I agree with not analysing China as a western economy. But the reality is they are still producing EV's and solar panels at a rate that is far in excess of the real demand; domestic or export. The fact that that there are still too many EV producers in China surely indicates that by any form of analysis, resources are being miss allocated because there is no regard to demand. That was what Deng tried to unwind post Mao and was what started China on what has been its successful development. I just worry that President Xi is in the process of repeating Mao's mistakes. EV overproduction. Agricultural policy of insisting on rice production over fruit trees in areas when rice doesn't grow and fruit trees do. Good point about the trade balance and with investment in solar and wind plus Russia being on the back foot; its energy security seems assured.
But it does still have a problem with youth unemployment and as it seeks to become the advanced manufacturer to the world with modern manufacturing it is not addressing the needs of the youth. It still has a property crisis because it tried to change the investment policy too quickly. It tried to encourage domestic consumption but that has just left most of the population holding property because they didn't trust the banks or the government. It says it is the most effective manufacturer in the world but because it not only wants to sell to the world but change the world order it is getting push back from the world. We may be analysing it wrongly but equally maybe the government isn't telling the world the whole story..
All countries have problems. For investors, it's just a case of how the government responds. Part of the reason for setting out the laundry list is that it is the one handed to the media by the US government - and repeated widely in the Economist, FT, Bloomberg etc. as a way of defending its Economic model and discouraging the rest of the world from following China. Not to indulge in whataboutery, but the youth unemployment is actually a small cohort, around 6% of the workforce and has much to do with graduate unemployment. Graduates are far more vocal than say the much higher proportion of the workforce that is in the equivalent cohort in India (where the unemployment rate is far higher as well).
The crisis is not in Property, it is in property developers and the government is bringing in policies to clear the excess inventory that does not involve free money for Wall St. A lot of western investors speculated that the Chinese would come in and rescue the developers last year and bought the debt at 7c on the $. The smart ones got out at 70c a few months later, while the rest are back at 7c. In the meantime 150m have moved from the countryside and been housed. That was the policy. New cities have been built, people have moved, the infrastructure is there and there are no favellas.
The western way of looking at the economy is to say - exports are x% of GDP, therefore they need to cut the exchange rate to boost GDP, or that Investment is y% of GDP and thus when they stop building housing and infrastructure GDP will collapse or that Consumption is z% of GDP and thus they need to encourage more consumption to get GDP up. Everything is about a KPI of GDP and everything 'recommended' by IBs to achieve it is about making money cheaper. Funny that.
This is managerialism - like corporate managers leveraging up the balance sheet to generate an EPS number. Western politicians - advised by consultants and economists do it. China doesn't.
They will not cut interest rates to stimulate the economy - the knee jerk recipe from western 'economists' because they understand that manipulating targets with leverage is unsustainable. Indeed, they recognise that GDP is an output, not a target. In this instance they also know that with 96% home ownership and very little household leverage, this is not a good way to run a balanced economy.
This is why they never did QE, it is also why they don't set stupid targets for 'net zero' - they want to reduce roadside pollution (a huge issue) so they build EVs, that also reduce the need to import oil (another huge issue). They have a balance of renewables - wind where it blows, solar where the sun shines that are backed up with coal and gas., They also have small modular nuclear and every aspect of the energy transition complex aimed at making power cheaper. They don't set out to 'create high paying green jobs' that end up crippling actual job creation.
Manufacturing efficiency is about utilising technology - the AI in China is going into Robots, not into creating fancy images and writing news commentary - and the supply chain effect is powerful - which is why VW and Mercedes are building there.
As to savings and consumption - that is the next step. All Asian countries have excess savings, much of which is in relatively unproductive assets and building an investment infrastructure is a key long term goal. Right now China doesn't need any more domestic savings to fund its investment, just as it doesn't need any more $ to fund its energy costs, so wages will ultimately feed through into consumption - just without the dangerous turbo charge of consumer credit - the driver (and now Achilles heel ) of the 20th Century 'west.
Finally, the 'security threat' from China is an almost entirely US manufactured artifice to enable them to avoid their own rules and try and limit China's economy. Unfortunately for the US, these sanctions are actually making China more efficient and damaging companies like Apple and even the might Nvidia - note that the Chip Nvidia is 'allowed' to sell in China hss already been beaten by a new one from Huawei that was supposed to take 5 years to develop but took 5 months. They are cutting prices to compete. As are Apple and while there is little demand for a $130k Taycan, there is plenty for the $30,000 Xaomi lookalike. Same across almost every product line. The US can bully the EU into sanctioning China to protect (mainly US) western manufacturers, but they can't force the rest of the world to. To that extent, China is challenging the world order, but the push back is coming from the US. The rest of the world is on board.
