Like us in the West, the Chinese set out in the new lunar year with new hopes and resolutions. However, the new Dragon Year does not bode well for people’s wallets. The tense economic situation increasingly weighs the income of the middle class. In 38 major cities, average incomes fell in the fourth quarter of 2023 compared to the year before. But it is the middle class in particular that has high expectations of economic progress, as Joern Petring analyzes.
After all, that is the unspoken social contract between the Communist Party and the population. And now? Shrinking wages reduce people’s purchasing power, which is likely to lead to a further decline in consumer spending – and thus exacerbate China’s persistent deflation problem. So, for the time being, the new year promises troubled times ahead.
The situation is also turbulent elsewhere in the Far East. Many fear North Korea’s nuclear build-up or a Chinese attack on Taiwan. This has led to a radical rethink in Japan. Given the situation, Tokyo sees an increased need for military armament – and is realizing these plans, as Felix Lill writes. Defense spending is rising; the defense budget is set to double to two percent of gross domestic product by 2027. This would be in line with the NATO target. In addition, Japan’s National Security Strategy now officially lists Russia as a “potential threat” alongside North Korea and China.
The tense economic situation in China continues to impact the income of the Chinese middle class. The average wages companies offered new employees in 38 major Chinese cities fell by 1.3 percent year-on-year to 10,420 yuan (1,458 US dollars) in the fourth quarter of 2023. This is according to data from Zhaopin, China’s largest online job platform. It was the sharpest decline since the start of the survey in 2016 and the third consecutive quarter of decline. This is also unprecedented.
Reports of falling wages are particularly alarming in China. The Communist Party bases its claim to power on an unspoken social contract built on a steady improvement of living standards. The middle class, in particular, has high expectations of economic progress. Recently, however, they have been feeling the growing financial woes. Not only is the ongoing crisis on the property market reducing people’s wealth. Falling wages mean that less fresh money ends up in their bank accounts every month.
According to Zhaopin, wages are not only falling for new contracts. People in existing employment relationships have also recently complained more frequently about cuts. In another Zhaopin survey, 32 percent of respondents stated that their income had decreased in the past year – the highest figure since at least 2018, as Bloomberg calculated.
Falling wages reduce people’s purchasing power, further depressing consumer spending. This will likely exacerbate China’s deflation problem as companies react to falling demand by lowering prices to remain competitive. And this, in turn, further reduces their revenues and, consequently, their ability to offer high wages. It’s a vicious circle.
More and more experts assume that the deflation recorded since 2023 will continue. Data from January shows that consumer prices fell by 0.8 percent year-on-year, the sharpest decline in over 14 years.
Falling wages are not the only problem for Chinese workers. The Wall Street Journal recently looked into the problems plaguing the Chinese middle class and spoke to those affected.
The state-run newspaper Global Times rejects the pessimistic outlook of the Chinese job market and speaks of an “optimistic assessment” by Chinese experts. They claim that “a stable employment market and income growth” can be expected in 2024. In particular, there have been wage increases in new economic sectors, such as new energies, in the past year, they say.
That may be true, but China’s new booming industries cannot absorb the entire unemployed population. They only represent a part of the job market.
Japan is on its way to becoming one of the best-funded military powers. And this is particularly due to China. The country’s defense budget is set to double to two percent of gross domestic product by 2027. Japan would thus fulfill the NATO target and could become the third-largest economy in the top 5 military powers – behind the USA, China, Russia, and India. The 2024 budget adopted in December paves the way: It marks the twelfth budget increase in a row and the highest to date – an increase of 16 percent to 7.95 trillion yen (around 50 billion euros).
This is remarkable, as the East Asian country is officially a state without a military: “Aspiring sincerely to an international peace based on justice and order, the Japanese people forever renounce war as a sovereign right of the nation.” This is guaranteed by Article 9 of the Constitution, which has been in force since Japan’s defeat in the Second World War on the side of Nazi Germany. The constitution also states: “In order to accomplish the aim of the preceding paragraph, land, sea, and air forces, as well as other war potential, will never be maintained.” The army is officially called the “Japan Self-Defense Forces.”
