The End: Why China Can’t Fix This Crisis | The TikTok Deal | Xi & The ‘New Frontier’

Happy Saturday, everybody. Welcome to another episode of China Update, where we discuss leading political, economic and geostrategic analysis on the world's number two economy. My name is Tony. Let's jump in. And first up, China should make greater efforts to boost household income in the coming years as the country looks to consumption rather than exports and investment to power future growth, according to a former senior economic planner in Beijing, a former deputy head of the Office of the Central Leading Group on Financial and Economic Affairs, speaking to an audience at China's elite Tsinghua University in Beijing this week, said income growth would be a central issue as policymakers prepare to outline the nation's next five-year plan at the Communist Party's fourth plenum next month. It lies in shared development, the pursuit of common prosperity and gradually narrowing the income gap. The main reason for weak consumer demand in China is fundamentally a matter of income, in quote. Yang, who helped draft multiple five-year plans, called for raising the share of household disposable income and national income and increasing consumer spending's role in total demand. He also urged the government to, quote, increase the portion of fiscal spending devoted to people's livelihoods and transfer more profits from state-owned firms, in quote, to address the pension shortfalls as China's population ages. A lack of consumer confidence linked to falling property values and local government debt pressures has complicated Beijing's push toward a consumer-driven economy. While consumer spending contributed 52 percent of China's economic growth in the first half of the year, property investment fell 12.9 percent over the same period. But of course, spending is just one side of the coin. The other, darker side, Beijing still appears very reluctant to accept. China's other elite university, Peking University, professor of finance Michael Pettis, observed on Yang's comments in recent days, quote, Yang Weimin said the main reason for weak consumer demand in China is fundamentally a matter of income. He's right, of course, but this is only the second of what is likely to be a three-stage process. First is the recognition that weak consumption is the main medium to long-term constraint on Chinese growth. That certainly happened in the past three to five years. Next is to recognize that weak consumption is mainly an expression of the low household income share of GDP. In the past year, we've seen a few academics point this out, even though policymakers continue to act as if consumption is weak mainly because of limited supply. Finally, and we are clearly not there yet, will be the recognition that to increase the household share of GDP means reducing the share that goes either to businesses or to the government, and neither will be easy, especially as it is eventually recognized that China's manufacturing competitiveness globally is largely based on the low share households retain. Recognizing this means recognizing that reversing weak household consumption will probably also mean reducing manufacturing competitiveness. Japan learned this in the two decades after it began rebalancing in 1990-91. It took 17 years, 1991-2008, for Japan to raise the consumption share of its GDP by 10 percentage points, and China's consumption problem is much deeper than Japan's was. During this time, however, its GDP growth slowed to barely over 0%, while the manufacturing share of its GDP fell from 27%, roughly the same as China today, to 19%. GDP growth fell mainly because the so-called good way to rebalance a surge in consumption growth proved impossible. So it occurred with a slowdown in production. The point is that the hidden transfers that had made Japanese manufacturing so competitive and so technologically advanced in the 1980s were also the transfers that restrained consumption growth. Inevitably, reversing the latter meant undermining the former. This still isn't part of the discussion in China, but perhaps will become so over the next two to five years, as debt constraints start to limit the role of non-productive investment in generating activity." Next up, US President Donald Trump moved ahead this week with plans to force ByteDance Limited to divest TikTok's US operations, signing an executive order that sets the stage for American investors to acquire the popular video sharing platform at an estimated US$14 billion valuation. The move fulfills a national security law passed in 2024 requiring ByteDance to seek control or face a nationwide ban. Trump told reporters that General Secretary Xi Jinping had given his go-ahead for the transaction during a recent call, but Beijing has not confirmed this. The deal envisions TikTok's US business being spun into a new venture majority owned by American investors, with ByteDance's stake reduced to around 20%. Oracle Corp., Silver Lake and Abu Dhabi-based MGX are among the expected participants in the buying consortium. The proposed US$14 billion price tag floated by Vice President J.D. Vance shocked investors, who had expected a valuation closer to US$35-40 billion. At that US$14 billion figure, TikTok's US business would be valued at just 1.4 times annual sales, or in line with oil majors and food companies than high-growth digital platforms. By comparison, Meta trades