Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Category: China Page 3 of 12

What Xi Jingping Has Done Right to Preserve CCP Power and Effectiveness

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On June 26, 2024

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I was a doubter about Xi. His early anti-corruption drive seemed most likely to be a way to purge the Party of his enemies, and I assumed he was driven primarily by ambition for personal power.

I was wrong.

If you want to join the CCP, you have to be accepted. It isn’t automatic. Once accepted you undergo training and if you want real power you have to rise: you have to be in charge and deliver.

In this the CCP is similar to the old Roman Republic: high political rank required you to rise up thru the cursus honorum. Doing so required you to gain experience with government: roads, sewage, trade, law and so on. In practice, few people were elected to the highest offices without military experience, and the result was that high elected officials had some actual experience with how both military and civic affairs ran.

The CCP has much the same virtues, minus the de-facto military experience. You can’t get to the top without having risen from the bottom.

There were serious threats to this in the early years of the second decade of the twenty-first century. The first was corruption: the job of officials shouldn’t be to make themselves and their families rich. People shouldn’t rise to the top because they’ve spread wealth to their supporters.

So an actual crackdown on corruption was required to retain the CCP’s policy effectiveness.

The second threat was the “princelings”. Children or grandchildren of high Communist officials, often companions of Mao. They expected office and power without having truly earned it. Xi has sidelined the majority of them. Very few have any real power in the CCP.

The third was the oligarchs. By one calculation the wealth of billionaires declined by 47% between 2021 and 2024. During the same period in America it increased over 70%. More than that, the CCP has prosecuted and imprisoned multiple billionaires, something the West never does.

Wealth=power. Huge concentrations of power outside the CCP were a huge threat to it, especially in combination with internal corruption, since corrupt and rich party members were cooperating with the oligarchs.

This has allowed China to do things like move massively to social housing and crash the housing market, something oligarchs would never allow the government to deliberately do in America. Young people being unable to afford housing was (and still is) a huge threat to the CCP’s legitimacy, but it’s being dealt with.

Weakening oligarchs hasn’t come at the expense of industry and commerce, either: the Chinese economy continues to grow, science and engineering progress is rapid, and they have recently taken control of the majority of the global EV market.

Internal corruption, cliques and external power centers controlling government are the biggest threats to any government and especially to any one party state. Xi has dealt with these problems effectively and relatively quickly and is moving on other policy concerns.

This doesn’t mean the CCP is perfect or doesn’t make mistakes. Zero Covid was done very badly (avoiding Covid was the right policy, but they screwed it up.) It does mean that they retain the ability to implement policy, often effectively.

And that’s a big win for China and the CCP.

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US Likely To Sanction World’s Largest Drone Manufacturer

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On June 20, 2024

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And, it’s Chinese, of course.

The United States House of Representatives passed a ban on the future sale of DJI drones in the U.S. on Friday, making the DJI ban more likely than not. The “Countering CCP Drones Act” is part of the United States’ 2025 National Defense Authorization Act (FY25 NDAA), a major piece of yearly legislation allotting defense spending for the coming year.

Drone maker DJI is based in China and controls over 70% of the world’s drone market share, a combination that threatens U.S. lawmakers

But…

DJI has 90% market share of the U.S. hobby market, 70% market share of the industrial market and over 80% market share of the first responder market. And their main competitor is Autel Robotics which… is also a Chinese company

(my emphasis)

As I noted years ago, what’s going to happen, er, is happening, is the world splitting into two trade blocs. Problem is the Western bloc is smaller, economically and in terms of land mass, than the one led by China and Russia, which includes a big chunk of Africa and South America, in addition, and which is growing.

Now bans and tariffs aren’t automatically bad. They can give space to domestic industry to compete. China’s “overcapacity” is the result of a lower cost structure and, in many areas, fierce competition. There are twenty-two significant drone manufacturers on this list, for example, and there are hundreds more.

To compete, the US needs to create a competitive market again, and it needs to reduce its cost structure. The simplest ways to do that would be to reduce housing and medical costs; to enforce anti-trust laws vigorously and to reduce barriers to entry for new businesses.

