China Economic Update: Further State Control

An apt quote describing Chinese economic reform (my emphasis added):

The analytical community will pore over the entrails [of the reform agenda] to analyse whether the spirit of market-based reforms continues to flourish for the future. Or whether it has begun to fade amidst a more general Chinese political and ideological redirection to the left. Or just as problematically, for economic reform to die at the implementation level because of confusing political and policy signals from the centre, meaning that it is much safer to just keep your head down. Or because there are limited local incentives, either personal or institutional, to actively prosecute reform which inevitably generates local conflict with deeply entrenched vested interests. Or, more likely, an unholy cocktail of the above, collectively reinforcing a natural predisposition towards bureaucratic inertia.

-Kevin Rudd

President of the Asia Society Policy Institute and Former Australian Prime Minister

As this blog has stated many times before, Chinese economic reform is dead. China, for the past decade, has seen a systemic rise in debt as state influenced asset allocation becomes increasingly inefficient. Three years ago Chinese credit growth was 16.6% . With over $40 trillion in bank assets, it will not likely return to previous growth levels. Even so, the current  pace of credit growth, 10%, once again exceeds nominal GDP growth, meaning that China is adding to economy-wide leverage rather than moderating the debt load.

Xi in Davos

In 2017, General Secretary of the Chinese Communist Party Xi went to Davos to promise to defend globalization and reform the Chinese economy.

The SOE share of listed company revenue in “normal” industries–those that Beijing identified as non-strategic and commercial–increased significantly, to 15.6% in 1Q2019 from 14.8% in 4Q2018. This increase is the first since 1Q2016, and it shows that the state is advancing even in industries where Beijing set out to withdraw influence in the 2013 Third Plenum Decisions. Industrial SOE assets grew by 4% year-on-year in 1Q2019, faster than private asset growth of 1.4%. SOE profitability flattened in 1Q2019, suggesting that past policies framed as reform (e.g., capacity cuts, deleveraging) have failed to improve SOE efficiency. Returns on SOE assets peaked at 4.5% in 3Q2018 and then declined to 4.0% in 1Q2019.

In 1Q2019, the State Administration for Market Regulation (SAMR) reviewed 28% of foreign-involved mergers but only 9% of domestic mergers. At the same time, China’s poor judicial transparency has deteriorated further. Courts publish less than 5% of the competition and intellectual property disputes they handle each year, with significant delay. In 1Q2019, the courts even removed previously published cases (400–600 cases a year) from their websites.

Communism Guides the Economy

I recently read through the 国务院关于深化国有企业改革的指导意见 (Guiding Opinions of the Central Committee of the Chinese Communist Party and the State Council on Deepening the Reform of State-owned Enterprises) which was published in 2015. Here are two interesting quotes with translations following:

1.) 坚持党对国有企业的领导。这是深化国有企业改革必须坚守的政治方向、政治原则.  The Party’s leadership over SOEs shall be upheld. This is the political direction and principle that must be held fast to in deepening SOE reform.

2.) 企业党的建设全面加强…工作体系更加完善,国有企业党组织在公司治理中的法定地位更加巩固,政治核心作用充分发挥.  The Party building of enterprises shall be comprehensively strengthened… In addition, the Party organizations of SOEs shall enjoy a more solid statutory position in corporate governance, and fully display their core political role.

Chinese reform has regressed towards China’s bureaucratic mean- communism and state control. As China releases GDP numbers, quarterly updates, and policy guidelines, readers should put those documents into a clear framework: China is slowing, debt is growing, and the state is consolidating.

Lastly, here is a quote from the EU Chamber of Commerce’s report “18 Months After Davos:”

One of the largest concerns for European players in the healthcare equipment sector is the CM2025 initiative. The China Manufacturing 2025 Key Area Technology Roadmap, which was drafted under the guidance of the China Academy of Engineering, sets domestic market share targets for Chinese players in the healthcare equipment sector. International players are concerned that any available support will only be extended to domestic companies. So far, there has been no obvious effect on the healthcare market, and the European Chamber has been assured by the Chinese authorities that this implementation strategy is not to be taken seriously.

Thanks for reading.

 

Certainties From Tsinghua: $3 Lunch and Evidence Donald Trump Won’t Secure a Meaningful Trade Deal with China.

When I was a student at Tsinghua, I remember constantly complaining about the cafeteria food. In general, I struggled getting the amount of protein I needed, and a  lot of the food was oily. Picking which vegetables to eat was always difficult, because so many of them seemed to just soak in salty, oily brine.

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Campus has a number of cafeterias; this one was my favorite. Each floor has perhaps 10 stalls, and each stall on a floor is loosely affiliated with one style/region of food. This cafeteria was my favorite because the fourth floor is devoted to Sichuan cuisine.

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热饮冷饮 – Hot Beverages and Cold Beverages 西式面- Western Style Bread

Although I consistently fretted over protein and oily vegetables, the food was good and -perhaps most importantly- cheap. Here are examples of what I ate:

 

I spent an average of RMB 20 per meal (something akin to $3).  I’m certain that this is the best cafeteria food that one can buy for $3.

