China Decode: China Drops Its Jobs Target, Tencent Buys Back Manus, and the Rise of "Tier 3 City" Living

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1:35Why wait? Ask your doctor, visit BotoxChronicMigraine.com, or call 1-800-44-BOTOX to learn more. The number of people now in China in flexible employment is about 320 million workers this year. So this accounts for about 44 % of China's workforce. That sounds to me like a very lopsided, very imbalanced economy that potentially could engender social stability issues.

2:11Welcome to China Decode. I'm Alice Han. And I'm James King. In today's episode of China Decode, we're discussing economic indicators from unemployment to inflation raising flags, Tencent could buy Manus back from Meta, and why Gen Z is moving to smaller cities across China looking for a different lifestyle. That's all coming up, but first, let's do a quick check-in with how the Chinese markets are starting the week. Markets were down, with the Shanghai Composite falling around 2.06 % and Shenzhen Component dropping 3.48%, partially attributed to risk-off sentiment surrounding escalating U.S.-Iran tensions.

2:52The Hang Seng Index was up slightly at 0.16%. All right, let's get right into it. We'll start with the broader economic situation in China right now, as it's facing a bit of an uphill battle. China's Ministry of Human Resources and Social Security released its 15th five-year plan just a few days ago. And for the first time in decades, it didn't set a numerical target for urban job creation over the next five years. This marks the first time since at least the 1990s that a headline number for new urban jobs has been left out of the country's medium-term economic plan. It's being blamed in part on the uncertainty being created by the AI boom in China.

3:35The official target for new urban jobs over the past five years was just over 55 million. That's slightly higher than the target that was set in the late 1990s at about 40 million. But it's fitting given that this is a country that really is driven by targets, economic, social, and political targets. So the fact that we have had this change to the way that they think about the urban employment market, i.e. basically getting rid of this target, suggests, I think, a lot of what we've discussed previously, which is uncertainty about the job market, uncertainty about demographics, uncertainty about how AI could displace a lot of the jobs, especially the gig economy jobs, but not just gig economy, also increasingly white-collar jobs, as we've seen elsewhere in the West.

4:27And I think that in general, we're starting to see a public consternation globally about the AI implications for the labor force. And the way that it manifests in China is quite interesting to me because on the one hand, you have the government trying to proactively set up guardrails, whether it's through the court rulings or through some of the policy statements they made recently about how companies should not be displacing jobs on the grounds of AI disruption. But on the flip side, you know, you still see, I think, in general, a lot more enthusiasm for AI by the general public compared to, say, America and Europe.

5:09How do you see this decision to take away the target? And do you think, you know, do you agree, rather, with my intuition that it has a lot to do with uncertainty about how AI is going to pan out for the labor market? Absolutely agree, Alice. And I think it's a really important topic. I'm really glad that we're focusing on this one today. I would say that if there's one area in which the wheels might come off China's extraordinary economic advances over the past few decades, it has to be employment. And what you've already explained, the spreading adoption of artificial intelligence over the past year and the older adoption of factory automation over probably the last decade or 15 years, I think this makes China a guinea pig for the rest of the world to watch.

6:00I don't say that in any pejorative way about China. What I mean is that China is simply moving ahead so quickly on all of these topics that it now becomes an experiment for what happens to employment and social stability when you have hyper-rapid AI adoption and automation adoption throughout the economy. I did witness some aspects of this when I was last in China a few months ago. The first thing is I took a train journey from Shenzhen right in the south of China to Beijing, 24 hours on the train. Of course, I got to chat to a lot of fellow passengers. And I have to say, I think every single one of them voiced this concern about AI taking away people's jobs.

6:49So it came over to me really in a really concrete way in that regard. And then reading around the subject, doing a bit of research for today, a couple of examples really stood out to me. The first is an example of embodied AI, which is physical AI. So AI being used to power machines, robots, and things like that. And in this regard, I would go to the example of the Xiaomi car factory in Beijing, which has 100 % automation on its production lines. That means that not a single person is on those production lines. There are people in the factory doing things like quality control, checking that the machines are not breaking down, etc.

7:40But not a single human being is actually making those cars. And those production lines produce a new car every 76 seconds. 700 robots were employed. This has got to be probably, I think, one of the most advanced factories in the world. So that's one example. Another would be the Robot Expo that I went to in southern Beijing. And when I got there, I found robots able to do just about everything. There were scores of these robots. robot surgeons, robot shop assistants, robot waiters, robot basketball players, robot bartenders, robot like wise people, like encyclopedias, you could ask them any question under the sun, robot vacuum cleaners, etc, etc, etc.