But part of the problem is simple: the US market is no longer as big as the one China has access to. For a long time, access to the American market was what mattered, but that’s no longer the case. The US, and the West in general, has to catch up, and they have to do so in an environment where they are the underdogs. This reality doesn’t seem to have penetrated thru to policy makers—if it had, they wouldn’t still think that sanction after sanction does significant damage to China or Russia, or almost anyone else.

But, with an oligarchy and a commitment to neoliberal “crush wages and workers and embrace austerity” ideology, the West is damaging its internal demand and markets at the same time as it needs those markets to catch up.

The USSR lost to the West for fairly simple reasons, and the main was that the West had more industrial base and more population. Now the shoe is on the other foot. It’s not likely to work out better for us than it did for the Soviets.

China’s Rise Is Normal

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On June 17, 2024

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China used trade protection and cheap wages & grabbed industry from the leading industrial power exactly the same as the US did with Britain.

 

The tech/science lead follows the manufacturing floor, with some delay, this was, again, the same with Britain & the USA.

The dynamics of industrialization are well understood at this point. The first books to read are “Bad Samaritans” and “Wealth and Democracy”.

Unlike Japan or South Korea, China has a larger population than America (same as America vs. Britain) and is has a large land mass and plenty of resources. In fact, it has slightly more land area than America.

Initial industrialization in England is an interesting story and still hotly debated. Later industrialization waves are mostly all the same. (The USSR is an exception, as are city states.)

Big leaps, as opposed to adaptations of existing models almost always come from states in hot competition, and among them the peripheral states usually win (Britain, for example, is peripheral to Europe.) The biggest tech surges in Chinese history came during warring states periods.

I’m very impressed by China’s rise and the West’s sheer incompetence in enabling it, but it’s not a huge leap the way the industrial revolution was. It’s just an extension of a previously existing model.

Japan’s rise was more impressive than China’s, as the first non-European nation to pull it off. But as an island nation with limited population, they were sharply limited. They made 2 runs at the US, one a war, one industrial, and neither let them become the foremost power.

The West was very good at keeping everyone but client states from industrializing. Even Japan needed British aid (the first time), then America’s (the second time.) But the West got stupid under neoliberal “end of history” ideology & let China run the playbook, thinking it wouldn’t challenge the West. Oops.

Americans probably should have learned from the Western experience with Japan. The British enabled Japan’s rise only to have Japan attack British possessions. Without American aid, that loss would have been permanent. But China is a continental power w/a massive population. The stupid was epic.

A radical change in economic model hasn’t happened yet, and seems unlikely to before ecological and economic collapse puts an end to the viability of the current model. Looking at Chinese cities with the 7 lane highways is instructive. It’s just a better version of the same old

A complete change of the permission system will be necessary for radical economic change. No one in power, whether in the West or China, wants that or can even imagine it.

Who knows, radical economic change might happen in China when collapse really starts biting. After all, they have the manufacturing base. But usually it happens at a periphery or in a tight area with multiple competing states.

This stuff is fairly well understood. However it’s not economists who put the pieces together, it’s sociologist and historians and even some anthropologists. Economists have done more damage to the West than astrologers did to Chinese dynasties. MBA factories get an honorary mention. (They mostly weaponized economic theories, as when they noticed economic theory saying that high profits come from not competing.)

One of the most instructive trends right now is watching so many people screaming about population collapse, when what the world actually needs is a lower population. (We could have avoided that necessity, but the window is closed. Sometimes you have to act at the right time.)

All people who yell about lower birth rates can imagine is economic growth through population expansion. Anyone who thinks that way can’t create a new economic model, they’re stuck in the old one. (Elon Musk is a good example.)

People who can’t even understand population overshoot are incapable of the thinking required to deal with the world’s actual problems.

We’ll talk about permission systems at a later date. As noted, they’re key.

Using Comparative & Absolute Advantage To Explain China’s Rise

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On May 14, 2024

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Economists spend a lot of time talking about comparative advantage: France has just the right climate and land to make great wine, for example. In the Industrial Revolution England had good quality coal in just the right place. Germany has a lot of good industrial workers and craftsmen.