at 10 times sales, while YouTube parent Alphabet trades at about 8. This could be the most undervalued technology acquisition of the decade, said Ashwin Bhenwani, founder of Alpha Bhenwani Capital, adding, By every financial metric, this looks dramatically misaligned with reality. The unusually low valuation may be explained by the profit-sharing structure under discussion. ByteDance reportedly will continue to receive licensing fees for TikTok's prized recommendations algorithm and the share of profits tied to its remaining equity stake. All told, the Beijing-based firm could still collect 50% or more of TikTok's US overall profits, even after majority control shifts to American hands. Critics argue the arrangement amounts to ByteDance being forced to sell at a discount while still capturing a lucrative share of revenues. The sale must be finalized within 120 days. The US president, who credits TikTok with helping boost his 2024 campaign, and likely recognizing that a TikTok ban would risk alienating many younger voters more concerned with their social media lifestyles than national security, has framed the deal as a win for both security and US investors. But with key details unresolved and Beijing silent on approval, the fate of the platform's 170 million American users hangs in the balance. And finally for today, General Secretary Xi Jinping arrived in Xinjiang this week to preside over celebrations marking the 70th anniversary of the establishment of the so-called Xinjiang Uyghur Autonomous Region, part of Beijing's determination to cement its control over the rest of far-western territory. Xi, accompanied by Politburo Standing Committee members Wang Huning and Cai Qi, as well as a broad retinue of senior party and state officials, attended a commemorative ceremony in Urumqi on Thursday morning. He is the first Chinese leader to personally attend such an anniversary event in Xinjiang, a signal of the symbolic and political weight Beijing attaches to the region. Over two days in Urumqi, Xi toured an exhibition chronicling Xinjiang's development since 1955 and met with local leaders. In remarks, he praised the Communist Party's strategy for governing Xinjiang as, quote, scientific and effective, in quote, pledging that the policies of development, integration and security must be adhered to for the long term. Xi called for the continued, quote, assimilation, in quote, of Xinjiang's cultural and religious traditions into broader Chinese society, insisting that the region's stability and unity had been, quote, hard won and must be cherished, in quote. The visit, Xi's third to Xinjiang in just over three years, follows his appearance in Tibet last month for a similar regional anniversary. Analysts see the back-to-back trips as part of a carefully choreographed campaign to highlight what Beijing presents as successful ethnic governance, even as international criticism of its policies in Xinjiang remains fierce. Human rights groups and western governments have accused China of mass detentions, forced assimilation and other abuses against Uyghurs and other minorities. A 2022 report by the United Nations Human Rights Agency concluded that Beijing's actions may constitute crimes against humanity, allegations China strongly denies, maintaining that its measures have restored peace and spurred economic growth. Like any sensitive region in the world, its history is complex. The ethnic groups of Xinjiang are Eurasian, many are Turkic speakers, not Han Chinese. The region has seen periods of unity and fragmentation, periods where it has been folded into a Chinese imperial order, and periods of autonomy and independence. What is new under the communists, however, has been the use of state-driven Han Chinese settler colonialism as a mechanism of control and integration, something which has sparked much unrest in modern times. Since violent attacks in Urumqi in 2014 themselves sparked in response to Han attacks on Uyghurs in southern China, Beijing has built an extensive security apparatus in Xinjiang, from surveillance systems to so-called re-education programs. She has consistently defended these policies, declaring in 2020 that the party's approach was, quote, completely correct, end quote. James Leibold, a professor at Australia's Latrobe University, describes Xi's back-to-back visits in Xinjiang and Tibet as, quote, a symbolic jubilee, proclaiming the party's success and binding its most restive frontiers into the heart of the nation, end quote. Others, such as historian Mark Oitman, argue that the underlying aim is to reshape minority cultures, to forge, quote, an irreversible molding of the ethnic groups into one Chinese consciousness, end quote. For Beijing, the anniversary celebration was an occasion to showcase loyalty and stability. For critics abroad, it serves as a reminder of the deep tensions that persist beneath the surface of Xi's vision for a united Chinese nation. Rhetorically, that nation is made up equally of all ethnic groups, from Han to Mongolian, from Miao to Tibetan. But in practice, one cannot help but recall those infamous lines near the conclusion of Orwell's Animal Farm. All animals are equal, but some animals are more equal than others. Okay, that is today's episode of China Update. Thank you so much, everybody, for watching. Have a good Saturday, have a restful weekend, and I will see you, or hope to see you at least, for a new week of updates on Monday.