader of the global economic order.

Overall, the book comes across as intensely deterministic and ignores several shortfalls of socialism and the Chinese state. It also overemphasizes the perceived negatives of capitalism. Lin Chun has written a book with a coloured understanding of the socioeconomic models it talks about, and there is a unique sense of Chinese exceptionalism throughout the book. The flow of the arguments highlight Chun’s own New Left ideology[6] and robs the readers of a chance to formulate their own opinions. The chapters appear to be individual essays, with little logical linkages.

However, one attractive characteristic of the book is its use of Marxism and the dependency theory to formulate arguments for socialism. The book follows a clear theme about the origin, cost and durability of the Chinese model of development. The author attempts to relate China’s growth with the long term global trends and pushes for the adoption of a perspective of social justice and political righteousness instead of generic economic indicators as measures of progress. So, while the book has a biased narrative, it does develop a new understanding about measuring progress and creating new modes of development by focusing on value creation over accumulation.

However, being written in 2013, Lin Chun’s predictions of an anti-capitalist world order appear to be far from realization today. While the world does seem to be shying away from the snowballing externalities of capitalism, it is no closer to demanding a socialist revolution than it was when the book first came out. In this respect, the author seems to have missed the mark, being overly embroiled in her ideological aspirations, to objectively analyze the possibility of a change in the world order. Despite its shortcomings, the book comes out as a commendable assessment of the logic and crises of capitalist integration and raises crucial questions about how the global economy will address them in the coming years.

End notes:

[1] ‘The Nordic model encompasses a mutually supportive interaction of risk sharing and globalization. It is marked by a large welfare state, a particular set of labour market institutions and a high rate of investment in human capital’ in Andersen, T., Vartiainen, J., Tson Söderström, H., Holmström, B., Honkapohja, S., & Korkman, S. (2007). The Nordic Model: Embracing Globalisation and Sharing Risks. Yliopistopaino, Helsinki: Taloustieto Oy.

[2] The book was published on December 2013 by Palgrave Macmillan. ISBN: 978-1-137-30125-3

[3] For the author, ‘race to the bottom’ signifies the socio-economic phenomenon of countries exploiting labour and capital to reduce costs as much as possible, in an attempt to retain competitiveness in an increasingly unified global market.

[4] A Dictionary of Sociology, 1998. “In Marxism, proletarianization is the social process through which individuals from the middle class become absorbed into the working class as wage labourers, and producers are separated from the means of production through coercive and persuasive means”.

[5] Ancient Chinese principle of popular wellbeing, and development as freedom (p. 99-104).

[6] This claim is based on Chun’s participation as a writer for New Left Review, and her book ‘The British New Left’.

SME Financing: The need for Concrete Reforms in China’s Financial Sector

“As China plans loan boost for small companies, technology firms could be the answer”

The annual meeting of China’s legislative body, the National People’s Congress (NPC) came to an end on 15 March 2019 with Premier Li Keqiang expressing commitment towards several reforms in China’s banking and financial sector. Apropos the reforms, the large state-owned commercial banks have been instructed to increase their lending by 30 per cent to micro, small and medium enterprises (MSMEs). Economists, analysts and bankers remain sceptical however, owing to the vague character of the declarations. Detailed and clarified reforms are required in order to encourage truly productive lending.

At present, there are 38.82 million MSMEs in China. MSMEs in China are defined as firms with less than 300 employees, an average revenue of RMB 30 million and RMB 40 million in assets. Market liberalisation and reform policies in various sectors and industries have been beneficial for MSMEs. MSMEs have emerged as a crucial component of China’s economy as they account for 75 per cent of total jobs, alleviate poverty and facilitate rural development. However, vulnerabilities remain due to poor execution of reforms.

For example, reforms have been inadequate with respect to the property rights of the SMEs, leading to the discouragement of private investors. Investors face problems in administrative procedures like taxation due to vague definitions. In particular, firms find it difficult to predict the level of tax they will face owing to the ambiguity regarding whether they qualify as a state-owned or collective owned enterprise. Raising lending targets of banks without addressing this ambiguity, therefore, is not adequate to empower MSMEs.

While the Chinese government expects total loans made to MSMEs to increase by RMB 300 billion on account of the raised lending requirements, this may not materialise due to lack of clarity in the NPC report. Although it instructs banks to lend to “small companies,” it is uncertain whether this term is defined the same as MSMEs or whether it refers to a subset of these. These will exacerbate existing confusions – only 63.1 per cent of the total SMEs in China applied for loans from the institutions as of 2018. Moreover, the creation of too many administrative stages in lending procedures for Township and Village Enterprises (TVEs) has made the entire affair more time-consuming.

Nor has the recently expressed reform commitment adequately addressed shortcomings in the Credit Guarantee System (CGS) – an institutionalised service offered by specialised agencies that help SMEs obtain loans from non-banking financial institutions. The CGS is intended to solve the problem of high financing cost for SMEs, reducing the bank’s management and operational risks, while developing the credit rating agency market in the country. It suffers from notable shortfalls that are in need of resolution. Firstly, the seven thousand credit guarantee subsidiaries that currently exist are still not catering to the problem of asymmetric information between the banks and enterprises. Enterprises are not adequately aware of collateral management, ways of repaying previous loans and other finance related technical details (like credit score) that the banks can mentor to the SMEs.

Secondly, there are no specific changes in the collateral requirements by the government, which is of significant concern for the banks. Even though the CGS Policy is well defined in official papers, it is not very efficient at the grass root level as the bank managers are still reluctant to invest in SMEs. This is also owing to the rising non-performing loan ratio – banks are, thus, resorting to fulfilling their annual loan targets by lending largely to small State-owned enterprises (SOEs) on the grounds that the state guarantees repayment. For example, the famous InnoFund government program that supports R&D activities does not fund the MSMEs at opening stages as the preference is for state-backed companies.