Chartbook-Unhedged Exchange: China under pressure, a debate - 0 views
adamtooze.substack.com/...rtbook-unhedged-exchange-china
china crisis policy politics economics history analysis options strategy
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China’s investment-driven, debt-heavy development model needs replacement. Its geopolitical and economic position will become more precarious if the globe’s authoritarian and liberal democratic blocs decouple, a threat made vivid by the war in Ukraine. Its demographics will be a drag on growth
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Similarly, the Chinese state’s recent intervention in the tech sector, while it has led to market volatility, is aimed at doing exactly what western regulators want to do, but can’t seem to do: stop huge companies from extracting monopoly rents from the economy.
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we think China’s underlying growth story is coming to an end as the country’s economic imbalances become unsustainable and global decoupling picks up steam. The volatility and low valuations, on the other hand, are likely here to stay.
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“On balance,” Adam sums up, “If you want to be part of history-making economic transformation, China is still the place to be.”
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The third point is where we disagree. We just don’t see China as having any good options for maintaining strong growth.
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Mainland China has delivered significant extra returns -- 87 basis points a year more than the mighty S&P -- for anyone willing to hack the wild volatility
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What imbalances are we talking about? In crude summary, China’s growth has been driven by debt-funded investment, especially in property and infrastructure. The problem is that the returns on these investments are in fast decline, even as debt continues to build up.
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This can’t go on forever. Eventually, you have all the bridges, trains, airports and apartment blocks you need, and the return on new ones falls below zero (How do you know that you have arrived at that point? When you have a financial crisis).
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The problem is that without a healthy consumer, China’s only real options to create growth are investment and exports -- and at the same time as return on internal investments are declining, the rest of the world, led by the US, are increasingly wary of dependence on Chinese exports.
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Replace bad investment in things like infrastructure and real estate with good investment in things like tech and healthcare.
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we think that options 1 and 5 are not really options at all. The current model will lead to a financial crisis as return on investment falls further and further behind the costs of debt. Simply ceasing to overinvest in infrastructure and real estate, without changing anything else, will simply kill growth.
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Option 2 might be summed up -- as Jason Hsu of Ralient Global Advisors summed it up to us -- as China becoming more like Germany.
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The idea is that China would steer more and more money away from real estate and towards high value-add sectors from biotech to chip manufacturing.
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The problem with option 2 is that investment is such a huge part of the Chinese economy that it is difficult to see how that the capital could be efficiently allocated to the country's tech-heavy, high value-add sectors, which are comparatively small
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The most promising Chinese firms are swimming in capital as it is. And developing productive capacity isn't just about capital. It takes things the state can't rapidly deploy, like knowhow and intellectual property.
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Option 3 is more promising. China could start, as Adam suggests, by building up a proper welfare safety net. But it is reasonable to expect pretty serious social and institutional resistance to this sort of mass redistribution.
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why hasn’t China increased its welfare state until now? Longtime China watcher and friend of Unhedged George Magnus suggests it is because of a deep bias in the Chinese policy establishment. “It’s how Leninist systems operate: they think production and supply are everything … if you see a demand problem as a supply problem, you get the wrong answers.”
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Option 4, increasing exports’ share of China’s economy even further, may be in the abstract the most appealing. But it runs directly into the fact that both China and the US and its allies have reasons to reduce mutual dependence on their economies.
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The emergence of geopolitical divisions between the west, on the one hand, and Russia and China, on the other, will put globalisation at risk. The autocracies will try to reduce their dependence on western currencies and financial markets. Both they and the west will try to reduce their reliance on trade with adversaries. Supply chains will shorten and regionalise…
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Russia must remain a pariah so long as this vile regime survives. But we will also have to devise a new relationship with China. We must still co-operate. Yet we can no longer rely upon this rising giant for essential goods. We are in a new world. Economic decoupling will now surely become deep and irreversible.
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In all, the most likely scenario is that China’s growth just keeps slowing. That does not mean that investors in China will necessarily lose money. But it does suggest that generic China exposure -- simply owning Chinese equity or credit indices -- is going to be a losing proposition in the long-term