Tsinghua also taught me another certainty: Donald Trump is set for failure regarding the coming trade deal with China. Let me show you:

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Consumption-led growth. The decisive role of the market. Tsinghua has an amazing library. I was floored that there were so many books in foreign languages (the English selection is enormous).  I was also floored to see that many Chinese think-tank publications on economic reform were translated into English. I devoured them, nodding my head in agreement and proud at the tough policy recommendations they made: transfer state wealth to Chinese people in order to have a balanced economy.

The Chinese economic model is built upon transferring wealth from households, consumers, and savers to corporations, producers, and investors. This is best seen in China’s comically low household consumption rate.

consumption-china

As China’s economic model has progressed, Chinese households have enjoyed an increasingly small share of the nation’s wealth. Corporations, both ‘private’ and state-owned, have enjoyed an increasingly large share of the nation’s wealth (as has the richest in China). This ‘problem’ has been on the Chinese government’s radar since at least 2007.

In 2007 Premier Wen Jiabo cautioned, “”the biggest problem with China’s economy is that the growth is unstable, unbalanced, uncoordinated, and unsustainable.” This prompted IMF economists to write, in 2007, about strategies to have consumers share a larger percentage of national wealth.

However, economic reform wasn’t planned until Chairman Xi Jinping took over in 2013. Economic reform plans were immediately organized:

1.) The market had been defined as a “basic” role in allocating resources since the country decided to build a socialist market economy in 1992. In 2013, The Communist Party of China defined the market’s role as “decisive” in allocating resources. This importance cannot be underestimated.

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It is common for state-owned enterprises to have pictures to pay homage to Chairman Xi in their lobby (Forgive the poor quality).

2.) On November 12, 2013 in the Third Plenary Session of the 18th CPC Central Committee, Chairman Xi said the following regarding China’s economic reform:

The key to establishing a sound socialist market economy lies in striking proper balance between the role of the government and that of the market, so that the market can play a decisive role in allocating resources and the government can play its own role more effectively… Letting the market play a decisive role in allocating resources will mainly require economic reforms, but it will also inevitable affect politics, culture, society, ecological progress, and Party building.

3.) On April 8, 2013 at the Boao Forum for Asia Annual Conference, Chairman Xi said the following regarding China’s economic reform:

We will continue to enhance the rule of law and actively improve our investment environment so that all enterprises can enjoy equal access to the factors of production, market competition, legal protection. The Chinese market can become fairer and even more attractive… China will never close it’s door to the outside world… We will open up new areas and enable deeper access… We firmly oppose protectionism in any form, and we are willing and ready to solve economic and trade differences with other countries through consultation.

4.) On May 26th, 2014 at the 15th Group Study Session of the Political Bureau of the 18th CPC Centeral Committee, Chairman Xi said the following regarding China’s economic reform:

We should reduce the government’s involvement in resource allocation and its direct interference in microeconomic activities. We should step up efforts to develop a uniform market system characterized by openness and orderly competition, and set fair, open, and transparent market rules.

Xi in Davos

5.) In 2017 at the World Economic Forum in Davos, Chairman Xi said the following regarding ‘free trade:’

Whether you like it or not, the global economy is the big ocean that you cannot escape from. Any attempt to cut off the flow of capital, technologies, products, industries, and people between economies, and channel the waters in the ocean back into isolated lakes and creeks, is simply not possible.

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These books which I vociferously read at Tsinghua are remnants, relics of this forgone economic reform. Chairman Xi’s economic reforms, as I have been writing about for the past two years, have been complete failure. China is backtracking on reform, encouraging state-backed growth, reducing competition, and exacerbating the economic slowdown already underway. According to Ruchir Sharma at Morgan Stanley Investment Management, it now takes $3 of debt to create a dollar of growth in China. In the face of economic reform failure, China is pumping debt into large state-backed corporates while the private sector is squeezed out.

A Chinese dictator tried to force reform. That reform failed.

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The United States is seeking the following changes in the Chinese economy: trade deficit reduction, IP protection, cease market distorting subsidies, end of cyber intrusions, and end technology transfer.

The idea that the United States would be able to force large, structural reform in China when a Chinese dictator could not is absolutely ridiculous. The idea that Beijing is unable to move on the US requests, most made 9 months or even years ago (IP Protection), and that another 60 days will be enough time for them, seems somehow more ridiculous.  The hubris of the United States position is overwhelming. The Xi speeches, the policy reports from think tanks, these are fossils of failure that the United States should heed.

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CNBC is also reporting that President Donald Trump said he will be discussing the criminal charges against Huawei with US attorneys and attorney general in the coming weeks. Is the United States judiciary no longer independent? If the United States accepts a trade deal that backs Chinese purchases of US goods to reduce the trade deficit, America is run by a spineless swamp with no sense of the lack of economic freedoms that put the US in this position to begin with.

The White House would do well to look at Chinese economic planning relics from 2013 or read Chairman Xi’s speeches.

Thanks for reading.

 

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.

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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.

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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.