Huawei and A Bifurcated Tech Future

I thought more than I would like to admit about how I could fit the following phrase into this blog post:

It’s my way or the Huawei.

And with that off my chest, lets get to today’s topic: the near future of tech.

Any definition of emergent technology should include the following: information technology, robotics, green energy and vehicles, aerospace equipment, oceanic engineering, new materials, medicine, medical devices, agri-tech. Very conveniently, these are the sectors explicitly slated to gain state support in China under Made In China 2025.

made-in-china-2025-supchina-explainer

Crucial to emergent technology is infrastructure to move vast amounts of data and information. Only a few telecommunications companies are positioned to provide the complex solutions these new industries demand. 5G (telecommunication networks), mobile devices, and global services are necessary is securing the success of emergent technology.

Luckily for the world, China’s Huawei is positioned to provide such solutions.

The Pride of China

I studied Chinese at Tsinghua University. The view from my chair was that of a large blackboard. 20180403_113153

Note the camera on the top left. There was also a camera in the back of the room. 

Sitting to my left in one of my classes was a young Swiss man. On a Friday morning, he told his language partners that he was in the market for a new phone. On Monday morning he walked into class with a new Huawei phone. My teacher, a brilliant young graduate student at the neighboring Beijing Language University (北京语言大学), was floored.

“Why didn’t you buy an iPhone?” she asked.

He replied, “Huawei phones are much cheaper and just as good. I don’t like iOS anyway.”

“As a Chinese, I am so proud. Huawei is the pride of China,” She beamed.

20180313_114812

The ‘pride of China’ should be its food. This was a normal lunch at Tsinghua. It was delicious.

She was right. National champions, large companies that enjoy massive amounts of state subsidies and are protected from competition, are a distinct part of the national identity. Apple is not a competitor. Apple is America. Huawei is China.

Huawei is China

So lets expand on Huawei. Their Wikipedia page is absolutely fascinating:

Wiki capture

A warning about buzzwords and advertising? The following quote is worth thinking about. From Huawei’s Wikipedia:

Although successful internationally, Huawei has faced difficulties in some markets, due to allegations – particularly from the United States government – that its telecom infrastructure equipment may contain backdoors that could enable unauthorised surveillance by the Chinese government and the People’s Liberation Army (citing, in particular, its founder having previously worked for the Army).

Huawei has faced difficulties in some markets, due to allegations- particularly from the United States government. Does this hold water? Let me list some links.

Huawei blocked from bids in England.

Germany is drafting new rules for how to deal with Huawei.

Norway’s PST warns against Huawei.

The Czech Republic’s cyber security agency reports that Huawei is a national security threat. (This is particularly worth following because China has invested heavily into the Czech Republic, and Huawei has had a contract to fulfill the communication needs of the president and his staff for the past four years.)

Lithuanian intelligence reports that Huawei is an intelligence arm of China.

Rumors in Italy of banning Huawei from 5G infrastructure are ongoing.

Last month in Poland, a Huawei employee was arrested as spy for China. Huawei has responded by offering to build a cyber security center in Poland.

FBI raids Huawei’s San Diego Office.

It is certainly true that the United States was early in its concern of Chinese (Huawei) infrastructure investments. However, to say now that concern is solely or mostly propagated by America is dishonest.

Bifurcated Tech

I said something to this point relatively recently on China Unscripted (episode 20): there is a growing Cold War between China and America. That Cold War is not being waged in proxy wars or through arms races. The new Cold War is being waged through a race to emergent tech, economics, and business access.

The truth about Huawei is pretty simple. If the new Cold War is being fought in emergent tech, Huawei is going to play a key role. It is an arm of the Chinese Communist Party.

Huawei Capture

Examples of communist control include the following:

1.) Huawei has a party secretary. Party control of Huawei is explicit. Its in their Wikipedia page.

2.) Huawei enjoys lending at the direction of Central Huijin.

3.) Huawei enjoys price setting and input discounts from the NDRC.

Given these facts, it is almost intuitive that Developed countries decouple from Huawei and Chinese tech in general. What we are witnessing across Europe, North America, and Australia is decoupling at a time when Africa, South East Asia, Russia, and the Middle East are increasingly embracing Chinese tech. We are witnessing a technological divide. With that tech divide, we are seeing a divergence in public opinion and thought.

Consider Chairman Xi’s recent trip to visit the new media operation of People’s Daily, the party’s mouthpiece. He spoke at length on the importance of “boosting integrated media development and amplifying the mainstream voice” in public communication. Mainstream voice indeed.  The mainstream voice seems to be Xi’s way or the Huawei.

(Nailed it).

Thanks for reading.

 

 

What Caused The Great Recession

Savings, Investment, and My Worldview

Riemann Surfaces are pretty neat. Frankly speaking, anything with complex numbers – sometimes referred to as imaginary numbers- is just cool. I think there is just something intrinsically pleasing when they are modeled.

riemann surfaceCool, right?

