By Jorge Costa Oliveira

Partner and CEO of JCO Consultancy

Well-defined public policies (including significant government incentives – purchase subsidies, tax incentives and favourable licensing plates), good government and business planning in creating an integrated value chain in the electric storage and mobility sectors, and the absence of entropies created by radical environmentalist activism, all these factors converged to make China the largest market in the production (45%) and consumption (60%) of electric vehicles (EV). It should be noted that it is not only Chinese brands (BYD, Great Wall, SAIC, BAIC, Changan, Chery, Geely, XPeng, NIO) that produce EV in China; many foreign brands (Tesla, Ford, GM, BMW, VW, Mercedes, Audi, Renault, Volvo, Jaguar Land Rover, Nissan) also have EV plants within China, producing for the Chinese domestic market, but also for export. Value chain integration – from the refining of critical metals to the production of electric cells, cathodes, anodes, to gigafactories and EV assemblers – low production costs, the abovementioned government incentives and effective competition, have enabled the production of EVs in China to be significantly cheaper than in the US and Europe. According to some  industry experts, production in China can shave up to €10,000 off the cost of an EV. In 2022, electric battery prices were 24% lower in China than in the U.S.

Meanwhile, in the Chinese domestic EV market, demand growth is slowing down (+90% in 2022, +36% in 2023, +22% in 2024) and competition is fierce (with a price war that has lasted for more than a year). Furthermore, several western institutions consider that China’s EV industry is at overcapacity, producing annually an excess of 5 to 10 million EVs beyond domestic demand, forcing China to find new markets to fuel continued growth.

Internationalisation has become an essential facet for all EV producers in China, focused on key potential consumer markets. Thus far, the internationalisation of Chinese EVs has been made mainly via exports. The growth of EV exports was the key factor for China’s reversion of its automotive trade balance; since mid-2022, vehicle exports have continuously outperformed imports. This trend was catalysed by China-produced vehicle exports to Russia amid the retreat of western corporations from this market since Ukraine’s invasion.

Overall, the Association of European Vehicle Logistics (ECG), citing data from the China Association of Automobile Manufacturers (Caam), reports that Chinese [all] vehicle exports rose >1.3m in Q1 2024 (76.8% ICE, 23.2% NEVs), up 33% from Q1 2023, with leading markets being Russia (112,000 units), Mexico (66,000), Belgium (42,000) and the UK (38,000). The main Chinese carmakers exporters were Chery (with 253,000 units), SAIC (206,000), Changan (145,000), Geely (111,000), BYD (99,000), Great Wall (93,000) and Tesla (88,000).

The main destination market for Chinese-produced EVs is Europe, followed by Asia; there is little penetration in the North American and Latin American markets (although growing fast in Brazil). Chinese EV brands avoid exporting to the US, which has a 27.5% tariff on automobiles imported from China (soon to be increased to 100%) and tie EV tax credits to local incorporation requirements. The majority of EVs exported from China are destined for Europe due to high demand in the region, high European per capita income, high local EV prices, low European customs tariffs, and substantial government subsidies for EVs, regardless of its origin.

To understand the competitiveness of Chinese EV brands, a recent report by Rhodium Group gives the example of BYD’s Seal U model that sells for €21,770 in China and €41,990 in the EU. Not only are Chinese automakers rapidly gaining shares of the European EV market (especially in the lower-priced segments), but they are making higher profits in Europe. Elon Musk’s prediction that Chinese carmakers would ‘demolish’ global rivals is coming true in literally every market (hence the 100% tariff imposed by the US government).

According to the European Automobile Manufacturers’ Association (ACEA), China maintained its position as the leading source of new car imports to the EU in terms of value, with a growth of 37.1% and a market share of 17.7%. A significant portion of this growth is due to EVs. According to the European Federation for Transport and Environment (T&E), EVs manufactured in China are expected to account for 25% of total EV sales in Europe in 2024 (+5% compared to 2023).

T&E projections estimate that [among the EVs manufactured in China] Chinese brands will progressively gain bigger market shares – 11% by 2024 and 20% until 2027. However, it is important to clarify what “Chinese brands” means. In 2023, Chinese brands only represented a 2.5% market share of the European market last year, with 72% of that share belonging to MG, a British car brand controlled by the Chinese group SAIC Motor, MG being today a fully Chinese brand from production to design. Without MG, Chinese brands have only a 0.6% market share in Europe. This discrepancy arises from the fact that most vehicles imported from China to Europe are not Chinese brand vehicles but rather vehicles manufactured in China by foreign brands. Tesla alone accounts for 68% of the EVs imported from China and registered in Western Europe.

Following an investigation launched by the European Commission on “unfair subsidization” of China-produced EVs’, the currently low EU customs tariffs (10%) are going to be increased to up to 38% (on BYD: 17,4%; on Geely: 20%; on SAIC: 38,1%; on other BEV producers in China, which cooperated in the investigation but have not been sampled: 21%; on all other BEV producers in China which did not cooperate in the investigation: 38,1%). It is not clear the effect that such an increase will have on European consumers demand for China-produced EVs, but it is likely to slow down the [fast] penetration they were having.

Given the high tariffs already imposed in many relevant markets (e.g., India, Thailand, Brazil) to protect local automobile industries and the high probability that the EU would raise its tariffs (and eventually impose non-tariff obstacles), Chinese EV producers have planned to and are gradually setting up plants in several countries outside China.

Journey to the West – the European Market

The growing decoupling between China and the US has refrained Chinese EV producers from venturing into US-based production. Only Polestar – a luxury EV brand owned by Geely – has an investment in an EV plant, scheduled to start production in South Carolina in 2024 (it is so far the only brand selling in the US China-produced EVs).

The main market where Chinese-branded EV companies plan to set up plants is Europe. BYD will have its first European plant investment in Hungary, and announced it is considering a second European plant in 2025. It is also likely that Great Wall Motors will make its first European plant in Hungary (negotiations concerning government incentives, including tax breaks, to attract foreign investment and for job creation, are under way). These investments are in line with sizable investments (and government incentives) for gigafactories in the country, to be made by South Korean groups SK On and Samsung SDI and Chinese battery giant CATL.

Spain, Europe’s second largest car-making country after Germany, has secured investment from Chery, which will start production in the fourth quarter at a former Nissan facility in Barcelona, via a partnership with Spanish EV Motors. Chery is expected to benefit from Spain’s 3.7 billion-euro programme launched in 2020 to attract EV and battery plants.

China’s Envision Group has already received 300 million euros in incentives under the scheme for a 2.5 billion battery plant creating 3,000 jobs. Spain might also host Stellantis’ planned fourth gigafactory in Europe, with CATL.

Poland will have an EV plant to be made, in Tychy, by a partnership of China’s Leapmotor and Franco-Italian Stellantis.

Chery is mulling over plans to establish a plant in the UK as it begins to launch its Omoda and Jaecoo brands, following in the footsteps of several Chinese-owned gigafactories producing electric batteries in the country.

According to Reuters, Chery plans a second, larger facility in Europe, a source with knowledge of the company’s plans told, and has held talks with governments, including the Italian one, which is keen to attract a second automaker to rival Fiat-maker Stellantis.

Italy can tap its national automotive fund, worth 6 billion euros between 2025 and 2030, for incentives for both car buyers and manufacturers. China’s Dongfeng is among several other automakers that have held investment discussions with Rome.

Still, according to Reuters, SAIC, owner of the MG brand, aims to build two Europe plants. The first, based at an existing facility, could be announced as early as July and would employ a kit-assembly technique, targeting annual production of up to 50,000 vehicles. SAIC’s second European plant would be completely greenfield and produce up to 200,000 vehicles annually. Germany, Italy, Spain and Hungary are reported to be on SAIC’s location shortlist.

BYD, Chery, SAIC and Great Wall are also looking for attractive locations in Eastern Europe and Turkey (its Association Agreement with the EU creates a customs union, and the country has several free trade agreements with non-EU countries) to set up plants for lower-cost vehicles.

Turkey is reported to be in advanced negotiations with BYD and Chery for EV plants investments in the country. The Turkish government says that separate negotiations are also underway with SAIC Motor, which owns MG, and Great Wall Motor.

Overcoming shipping issues

In 2023, prices for car shipping carriers increased by up to 700% compared to 2019; Houthi attacks in the Red Sea further exacerbated them. A perception of shortage of shipping carriers [capacity] and inflated costs stemming from the war in Ukraine led Chinese EV carmakers and associated shipping companies to place orders for a significant number of new car carrier ships. According to the abovementioned report by the Rhodium Group, the combined capacity of these ships will allow the shipment of an estimated 560,000 cars annually to Europe in 2025, based on six trips a year (in 2023 the EU imported 472,000 EVs from China). Said capacity could surge to 1.7 million cars in 2026. “In the unlikely case that all ships were used for transporting cars to Europe, the volumes exported from China would likely be enough to capture 50% of the EU’s EV market”. The decision to purchase rather than lease these car-shipping carriers shows the long-term commitment of Chinese EV producers to export large quantities of cars.

Journey to SE Asia

The other relevant market where Chinese-branded EV companies plan to set up plants is Southeast Asia.

According to a Counterpoint analyst, “over 70% of EV sales in [Southeast Asia] are from Chinese brands, led by BYD”. Thailand is the main destination market in SE Asia, accounting for 79% of ASEAN EV sales. Several major Chinese EV manufacturers have already established or announced plans to invest in Thailand. Great Wall Motors operates an EVs plant in Rayong province that produces its Ora brand. The company also plans to build a battery factory and an R&D centre in Thailand. BYD (in cooperation with Rever Automotive) also has a plant in Rayong that produces EVs and batteries. Chongqing Changan Automobile intends to invest 10 billion baht ($290 million) to set up an EV production facility in Chonburi province. The company expects to start production in 2024 and sell its vehicles under the Kaicene brand. GAC Aion plans to invest 6.2 billion baht ($180 million) to build an EV plant in Chachoengsao province. The company targets to begin production in 2024 and launch its Aion V model in Thailand. Hozon New Energy Automobile (in partnership with a local firm, Yontrakit Group) will start production of its Neta brand of EVs in Thailand in 2024. In 2023, SAIC Motor, in cooperation with Charoen Pokphand Group (CP), opened its first battery plant for EV in Chonburi province. SAIC Motor-CP said it intended to start making MG BEVs in Thailand.

Several Chinese EV brands are also scheduled to be produced in Malaysia. Hozon New Energy Automobile announced investments to produce the Neta brand in Malaysia. Changan Automobile Corporation (in partnership with Fieldman EV Sdn Bhd (FEV)) plans to build the Eado EV460 model in Lipat Kajang, Jasin, Melaka. Chery also plans to produce its EQ1 model in Malaysia. BYD (in partnership with CSH Alliance) will assemble (CKD) the BYD T3 electric van in Tanjung Malim, Perak.

Even in Vietnam, home to the successful VinFast EV carmaker, BYD and Haima announced plans to build plants to produce car parts and plants to assemble EVs.

In Indonesia (by far the most populous SE Asian country, but with a low GDP per capita), PT Neta Auto (a subsidiary of Chinese firm Hozon Auto), in partnership with PT Handal Indonesia Motor (HIM), has started the production of Neta’s latest model, the Neta V-II (on a CKD basis) in Bekasi, West Java. Neta V-II is powered by LFP batteries from Chinese battery maker Gotion High-tech, a battery pack that, according to Neta Auto, has 44% of its components produced in Indonesia. BYD announced in January 2024 that it will make an EV plant in Indonesia, following a previous intention of building an electric bus assembly plant and, eventually, a battery manufacturing factory in Indonesia. Chinese EV maker Aion  announced in April 2024 that plans to make an EV plant in Indonesia (in partnership with Indomobil Group).

Indonesia has also great potential to become a production hub for EV batteries given the abundant nickel ore natural resources in the country. Many EV carmakers, namely from China, are keen to enter upstream in the supply chain for EVs and automotive batteries including the mining and refining of nickel ore, producing precursors and cathode materials.

Journeys to other geographies

Although Europe and ASEAN are the main markets in the internationalization path of Chinese EV carmakers, the main producers are also expanding into other relevant geographies.

In Central Asia, the Kazakhstan government, unveiled (on March 2023) that it reached an agreement [with Chery and ZEEKR] for the construction of EV plants for the production of Exeed and Geely car models, with a planned capacity of 80,000 finished vehicles.

It is noteworthy the sizable investment by BYD [Europe] (in partnership with Uzavtosanoat) in the Jizzakh region, in Uzbekistan, for an EV plant using initially the CKD method. Chinese firm Henan Suda signed a deal with Uzbekistan’s Energy Ministry to build upwards of 50,000 electric vehicle charging stations around the country by 2033.

In Latin America, thus far, Chinese EV carmakers have focused in Brazil and in Mexico. In Brazil, Chinese EV carmakers are already the EV market leaders, and they appear set to capitalize on the rapidly growing market for EVs in the country. EV sales in Brazil were up 145% in the first three months of 2024, according to the Brazilian Electric Vehicle Association, with BYD and Great Wall Motors leading the pack on EV sales in Brazil, the world’s sixth-largest auto market. Like the US and the EU, Brazil has raised tariffs on all imported EVs, which should reach 35% in 2026.

Great Wall and BYD have both pledged to build EV factories in the country. BYD estimates that its Camaçari complex (a former Ford cars plant) will be able to churn out 150,000 vehicles per year once it opens, while Great Wall’s plant in Iracemápolis (a former Mercedes-Benz cars plant) could produce 100,000 vehicles annually. Following its business model in China, BYD is trying to recreate an integrated supply chain in Brazil (and Chile), reportedly holding talks about taking over one of the country’s lithium producers.

BYD committed to make an EV plant in Central Mexico. SAIC also plans to build an EV plant in the country, to produce locally MG-branded vehicles. Jetour (in alliance with the LDR company), another Chinese EV automaker, also announced large investments in Mexico (in Aguascalientes and/or Guanajuato) for a dual assembly plant – it will produce both combustion vehicles (ICE) and EVs. Chery is also mentioned in the media as being engaged in discussions with Mexican authorities over the setting up of EV car assembly plants.

A report from the ‘Alliance for American Manufacturing’, released in February 2024, describes as “alarming” the Chinese focus on building plants in Mexico. “They can access the US by way of the more favourable tariffs [2.5%] under the USMCA. This strategy is, in effect, an effort to gain backdoor access to American consumers by circumventing existing policies that are keeping China’s autos out of the US market.” The Alliance expressed concern that “the introduction of cheap Chinese autos – which are so inexpensive because they are backed with the power and funding of the Chinese government – to the American market could end up being an extinction-level event for the US auto sector”. Reuters reported, on April 2024, that the Mexico’s federal government, under pressure from the US authorities, is keeping Chinese automakers at arm’s length by refusing to offer such incentives as low-cost public land or tax cuts for investment in EV production.

In the Middle East, in 2022 Enovate Motors, a Chinese EV start-up, announced it would make (in partnership with Saudi Sumou Holding) an EV plant in Saudi Arabia. On mid-2023 Saudi Arabia’s Ministry of Investment agreed with Chinese EV carmaker Human Horizons a mega-deal of $5.6 billion to collaborate on the development, manufacture and sale of vehicles. These investments in the new plants made by Chinese-based EV automakers in Saudi Arabia are expected to serve the surrounding region.

In India, BYD, which entered the Indian passenger vehicle market in 2021, currently offers two products in its India portfolio – Atto3 SUV and e6 MPV – which are imported and assembled at its plant in Chennai. However, on mid-2023, a proposal by BYD (in partnership with Hyderabad-based Megha Engineering and Infrastructures) to make another EV plant, in Hyderabad (the proposal included a plan to set up charging stations in India and build research and development and training centres) was refused by the Indian government on “security concerns with respect to Chinese investments in India”. More recently, the Indian government changed its approach. On March 2024, the new EV policy approved by Indian government, allows import duty concessions (a limited number of cars costing USD >35,000 will be subject to lower customs/import duty of 15% for five years) to be given to foreign companies setting up manufacturing units in the country with a minimum investment of USD 500 million. Clarifications were made by the Indian government that this new policy also applies to Chinese EV carmakers, but many of these Chinese EV corporations will remain at large given the serious tension arising from regional rivalry and borders conflicts.

Conclusion

Several 2021 Merics analysts’ predictions – that China would become a major automotive export hub, that Europe would be the main market for Chinese EV exporters, that the Chinese government would issue directives, put pressure and support Chinese and China-based foreign carmakers to export, that Chinese manufacturers would move up the EVs value chain, that Chinese companies’ overseas investments and partnerships would make them global [successful] competitors, that government subsidies for China-based manufacturers could distort global markets – became true.

The internationalization of Chinese EVs is global, albeit giving priority to markets with higher income and demand for EVs.

The internationalization of Chinese EVs is subject to political decisions at home and abroad, often influenced by geopolitical concerns.

In several cases, of which BYD is a good example, the integration of upstream stages in the EVs value chain (producing its own EV batteries and its components as well as refining the critical metals needed for EV batteries), creates bigger operating margins that provide greater price elasticity and makes Chinese EVs very competitive.

Internationalization of Chinese EVs will continue to be made on a dual track – via exports of certified models and via investments in local EV plants.

High(er) tariffs on imported EVs to protect domestic automotive industries – as is the case in the US, the EU, Brazil and Thailand – are likely to continue.

The impact of higher tariffs on imported EVs is not clear but it is likely to reduce [the pace of] exports of Chinese EV models of such relevant markets.

Although higher tariffs will make some Chinese EV carmakers (e.g., XPeng) hesitate to go ahead with planned EV plants in said protected markets, such investments likely will be a necessary cost to maintain access to some of those markets, namely in Europe.

In some markets where higher tariffs are but a tool arising from a clear political will of not allowing Chinese EV carmakers to enter the national market – as seems to be the case of the US and India – it is unlikely that Chinese EV will be successful in penetrating such markets; in some cases (US), commitments on investments in local EV plants will probably not be authorized.

Nonetheless, even with the recently announced imposition of US, EU and Brazil higher tariffs on EVs from China (and, in the case of the US, from 2030 also from Southeast Asia), a fast pace for the internationalization of Chinese EV carmakers is inevitable in every relevant market and hard times lie ahead for European, American, Japanese and Korean automakers.

By Jorge Costa Oliveira

Partner and CEO of JCO Consultancy

As the war on Ukraine raged on, China re-affirmed its “neutrality”, albeit adopting a de facto stance of “collaborative [pro-Russian] neutrality” towards Russia. The reasons for this stance are evident – China has much to gain and little to lose from it. Thus, until recently, it was arguable whether China was interested in a quick end to the Ukraine war. In fact, it looked as if it was interested in its continuity (as the US, although for different reasons). Trade between Russia and China grew tremendously after the beginning of the war (Feb 2022) having reached in 2023 a record number of 240 billion US dollars (the number gets much higher if one adds the increase in indirect trade, via Central Asia).

On the other hand, the progressive isolation from Western markets is making Russia and its companies dependent on Chinese firms or China’s authorities. Russia sells (often at discount prices) oil, natural gas, critical metals, agrifoods to Chinese companies, and buys from China cars, machinery and critical components for its defense industry (e.g., drone and missile engines, semiconductors). The growing interdependence between the two countries has provided good business deals for Chinese companies (the top six foreign car brands sold in Russia are now all Chinese, Xiaomi and Tecno have eclipsed Apple and Samsung, the same in home appliances and other everyday items). This dependence has even led to Russian strategic companies relocating to China part of the value chain of relevant products, such as the Norilsk Nickel smelters. In recent months, Russia is boosting China’s military capability by providing Beijing with advanced aerospace technology, as well as advanced air defense systems and technology used in China’s new silent submarines. It is true that, within the framework of the Shanghai Cooperation Organization and other agreements, Moscow and Beijing already had a good cooperation in the areas of security and defense. However, only in recent months has Russia made advanced military and aerospace technology available.

On the other hand, China maintains a good relationship with many Western countries (mostly European) whose rich markets are the destination of a sizable part of China’s exports and from which advanced technology and investment comes to China. China clearly intends to maintain this situation, as well as avoid financial sanctions that have been imposed on Russia.

Whilst combating an international order dominated by the main Western powers remains the long-term goal of China, an openly confrontational path with the West – as Russia did – is dangerous and entails significant costs, especially in terms of financial sanctions. China stance thus far shows its leadership fully understands this, yet does not want Russia to become too weak from the war effort.

However, the recent escalation of the war effort on both the Russian and the Ukrainian sides, the increased pro-Ukrainian commitment of Western countries, in particular the European ones, and the non-veiled threats by the US governments as regards the supply to Russia of dual use goods, seem to have provoked a change in the Chinese stance as regards the continuity of the war.

It is not in China’s interest to have Russia significantly weakened. However, the war has claimed the lives of hundreds of thousands of Russians, the replacement of military capability is severely jeopardized and the economy of Russia is being transformed into a war economy with progressive allocation of resources for military and defense purposes. Furthermore, on top of the American pressure for Europe to decouple from China (thus far unsuccessfully), several opinion polls show that the image of China in Europe is being eroded at a fast pace. That is creating already significant hurdles and difficulties for Chinese companies in Europe. Moreover, China’s international image is also being damaged, and the dominance of Western media and entertainment globally does not bode well for China’s willingness to reinforce its soft power with developing countries, including as a potential peacemaker of international conflicts.

The Russian leadership, behind the mask of a hardline speech, seems to be aware of its country’s growing fragility. And both the Russian leadership and elites are fearful of this situation of growing dependence from and reliance on China. It is not surprising that Putin keeps reiterating his readiness for a peace agreement in Ukraine. Moreover, the timing for peace talks is good for Russia given the current military situation on the battle fields.

The Beijing leadership, although certainly pleased by Russia’s growing reliance on China, seems to have brought into the equation other relevant concerns of China. It is in this light that the statements made by Chinese officials before and on the occasion of the 16-17 May visit to Beijing by the “lao pengyou” (old friend) Putin should be analyzed.

A month before the visit, Feng Yujun – one of China’s leading Russia experts and a professor at Beijing University’s School of International Studies – published in The Economist an article whose title is: “Russia is sure to lose in Ukraine”. It is hardly credible that such an article in a high profile international magazine was published without the express consent of the Chinese authorities, rather it is likely that it was written upon request. Feng Yujun lists 4 reasons why he thinks the Russian Federation will lose to Ukraine: (i) the extraordinary level of resistance and national unity shown by Ukrainians; (ii) the international support for Ukraine, which, though recently falling short of the country’s expectations, remains broad; (iii) the nature of modern warfare, a contest that turns on a combination of industrial might and command, control, communications and intelligence systems; (iv) information as a key factor in decision-making; Putin and his national-security team lack access to accurate intelligence and the system they operate lacks an efficient mechanism for correcting errors, while their Ukrainian counterparts are more flexible and effective. Prof. Feng’s conclusions are also very interesting: (i) Russia will be forced to withdraw from all occupied Ukrainian territories, including Crimea; (ii) Russia’s nuclear capability is no guarantee of success (he gives the example of the US, which left Vietnam, Korea, and Afghanistan with no less nuclear potential); (iii) Kyiv has proven that Moscow is not invincible, so a Korean-type armistice is ruled out; (iv) the war is a turning-point for Russia; it has consigned Putin’s regime to broad international isolation and forced it to deal with difficult domestic political undercurrents – from the rebellion of the Wagner Group to other pockets of the military to ethnic tensions in several Russian regions and the recent terrorist attack in Moscow; all these show that political risk in Russia is very high; (v) after the war, Ukraine will have the chance to join both the EU and NATO, while Russia will be further away from the former Soviet republics because they see Putin’s aggression in Ukraine as a threat to their sovereignty and territorial integrity; (vi) the war has made Europe wake up to the enormous threat that Russia’s military aggression poses to the continent’s security and the international order, bringing post-cold-war EU-Russia détente to an end.

