The editor’s trip to China last week did not significantly change this website’s forecasts; at least the direction remains the same. However, the trip reinforced Insightview’s conviction when it comes to the short-term and long-term economic scenario. In 2019, the economy is headed towards an L-“recovery”, which means no profound rebound in growth, according to Chinese as well as foreign businesspeople on the mainland. This is the case, as the latest stimulus measures appear to be only just enough to offset the impact of the current cyclical headwinds, according to most people the editor met last week [Chinese and expats]. The Chinese economy faces tremendous secular headwinds, which also explains why Beijing is not yet eager to launch aggressive fiscal easing measures [see more below].
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The trip also reinforced the editor’s perception of the political situation on the mainland. President Xi Jinping appears to aim for a political system with the reminiscence of something Europe experienced in the first half of the previous century, although China is not there yet [read also the Insightview article, What is the agenda of President Xi Jinping? 'The opening and closing of Chinese politics', December 14, 2018]. Does it matter for foreign investors and companies operating on the mainland where China is headed politically? Yes, it matters when the concentration of political power in the hands of “the core leader”, President Xi Jinping, is not only impacting the mainland economy. Mr Xi has deliberately boosted Beijing’s influence around the world to a level, which has finally forced the West to draw a line in the sand. The global “expansion” of China does not matter if this is only a question of China’s global business activities. The fact is that President Xi also pursues a highly assertive foreign policy, which is reinforced by a tremendous military build-up. The policy is “un-Chinese”, according to most foreigners on the mainland. Interestingly, this also applies to most ordinary Chinese people. In the past, China has not pursued an imperialist policy, at least not to the extent that the West has done in China in the last two centuries. In fact, the policy approach is seen by many Chinese as a significant policy mistake [see more below].
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The trip also showed that China's tech sector faces a bumpy road ahead. Its plan to conquer the European and US markets is at risk after both the United States and Europe appear, as already mentioned, to have drawn a line in the sand when it comes to “China’s rise”. Chinese tech companies have suddenly discovered that it is no longer enough to say that they respect Europe’s General Data Protection Regulation rules [GDPR]. More than ever, they need to prove that their data handling is safe from the hands of Beijing. This will be difficult for a mainland company, when at the same time Chinese citizens are under more surveillance than ever before [read also the latest travel notes from November 2018, Beijing reinforcing the use of “big data” puts Europe in a quandary]. This has created dark clouds on the horizon for a Chinese tech sector, which faces several other problems such as dissatisfied employees working nine to ten hours daily six days a week, and a quality gap, which is probably still wider than assessed by some Western journalists, whose late discovery of China’s tech sector has contributed to an exaggeration of the ability of the mainland’s tech sector [see more below].
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Last, but not least, the editor spent much time discussing the outcome of the ongoing trade talks between the United States and China. These conversations continued to show unequivocal support among foreign companies and, interestingly, private Chinese companies for President Trump’s tough stance towards Beijing. In China, the private sector, in particular, hopes that US pressure will also level the playing field for them when it comes to competition with state-owned enterprises [not least when it comes to access to financing]. The only worry in the context of the ongoing trade negotiations was that many feared that the White House would “reap the benefit” too early by compromising on what is only a diluted deal. This website’s scenario of a trade deal, which will be no stronger than President Trump’s tweet was widely endorsed among the Chinese and expats. Also, nobody expected China to live up to any trade deal. The conclusion was that Beijing only tried to buy time [see more below].
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The editor also managed to talk with several people about the Chinese stock market rally; these talks included a Chinese asset management company. They all described a soaring Chinese stock market in 2019 as a “politically motivated” rally. They pointed out, as this website has done in the last few months, that the central bank was actively withdrawing liquidity from the economy rather than providing new liquidity. 
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The economy remains on a path of a “long soft fall in growth”
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‌The editor’s trip to China last week did not change the overall picture of an economy, which has seen growth slow substantially in the last six months. The only adjustment to the forecast is that economic activity in tier-2 and below cities is probably weaker than assessed shortly before the trip. Indeed, the long-term scenario remains lower growth or what the Conference Board a few years ago called the “long soft fall in growth” [see also Insightview’s global economic growth forecast]. The editor did not meet anyone who sees signs of growth reaccelerating. The conclusion was the same when the editor confronted the same people with the fact that the headline index in the leading PMI surveys bounced back in March. There was, however, no clear conclusion when it comes to whether the growth slowdown was an outcome caused deliberately by policymakers in Beijing or whether the growth slowdown was a function of structural headwinds in the economy. 