The enormous armament program of recent times is based on the National Security Strategy, which the cabinet of Prime Minister Fumio Kishida adopted in December 2022. It states that Japan is in the “most severe and complicated security environment” since World War II. In addition to significantly increasing national defense spending, the paper also empowers the Self-Defense Forces to launch military counterattacks in the future.
Not only Germany is experiencing a “Zeitenwende” in security policy. For Japan, which has considered itself a pacifist nation since the United States dropped the atomic bombs on Hiroshima and Nagasaki in August 1945 and the resulting collapse and end of the war, this turning point is even more profound. After all, the Self-Defense Forces have tended to participate in armed conflicts as humanitarian aid workers. Tokyo has also never sent any lethal weapons abroad. Until now, the USA has tended to be responsible for Japan’s defense.
That is currently changing. Alongside North Korea and China, the National Security Strategy now officially lists Russia as a “potential threat.” As with China, Japan also has territorial disputes with Russia. Tokyo also largely supports the Western sanctions against Moscow due to the invasion of Ukraine.
And in case of a Chinese invasion of Taiwan, Japan’s government would probably see this as an attack on its own security. A full-scale war would then break out in the Pacific, with Taiwan, the USA and Japan on one side and China and potentially Russia on the other. China has never ruled out a violent conquest of Taiwan.
To prepare for such scenarios, Japan is now arming itself so quickly that the US ambassador in Tokyo, Rahm Emanuel, has already praised these efforts as a “historic decision” and a “significant example of Japan’s shared commitment to deterrence.” The weapons systems that Tokyo is now purchasing mainly come from the United States. These include the F-35 stealth multi-role jet fighter and Tomahawk cruise missiles.
In parallel, Japan will also step up the production of domestic goods: Mass production will begin for the Type 12 land-to-ship missiles developed by Mitsubishi Heavy Industries. In addition, a hypersonic missile with a range of 3,000 kilometers is being developed. It is designed to defend remote islands but could, in principle, reach Chinese and North Korean territory. The construction of two warships equipped with the Aegis warning and fire control system is also planned.
Furthermore, Japan is developing a fighter jet in cooperation with Italy and the UK, which will then also become an export product – for which Prime Minister Kishida intends to loosen legal restrictions in the near future, as Japan has so far barred itself from exporting potentially lethal weaponry.
Ken Jimbo, a professor of politics at Keio University in Tokyo and an expert on security issues, sees this as one reason Japan’s defense industry lags behind. “Japanese companies have been unable to participate in international competition for decades. This resulted in hardly any contracts.” This is now set to change. The significant increase in the defense budget also includes subsidy programs worth the equivalent of half a billion euros for the domestic industry to ensure that it becomes competitive as quickly as possible.
Domestically, the debate about Japan’s rearmament has changed from “if” to “how” since Russia’s full-scale invasion of Ukraine in February 2022. While some have long cited the pacifism enshrined in the constitution as an argument against any armament, such voices have become quieter. Instead, the question of financing has taken center stage.
One controversial issue, for example, is that the government is now willing to accept a national deficit to fund the rearmament program. The government argues that the debt-financed expenditure is an investment in the future because it will increase defense exports and, ultimately, government revenue.
However, this rapid armament will not solve Japan’s security policy challenges for a long time. Conservative politicians, in particular, emphasize that current armament increases are not enough. And as the defense arsenal grows, so does the need for recruits. This is a problem, as the Self-Defense Forces have been acutely short of personnel for years.
According to insiders, it is likely to stay that way. In the past, young Japanese joined the military mainly because it was considered safe employment without any real risk of war, says Yuushi Kodama, who until recently was an infantryman and now runs the YouTube channel “Jieitai No Ace,” which regularly provides information about the Self-Defense Forces. “Low salaries were accepted.”
Today, with the acute threat of war, salaries would have to rise significantly, says Kodama, who has never “considered himself a die-hard soldier.” And even with higher pay, it will still be hard to find new soldiers given Japan’s shrinking population. After all, there are labor shortages in various sectors. Felix Lill
Sinolytics is a research-based business consultancy entirely focused on China. It advises European companies on their strategic orientation and specific business activities in the People’s Republic.