8:32So the Chinese job market is being pinched by AI taking away, as you just mentioned, a lot of white collar jobs. And then you've got a lot of blue collar jobs, which are going to this embodied AI, where you've got effectively robots taking away the jobs of the blue collar workers. And this comes on the back of about a decade of the most intensive automation drive in China's factories that we've seen anywhere in the world. And so all of this leads to one of the most stunning statistics that I think I've read about China in a very long time. And that is that at the moment, the number of people in flexible employment, so another word for that would be the gig economy, the number of people now in China in flexible employment is about 320 million workers this year.

9:30That is an increase from about 280 million workers in the gig economy last year. So this accounts for about 44 % of China's workforce, which to me is just an incredible number. This does seem to be a really big issue. How do you perceive all of this? How do you put this in China's context? I mean, I agree with everything you've said in terms of the labor market side of things. I think another dimension of it that we haven't touched yet is the demography dimension and the uncertainty about how quickly the not just the labor force will shrink, but the population itself. And if you think about that level of uncertainty, then it becomes clear that the government also is unsure how many new jobs that they can try to target in the next five-year plan, because it remains to be seen how quickly the population is shrinking.

10:26Now, China has one of the lowest replacement rates now, about one in the world. I think only really South Korea is slightly lower than this at around 0.75 or 0.8. So this could move quite quickly and again throw a lot of uncertainty into the future projection models of job growth, right? So if I think about it as these twin problems, the demographic challenge, the AI displacement challenge, it makes sense that the government is deciding, hey, we're not going to issue targets. We're going to see how this actually plays out over time. But it's very clear in all the anecdotes that you've just raised, as well as the stats, James, that China is in a way more exposed than some of the other countries that we're familiar with in the West because it has a huge portion of the labor market that is in this flexible gig employment situation, right?

11:25You just said 44%. That's a huge amount. It's much larger than Europe, the UK, and the US. On the flip side, this is an argument that I've heard. Household debt levels are pretty low in China. The cost of living is much lower in China. Now, even rental prices have been cut substantially because of the property bust that really started in 2021. So there is an argument that if the government can try to cushion the blow to the labor market through more support for the social security system, more buffering through some kind of a universal basic income to support everyday citizens, then maybe they can try to weather the storm.

12:07But I think that the biggest takeaway for me in this decision to cut targets, and remember, this is a system, political system that loves targets, is that it just doesn't, Beijing doesn't really know what the future pathway is for jobs, for population growth, for fertility. Right. Absolutely, Alice. I think Beijing is hurtling into an unknown future and an untested future in this regard. Far be it from me to sort of be overly pessimistic about the abilities of China's economic planners. You know, we've got at least four decades of this Chinese economic miracle that burnishes those people's reputation.

12:45They've been proved right again and again and again, even when the commentary in the West has been pointing out various problems. But on this topic, honestly, I am, you know, concerned that China may be hurtling ahead too fast into this uncertain future. 320 million people in the gig economy. That sounds to me like a very lopsided, very imbalanced economy that potentially could engender social stability issues. That number that you decided, that's just a little bit under the total US population, just so that people get a sense of the scale, 320 million compared to 350 million US populations. That's a huge amount of people.

13:31But James, one question I do have for you, and this is going back to China in the 1990s, you know, when China was going through, in a way, its own kind of technological economic cycle. And that was really, you know, trying to get rid of the overcapacity and overbuild in the state-owned enterprise sector. You know, remember Zhu Longji talked about capturing the big and letting go of the small. And you had, you know, hundreds of millions of SOE workers in the industrial sectors losing their jobs. There was the introduction of the iron rice bowl basically creating subsidies for employment, housing, and other benefits.

14:10Don't you think that in this AI revolution, if something in the same vein would have happened, that the government in China would be a lot more responsive just compared to the US or Europe, just as they have been historically in the same 1990s? Well, I mean, actually, I think it's a really good analogy that you've drawn, because at the time of smashing the Iron Rice Bowl and letting go of tens of millions of state-owned enterprise workers around the end of the 1990s, early 2000s, I mean, that was a huge social experiment as well as an economic reform program. And a lot of people in China were unsure whether that would work.

