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Musing on Economics
China’s Changing Geopolitical and Economic Conditions and the Trump Administrations Interference with Technology Growth in China
China’s President Xi Jinping has increased control over the Chinese Communist Party (CCP), which has greater control over all aspects of life. He is in a position to reshape the economy and determine whether companies will prosper or fail. He has brought reforms that liberalized the economy to a halt and has smothered market forces, returning to a top-heavy state-dominated growth model which looks distinctly creaky. Private companies have rushed to set up party committees with an increasing say over strategy. Their once-swashbuckling bosses have adopted lower profiles. Mr. Xi is not simply inflating the state at the expense of the private sector. Rather, he is presiding over what he hopes will be the creation of a more muscular form of state capitalism.
Figure 1: China Statistics
China’s Changing Geopolitical and Economic Conditions and the Trump Administrations Interference with Technology Growth in China
China’s President Xi Jinping has increased control over the Chinese Communist Party (CCP), which has greater control over all aspects of life. He is in a position to reshape the economy and determine whether companies will prosper or fail. He has brought reforms that liberalized the economy to a halt and has smothered market forces, returning to a top-heavy state-dominated growth model which looks distinctly creaky. Private companies have rushed to set up party committees with an increasing say over strategy. Their once-swashbuckling bosses have adopted lower profiles. Mr. Xi is not simply inflating the state at the expense of the private sector. Rather, he is presiding over what he hopes will be the creation of a more muscular form of state capitalism.
Figure 1: China Statistics
The idea is for state-owned companies to get more market discipline and private enterprises to get more party discipline, the better to achieve China’s great collective mission. It is a project full of internal contradictions. But progress is already evident in some areas. Mr. Xi announced his agenda in 2013, vowing that China would “let the market play the decisive role in allocating resources”, while reinforcing “the leading role of the state-owned sector”. When domestic stocks crashed in 2015 the government’s focus shifted to recapitalizing its banks, tightening controls on cross-border cash transfers and taming the wildest corners of its financial system. But the party now thinks it has won this “battle against financial risks” and is getting Mr. Xi’s agenda back on track in a new, bolder form.
American policy in terms of isolating some of China’s fastest growing companies, Huawei, ZTE, WeChat and TikTok has persuaded the party that China must be able to get ahead on its own. At the same time, China’s success in stalling its coronavirus epidemic and restarting its economy has reinforced its belief in what Mr. Xi calls China’s “institutional advantages”—the idea that, as a strong one-party state, China can pool its economic and social resources to meet critical objectives. Mr. Xi’s push can be broken down into two big segments. The first is to establish clearer boundaries for the fizz and ferment of the Chinese marketplace: a stronger legal system for businesses; simplified rules for day-to-day activities; a financial system better at allocating funds. The second is to make more adroit use of the government’s grip on the economy’s main levers: to make state firms more efficient; and to team them up with private firms in new industrial-policy initiatives.
Entrepreneurs still have considerable latitude, so long as they stay in their lane and move in government-endorsed directions. And they still have powerful incentives. “To get rich is glorious”, a quip attributed to Deng Xiaoping that became a mantra for China in its go-go years, still applies. But only so long as your pursuit of riches also benefits the state.
Into this quandary, the Trump administration puts a stranglehold on these companies. Eric Schmidt, former CEO of Google pointed out the recklessness 0f such a strategy. The US tech industry has thrived on creativity and openness that allowed the marketplace to establish winners and losers. Our technology has been able to cross geographic boundaries, because people wanted it. The unintended consequences of limiting the ability of companies to compete in the US, is eventually to limit US companies from competing outside the US. Moreover, as Huawei and ZTE are constrained from buying chips made with US equipment; the Chine government will use their resources to 1) invest in semiconductor fabs, 2)subsidize Chinese companies to copy and produce the very tools that propel our semiconductor industry and 3) constrain their OEMs to buying China when the chips are available. In terms of Internet companies, the policy is propelling China to take more control of the ubiquitous infrastructure. If we were concerned that data on US citizens was being held in China, why not get these companies to use the efficient cloud services developed by Microsoft, Amazon and others. Trump is using dynamite when some sugar is more effective and as a result, he is toying with blowing up a part of our high tech hegemony.
Xi sees a range of economic problems facing his country, not the least of which is the handwriting on the wall left by Japan. In the 1980s, Japan was the envy of the world. Its economy grew rapidly to become the second largest in the world, led by a strong central government, a surging and increasingly productive manufacturing sector, easy access to money and credit, and protective trade policies that spawned huge surpluses with the U.S. Then the bubble burst, followed by three “lost” decades of economic stagnation. While history doesn’t repeat, it does often rhyme, and the Japanese experience may very well offer important lessons that are relevant for China, the current second-largest world economy.
In a world where labor represents a smaller share of overall input costs, the center of the U.S. is perhaps becoming the world’s most attractive “emerging market.” It has cheap and easy shipping routes to attractive end-markets on the East and West Coasts, abundant oil and gas resources, ironclad intellectual property protections, one of the lowest tax rates in the world, an educated workforce and policymakers who are keen to bring investment back to the U.S. China very well may have made a critical strategic error in being too forward with its ambitions in unveiling these goals, underestimating the U.S.’s resolve to maintain its place as the preeminent economic power. But China’s strength is more than just cheap labor. As the Musing’s constituents are well aware, China has won the display battle (and LEDs, and Solar) not because of labor but because of capital. Now they are being pushed to accelerate their investments in semiconductors and the Internet.