I agree with much of that, especially the graduate unemployment. The fact that so many Chinese grads are now applying for government jobs is a worry as they were the entrepreneurs until recently. I also agree that sanctions could well be the mother of invention for China plus from what we know about AI you can better design a chip rather than adapting a chip that was originally designed for graphics.
But I still think a lot of Chinese savings have been wiped out. Now the government may not worry about that so much but a lot of those who 'got rich first' and have been big government supporters have lost money via property and wealth management schemes. I agree a lot of western money has been used to financed the developers and that is gone and Beijing doesn't care but so has a lot of domestic money and with local government 'buying' properties they are not going to get that money back . Which hurts consumption and raise social unrest issues too. More over China does need capital to finance it tech and new factors of production. The aim was to redirect savings from property to tech. That hasn't happened and whilst Huawei can design an equivalent chip it id not currently efficient at it and can't get the machines it needs yet.
I agree with AI and robotic and think some of the Chinese LLM's are world leaders.
The question I guess comes down to does the China export model work if the west doesn't buy the goods its making; no matter how economically it does it. Especially without domestic consumption which is also hampered by rising health care costs for an aging society? Other issues are there too like asset allocations; when even the domestic solar panel makers complain about over capacity you have to think something is wrong?
I guess my point is that in so far as the Chinese needed to export and earn $s to buy energy it has more than succeeded; they have too many dollars and their exports continue to grow (look at trade balance). But this is at least in part because they have moved higher up the value added chain - most obviously EVs.
But part of the process of 'proper' economic growth is creative destruction; China has 10s if not 100s of EV manufacturers that have gone bust along the way, leaving a strong cohort behind. The west, having consolidated into giant subsidy hungry mega-corps, struggles to compete. The west is helping them clear the excess inventory, but if they stop buying the Chinese will stop producing..
There is nothing intrinsically 'right' or 'wrong' about China, it's a system that (so far) delivers on its stated goals. My point is that analysisng it as if it should (and does) behave like the west is wrong and the reason that all the western analysts keep being 'surprised".
Spain, Portugal and probably even Italy have probably for many years have even (much) higher youth uneployment (probably similar has been in much of the US "flyover country") , but you probably haven't wrote about it. So much about your Asian "sense".
btw: I am a white conservative native European, not Chinese
I agree with not analysing China as a western economy. But the reality is they are still producing EV's and solar panels at a rate that is far in excess of the real demand; domestic or export. The fact that that there are still too many EV producers in China surely indicates that by any form of analysis, resources are being miss allocated because there is no regard to demand. That was what Deng tried to unwind post Mao and was what started China on what has been its successful development. I just worry that President Xi is in the process of repeating Mao's mistakes. EV overproduction. Agricultural policy of insisting on rice production over fruit trees in areas when rice doesn't grow and fruit trees do. Good point about the trade balance and with investment in solar and wind plus Russia being on the back foot; its energy security seems assured.
But it does still have a problem with youth unemployment and as it seeks to become the advanced manufacturer to the world with modern manufacturing it is not addressing the needs of the youth. It still has a property crisis because it tried to change the investment policy too quickly. It tried to encourage domestic consumption but that has just left most of the population holding property because they didn't trust the banks or the government. It says it is the most effective manufacturer in the world but because it not only wants to sell to the world but change the world order it is getting push back from the world. We may be analysing it wrongly but equally maybe the government isn't telling the world the whole story..
Thanks for this. A few comments to follow
All countries have problems. For investors, it's just a case of how the government responds. Part of the reason for setting out the laundry list is that it is the one handed to the media by the US government - and repeated widely in the Economist, FT, Bloomberg etc. as a way of defending its Economic model and discouraging the rest of the world from following China. Not to indulge in whataboutery, but the youth unemployment is actually a small cohort, around 6% of the workforce and has much to do with graduate unemployment. Graduates are far more vocal than say the much higher proportion of the workforce that is in the equivalent cohort in India (where the unemployment rate is far higher as well).
The crisis is not in Property, it is in property developers and the government is bringing in policies to clear the excess inventory that does not involve free money for Wall St. A lot of western investors speculated that the Chinese would come in and rescue the developers last year and bought the debt at 7c on the $. The smart ones got out at 70c a few months later, while the rest are back at 7c. In the meantime 150m have moved from the countryside and been housed. That was the policy. New cities have been built, people have moved, the infrastructure is there and there are no favellas.
The western way of looking at the economy is to say - exports are x% of GDP, therefore they need to cut the exchange rate to boost GDP, or that Investment is y% of GDP and thus when they stop building housing and infrastructure GDP will collapse or that Consumption is z% of GDP and thus they need to encourage more consumption to get GDP up. Everything is about a KPI of GDP and everything 'recommended' by IBs to achieve it is about making money cheaper. Funny that.