After lengthy negotiations in the trilogue, Germany has called into question the consensus reached in December for a European supply chain law. However, many companies in Germany – including many small and medium-sized enterprises – have long since embarked on the path to a sustainable economy and are implementing comprehensive due diligence obligations. They support regulations that would create clarity for everyone in Europe. We also advocate a strong European supply chain law, the Corporate Sustainability Due Diligence Directive (CSDDD).
Ever since the Covid pandemic and the Russian war of aggression against Ukraine, it has been clear that Europe needs strategic autonomy, including in the economy. A central building block for this is the diversification of relationships in various sectors. For this to succeed, the member states urgently need to coordinate their requirements. European regulation ensures the standardization of different laws and creates orientation for partner countries.
In recent years, pressure on governments and businesses in third countries to implement sustainability and human rights standards has also increased. The USA, with its strict legislation against forced labor, is very important for many companies. Australia and New Zealand have laws against modern slavery. The Japanese government has issued guidelines for companies, India and Thailand have national action plans for business and human rights, and South Korea, Malaysia and Indonesia are also addressing the issue.
The Mexican government is using the trend towards compliance with social standards as an argument to entice companies away from China. There is a draft law in Colombia and a law is also being discussed in Brazil. Even the Chinese government is now holding its companies to account: They are supposed to follow the OECD guidelines for multinational companies abroad.
The EU is one of the major global economic players. The CSDDD now offers the EU the opportunity to influence global standard-setting on environmental and social issues in its favor. This gives European companies a clear orientation and gives them a competitive advantage.
Critics argue that European regulation stands in the way of current efforts to ensure security of supply because companies are confronted with bureaucratic requirements. However, the opposite is true: the implementation of due diligence obligations helps companies to get to know their supply chains better. They not only look at which countries their products come from, but also which actors are involved and under what conditions they are manufactured. This applies in particular to sectors in which supply chains are not transparent, suppliers change frequently and relationships are very non-binding.
The debate also leads to more cooperation with suppliers and partners. We can already see how transparency is being increased through data collection and data pooling. Because the EU is a very important market for many third countries, many companies are already adapting to EU regulations. In practice, this does not lead to less cooperation, but to more exchange and reliability between trading partners. “Supplier shopping” in the pure search for the lowest price – this is proving to be an outdated model. More direct contact with producers is being sought and agencies are increasingly being bypassed.
Around half of German exports, especially from SMEs, go to the European domestic market. This makes it the most important export market for German companies. This success of our SMEs is largely due to the fact that laws in the European single market have been standardized. If the CSDDD does not come about, German SMEs will continue to be confronted with a patchwork of regulations.
With the Corporate Sustainability Reporting Initiative (CSRD), there is already a uniform reporting obligation in the EU without the underlying processes being regulated. The EU taxonomy is also already having an impact. More and more investors are demanding high environmental and social standards when investing in companies. There are also other EU regulations, such as those on conflict minerals, which companies have to comply with.
The CSDDD would regulate the many underlying due diligence processes and create a uniform standard for sustainability processes. This would significantly reduce the burden on companies. An EU-wide regulation would therefore make sense, particularly in order to keep the bureaucratic burden low and to support German companies in implementing due diligence obligations in a targeted manner.
The CSDDD can even provide economic impetus because it will bring a further standardization push for risk management data and tools. In 2023, investors will have invested hundreds of millions in start-ups that develop digital solutions for supply chain management. This standardization will make risk management much simpler and cheaper in the long term. This will help SMEs and create new market opportunities.
Markus Löning has been a member of the Bundestag for the FDP and, as the Federal Government’s Human Rights Commissioner, has dealt with international relations and human rights. He has been supporting companies in establishing human rights due diligence processes for ten years.
Melanie Müller is a researcher in the Africa and Middle East research group at the German Institute for International and Security Affairs (SWP). She heads the SWP component of the Sustainable Supply Chains Research Network and focuses on the supply chains of metallic raw materials.
The New Year festivities continue on the fourth day of the Dragon Year, as most Chinese still enjoy the holidays. In Beijing, Ditan Park is known for its New Year decorations and open-air shows – despite freezing temperatures. Here, a group of men perform a traditional dragon dance.
