IBM announced they'll be ending their research and development operations in China, impacting over 1,000 jobs. But they're not cutting these jobs, just relocating them outside of China. Miles explains why. Next, Miles details the CCP's new "housing pension system" and closes with the latest collision in the South China Sea when a Chinese Coast Guard ship rammed a Philippine counterpart.
China Insider is a weekly podcast project from 91ÆÞÓÑ Institute’s China Center, hosted by Miles Yu, who provides weekly news that mainstream American outlets often miss, as well as in-depth commentary and analysis on the China challenge and the free world’s future.
Episode Transcript
This transcription is automatically generated and edited lightly for accuracy. Please excuse any errors.
Miles Yu:
Welcome to China Insider, a podcast from the 91ÆÞÓÑ Institute's China Center. I am Miles Yu, senior fellow and director of the China Center. Join me each week for our analysis of the major events concerning China, China threat, and their implications to the US and beyond.
Phil Hegseth:
It is Tuesday, September 3rd and we've got three stories to detail with Miles. First, we discuss IBM's announcement that they'll be ending their research and development operations in China impacting over 1000 jobs, but they're not cutting these jobs, just relocating them outside of China. Other big tech companies have done the same and Miles explains what's causing the business exodus. Second, we break down the CCP’s new housing pension system being rolled out to 22 cities inside China. And why this plan program is just another example of massive state bureaucracy chipping away at the public's trust. And finally, we add another point to the story of the summer, and that is Naval disputes and collisions, which saw its newest entry this weekend with China ramming a Philippine Maritime patrol vessel. Miles explains the strategy and mindset driving the CCPs specific targeting of the Philippines. Alright, Miles, it's good to see you.
Miles Yu:
Good to see you, Phil.
Phil Hegseth:
We start with an economic shakeup as IBM is going to close all of its research and development operations in China. It's over a thousand jobs. So in their statements, they talk about this just being a business decision, but we know there's more there, Miles. So, peel back the curtain for us on this.
Miles Yu:
Well, IBM is pulling out, China is a major event because IBM's primary in doing business in China is in research and development. So, the R&D apparatus in China has been huge and also very instrumental in helping China developing its own R&D apparatus. IBM is famous for making computers and many years ago IBM sold its personal computer laptop business to China as [inaudible]. So Chinese a hundred percent owns it. This time IBM is pulling out of China. It's a big deal, but it's also very, very telling. It's not an isolated incident. Let's start with the Chinese national strategy. IBM's [inaudible] China fits into the Chinese national strategy. The Chinese government first started out with getting Americans invested in China by a huge number by creating all kinds of unrealistic investment incentives. And then there was still US companies' operational models and trade secrets by fiat because if you want to invest in China, you must agree with the Chinese government to share your technology and key data with the Chinese government, otherwise no business for you.
[Right?] So, if you want to invest in China, you joined the company with a Chinese partner and that Chinese partner by law must have more than 51% of the ownership. [Oh wow.] So, the Chinese government started out by creating a very unfair environment. So, you will be in disadvantage in the first place, but people keep putting billions, billions, hundreds of billions of dollars into China. Over the years, once the Chinese government created competitors for the American companies and government tried to kick out the US companies and with the Chinese companies under total Chinese control would dominate the market. And this is basically the pattern. And how do they do that? Well, all kinds of methods. Number one, through all kinds of national security laws in the pretext of protecting China's national security. Particularly in July last year, China amended its counter espionage law and that will make China a draconian national security state and that would have all reasons or no reasons at all to kick out any foreign companies, particularly American companies.
Since last year, the Chinese national security apparatus has raided many American companies, arrested the employees of this working for US companies, and they kicked out at least seven US due diligence companies. Those are companies that provide real economic data and provide a realistic assessment of the Chinese economy to American investors. And those companies include banks and corporations, Mintz Group, Capital Vision Partners, et cetera. The reasons that the Chinese government is most afraid of economic reality, all major global credit rating companies, particularly the big three, S&P global ratings, Moody's and Fitch group, have given China negative ratings and they're all kicked out of China by the Chinese government. This was created a terrible investment environment in China. That's one reason why most American companies have fled China.
