Marvin Liao’s Post

The United States might be "out spent" in industrial policy by China, but that doesn't mean we will lose the race - quality matters. Markets and the allocation of capital matter more than the overall amount. Recent work by the Center for Strategic and International Studies (CSIS) estimated China spent 12x as much as the US on subsidies - in fact, ~5% of the country's overall GDP! “If you look at the scale of the Chinese industrial funds, what they called industrial guidance funds, they're of an order of magnitude which would make the CHIPS and Science Act and the IRA look like a walk in the park by comparison,” said Kevin Rudd, former ambassador to Australia, referring to Chinese spending over the last decade. But the overall amount of funding isn't all that matters. “The question, of course, is the efficient use of capital. And for Chinese industrial policy, that's not been a prime concern," Rudd continued. What will set the United States apart is that more competitive markets - both in the labor and product markets - will ensure that physical and human capital are better allocated. This must remain a continued priority - and efforts to strengthen competitive markets will have big payoffs. #semiconductors #china #chips https://lnkd.in/eWrCNR3X

“The maiden speech of Li Qiang, China’s premier, to the National People’s Congress this week felt like a blast from the country’s ideological past. He lavished paeans of praise upon his boss Xi Jinping but failed to outline in detail how Beijing plans to combat multiple economic impediments. Investors drove Hong Kong’s stock index lower on Tuesday after Li set a target for gross domestic product growth of ‘around 5 per cent’ for this year but did not unveil a significant stimulus to reach that goal. Indeed, the premier’s focus on ‘high-quality development’ shows that Beijing is no longer single-mindedly pursuing GDP growth. Li has styled himself as a loyal ‘executor’ and a ‘practical doer’ in formal remarks since he took office last year, sending a clear message that Xi is in charge of China’s economic portfolio. This is at odds with more reformist phases in recent decades when China’s premier tended to oversee the economy while the general secretary of the Chinese Communist party, a post that Xi holds, looked after politics.” “He was at pains in his hour-long address to make clear where the current power lies. The achievements of 2023, Li said, were thanks to Xi, ‘who is at the helm, charting the course, to the sound guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era’. The display of subservience came one day after Beijing scrapped a tradition that China’s premier gives a televised press conference at the close of the congress. Such signals, taken together, contribute to a sense that it is ideology more than generating prosperity that really animates Beijing. This cognitive shift is, in turn, driving a reorientation of international capital away from Chinese assets to seek returns in Japan, India, south-east Asia and other markets. Li’s speech gave little cause for optimism that China will achieve its ‘around 5 per cent’ target this year, following an official 5.2 per cent growth rate last year.” “An objective to expand domestic demand was demoted from top priority in last year’s report to third place this year. Outranking it were the two industrial policy goals to ‘modernise the industrial system’ and develop ‘new quality productive forces’. Both goals involve promoting China’s technological emergence. In terms of fiscal support, one modest new impetus was unveiled. A Rmb1tn ($139bn) issuance of special Treasury bonds was scheduled to finance ‘security capacity in key areas’. In another sign of the importance placed on security, Li announced a 7.2 per cent increase in defence spending to Rmb1.6tn. China has the world’s second-largest defence budget after the US and Li vowed to oppose ‘external interference’. There are real risks for China in prioritising security, technology and self-reliance over GDP growth. More profoundly, it should heed warnings from its own history: when ideology infests economics, sharp reversals may follow.”

Welcome to the 222nd edition of Trade War. The muzzling of an outspoken former editor shows party’s growing concern over economy. Beijing has a history of censoring unsanctioned comments on the Chinese market. And why the Ministry of State Security sees development and security as “two wings of one body.” Following a politburo meeting, Beijing rolls out 20-step action plan to boost household spending. China’s stubbornly-low consumption the flip side of its competitive manufacturing sector and the world’s best infrastructure, argues economist. And new home sales drop by 20% in July, despite $42 billion aid package. Xi Jinping’s policy preferences aim for a “fortress economy.” And youth angry about plans to raise retirement age—same as they were over a decade ago, when China unsuccessfully pushed same policy. Notable/In depth ~ *Local debt swamps China’s hinterland cities including Liuzhou, Guangxi —plus a photo essay from my April visit to that remote southwestern city *A PRC annexation of Taiwan that disrupted the chips industry could cause economic losses on par with WWII, says new report *China is “producing well beyond domestic demand” in lithium batteries, electric vehicles, and solar panels, warns U.S. Ambassador to China Nicholas Burns Read more in Trade War:

China’s annual “Two Sessions” has begun. The first surprise: the decision to scrap the 30-year tradition of the Premier's presser, usually held at the end of a week-plus of meetings. (I was shocked by that and what it says about China openness..) Not a surprise for me was the Premier's announcement of an around 5% growth target which I'm pleased to say I called correctly: "Despite economic headwinds, Roberts said he expects China to set the 2024 economic growth target at 5%,” I said in an interview with Voice of America. (and wrote in my newsletter below.) “[Since] the 26 biggest cities [in China] have already set their 2024 economic growth targets slightly higher than 5%, it’s a sign that the figure will also be around 5% at the national level,” I said. One new thing we will hear a lot about during the Two Sessions is what Beijing calls "new productive forces." Premier Li Qiang already referenced the slogan three times in the work report. So what are they and will they help save China's ailing economy? “New productive forces are crucial to promote self-reliance in high-level science and technology,” says Yuan Yuyu, a NPC deputy and the chairman of medical technology company. (Notice "self-reliance"-popular in a China facing ever more US sanctions..) “These forces—the EV supply chain, AI, renewable energy, adv infrastructure, cutting-edge semiconductors—has already been apparent. But President Xi Jinping putting a stamp on it at the NPC [sends a] signal to everyone from bureaucrats to businesspeople,” reports Bloomberg News. Don’t expect the development of “new productive forces” to be easy, however. First of all, high tech industries are unlikely to be big job providers, with the bulk of employment still happening in the service sector. And with unemployment still high, that fact matters and could lead local officials to push scarce resources to industries more likely to hire new workers--neglecting "new productive forces" even when Beijing tells them to do otherwise... And there is the likelihood of pushback from countries around the world. “If it doesn’t consume what it produces, all that stuff sloshes on the international markets,” Rhodium Group’s Daniel Rosen said in a recent presentation at the Harvard Kennedy School. During “the first three decades of the Chinese growth story, everyone bent over backwards to embrace China entering the international system,” said Rosen, who worked in the Clinton administration as it brought China into the World Trade Organization in the early 2000s. But today “every major consumer market around the world is currently thinking about putting emergency tariffs to keep [Chinese electric vehicles] out,” Rosen pointed out. For more on the ongoing Two Sessions and China's economy (plus explanations of Beijing's sometimes confusing economic and political slogans) check out my weekly newsletter "Trade War" and consider subscribing:

Finally, some time to read again, starting this weekend. * China's out-of-sync Transition by the Milken Institute "The party’s answer to this imbalance is more of the old medicine – drive investment to the state sector and manipulate the way the money is spent to activities that fit the state’s development strategy. State-sector investment grew more quickly than private investment in both 2022 and 2023 as the private share of fixed-asset investment fell to lows not seen in more than a decade." "As the state pushes investment toward favored sectors, old industries limp along. And while the “new three” are growing very fast, these favored activities will not be able to absorb the bulk of new labor force entrants along with those let go by declining sectors. Exports of the trio exceeded RMB 1 trillion for the first time in 2023, to much fanfare in China and handwringing in the West. But despite the hype, these sectors represent a small share of China’s goods exports – less than 5% overall." https://shorturl.at/Jj2dv * China's real economic crisis, appearing in Foreign Affairs just before the USA stabs herself "US policymakers also need to recognize that China’s overcapacity problem is exacerbated by Beijing’s pursuit of self-sufficiency. This effort, which has been given major emphasis in recent years, reflects Xi’s insecurity and his desire to reduce China’s strategic vulnerabilities amid growing economic and geopolitical tensions with the US and the West. In fact, Xi’s attempts to mobilize his country’s people and resources to build a technological and financial wall around China carry significant consequences of their own. A China that is increasingly cut off from Western markets will have less to lose in a potential confrontation with the West—and, therefore, less motivation to de-escalate." "China’s professional and business elite feel despair about the state of relations with the US. They know that China benefits more by being integrated into the Western-led global system than by being excluded from it. But if Washington sticks to its current path and continues to head toward a trade war, it may inadvertently cause Beijing to double down on the industrial policies that are causing overcapacity in the first place. In the long run, this would be as bad for the West as it would be for China." https://shorturl.at/QSb92 * Antidote to the American malaise, by Huang Yasheng "Democrats should play the long game. Their goal should be to defeat and permanently eliminate the toxic influence of MAGA on the American body politic. But the battle of ideas . . . is won through real-world policy outcomes and lived experience. This helps explain why neither the inspiring rhetoric of Harris and former President Barack Obama nor the vast sum of money spent by Democrats on political ads succeeded in convincing the American electorate just how harmful and callous the MAGA GOP really is." https://shorturl.at/zMg2I