Like us in the West, the Chinese set out in the new lunar year with new hopes and resolutions. However, the new Dragon Year does not bode well for people’s wallets. The tense economic situation increasingly weighs the income of the middle class. In 38 major cities, average incomes fell in the fourth quarter of 2023 compared to the year before. But it is the middle class in particular that has high expectations of economic progress, as Joern Petring analyzes.
After all, that is the unspoken social contract between the Communist Party and the population. And now? Shrinking wages reduce people’s purchasing power, which is likely to lead to a further decline in consumer spending – and thus exacerbate China’s persistent deflation problem. So, for the time being, the new year promises troubled times ahead.
The situation is also turbulent elsewhere in the Far East. Many fear North Korea’s nuclear build-up or a Chinese attack on Taiwan. This has led to a radical rethink in Japan. Given the situation, Tokyo sees an increased need for military armament – and is realizing these plans, as Felix Lill writes. Defense spending is rising; the defense budget is set to double to two percent of gross domestic product by 2027. This would be in line with the NATO target. In addition, Japan’s National Security Strategy now officially lists Russia as a “potential threat” alongside North Korea and China.
The tense economic situation in China continues to impact the income of the Chinese middle class. The average wages companies offered new employees in 38 major Chinese cities fell by 1.3 percent year-on-year to 10,420 yuan (1,458 US dollars) in the fourth quarter of 2023. This is according to data from Zhaopin, China’s largest online job platform. It was the sharpest decline since the start of the survey in 2016 and the third consecutive quarter of decline. This is also unprecedented.
Reports of falling wages are particularly alarming in China. The Communist Party bases its claim to power on an unspoken social contract built on a steady improvement of living standards. The middle class, in particular, has high expectations of economic progress. Recently, however, they have been feeling the growing financial woes. Not only is the ongoing crisis on the property market reducing people’s wealth. Falling wages mean that less fresh money ends up in their bank accounts every month.
According to Zhaopin, wages are not only falling for new contracts. People in existing employment relationships have also recently complained more frequently about cuts. In another Zhaopin survey, 32 percent of respondents stated that their income had decreased in the past year – the highest figure since at least 2018, as Bloomberg calculated.
Falling wages reduce people’s purchasing power, further depressing consumer spending. This will likely exacerbate China’s deflation problem as companies react to falling demand by lowering prices to remain competitive. And this, in turn, further reduces their revenues and, consequently, their ability to offer high wages. It’s a vicious circle.
More and more experts assume that the deflation recorded since 2023 will continue. Data from January shows that consumer prices fell by 0.8 percent year-on-year, the sharpest decline in over 14 years.
Falling wages are not the only problem for Chinese workers. The Wall Street Journal recently looked into the problems plaguing the Chinese middle class and spoke to those affected.
The state-run newspaper Global Times rejects the pessimistic outlook of the Chinese job market and speaks of an “optimistic assessment” by Chinese experts. They claim that “a stable employment market and income growth” can be expected in 2024. In particular, there have been wage increases in new economic sectors, such as new energies, in the past year, they say.
That may be true, but China’s new booming industries cannot absorb the entire unemployed population. They only represent a part of the job market.
Japan is on its way to becoming one of the best-funded military powers. And this is particularly due to China. The country’s defense budget is set to double to two percent of gross domestic product by 2027. Japan would thus fulfill the NATO target and could become the third-largest economy in the top 5 military powers – behind the USA, China, Russia, and India. The 2024 budget adopted in December paves the way: It marks the twelfth budget increase in a row and the highest to date – an increase of 16 percent to 7.95 trillion yen (around 50 billion euros).
This is remarkable, as the East Asian country is officially a state without a military: “Aspiring sincerely to an international peace based on justice and order, the Japanese people forever renounce war as a sovereign right of the nation.” This is guaranteed by Article 9 of the Constitution, which has been in force since Japan’s defeat in the Second World War on the side of Nazi Germany. The constitution also states: “In order to accomplish the aim of the preceding paragraph, land, sea, and air forces, as well as other war potential, will never be maintained.” The army is officially called the “Japan Self-Defense Forces.”