As Prof. Feng points out, the war has highlighted that “China and Russia are very different countries” with increasingly differing objectives in their foreign affairs. “Russia is seeking to subvert the existing international and regional order by means of war,” he writes. “Whereas China wants to resolve disputes peacefully” and without exacerbating the current tensions between China and the West. In the words of Prof. Feng Yujun, “shrewd observers note that China’s stance towards Russia has reverted from the ‘no limits’ stance of early 2022, before the war, to the traditional principles of ‘non-alignment, non-confrontation and non-targeting of third parties’”. And he adds that “no one should doubt China’s desire to end this cruel war through negotiations.” This wish, Prof. Feng says, “shows that China and Russia are very different countries. Russia is seeking to subvert the existing international and regional order by means of war, whereas China wants to resolve disputes peacefully.”

Putin’s recent visit to Beijing was a way for the leaders of China and Russia to show a united front and reiterate their “comprehensive strategic partnership”. Nonetheless, it is especially important to pay attention to a “restrictive meeting” of Xi and Putin in Zhongnanhai (the new Forbidden City, in Beijing), “during which they had in-depth exchanges on strategic issues of common concern”, as written in a statement by China’s state agency Xinhua, posted on the Chinese government’s website. In this “restrictive meeting”, Xinhua reported, “Xi said China supports the convening of an international peace conference recognized by Russia and Ukraine at an appropriate time with equal participation and fair discussion of all options, so as to push for an early political settlement of the Ukraine issue” and that “China stands ready to continue to play a constructive role in this regard.”

The warnings in Prof. Feng Yujun’s article, and the demand for “an early political settlement of the Ukraine issue” constitute an evolution of China’s stance. Europe should use this window of opportunity to join efforts with China to actively promote a ceasefire and realistic peace negotiations, i.e., with both sides at the table.

By Jorge Costa Oliveira

Partner and CEO of JCO Consultancy

Football (“soccer”, for Americans) is, by far, the most popular sport in the world. It is the most popular spectator sport in the vast majority of the countries worldwide (with relevant exceptions only in North America, South Asia and Oceania) and it is the most popular sport by number of fans (4 billion).

Football reinforced its position as the world’s leading sport with worldwide TV broadcasting. This is particularly true for the main European national professional leagues as well as for international competitions, be them of clubs (the UEFA Champions Cup, the UEFA Europa League) or of national teams (FIFA World Cup and UEFA European Championship and UEFA Nations League). In the second half of the 20^th century, football clubs evolved from associations and member owned clubs to corporate structures. The market for investors in European football clubs is characterized by low entry barriers; in contrast to the major sports leagues in the US, there is no artificial limitation of licenses. Moreover, the market for European football club ownership is very diverse. Teams may be, and have been, owned by its members, regional or national businessmen, industrial companies, sports investment firms, financial corporations, other football clubs, or other entities, with no restrictions for foreign investors. In the last two decades, transformation from associations to corporations capable of raising significant funds was undertaken and was the outcome of the significant changes that the business and financial aspects of football underwent as a result of the increasing commercialization of the sport, with clubs generating significant revenue from TV broadcasting rights, merchandising, sponsorship deals, stadium revenue and IPRs, along with a share of the wagering on football sports betting – making this sport-entertainment a multi-billion dollars business. The clubs with more well-known brands received ever growing prize money from the UEFA Champions Cup, bigger TV revenues for premium competitions, and additional funds from the internationalization that the marketing of their famous brands rendered possible. Yet, overall, new waves of investment from several types of investors were generated that facilitated raising ever growing funds needed for clubs in European football leagues. The investors, the financiers and regulatory entities also demanded a proper professional corporate and financial management of the most relevant clubs showing it is possible to make it a profitable business, namely by: (i) monetizing its [international] fan base through streaming, merchandise, and sponsorships; (ii) monetizing its digital footprint through advertisements, partnerships, and merchandise sales; (iii) increasing the club’s revenue streams; (iv) improving the club’s brand value; and (v) managing the club’s financial debt. In the last years, HNWIs, sovereign funds, private equities and other investment funds entered the football arena bringing or raising billions of dollars / euros / pounds. This is a short essay on this phenomenon and its latest background and developments on a quickly changing landscape.

Arabian sovereign investment in football and soft power

In December 2022 Cristiano Ronaldo (CR7) joined Al Nassr in a transaction that may reach 200 million euros / year, while in June 2023 Karim Benzema and N’Golo Kante left Real Madrid and Chelsea, respectively, for Saudi champions Al Ittihad. Al Hilal have recently strengthened its team with Neymar Jr., who the media says will receive 100 million euros / year. Other football stars are expected to continue to enhance the Saudi Professional League (SPL) clubs. This uninterrupted flow of petrodollars comes from the Saudi sovereign wealth fund – the Public Investment Fund (PIF). As part of the Sports Clubs Investment and Privatization Project, four Saudi clubs – Al Ittihad, Al Ahli, Al Nassr and Al Hilal – have been transformed into companies, each of which is owned by PIF (75%) and non-profit foundations. Why is PIF making these multimillion-dollar investments? According to statements by those in charge, in order to increase the value of the club-companies and, subsequently, to sell them, to privatize them. The strategy is not entirely new. Qatar Sports Investments (QSI) – a sub-holding of Qatar’s sovereign wealth fund (QIA) investing in sports assets – had already adopted it. Following in the footsteps of Sheikh Mansour [ibn Zayed Al Nahyan] (Prince of Abu Dhabi) who had acquired Manchester City FC in 2008, QSI acquired, in 2011-2012, the French club Paris Saint-Germain FC and, in 2022, took 21.67% of SC Braga, having also invested in the “Premier Padel Tour”, in conjunction with the FIP. On the way, Qatar created (within Al Jazeera) beIN SPORTS and organized, in 2022, the FIFA World Cup.

In parallel, state-owned aviation companies from the UAE and Qatar have also invested heavily in European football; Emirates, Etihad Airways and Qatar Airways all have huge promotion deals with European football clubs worth hundreds of millions of euros.

Inevitably, some accuse the authorities of these GCC countries of sportswashing. Notwithstanding, irrespective of what one calls it – nation branding, sports diplomacy – there is clearly a purpose in the PIF’s strategy: to improve Saudi Arabia’s external image. Another example of this is the investment in Newcastle United, a club in the English Premier League; and PIF has made other international sporting investments – in Formula 1 (Aston Martin), horse racing (Saudi Cup), boxing, tennis, wrestling (WWE) and golf (LIV Golf). For Saudi Arabia’s leadership, sport is one of the pillars of its “Vision 2030” strategy for national development and economic diversification and a vehicle to improve diplomatic relations and gain political goodwill, whilst generating investment in the kingdom and contributing to create new industries and jobs – and the PIF is at the heart of this strategy.

When it comes to football, these signings – and other investments in the sector – facilitate the SPL’s ambitious plan to become one of the top 10 professional leagues in the world by 2030. The signing of so many global football stars will increase the visibility and audiences of the SPL, having already generated deals for television/cable broadcasting in more than 120 countries. In addition to television rights, it will allow various forms of return on investments now made (e.g., via commercial sponsorships, merchandising) as well as strengthening ties with business networks in the West and beyond.

But these investments by Arabian sovereign funds are not motivated only or mainly by a return-on-investment approach. The return most desired by the Saudi, the Emirati and the Qatari leaderships is the strengthening of their soft power at the international level. This is particularly important for the Saudi Arabia leadership, whose goal is to change the image of an ultra-conservative and archaic kingdom where women were not allowed to drive and where music and entertainment were manifestations of the demon, into one of a modern country, stage of mega sporting events, open to tourism and to the outside, leader in futuristic sustainable projects (like NEOM with The Line), with a good quality of life based on a services economy.

Boom in acquisitions in European football by private investment funds

Despite the investments made by [Arabian] sovereign funds in football, the vast majority of investment made in football – and other sports – comes from private investment funds, private equities, other financial entities and HNWIs (hereinafter collectively mentioned as “Funds”). We are going to focus on the Funds taking equity in the corporate structures set up by the clubs.

Funds invest with the purpose of making a financial investment on an asset profitable through its sale (or securitization). They expect a good return-on-investment from said sale of the specific asset invested in. In spite of the opinion by some that the European football market (with the exception of England and Germany) has low profitability regardless of escalating revenues, many Funds challenge this view and continue entering the European football market investing in clubs of virtually all leagues. They are also aware that European football clubs typically follow both financial and sporting objectives such as profit or win maximization. However, as per a comprehensive UEFA report, albeit European football revenues have continued to grow, “the financial gaps both between and within leagues are increasing”. There is “a growing concentration of financial resources in the top clubs throughout the leagues in Europe” and “the growth rate of this inequality is increasing”. The monetary muscle of English football clubs was spotlighted in said report, revealing their significant contribution to the European football economy that has soared to an all-time high of 24 billion euros ($25.75 billion) in 2022. The English Premier League’s collective revenue hit a staggering 6.5 billion euros ($7 billion), rivaling the combined income of Spain’s La Liga and Germany’s Bundesliga, which stood around 3.3 billion euros ($3.54 billion) each.

Remarkably, the revenue accrued by the 20 teams of England’s top division equaled the financial intake of all 642 clubs in the remaining 50 European leagues outside the elite “Big Five” leagues (England, Spain, Italy, France, Germany), according to UEFA’s findings. UEFA anticipates that roughly half of the total European football revenue will be claimed by the top 20 money-making clubs, with half of those likely to be from England. However, English clubs were also responsible for a significant portion of the overall pre-tax losses which amounted to 3.2 billion euros ($3.43 billion) across European leagues in 2022.

According to a 2023 UEFA report, the total revenues (broadcasting contracts, commercial partnerships, and gate receipts) of UEFA’s top 55 clubs increased from €11.7 billion in 2009 to €21bn in the 2018 fiscal year. According to a recent KPMG Football Benchmark assessment report of the top European clubs [The European Elite 2023], the aggregate enterprise value (EV) of the 32 most prominent European football clubs increased by 96% in the seven-year period from 2016 to 2023, a performance that far surpasses the FTSE 100 Index. And EV growth is accelerating; in 2023, the aggregate EV of the aforementioned 32 clubs increased to a record value of €51.7 billion (+40% compared to the previous year). Although with a slightly different universe of [20] clubs, the Deloitte Football Money League 2023 report also shows, in 2021/22, increases in total revenue generated of +13% compared to the previous year.

Considering the brand value of the 50 most valuable clubs and listing them by country, there is a huge difference between those of the countries in the 5 “Big Leagues” – United Kingdom (9.371 billion dollars (mM$)), Spain (4.374 billion $), Germany (2.992 billion $), Italy (2.131 billion $) and France (1.519 billion $) – and those of the countries in 6th and 7th place – Portugal (228 M$) and the Netherlands (172 M $).

However, according to UEFA, operating costs increased by 70% in a decade, mainly due to player salaries, that almost doubled (although the introduction of the UEFA Financial Fair Play  rules contributed to reduce it). Albeit European football has become profitable in recent years, almost half of top-flight clubs operate at a deficit, resulting in unsustainable business models and in need of capital injections. During the pandemic period, several Funds took the opportunity to buy equity in clubs with upside potential.

Many reports focus on top European clubs from the bigger football leagues, yet some great return-on-investments are made in small teams. A good example is Red Bull’s 2010 investment in fifth-tier side SSV Markranstädt, rebranding it RB Leipzig. Leipzig quickly progressed through the Bundesliga pyramid, earning four promotions in just seven years. In its first year in the Bundesliga, it challenged with Bayern for the title, earning second in the season. Since then, Leipzig won the DFB-Pokal, became Europa League semifinalists, and Champions League semifinalists. RB Leipzig is now valued at €560 million, without counting with the inherent Red Bull brand value appreciation. In the last years, European and American PE – providing non-traditional means of funding – endeavored to identify undervalued small European football clubs with scope to grow in value that need funding and that they consider to be assets with good upside by trimming unnecessary or wasteful expenses, as well as improving operations and reduce inefficiencies. We may see a repetition of the RB Leipzig case in several leagues.

Data shows that the wave of investments from China and South-East Asia that took place in 2016 and 2017 in particular has now nearly stopped and was replaced by an even bigger wave of investments from the US that is currently dominating football M&A in Europe.

According to a Pitchbook Data report, 35.7% of clubs in the “Big Five” leagues have private equities (PE), venture capital companies or other private investment funds [often using leveraged buyouts (LBO)] in its share capital, many of which are from the US. The strategy of these funds is to promote revenue growth, restructure and better manage clubs and cut unnecessary costs. Restructuring a football club can take several seasons before producing results, with PE operating with return-on-investment expectations of 7 to 10 years. But it must be going well. In 2022 and 2023 an explosion of investments and acquisitions has taken place in these “Big Five” leagues. In 2018 M&A (mergers and acquisitions) in European football did not exceed €66.7 million, compared to €270 million spent in 2019, and €4.9 billion in 2022, with Pitchbook estimating that it would exceed €10.5 billion in 2023.

Multi-club ownership

One of the most interesting trends is the creation of small groups of football clubs in different [European and US mostly] countries’ leagues under the same holding corporation controlled by a Fund. Multi-club ownership (MCO) is a business strategy in which one Fund purchases and finances multiple clubs. These various clubs will occasionally be fairly independent, while other times they will be closely bound by a set of explicitly stated principles and practices. MCO is an increasing part of the football landscape, but how many clubs are interlinked across the globe and what are the long-term consequences? In 2017, UEFA’s research found 26 top-flight clubs across Europe involved in cross-ownership. By February 2021, the figure had leapt to 56 teams with 20 investors holding a portfolio of three or more clubs including one in Europe. Overall, UEFA estimated there were then 90 clubs with links and “just under” 50 shareholders owning two or more clubs. By 2021, World Soccer had found 117 clubs controlled by 45 different MCO groups. These clubs were from 37 different countries across the globe, from Egypt to Armenia and the USA, and the largest number (87) were in Europe. CIES Sports Intelligence estimated that, by November 2023, there were 124 entities worldwide which owned two or more football clubs. A November 2023 SportBusiness report, produced in collaboration with CIES Sports Intelligence, found that a total of 301 clubs around the world were part of MCOs; of these, 197 clubs in Europe now belong to a multi-club group. CIES Sports Intelligence reports, on February 2024, that the number is actually nearing 350, of which 221 in Europe (UEFA) and 58 in North & Central America (CONCACAF). The number is certainly going up as these MCO groups keep expanding and more investors are entering this field. Still according to CIES Sports Intelligence, the US (36), England (35) and Spain (30) are the countries with the highest number of clubs in MCO. But the number of clubs involved in MCOs is also growing in other European football leagues.

In some cases, the group controlled by the Fund has clubs in different sports leagues. It is the case of HNWI North American Todd Boehly, who, together with partner Mark Walter, controls Chelsea FC (England) and owns Los Angeles Dodgers (baseball MLB), the Los Angeles Lakers (basketball NBA) and the Los Angeles Sparks (WNBA). It is also the case of the Fenway Sports Group Holdings that controls the Liverpool FC (England), MLB‘s Boston Red Sox, the NHL’s Pittsburgh Penguins (as well as NASCAR’s RFK Racing and the TMRW Golf League’s Boston Common Golf). Wes Edens co-owns (with Egyptian Nassef Sawiris) Aston Villa FC (England) and is also co-owner of the Milwaukee Bucks NBA franchise and Vitória Guimarães (Portugal, 46%). HNWI North American John Textor controls Crystal Palace FC (England) and also has equity at Olympique Lyonnais (France), Botafogo FR (Brazil), RWD Molenbeek (Belgium) and FC Florida (US). Arsenal FC (England) is owned by the Kroenke Sports & Entertainment, which also owns the Los Angels Rams (NFL), the Denver Nuggets (NBA), the Colorado Avalanche (NHL), the Colorado Rapids (MLS), and the Colorado Mamoth (Lacrosse). Fulham FC (England) is managed by the American Shakid Khan, owner also of the Jacksonville Jaguars (NFL) and of the All Elite Wrestling.

In other cases, the expanding strategy remains focused on football, as is the case of the one being implemented by the City Football Group, that started by owning Manchester City (England) and expanded from there: New York City (2013), Melbourne City (2014), Yokohama F. Marinos (2014, 20%), Montevideo City Torque (2017), Girona FC (2017, 44%), Sichuan Jiniu (2019, 46.7%), Mumbai City FC (2019, 66%), Lommel SK (2020, 99%), Troyes/ESTAC (2020, 100 %), EC Bahia (2022, 90%) and Palermo FC (2022, 94.9%). It also has a partnership with Clube Bolívar (Bolivia).

NewCity Capital, a consortium led by Chien Lee, an Asian-American entrepreneur adept of “Moneyball” strategies, after a successful investment and sale for a record price (in France) of OGC Nice (France), expanded to control Barnsley F.C. (England), FC Thun (Switzerland), K.V. Oostende (Belgium), AS Nancy (France) and Esbjerg fB (Denmark).

777 Partners is a Miami-based Fund that holds controlling stakes at Sevilla FC (Spain), Genoa CFC (Italy), CR Vasco da Gama (Brazil), Melbourne Victory FC (Australia), Standard Liège (Belgium), Red Star FC (France), Hertha BSC (Germany) and Everton FC (England). Italian HNWI Gino Pozzo controls Udinese C (Italy) and Watford FC (England) and, until June 2016, also Granada CF (Spain), when he sold it to the Chinese Jiang Lizhang. He also has a private company of around 30 scouts around the world, which allows him to find players at low cost, many from South America.

In other situations, the strategy seems to be more focused on practical purposes. QSI controls Paris Saint-Germain FC and has a current share of 29% in SC Braga (Portugal) (and will control it if the club’s by-laws are amended to allow it) not only as a good investment in itself, but also as a means to benefit from the current platform that Portuguese clubs have become for South American players into Europe, as well as from Portugal’s good tradition on young players training.

Investment to enhance a Company Brand: the Red Bull case

Another type of investment aimed primarily at improving the image of the investor (and not recouping necessarily a profit directly from the club as an entity) is company branding. In a way, it is the ultimate move of a sponsor; instead of paying an annual contribution to the club, the sponsor takes control [of the management] of the club in order to maximize the image return for its brand. A good example of such a strategy is Red Bull’s investment in football clubs around the world. Red Bull’s stake and influence in four clubs (Red Bull Salzburg, RB Leipzig, Red Bull New York, and Red Bull Brasil), that are part of the firm’s Global Soccer franchise, renders it the ultimate example of a company that invests in football as a way to brand at scale. Despite the success that Red Bull football clubs have experienced, in sportive and commercial terms, the purpose for Red Bull investing in football seems to be to further promote the brand and sell its energy drinks.

Red Bull had previously tapped into branding via sport and had worked out a way to brand at large utilizing extreme sports. Red Bull campaigns focused on associating itself with elite sport, perhaps thus conflating the alleged performance enhancing capabilities of its beverages or at least that its product was trendy and fashionable to drink in the context of sport.

When it came to football, Red Bull followed an ownership strategy rather than a traditional sponsorship method, opening up both the benefits of the ownership over traditional sponsorship models, and, the size, scale and reach of football as opposed to the more niche extreme sports. Branding through football is seen as more covert, as the consumer is less aware that when they watch a branded club in a branded stadium, they are being advertised to.

This path, of investing in football clubs to enhance a company’s brand [at scale], clearly has great upside potential for many brands that want to go beyond the mere sponsorship.

Conclusions

When substantial television broadcasting rights deals became the main source of revenue for European football clubs, Funds realized that, with good management, these clubs could maximize commercial opportunities and generate good returns-on-investment, benefiting from the worldwide visibility of football. The growing prize moneys of the UEFA Champions Cup and the UEFA Europa League created additional interest. The success of initial investments by high-profile investors further catalyzed the Funds appetite for business opportunities in European football clubs, said investment flowing mainly from Europe, China, SE Asia and, lately, the Middle East and the US.

Although no one seems to be investing in this field to lose money, there is a wider diversity of types of investors, that perceive football clubs as a means to achieve different ends. In general terms, investors can be categorized in three groups, according to the main objective pursued:

• Investing for Direct Financial Return: Private Equities.
• Investing for Nation Branding, Soft Power & Sports Diplomacy: UAE, Qatar & Saudi Arabia sovereign funds.
• Investing for Company Branding: Red Bull.

Unlike other industries, the football industry thrives on healthy levels of competition between its participants, whether in terms of a title race, a relegation battle or qualification for UEFA Champions Cup.

In the European football market, financial and sporting objectives remain aligned.

Multi-club ownership keeps growing and international multi-continental groups are multiplying. Funds, in particular Private Equities, are catalyzing it as they find new ways to benefit from the synergies arising from MCO.

In the last years, whether one takes as main criteria the total revenue, the enterprise value or the brand value, the return-on-investment in European football clubs appears to be very good, although most of the information available is centered in the main clubs of the “Big Five” leagues.

By Jorge Costa Oliveira

Partner and CEO of JCO Consultancy

The policy of “reform and opening-up” instituted by Deng Xiaoping’s leadership created fears in more conservative sectors of the CCP that the unbridled pursuit of economic development – so well illustrated in the phrase “to get rich is glorious” – would lead to a moral and ethical regression, to a society whose citizens would be materially “rich”, yet selfish, greedy, distrustful of others, and unable to cooperate for the common good. These fears were catalysed by the entry of Western popular culture in China, leading to the launch (in 1983) of a “campaign against spiritual pollution.” The campaign was interrupted after a few months due to slowing economic growth. It then became clear that in a dilemma between “material civilization” and “spiritual civilization,”  the CCP would favour the material one.

But Deng recognised the need to balance the preeminence of economic development with [the building of] a “socialist spiritual civilization” (shehuizhuyi jingshen wenming, 社会主义精神文明), and the concept was mentioned in the Political Report to the 13th CCP National Congress (1987) and adopted by its leadership ever since. In April 1997, a “Central Guidance Commission on Building Spiritual Civilization” was established under the CCP Central Committee, formally designated as the “Central Commission for Guiding Cultural and Ethical Progress.” In any case, the concept of “socialist spiritual civilization” has been evolutionarily densified at the whim of each leadership. In one respect, there is no change: the term “socialist” is there to remind everyone of the absolute primacy of the CCP’s interests.

During the leaderships of Jiang Zemin and Hu Jintao, the concept was maintained and an approximation was rehearsed to Confucian concepts with multiple statements by Party leaders to a “harmonious society,”  “people as the basis of the state,”  [calls for the promotion of] “traditional Chinese culture,” and references to the “great renaissance of the Chinese nation.” But these statements took place against a historical backdrop in which corruption kept growing and several key issues of the Chinese economy (the coming demographic fall, the real estate bubble, the financing of local governments, the poor management of the main state-owned banks) kept rising, and its solution kept being postponed, normally by throwing money at them. With the CCP’s credibility eroded, the spectre of moral and ethical regression returned, as well as the scepticism on whether citizens are motivated to feel a deep “spiritual” loyalty to the Party-State.

