Sorting out the West’s problems with China
And China has some problems of its own to sort out.
Keynesian problems need Keynesian solutions—even in China
In a recent post in his Noahpinion newsletter, Noah Smith compares “two theories for why China’s economy is doing badly,” each relating to a different perspective on the “macroeconomy.” If you believe that a macroeconomy is just the sum of output of various industries (i.e., that “there basically is no ‘macroeconomy’”), when demand dips in one area (like real estate, in the case of China), you can just “shift real resources out of the ‘bad’ sector (real estate) and into a sector [you think] is ‘good’ (manufacturing),” which as Smith points out, seems to be what PRC president Xi Jinping’s government is attempting. In other words, Xi thinks the country is actually tackling “a microeconomic problem, with microeconomic solutions.” However, another theory posits that “lots of recessions. . .are caused by a lack of aggregate demand”—that is, a drop in the “amount of everything that people buy.” When aggregate demand falls, a recession is likely. Looking at the data, Smith argues that the economic situation in China “looks like a classic Keynesian recession,” a result of the failure of “‘local government financing vehicles’—businesses that local governments set up to help them sell land to companies in order to finance infrastructure and public services, and which ended up evolving into shady business conglomerates.” The silver lining is that US policy offers a playbook for tackling a recession; as Smith notes, “Keynesian problems need Keynesian solutions.” Here’s how China might get back on track. (A few of these prescriptions may sound familiar.)
Pretty much everyone is calling for a big consumption-based stimulus package. . .
The other thing that China’s government could do is to remove some of the causes of low demand. This would mean bailing out the banks and LGFVs, so they no longer have a mountain of bad debt on their books and can get started lending again. . . .
There’s one more thing China’s government could possibly do. Among the advocates of fiscal stimulus, there’s a big focus on stimulating consumption rather than investment. . . .
+ Here’s Bloomberg columnist John Authers’s take on China’s “sputtering growth”: “Don’t Let Fed Noise Drown Out the Signal from China.”
+ More from Bloomberg: “China Unleashes Stimulus Package to Revive Economy, Markets”
+ From The Washington Post: “The Chinese Economy Is Faltering—and That Means More Trade Tensions.”
Business dynamics are geopolitics
Last month in his Chartbook newsletter, Adam Tooze thought through the geopolitics of car manufacturing as they relate to China. Responding to a Financial Times article questioning Germany’s continued investment in the country (“much of it,” FT notes, “driven by big German carmakers”), Tooze argues that “in the case of major industries like car-making, the choices themselves, the industry dynamics themselves are the geopolitical vector that matters”:
If you are in the business of making cars and selling cars at the global level, which is the aspiration of a VW and the German high-end marques, but also the likes of Toyota and, perhaps, GM, then being in China is not a basket you do or don’t put your eggs into. China is not a market that you can derisk from, or balance with other markets. It is the market, it is the country where both in terms of trends of consumption and production, the future of the global industry is likely to be decided. . . .
If you want to talk seriously about industrial policy and geopolitics, you need to start not from drawing board analyses of supply chains, but from business dynamics i.e. from political economy and the hybrid, oligopolistic, state-sponsored capitalist assemblage that we are in. If you start there you immediately understand the real pressure that major non-Chinese corporate players are under in China.
That pressure isn’t (or at least isn’t mostly) the result of military brinkmanship or the contest over critical industrial minerals; it’s being driven by concerns about the competitiveness of Western automakers’ products. “Right now,” Tooze explains, “non-Western firms are at risk of losing touch with the technological frontier being defined by China’s EV ecosystem.”
+ From The New York Times: “Biden Administration Proposes Ban on Chinese Software in Vehicles.”
+ The calculus may be different for consumer goods companies. From Bloomberg: “Maker of Elmer’s Glue Is Showing How to Wean Off China.”
Is the shine wearing off cheap Chinese ecommerce?
Car makers aren’t the only Chinese companies keeping US lawmakers up at night. Of course, there’s TikTok: The government wants the app banned or divested from Chinese owner ByteDance, but it’s still just as popular as ever with everyday Americans. And then there are fast fashion retailers Shein and Temu. As The Guardian reports, “Shein is the world’s most-Googled clothing brand, the largest fast-fashion retailer by sales in the US, and one of the most popular shopping apps in the world.” Likewise, Temu is “one of the most downloaded iPhone apps in the country, with around 50 million monthly active users.” (The two are battling it out for dominance in the marketplace, resorting to countersuits claiming copyright abuse, false advertising, anticompetitive behavior, and more. Over at Sherwood, Ryan Broderick and Adam Bumas offer some context for these apps and on their entangled relationship with TikTok.) Now, both the US and the EU are closing customs loopholes that have allowed Shein and Temu to ship cheap goods duty-free, known in the US as the de minimis exemption. In the fact sheet describing the proposed rule changes, Biden framed the scheme as increasing the US’s ability to “target and block illegal or unsafe shipments.” But it’s also about ending “unfair competition” harming US manufacturers. And Shein, Temu, and the like have a more dubious case against that protectionism than Chinese electric vehicle makers (similarly targeted by the Biden administration).
+ Chinese ecommerce firms benefit from the de minimis exemption. But so do US-based retailers like Amazon and Walmart. Here’s The New York Times on why the “new tariff rules could reverse a ‘paradigm shift’ in retail.”
+ From Disconnect: “Amazon’s Disastrous Plan to Emulate Temu”
+ From More Perfect Union: “It’s Not Just Shein: Why Are ALL Your Clothes Worse Now?”
+ From Bloomberg: “Temu and Shein Keep Trying to Shed Their Chinese Roots.”
+ From WIRED: “TikTok’s Defense Strategy Involves Throwing Shein and Temu Under the Bus.”
TikTok trends and social credit
Here’s a fun one we’ve been saving since July. Young Westerners are recreating the once-feared Chinese social credit system. Yesterday’s devil becomes today’s fashion. Either that or China’s doing psyops via TikTok. (We probably lost 1,000 aura points just now for talking about a silly trend that’s well past its sell-by date. And another thousand for saying “sell-by date.”)