The enormous armament program of recent times is based on the National Security Strategy, which the cabinet of Prime Minister Fumio Kishida adopted in December 2022. It states that Japan is in the “most severe and complicated security environment” since World War II. In addition to significantly increasing national defense spending, the paper also empowers the Self-Defense Forces to launch military counterattacks in the future.
Not only Germany is experiencing a “Zeitenwende” in security policy. For Japan, which has considered itself a pacifist nation since the United States dropped the atomic bombs on Hiroshima and Nagasaki in August 1945 and the resulting collapse and end of the war, this turning point is even more profound. After all, the Self-Defense Forces have tended to participate in armed conflicts as humanitarian aid workers. Tokyo has also never sent any lethal weapons abroad. Until now, the USA has tended to be responsible for Japan’s defense.
That is currently changing. Alongside North Korea and China, the National Security Strategy now officially lists Russia as a “potential threat.” As with China, Japan also has territorial disputes with Russia. Tokyo also largely supports the Western sanctions against Moscow due to the invasion of Ukraine.
And in case of a Chinese invasion of Taiwan, Japan’s government would probably see this as an attack on its own security. A full-scale war would then break out in the Pacific, with Taiwan, the USA and Japan on one side and China and potentially Russia on the other. China has never ruled out a violent conquest of Taiwan.
To prepare for such scenarios, Japan is now arming itself so quickly that the US ambassador in Tokyo, Rahm Emanuel, has already praised these efforts as a “historic decision” and a “significant example of Japan’s shared commitment to deterrence.” The weapons systems that Tokyo is now purchasing mainly come from the United States. These include the F-35 stealth multi-role jet fighter and Tomahawk cruise missiles.
In parallel, Japan will also step up the production of domestic goods: Mass production will begin for the Type 12 land-to-ship missiles developed by Mitsubishi Heavy Industries. In addition, a hypersonic missile with a range of 3,000 kilometers is being developed. It is designed to defend remote islands but could, in principle, reach Chinese and North Korean territory. The construction of two warships equipped with the Aegis warning and fire control system is also planned.
Furthermore, Japan is developing a fighter jet in cooperation with Italy and the UK, which will then also become an export product – for which Prime Minister Kishida intends to loosen legal restrictions in the near future, as Japan has so far barred itself from exporting potentially lethal weaponry.
Ken Jimbo, a professor of politics at Keio University in Tokyo and an expert on security issues, sees this as one reason Japan’s defense industry lags behind. “Japanese companies have been unable to participate in international competition for decades. This resulted in hardly any contracts.” This is now set to change. The significant increase in the defense budget also includes subsidy programs worth the equivalent of half a billion euros for the domestic industry to ensure that it becomes competitive as quickly as possible.
Domestically, the debate about Japan’s rearmament has changed from “if” to “how” since Russia’s full-scale invasion of Ukraine in February 2022. While some have long cited the pacifism enshrined in the constitution as an argument against any armament, such voices have become quieter. Instead, the question of financing has taken center stage.
One controversial issue, for example, is that the government is now willing to accept a national deficit to fund the rearmament program. The government argues that the debt-financed expenditure is an investment in the future because it will increase defense exports and, ultimately, government revenue.
However, this rapid armament will not solve Japan’s security policy challenges for a long time. Conservative politicians, in particular, emphasize that current armament increases are not enough. And as the defense arsenal grows, so does the need for recruits. This is a problem, as the Self-Defense Forces have been acutely short of personnel for years.
According to insiders, it is likely to stay that way. In the past, young Japanese joined the military mainly because it was considered safe employment without any real risk of war, says Yuushi Kodama, who until recently was an infantryman and now runs the YouTube channel “Jieitai No Ace,” which regularly provides information about the Self-Defense Forces. “Low salaries were accepted.”
Today, with the acute threat of war, salaries would have to rise significantly, says Kodama, who has never “considered himself a die-hard soldier.” And even with higher pay, it will still be hard to find new soldiers given Japan’s shrinking population. After all, there are labor shortages in various sectors. Felix Lill
Sinolytics is a research-based business consultancy entirely focused on China. It advises European companies on their strategic orientation and specific business activities in the People’s Republic.