With the arrival of Xi Jinping to the helm (Nov 2012), a serious fight against corruption starts, as well as a gradual resolution of the key issues of the Chinese economy (still ongoing), along with a strengthening of the Party’s identification with Confucianism; expressions such as “social harmony” are used again, and the concept of “excellent traditional culture” (youxiu chuantong wenhua) is reconstructed and used for several years with the purpose of showing how the CCP, under Xi’s leadership, values traditional Chinese morals, sanctioning the role of tradition in public, political and party life, naturally accompanied by a “comprehensive and positive propaganda” that combined school education, theoretical and historical research, and the production of popular films, television shows and literature.

However, after the 20th CCP Congress (October 2022), Xi returned, in multiple speeches, to the concept of “socialist spiritual civilization.” “The long-standing and rich Chinese civilization is the foundation of contemporary Chinese culture, and a treasure trove inspiring cultural innovation,”  Xi noted on several occasions. In Xi’s eyes, “China’s excellent traditional culture is the root and soul of the Chinese nation.” Xi also believes a “socialist spirituality” may be created by exposing the younger generations to the epic history of the CCP. The Party, Xi says, should “focus on telling the stories of the CCP, the revolution, and the heroes, and cultivate the love of the Party, the country, and socialism.”

Hence, when mentioning “China’s excellent traditional culture,”  he also adds that “efforts should be made to adapt it to the context of a socialist society and to develop an advanced socialist culture.” That is, such efforts must always be subordinated to the dictates of “socialism with Chinese characteristics” as defined by the Party-State. In a nutshell, the CCP realigns itself with the Chinese civilization heritage and societal expectations without making concessions over the ideological foundations of the Party-State.

The resurgent concept of “socialist spiritual civilization” is a powerful composite tool aimed at re-legitimising the regime, resulting from the aggregation of the Confucian cultural heritage with the Leninist component of subjection of everything and everyone to the Party-State.

Therefore, it comes as no surprise that the compilation of Xi’s speeches on the subject, collected in a 2023 book – “Excerpts from Xi Jinping’s Exposition on the Construction of Socialist Spiritual Civilization (习近平关于社会主义精神文明建设论述摘编)” (2023), is now mandatory study material for CCP cadres and in all Chinese schools.

China’s dependence on maritime trade is huge – 90% of all Chinese foreign trade, including 80% of its oil and 66% of its LNG imports, but also container and bulk cargo shipments. The vast majority of this foreign trade uses the main sea route between the Far East and Europe – approximately 25%-30% of all global maritime trade passes through the Strait of Malacca – which runs from the ports of China (and Japan, South Korea, Vietnam) to Rotterdam / Istanbul / Athens-Piraeus / Trieste, via the Strait of Malacca, the Indian Ocean, the Red Sea, the Suez Canal, the Mediterranean Sea.

The maritime route of China’s BRI

China and Chinese companies – in the last decade under the auspices of the Belt and Road Initiative (BRI) – have invested in the infrastructure along this sea route. First of all, in relevant deep-water ports – some new (e.g. Gwadar, Pakistan; Ream, in Cambodia), some already operating ports (e.g., Hambantota, in Sri Lanka; Athens-Piraeus, Greece); but also in new logistics hubs and access corridors to the hinterland of several countries.

In 2022, the EU exported €230 billion of goods to China and imported €627 billion worth of goods. From 2018 to 2022, China’s trade surplus with the EU increased from €154.7 billion to €396 billion, mainly driven by a strong increase in EU imports (+83%) from China.

China is Europe’s main trading partner for imports of goods, a substantial part of which transits through EU ports, in particular seaports. This is one of the reasons why Chinese companies – in particular  China COSCO Shipping Corp and China Merchants Port Holdings – have been taking relevant shareholder positions in strategic port concessionaires in Europe, in particular in Germany (in the holding company of the port of Hamburg, in the multimodal dry port in Duisburg), Belgium (Zeebrugge, a container terminal in Antwerp), Spain (main terminals in Valencia and Bilbao), France (Montoir, Dunkirk, Le Havre and Fos), Greece (Piraeus, Thessaloniki), Italy (Vado Ligure, Naples (sold in the meantime), Palermo?), Malta (Marsaxlokk), The Netherlands (Euromax and Delta terminals in Rotterdam; terminals in Venlo, Amsterdam and Moerdijk), Poland (Gdynia) and Sweden (Stockholm).

According to a study by the University of Antwerp, the sea route via Trieste drastically reduces transport costs. Taking Munich as the destination, the study shows that transport from Shanghai via Trieste takes 33 days, while the route via Rotterdam or Hamburg takes 43 days. From Hong Kong, the southern route reduces transportation to Munich from 37 to 28 days. Hence the interest of Chinese companies in the operation of the port of Trieste. The reduction of transport time means not only greater efficiency in the cost-benefit ratio of maritime transport, but also a reduction in CO2 emissions, since maritime transport is a large and growing source of greenhouse gas emissions.

The “Malacca Dilemma”

The proper functioning of the main current maritime route, via the Indian Ocean and the Suez Canal, in any of its variants, depends on its safety. One of the great fears of successive leaderships of the PR China is the vulnerability coined in 2003 by then-president Hu Jintao as the “Malacca Dilemma”, the fear that, in the event of a serious conflict with other powers, especially the US (and also India), a naval blockade will be imposed on products coming to or from China, passing through the Strait of Malacca. This “Malacca Dilemma” has been the subject of special analysis in scenarios of possible war in Taiwan.

The recent attacks on vessels by Houthi rebels at the entrance to the Red Sea reinforce Chinese fears that sooner or later this could be replicated [by terrorists or Islamic fundamentalist groups] in the Strait of Malacca.

To mitigate this fear, China has endeavored to reduce its dependence (especially in energy) on the Strait of Malacca through new land corridors: (i) the Eurasian rail corridors; (ii) the China-Pakistan Economic Corridor; (iii) gas and oil pipelines (Central Asia–China Gas Pipeline) from several Central Asian countries (Kazakhstan, Turkmenistan, Uzbekistan); (iv) gas pipelines from Russia (the Power of Siberia I; the Power of Siberia II (in project)); (v) the East Siberia-Pacific Ocean crude oil pipeline (ESPO); (vi) the trans-Burmese oil and gas pipelines to China (between the Port of Sitwe, Myanmar, and Kunming, Yunnan, China); (vii) a gas pipeline (under project) from Iran, via Pakistan, to Xinjiang, China; (viii) an oil pipeline (under project) from Gwadar, Pakistan, to Xinjiang, China; (ix) the Goureh-Jask pipeline in Iran to the port of Bandar-e-Jask.

The Sunda Strait and Lombok / Makassar Straits

There are at present alternative shipping routes to the Strait of Malacca. The Sunda Strait is more difficult to navigate due to strong tidal flows, with sandbanks, has a minimum depth of only 20 meters in parts of its northeastern end, and there are man-made obstructions, such as oil rigs, off the Java coast. In a nutshell, the Sunda Strait narrowness and shallowness make it unsuitable as a passageway for large, modern ships.

The Lombok / Makassar Straits are more easily navigable yet longer routes, which can increase shipping costs ($84 to $220 billion per year, according to RSIS). The Lombok and Makassar Straits are considered the safest alternative route for supertankers.

To ensure regular use of these Straits, China needs to maintain a good relationship with Indonesia.

The Kra Canal

The Malacca Dilemma is also at the origin of an ambitious project to create an alternative route between the Pacific Ocean / Gulf of Thailand and the Indian Ocean / Andaman Sea: the Kra Canal (also known as the “Thai Canal” or the “Kra Isthmus Canal”); it has been a project idea since at least 1974, albeit the Thai monarch Narai the Great had already commissioned a study of its viability in 1677. This canal, somewhat similar to those of Suez and Panama, would be made in the Thai part of the Malay Peninsula, with several suggested locations, and would save c. 1200 km and voyage time by 2~5 days on the current sea route between the Far East and Europe, with an estimated bunker savings (for a 100,000 dwt oil tanker) of $350,000 per trip. Bulk shipments (e.g. oil tankers) that are chartered for direct shore to shore voyages will benefit the most. Large container ships that must make frequent stops may not benefit as much – vessel capacity may not be sufficiently utilized when skipping ports in Southeast Asia. Thailand may greatly benefit from the canal toll fees (the cost of using the Canal would be a key factor, though), port facility charges and development in the surrounding area, with the creation of relevant logistics and port hubs, which would cannibalize part of Singapore’s current business in these sectors.

It would also reduce exposure to piracy in the Strait of Malacca. And it would make more difficult to impose a naval blockade of the Strait of Malacca, especially if there are Chinese military naval bases in the Coco Islands (in the Andaman Sea) and in the port of Kyaukpyu, as is likely to happen, in time, following agreements between Myanmar and the PR of China. Anyway, with traffic volumes projected to exceed the Malacca Strait’s capacity by 2030, this new project would provide an alternative to ensure a seamless flow of goods. In 2014, Thailand set up a Thai-Chinese Strategic Research Center (TCRC) [of National Research Council of Thailand] to study the strategic docking and regional cooperation between Thailand and China. The TCRC increased the exchange and cooperation with China, mainly via the National Academy of Development and Strategy of the Renmin University of China (NADS), along with the planning of the “One Belt One Road” Research Center of the China-Thailand Joint Venture and other think tanks of Thailand and China. In May 2015, a Memorandum of Understanding between China and Thailand on the Kra Canal was signed. The Thai-Chinese Cultural and Economic Association (TCCEA) and Thai Canal Association for Study and Development (TCASD), have both suggested that China could finance the Kra Canal as part of one of the BRI’s six designated corridors, the “China-Indochina Peninsula Economic Corridor”. China seemed keen to invest in regional infrastructure projects such as the Kra Canal as part of its BRI. And the P. Chan-o-cha Thai government had promulgated a two-decade national development strategy which emphasized the importance of global connectivity initiatives. But the Kra Canal project did not move forward due to its high cost, opposition in Thailand to dependence of China and the canal being run by China or Chinese companies, internal political disputes in Thailand, environmental concerns and pressure from other countries (US, India and Singapore).

The Thai Land Bridge

Following years of internal debate, the concept of a navigable channel linking the Gulf of Thailand and the Andaman Sea was dismissed by the Thai government in 2020. The dream of a Kra Canal was replaced by a Thai Land Bridge, with two deep-sea ports [to be built] in Chumphon and Ranong, linked by road, rail, and pipelines (100 km) to connect the Gulf of Thailand and the Andaman Sea, and located well north of the projects for the Kra Canal. This land-based route would avoid major drawbacks involved in digging a canal, such as environmental waste, and, if made more to the north of the Peninsula (as planned now), reduces the insurgency and unrest risks of the [predominantly Muslim] southernmost provinces of Thailand. The Thai government estimated cost of this Land Bridge – 1 trillion baht ($29 billion) – is roughly ½ of the staggering $55 billion projected to be required to make the Kra Canal. The deep-sea ports in Ranong in the Andaman Sea and Chumphon in the Gulf of Thailand may cost 630 billion baht, according to the Thai Office of Transport and Traffic Policy and Planning. Foreign investors will be allowed to own more than 50% in joint ventures with local companies in building the ports and related infrastructure. A 50-year concession will be granted to the winning consortium that may comprise shippers, logistics operators, port managers, property developers and industrial investors. According to the Thai government, this Thai Land Bridge project will help create 280,000 jobs and propel Thailand’s annual GDP growth rate to 5.5% when it is fully implemented (2.6% in 2022). If a feasibility study currently underway is given the green light, Thailand plans to hold an international competitive bidding in the second quarter of 2025 and work could start in 2030.

The Thai government is pitching this mega infrastructure project to global investors, having already made road show presentations to investors in China, Saudi Arabia, Japan USA and Germany.

China has not yet commented on this land bridge project, appearing to prefer a navigable canal. Probably because the land bridge does not solve the problem of large oil and gas tankers (and possibly large vessels carrying other commodities), whose ships would still have to pass through the Strait of Malacca. Nonetheless, Thai officials say the Chinese construction giant China Harbor Engineering Company (CHEC) expressed interest in the Land Bridge project.

Despite these initiatives (new land corridors, Kra Canal / Thai Land Bridge), China’s international trade’s dependence on shipping remains very high, which is why the Chinese authorities have been looking for alternative sea routes to and from China – routes via the Pacific Ocean / Panama Canal and Arctic routes.

The transpacific route via the Panama Canal

One of the alternative maritime commerce routes [between the Far East and Europe] is the transpacific route that crosses the Pacific Ocean and the Panama Canal. With the widening of the Panama Canal in 2016, it became possible for Neopanamax container ships to carry up to 14000 TEU (previously, Panamax freighters were limited to 5000 TEU), which is leading some ship owners to consider a route between the Far East and Europe via the Panama Canal via Neopanamax or post-Panamax Plus vessels. And a new widening of the channel is already planned to allow the passage of container ships with a capacity of up to 20,000 TEU.

72.5% of the total traffic that flows through the Panama Canal either begins or ends in the US; China cargo volume accounts for 22.1%, Japan, 14.7%, South Korea 10.1%. Currently, a large proportion of seaborne trade flows from Asia to the US.

Some analysts have argued that the transpacific sea route to Europe still isn’t competitive. But it is a route of great strategic importance for China. It has the advantage that its foreign trade is not dependent on so many exogenous factors beyond its control. Of course, although the Panama Canal is now operated and managed by a Panama Canal Authority (an agency of the government of Panama), its access could also be limited by a naval blockade. But it is far from the coast of China and it is less likely that a naval blockade would be made there; however, in the Treaty transferring the control over the Canal, the US reserved the right to exert military force in defense of the Panama Canal “against any threat to its neutrality”. The potential of this route depends on the ease with which merchant ships to and from China can use the various shipping channels between the Chinese coast and the Pacific Ocean. This is one of the reasons for China’s diplomatic strides with Pacific Ocean countries.

The interest of China in the Panama Canal seems clear. In consonance with the BRI (of which Panama was the first Latin American country to join in 2018), Chinese companies have been involved in infrastructure-related contracts in and around the Canal in Panama’s logistics, electricity, and construction sectors. Chinese companies are positioned at either end of the Panama Canal through port concession agreements. Hutchison Ports PPC, a subsidiary of Hong Kong–based CK Hutchison Holdings is the operator of the Balboa and Cristobal ports, two major hubs of the Canal’s Pacific and Atlantic outlets, respectively. In 2016, in a $900 million deal, the China-based Landbridge Group acquired control of Margarita Island, Panama’s largest port on the Atlantic side and in the Colón Free Trade Zone, a very large free trade zone. The deal established the Panama-Colón Container Port (PCCP) as a deep-water port for megaships, and the construction and expansion were carried out by the China Communications Construction Company (CCCC) and the CHEC.

The Arctic routes

Other alternative sea routes for merchant ships between the Far East and Europe are the Arctic routes (also called Northern Sea Routes – NSR). One of them is Canada’s “Northwest Passage”, but it still has several shortcomings in terms of logistics support along the route in Canada’s shipping channels. The main NSR runs along Russian waters in the Arctic Ocean. One advantage of the NSR is that they can significantly reduce travel time between the Far East and Europe. The sailing distance by the NSR from a Northwest European port to the Far East is approximately 40% shorter compared to the Suez Canal route. A container ship from China or South Korea can take about 34-40 days to reach Rotterdam, the main European port. In contrast, on the NSR ships can take around 23 days.

Several years ago, China COSCO Shipping Corp and Maersk have completed voyages testing these Arctic shipping lanes, where gradual melting of ice is expected to allow the route to operate all year-round on a regular basis; currently it operates only during the “navigation season”. Russian authorities believe this NSR could be viable for regular all year-round navigation by 2035. In 2023, Russia’s largest LNG producer Novatek shipped a total of 31 LNG cargoes, or 2.27 million tons, from Yamal Arctic LNG terminal to Asia (including China), during navigation season. Ice-class tankers, methane tankers with a reinforced hull like an icebreaker and able to cut through 2-metre thick ice, are being built at Russia’s Zvezda shipyard, at Guangzhou Shipyard International Co. Ltd (since 2018) and at Hanwha Ocean Co. (S. Korea).

The Arctic Routes will be more likely operated the sooner the Arctic Ocean ice melts due to global warming. Several scientific studies confirm that the Arctic is warming four times faster than the rest of the world. Apparently, this accelerated warming of the Arctic, with a higher incidence above the Arctic Circle, is essentially due to physical processes, and is melting large areas hitherto covered by ice, including the permafrost. The navigability of the Arctic Ocean will make Russia unavoidable in international maritime trade for decades. From 2035-2040 on, a significant percentage of the maritime trade currently going through the Strait of Malacca and the Suez Canal will be diverted to the NSR, thus significantly reducing the risk underlying the Malacca Dilemma. It is therefore not surprising that Russia and China have agreed to jointly develop the NSR, calling it the “Polar Silk Road”.

Conclusion

China’s leadership and Chinese strategists continue to perceive the Malacca Dilemma as a relevant economic security threat to China. The Malacca Dilemma works also as a strong deterrent to South China Sea serious security or defense conflicts. The protection of its maritime interests has become and will remain a paramount concern of the P R China. This geopolitical challenge will continue to be an important driver of China’s medium- and long-term strategies and international relations. To reduce exposure to the Strait of Malacca, new economic corridors and maritime routes will continue to be opened by Beijing, under its economic diplomacy. The BRI is one of China’s most relevant tools to this end. However, despite China’s attempts at diversification, it will continue to remain dependent on the Strait of Malacca in the short-term. In any case, China’s engagement with several other countries inevitably will continue, in a mutual advantageous economic interdependence.

According to research by the Pew Research Center (in Washington, D.C.), along with demographers from the International Institute for Applied Systems Analysis (IIASA) in Laxenburg, Austria, whose content was reproduced later by the World Economic Forum, by 2050 there will be significant changes in the markets of religious beliefs, largely affected mainly by demographic evolution. According to the Pew Research Center, whilst there have been other predictions on the future of religion, “these are the first formal demographic projections using data on age, fertility, mortality, migration and religious switching for multiple religious groups around the world.”

Starting with the sub-universe of believers, the first assertion is the concentration and dominant position of two monotheistic faiths – Christianity and Islam – which, in total, currently hold 65.3% of this sub-universe, and are expected to represent 70.4% by 2050. These are also the two religions that historically used States as instruments for the “propagation of the faith”, conquering and submitting peoples to their respective salvific beliefs, that have invested heavily in the internationalization of their product – with abundant waves of missionaries and vast implantation of temples, schools and assistencial & social works on a planetary scale – and, more recently, have bet on mass communication via television and cable broadcasting (USA and Brazil being good exemples as regards Christianity).

Christian believers will continue to be the largest market, rising from 2.17 billion (Bi) in 2010 to 2.92 Bi in 2050 (maintaining 31.4% of the total). Interestingly, by 2050, 4 out of 10 Christians in the world will live in sub-Saharan Africa. In the USA, Christians will decline from >3/4 of the population in 2010 to 2/3 in 2050, and Judaism will be overtaken by Islam as the largest non-Christian religion.

Higher fertility rates will make the population of Muslims grow even faster than that of Christians, from 1.6 Bi in 2010 (23.2% of the total) to 2.76 Bi in 2050 (29.7% of the total). By 2050, 10% of the population in Europe will be Muslim. By 2070, the oveall number of Islamic believers in the planet is expected to surpass that of Christians.

Hindu believers will grow (from 1.03 Bi in 2010) to 1.38 Bi in 2050, but maintain the overall percentage of 15%. By then, the majority of India‘s population will continue to be Hindu, but this country will also have the largest Muslim population in the world, surpassing Indonesia. The global Buddhist population will have roughly the same number of followers in 2050 as it did in 2010 (0.49 Bi), but will decline from 7.1% of the total in 2010 to 5.2% in 2050. The market for “folk religions” grows slightly to 0.45 Bi in 2050, but loses global relevance (from 5.9% to 4.8%). Sikhism will surpass Judaism, both growing in population, but maintaining little relevance (0.3% and 0.2% of the total), as well as “other religions” (0.5% of the total).

Today, 6 of the G7 nations have Christian-majority populations. By 2050, of the world’s top 15 economies, only 4 will have a Christian-majority population – the USA, Brazil, Mexico and Russia. The other mega-economies in 2050 include 5 Muslim-majority countries (Indonesia, Turkey, Saudi Arabia, Nigeria, and Egypt), 1 with a Hindu majority (India), and 5 with high levels of beliefs diversity (China, Japan, Germany, UK, France).

Another important finding of these projections is that the overall number of believers will continue to far outnumber that of non-believers (termed, in both surveys, as “unaffiliated” and including atheists, agnostics, and other people who are not affiliated with any religion). Although increasing in Western countries (USA, France, NZ) non-believers will suffer a reduction from 16.4% of the world’s population in 2010, to only 13.2% in 2050. In an era when education and access to scientific knowledge have become widespread, it is surprising how many people continue to need divinities in their lives. Along with the huge number of organizations that make a living from exploiting this need.

When we observe in recent decades a growth of religious fundamentalisms – especially in predominantly Islamic countries (with the Sharia being imposed in a growing number of them), but also in some mostly-Christian countries and in mostly-Hindu India (Hindutva) – and intolerance towards divergent thought, with a radicalization of discourse on the part of many leaders of expanding religious movements, non-believers cannot but be deeply apprehensive about the foreseeable path that lies ahead. And the same aprehension is certainly shared by the [minority] believers of “other” “infidel” or “heretical” beliefs, often subject to persecution and acts of violence and barbarity.

Since the Han dynasty, over the centuries and dynasties, Confucianism – transformed into a bureaucratic ideology to serve the interests of the Middle Kingdom – constantly reinvented itself, accommodating to the dominant philosophical and political orientations of the time (e.g., during the Song dynasty it integrated elements of the Buddhist and Taoist philosophies that were then sweeping China).

With the establishment of the Republic in 1912, Confucianism lost support – after all, it was the Confucians’ arrogance of resisting modernization and considering modern [Western] knowledge as strange and frivolous that led to China’s backwardness and humiliation before foreign powers. in the 19th century – having been ridiculed and insulted during the “Movement for a New Culture”. When the Kuomintang nationalists came to govern the country in 1927, Confucianism regained some of its lost status. With the creation of P.R. China in 1949, Confucianism became anathema. This was not always the position of the Chinese Communist Party (CCP). In his speech to the Sixth Plenary Session of the Sixth Central Committee of the CCP in 1938 – which established Mao Zedong’s undisputed pre-eminence – Mao asserted that CCP members should study China’s “historical heritage” and “preserve the precious legacy of Confucius to Sun Yat-sen” to adapt Marxism and Leninism to the specific conditions of China.

However, after 1949, the CCP considered the Confucian belief system bourgeois and reactionary; Confucius and Mencius “represented slave owners and aristocrats”, so they were considered “enemies of the people”. The “Cultural Revolution” (1966-1976), with Mao’s exhortation to “Crush the Four Old [Things]” – “old ideas”, “old culture”, “old customs”, “old habits” – fought fiercely Confucianism (“Criticize Lin Biao, Criticize Confucius” Campaign of 1974), leading to the destruction of hundreds of temples and the burning of Confucian texts, with “The Analects” being banned.