And those who are still remaining in China are still thinking about it, they have the plan B including Apple by the way. So, because it's impossible for China for your company to stay in China. As far as IBM per se, there's a very specific reason because IBM, Dell, all the IT companies, their main business to provide IT infrastructure, and IBM in particular, their business is in maintenance, I'm sorry, mainframes and data systems. So, the Chinese government right now has given all these orders to non-American companies. And so, IBM, basically they don't get any orders at all from the Chinese government because the Chinese government has total control of many of the major orders in China. So that's why IBM is literally out of business. I think the Chinese government would encourage; they actually have a national policy to buy Chinese. That's why IBM literally no business staying. This is one of those things that they do. This would have a global impact, not just IBM, but also many companies fleeing China would have global impact.
Phil Hegseth:
Yeah, they aren't cutting these jobs. They're likely just relocating a lot of these workers to different places, different countries in Asia, some in the US, and Microsoft also made a similar move to relocate seven, 800 employees based in the other countries that were previously located in China. So, a lot of companies are making this pull out of China. What could it mean for the global economy and world politics?
Miles Yu:
You mentioned that many companies are doing the same thing. And I'll answer the question about the impact of this exodus. The companies that have got out of China or have been kicked out of China or relocated, whatever we call the fact is they have no presence in China.
This will include big companies like Nvidia, Samsung, Google, and this French grocery chain that's been in China for almost 40 years, Carrefour, who just got out of China. And Japanese companies are particularly keen to this. Many of them have already out China, Japanese company giants like National, Nikon, Suzuki, Toshiba Cannon, Sony, so Americans, of course Yahoo has been out of China for years and Amazon is getting out of China. So, this is basically the global exodus out of China. Now, what does it mean potentially? This could potentially mean a lot to global economy and world politics because global economy is now at risk of being divided into two parts, the CCP dominated part and the free market part. Yet both parts share the same international free trade and open market system. And this is basically a sheer economic reality. Therefore, the key to stopping the CCP’s march toward global technology and economic dominance is to disqualify China from joining the international free trade and open market system by declaring China as a non-market economy. This is something I've been advocating for quite some time; I hope somebody who is in a position of power will listen to what I'm saying.
Phil Hegseth:
Yeah, okay. If somebody who is in power heard you say this and wanted to act on it, what would they have to do?
Miles Yu:
We would start with the examination of China's qualification of joining say WTO or whether China would be qualified to join American market, particularly the capital markets and some of the technological aspects of that. So, this is the only way you can do it because the Chinese economy fundamentally is CCP-driven. The decision power that decides the Chinese economic reality is not a market, it's the Chinese Communist Party’s political bureau, the politburo. So, this is not a market. That's one of the reasons why China in my view, is not even qualified to be a member of the international global trading system.
Phil Hegseth:
I think that's a good way to close it out. Miles. Moving on to our second topic. China is piloting a housing pension system in 22 cities, which is causing some great national unease. But my question is, as someone in a market economy, what is a housing pension system?
Miles Yu:
Housing pension is a fine thing then just rolled by the Chinese government a couple of weeks ago. It's going to be experimented in 22 major Chinese cities, including major metropolises like Shanghai and Beijing. This is going to affect a lot of people, hundreds of millions of people. Housing pension system. The Chinese government said that is basically a regular payment system by the homeowners to a public fund, which will be used to check the safety of the house. It's like a person growing older. So, all houses also have a process of aging, so that's why you paid the pension to take care of the house.
Phil Hegseth:
So, people have been paying into a ‘housing maintenance fund’ since 1998. So, this has been something they've kind of been thinking about or planning for. But why is housing maintenance such a crisis in the first place?
Miles Yu:
The crisis is happening for many reasons. Number one is really an ownership dilemma. In China, China's a socialist country by which nobody really owns the house. You can buy a house, but the ownership belongs to the state. You only have a right to live on that allegedly for 70 years. So, after that, you go back to the government. So, people do not really have a sense of ownership. So that means two things: number one, people do not pay much attention to the maintenance of the house, just like you are a renter versus the owner of the house. So, you don't take care of your house nearly as much as if you actually own the thing. Secondly, if you don't own the house, there's no reason for the government to really collect property tax. So, property tax is a taxation on owners. So, the government in theory should pay for the property tax because it's not owned by people.