Xi Jinping Wishes He Could Get as Lucky as Biden An AI boom in the private economy throws a lifeline to the U.S. president, while China’s leadership flails. Joseph C. Sternberg Feb. 29, 2024 1:20 pm ET What China wouldn’t give to be America for a day. President Xi Jinping faces a series of probably intractable problems ahead of March’s “two sessions”—the annual set-piece meetings of the Chinese state’s and Communist Party’s highest decision-making bodies. His regime is under growing pressure to manage the consequences of a continuing property-market rout. Along with this comes enormous fiscal strain on the many local governments that went into heavy debt in the name of property investment. Chinese consumer confidence, rocked by that real-estate meltdown, has yet to recover fully from the consequences of draconian pandemic lockdowns. Economic relations with the U.S. and Europe are becoming more tense, raising the question of whether China can export its way out of its malaise. Foreign investors are growing warier. To date, all Mr. Xi has to offer is gimmicks such as “new productive forces,” a catch phrase introduced last year. This seems to mean placing an emphasis on high-tech innovation as opposed to China’s traditional brute-force mobilization of labor and raw resources to mass-produce cheap T-shirts, toys or—more recently—solar panels and windmills. Yet Beijing could only look in envy as American artificial-intelligence darling Nvidia last week briefly surged past a $2 trillion market capitalization. To fully appreciate this turn of events, recall that one of the sillier intellectual tics of the 2000s was the notion that China’s authoritarian regime had figured out how to Solve Big Problems and Deliver Economic Growth in a way that democracies—especially American democracy—couldn’t. The concept found its fullest expression in a New York Times columnist’s wistful imaginings in the early years of Barack Obama’s first presidential term about what might have happened if the U.S. could “be China for a day.” The “China for a day” meme conflated two distinct concepts. The Communist Party’s capacity to mobilize vast resources in support of its political or economic goals operates independently of whether a given goal is the right one. That’s why more democratic paralysis—the proper word actually is “reflection”—would have benefited China. A more sclerotic system might have avoided the public-works overbuilding boom now in danger of bankrupting local governments. It likewise would have been able to avoid the human and demographic disaster of the one-child policy.

A worthwhile read from Sarah Doyle and Mariana Mazzucato on US industrial strategy. I'm sure it shocks no one who has read my posts recently that this quote resonated: "companies in the real economy, such as those in pharmaceuticals and manufacturing, are spending more on share buybacks than on productive activities such as worker training, infrastructure and technology upgrades, and R & D. Share buybacks in the United States (in which firms repurchase their own stocks to inflate their stock prices) have been on the rise for several years, reaching $795.1 billion in 2023, and are expected to increase this year. Companies have spent over $4 trillion in the last decade in share buybacks." Addressing financialization in the economy and aligning the incentives of businesses to innovate and invest in their workers is a big challenge here as in the US. I wonder how well it would go down if the federal government required that companies who receive public funds should invest more in R&D and worker training as Sarah and Professor Mazzucato suggest. Plenty more of interest in the article though. Their argument around the need for government to be market shaping is an important one I think: "By judiciously choosing what to buy and whom to buy from, the U.S. government can create new market opportunities for businesses and catalyze investment and innovation that aligns with both industrial policy goals and societal and environmental objectives." This lines up with some of what the Council of Canadian Innovators | Conseil canadien des innovateurs and Laurent Carbonneau have argued in their recent report on Canadian procurement: "the current culture of government procurement — both federally and provincially — is not serving the Canadian economy, and it is not serving the government’s own purposes". They have some interesting recommendations on how to change that culture here that are also worth reading: https://lnkd.in/gQ5kuYj7