In the 1980s, it was still so maligned that historian Yu Ying-shih said Confucianism had become a “wandering soul” devoid of an institutional “body.”

With the policy of liberalization and openness to the outside world promoted by Deng Xiaoping, China underwent a social transformation that gradually led to a blooming of ideas that drew heavily from the influence of Western societies, putting the CCP under great pressure for change, including the improvement of the legal system and political reform. With the CCP leadership maintaining a “firm fight against bourgeois liberalization”, the dissatisfaction of various sectors of the Chinese society, starting with university students, to such resistance to change led, in 1989, to successive demonstrations and the Tiananmen square uprising, in Beijing, where the young protesters erected a statue of a “Goddess of Democracy”.

After the Tiananmen massacre and subsequent crackdown, the CCP and several Chinese think tanks desperately sought that blend of philosophy and history that could instill a nationalist sentiment and insulate the Chinese masses, especially the youth, from Western values ​​(democracy, civil liberties) that had influenced the protesters of Tiananmen and enter(ed) China daily through VPNs that allow them to bypass the ‘Great Firewall’.

One thing was certain: no matter how much rhetoric the CCP spells out about its devotion to Marxism-Leninism, party leaders realized long ago that the “construction of a socialist state based on SOE with a[n inefficient] centralized planned economy on the path to communism” would probably lead to a repetition of what happened in the defunct Soviet Union.

With the economic reform and open-door policy initiated by Deng, state capitalism was transformed into a mixed economic system with an increasingly thriving private sector. The success of the option for a singular economic path, along with the shake-up from Tiananmen demonstrations in 1989, showed the need to reinforce the political legitimacy of the party. The option was for a strong nationalist base, anchored in an unquestionable “Chineseness”, christened “socialism with Chinese characteristics”. In a nutshell, the outcome of this reflection was the return of Confucius, by the hand of the CCP.

By promoting the resurgence of Confucianism, the CCP seeks to reconnect with China’s cultural identity, reinforce national pride, and link the party to the preservation of China’s traditional values ​​and historical roots. Furthermore, Confucian teachings place an emphasis on social harmony, ethical behavior and hierarchical order, values ​​conducive to maintaining social stability, especially in a context of rapid modernization and social change. By promoting Confucianism, the CCP reinforces social cohesion and alleviates potential conflicts arising from rapid social transformations. Confucianism’s promotion of personal virtues such as integrity, filial piety, and respect for authorities offers a moral and ethical framework that is in line with the CCP’s discourse of instilling ethical behavior among citizens as a contribution to a more harmonious society and responsible citizenship. Lastly, but of no less importance, by supporting Confucianism, the CCP also increases its political legitimacy, presenting itself as the guardian and interpreter of traditional Chinese values, seeking to align them with its political objectives. And the Confucian idea of ​​centralized authority and respect for political leaders serves the CCP’s interests in governance.

It is therefore not surprising that in the 1990s, the elite began to speak warmly of Confucius and that there was, under the patronage of the State, a flurry of research and conferences about his doctrine. Several Chinese leaders participated in multiple ceremonies and conferences on Confucius and his teachings. Expressions such as “harmonious socialist society”, “harmony despite different points of view”, or “people as the basis of the state”, strongly linked to classical Confucian doctrines, appeared. The first decade of this century saw the creation of the “Confucius Institute” (in 2004) and its rapid international expansion, in one of the first manifestations of China’s external projection and increase of its soft power. The trend was furthermore accentuated with the use of Confucian concepts by CCP leaders; in 2005, Hu Jintao presented the ideal of a “harmonious society” for China, reiterating that “culture is the lifeblood of the nation” and calling for the promotion of “traditional” Chinese culture and making references to the “great revival of the Chinese nation”.

Under Xi Jinping’s leadership, not only has this rehabilitation continued, but Confucianism and legalism have become particularly important in supporting Xi’s dual rhetoric of “rule by virtue” and “rule the nation in accordance with law”. However, the rehabilitation of Confucianism is conditional on it being subordinated to the interests of the CCP. A battalion of “socialist Confucians” studies the adequacy and harmonization of Confucianism with Marxist principles, in accordance with party guidelines. The aim of this “study” of Confucianism is to legitimize the authority of the CCP and thus seek to modify Confucianism “under the positions, principles and methodologies of Marxism, Leninism and Mao Zedong Thought”. Fang Keli, one of the most prominent socialist Confucianists, argues that Confucianism is complementary to Marxist ideology and can be useful in preventing “Western liberalization” and promoting “the patriotism of the Chinese people.” In short, under Xi, Confucianism serves to reinforce the Sinicization of Marxism, but subordinated to strengthening the party’s legitimacy as holder of the “Mandate of Heaven”.

The CCP leadership continues to feel the need, without losing the Marxist-Leninist roots, to accentuate its Chinese component. In part, this had already happened with “Mao Zedong Thought”, “Deng Xiaoping Thought” and, more recently, “Xi Jinping Thought”. But it is this adapted and functionalized Confucianism that provides it a deep connection to Chinese cultural identity. This alchemy, marked by the tension between the revolutionary and the conservative, the past and the “future”, and by the “fusion of ideologies” between a Chinese version of Marxism-Leninism with traditional Confucian teachings, led the American sinologist Lucian Pye to define the P.R. of China as a “Confucian Leninist State”.

Over time, one will see whether the Chinese wenming (cultural civilization) will continue to be subordinated to Marxism-Leninism… if the ruling elite holding political control of the country will, due to inertia and risk aversion, maintain a Marxist-Leninist[-Maoist-Dengist-Xiist] party or whether gradually convolves it into a party with a proto-Confucian ideology more rooted in Chinese history and culture.

The US Government and Congress remain committed to implementing a decoupling in relation to China, which is now obvious in high technology sectors.

Since 2001, the year of China’s accession to the WTO, globalization has accelerated, with the inherent relocation of countless western companies to China, contributing with capital and technology to its development. China’s technological dependence on the US and the EU peaked c. 2009. The American commitment to decoupling in technological areas has been increasing since the middle of the last decade. The pace of China’s technological advance has scared American elites, leading US leaders to consider it a serious threat, since high technology is the engine that feeds superpowers. The first US reactions were essentially “defensive” to prevent access to relevant technologies by Chinese companies: export and import controls, limitations on investment (from and to China), restrictions on licensing in the areas of telecommunications and electronics, visa bans, rules on technology and data transfers. Lately, Washington has focused on “offensive” measures: blacklists of Chinese companies (the Communist Chinese Military Companies (CCMC) included in the Entity List, whose number reached 532 in 2022, and include companies in the technological area such as AMEC, Huawei and Hikvision), the ban on any US Person to have any relation with CCMC, financial sanctions, banning Chinese technologies for national security reasons, threats to foreign companies that continue to sell to Chinese companies (eg, AMSL) or that continue to operate in China (eg, TSMC, SK Hynix). European authorities did not go so far as the American bellicosity. But they have already approved European legislation to screen Chinese investment, and public opinion in many European countries is gradually shifting towards an unfavourable opinion on China, which has led more and more European governments to adopt measures to contain Chinese investment and companies.

However, in spite of this historical background, in order for Europe to move forward quickly in many areas of a [greener] economy, it is important to have a non-animosity relationship with China. One of the sectors in which there is a huge [European] dependence is the production of solar panels and photovoltaic material, which will feed a significant part of the additional production of renewable energies in the coming decades. According to the IEA, Chinese companies hold at least 74% of the market share in each step of the solar panels supply chain. Other sectors crucial to accelerating the energy transition are transport and energy storage – responsible for c. 40% of the European energy mix – for whose rapid electrification it is necessary to have an understanding with China, given Europe’s current dependence on critical metals, the delay in know-how regarding gigafactories and their components and intermediate products, in addition to the huge dependence as well regarding access to the ores from which critical metals are processed from.

Europe currently manufactures less than 1% of the global total of electric batteries for EV, compared to over 90% in Asia. How did this happen? How, in some areas, did China become more advanced than Western countries?

Twenty years ago, while Europe continued pushing the issue of electric mobility and storage with its belly button, in China the enormous potential of these strategic sectors was perceived to leverage a significant part of the [green] economy of the future. As a result, in execution of clear public policies (including strong governmental financial incentives) Chinese companies invested in all segments of this value chain. Massive sums were invested in R&D. Efforts were made to ensure access to ores such as lithium, nickel, cobalt, manganese, graphite, rare earth elements, copper, iron, aluminum. Some companies (Tianqi, Ganfeng) got expertise in chemically processing (refining) these ores into critical metals. Companies specializing in the manufacture of electrodes (cathodes and anodes), electrolytes and other components for electric batteries benefited from strong state support, producing these components in a complex value chain culminating in [plants integrating the value chains linked to] gigafactories. Electric vehicle (EV) manufacturers have multiplied in China – by 2021 there were >500 EV brands in the country.

The nascent European EV and gigafactories industries are dependent on supplies by Chinese companies – many of them state-owned – of electric batteries (for 5-10 years) and critical metals (in the long term, for at least 10-20 years) from China. On the other hand, given the progressive decoupling between the US and China and low customs tariffs, Europe will certainly constitute the second largest market for Chinese EVs, analysts predicting a significant growth in their market share.

By 2050, the EU estimates that its demand for lithium alone will be 16~57 times higher than today and that critical metals will soon be as important or even more important than oil and gas. It has been evident for some time now that to reach ‘Net Zero’ in 2050 (or 2060 ~ 2070, to be more realistic…) a much larger quantity of critical metals and the ores from which they come from will be needed. Public policies to achieve that goal and reduce the production of greenhouse gases imply, therefore, a significative increase in mining and refining of these ores. Those responsible for defining and executing public policies must assume this clearly.

In a notable speech on the occasion of her official visit to China in March 2023, the President of the European Commission, after mentioning the Net-Zero Industry Act as a fundamental part of the EU’s Industrial Green Deal Plan, reiterated the European objective “to be able to produce at least 40% of the clean technologies we need for the green transition”. Ursula von der Leyen is aware that, in order to achieve this objective, the EU needs to be more independent and diverse with regard to the essential factors necessary for its competitiveness in the energy transition. And she openly expressed her concern about the massive reliance on critical metals “from a single supplier – China – for 98% of our rare earth supply, 93% of our magnesium and 97% of our lithium – just to name a few.”

For months, after the criminal prosecution of Suncity and Tak Chun and their main directors, first in Wenzhou and other cities in Mainland China, then in Macau, casino gaming concessionaires closed VIP Rooms and several analysts sentenced that VIP gaming in Macau was dead.

I’ve repeatedly pointed out that such an approach was neither realistic nor likely.

First, because if that was the case, if the new Macau SAR policy on casino gaming wanted to eradicate VIP gaming, the Law on Credit for [Casino] Gaming (Law no. 5/2004) would have been clearly amended to remove the possibility of licenced gaming promoters / junkets granting credit for casino gaming credit. Said amendment did not take place at the time of the last tender for casino gaming concessions, when the Macau Legislative Assembly and the Macau Government amended several casino gaming laws and regulations. There is a Bill amending said Law pending in the Macau Legislative Assembly but it does not remove the possibility of licenced gaming promoters / junkets continuing to grant credit for casino gaming. The Bill imposes some restrictions (we’ll return to this subject in a coming article), but that is it. Considering that it is unlikely that the Macau legislators and members of the Government do not know what Macau casino gaming credit entails, clearly the intention was not to destroy one of the main sources of gross gaming revenue (GGR) generated, and consequently, one of the main sources of Macau Government fiscal revenue.

Second, the main reason why Macau junkets started to operate in markets where casino gaming-related activities were, [at the time,] not only unlawful but a crime (e g, Mainland China, Thailand, Japan), lied on the need to avoid exposing the Macau casino gaming concessionaire(s). This situation remains unchanged, namely as regards the most relevant market (Mainland China) where visitation comes from; Macau casino gaming concessionaires cannot risk venturing into the direct gaming promotion for VIP patrons from Mainland China. The underlying risk for their concession and the possibility of incurring in operations violating the law might not bode well for the [required] suitability that these concessionaires and their mother companies need to have at all moments – in Macau and in other relevant jurisdictions. Not to mention the embarrassment for the Macau Government if, from time to time, employees of a casino gaming concessionaire were caught practicing [blatantly] crimes in Mainland China.

Third, the most relevant activity of Macau gaming promoters concerning Mainland China patrons is to grant credit for Macau casino wagering. Macau law does not allow any write-off of uncollectible credit arising from casino gaming credit, hence, casino gaming concessionaires have been sharing GGR with gaming promoters to compensate these for [taking the full] casino gaming credit granting risk.

Last, but not the least, the numbers.

The number of licenced gaming promoters in Macau continues to diminish. In January 2023 there were 36 gaming promoters, a fall from 46 in January 2022, according to the latest updated list of licensed operators published by the Macau SAR Gaming Inspection and Coordination Bureau (DICJ).

Prior to the pandemic, Macau VIP GGR in 2019 – taking “Baccarat VIP” numbers as reference – was 135.2 billion HKD (46.2% of total tables games’ GGR). Since Baccarat’s win is c. 3%, and assuming side betting of at least the same amount of wagering in VIP rooms, the overall amount wagered in Macau VIP Gaming in 2019 was above one trillion US dollars. The vast networks of companies and associated entities from Mainland China (Macau gaming promotion companies are minor players and are fungible) that have been running this profitable business are not likely to abandon this sizable source of revenue.

In any case, the numbers for Q1 2023 are available and confirm our analysis. According to the DICJ webpage, “Baccarat VIP” in Q1 2023 was 8.565 billion HKD (24.7% of overall GGR, 26.6% of total table games’ GGR). Not bad for a dead VIP gaming segment!

By Jorge Costa Oliveira

Partner and CEO of JCO Consultancy

According to a recent report by the Mercator Institute for China Studies (MERICS) and the Rhodium Group, global Chinese outbound foreign direct investment (OFDI) fell by 23% in 2022 from the previous year, to USD 117 billion, an 8-year low. China’s outbound mergers and acquisitions (M&A) activity also dropped, falling 21% year-on-year (y-o-y) to a total of USD 24 billion.

FDI in Europe originated in China has declined to $8.7 billion, a 22% fall y-o-y. The drop takes Chinese investment in Europe back to its 2013 level. Less Chinese M&A transactions seem to be the main reason. Only Tencent’s purchase of British video game developer Sumo Digital was of significant value (>1 billion euros).

Another interesting feature is that greenfield investment overtook M&A for the first time since 2008 (see chart). Driven by electric vehicle (EV) and electric battery plants (gigafactories), Chinese greenfield investment in Europe increased by 53%, accounting for €4.5bn in 2022 or 57% of the total, exceeding M&A flows for the first time since 2008.

As regards European countries where Chinese OFDI took place in 2022, it remains concentrated on the “Big Three” and Hungary: 88% of Chinese OFDI flowed to just four countries, the [traditional recipients] “Big Three” European economies (the UK, France, and Germany) plus Hungary. All four received major greenfield investments by Chinese battery makers, as well as most of the year’s M&A activity.

The main sectors (3/4 of the total) where Chinese OFDI in Europe has flowed were “consumer products” and “automotive“, as in 2021.

Another feature of Chinese OFDI in Europe is the concentration of investment on a very small number of large corporations. Albeit this pattern was somewhat already there before, in 2022 the level of concentration has intensified: 72% of total Chinese OFDI in Europe stemmed from just five investors, including CATL and Tencent. Both the type of investor and the nature of investment have changed as well. A decade ago, investors were primarily major SOEs acquiring European firms. In 2022, Chinese corporations are mainly private firms investing in greenfield projects in Europe.

For Q1 2023, Ernst & Young data shows China overseas M&As in Europe totaled US$952 million, down 39% y-o-y; there were 32 announced deals, down 24% y-o-y. Investment in the UK (on the real estate, hospitality & construction sectors) and Germany (on advanced manufacturing & mobility sectors) collectively took up 86% of the total value.

What are the reasons?

What are the reasons for this [continued and gradual trend of] falling Chinese OFDI in 2022 (apparently continuing into 2023)?

According to the United Nations Conference on Trade and Development (UNCTAD), global direct investment flows dipped after the first quarter of 2022 due to the global crises triggered by Russia’s invasion of Ukraine. The war escalated inflation as food and energy costs soared, leading central banks to hike interest rates in advanced economies. The resulting economic uncertainty and shifts in global financial conditions have spread caution and suppressed investment. Chinese companies involved in OFDI seem to have followed this general path of caution.

On a domestic level, China’s zero-Covid policies (only lifted at the end of 2022) and the economic disruption it provoked probably also took a toll.

Other endogenous factors that contributed to the said fall of Chinese OFDI (in Europe and elsewhere) last year were: (i) the ongoing domestic constraints on outbound capital flows; (ii) the policy of financial deleveraging; and (iii) economic uncertainty caused by China’s crackdown on its biggest tech companies with new regulations on fintech.

The historical background

However, to analyse other factors that probably created strong headwinds for relevant Chinese companies involved in OFDI decisions in 2022, it is important to look at the historical background in the preceding years.

First, one should take into account the restrictions imposed by the US authorities on almost 600 relevant Chinese companies – deemed to be “Communist Chinese Military Companies” (CCMC) – that led to the delisting from US securities markets of several of them (through the US President’s Executive Order 13959, superseded by Executive Order 14032, it is now prohibited for any US entity to own or transact (except to divest) publicly traded securities, or financial products derived therefrom, of companies that the DoD has listed as CCMC), the creation of blacklists (compiled under the “Entity List”), and led to the US Treasury forbidding  any “US Person” to interact with them. This aggressive posture of the American authorities is part of a decoupling strategy that intends to exclude relevant Chinese companies from US markets and/or US technology. Simultaneously, the “trade / tariff war” with China initiated by the Trump Administration and continued by Biden’s Administration led to several disputes at the WTO.

This should have led Chinese companies on the path of internationalisation to focus more on Europe. There are compelling reasons for Chinese companies to invest in Europe: demand for European innovation and technology, the need for integration with European value chains, compliance with European regulations and avoiding regulatory hurdles, clear public policies on climate transition, and internationalisation to markets with high disposable income.

Furthermore, at the end of 2020, China and the EU concluded [an “agreement in principle” on] a Comprehensive Agreement on Investment (CAI). The aim of CAI was to create a more open, transparent and secure environment for greater future flows of investment, within an open multilateral trading system framework supported by both parties. However, in May 2021, the European Parliament passed a resolution to freeze ratification of the CAI in response to Chinese sanctions on European human rights advocates following EU-imposed sanctions on Chinese officials involved in alleged human rights violations in the region of Xinjiang.

In 2022, EU-China relations deteriorated further in the wake of the Russia-Ukraine war, as China and European countries found themselves on opposite sides of the conflict. In addition, European countries have also been under pressure from the US to distance themselves from China as the US seeks to decouple its economy from China.

European public opinion on China

Also, during the last few years, several polls show that Western and European public opinion on China [and the Chinese government] has become more and more unfavourable, in some cases strongly negative. The charts on public opinion on this subject in several western countries published here – extracted from the Pew Research Centre poll published in September 2022 – is a good example. Depending on the country, the trend is clearly towards unfavourable views, accentuated in the last decade. In southern European countries, the trend is also there but not as strong.

This shift in European public opinion was realised by many Chinese companies and made them wary of a European venture. The risk assessment by banks and financiers also became more prudent when considering the internationalisation of Chinese companies in Europe.

European restrictive rules on Chinese investment

In line with this new unfavourable trend in European public opinion, and fearful of a rising “systemic rival” that still has not opened its market in equal terms to European companies, the European Commission and several European countries introduced restrictive rules tightening OFDI in the EU, mainly aimed at Chinese companies, in particular SOE.

According to the abovementioned MERICS-Rodhium report, one of the key reasons for the low Chinese OFDI was an increased scrutiny by European governments of Chinese investment, as European governments seek to decrease their economic reliance on China. The said increased scrutiny, via tightening investment screening measures, impacted Chinese acquisitions of strategic assets such as European semiconductor companies and critical infrastructure. MERICS-Rodhium researchers found that at least 10 out of 16 investment deals pursued in 2022 by Chinese entities could not be completed in the technology and infrastructure sectors, principally because of objections raised by authorities in the UK, Germany, Italy, and Denmark.

According to the abovementioned MERICS-Rodhium report, several of the aborted deals, such as proposed semiconductor acquisitions in Germany (Sai MicroElectronics’ proposed acquisition of the automotive chip assets of Elmos Semiconductor) and in the UK (Hong Kong’s Super Orange buying electronic design company Pulsic), were blocked following reviews into the specific technology targeted by the Chinese investor. In other cases, deals already agreed upon were annulled (Italy’s annulment of the sale of a military drones’ group, Alpi Aviation, to Chinese state-backed companies) or collapsed after the imposition of regulatory stipulations, the report added.

These review mechanisms on relevant M&A in strategic sectors, sensitive technologies, and energies are likely to be expanded in 2023 and are coming into effect in Belgium, Estonia, Ireland, and the Netherlands.

In any case, while screening of Chinese investments in Europe has increased, the region still remains more politically open to China than the United States, which has cracked down on Chinese battery imports and imposed other restrictions on Chinese companies via the Inflation Reduction Act.

Main fields where Chinese companies are investing in Europe

The main fields where Chinese companies are increasing investment in Europe are: (i) the automotive sector; and (ii) the consumer-oriented / retail sector.

Chinese OFDI in Europe is now directed to sectors where Chinese private conglomerates are highly competitive, like automotive, more precisely the electric vehicle (EV) value chain – both on electric battery plants (also known as gigafactories) and on EV plants – or end consumer-oriented sectors like video gaming or household products.

The leading sector for Chinese OFDI in Europe, in 2022 and most likely for the coming years, is the automotive one. As Europe becomes the world’s second biggest EV market after China, the Chinese companies producing electric batteries and EV want to use their expertise to enter this key strategic sector and grab a sizeable portion of the European market. Europe has a good charging infrastructure and generous government purchasing subsidies, developed within a clear public policy on energy transition aiming at decarbonizing road transportation.

Furthermore, unlike other major automotive hubs (such as Japan or South Korea) Europe

has few gigafactories or battery firms of its own and is therefore still open to Chinese investment in this field. Whilst the commitment in the sector of electric battery plants is clear and includes almost all the big Chinese groups in the sector, the same cannot be said as regards the main Chinese EV manufacturers. Economic history teaches us that the current easy EU-certification of Chinese-manufactured EV will not last long, hence the sagacity of producing a sizeable portion of EV for the European market within Europe before a new “Fortress Europe” policy is raised. However, many relevant Chinese EV manufacturers have not realised it yet. They will probably realise it in the short term.

The trend of Chinese investment in Europe is clearly downwards, having fallen to its lowest point in almost a decade last year. Uncertainty fueled by unfolding geopolitical tensions, the war in Ukraine, changes in European public opinion on China, and greater scrutiny by European governments and agencies, is not likely to lead to a new era of vast amounts of Chinese capital flowing into Europe.

The main driving sector for Chinese OFDI in Europe will probably remain the automotive one. It is possible that overall considerations on friendly countries to Chinese investment will influence investment decisions by relevant Chinese investors, in particular as regards greenfield investments. The “Big Three” European economies will likely continue to be the main destination of Chinese investments, but southern European countries may well be another preferred destination for these greenfield investments.