So that's an ownership problem. So historically, the maintenance cost is not really a factor in the properties and does not basically cost a lot of deterioration of the housing infrastructure. Secondly, China's infrastructure building and particular housing has a problem of quality. Corner-cutting is a national pastime in China. So, you've got a lot of contractors who are pretty unscrupulous. They build houses of poor quality. So many houses were poorly built. And so, this is not just about housing, China, the entire infrastructure system, it's a high-speed rail, airports, hydro-electric dams, skyscrapers, et cetera, et cetera, they’re all entering the same high maintenance period. So, China has a huge burden of infrastructure maintenance right now. That's one reason so many crises occur, but China has more skyscrapers than many countries. It has several times more skyscrapers than the United States, for example. But many of skyscrapers are poorly built and occupancy is very low.
So, it's not driven by the market, as I said earlier, but it's driven by party policy. This is one of the reasons why right now you need a huge amount of money to keep the infrastructure healthy and safe. Now of course, some people who actually buy the houses have to pay some fees at the community level, at the homeowners’ association type, but that's not nearly enough. So, what this housing pension is trying to do is mostly create a public fund to be managed by the local governments and to provide sufficient funds out of pockets of the buyers. And that's why people are so anxious and confused and even upset about more money coming out of the pockets where people have really worried about money in the first place. Now, this money to be collected from home buyers would do basically three things according to government announcements.
Number one, to conduct regular home safety inspections. Number two, to buy home insurance. Number three to basically to make sure if there has been some kind of catastrophic event that has happened to the structure or foundation of the house, and then you have money to pay for it. People's reactions have been very mixed. Most of them were confused and unhappy, but they also believe this probably is a good way to go forward. The major problem right now is the concern about local corruption, because if a local government or Chinese government as a whole is going to manage this, and who knows who is going to take the money away from their hard-earned payment. So, this is the problem that people were not very clear, because Chinese bureaucracy is so corrupt and so costly, they're very parasitic, number one, they're also most hated by the Chinese people.
Phil Hegseth:
So, Miles, is the real issue here, and people's reaction really just this is the latest example of trust issues between citizens and how the party might use their money, whether it's local corruption or risky housing built in the first place. Does this seem like a trust issue?
Miles Yu:
Well, in the real sense, yes. The tension between the Chinese government, a huge bureaucracy, and the Chinese people, particularly middle-class people, keep in mind people who could afford buying a house, they're relatively well off. So that's why there's trust in, let me just say to in that point a little bit, China is the world's second and largest economy after the United States, but China's bureaucracy is just atrociously huge. In the United States, the federal budget, you spend us for example, spend about 21% on healthcare, 5% on education and only spend about 6.5% on government administration. The bureaucracy in China, the government budget, 70% of them, of them are spent on government administration, on bureaucracy.
That's huge, right? Yeah. So that's why that's the source of corruption because the government right now, local government are kind of broke. This is why people were leery about paying more money for the house they bought which probably they thought was a good idea, but then gave the money to the corrupt bureaucracy. That's something that they're not really sure about. Now, this also could have a huge impact. I just mentioned the phrase the middle class. Well, there's no sort of a middle class per se in China, just a middle-income class probably because these people are normally what we call within this Chinese system. So, in other words, many of them are government employees, they're supporting the Chinese government, even their self-interest, particularly their houses or impact. And I think it's to create a major problem for the Chinese regime. So eventually this housing pension system may be a very bad sign for China's political security. So, the government, of course, will normally clearly support this kind of stuff.
Phil Hegseth:
Well, and the bureaucracy is that big. It shouldn't shock people that come up with another new program for an influx of money.
Miles Yu:
That's right. In a dictatorship, greed and corruption normally are habits that are hard to kick.