Welcome to the 204th edition of Trade War. Foreign minister Wang Yi shows his pugnacious side, calling America “obsessed with suppressing China,” and questioning its “credibility as a major power.” And breaking a thirty-year tradition, Beijing announces an end to the annual premier’s press conference. With “high quality development,” and “new productive forces,” Xi Jinping is pushing China to accept a slower growth model. But many Chinese are still hoping for a “new and decisive policy intervention” to jumpstart the economy, argues Gavekal’s Andrew Batson. A Goldman Sachs exec argues “one should not invest in China,” while JPMorgan Chase calls the country “an irreplaceable growth market,” as asset managers increasingly diverge on the economy. And new bipartisan efforts in Washington to restrict TikTok gather steam. *Luxury brands double down on China market *When China and the US are both feeling pessimistic about themselves, their relationship is more likely to worsen *Leaked report shows hacking businesses engage in “lavish dinners and late night binge drinking” And along with all the latest, most vital China news, check out a new podcast featuring yours truly inside this week's edition of my newsletter. Read it here and if you like it, consider subscribing:

The Third Plenum confirms that China's focus on export competitiveness and industrial policy will continue, vindicating the predictions of quite a few speakers at the Institute of Strategic & International Studies (ISIS) Malaysia 37th Asia-Pacific Roundtable. While much discussion was given to China's upcoming Plenary, no speaker predicted that China would pivot from its trade strategy. It would seem that the Third Plenum would, therefore, confirm the general pessimism at the Roundtable around whether China would back down in the face of pressure from the EU and US. It's still unclear whether the US-China trade showdown will worsen, but it seems apparent that Chinese Industrial Policy will continue to play a prominent role in shaping perceptions of the Chinese economy. Asia New Zealand Foundation

The Chinese perspective on the West's overcapacity & dumping frame For us at ECR Research and ICC Consultants BV to have a good idea where the global economy and financial markets are heading, it's essential to understand how the China-US relationship and globalization will evolve. It won't do to just focus on western perspectives and analyses. Professor at the Chinese University of Hong Kong (Shenzhen) Zheng Yongnian provides - in the words of Robert Kapp - a sophisticated repackaging of now-familiar Chinese official responses to Western criticisms. Sinification offers a summary and translation. Some excerpts (but make sure to read the whole piece): "..The emergence of “Chinese overcapacity” is simply a manifestation of the West reacting to the loss of some of its comparative advantages. The West’s decision to pursue neoliberal economic policies was a strategic mistake, which led to the de-industrialisation of their economies and provided China with an opportunity to become the manufacturing powerhouse that it is today. Government intervention in the economy has existed throughout history and continues to be practiced by some of the most ardent proponents of free-market economics (e.g. America’s military-industrial complex). Historically, countries with comparative advantages (often developed countries) advocated free trade, while countries without comparative advantages or with fewer comparative advantages (often developing countries) embraced trade protectionism. the West used to lead the way, and thus the West argued for free trade. Now, China is leading the way, and thus it is China who makes the case for free trade. In the early days, Western countries even resorted ruthlessly to using artillery to open the doors of backward countries and dump goods there. In actuality, during the era of Western colonialism, colonies not only provided raw materials to the colonial powers but also served as places for the colonial powers to dump their goods. China has completed its transition from technological replication to technological improvement and is now in the process of transitioning from technological improvement to technological innovation. Both history and [our] recent experience suggest that the following inevitable changes are already taking place in the United States. These include: - the resurgence of US mercantilism. - the re-emergence of US-style state capitalism. - the reduction of government oversight in order to "strengthen and enlarge" US companies and thus increase their international competitiveness (i.e., against Chinese companies)..." https://lnkd.in/e4zpN-HK #China #ChinaUS #globalization #deglobalization #protectionism #tariffs #economy #economics #politicalrisk #politics #internationalaffairs #foreignaffairs