The “Comprehensive Strategic Partnership of Coordination for A New Era” between Russia and China, concluded in 2019, was re-affirmed during a bilateral summit in Beijing on February 4, that strengthened relations between the two countries, with a lengthy statement then issued saying that “the friendship between the two states has no limits”, “there being no ‘prohibited’ areas of cooperation”. On 20 March, another meeting between the leaders of the two countries took place in Moscow; the two major powers have described Xi’s three-day trip as an opportunity to deepen their “no-limits friendship.”   

China and Russia share a long common border and have a long relationship that has experienced different phases from the 16^th century up to the USSR-Soviet period and more recently during the Russian Federation and the P. R. of China. At the political level, both countries are founding members of the Shanghai Organization and founding members of the BRICS.

Both countries share a similar vision of combating the hegemony of the US in international affairs, a mutual distrust of the West and disdain for the liberal democratic regimes. China looks for Russia as a partner in standing up to what both see as U.S. aggression, domination of global affairs and unfair punishment for their human rights records. Recent Western trade wars against China, tech export restrictions and the threat of sanctions over Ukraine also conspire to push Beijing and Moscow closer together. Last, but not the least, both countries have a long tradition of non-democratic regimes.

Thus, given its great geostrategic importance for China, this relationship of enhanced friendship between China and Russia should not come as a great surprise.

With Russia’s invasion of Ukraine, it has become clear that most of the world’s governments condemn attempts to alter political boundaries by armed force – a principle reiterated in China’s recent 12-point document on peace for Ukraine. The Chinese economy relies heavily on international trade – about 1/3 of the relevant Chinese companies are exporters – and this war is creating economic instability that has repercussions on the demand for Chinese goods. And, although Ukraine is also a major producer of cereals, food products and raw materials, Russia is a superpower of agri-foods, energy products and critical metals.

The strong and growing anti-Russian sentiment in Europe should be a cause of concern for China, increasingly seen by Europeans as Russia’s de facto ally. Chinese companies’ access to the European market, whether for trade, technology, finance, or other purposes, could be severely affected. This is especially relevant with regard to access to high technology; if the EU follows the US stance on high-tech, many Chinese companies will be left out of these value chains and this will significantly delay their advancement in several cutting-edge technological areas. On the other hand, China continues to need foreign capital and the Ukraine war and financial sanctions imposed by the West have slowed these flows temporarily after the Russian invasion. The West, especially the US, has here a financial Sword of Damocles that China’s leaders are well aware of.

This war has also brought enormous uncertainty to one of the most important projects launched by China, the Belt and Road Initiative (BRI), especially with regard to the main land corridor of the BRI, reducing investments along the main sub-corridors to Europe, via Russia and Ukraine, and leading to the strengthening of the sub-corridor that crosses Turkey.

However, Russia provides the main viable alternative, in the long term, to the present sea route from the Far East to Europe – of enormous importance to China, which can be blackmailed through maritime blockades by the American naval superpower – through the Arctic Route (NSR).

Russia’s weakness emerging from this war and its dependence on China also opens up opportunities for Beijing to expand its influence in Central Asia. In the new Great Game in Central Asia, it is in China’s interest that its growing influence (mainly economic) in the ‘Stans’ be done without creating tensions with Russia that considers this region as part of its sphere of influence.

It is against this historical backdrop that one should look at China’s 12-point document “on the Political Settlement of the Ukraine Crisis” as a contribute for the opening of peace negotiations between Russia and Ukraine. On the one hand, China benefits from Russia’s weakening to ensure security on the supply of gas, oil, copper, nickel, platinum, palladium and various other critical and precious metals. The weaker Russia is, the more China companies leverage increases, whether in the access to raw materials and cereals (at discounted prices) or in the entry of Chinese companies into the equity of Russian conglomerates. Russia’s growing economic dependence on China also allows Chinese access to resources that the Russian Government had pre-allocated to other countries; this is clearly the case with gas from the Yamal gas fields, the main destination of which was Europe and henceforth will be China; but it is also the case with the exploration of rich gas fields in the far northeast of Siberia, which were reserved to be concessioned to partnerships with Japanese companies and are now likely to be concessioned to partnerships with Chinese companies.

Nonetheless, China is not at all interested in a half-destroyed Russia, for reasons symmetrical to those of the US. And the very recent long phone call between the presidents of China and Ukraine signaled that Beijing is willing to play a more active role as a mediator in the current war on Ukraine.

Ukrainian leaders need someone on whom Putin depends to force him to stop the war and to open peace negotiations. That is why they consider the Chinese proposal useful. Even acknowledging the significant vested interests of China on Russia and realizing that Chinese pressure on Russia is gradual and that it is still far from its peak.

By Jorge Costa Oliveira

Partner and CEO of JCO Consultancy

According to China’s National Bureau of Statistics, in 2022 the Chinese population was 1,411.75 million, having declined by c. 850,000 people. It is the biggest reduction in Chinese population since the Great Leap Forward, which triggered the Great Famine of 1960-1962 that claimed >30 million lives. In 2022, the number of births was 9.56 million and the number of deaths 10.41 million, with birth rates of 6.77‰, mortality rates of 7.37‰ and natural population growth of -0, 60‰.

The UN estimated that, if China’s fertility rate remains at a very low level (1,15/woman, although only 0.7/woman in Beijing or Shanghai) and the country does not attract immigrants (China has one of the lowest rates of immigrants in the total resident population – 0.1%), the Chinese population could contract to around 767~775 million in 2100. UN experts reformulated the initial estimates and, based on the 2020 Census, revised China’s population by -18.5 million and declining by 109 million by 2050 (more than triple the decline of its previous forecast in 2019). According to the Shanghai Academy of Social Sciences, China’s population may decline to only 587 million by the end of the century. Moreover, in China, the legal retirement age is low (60 years for men; 50~55 years for women) and comes from a period when the life expectancy was much lower than the current one (the Chinese government has already announced the gradual extension of these ages).

This reduction in the Chinese national population marks the beginning of China’s population decline and accentuates its ageing. Credible sources (Airfinity, Wigram and FT) also estimate that the deaths resulting from the waves of covid-19 infections after December 2022 exceed one million lives, contributing to an additional decrease in the population in 2023.

The aging of the population increases the burden on social security for the elderly, reduces the propensity to save and has other negative effects that the Chinese government will not be able to easily mitigate.

The 1,73% average annual decline in China’s working-age population is likely to lead to lower economic growth unless productivity rises rapidly (unlikely). The reduction of the working-age population has led the Chinese government to change its economic focus. China’s 14th Five-Year Plan focuses on orienting the economy for its domestic market and towards the production of goods with higher added value rather than the production of intermediate goods in the global supply chain. This transformation takes time.

However, internal migration from the countryside to the cities remains strong (in 2022 there were 920 million people in Urban China, with an annual growth of 0.5%) and will allow to mitigate, in the short term, the effects of the gradual reduction of the active population resulting from the population decline. Nonetheless, many Chinese companies producing manufactured goods are already rapidly relocating to Bangladesh, Pakistan, Vietnam and Africa.

One of the sectors where there will be implications in the short term is construction and real estate (responsible for c. 25% of China’s GDP). According to a forecast made by the Beike Research Institute, demand for residential real estate in China is expected to continue to decline – on average -2.5%/year until 2035 – as the demographic dividend declines. Although some analysts believe that the real estate market will not fall sharply, the annual demand for new housing is expected to fall to 1.3 billion m² by 2035, from an average of 1.9 billion m² between 2016 and 2020.

Overall, one may summarize, with HSBC’s chief economist for Asia, Frederic Neumann, that “the Chinese economy is entering a critical transition phase, and can no longer count on an abundant and cost-competitive workforce to drive industrialization and growth” [based on the production of intermediate goods in the global supply chain]. To avoid an economic slowdown and an industrial recession in the country – predicted by Yi Fuxian, an expert demographer, as a result of population decline – the Chinese government, in line with an increase in professional qualifications of the less elderly generations, intends to upgrade the Chinese industry focusing on the production of goods with higher added value, with a view to positioning China as a global power in high-tech industries, betting on the priority sectors identified in the Made in China 2025 program.

The Chinese government is creating incentives for an increase in the fertility rate; but no one envisions a level of success different from [the poor results of] similar programs in other countries with declining (and aging) populations. There is another way out of this demographic decline conundrum, that consists in increasing significantly immigration into China. An active immigration policy can reduce China’s population decline. But in times of exaltation of Han ethnic nationalism, strongly stimulated by the authorities, will the Chinese government be able to adopt a policy of attracting immigrants to restore balance in a number of economic sectors?

By Jorge Costa Oliveira

Partner and CEO of JCO Consultancy

The potential of Brazil’s gambling market is huge, namely in the richest States of Brazil – in particular in the State of São Paulo (SP).

The Extended Metropolitan Area of São Paulo is an agglomeration of five contiguous metropolitan areas that have grown into one another and three micro-regions, dominated by São Paulo; it has more than 36 million inhabitants.

The State of São Paulo (SP) has c. 47 million residents (c. 22% of the total of Brazil’s population) and accounts for c. 31.2% of Brazil’s GDP. The wealth produced by the state in the year of 2020 totaled more than US$ 453 billion (R$ 2,32 trillion), the equivalent of US$ 9,771 per capita (R$ 50.264,71) (this figure is 42.9% higher than the national average) or US$ 23,100 per capita, calculated using implied PPP conversion rate from World Economic Outlook, IMF (IBGE and Seade).

São Paulo concentrates more than half the wealth generated by Brazilian financial institutions, also leading in services provided to companies (40.84%), information (49.64%), health and education services (37.3%).

Three of the Brazil’s larger 12 metropolitan areas are in the São Paulo State. Several other large metropolitan areas in the country are also appealing markets and opportunities. The main metropolitan areas in Brazil are as follows:

Rio de Janeiro metropolitan area ranks immediately after São Paulo, not only due to the size of its population, but also because it is an international civil aviation hub and a renowned tourism and entertainment destination. The State of Rio de Janeiro (RJ) had in 2017 a GDP of US$ 308 billion (c. 5% of Brazil’s GDP), the equivalent of US$ 18,450 per capita, calculated using implied PPP conversion rate from World Economic Outlook, IMF.

But even Curitiba (capital of the State of Paraná) metropolitan area, with a total population over 3.5 million people (ranking 9^th in population in Brazil), is appealing; the GDP of the State of Paraná in the year of 2015 totaled more than US$ 203 billion, the equivalent of US$ 18,000 per capita, calculated using implied PPP conversion rate from World Economic Outlook, IMF.

In spite of large inequalities in the distribution of income, in these metropolitan areas the VIP segment is good or very good (e.g., São Paulo has the world’s largest fleet of urban private helicopters) and the middle class enjoys a reasonable / good disposable income that has grown until 2019 and most likely will grow again with the post-covid economic recovery.

On 2019 Brazil still had a significant number of international leisure tourists – c. 6.4 million – whose main destinations were well known leisure touristic spots (Foz do Iguaçu, Armação de Búzios, Angra dos Reis, Paraty, Balneário Comboriú, Itapema, Ipojuca, Natal) and some large cities (São Paulo, Rio de Janeiro, Florianópolis, Salvador da Baía, Fortaleza).

Gambling in Brazil has been illegal and without structured legislation since 1946. Until recently, Brazil’s legislation on gambling – Decree-Law 3688/1941 – prohibited gambling and established penalties for those who conducted it with the exception of the state monopoly on lotteries and betting on horse racing in [a few] authorized locations. According to this law, the operation of gambling in Brazil is a criminal misdemeanor.  The mentioned Decree-Law considers the following to constitute gambling:

• games in which winning or losing depends exclusively or mainly on luck (casino gaming);

• betting on horse racing outside of a racetrack or other authorized area;

• sports betting.

Notwithstanding, there is widespread illegal gambling in the country. The most popular illegal game (except in the State of Paraíba where it is “legal”) is “jogo do bicho”, a lottery-type drawing, operated on a regional basis using the daily state lottery draw, in which players place bets on numbers that are associated with or alluding to animals.

There is also a shortage of fiscal revenue at all levels of government of the Brazilian Federation; many of the Brazilian States want additional fiscal revenue and perceive gambling, in particular casino gambling, as the easier road to it.

Several South-American countries already legalized it in order to attract foreign tourists, to diversify the touristic products available and to increase government revenue. For some time, there have been rumors of the impending legalization of several modalities of gambling in Brazil. During the government of former President Temer, the way for the legalization of gambling, including casino gambling, was paved by setting up a special Commission in the Brazilian Congress where preparatory work and political negotiations took place. The discussions on the legalization of gaming and gambling, the model for the regulatory framework of the gaming sector, how to regulate and tax it and the division of tasks amongst the several layers of the Federation continued in the same Congressional Commission.

The first output of this Congressional Commission’s work concerned sports betting; on December 2018 the National Congress approved Law No. 13,756/2018 that legalized the so-called “fixed-quota bets related to real events with a sports theme”, authorizing their exploitation by private companies. Currently, the regulation of the law by the Executive Branch is under way, with several public hearings having been held. It is expected that the regulation will be presented in the coming months.

In the meantime, as regards public lotteries, on September 2020 the Supreme Court handed down a definitive decision that recognized that the 27 Brazilian States are authorized to institute their own lotteries just as the Federal Union does. Several states have already started procedures to choose private companies to implement their operations.

Following long debates in the Congress and in the civil society at large, Bill PL 442/91 ,  – submitted in 1991 (!) – was finally approved on February of 2022, at the House of Representatives, legalizing a wide array of modalities of gambling in the country. This Bill is now pending approval in the Federal Senate, as PL N° 2234, of 2022. In terms of political calendar, the next step will be the Senate approval, delayed by the Presidential election, and expected to take place during this year. The approved Bill will then be sent to the President for sanction / promulgation and, subsequently, the Ministry of the Economy (or State Governments by delegation) will enact the respective implementation regulations.

This Bill (PL 442/91, now PL N° 2234, of 2022) legalizes the following modalities of games:

i) Casino games;

ii) Bingo games;

iii) Online games;

iv) Jogo do bicho;

v) Turf betting;

vi) Games of skill.

A federal-level National System of Games and Bets (Sinaj) is to be setup, and the Bill also foresees the necessary creation of a “federal regulatory and supervisory agency” for the sector, with powers to be defined in the regulations creating it, to be enacted by the federal Ministry of the Economy.

It will also be necessary to create a proper legal and regulatory framework. More likely, several legal and regulatory frameworks for different modalities of gambling. According to the Bill, the licensing of gambling activities will be made by the [federal] Ministry of the Economy and the licensees can only be legal entities with a restricted corporate purpose that needs to include in their denomination the expression “entity operating games and bets”. Albeit this Bill-Law is a very good first step, it is important that the Brazilian authorities understand that a more complete and comprehensive legal framework, that complies with international standards, is of paramount importance. For many reasons. Namely because large casino and gaming and betting operators, their investors and financing entities of sizable investments in integrated leisure complexes with casinos need such a legal and regulatory framework in place. While casino resorts may still be a few years from becoming a reality in Brazil, it will take time to set up a proper and comprehensive legal and regulatory framework that may be prepared in tandem with the political calendar of legalization via approval of this Bill and enactment of the subsequent regulations.

The Bill allows publicity of games of chance with the usual restrictions (Art.s 79-80). However, advertising of the games and of betting is bound to social responsibility and the search for awareness of responsible gambling (Art. 77). Publicity and marketing of operators or brands not licensed in Brazil is forbidden (Art. 78).

Credit for gaming is prohibited, in whatever form (Art.s 46, 56 VIII).

The Bill does not create restrictions for Brazilian nationals on the access to licensed casinos and other gaming or gambling venues. We also did not find restrictions on payment processing for the gaming and betting operators duly licensed (except when credit is involved).

The Bill is extensive and covers several other matters, including some rules on suitability, financial capacity, the integrity of gaming, gamblers’ rights, responsible gambling, gaming supervision and monitoring, auditing and accounting, prevention of money laundering and counter-terrorism including internal governance, controls and procedures, administrative infractions and penalties, crimes against gaming and betting.

Bingos

In the case of bingo, the Bill permits its operation on a permanent basis only in “bingo houses” (Art. 59 et seq). The minimum area for a bingo house is 1,500 square meters, where up to 400 video bingo machines can be operated. Slot machines are banned from these establishments. A maximum of one bingo house license per 150,000 inhabitants will be allowed. Bingo houses must have a minimum capital of R$ 10 million. Municipalities and the Federal District (DF) are allowed to explore bingos in stadiums with capacity >15,000 fans. Brazil has 5,568 municipalities and c. 215 million inhabitants; it is estimated that there will be up to 7,000 bingo houses in Brazil.

Licenses for a bingo house will be for 25 years, renewable for the same period (Art. 64).

Jogo do Bicho

Licensees of the jogo do bicho must have a minimum share capital of R$ 10 million and reserve of funds as guarantee for payment of the obligations and duties stipulated in the project, which may be in the form of a cash deposit, guarantee-insurance or bank bond, except as regards the prizes. There may be a maximum of one operator of this game per 700,000 inhabitants of the State or DF. Redeeming prizes up to the income tax exemption limit will not require identification from the bettor (Art. 67 et seq). The license will be for a period of 25 years, renewable for the same period if the requirements are met (Art. 69).

Casino Gambling

According to the Bill, casinos can be installed in resorts as part of an integrated leisure complex that must contain at least 100 high-end hotel rooms, meeting and event venues, restaurants, bars and shopping centers. The physical space of the casino (not equivalent to gaming floor) cannot be >20% of the built area of the complex (Art. 50).

For the determination of the specific areas where casinos can exist, the Executive Branch should consider the existence of tourism heritage and the economic and social potential for the development of the region (Art. 52).

The number of casinos spread throughout Brazil will follow its demographic density. States with more than 25 million inhabitants (São Paulo alone, for now) may have three casinos, between 15 and 25 million (Rio de Janeiro and Minas Gerais) two, and less than 15 million only one (Art. 53).  Additionally, the Executive Branch may grant the operation of casinos in leisure complexes for up to two establishments in States with a size of more than 1 million square kilometers (Amazonas and Pará) (Art. 53, § 3).

A given economic group cannot operate more than one casino per State (Art. 53, § 1).

Tourist casinos

In locations classified as tourism hubs or destinations (by the Ministry of the Economy), a casino may be allowed, regardless of the population density of the State in which it is located. The proposal defines these tourism hubs or destinations as those that have regional identity, adequate infrastructure and offer of tourist services, high density of tourists and title of natural heritage of Mankind, besides having tourism as an important economic activity. Nonetheless, a tourist casino cannot be located less than 100 kilometers away from any casino within an integrated leisure complex (Art. 52, § 2~5).

Riverine and maritime vessel casinos

The Bill still foresees the operation of casinos in river vessels, one for each river with 1,500 km to 2,500 km long; two for each river with an extension between 2,500 km and 3,500 km; and three per river with an extension longer than 3,500 km. These vessels may not be anchored in the same location for more than 30 consecutive days (Art. 54).

It will also be possible to operate casinos in maritime vessels, within Brazil’s “national territory”, with a cap of up to ten establishments / vessels (Art. 55).

Both river and maritime vessels ships must have, at least, 50 high-end rooms, meetings and events venues, as well as restaurants, bars and shopping centers (Art. 56, § 3º).

Public tender

Casino gaming exploitation will be possible only for holders of a license (Art.s 2º X, XVII, 11 IV, 19, 22 II, 27, 28, 29, 30, 31, 32, 35, 76 III, 78, 94 I, 96 IV, V, VII, 100, 119) to be granted by the federal Ministry of the Economy. With a few exceptions, the adjudication of a license will be made following a public tender (in the technical and price modality) (Art. 53, § 2º).  As regards its term, each license will be valid for 30 (thirty) years (Art. 56) renewable for the same period.

The selection criteria for the adjudication of a license in said public tenders are set forth in Art. 56: (I) the entertainment and leisure options committed to be offered; (II) investment amount committed and term for setting up the integrated leisure complex; (III) integration of the complex with the conditions of environmental sustainability of the area chosen for its implantation; (IV) preferential hiring of local human resources; (V) number of jobs to be created; (VI)  investments (by the licensee), in the maintenance of the casino, compliance with the rules of safety in the construction, expansion, renovation or reequipment of casinos; (VII) training programs – with effective use of the professionals trained – in hospitality, tourism and related services. For tourist casinos, the criteria (I), (II) and (III) shall not apply.

Modalities of casino games

The Bill does not limit the modalities of games to be explored by casino gaming licensees, mentioning specifically “games of cards such as blackjack or baccarat, electronic games and roulette, among others”, as well as “new modalities of games of chance, duly authorized” (Art. 51).

Electronic gaming and betting machines

An interesting precept of the Bill (Art. 45) stipulates that “electronic gaming and betting machines will be exploited in the proportion of 40% (forty percent) for the leasing company and 60% (sixty percent) for the bingo or casino establishment, on gross gaming revenue”. Apparently, bingo houses and casino gaming operators will not be allowed to own their own slot machines… Since Brazil is not exactly a powerhouse on the production of gaming machines and has no tradition on leasing of such machines, what is the public interest purpose of this odd restriction imposed by Federal Law?… And why to restrict the freedom of bingo and casino operators to decide if they want to buy or lease said machines? And why to impose such a precise and leonine split of GGR?… If the idea is to force mandatory partnerships with Brazilian companies, the Law should state it clearly. But it doesn’t. One cannot but wonder whose interests are being so keenly protected… One thing is certain, this does not bode well for the creation of a proper legal and regulatory framework.

Online gambling

The Bill legalizes online games with no limitations, but stipulates no precepts on the subject except that the exploitation of online games of chance is subject to regulations to be enacted by the Ministry of the Economy (Art.s 66, 76 § único).

Taxation

The taxation on the exploitation of all types of games legalized through this Law will be in the form of the Contribution for Intervention in the Economic Field focusing on Gaming and Betting (Cide-Jogos). This novel tax will be levied on the gross gaming revenue (GGR) of the gaming and betting licensees under this Law and subsequent regulations (Art. 102). The Cide-Jogos rate will be of 17% of the GGR, with exclusion of any other type of tax being imposed or levied over that income (Art. 103). Cide-Jogos will be paid quarterly (Art. 108). An additional 1% of the GGR will be paid directly by the gaming and betting operators to 3 entities for the financing of the training of athletes (Art. 102, § 3º).

A Supervision Fee on Games and Bets (Tafija) is set up, the Bill (Art. 101) stipulating amounts per licensed type of gaming operator or establishment.

Last but not the least, gamblers will be levied a 20% tax on the income arising from the net prizes (interesting to see how well it will work…) ≥ R$ 10.000,00, to be deducted ahead by the gaming or betting operator from said net prize.

In summary, assuming the Senate will honor the political agreement that led to the approval of this Bill and that President Lula will not veto it (his PT party used to be quite puritanic as regards the legalization of gaming and gambling…), this Bill is not only a good first step in the direction of creating a proper legal and regulatory framework, but also very appealing in business terms for the gaming and betting operators, especially for the fortunate ones that manage to get casino licenses in the main metropolitan areas of Brazil.