This is managerialism - like corporate managers leveraging up the balance sheet to generate an EPS number. Western politicians - advised by consultants and economists do it. China doesn't.
They will not cut interest rates to stimulate the economy - the knee jerk recipe from western 'economists' because they understand that manipulating targets with leverage is unsustainable. Indeed, they recognise that GDP is an output, not a target. In this instance they also know that with 96% home ownership and very little household leverage, this is not a good way to run a balanced economy.
This is why they never did QE, it is also why they don't set stupid targets for 'net zero' - they want to reduce roadside pollution (a huge issue) so they build EVs, that also reduce the need to import oil (another huge issue). They have a balance of renewables - wind where it blows, solar where the sun shines that are backed up with coal and gas., They also have small modular nuclear and every aspect of the energy transition complex aimed at making power cheaper. They don't set out to 'create high paying green jobs' that end up crippling actual job creation.
Manufacturing efficiency is about utilising technology - the AI in China is going into Robots, not into creating fancy images and writing news commentary - and the supply chain effect is powerful - which is why VW and Mercedes are building there.
As to savings and consumption - that is the next step. All Asian countries have excess savings, much of which is in relatively unproductive assets and building an investment infrastructure is a key long term goal. Right now China doesn't need any more domestic savings to fund its investment, just as it doesn't need any more $ to fund its energy costs, so wages will ultimately feed through into consumption - just without the dangerous turbo charge of consumer credit - the driver (and now Achilles heel ) of the 20th Century 'west.
Finally, the 'security threat' from China is an almost entirely US manufactured artifice to enable them to avoid their own rules and try and limit China's economy. Unfortunately for the US, these sanctions are actually making China more efficient and damaging companies like Apple and even the might Nvidia - note that the Chip Nvidia is 'allowed' to sell in China hss already been beaten by a new one from Huawei that was supposed to take 5 years to develop but took 5 months. They are cutting prices to compete. As are Apple and while there is little demand for a $130k Taycan, there is plenty for the $30,000 Xaomi lookalike. Same across almost every product line. The US can bully the EU into sanctioning China to protect (mainly US) western manufacturers, but they can't force the rest of the world to. To that extent, China is challenging the world order, but the push back is coming from the US. The rest of the world is on board.
I agree with much of that, especially the graduate unemployment. The fact that so many Chinese grads are now applying for government jobs is a worry as they were the entrepreneurs until recently. I also agree that sanctions could well be the mother of invention for China plus from what we know about AI you can better design a chip rather than adapting a chip that was originally designed for graphics.
But I still think a lot of Chinese savings have been wiped out. Now the government may not worry about that so much but a lot of those who 'got rich first' and have been big government supporters have lost money via property and wealth management schemes. I agree a lot of western money has been used to financed the developers and that is gone and Beijing doesn't care but so has a lot of domestic money and with local government 'buying' properties they are not going to get that money back . Which hurts consumption and raise social unrest issues too. More over China does need capital to finance it tech and new factors of production. The aim was to redirect savings from property to tech. That hasn't happened and whilst Huawei can design an equivalent chip it id not currently efficient at it and can't get the machines it needs yet.
I agree with AI and robotic and think some of the Chinese LLM's are world leaders.
The question I guess comes down to does the China export model work if the west doesn't buy the goods its making; no matter how economically it does it. Especially without domestic consumption which is also hampered by rising health care costs for an aging society? Other issues are there too like asset allocations; when even the domestic solar panel makers complain about over capacity you have to think something is wrong?
I guess my point is that in so far as the Chinese needed to export and earn $s to buy energy it has more than succeeded; they have too many dollars and their exports continue to grow (look at trade balance). But this is at least in part because they have moved higher up the value added chain - most obviously EVs.
But part of the process of 'proper' economic growth is creative destruction; China has 10s if not 100s of EV manufacturers that have gone bust along the way, leaving a strong cohort behind. The west, having consolidated into giant subsidy hungry mega-corps, struggles to compete. The west is helping them clear the excess inventory, but if they stop buying the Chinese will stop producing..
There is nothing intrinsically 'right' or 'wrong' about China, it's a system that (so far) delivers on its stated goals. My point is that analysisng it as if it should (and does) behave like the west is wrong and the reason that all the western analysts keep being 'surprised".
Spain, Portugal and probably even Italy have probably for many years have even (much) higher youth uneployment (probably similar has been in much of the US "flyover country") , but you probably haven't wrote about it. So much about your Asian "sense".
btw: I am a white conservative native European, not Chinese