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One thing supporting the argument that the growth slowdown was caused by the authorities [deleveraging] is the fact that Beijing has neither launched aggressive monetary nor aggressive fiscal stimulus measures to support economic growth. Indeed, one could argue that Chinese policymakers are acting as if the economy is within the targeted range. “At the same time as Beijing launches measures to stimulate private consumption, Chinese policymakers order state-owned enterprises or provincial governments to tighten their belt,” one Chinese company owner told the editor [read also the Caixin article, China: Central Government Departments Heed Call to Tighten Their Belts]. Also, the downbeat assessment was not changed by the fact that Insightview pointed out that Chinese households have been exposed to “significant tax cuts” at the beginning of 2019. A Chinese economist pointed out that these measures only mitigate the impact of the fact that the “real” unemployment rate, which is not to be mistaken for the official unemployment rate, has increased significantly in the last twelve months. Last, but not least, the cut in corporate taxes helps little; many private companies are losing money, as a Chinese company owner argued. Furthermore, at the same time as Beijing cut the tax rate, the authorities have also boosted tax revenues by broadening the tax base. 
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The question is, therefore, why Beijing is not more eager to boost growth? Beijing firmly believes that the country has a debt problem, which limits the possibility of supporting the economy. In the last few years, President Xi Jinping, in particular, has put significant efforts into reducing the overall debt level, as one person told Insightview. In October 2017, Mr Xi said that “housing is for living, not for speculation.” That China’s debt level is too high appears to be a general conclusion on the mainland. A new debt-driven spending spree in the public sector would, therefore, contradict what Mr Xi said in the past.
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Beijing is also aware that China faces significant secular headwinds from a demographic time bomb, which will add considerable pressure on public sector finances in the coming decades. Today, two persons in the working-age population will pay for one pensioner [older than 65]. In 2050, one working-age person will have to pay for one pensioner, according to China’s Academy of Social Sciences. In this context, it is no surprise that China’s pension system is profoundly underfunded [read also the Caixin article, China: Rich Provinces Cough Up Pension Funds to Help Struggling Peers]. Last week, the government ordered pension funds of the rich provinces to transfer assets to pension funds in the poor provinces.
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The headwinds created by China’s demographic time bomb have gained attention in the Chinese media. This is also an essential factor behind Beijing’s reluctance when it comes to providing fiscal stimulus measures to support growth to the same extent as in 2008. China also faces increasing financing problems in education as well as the healthcare sector. The clear visibility of these headwinds is also why the Chinese are today less optimistic about the future than a few years ago.
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Another factor, which makes it harder to sustain the growth rate of the past is the fact that the Chinese are no longer “hungry” when it comes to working faster and making more money, at least not to the same extent as in the past. Instead, they want more out of life. They want to work less and have more spare time. In several Western companies, Chinese workers are now offered five weeks of vacation rather than higher wage increases, which has been an enormous success. On the other hand, this also puts a limit on China’s potential growth rate. 
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Furthermore, the potential growth rate of the economy risks being reduced by the fact that young couples in the urban areas, in particular, do not plan to have more than one child [the costs are too high]. This poses more headwinds to future growth, as this will reduce the number of well-educated workers in the future. Indeed, it feels very much like China is turning “Japanese”, even though this is precisely what Beijing has tried to avoid. Granted, the unemployment rate in the rural area is estimated to be close to 20%, but this is because the people there do not have the skills needed to fill jobs in the “new economy”. At this visit, the editor experienced the highest level of fear ever among workers in tier-2 and below cities of being disrupted by new technologies, which applies to blue-collar as well as white-collar workers [read also the Technode.com article, JD.com reportedly planning to lay off as many as 12,000].
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Generally speaking, the Chinese are no longer as upbeat about the future as in the past. The low-hanging fruits are gone, according to the people the editor met last week. This is an assessment by workers in the cities as well as in the rural areas. There is no doubt that China faces significant long-term economic imbalances, which are being discussed openly. The future problems are probably being addressed too openly, according to policymakers in Beijing, as this could dent “optimism”. In China, the foundation of high growth is built on optimism. 