Economics, like Math, has many tools . This blog has tended to use one or two tools when addressing China and Chinese trade policy. The most noteworthy of which is the following:

(M – X)   =   (I – S) +   (G – T)

Don’t panic. The function above states that a trade deficit (imports-M- less exports-X) is equal to the savings deficit (investment-I- less saving-S) plus the government’s fiscal deficit (government spending-G- less its tax revenue-T).

This blog has consistently talked about policies that influence national investment, savings, and consumption rates, because that is a key tool for how I understand China. Consider the picture below:

jinanxi station

My first corporate training with DuPont Pioneer actually took place in Shandong Province.  I took a bullet train from Beijing to Jinan (Google Maps link) to train Pioneer staff. The picture above is one of Jinan’s railway stations. I was awestruck by how large it was. I was awestruck by how empty it was.

20170220_182139.jpg

In China you return tickets to your company in order to get reimbursed for travel expenses. I wish I could have kept all of my train tickets. Thanks to DuPont for the first class travel.

One could look at the empty infrastructure in Jinan and see wasted money (NY Times link – Good read), but I believe a better mental exercise is to determine what it says about the relative power of different parts of the economy. China and its state banks deploy large swaths of capital to local infrastructure projects, so China’s investment rates are quite high. Investment rates are so high because of a set of policies that force money from savers and consumers to investors and producers: environmental degradation, artificially low interest rates, tariffs, and state owned enterprises – to include banks. This means that Chinese people receive a smaller portion of GDP so household consumption is low and savings are high. If there are 4 sectors to an economy- normal households, wealthy households, businesses, and governments- we can observe the ratios of investment, savings, and consumption to paint a story about who is benefiting in a given economy.

This ratio of investment and savings also fits into trade. I have previously written about how domestic policies – like tariffs – affect the balance of investment and savings in an economy and can impact foreign trading partners. This reasoning- domestic imbalances leading to foreign trade friction- has been a theme of my blog. It greatly contributes to my worldview.

Tsinghua University and What Caused The Great Recession

pierce at tsinghua

I was blessed to study at Tsinghua University (清华大学). At Tsinghua I, unsurprisingly, found myself attending meetings with the Tsinghua Economics Club. It was there that I inevitably talked to my Chinese peers about the real economy and how China’s domestic imbalances affected America. China, I contended, was unfair.

My thoughts were met with poignant questions: is there a link between the real economy, trade imbalances, and East Asian capital account surpluses with America’s financial stress and the Great Recession?

I found the answer from BIS, the Bank for International Settlements. Consider the following pictures that show trade flows and banking flows.

china banking flowschina trade flows

What imploded in 2007-2008 were not Sino-American financial relations, but the interlocking claims between American and European banks. I’ve written about this previously. My favorite math, my worldview based on investment and savings rates, was lacking when confronted by questions at Tsinghua.

gross capital flows Discussions at Tsinghua taught me that gross capital account flows matter. They matter a lot. In 2007-2008 Europe’s banks were at least if not more dangerous than their American counterparts. They straddled three giant credit bubbles: in the US, in the hot spots of the Eurozone, and in Eastern Europe. Their leverage was enormous, their capital laughably thin, and unlike their US counterparts they had considerable currency mismatch on their balance sheets. They needed to raise dollars to hold huge portfolios of America subprime. Their primary home funding sources were in European currencies.

european leverage

European banks went to great lengths to underwrite mortgage backed securities. Did you know that from 1997 to 2007 it was not an American bank that was the top underwriter for MBSs?

underwriters of mbs

Furthermore, we can clearly observe European banks changing safe assets to short-term, speculative assets in a different currency.

european changing investment

When emerging markets like China acquired US safe assets, they crowded out other investors and created the opportunity for private financial engineers to launch the securitization boom. The industry generated a new, private source of safe assets. European banks bought into short term gross flows (both in and out) while comically leveraged. In fact, the earliest sign of coming collapse was Paribas’s announcement in 2007 that it was closing its US real estate funds, for lack of liquidity in the market. Following as it did on the difficulties of several smaller German banks, one might think of this as a moment of European crisis.

So, again, what caused the Great Recession? It is worth repeating. Emerging markets like China acquired US safe assets, crowding out other investors and creating the opportunity for financial engineers to launch the securitization boom. The industry generated a new, private source of safe assets. European banks poured money into America to shuffle assets into MBSs. A European banking glut was a crucial – if not the crucial- driver.

There exists different rule sets for different economic segments. In 2008 central bank liquidity swap lines were deployed within a familiar trans-Atlantic frame. The swap lines still mapped the contours of the cold war and world war II. On the new frontier of the global economy none of that soft tissue is present- Russia, India, and China still have no swap lines. Rule set mismatches are always friction points. I see less-and-less global savings-glut imbalances, while I increasingly see global rule set imbalances. I am pessimistic about our ability to resolve these discrepancies.

BIS study links (all worth reading):

Tracking the International Footprint of Global Firms

Global imbalances and the financial crisis: link or no link?

A key currency view of global imbalances

My favorite studies on the Banking Glut:

Global Banking Glut and Loan Risk Premium

ABS Inflows to the United States and the Global Financial Crisis