By Jorge Costa Oliveira

Partner and CEO of JCO Consultancy

Under Thai Law (Gambling Act BE 2478 (1935)), gambling is illegal even though the Kingdom permits betting on horse races, a government-sponsored lottery, on some Muay Thai fights. For a long time (at least a decade in terms of public political discussion), there have been rumours of the impending legalization of casino gaming in Thailand. Some nearby countries – Laos, Cambodia, Malaysia, Singapore – already legalized it in order to attract foreign tourists, to diversify the touristic products available and to increase government revenue.

On January 12, Thailand House of Representatives approved (by an overwhelming majority) a report prepared by a special House committee studying the feasibility and economic value of the legalization of gaming in Thailand, including allowing integrated resorts (IR) (“mixed-use entertainment complexes”) with casinos. The report has a comprehensive nature, covering not only several modalities of gaming to be eventually legalized but also social concerns related to the negative aspects of gaming. Following this report, further studies are to be conducted, namely by the government, examining the potential benefits and drawbacks of legalized casino gaming and other modalities of gaming and gambling.

The approval of this report may well be the first step toward the legalization, under an appropriate legal and regulatory framework, of IR with casinos in Thailand. Nonetheless, the political calendar of casino gaming legalization is still uncertain. It is necessary for the Thai government to commit to implementing it. High-level political circles in Thailand consider that, albeit this feasibility report is important in showing wide-spread political support for regulated gaming, no governmental decision will be taken prior to general elections scheduled to take place on the 7^th of May of this year. Apparently, only the government emerging from this election will take a decision proceeding to launch legislation regarding the legalization of IR with casinos and other modalities of gaming.

The feasibility report approved by the House proposes that one or more IR with casinos be located in one of the 22 tourist provinces or in the Eastern Economic Corridor (EEC). Some media mention five regions to be allowed to have said IR with casinos.

Apparently, the feasibility report also proposes that access to casinos be restricted to only foreigners and “mature and wealthy Thais”. This is an issue that will certainly be discussed until the latest stages of approval of legislation legalizing IR with casinos.

Curiously, for some, what is worrying is not so much the existence of IR with casinos. For relevant sectors in Thai society, the “real concern” is that this House feasibility report also recommends “the legalization of online gambling such as online bingo, baccarat, betting on government lotteries, the stock exchange index, foreign exchange rates and gambling on the results of international and local sporting events, including horse races and e-sports and, believe it or not, elections.” Apparently, there is a serious concern with “major gambling debts that were wracked up by [Thai] youths during the recent Fifa World Cup”.

Thailand is already a powerhouse in terms of tourism. From 2010 to 2019 the number of tourist arrivals in Thailand increased from 16 to 40 million: from 2015 to 2019 it grew 32.3%. In 2019, 16.6 million came from East Asia (11 million from China) and 10.6 million from ASEAN countries. Then come 6.7 million from Europe, 2.4 million from South Asia and 1.6 million from the Americas, 0.9 million from Oceania and 0.7 million from the Middle East. The numbers of tourist visitors will certainly increase due to IR with casinos and the average expenditure will likely grow in a higher percentage. The main civil aviation hubs of Thailand are the cities / provinces that can benefit the most from this coming legalization of casino gaming. The Bangkok Metropolitan Area is already a fully integrated entertainment area covering a very wide range of fields – e.g., hospitality, retail, leisure. Yet, other tourist areas – such as Phuket, Pattaya, Chiang Mai – in the country, whilst not as comprehensive and in a smaller scale, also boast plenty of entertainment features that can blend well with IR with casinos. Any of these areas has tremendous potential. In fact, many medium-size cities with international flights may benefit greatly with IR with casinos. For many years it is unlikely that China will authorize national low-cost air companies, although tier-2 and tier-3 cities in China keep pressing and getting international flights. This has allowed Thai low-cost air companies to grow significantly with flights to/from China. Until recently (pre-pandemic), most of the Chinese visitation demand was for Bangkok, with some flights to Phuket. More and more, other destinations in Thailand are getting in the radar. More medium-size Thai cities will definitely increase significantly their Chinese (and Asian) tourist visitation if they have an IR with casino.

In case Thailand proceeds towards legalization of casino gaming, it is important to create a proper legal and regulatory framework. Not only because it is the right thing to do, to comply with international standards and to protect its citizens. But also, because large casino operators, their investors and financing entities of sizable investments in IR with casinos need such a legal and regulatory framework in place. While casino resorts may still be a few years from becoming a reality in Thailand, it will take time to set up a proper legal and regulatory framework and probably should be prepared in tandem with the political calendar of legalization.

Casino gaming in Thailand will be legalized, and regulated, at a time when there are already two very large casino gaming centres with IR in Asia – Macau and Singapore. The mass market operation in Thailand will be fuelled by Thai nationals (depending on the entry restrictions imposed by law) and from foreign visitors probably in the proportion of the countries / regions of origin. Given the high propensity for gambling and higher wagers placed by Asian visitors, it is likely that these are the main marketing target group. Assuming Thailand will legalize, and regulate, credit for gaming – as every relevant casino gaming jurisdiction in the world has done, and in order to avoid the reminiscence of underground operations – the VIP segment of gaming has incredible potential. At present the VIP gaming operation in Macau has suffered from the repression and criminal prosecution in 2021 & 2022 of some of the most relevant Macau gaming promoters. Although VIP gaming is far from dead in Macau, the uncertainty arising from this repression and criminal prosecution will remain for years. Singapore, with its beatifically hypocritical posture regarding junkets – only junkets clean as a whistle!… – will never be a desirable market for the Chinese VIP gaming operators and for whom “operational junkets” in external jurisdictions are fungible. For some time, Thailand has a fantastic window of opportunity of capturing a sizable portion (1/3? – 1/2 ?) of this Chinese VIP casino gaming business, whose magnitude is at least one trillion USD in wagers and 30 billion USD in gross gaming revenue per year. If Thai decision-makers are shrewd, they should seize this opportunity and pay significant attention to VIP gaming, without prejudice to other pertinent and relevant matters involved in the legalization of casino gaming.

A few days ago, the Macau government publicised the casino gaming contracts entered into with the concessionaires. We are still waiting for the publicisation, in the government website or somewhere else, of the substantiated report underlying the adjudication of the six concessions.

It is the document prepared by the tender committee for the Chief Executive where the tender committee explains the reasons for the decision regarding the adjudication of a concession to some companies, the scoring weight given to each criterion set forth in the law and eventual adjustments and why. In the 2001-2002 casino gaming tender, the Substantiated Report then made was not only notified to each tenderer but also publicised for one month on the Macau Government webpage. What is the government waiting for to publicise it?

As regards the investment plans referred to in the casino gaming concession contracts entered into between the government and each of the tenderers-concessionaires, the information contained in the concession contracts is very scarce, close to none. Apparently, Macau concessionaires will have to invest significant sums in non-gaming areas. However, although Macau casino gaming concessionaires have made brief statements on the non-gaming investments that each of them commits to making in the coming 10 years, the Macau government has not given any details on the subject. We know the overall amount of committed investment for each concessionaire – quite diverse between them and again with no explanation on how they were reached – since it is mentioned on the 8-lines Appendix to each concession contract. But these amounts refer to gaming and non-gaming investments altogether and they can be made, “namely” (!) in a myriad of “areas: (1) Origin of international visitors; (2) Conventions and exhibitions; (3) Entertainment shows; (4) Sporting events; (5) Culture and art; (6) Health and well-being; (7) Thematic amusements; (8) City of gastronomy; (9) Community tourism; (10) Maritime tourism; (11) Others”. This amazing contract drafting technique does not bode well for any purpose.

As per clause 41 of the concession contracts, these investments can be made directly or indirectly. And each concessionaire is bound by the commitments it assumed to do during the tender process (clause 30, 33, 36 of said contracts). Again, we do not know what investment commitments were made during the tender process, apart from some brief references made by the concessionaires.

Some of the intended investments alluded to by the concessionaires seem to be in line with the goals – set forth in the “Outline Development Plan for the Guangdong-Hong Kong-Macau Greater Bay Area” – of making Macau a global tourism and leisure centre, as well as a platform to facilitate multi-cultural exchanges.

Many wonder if is wise to expect that companies that have expertise in running integrated resorts with casinos will excel in other fields of the economy. But one may be making assumptions or considerations based on what one does not know but through brief references by the concessionaires. Hence the need to have the alluded investments publicised.

Also, to give the casino gaming operators the possibility of entering many other sectors of Macau’s economy, deepening even more the dependence of Macau’s economic tissue from the casino gaming sector is a questionable strategy. It certainly does not help as regards the creation of local critical mass in other fields of the economy. Given the huge influence that Macau casino concessionaires (half of which have their mother-companies in the US) will have in Macau’s economy within a decade, let us hope that the Macau Government made this political choice in strict articulation with China’s Central Government.

The fact that such unnecessary opacity surrounds the greatest innovation underlying this tender is hardly understandable. The Macau Government certainly wants the Macau residents to know about the non-gaming investments that are going to change Macau’s economy. At a time where China’s Central Government reiterates statements on efforts to improve government transparency in China, the Macau Government seems to move in the opposite direction. Let us hope this is but a delay and that the Macau Government publicises the non-gaming “investments” in the order of dozens of billions. And the Substantiated Report.

By Jorge Costa Oliveira 

Macau’s economy has gradually become more and more dependent on China. This is particularly true as regards casino gaming, a sector where more than 90% of visitors and income generated have their source on Mainland Chinese visitors. Since the COVID pandemic, visitation and casino gross gaming revenue (GGR) dropped significantly. According to the Macau Gaming Inspection and Coordination Bureau (DICJ), Macau casinos’ GGR dropped from 292.45 billion (bn) HKD in 2019 to 60.44 bn HKD in 2020, 86.86 bn HKD in 2021 and mere 31.81 bn HKD until the end of the 3^rd quarter of 2022. Long gone are the predictions of S&P Global Ratings, expecting that Macau’s 2022 GGR might (at most) reach HKD 85.1 bn. The Macau government decided to open the casino gaming tender on July 28, 2022. In July 2022, Macau’s GGR plummeted to just 386 million HKD, the lowest monthly revenue result at any time during the COVID-19 pandemic, corresponding to a drop of 95.3% year-on-year.

It has been clear since at least the beginning of 2022 that China will not abandon its zero-COVID policy any time soon. Everyone knew it. It has been stated countless times by China’s central government and every China analyst. Some had hoped that this policy might change after the 20^th CPC Congress, but most of the analysts saw no indication of any change in its sanitary policy. The 20^th CPC Congress came and the zero-covid policy was reiterated with no mention to any gradual approach on lifting it.

Macau’s overwhelming dependence on visitors from Mainland China means that the Macau government’s leeway as regards the zero-covid policy is null. The occurrence of a covid outbreak in Macau, no matter how small, has led and may lead again to a closure of the borders.

As long as Mainland China maintains a zero-covid policy, enforced through strict lockdowns and massive testing, it is not reasonable to expect that visitation to Macau may increase; quite the opposite, it is probable that visitation from China’s Mainland will continue to be low and that businesses in Macau, starting with casino gaming, will continue to suffer in terms of overall revenue. Securities markets quickly realised this, and the stocks of casino gaming operators are at all-time lows.

Furthermore, the detentions in November 2021, followed by lawsuits and criminal charges brought against the two larger gaming promotion groups – Suncity and Tak Chun – and their directors, both in Macau and in Mainland China, led to the closing of most VIP areas in Macau casinos and created serious uncertainty as regards the future of the Macau VIP casino gaming segment (in 2019, ‘Baccarat VIP’ accounted for 46% of all table games’ GGR).

The casino concessionaires and subconcessionaires are seriously indebted given the significant drop on revenue since the beginning of the pandemic. In spite of their responsible stand during this period, it is not certain if they will be able to keep the jobs of the bulk of their workers and the commitments towards many service providers in Macau. Reports of Macau operators running low on cash and likely serious difficulties in terms of cash flow in the 2^nd quarter of 2023 are to be taken seriously. Given the financial situation of casino gaming operators, can anyone with common sense expect that they will adhere to significant commitments in the short-term involving additional risky financial exposure?

Law 16/2001, even prior to the recent amendments, allowed for an extension of the current concessions and subconcessions until June 2026 and, if necessary, the government could easily propose an extension of the number of years referred to in the Law.

Considering all the above mentioned, one must wonder why a casino gaming tender was opened at a time when there is an ocean of uncertainties – the continuation of the zero-covid policy in Mainland China with no end in sight, grave uncertainty on the VIP gaming segment, restrictions of visas for Mainlanders to come to Macau, uncertainty on the financial capacity of the casino operators. The Macau government is expected to act in a responsible manner. The fact that only one outside operator – Genting – came to the tender of the largest casino gaming center in the world speaks volumes. The leverage of the Macau government to press the tenderers to make better offers is clearly diminished, thus harming the Macau SAR public interest.

It is not too late for the Macau government to recognise the serious mistake it has embarked upon and to backtrack. Eventually, they decided not to proceed with any adjudication. And announcing a temporary extension of the current concessions and subconcessions. The Macau SAR’s public interest must prevail over the face-saving of a government that showed such an inconceivable level of incompetence.

文： 高德志

“2022年9月8日，我有幸參與由法國澳門商會與《Macau Business》合辦、以“處於十字路口的澳門博彩業：公開招標及招標以外”為主題的研討會。與會專家包括Sanford C. Bernstein全球博彩董事總經理兼高級分析師Vitaly Umansky，和2NT8有限公司董事總經理李達勝(Alidad Tash)。活動由《Macau Business》總監馬天龍(José Carlos Matias) 主持。是次網絡研討會關注的議題之一是澳門博彩業貴賓廳業務的未來。鑒於該細分業務的相關性，我認為更徹底地解決這一問題具重要意義。

有人認為，澳門貴賓廳市場已經殆盡，主要由於本地兩家主要的博彩中介人太陽城集團和德晉集團先後於2021年和2022年結束業務，其集團主腦相繼被捕及被刑事起訴。逾九成澳門貴賓廳業務來自內地市場，在分析人士看來，透過逮捕和刑事起訴相關集團主腦，北京當局發出一個明確的信號：不希望澳門博彩中介人到中國內地開展業務。此外，有跡象顯示，除了限制資金外流，中國政府還通過收緊簽證政策限制居民到訪澳門。

衡量這一分析的準確性具重要意義。能否假設我們所熟悉的澳門貴賓廳博彩市場——即，博彩中介人將內地豪客帶到澳門娛樂場並向其提供信貸，供其在貴賓廳耍樂——已經消亡並不再復返？儘管我們正處於充滿不確定的十字路口，但那些關於澳門貴賓廳博彩業務失去生命力的報道確實有點誇大其詞了。讓我解釋一下箇中原因。

首要考慮的是澳門娛樂場營運商不能冒險向來自內地的豪客貴賓直接推廣博彩活動，這是共識。對時刻需要保持其適用性的承批公司及其母公司而言，任何可能危及其特許專營權的潛在風險，以及在營運期間發生的違法行為均非好兆頭，不論是在澳門，還是在其他相關的司法管轄區。

因此，讓我進一步解釋，不應對澳門貴賓廳博彩短期發展感到悲觀的原因。

其一，作為澳門娛樂場博彩的組成部分，貴賓廳業務本身的關聯性，疫情爆發前數年的業績恰恰證明了這一點，即2017年至2019年的數據。2019年，貴賓廳百家樂毛收入為1,350億港元，佔賭枱總收入的46.2%；因為百家樂的贏率是 c.3%，當中包括薪酬45億港元；假設“拖底”確實存在（正如澳門法庭對周焯華的審判所證明的那樣），這一數字必定更高。這意味著，多年來，一個極度龐大的推廣網絡不惜一切努力將內地豪客帶到澳門。經營這一業務的公司不會在一夜之間消失，更重要的是，來自中國內地且在這一收益豐厚的業務領域擁有既得利益的關聯實體網絡不太可能願意放棄這一可觀的收入來源。

其二在於中國對澳門博彩中介人公司高管的刑事指控的性質。內地執法部門已對澳門兩大博彩中介人公司，即太陽城集團和德晉集團的領導人提起訴訟並提出刑事指控。據稱，這些刑事指控與有關集團領導人在中國以外的第三國經營線上博彩業務有關。長期以來，他們無視中國當局多次發出的警告是不明智的。就現有公開資料來看，溫州檢察院未就在澳門推廣博彩活動一事對周焯華提出指控。在那之前，以博彩監察協調局為首的澳門行政部門從不曾聲稱任何這些團體或其董事有任何非法行為，更不用說犯罪行為了。然而，鑒於對太陽城集團和德晉集團領導人高調的刑事指控，澳門執法部門陷入了尷尬的境地，不曾再三思考就倉促行動，逮捕了這些公司的多名董事，檢察機關亦對這些公司董事提出多項刑事指控。

其三，與上述原因有一定聯繫，就是中央政府沒有就澳門博彩中介人活動的合法性作出指示。據了解，沒有指示禁止澳門博彩中介人到中國內地經營。這一直是灰色地帶，並且可能會繼續如此。

第四個原因在於澳門博彩中介人的可取代性。回顧過去20年，我們可以看到澳門博彩中介人業務並不是一項穩定的業務。行業曾經發生變化、甚至變革，新公司和玩家不斷湧現，中國內地的網絡是這項業務的關鍵所在。無論是在嚴格的博彩推廣中，還是在涉及博彩信貸償還或收款方面，澳門主要的博彩中介人公司或將發生變化。但只要內地富裕的玩家有興趣到澳門賭博和娛樂，為他們提供服務的網絡，包括博彩信貸，就不會消失。澳門博彩中介人公司只是這些網絡的冰山一角。

最後是政治原因。在香港局勢不穩定的情況下，中國需要將澳門打造成可以向台灣和海外展示“一國兩制”政策行之有效的成功案例。儘管澳門經濟多元化過程承受壓力，但由於缺乏本地人才而缺乏臨界規模，意味著博彩業在不久的將來仍將是澳門特別行政區最重要的經濟範疇。製造障礙和困難以遏制行業發展是不明智的，否則這會危及澳門作為成功案例的發展。尤其是在中國經濟放緩的時候，中國公民的可支配收入和消費傾向不可避免地受到影響。

話雖如此，我們應該重點關注激勵本地博彩業務專營公司和本地博彩中介人從海外其他司法管轄區吸引貴賓顧客的重要性。吸引東南亞豪客而建立的網絡非常小；至於南亞、日本、韓國、俄羅斯等其他相關司法管轄區，此類網絡幾乎不存在。這不應僅僅依賴政府進行強化，還應通過推行激勵措施，即財政津貼，方能實現。 儘管如此，到目前為止，澳門娛樂場特許經營商所表現出的蔑視及博彩中介人缺乏其他市場網絡的事實，對於為此目的而創造的臨界規模來說並非好事。人們充其量將其視作中期目標。因此，人們不得不假設，未來數年的澳門娛樂場博彩貴賓廳業務將繼續由來自內地的顧客支配。

On September 8, 2022, I had the pleasure of participating in a webinar promoted by the France Macao Chamber of Commerce (FMCC), in partnership with Macau Business, revolving around the theme “Macau Gaming at Crossroads: The Public Tender and Beyond,” with Vitaly Umansky, Managing Director & Senior Analyst of Global Gaming for Sanford C. Bernstein, and Alidad Tash, Managing Director at 2NT8 Limited, that was moderated by Macau Business Director, José Carlos Matias. One of the key issues discussed at the webinar was the future of the Macau VIP gaming sector. Given the relevance of this sector, it is important to address it in more depth.

Some believe that the VIP market is dead in Macau. The main reason lies in the repression and criminal prosecution in 2021 & 2022 of some of the most relevant Macau gaming promoters—the Suncity Group (led by Alvin Chau) and the Tak Chun Group (led by Levo Chan). The VIP market operates 90%+ in Mainland China. For these analysts, with the said repression and criminal prosecution, the Chinese authorities have signalled clearly that they do not want Macau gaming promoters operating in Mainland China. Furthermore, there are indications that, on top of restrictions concerning outflows of capital, Chinese authorities are repressing visitation to Macau, via restrictions on visas granted.

It is important to assess if this analysis is accurate. Should one assume that the Macau VIP casino gaming market as we know it – i.e., based on bringing to Macau casinos rich patrons from Mainland China that gamble in VIP areas on credit granted to them by Macau gaming promoters – is dead and will not return? Although we are at a crossroads of uncertainty, the news on the death of the Macau VIP casino gaming segment has been greatly exaggerated. Let me explain why.

The first prior consideration, which is consensual, is that Macau casino gaming concessionaires cannot risk venturing into the direct gaming promotion for VIP patrons from Mainland China. The underlying risk for their concession and the possibility of incurring in operations violating the law might not bode well for the [required] suitability that these concessionaires and their mother companies need to have at all moments – in Macau and in other relevant jurisdictions.

This said, let me expound the reasons that should make us be not so pessimistic as regards the near future of the Macau VIP gaming promotion.

The first reason lies in the business relevance of this component of Macau casino gaming, as evidenced by the numbers of the last years of operation prior to the COVID-19 pandemic – 2017~2019. Macau VIP gross gaming revenue (GGR) in 2019 – taking “Baccarat VIP” game numbers as reference – was 135 billion HKD, which corresponds to 46.2% of total table games’ GGR; since Baccarat’s win is c. 3%, this involves wages of c. 4500 billion HKD; if one assumes the existence of side betting (as the Macau trial of Alvin Chau has shown to exist), the number is certainly higher. This means that, along the years, very large promotion networks have been working to bring to Macau rich patrons, mainly from Mainland China. The companies that have been running this segment of the market are not going to disappear overnight. More important, it is not likely that the vast networks of associated entities from Mainland China that have vested interests in this profitable line of business are willing to let go of this sizable source of revenue.

The second reason lies in the nature of the criminal charges brought in China against Macau gaming promotion companies’ executives. Mainland China law enforcement authorities have prosecuted and made criminal charges against leaders of two of the larger Macau gaming promoters – Suncity Group and Tak Chun Group. The criminal charges are allegedly related to online gaming operations run by top officers of these groups in third countries, outside China. They were unwise to ignore several warnings made by Chinese authorities through a long period of time. As far as one can see from available public information, there were no charges made by the Procuratorate of Wenzhou against Alvin Chau that concerns gaming promotion activity related to Macau. Until then, the Macau authorities, starting with the Gaming Inspection (DICJ), had never found any unlawful behaviour, let alone criminal practice, on any of these groups or their directors. However, given the high profile of the criminal charges brought against the leaders of the Suncity Group and the Tak Chun Group, the Macau law enforcement authorities felt embarrassed and, without pondering much the consequences of its hasty actions, arrested several directors of those companies and the Macau Public Prosecutor’s Office made a number of criminal charges against directors of those companies.

The third reason, somewhat linked with the prior one, stems from the absence of instructions given by China’s Central People’s Government regarding the lawfulness of the activity of Macau gaming promotion companies. As far as it is known, no instructions were given to prohibit Macau gaming promoters from operating in Mainland China. This has always been a grey area and probably will continue to be so.

The fourth reason lies in the fungibility of the Macau gaming promotion companies. If one looks at the last 20 years, we can see that Macau gaming promotion has not been a steady or stable activity. It has changed, evolved, and many new companies and players have popped-up. The most important part of this activity lies in the networks that exist within Mainland China. Both in the strict gaming promotion, and as concerns the gaming debts settlement or collection inherent to the gaming credit granted. It is possible, and probable, that there will be changes in the main Macau gaming promotion companies. But as long as rich Chinese patrons are interested in coming to Macau to gamble and for entertainment, the network providing services to them, including credit for gaming, will not disappear. The Macau gaming promotion companies are but the tip of the iceberg of those networks.