14:54And of course, it worked tremendously well in terms of building up the efficiency of Chinese industry. But it was very bruising for, as I said, tens of millions of state-owned enterprise workers who were let go or their factories were sold for, like I remember in some cases, a single renminbi. They were just put on the chopping block and sold off. So what we may be going into now is in some senses an equivalent of that. We're going into potentially a bruising period of economic reform in which China pushes automation and AI at the expense of the interests of the workers. So from that perspective, I would draw that analogy.

15:39We just don't know how it's going to pan out. As I said previously, at the time, around the turn of the millennium, a lot of commentators were saying this isn't going to work. China's social stability is going to be impinged upon. But, you know, with hindsight, it obviously did work, certainly from an economic efficiency perspective. Therefore, I don't want to again say this. I don't want to say this is going to bring the Chinese economy down. But I certainly think that a lot of gig economy workers in China now are leading very tough lives. Yeah, and I think you're right because the scale is slightly different.

16:20In the 1990s, there were around 35 million SOE workers that were laid off and, you know, had their benefits, pensions, housing, subsidies as part of the iron rice ball smashed, as you say. But then, as you know, you fast forward a couple of years ago into 2001, China joins WTO. You see a big boost in China being a manufacturer to the rest of the world. You also then see a big boost in the property sector, which becomes a bubble, a problematic bubble for the next two decades. The big question is, will AI be enough of a productivity growth boost as the property sector and manufacturing were in the early 2000s to help transition this workforce into a new growth trajectory, into new jobs, right?

17:04But that is, I think, the trillion dollar question that we don't yet know. But I think it's helpful to think about the 90s in the sense that historically we have been through a similar period of labor disruption and dislocation. In that instance, you did have strong leadership in Beijing that said that the SOEs and the employees had to basically carry the burden of that cost. But they were lucky in terms of the timing, too, because there was obviously WTO and the property sector boom. But at the time, I mean, I was a reporter in China. I used to go to a lot of those factories where all of the workers had been laid off and the buildings had been sold for a few renminbi.

17:46And there were demonstrations in a lot of places in northern China. And these demonstrations would go on for weeks, sometimes months. It was a period of social instability. And some of the stories that you heard from these state-owned enterprise factory workers who'd spent their whole life, as you said, in the iron rice bowl, you know, working for a pittance of a wage because the trade-off was that their health care and their pension, et cetera, would be taken care of. And suddenly their iron rice bowl was smashed and they had no way to support their family or their grandkids or anything like that.

18:25Some of those stories were heart-rending in the extreme. So, you know, the idea, I think, that sometimes the outside world has of China as a sort of managed communist state has always been vastly wrong. Because a lot of people in China have had to sacrifice masses and live very difficult lives to build what we see now. And China has, you know, in many cases not been communist in the sense of taking care of its workers in any way at all. It's been much less communist than the societies that we have built up in the West at the moment. And right now with our 320 million gig workers, I think that's just the latest example of the real nature of the Chinese economy.

19:12How hardscrabble it is, how difficult it is for a lot of people to get by. We'll be back with more after a quick break. Stay with us.

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21:43Do you hear that? Sounds like breakfast is ready. Because Quaker's coming in hot with morning nutrition. 100 % whole grain oats. And a good source of fiber. To fuel the rhythm of your morning and kickstart your day. And that sounds absolutely delicious. Fuel to start whatever's next. Quaker. Official sponsor of FIFA World Cup 26. I-O-L-L-I-O Welcome back. Looking more closely at one particular AI company in China now, Tencent Holdings is in discussion to become the largest shareholder in Manus, a Chinese-founded agentic AI startup that builds general-purpose AI agents. Now, you'll remember that in December of last year, US company Meta announced plans to acquire Manus for roughly$2 billion to bolster its agentic AI efforts.

22:37But Beijing rejected this on regulatory national security grounds and ordered the deal be unwound. Tencent was already among Manus' early round investors. Now, James, this is again another story that shows how tech companies are increasingly victim to geopolitical conflict and the nationalization of technology issues. So in this case, Beijing got ahead of Washington in trying to block this because remember, but Washington was also upset with the idea that this US company, Meta, would be spending$2 billion and effectively a Chinese AI company. But Beijing has gone ahead and said, actually, this is not in line with our regulations when it comes to purchasing Chinese technology IP.