After lengthy negotiations in the trilogue, Germany has called into question the consensus reached in December for a European supply chain law. However, many companies in Germany – including many small and medium-sized enterprises – have long since embarked on the path to a sustainable economy and are implementing comprehensive due diligence obligations. They support regulations that would create clarity for everyone in Europe. We also advocate a strong European supply chain law, the Corporate Sustainability Due Diligence Directive (CSDDD).
Ever since the Covid pandemic and the Russian war of aggression against Ukraine, it has been clear that Europe needs strategic autonomy, including in the economy. A central building block for this is the diversification of relationships in various sectors. For this to succeed, the member states urgently need to coordinate their requirements. European regulation ensures the standardization of different laws and creates orientation for partner countries.
In recent years, pressure on governments and businesses in third countries to implement sustainability and human rights standards has also increased. The USA, with its strict legislation against forced labor, is very important for many companies. Australia and New Zealand have laws against modern slavery. The Japanese government has issued guidelines for companies, India and Thailand have national action plans for business and human rights, and South Korea, Malaysia and Indonesia are also addressing the issue.
The Mexican government is using the trend towards compliance with social standards as an argument to entice companies away from China. There is a draft law in Colombia and a law is also being discussed in Brazil. Even the Chinese government is now holding its companies to account: They are supposed to follow the OECD guidelines for multinational companies abroad.
The EU is one of the major global economic players. The CSDDD now offers the EU the opportunity to influence global standard-setting on environmental and social issues in its favor. This gives European companies a clear orientation and gives them a competitive advantage.
Critics argue that European regulation stands in the way of current efforts to ensure security of supply because companies are confronted with bureaucratic requirements. However, the opposite is true: the implementation of due diligence obligations helps companies to get to know their supply chains better. They not only look at which countries their products come from, but also which actors are involved and under what conditions they are manufactured. This applies in particular to sectors in which supply chains are not transparent, suppliers change frequently and relationships are very non-binding.
The debate also leads to more cooperation with suppliers and partners. We can already see how transparency is being increased through data collection and data pooling. Because the EU is a very important market for many third countries, many companies are already adapting to EU regulations. In practice, this does not lead to less cooperation, but to more exchange and reliability between trading partners. “Supplier shopping” in the pure search for the lowest price – this is proving to be an outdated model. More direct contact with producers is being sought and agencies are increasingly being bypassed.
Around half of German exports, especially from SMEs, go to the European domestic market. This makes it the most important export market for German companies. This success of our SMEs is largely due to the fact that laws in the European single market have been standardized. If the CSDDD does not come about, German SMEs will continue to be confronted with a patchwork of regulations.
With the Corporate Sustainability Reporting Initiative (CSRD), there is already a uniform reporting obligation in the EU without the underlying processes being regulated. The EU taxonomy is also already having an impact. More and more investors are demanding high environmental and social standards when investing in companies. There are also other EU regulations, such as those on conflict minerals, which companies have to comply with.
The CSDDD would regulate the many underlying due diligence processes and create a uniform standard for sustainability processes. This would significantly reduce the burden on companies. An EU-wide regulation would therefore make sense, particularly in order to keep the bureaucratic burden low and to support German companies in implementing due diligence obligations in a targeted manner.
The CSDDD can even provide economic impetus because it will bring a further standardization push for risk management data and tools. In 2023, investors will have invested hundreds of millions in start-ups that develop digital solutions for supply chain management. This standardization will make risk management much simpler and cheaper in the long term. This will help SMEs and create new market opportunities.
Markus Löning has been a member of the Bundestag for the FDP and, as the Federal Government’s Human Rights Commissioner, has dealt with international relations and human rights. He has been supporting companies in establishing human rights due diligence processes for ten years.
Melanie Müller is a researcher in the Africa and Middle East research group at the German Institute for International and Security Affairs (SWP). She heads the SWP component of the Sustainable Supply Chains Research Network and focuses on the supply chains of metallic raw materials.
The New Year festivities continue on the fourth day of the Dragon Year, as most Chinese still enjoy the holidays. In Beijing, Ditan Park is known for its New Year decorations and open-air shows – despite freezing temperatures. Here, a group of men perform a traditional dragon dance.