Phil Hegseth:
Well said. Well, for our final topic, I feel like the theme of this summer since I've been helping you out with the show has been South China Sea Naval Encounters, and this weekend we saw yet another one with a Chinese Coast Guard vessel ramming a Philippine maritime patrol vessel. Both sides blamed each other for the incident, but if you watch the video, it's pretty obvious, there's a clear caught-in-4K scenario of the Chinese ship ramming the Philippines ship. It's pretty obvious. So, this has been the Philippines, Taiwan, they've had issues with all kinds of people, but in this instance in particular, why is China picking on the Philippines?
Miles Yu:
That's a good question. China has the maritime and territorial disputes with pretty much most of its neighbors, right? You have India, Vietnam, Malaysia, Brunei, and South Korea, Japan, Taiwan, to them the most obvious,
Phil Hegseth:
Sending him a few, but...
Miles Yu:
[The reason for] the Philippines is not really about the Philippines, it's about the United States. China has designated United States as a chief adversary for decades. Why the Philippines? Because the Philippines is the only country in all of southeast Asia that has a mutual defense treaty with the United States.
Phil Hegseth:
This is an extension of the US in their eyes...
Miles Yu:
Absolutely. Everything China does, global strategic wide is all about United States. So, supporting Russia's war in Ukraine, supporting Hamas, Iran's interference in the Middle East, peace supporting Maduro regime in Latin America. It's all aimed at the United States global hegemony as China [calls it], because ultimately only United States can stop China's global march to dominance. So that's why the Philippines, now you notice this. It's not just about the Philippines, it's the timing, because the American National Security advisor, Jake Sullivan, just went to China and told the Chinese, just behave, right. Just please be nice to us. And of course, they're very cantankerous. This is the gigantic middle finger to Jake Sullivan and the United States. So not only this, China also at the same time is speeding up its provocation against Japan. China's an airplane for the first time intruding into Japanese sovereign airspace, and also just the other day, their warship has entered Japanese sovereign water, or this is pretty provocative.
It's all about giving the United States the middle finger. That's it. Because Japan is another country that has very strong security, mutual defense agreement with the United States. So that's one reason why Japan and the Philippines were the primary targets. By the way, incidentally, the maritime police ship that the Chinese Coast Guard vessel rammed into, is a ship provided by Japan to the Philippines to enhance maritime law enforcement. So, there's a lot of symbolic meaning going on there. So that's why China is a country that is determined to kick the Americans out of the East Asia, out of Southeast Asia, so it could become a hegemon. You know what happened? This is very interesting because today this program goes live to the audience is September 3rd. September 3rd marks the signing of the surrender by the Japanese during World War II, the Japanese bombed per harbor for exactly the same reason China is doing right now. That is, Japan wanted to become a hegemon of what called the cold prosperity sphere in East Asia. And we realize soon that United States would not allow it to happen. That's why United States become the target of Japan. This is what China has realized in the last 10, 15 years, that in order to be even a regional hegemon, China must destroy United States as simple as that.
Phil Hegseth:
Is there any significance behind the timing of this one, or is this just more of the same theme that we've been seeing?
Miles Yu:
Oh, this has been a national strategy since the 1940s. So, it has never changed. The tragedy of all this is such a major doctrinal principle held by the Chinese Communist Party has been invisible to a lot of people in Washington DC in a decision-making circle. It is time to change that, and I think we did change that since the Trump administration, endorsed by both parties, by the way.
Phil Hegseth:
There we go. And hopefully this show just continues to be an extension of that...
Miles Yu:
Extension that, and to understand China's strategic intent has been so lacking for decades, and now the door changed.
Phil Hegseth:
Well, let's hope we can continue to change that. Thank you as always, Miles. We appreciate your insight, and we'll see you next week for three more.
Miles Yu:
See you next week. Thank you for listening to this episode of China Insider. I'd also like to thank our executive producer, Philip Hegseth, who works tirelessly and professionally behind the scenes for every episode. To make sure we deliver the best quality podcast to you, the listeners, if you enjoy the show, please spread the word. For Chinese listeners. Please check our monthly review and analysis episode in Chinese. We'll see you next time.