The fifth reason is political. With an unstable situation in Hong Kong, China needs Macau to be a successful case that can be shown to Taiwan and abroad, a good example that the “one country, two systems” policy works and helps the development of a Special Administrative Region. Notwithstanding the pressure for the diversification of Macau’s economy, the absence of critical mass by lack of local talent means that the gaming industry will continue to be the most important economic sector in the Macau SAR in the near future. To create too many obstacles and difficulties that hinder this industry is unwise, under penalty of jeopardizing Macau’s development as a successful case. Especially at a time where China’s economy is slowing down, with the inevitable repercussions on Chinese citizens’ disposable income and their propensity to spend.    

This said, one should emphasize the importance of motivating Macau casino concessionaires and Macau gaming promoters to bring VIP patrons from other jurisdictions beyond China. The networks set up to attract VIP gamblers from Southeast Asia are very small; as regards other relevant jurisdictions in South Asia, Japan, South Korea, Russia, such networks are virtually non-existent. That should not be done by mere government imposition, rather by creating incentives, namely fiscal. Nonetheless, it is clear that the disdain shown thus far by the Macau casino concessionaires and the lack of network by the current Macau gaming promoters for other markets beyond China does not bode well for the creation of critical mass to this end and will render it a medium-term objective at best. Therefore, one has to assume that in the next years the Macau casino gaming VIP market will continue to be supplied essentially by patrons from China.

Until 2002, Macau credit for gaming (usually mentioned as VIP gaming) was not only unlawful but a crime under Macau laws. Yet, the Macau authorities knew of it, acknowledged its existence and allowed its continuous growth. Given that it accounted then for 2/3 of the overall GGR, and the situation was untenable in the medium term, public policy changed and casino gaming credit was regulated and brought into the boundaries of lawfulness. A specific Law (no. 5/2004) was enacted and casino gaming concessionaires (and sub-concessionaires) and gaming promoters were allowed to grant credit as long as they had agreements with casino (sub-)concessionaires. Gaming promotion was regulated (RA no. 6/2002) and their activity subject to licensing and supervision from the Macau Gaming Inspection (DICJ).

In the beginning of the casino gaming liberalization (2002~2007), casino gaming promoters (junkets duly licensed in Macau) were the traditional way of granting credit for gaming to patrons from jurisdictions on which said activity – or at least the collection of gaming debts – was unlawful. And, given the previous practice of S.T.D.M. of not accepting junkets but from Macau and Hong Kong (with very few exceptions for Thailand and Indonesia), all major relevant gaming promoters, working essentially with Mainland China wealthy patrons, were from Macau (and Hong Kong). This led to a thesis that gaming promoters were the local component of the Macau casino gaming industry, given that controlling shareholders of all concessionaires (and sub-concessionaires) were from outside Macau (USA, Australia and Hong Kong). This thesis was adopted by successive Macau governments and is critical to understand the posture of the Macau authorities towards the gaming promoters along the last 20 years. Gaming promotion is a fiscally protected activity with only a very low special tax being levied on their income. Gaming promotion companies were always allowed to operate with quite opaque very light organizational structures. No pressure was exerted on them to properly list, through normal IPOs with appropriate disclosure of information, in the Hong Kong Stock Exchange (HKSE) (or other stock exchanges); more than a dozen “back-door listings” were made, with the acquiescent silence of the Macau governments and the regulatory authority of the HKSE. The concentration of gaming promotion in large companies that internationalized their activities outside China was clearly stimulated or supported by DICJ and the Macau government until 2019.

The supervision of casino VIP areas – in practice jointly operated by a (sub-)concessionaire and a gaming promoter was always very loose and in two decades there were almost no Suspicious Transaction Reports (STRs) submitted for operations taking place there. Neither DICJ nor any Macau authority punished gaming promoters when they started to fund themselves through deposits received from Macau residents on which they paid significant interest rates, in a clear violation of Macau banking laws and regulations. Until 2019, a close proximity, bordering collusion, existed between DICJ casino supervision and some large gaming promoters (M. Assis da Silva became a member of the board of several Suncity Groupcompanies after his retirement from DICJ where he was the head of the casino gaming department and the de facto boss of DICJ for 15+ years). Since all casino gaming (sub-)concessionaires wanted the large amounts of GGR generated by VIP gaming, the most relevant Macau gaming promoters gradually managed, with the Macau government acquiescence, to get ever larger portions in sharing of gaming revenue in the contracts between them and the (sub-)concessionaires; in 2002 the sharing of gaming revenue followed a model of 40-40-20 (meaning 40% tax, 40% for the concessionaire, 20% for the junket); in 2010 the model had evolved to 40-5-55! Last but not the least, this sharing of gaming revenue model was deemed by the Macau governments as being excluded from the regulations that imposed a cap on the commissions paid by Macau casino gaming (sub-)concessionaires to gaming promoters.

Furthermore, given that Mainland China’s legal system deems unlawful any attempt to collect gaming credits and that no credit collection agencies exist, Macau authorities found normal that gaming promoters used alternative means to operate in the Mainland, namely via association with high-ranking military, police chiefs and / or members of “secret societies”. Anyone that has worked in Macau in the last 20 years knows the sense of impunity that Macau gaming promoters felt arising from the situation above described.

It is also quite relevant – namely at the eyes of China’s authorities – that Macau gaming promoters only focused in the Chinese market, especially in Mainland China; other markets of great potential, such as Japan, Korea, India, Russia, Thailand, Indonesia, Vietnam, were disregarded.

Since at least 2015 the government of the P. R. China has been fighting overseas online casinos catering for Chinese patrons and pressing foreign governments to prevent operators licensed there from targeting residents in China. The most noticeable cases have been Sihanoukville, in Cambodia, and POGO operators in the Philippines. As the Chinese government pressure mounted, Macau gaming promoters involved in such operations, especially in the Philippines, were repeatedly warned to change course, namely the Suncity Group. At the same time, China’s law enforcement agencies opened investigations regarding online betting by wealthy patrons of big Macau gaming promoters. The repeated disregard by relevant Macau gaming promoters of these concerns of the Chinese government led to waves of detentions in Mainland China of gaming promoters’ employees and sub-junkets, as well as their partners in gaming promotion and in gaming debts collection, and culminated in formal criminal charges being submitted against Alvin Chau, the head of the Suncity Group and, later on, against Levo Chan, head of the Tak Chun Group.

Only after such criminal charges in Mainland China did the Macau government decide to take action and the (sub-)concessionaires severed relations with the gaming promoters.

It is bearing in mind this historical background that one should look into the changes taking place in Macau’s casino gaming regulatory legal framework regarding gaming promotion.

The first note is that there is uncertainty as concerns said regulations. This is not a minor issue. It really needs to be well pondered. For now, the recent amendments to Law no. 16/2001 keep gaming promotion as a relevant activity but introduce restrictions to the gaming promoters’ activities: (i) a gaming promoter cannot work but with one concessionaire; (ii) the payment for the gaming promotion activity can only be through commissions (thereby forcing a change in their modus operandi).

But the main reason for said uncertainty is that it is still not clear to what extent will the activity of Macau gaming promoters be allowed in Mainland China.

The strict enforcement by Mainland China’s authorities of the unlawfulness of casino gaming promotion linked with credit gaming is likely to take place. A concerted action by the Macau government will most certainly bring credit for gaming back to be an underground activity. The idea that credit gaming for Mainland patrons will disappear by rendering gaming promotion in the Mainland unlawful did not work in the past and is wishful thinking. But it may lead to a significant reduction of Macau gaming revenue. Also, it will work as a catalyzer for competing markets in this sector – both in hypocritical Singapore (only good junkets…) and in about-to-liberalize Thailand.

In 1990 the first Cold War ended peacefully and the resulting stability benefited Europe, in particular Eastern European countries that became liberal democracies with flourishing market economies and joined the EU. Barely 30 years later, we seem to be on the brink of a new Cold War, this time between the US and China.

A new Cold War is not in Europe’s interest. Since the end of the first Cold War, the world has changed profoundly. A bipolar world of two hostile ideologies and irreconcilable economic systems – the historical background in the first Cold War – no longer exists. Europe is no longer divided by an iron curtain and the fear of becoming the battleground between NATO and the defunct Warsaw Pact has disappeared. The only remaining threat to the EU – Russia – still is a military power but hardly a serious menace when we look at its economic relevance – a developing-country economy based on the export of raw materials (oil, gas, coal, and ores), with a GDP < USD1,5 billion in 2020 (between Spain’s and Italy’s), a per capita income equivalent to Malaysia and a high income inequality.

Europe is no longer the centre of the world and transatlantic commerce is no longer the most relevant in international trade. The new global economic hub is shifting to the Asia-Pacific region and South Asia. It is also in these geographies that the new Cold War will unfold. The US wants to play an active role in this region, namely in terms of military hard power and is forging new alliances (AUKUS) and strengthening old ones to contain the rise of China (and, in the long run, India). It is not in the EU’s interest to get involved in this new Cold War in Asia-Pacific.

Europe has other more pressing matters to handle. It must continue to “straighten” European issues, starting with consolidating European integration and preparing the EU’s expansion to the Balkan countries and the rest of Eastern Europe with whom there are association agreements. Fiscal and monetary integration should be deepened as well as regional cohesion. Border control mechanisms and relations with buffer states (Turkey and Maghreb) need to be strengthened to ensure that the EU does not continue to experience uncontrollable economic migration flows. A policy of attracting young couples’ migration is needed to help reverse the European aging trend. And it is essential for Europe to assume its strategic autonomy in defence matters, to allow for effective independence from the US, at least as regards the European area.

European leaders should also acknowledge that, despite the EU countries’ combined military expenditure (€198 billion in 2020) being more than triple that of Russia (€55 billion), the EU’s main strength is not nor will it be on the military component. Europe’s might lies essentially on its soft power. The strong European soft power comes from factors such as being the main humanitarian and aid-to-development donor in the world. As well as from its cultural diversity, its tolerant society, its social welfare system, its social mobility, the creativity of its scientists and entrepreneurs, its educated workforce, the disruptive capacity of its SMEs and its export-oriented industries. Europe is attractive for its political stability, functioning governments, reliable legal systems and relatively low rates of corruption – qualities that are rare in today’s world.

Furthermore, recent surveys show that the vast majority of EU citizens does not want Europe or its European country to be involved into a new Cold War.

Lessons can and must be drawn from the recent European stance on several disastrous US-led military interventions and the implosion of nearby states such as Libya and Syria. It is in the EU’s interest to use its military and economic might to impose a Pax Europea in the Mediterranean area. It’s not in Europe’s best interest to get involved in adventures in the Indo-Pacific, let alone as squires of its American allies.

Macau Business | January 2022

In 2013 China launched the new Silk Roads project, initially called the “Silk Road Economic Belt”, which included six main economic corridors (linking China with: Mongolia and Russia; countries of Eurasia; Central Asian countries; Pakistan; other countries in the Asian subcontinent; and Southeast Asian countries) and a sea route (the “Sea Silk Road of the 21st Century”) that initially comprised the Indo-Pacific maritime routes connecting to China; together they were called “One Belt, One Road” (一带一路) and, more recently, renamed, in English language, the “Belt and Road Initiative” (BRI).

The BRI sets five main priorities – policy coordination; infrastructure connectivity; trade unimpeded; financial integration; and connect people – and comprises a massive program of investments in infrastructure and logistics development – ports, highways, railways and airports, as well as power plants and telecommunications networks.

The initiative was widely welcomed – by March 2020, 138 countries had signed MoUs with China on BRI. These countries hope to benefit from additional investment in infrastructure and logistics. In addition, these corridors and routes facilitate the access of products from these countries to the Chinese market and help Chinese products to enter or grow in those countries’ markets, as well as facilitating the internationalization of Chinese companies and the relocation of part of their industrial capacity. Hence the reference to mutual benefit (“win-win”) as a characteristic of the BRI. Since 2018, enthusiasm for the BRI has been decreasing, for several reasons, among which the reduction in Chinese outwards FDIdeserves to be highlighted.

In the meantime, the US and some European and Asian countries that expressed reservations to this Chinese initiative, launched similar initiatives, aimed at decreasing Chinese influence and increasing access to or integration with markets in several developing countries. The USA, Japan and Australia launched in 2019 the Blue Dot Network (BDN). And in 2021 the G7 promoted the Build Back Better World  (B3W),  through which, and based on the BDN’s assumptions, the G7 countries pledge to help mobilize 40+ trillion dollarsin infrastructure needed in the countries in development by 2035. The initiative aims to mobilize private-sector capital to catalyze financing for quality private sector infrastructure in four areas of focus – “climate, health and health security, digital technology and gender equity and equality”.

Finally, the EU launched at the end of 2021 the Global Gateway,the new European Strategy “to boost smart, clean and secure links in digital, energy and transport and strengthen health, education and research systems across the world.” It stands for “sustainable and trusted connections that work for people and the planet, to tackle the most pressing global challenges, from climate change and protecting the environment, to improving health security and boosting competitiveness and global supply chains.” Global Gateway draws on the new financial tools in the EU multi-annual financial framework 2021-2027. This strategy foresees the use of recent financial instruments, in particular the European Fund for Sustainable Development+ (EFSD+) – albeit with a somewhat limited financial envelope. Particularly interesting (especially for Portuguese companies) is the possibility of creating a European Export Credit Line.

In this increasingly multipolar world, China, the US and the EU compete with each other in terms of image projection, in an attempt to win the sympathies and hearts of billions of citizens in developing countries.

Current international conflicts are disputed in terms of soft power, global communication and access to relevant markets and natural resources and commodities. No longer just between the great traditional powers but also between them and several emerging powers.

This competition is globally positive for developing countries and international trade. Yet, it is moving to see so many global powers committed to supporting the creation of “quality infrastructure” in countries where basic infrastructure is scarce after decades of “cooperation” and “aid to development”.

Macau Business | October 2021

For years most Chinese FDI in Africa was done by Chinese State-Owned Enterprises (SOEs). But more and more Chinese private investment is pouring into the continent; the proportion of FDI from Chinese Private-Owned Enterprises (POEs) in Africa relative to FDI from SOEs on the continent has been steadily increasing – from 29%-71% in 2009 to 49.9%-50.1% in 2019.

One of the reasons why Chinese private FDI is flowing to Africa is due to demographic projections.

The Chinese population is aging rapidly. The 2020 Census revealed that 18,7%  of the Chinese population was aged 60 years or older. In 2050 the average age is expected to be 51 years old; it is estimated to be 43 in the US and 47 in the EU. By 2060, a third of Chinese citizens will be over 65, making China one of the oldest countries in the world. China is aging before it gets rich. When the US, Japan and South Korea reached the 12.6% mark of the elderly population (people ≥ 60 years old), their average GDP per capita was US$ 24,000. With the same level of aging, China’s GDP per capita was US$ 10,000.

According to the UN Population Survey, 2019 review, by 2034 Africa’s workforce is expected to surpass that of China and India combined. By 2050, the African population is expected to be 2400 million (half of whom will be under 25 years old), with Sub-Saharan Africa, a region inhabited today by c. 1340 million people, expected to be in 2050 c. 2117 million people; it is the region where most Chinese investments in Africa have been made.

This demographic evolution coincides with a continuous migration from the countryside to cities, especially to metropolitan areas. According to a  2014 paper by Hoornweg, Daniel & Pope, Kevin, 44 of the world’s 101 largest mega-metropolises in 2100 will be African.

Africa’s young workforce, concentrated in urban areas, is exactly what many Chinese companies – eg, labor-intensive manufacturing entrepreneurs – look for in Africa. At a time when many factories in China have difficulty finding workers, who are getting older and with higher labor costs.

Furthermore, African needs for infrastructure of all kinds – health, transport, energy, water, sanitation – associated with the scarcity of capital, a low degree of industrialization, low technological capacity, large gaps and needs in the areas of education and training, abundant untapped natural resources and fledgling agriculture open up immense opportunities for foreign companies. More and more POEs are entering African markets, bringing technical expertise, Chinese machinery and equipment, technology platforms suitable for emerging markets, business models integrated with Chinese and Southeast Asian markets, and supported by financing mechanisms that facilitate them the necessary funds. This presence of Chinese companies in Africa is not temporary and will continue.

Companies from Portuguese-speaking countries – many of which have adequate technical capability and good network in various African markets – can benefit from partnering with Chinese companies. In the case of companies from Portugal, such partnerships are already foreseen in a 2016 Agreement between the Portuguese and Chinese governments regarding tripartite entrepreneurial cooperation in third geographies.

Macau Business | September 2021

China is aware of the power FDI has had in transforming its own economy. Africa today bears similarities to the China of four decades ago.

In 1978, when China began its policy of “Reform and Openness”, it had a population of 956 million with an average age of 21.5 years; Africa today is home to 1,340 million people, with an average age of 19,7 years – a huge, young and low-cost workforce, eager to learn and desperate for a better life, as much as China then. Africa still contains countless mineral riches and abundant arable land, most of which is still uncultivated.

Although Africa represents 16.7% of the world’s population, the Outward FDI stock on the continent is only 2.6% – €812 billion (bn) of the world total in 2019. China’s FDI stock in Africa was the fifth largest in 2018 at €39 bn, behind the Netherlands, France, USA and UK. However, between 2014 and 2018, China’s OFDI stock in Africa increased by 43.8% while France, UK and US stocks fell by 11.7%, 26.9% and 30.4%.

OFDI flows from China to Africa amounted to €81.5 bn from 2005 to 2019, representing only 7.8% of the Chinese OFDI stock in that period.

Between 2005 and 2019, only 6.5% of Chinese OFDI in Africa went to North Africa (compared to 31.6% of global OFDI in Africa), the bulk of Chinese OFDI in Africa went to Sub Saharan Africa (SSA). A third of Chinese OFDI on the continent went to West African countries. 53.6% of Chinese OFDI flows to SSD are concentrated in just six countries: South Africa, DR Congo, Zambia, Nigeria, Angola and Ethiopia (v. table 1).

Among these top six recipients of Chinese OFDI in SSA, the patterns of investments differ

considerably in terms of targeted industry sectors. In the more economically developed South Africa, Chinese OFDI has been more diversified across sectors (autos, construction, oil, copper and other metals), as well as in Nigeria (hydro, railways, oil & gas, real estate, autos), while its investments in Zambia and the DR Congo were concentrated on mining sectors (copper, cobalt and other metals; real estate is also relevant in Zambia); in Angola its investments were concentrated on construction (in a much smaller scale, also in manufacturing) whilst in Ethiopia they were concentrated mainly on manufacturing.

Significant Chinese OFDI in SSA’s natural resources – oil, natural gas, minerals and metals, for construction materials – indicates China’s continued interest in the region as an important import source of key raw materials for its development. But overall, the two largest sectors where Chinese OFDI in Africa is most relevant are construction and energy. The value of Chinese construction projects on the continent is very high and signals that Africa is a priority for Chinese infrastructure projects. From 2005 to 2019, Chinese companies signed 544 construction contracts in Africa with a global value of €228 bn (main destination countries: Nigeria (€ 21.7 bn), Algeria (€ 20.2 bn), Ethiopia (€ 19.7 bn), Egypt (€ 18.2 bn), Angola (€ 17.3 bn)), which is equivalent to around one third of the total value of construction projects by Chinese companies around the world. And 38% of Chinese FDI in Africa went to the energy sector – from hydropower plants to gas exploration. Since 2010 a third of Africa’s electricity grid and energy infrastructure has been financed and built by Chinese companies.

These huge investments in construction and energy are driven by their strategic relevance and the potential for Africa’s economic growth and long-term returns and are made mostly by large Chinese State-Owned Enterprises (SOEs).

Interestingly, despite the importance of investment by SOEs in these sectors, already by 2010 around 90% of Chinese companies investing in Africa were private, according to the Chinese Ministry of Commerce. And the share of Chinese private companies’ OFDI in Africa vis-à-vis Chinese SOEs’ OFDI in the continent has been steadily increasing – from 29%-71% in 2009 to 49.9%-50.1% in 2019 – in line with the same trend on the overall proportion of SOEs and Non-SOEs in China’s OFDI stock.

In a next article, we will address the motivations of these private companies’ investment in African countries, that are not similar to those of the SOEs.

Macau Business | August 2021

Notwithstanding the “trade war” between the US and China, the endless “black lists” of Chinese companies in the US, the anti-China speech of the new Biden Administration, and the US government’s barrage of criticism of the EU-China Comprehensive Agreement on Investment (CAI), signed in late 2020, the truth is that the US and China signed in early 2020, and maintain in force, an Economic & Trade Agreement; this Agreement is called “Phase 1”, ie, it is intended to be deepened in subsequent phases.

This US-China Economic & Trade Agreement is at least as complex and broad as the EU-China CAI and includes, in line with the narrative then prevailing in the US Administration, an obligation by China to purchase large quantities of American products.

Reading international news, one would assume that the growing deterioration of relations at various levels between the US – the only current superpower – and China – the largest of the new emerging powers – would prevent the existence of such an Economic & Trade Agreement. But not only did it not prevent it, as the Economic & Trade Agreement was not denounced, rather negotiations are ongoing aimed at deepening it.

Behind the diaphanous cloak of the official American rhetoric about a “new consensus on China” – implying a global demonization of China in direct proportion to its growing international relevance – is a pragmatic policy of cool-headed American policymakers aware of the difficulty in having a consistent American policy beyond a general internal consensus of “getting tough on China”.

American elites and think tanks have realized that the current trade war won’t accomplish practically anything and want to end it; but they are well aware of the internal political difficulty of maintaining some constancy of course and of articulating contradictory interests – on the one hand, American companies want access to the huge market of Urban China, yet on the other hand American leaders have projected so much its country as an evangelist for democracy and civil and political rights worldwide that they have become hostage to this discourse (with occasional exceptions when access to energy sources are at risk or when special circumstances may jeopardize the pax americana in a specific geography).

And both US elites and political leaders are well aware that in the multipolar world we find ourselves in and in today’s international relations, economic interdependence is irreversible and often necessary. For instance, funding for the Biden Administration’s ambitious infrastructure, social and military investment plans requires no hesitation on the part of the major traditional US Treasury Bond takers (China is the second largest with c. 15% of the total), otherwise their interest rate will rise and influence similarly bonds issued by American companies, thus slowing the pace of post-pandemic economic growth. And indeed, China is unlikely to scale back bulk buying of US Treasuries.

In short, confrontational American rhetoric towards China serves to neutralize the matter in the US domestic political debate and American tabloid culture; but if we want to understand the real US policy we must follow closely the negotiations around the US-China Economic & Trade Agreement.

Over the past few years, especially in the last months of the Trump Administration, the U.S. government has been blacklisting many Chinese companies.

Macau Business | June 2021

There is a blacklist from the Department of Commerce, called the “Entity List”, which includes about 60 Chinese companies, for allegedly acting against the interests of national security or foreign policy of the United States. The specific grounds invoked for inclusion on this list vary; in the last addition, the “risk of access to American technology being used for military use by a potential enemy State” (in the case of SMIC and related entities) and “enabled wide-scale human rights abuses within China through abusive genetic collection and analysis or high-technology surveillance, and/or facilitated the export of items by China that aid repressive regimes around the world, contrary to U.S. foreign policy interests” (in the cases of DJI, AGCU Scientech, China National Scientific Instruments and Materials (CNSIM), Kuang-Chi Group) stand out.