China knows it can survive and thrive in a world led by the U.S. The U.S., on the other hand, does not know that its values and interests would be safe in a world led by China. As such, consensus appears to have formed in a bipartisan manner, both in the halls of Congress and among the public at large that the U.S. needs to defend and protect its intellectual property. Policymakers will likely continue to push back on advanced technologies while finding ways to incentivize companies to “come back home.” Given this long-term strategic struggle, heightened tensions will continue to play out between the U.S. and China, in part because Chinese authorities might be forced to play a weaker hand. Over the course of 2020, relations are at risk of descending toward a more Cold War-like scenario, further enflamed by rising resentment at China’s lack of transparency in the initial stages of the Covid-19 pandemic. As long as the U.S. remains committed to protecting its economic interests, its advantages in terms of economic freedom, population growth, technological superiority and more efficient allocation of capital are likely insurmountable. But the steps to move away from an open economic environment will likely wreak havoc with our ability to compete with a more single minded and more driven entity not afraid to make major bets on technology. From: The Economist, Steve Chiavarone, Federated Hermes.
Xi Jinping hosted a symposium (link in Chinese) this Monday, bringing top officials and prominent economists and sociologists together in Beijing to discuss the upcoming 14th five-year plan. While the meeting was closed-door and individual comments have not been made public, the meeting has been prominently featured in state media. Xi gave a speech discussing six key takeaways:
American policy in terms of isolating some of China’s fastest growing companies, Huawei, ZTE, WeChat and TikTok has persuaded the party that China must be able to get ahead on its own. At the same time, China’s success in stalling its coronavirus epidemic and restarting its economy has reinforced its belief in what Mr. Xi calls China’s “institutional advantages”—the idea that, as a strong one-party state, China can pool its economic and social resources to meet critical objectives. Mr. Xi’s push can be broken down into two big segments. The first is to establish clearer boundaries for the fizz and ferment of the Chinese marketplace: a stronger legal system for businesses; simplified rules for day-to-day activities; a financial system better at allocating funds. The second is to make more adroit use of the government’s grip on the economy’s main levers: to make state firms more efficient; and to team them up with private firms in new industrial-policy initiatives.
Entrepreneurs still have considerable latitude, so long as they stay in their lane and move in government-endorsed directions. And they still have powerful incentives. “To get rich is glorious”, a quip attributed to Deng Xiaoping that became a mantra for China in its go-go years, still applies. But only so long as your pursuit of riches also benefits the state.
Into this quandary, the Trump administration puts a stranglehold on these companies. Eric Schmidt, former CEO of Google pointed out the recklessness 0f such a strategy. The US tech industry has thrived on creativity and openness that allowed the marketplace to establish winners and losers. Our technology has been able to cross geographic boundaries, because people wanted it. The unintended consequences of limiting the ability of companies to compete in the US, is eventually to limit US companies from competing outside the US. Moreover, as Huawei and ZTE are constrained from buying chips made with US equipment; the Chine government will use their resources to 1) invest in semiconductor fabs, 2)subsidize Chinese companies to copy and produce the very tools that propel our semiconductor industry and 3) constrain their OEMs to buying China when the chips are available. In terms of Internet companies, the policy is propelling China to take more control of the ubiquitous infrastructure. If we were concerned that data on US citizens was being held in China, why not get these companies to use the efficient cloud services developed by Microsoft, Amazon and others. Trump is using dynamite when some sugar is more effective and as a result, he is toying with blowing up a part of our high tech hegemony.
Xi sees a range of economic problems facing his country, not the least of which is the handwriting on the wall left by Japan. In the 1980s, Japan was the envy of the world. Its economy grew rapidly to become the second largest in the world, led by a strong central government, a surging and increasingly productive manufacturing sector, easy access to money and credit, and protective trade policies that spawned huge surpluses with the U.S. Then the bubble burst, followed by three “lost” decades of economic stagnation. While history doesn’t repeat, it does often rhyme, and the Japanese experience may very well offer important lessons that are relevant for China, the current second-largest world economy.
- An aging population
- China is aging at one of the most rapid paces of any major economy with remedies difficult to find.
- The migration from rural to urban areas represents the biggest driver of a population that’s expected to decline at an accelerating rate over the next three decades. Urban living typically coincides with declining birth rates given the higher expenses.
- Even with its more liberal 2-child policy adopted in 2015, China’s birthrate last year was the lowest in 70 years of communist rule.
- An aging, shrinking population means China will need robust productivity growth to continue experiencing meaningful economic growth.
- Similarity to Japan: This massive demographic headwind is almost identical to the pressure that hit Japan hard in the 1990s.
- China’s manufacturing advantage is disappearing.