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That said, this does not change the fact that China remains an excellent growth opportunity for many foreign companies, not least if one concentrates on the four growth centres: Tianjin-Beijing, Shanghai, the Greater Bay area [Guangdong, Hong Kong and Macau] and Chengdu. China’s manufacturing will, however, continue to face an uphill struggle, which is also why the exodus in this sector out of China will continue in the coming years – with or without a trade deal between Beijing and Washington – according to most people Insightview met. China has turned into a highly expensive production centre.
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‌The “core leader” moves China in an “un-Chinese” direction on the global stage
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On the political front, last week’s trip gives rise to a strengthening of this website’s clarification of the political situation on the mainland. The concentration of political power in the hands of President Xi Jinping is now so strong that, combined with other factors, this shows that China is slowly moving in the direction of “fascism”. It is important to take note of the fact that we are not there yet, but there is no doubt that the “core leader” is moving China in that direction [make your own judgment based on Merriam-Webster’s definition here].

‌Insightview is aware that only few foreign companies with economic activities on the mainland will endorse such a conclusion; the same applies to private Chinese companies. In China, however, it is more important to “listen” to what is not said or what is said between the lines, although this is Insightview’s own conclusion. Not surprisingly, the question of whether China is headed in the direction of fascism is, of course, difficult or too controversial to answer, as the “wrong” answer is attached with significant risks to businesses and individuals operating on the mainland.
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It is beyond doubt that the “core leader” is currently moving the country backwards politically while “modern China” moves forwards. The unanswered question is whether, further down the road, the distance between the “core leader” and the “real society”, not least when it comes to young Chinese citizens, is growing so fast that this will create political tensions on the mainland? The Chinese president appears not to be looking back, as Mr Xi continues to launch new measures to restore the “real party line” [read also the SCMP article, Millions of Chinese youth 'volunteers' to be sent to villages in echo of Mao policy]. Last week, the editor also heard an unconfirmed rumour that Beijing may penalise young couples on their “social credit system balance” if they get only one child. It is difficult to animate young people in the larger cities, in particular, to have more than one child, as education costs could easily run into $30,000 per annum.

Generally speaking, Europe should not interfere in China's domestic policy, according to this website. On the other hand, it is a European concern if Mr Xi has too much political influence abroad. In the context of “national security” in Europe, it is, therefore, long overdue to “call a spade a spade” when it comes to how to confront China – or more precisely, “Xi Jinping’s China” [read also Insightview’s travel notes in April 2018 here]. The European Union appears, finally, to respond to increasing Chinese influence in Europe, which is applauded by European businesses in China. 
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European politicians should form their China policy based on common sense. In the 1970s, it was political naivety which led to strong support for Maoism among the European youth. Today, “money makes many blind”, which is also why European politicians should be careful when listening to some European players with heavy business interests on the mainland. Politicians should be particularly cautious when listening to self-proclaimed China experts, who may have vested interests in China. Their views do not necessarily represent the interest of European countries when it comes to “national security”. 
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Today, the global influence of “Xi Jinping’s China” is growing so strongly that “national security” in Europe needs to take centre stage before corporate profit when it comes to cross-border investments of “strategic importance”. In the last two decades, Beijing cleverly exploited political naivety in Europe and the United States, as several Chinese people told the editor. They also added that this is the rule of the game [read also the Bloomberg article, China’s Next Naval Target Is the Internet’s Underwater Cables]. Many Chinese justify Beijing’s aggressive foreign policy with the need to counterbalance US dominance around the world. They oppose US supremacy in the world. The Belt and Road Initiative was widely seen by foreigners and Chinese on the mainland as a way for Beijing to gain political influence. On the other hand, the general conclusion was that this was an expensive way to increase leverage.
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What should give rise to food for thought in Europe is the fact that Australia, in particular, worries about the rise of “Xi Jinping’s China”. Canberra is now discussing how to prevent the potential risk that China could soon be able to cut its lifeline to the United States. This is the case, as Beijing has exploited economic weakness on several Pacific islands to gain a foothold. Therefore, Washington agreed with Australia in January to build a joint military base on Manus Island in Papua New Guinea. In South America, China has also gained a strong foothold in the backyard of the United States [read the AP article, China's construction binge spreads to Americas, rattles US]. Furthermore, China’s foothold in Eastern Europe will probably only get stronger, as the European Union does not offer any solutions to falling growth rates in the EU periphery [read also the ECNS article, China to enhance BRI cooperation with Croatia: premier].