But perhaps the most relevant blacklists are those of the U.S. Department of Defense (DoD), which includes “companies with connections to the People’s Liberation Army” (PLA) of the P.R. of China (“Chinese Communist Military Companies” – CCMCs) or what it designates as “strategy of Military-Civil fusion”, according to which “the PRC increases the size of the country’s military-industrial complex by compelling civilian Chinese companies to support its military and intelligence activities. Those companies, though remaining ostensibly private and civilian, directly support the PRC’s military, intelligence and security apparatuses and aid in their development and modernization.” Thus far, there are at least 5 DoD blacklists with 44 ‘CCMCs’ (eg., CCCC, CALT, CEC, CNCEC, ChemChina, CNECC, CTG, CSCEC, China Spacesat, Sinochem Group).

On November 12, 2020, the U.S. President Executive Order 13959 (EO 13959), “find[ing] that the PRC’s military-industrial complex, by directly supporting the efforts of the PRC’s military, intelligence, and other security apparatuses, constitutes an unusual and extraordinary threat, which has its source in substantial part outside the United States, to the national security, foreign policy, and economy of the United States”, prohibits transactions (except to divest) by or on behalf of U.S. persons in publicly traded securities of Chinese companies listed as ‘CCMCs’; further clarification on the intent of EO 13959 states that said prohibitions against U.S. person ownership of ‘CCMCs’ securities are to be applied anywhere in the world.

On December 28, 2020, U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) also published its initial list of entities subject to EO 13959, designating these entities “Non-SDN Communist Chinese Military Companies” (the NS-CCMC List). The NS-CCMC list, which was updated on January 8, 2021, includes the 44 DoD designations and also identifies a number of entities whose names exactly or closely match the names of companies identified under EO 13959. The entities added by OFAC came in conjunction with its announcement that NS-CCMC List would not automatically capture all subsidiaries 50% or more owned by the named CCMCs.

On January 6, 2021, NYSE announced to have commenced delisting proceedings against China Telecom Corporation Limited, China Mobile Limited, and China Unicom (Hong Kong) Limited to comply with EO 13959. In February 2021 delisting proceedings followed for CNOOC Limited. Many others will follow until the end of 2021, early 2022.

The Biden Administration has maintained this policy and apparently it will increase these blacklists. This U.S. stance is likely to lead to even greater restrictions on the interaction of American financial companies with these Chinese companies.

As the U.S. government reacts against the rise of China as a new superpower, engaging in a ‘trade war’, limiting the internationalization of Chinese companies in the USA market, blacklisting many of the most relevant Chinese companies from access to U.S. suppliers, market and finance, incertitude grows and a new international tension spreads around the world.

At the same time, the January 2020 “U.S.-China Phase One Trade Deal” is still in force, but its implementation will be difficult given the turbulent waters on trade between the two countries.

On the other hand, President Biden’s Infrastructure and Economic Recovery Plan is expected to cost more than $2 trillion and the American Families Plan roughly $1 trillion more. All this on top of $1.9 trillion for the Coronavirus Relief plan. A lot of this funding will come from Treasury Bonds and China is traditionally one of the main buyers…

In coming articles, we will look into the consequences of this backlisting of Chinese companies and the stance underlying it for international trade and investment, as well as for USA companies in China.

Macau Business | April 2021

At the end of 2020, the European Union (EU) and the People’s Republic of China concluded [an “agreement in principle” on] a Comprehensive Agreement on Investment (CAI). The aim of CAI is to create a more open, transparent and secure environment for greater future flows of investment; within an open multilateral trading system framework supported by both parties.

External trade and investment numbers are clear – the EU is the top destination for Chinese exports; China is the third destination for EU exports (after the USA and the UK). Between 2000 and 2020, EU companies invested around 174 Bn US$ in China and Chinese companies invested about 138 Bn US$ in the EU.

The most compelling reason for this Agreement lies in the strong desire of companies from both parties for market access. On the European side, the growth of the Chinese economy – which will be the largest in the world in 2050 with a GDP of c. 58 Tn US$ – makes it essential to have access to the Chinese market as soon as possible, in particular to the Urban China market (c. 875M persons in 2020; c. 1 Bn in 2030). Yet, Europeancompanies perceive major limitations to access the Chinese market on grounds of domestic development strategy and protectionism in some sectors. On the Chinese side, more and more companies want or need to internationalize themselves and the EU market is the most desirable market to this end, given its dimension and per capita income. Yet, there is growing scrutiny from EU national regulators, on grounds of national security and unfair competition.

On the other hand, CAI aims to level the playing fieldon the investment terms on the other party– e.g., binding China’s levels of openness, removing joint-venture requirements, lowering equity caps in some sectors, transparency in subsidies (namely as regards subsidies provided in the services sector) – and by removing strong restrictions or limitations – e.g., the strong restrictions in China on the financial services and telecommunications sectors.

Several relevant European companies already have a strong presence in China in the manufacturingsector. CAI brings commitments for access for EU companies in several services sectors in China, such as the financial services, international maritime services, environmental, construction and computer services, as well as in auxiliary air transport services, cloud services, and private health services.

The Chinese economy and consumers will benefit from fairer competitionin these sectors; sectors that have long been open in Europe to Chinese companies that have entered the EU market especially in the last two decades. China has already been opening gradually its financial markets to foreign investment; on other services sectors, CAI will contribute to opening up its markets further to foreign investment and letting the market play a decisive role in the allocation of resources. CAI also seeks to discipline the behavior of State-owned enterprises (SOEs) by requiring them to act in accordance with commercial considerations and not to discriminate in their purchases and sales of goods or services.

Furthermore, CAI aims to prohibit forced technology, with pledges of no interference in contractual freedom in technology licensing, protection of confidential business information and prohibition of investment requirements that compel transfer of technology.

Another relevant factor to put in the equation are the successive blacklists of Chinese companies formulated by the USA authorities that will not diminish; on the contrary, the Biden Administration will not soften the previous policy in this area, which will force many Chinese companies – mainly SOEs and technological ones, but not only – to leave the USA and look for new markets with similar level of income, capital and technology.

Despite the perception by many that Chinese capital is endless, the fact is that both for the BRI and for new waves of internationalization of Chinese [medium size] companies, capital available in China is insufficient. Therefore, it is paramount for China to create conditions for a constant flow of FDI into the country; as is essential to create the conditions for many of said medium size companies, having adopted international principles of corporate governance, to raise the funds required for their internationalization via IPOs in Europe.

The late March 2021 EU sanctions on Human Rights violations accusations and China counter-sanctions on the grounds of internal interference are inevitable. From a European point of view, the biggest hurdle to finalize CAI is having it approved by the European Parliament. Human Rights actions from the EU are inevitable and indeed necessary so that the European Commission and Council are not perceived as too aligned with China. In the end, European and Chinese business interests will likely prevail since CAI is crucial for EU and China’s interests.

Macau Business | March 2021

The latest “World Population Prospects: The 2017 Review” (‘The 2017 Revision, Key Findings and Advance Tables’), prepared by the Population Division of the UN Department of Economic and Social Affairs, contains forecasts that are worth considering and should serve as a reference in the definition of long-term strategies and public policies.

The world’s population will rise from the current 7.8 billion people to 8.6 billion by 2030, to 9.8 billion by 2050 and is estimated to reach 11.2 billion by 2100. The forecasts’ assumptions seem reasonable and realistic (e.g., reduced fertility rates yet remaining high in many developing countries; high probability of controlling or mitigating the effects of pandemic risks due to concerted action by national and international health authorities) and, albeit it is always difficult to try ‘reading’ 80 years ahead, even if  a particular specific forecast may be questionable, there are clear trends that deserve serious consideration and concerted action.

The most relevant novelty of this UN Population Survey is the significant increase in population in Sub-Saharan Africa. Today this region is inhabited by less than one billion persons (c. 13% of the world population); the Survey estimates that by 2050 it will have about 2 billion; and by 2100 it is expected to reach 4 billion persons (c. 36% of the world population).

This population increase is expected to occur across the African sub-continent. Nigeria’s population is expected to exceed that of the United States of America by 2050. And the population of Angola will grow six times (from c. 30 million in 2017 to c. 173 million in 2100). In turn, Mozambique is expected to move beyond current c. 30 million inhabitants to c.135 million at the end of the century.

On the other hand, the trend towards urban concentration shall continue. Much of this demographic evolution will take place alongside a continuous migration from the countryside / hinterland to cities, especially to metropolitan areas, which will become mega-metropolises. According to a 2014 study by Hoornweg, Daniel & Pope, Kevin (“Population predictions of the 101 largest cities in the 21st century“), 44 of the 101 largest mega-cities in the world by 2100, will be African, of which 10 located in Nigeria.

African countries will face tremendously demanding challenges over the next few decades. Of course, any policy decisions to be made in Africa must be the responsibility of its peoples and their representatives. The challenges that this population growth in Sub-Saharan Africa will cause can only be solved if there is a clear political will on the part of African governments and a clear commitment of their elites to the search for solutions. To this end, it is important that they live up to their responsibilities and have a position in line with the aspirations, objectives and strategies set out in the African Union’s ‘Agenda 2063’, eradicating corruption as well as selfish and predatory practices that still persist in many of those countries.

But these significant changes in African demography, albeit primordially an African peoples’ matter, will not only affect African countries and peoples. They will also affect all those that have a relationship with African countries and African people for historical, economic, geographical and other reasons. Therefore, the predictable incoming demographic explosion is also a relevant matter of interest for the international community and international organizations. And, although these challenges also pose opportunities, the first task is to determine what can be done to assist African countries in mitigating the effects of this population change.

In the short term the international community must endeavor to promote and support, in conjunction with the respective African authorities, programs and actions aimed at attempting to reduce those fertility rates, notably: (i) an increase in the use of contraceptive methods; (ii) the widespread promotion of the benefits of a small family; (iii) the promotion of women’s rights, with a special focus on their decision to use contraceptive methods; (iv) strong investment in the education and health sectors, particularly aimed at women; (v) incentives to bring about a decline in fertility rates.

Focusing on the medium term, policies need to be devised with these countries with a view to assist in their economic development. The Compacts entered into with several African countries under the G20 Compact with Africa (CwA) to promote private investment in Africa, including in infrastructure, is an excellent example of the kind of initiatives that need to be undertaken.

Several of the abovementioned short-term measures are contrary to the tradition and practices in many regions in Africa. But without them, the UN Population Survey predictions will take place with all the dramatic aspects that will ensue. In any case, the international community must prepare for pessimistic scenarios. Not only based on Murphy’s Laws, but because a cold analysis of History teaches us that the effectiveness of political intervention in generating structural change is low…

Macau Business | February 2021

Macau’s financial market is rather unsophisticated. This is caused by the restriction on the (already very small) number of banks and insurance companies allowed to operate in Macau and the resulting absence of effective competition, the limited size of Macau’s market, the adoption of the universal banking model, and the concomitant restriction to market access for specialized financial operators – there are no brokerage companies, no financial leasing operators, no private equity or hedge funds, no exports insurers, etc.

The negative impact of these factors is further amplified by the existence of a large, vibrant and efficient financial center in nearby Hong Kong (and Shenzhen).

One of Macau’s structural debilities lies in not having enough critical mass in regards to financial firms, professionals, investment analysts, as well as other qualified personnel for the financial sector. Given the political drive for establishing a financial services platform in Macau, it is important that the relevant authorities devise a strategy to overcome these shortcomings.

Specialized financial firms should be invited to come and operate in Macau. To be blunt, the strategic approach to be adopted by the government should be the very opposite to Macau’s tradition: no special protection should be awarded to local groups, families or vested interests since they have no critical mass, and Macau needs to move at a fast pace towards establishing a financial services platform.

It is also important to find ways to create conditions for the vast array of Hong Kong consultants and qualified financial professionals that may be interested in working in Macau. In the last two decades we have witnessed, as trading and shipping services have grown significantly in other parts of China, with Hong Kong’s share becoming less and less relevant in the overall. But in the financial services market, albeit Shenzhen and Shanghai have seen their relevance increase significantly (the Shanghai Stock Exchange reached a market cap of US$ 5 trillion in 2019) the Stock Exchange of Hong Kong keeps its preeminence – the SEHK had a market cap of HK$ 47 trillion in 2020. 

There are two main reasons for this. One lies in Hong Kong’s rule of law. The second stems from the legion of foreign firms, consultants, investment analysts and other qualified professionals that work in this sector in Hong Kong. And, unlike other sectors, thus far the vast majority of these financial sector professionals has not shown any inclination to move or set up shop in Shanghai or Shenzhen. As a consequence, to have access to the global network provided by these professionals, many financial firms from Mainland China moved or opened offices in Hong Kong, thus strengthening Hong Kong’s role as the foremost financial center of China.  

It is important to bear this in mind when devising a plan to attract to Macau part of this vast array of foreign firms and qualified consultants, investment analysts and professionals currently in Hong Kong. Macau has several features that appeal to these entities – rule of law, respect for human rights, religious freedom, an independent judiciary, free movement of capital, economic freedom, respect for private property, freedom of expression, low taxation, free port, among others. 

Attempting to transform Macau into a more securitarian city when there are absolutely no public security reasons that warrant it, as well as taking measures to unnecessarily “muscle” the civil society – that has always been “patriotic” and tame – in a way not dissimilar to what we see in Mainland China, is certainly not the way to go. And it would actually destroy that possibility. 

If China wanted another Shenzhen-like financial services market, there are plenty of cities in the Mainland with that potential. China wants another financial center similar to Hong Kong, and currently that can only be implemented in Macau. 

It is paramount to remind that Macau needs intelligent elites, not loyal elites. There is already enough loyalty and obedience to China and the Central Government. What is missing is critical mass to comply with and implement the directives that the central authorities have been repeatedly voicing. A successful financial market depends on international trust – on loyalty to no other factors but competence, independence and stability. No one will channel its money to a financial market whose institutions they do not trust. What Beijing needs is a political elite in Macau that understands that Macau is only useful to China if it is different.

Irrespective of undergoing studies on Macau’s role beyond being a China-PSC conduit, it is important to acknowledge the limitations and structural debilities of the current financial services sector.  

Historically, Macau’s governments have restricted the number of banking licenses and have not allowed many new operators. This has resulted in a very small number of operators in Macau’s banking and insurance sectors. 

The concomitant protection they have enjoyed over the years, the concept of universal banking, the limited size of Macau’s market, and the availability of sophisticated services in Hong Kong and Shenzhen, have all contributed to a stagnant banking and insurance sector and the non-existence of a variety of financial operators one would normally find in relevant cities worldwide. There are no brokerage companies, no financial leasing operators, no private equity or hedge funds, no exports insurers, etc.  

This reality and its inherent limitations are reflected in the sectoral regulatory authority – the Monetary Authority of Macau (AMCM).  

The first and most fundamental policy decision facing Macau’s authorities pertains to the redefinition of its financial services sector’s legal and regulatory framework. It is reasonable to assume that there will be such a redefinition; after all, one is not “writing on blank paper.” Limited as it may currently be, it seems unwise to reset all from scratch.  

Ideally, policymakers should clearly determine what is to be included within Macau’s financial services sector. In normal circumstances, this never happens in complicated matters, as it would indubitably require time to be appropriately thought through. However, to implement the GBA’s “Outline Development Plan”, consideration will have to be swift. As such, the studies taking place, and their respective consultation with the government, should be expedited. 

Since the policy decisions involved are of paramount importance, Macau’s Government should open the debate with civil society. This is unusual in Macau, but we are dealing with quasi-foundational decisions in matters that transcend the know-how of Macau’s bureaucrats and high-level officials. An open attitude is not only the right thing to do – the Government must lead and decide, yet not carry the burden alone – but also an intelligent pro-active approach since there will be a fast pace in the creation of critical mass in a few years. 

The referred to redefinition could and should be made within the boundaries of Macau’s Romano-Germanic-based legal system. The world’s financial centers have rebuilt sectorial legal and regulatory frameworks respecting the foundations of their respective legal systems. What’s more, some of the most relevant financial centers have been created in Romano-Germanic-based legal systems (Continental Europe, Japan, Brazil, etc). Each branch of a legal system tree should be made of the same stuff as the tree. Otherwise, countless problems will emerge and the branch will wither.  

To do it well, reforming Macau’s financial services’ legal and regulatory framework will have to be carried-out gradually, as it is a complex undertaking. Several politicians will want to speed things up and “copy & paste” some other model from a reference jurisdiction. What previous experience shows is that transplanting large-scale models of sectorial legal frameworks does not work.  

It is possible to regulate specific features or components of the legal framework based on an well proven reference jurisdiction; sometimes it is even desirable to make as little changes as possible (eg, when there is a recognized international standard). However, for many aspects of the legal regulatory field’s architecture, the exercise is far more complicated. On the one hand, it is necessary to take into account the existing features of Macau’s legal system and its local regulatory authorities. On the other hand, it is necessary to have regulatory institutions that work well, that understand the market and its main players and that realize that protecting investors’ interests must be a top priority in itself.  

The temptation of using current entities on reform work is inevitable, and to some extent, understandable. Macau’s past experience in the casino gaming sector shows us that the main failure is in establishing a new regulatory framework for that sector was the political decision to maintain a discredited and ineffective supervision authority – the Gaming Inspection and Coordination Bureau (DICJ).  

As deplorable as that was, Macau’s potential as gaming center was, and is, so great that it was possible to introduce meaningful change in the sector and, with it, in Macau and in the region as a whole.  

In the financial services sector, however, Macau has no regional monopoly nor many other advantages; quite the opposite, Macau is one of the least qualified relevant regional centers within the GBA. 

In summary, the reform of Macau’s financial services’ legal and regulatory framework should: 

– depart from the current framework; 

– respect Macau’s legal system features; 

– be implemented gradually, with appropriate planning; 

– be subject to open public consultation; 

– involve as many international qualified entities as possible; 

– create units that can start preparing the legal and regulatory framework for new areas and products on financial services; with 

– extensive resort to qualified outsourcing. 

By Jorge Costa Oliveira

Macau Business, November 2020

In October 2016, at the 5th Forum Macau Ministerial Conference, China’s Premier Li Keqiang announced that “China will support Macau to become a financial services platform”. This statement linked this goal to Macau’s purpose as a platform between China and the Portuguese-speaking countries (PSC).

The “Outline Development Plan for the Guangdong-Hong Kong-Macau Greater Bay Area (GBA)” sets the general framework to “develop an international financial hub in the GBA”, stating Macau’s role. Since its promulgation – in February 2019 – the Macau Government has what it needs to:

– Define a Policy to set up a platform for financial services; and
– Delineate Strategies aiming at implementing the said Policy.
Regarding Policy, there are two levels of implementation:

1st level (immediate mandate, linked essentially to China-PSC connecting role): 
–       to develop a China-PSC platform for financial services;
–       to establish an export-credit insurance system;
–       to develop as an RMB clearing center for PSC;
–       to leverage Macau’s strengths as the headquarters of the China-PSC Cooperation and Development Fund; and
–       to enhance financial cooperation services between China and PSC.

2nd level (pending studies and not linked to China-PSC connecting role):  
–       [to study the feasibility of] establishing in Macau a securities market denominated and cleared in RMB;
–       [to study the feasibility of] establishing in Macau a green finance platform;
–        [to study and explore the development of and] create a Macau-Zhuhai cross-boundary financial cooperation demonstration zone;
–       to develop special financial products and services such as leasing; as well as
–       [to] “promote cooperation between Macau and Shenzhen concerning special financial products”.

Clearly, the “Outline Development Plan” is cautious on requiring more “studies” to be undertaken on Macau’s role beyond the China-PSC bridge. The level of financial services currently offered is not sophisticated: there is no tradition and there is not enough critical mass in Macau concerning financial firms, financial professionals, investment analysts as well as other qualified personnel for this sector.

Therefore, it is but natural that Macau resorts to outside expertise, starting with the above-mentioned studies. It is not the first time that the Macau Government has to resort to outside expertise to compensate for lack of domestic critical mass. This was done in the Legal Transition in the late-80s to early 90s of the last century when hundreds of jurists, mostly from Portugal, were hired by Macau Government departments in order to guarantee that the works regarding the transition in the legal system – to ensure the “continuity of Macau’s legal system” but in fact requiring the making of modern, local, adapted key laws and regulations and the application of relevant international treaties – would be done in time and with quality.

Another moment when it was deemed necessary to hire outside preparatory studies services concerned the liberalization of the casino gaming sector. This last case sets a good example of what not to do. The said services were asked from only one Hong Kong large auditing firm. Unfortunately, since the services rendered were not of great quality, the Macau Government was not able to use them to enhance the local expertise and was forced to develop a policy and strategies resorting to other sources of outside know-how on an issue-by-issue approach.
Thus, the lesson to learn is that the Macau Government should seek contributions from a wide array of qualified entities; when Macau is at the early stages of creating critical mass to set a comprehensive policy and define strategies, why not get as many qualified contributions as possible?
The expertise required at this stage needs not be on all matters; for instance, at this early stage, it is not important to dive into the kind of financial products that a Macau securities market should offer. But rather focus on the pillars of the regulatory framework – the legal and regulatory framework, the supervision model, the training of qualified personnel.

Artificial transplant of outside models usually does not work; but given that Macau enjoys a wide degree of autonomy as a Special Administrative Region of the People’s Republic of China, it is inevitable to look at the neighbor S.A.R. and reflect on the foundations that made Hong Kong one of the world’s largest financial markets:

(i) geographical location, language and knowledge of the Chinese society that facilitates its role of gateway to China; (ii) traditional large business hub for China; (iii) a stable business environment; (iv) a reliable and stable legal system; (v) an independent Judiciary; (vi) the free flow of capital; (vii) low tax rates (in particular, regarding capital gains); (viii) extensive networks with the rest of the world; (ix) a large pool of financial talents; (x) a wide range of financial products; and (xi) an independent, reputable and highly qualified securities regulatory and supervision body (SFC).

Macau has some of these features. But it hasn’t been a large business hub for China for quite some time; it does not have extensive networks with the rest of the world; it does not have a pool of financial talents; with the exception – to a certain degree – of the Commission Against Corruption, there is no tradition of independent, reputable and qualified regulatory or supervisory entities; sadly, the most relevant regulatory and supervisory body in Macau – the Gaming Inspection and Coordination Bureau – has not lived up to the community’s expectations and is not praised by entities other than the supervised corporations themselves.

 Looking at the statistics of the Macau Courts on Administrative Law cases, the high percentage of Government wins does not bode well for an independent Judiciary; and, although Macau has a reliable and stable legal system, it is difficult to uphold that when the chairman of the Court of Final Appeal proposes to move away from the principle of continuity of the legal system, thus appealing to the subversion of a constitutional principle enshrined in the Basic Law and in an international treaty (the Sino-Portuguese Joint Declaration on the Question of Macau).

This last case is but one example of how many within Macau’s elites still fail to understand that Macau is only useful to China if it is different. Macau has been given the possibility to play a singular and distinct role on the creation of one of the world’s main international financial hubs. If some in Macau’s elites do not realize that, it is only understandable if China ends up promoting changes also at that level.