- Companies primarily moved production to China in recent decades to access its cheaper labor. Manufacturing, however, has changed. The products we consume generally are less labor-intensive in their production, and production methods themselves are less labor-intensive, as machines keep replacing workers.
- This erosion in China’s competitive advantage is being driven further by cheaper labor options among neighboring Asian countries.
- Similarity to Japan: Similar constraints on the energy and competitive manufacturing fronts slowed Japan’s rise, as well.
- China’s “mixed economy” isn’t all that mixed.
- While Chinese authorities have introduced capitalistic elements, China for all intents and purposes remains a command economy with the government firmly in control.
- This presents major challenges to its future development, writes Cato Institute Senior Fellow and China specialist James Dorn, who sees “no free market for ideas that is essential for innovation and for avoiding major policy errors.”
- These challenges have been most evident recently in Hong Kong, as the financial center of Asia has deteriorated rapidly into a state of open rebellion, and in trade talks with the U.S. and other countries that are openly accusing China of intellectual property theft in its efforts to improve its ascendant but still inferior technological standing.
- Similarity to Japan: Japan was not viewed with the same disdain or suspicions, but its highly homogeneous society and keiretsu business structure hampered its ability to adapt as the global economy became more digitized and diverse.
- They are all well-founded complaints. But they ignore the fact that when Mr. talks about market reform, it is order, not fairness, that he is after. He wants to define more clearly how businesses and people can work, and within what limits.
- Start with the legal system. It is a tool of oppression, as its extension into Hong Kong is making clearer than ever. Mr. Xi has been relentless in targeting anyone standing up for human rights. Yet he has also overseen a partial professionalization of the judicial system and given courts more authority on non-political matters. The economy is simply too complex, and corruption too prevalent, to rely on local officials to adjudicate disputes as they used to. These changes to the courts have coincided with an explosion in cases. Administrative lawsuits, which typically involve people suing the government, have more than doubled since 2012, the year that Mr. Xi became China’s paramount leader (see chart 2). Bankruptcy filings are up ten-fold. Last year Chinese courts accepted more than 480,000 intellectual property cases, nearly five times as many as they did in 2012, with some going to a new national court devoted to the area. Foreign plaintiffs won 89% of all patent infringement cases, according to Rouse, a consultancy.
In a world where labor represents a smaller share of overall input costs, the center of the U.S. is perhaps becoming the world’s most attractive “emerging market.” It has cheap and easy shipping routes to attractive end-markets on the East and West Coasts, abundant oil and gas resources, ironclad intellectual property protections, one of the lowest tax rates in the world, an educated workforce and policymakers who are keen to bring investment back to the U.S. China very well may have made a critical strategic error in being too forward with its ambitions in unveiling these goals, underestimating the U.S.’s resolve to maintain its place as the preeminent economic power. But China’s strength is more than just cheap labor. As the Musing’s constituents are well aware, China has won the display battle (and LEDs, and Solar) not because of labor but because of capital. Now they are being pushed to accelerate their investments in semiconductors and the Internet.
China knows it can survive and thrive in a world led by the U.S. The U.S., on the other hand, does not know that its values and interests would be safe in a world led by China. As such, consensus appears to have formed in a bipartisan manner, both in the halls of Congress and among the public at large that the U.S. needs to defend and protect its intellectual property. Policymakers will likely continue to push back on advanced technologies while finding ways to incentivize companies to “come back home.” Given this long-term strategic struggle, heightened tensions will continue to play out between the U.S. and China, in part because Chinese authorities might be forced to play a weaker hand. Over the course of 2020, relations are at risk of descending toward a more Cold War-like scenario, further enflamed by rising resentment at China’s lack of transparency in the initial stages of the Covid-19 pandemic. As long as the U.S. remains committed to protecting its economic interests, its advantages in terms of economic freedom, population growth, technological superiority and more efficient allocation of capital are likely insurmountable. But the steps to move away from an open economic environment will likely wreak havoc with our ability to compete with a more single minded and more driven entity not afraid to make major bets on technology. From: The Economist, Steve Chiavarone, Federated Hermes.
Xi Jinping hosted a symposium (link in Chinese) this Monday, bringing top officials and prominent economists and sociologists together in Beijing to discuss the upcoming 14th five-year plan. While the meeting was closed-door and individual comments have not been made public, the meeting has been prominently featured in state media. Xi gave a speech discussing six key takeaways:
- New opportunities and challenges should be viewed dialectically
- Building a new pattern of development requires smoothing circulation of the national economy
- i.e. the domestic half of dual circulation (see below)
- China must rely on indigenous innovation to achieve high-quality development
- i.e. taking control of key core technologies, and strengthening domestic R&D capacity
- Deepen reform to stimulate new development vitality
- i.e. continuing existing reform agenda including strengthening IPR, market competition, etc.
- Build new advantages in international cooperation & competition through high-level opening up
- especially in terms of
- increasing international cooperation, including at the state, local and enterprise levels in the U.S.
- balancing cooperation and security, and strengthening ability to regulate and control risks
- especially in terms of
- Social development via “joint efforts and shared governance”
- this point was not made particularly clearly, but Xi called to improve social security and public health, address “social contradictions” and maintain social stability
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