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China’s Economy, the Belt and Road Initiative, 5G and Cyber Security: The Basics

(Italiano qui) —Chinese president Xi Jinping values, so he said, retying the link between Beijing and Rome. Historically it was Beijing and Venice, but never mind, because it’s in Rome that he signed last week a Memorandum of Understanding with the Italian government: it includes an Italian participation in China’s One Belt One Road Initiative (BRI), bilateral trade and financial resources—of which Italy is badly in need of.

Is it a good deal? A bad deal? For the readers who want to form her or his own opinion, here are some facts.

China is a socialist country with a market economy. The system is based in principle on the primacy of a large, state-owned sector, but the private sector now accounts for 3/5 of the GDP and 4/5 of its workforce, and leverages on one of the most powerful of capitalistic techniques: capital markets.

The world’s second-largest economy, in 2017 China accounted for 15.4% of the global economy, from 2% in 1990. Nonetheless, despite holding over $3 trillion in foreign reserves and a massive trade surplus in excess of $420 billion, it is economy is slowing down.

If externally it is waging a trade war with the US, domestically its two big problems are a huge debt and an unbalanced distribution of wealth, according to Michael Pettis, a professor of Finance at Peking University. With a contrarian view, Mr. Pettis told me a few years ago that China could do with a 4.5-5% growth, and still plod along towards its goals, provided it reversed its imbalances.

China recently chose to raise public sector investment of the options it had to adjust, in Mr. Petty’s opinion last September (the other was reducing savings). Even so, solving its massive credit bubble will not happen overnight. “Since the government owns nearly all the banks, the Chinese government is essentially on the hook for the debts of the entire banking system,” Salvatore Babones of the Zhongguo Institute explained.

China’s path to the future hinges around its (last) five-year plan and the BRI, on top of other foreign investments like the $60 billion China recently pledged yet again for Africa (some call it “debt trap diplomacy”), or an intercontinental rail in South America.

Beijing’s policies for the next five years include: speeding up the reform of the financial system, developing a transparent capital market, having the renminbi upgraded to IMF reserve currency, achieving a modern military system by 2020, and having the Internet play a larger role in economic growth.

The BRI seeks to make China the hub of trans-Eurasian economic connectivity by linking China, both through physical and financial infrastructure, with Eurasia’s major continental and maritime zones. Launched in 2013, it has received tepid response from the Chinese private sector. According to Deloitte, businesses would prefer to invest in the U.S. and other mature markets (like Italy) than in the less-developed Eurasian countries.

Several peoples along the BRI stretch are angry with China’s exploitation of their resources through BRI projects or through the imposition of new forms of political and social control.

Forced technology transfers or intellectual property appropriation are a multifaceted issue. China’s investments in the US or US investments in China create complex dynamics by which its non-Chinese partners end up sharing proprietary technology or knowledge assets with their Chinese partners, or  result in greater portions of the automotive supply chain shifting to China. See the above links for a detailed explanation by Mary Lovely, a professor of Economics at Syracuse University, and William Kirby, a professor of China Studies at Harvard University.

US fear of China’s competition is likely giving the China-Russia axis a boost. A Commission debated the topic last week at the US Senate.

Moscow, as a case in point, showcased at MWC19 its coming 5G network—the paradigm-changing next-generation of connectivity—the main supplier of which is… Huawei.

The 5G pie could be huge. It is forecasted to add $2.2 trillion to the global economy over the next 15 years. Just in China the mobile ecosystem’s contribution to the economy in 2018 was $750 billion—or 5.5% of the country’s GDP—and is estimated to reach $900 billion by 2023, GSMA just revealed. The Chinese fiscal system reaped from the industry $87 billion, and China’s labor market 8.5 million jobs.

Huawei is China’s largest telco supplier. Its global market share is around 28%, with Ericsson and Nokia hovering around the 15% handle. It could prove hard to see these numbers shuffle.

Take French operator Orange, of which Huawei is top equipment supplier: Orange caters to 19 million users in its home market France, but to 200 million more in its African and Middle Eastern markets. That is a lot of 4G infrastructure to expand, maintain and upgrade eventually to 5G at affordable costs. Take Thailand: it just launched a Huawei 5G testbed resisting US pressure.

In a bid to reassure EU governments, Huawei just opened a security lab in Brussels, after the one in Bonn and the Huawei Cyber Security Evaluation Centre in Oxfordshire (since 2010). In its 4th report, the HCSEC writes of “shortcomings”, not of security-specific nature, however (they were deemed low risk). No other security specific issues with Huawei’s equipment have been reported since 2012, when the US Committee on Intelligence concluded that Huawei (and ZTE) failed to provide clear and complete information about its relationships with the Chinese government, the military and the Communist Party.

Europe is Huawei’s biggest market outside China. In the past years, many European operators installed Huawei 4G equipment and not only because it was good technology but also because it was cheaper. Now they might want to stick with their early supplier to minimize costs when upgrading to 5G. This is one of the reasons why shutting out Huawei in Europe as it moves to 5G might prove difficult.

“Cyber threats pose a greater threat to security than terrorism”. So the US Homeland Security Secretary Kirstjen Nielsen warned recently. Its global cost has grown by nearly 50% in four years to a whopping $600 billion, and accounts now for nearly 1% of global GDP—see hacking attempts against British MPs, Russia’s military intelligence meddling in the 2016 US election, or Norsk Hydro, a major aluminum producer, having to shut down all global operations after a ransomware attack last Monday.

Security firm Crowdstrike, in its just-released annual global threat report ranked the time hackers needed from their initial intrusion to being able to expand their access: Russia’s hackers were the fastest with 18 minutes, North Korea’s came in second with two hours, China’s needed about four hours, Iran’s more than five.