23:27And so effectively, they have strong-armed the Manus founders. So the two founders are now stuck in mainland China. This is supposed to be a shot across the bow for any companies that are looking to domicile in Singapore and hopefully be treated as non-Chinese Chinese companies. But the biggest story here that has just emerged is the Tencent story. Now, Tencent seems to be really keen to get into agentic AI. Thus far, I think it hasn't really been a leader in the space, hence the desire to increase its shareholding within Manus. Now, Manus reached a recurring annual revenue of$500 million earlier this year.

24:08Just for a sense of size, Tencent's revenue last year was$100 billion. So Manus is still very early stage, but there are interesting use cases that Tencent is pushing to try to put the embedded AI engine inside the WeChat app, which services about 1.4 billion people. This could be a huge upgrade to WeChat, which hasn't really changed that much in my use of it over the last couple of years. So I'm very excited to see how that space shifts. But there seems to be a lot of synergies between these two companies. It completely makes sense to me that Tencent wants to get in on the Manus action. Do you think that moving forward, we're just going to have to see what we've discussed previously, this iron curtain when it comes to foreign stakes in Chinese companies, that effectively Beijing and Washington are both going to draw the line and not allow foreign ownership or stakeholders in their homegrown AI talent.

25:08Yeah, I'm glad you asked that, Alice. That's exactly the kind of conclusion that I was coming to as well. I sort of think that this example, this case really shows that the idea that the US is the leading party in the tech war between China and the US, putting in lots of restrictions on entity lists and semiconductor sales to China, etc., etc., is certainly not quite right. It might not be right at all. Here, we've got a clear example, as you put it, of the Chinese regulator jumping in before the US regulator to prevent one of America's biggest companies getting hold of this very smart tech, in this case, the Manus Argentic AI.

25:57I think that is absolutely the right lens to look at through this. You mentioned the Iron Curtain idea. Yeah, I mean, I would not be in the least bit surprised if this is just the first of many examples that we see of China trying to hold tight its crucial AI technology and prevent foreign actors from getting control of it or buying it or any of that. And the other thing that I would highlight is, of course, that in this case, Tencent is the big mover, And Tencent is China's biggest company by market capitalization. Market capitalization of Tencent at the moment is about 533 billion US dollars, which, according to my research, makes it the biggest Chinese listed company.

26:49It's listed in Hong Kong. And you've already pointed out WeChat, which is used by 1.4 billion people. this is the messaging app where basically you can live your whole life through WeChat if you live in China. So the idea that Manus will be used to develop an agentic AI tool that can be used within WeChat makes this doubly important from a tech perspective. If Manus' agentic AI is going to be put to the service of China's biggest app, then this has obvious implications for WeChat going forward. And I'd just add one other, and that was that the co-founders of Manus were summoned to Beijing for a meeting with the National Development and Reform Commission.

27:43That's China's big kind of ministry that controls most of the big decisions that relate to the Chinese economy. And they were questioned about potential violations of the foreign direct investment rules tied to Manus' onshore Chinese entity. So we also get a version here of how China can exercise its regulatory authority. It goes through the people involved. In other words, in this case, the co-founders of Manus. They're summoned back to Beijing. They're questioned. and then a lot of pressure is put upon them. And it seems that there is an investigation into the foreign direct investment disclosure requirements of Chinese law related to this Manus deal with Meta.

28:39So it seems to me that the Chinese authorities are using you know, Chinese law applied to individuals to frustrate the flow of Chinese technology into foreign hands. Yeah. And maybe people won't realize this, but I think it's pretty significant that it's the NDRC that are doing the disciplining. Because I would have expected, as happened to Didi a couple of years ago, to some of these tech companies that were trying to list overseas without Beijing approval, that it was a lot of the CAC, so the Cyber Space Administration of China, doing a lot of the disciplining and talking. But the fact that this is the NDAC, which sits under the State Council, it's a really important body when it comes to the administration of Chinese industrial policy and economic policymaking at a high level.

29:34That says to me that this is the central government trying to get a bigger say over the technology issues, over these AI issues, right? Am I reading that correctly? I think that that's quite significant, and I was quite surprised that it was the NDRC doing it. Yes, absolutely. And I also noted the way in which the language was quite colorful. uh china uh chinese officials reportedly described the transaction i'm talking about meta's acquisition of manas as conspiratorial uh as a conspiratorial attempt to hollow out china's technology base that's very uh you know that's very revealing to me i think that shows the level of emotion involved in this as well uh you know china is just as determined to block the U.S.'s acquisition of crucial Chinese technology as the U.S.