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Chinese tech companies under pressure

‌The Chinese tech industry still sees downward pressure, according to the companies and persons Insightview met last week. Most tech companies, not least in the surveillance sector, are to no small extent sponsored, indirectly, by the Chinese government. This is, however, doing little to boost productivity and innovation. China is in a similar position as Singapore was in the early 1990s. At that time, the country had to move up the value ladder. Singapore learned the hard way that such a transition requires a far more liberal society and market competition.
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‌Nonetheless, this is not necessarily what the Chinese President aims for. The opposite is the case, as Xi Jinping is, as already mentioned, slowly moving China back in the direction of the 1960s, at least politically. This poses a significant threat to China’s ambitions of moving up the value ladder, according to several of the people the editor met last week. There is no doubt that China’s tech sector is in an excellent position to handle a massive amount of data better than the West, as there have, so far, been no privacy rules to limit the use of data. On the other hand, it is also a fact that the quality gap is still large, according to several companies and persons Insightview met. Insightview partly shares this assessment, although it is difficult to make a broad-based verdict.
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Chinese tech companies face another more important headwind, namely their link to the Chinese government. This could prove to be a severe obstacle for Chinese companies trying to gain a stronger foothold overseas. In an environment of a more authoritarian Beijing that wants to be in control of everything, it is hard to believe that private Chinese companies will not share data with the government. Whether this is true does not matter; the fact is that Europe and the United States are turning more hostile towards Chinese tech companies.
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The trade war
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‌When it comes to the ongoing trade negotiations, the editor did not meet any Chinese person who did not share the view that President Trump was right when he launched the trade conflict. Surprisingly, the White House is still widely applauded across the board. That said, most Chinese disagreed about the way Mr Trump has carried out the pressure on China. Furthermore, Washington should have confronted Beijing with levelling the playing field a decade ago, according to foreign and many local companies on the mainland. Indeed, they believe that the West has been naïve. If the West had used reciprocity in the past, China would only have been able to invest 25% of what they have done so far in the United States and Europe, a manager from a large European company said, referring to a report from the Mercator Institute for China Studies.
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Nonetheless, it seems that, finally, the West has drawn a line in the sand. Last week, this also applied to the European Union during negotiations with the Chinese Prime Minister, although the jury is still out [read the SCMP article, Before a joint statement, a threat: EU diplomats nearly walked out of talks with China]. Interestingly, what makes foreign companies in China nervous is, as mentioned earlier, that President Trump may “reap the benefit" too early by accepting a “diluted” trade deal to support the US stock market and gain political tailwind. Earlier this month, China apparently admitted, during the negotiations with the EU leaders, that there has not been a levelled playing field. On the other hand, this contradicts the fact that Beijing still refuses to give up 'developing country' status at WTO. 
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Therefore, when it comes to achieving a sustainable trade deal, optimism did not prevail during last week’s conversations with Chinese companies as well as foreign companies on the mainland. Such an agreement will only give Beijing time, according to not least foreign companies. Time is on Beijing’s side, as they noted. President Xi Jinping’s strategy has, so far, been “to grab as much land as possible”. Therefore, Europe and the United States drawing a line in the sand will not change the direction of Beijing. This will only make Chinese policymakers “rearrange their troops”; but Xi Jinping’s target remains the same, which is to gain more global influence. This was a view widely shared among the people the editor met last week. President Xi Jinping only respects strength, not weakness.
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Interestingly, the general feeling on the mainland was that the outcome of the trade negotiations was not that important, because the trend of foreign and Chinese companies has for some time been to reduce their exposure to China. This has been accelerating and will continue to gain momentum. The perception is that this is only the beginning of the trade conflict, which will, sooner or later, come back even stronger [read also the New York Times article, One Trump Victory: Companies Rethink China].
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‌6. November 2018 - Unplugged 'Travel Notes: Beijing reinforcing the use of 'big data' puts Europe in a quandary
‌17. April 2018 - Unplugged 'Travel Notes' - China could soon make far larger waves in the rest of the world
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