Most comparative advantage, however, is cost advantage. If it’s cheaper and you can produce it for less, it’s hard to compete against you.

Absolute advantage is different. Absolute advantage is when you are the only one who sells something other people want or need. For most of the 20th century if you wanted commercial airplanes you could only get them from the US or Europe or Canada (until Canada’s aviation industry was mostly destroyed in the 50s under threat from the President of the US.) Cars were available from the West and the USSR, then from Japan and Korea. Most advanced medicines were made only by the West, though India came on strong for a lot of generics towards the end of the century.

Absolute advantage is far superior to comparative advantage: you can charge much more.

This is the second article on the West’s situation via China. If you haven, read the first “You can’t run industrial policy or a war economy under neoliberalism.”

Absolute advantage can be created. The rise of England didn’t start with the Industrial Revolution, it started when England banned exports of wool to the Netherlands. Be clear, English weavers sucked in comparison, but it didn’t matter. England produced most of the wool, and if you wanted woolens, you had no choice but to buy them England, inferior thought they were at the start, or do without.

This sort of policy used to be fairly standard. When I was young Canada would not export raw logs or raw salmon, for example, but by the 80s we had begun to do so. African nations have recently started insisting on doing primary processing in country: refine the ore or hydrocarbons, tin the fish, and so on. It’s not the same as advanced manufacturing, but it captures more of the value. If you have a resource there is more demand than supply for, you can insist. Perhaps tinning or smoking fish in the US or Mexico saved ten cents a can, but so what, before fish farming there was never enough salmon.

The problem with absolute advantage, though, is it makes you lazy. When you’re competing on comparative advantage, you have to drive down costs or increase quality, or ideally both. People don’t have to buy your goods, so they have to be better or cheaper.

Now the problem is that for about two centuries the West has had absolute advantage. For most intents and purposes everything we made had absolute advantage outside the West. We had better weapons, machines, clothes, medicines, transport. Everything.

Japan was the first non-Western nation to catch up, but an island nation without significant resources, it couldn’t compete and was conquered and made into a satrapy. South Korea was given the same treatment, and allowed to industrialize, as was Taiwan.

I was a young adult when Japan roared in the 80s, but Japan was never a serious threat, simply because it didn’t have enough population. It was never going to unseat the US or Europe, only claim its place in the (still) Western system.

China is a different matter. The reason China is eating the West’s lunch is that it has overcome most of our absolute advantage and is now competing with us on comparative advantage: Chinese goods are cheaper and in some cases, like EVs, Chinese goods are better. This often isn’t a small difference: you can buy an EV in China for 14K, and it’s a decent car.

Further, China has a massive domestic market. Oh, incomes are still not as high in the West, but the population makes up for it, and Chinese industries mostly aren’t oligopolies or monopolies. In 2019 there were over 500 EV companies. As of 2023 there were still about a hundred. The competition was fierce. There is nothing like it in the west, where car companies are essentially an oligopoly, and don’t truly compete on either price or quality.

China moved up the technological chain. They actually practice competitive market capitalism much more than we do: their markets are closer to “free” than any western country’s. They have effective subsidies due to the exchange rate and direct government intervention, of course, but that’s not the key issue any more (though it was for a long time), it’s that they are genuinely better at manufacturing than we are, and more responsive to what buyers actually want.

Many nations in the West used to have competitive internal markets, with a myriad of companies competing, but under neoliberalism, and to be fair to a certain extent under Bretton Woods liberalism, they were replaced by oligopolies. The problem with real competition is that you might lose. Fake competition is far safer, and offers far better returns for the ownership and executive classes.

Until, of course, you run into companies which are used to real competition, and they eat your lunch and you scream to the government for tariffs and trade war.

Mind you tariffs aren’t a bad idea, but if they are to work, Western companies must actually become competitive again and they don’t want to do that, it’s too much like work. Nor, as I’ve noted before, is it easy for them to do. Internal rent in the West is very high, and thus so is the cost of living. If they’re involved in a trade war, they have to sell to their own citizens, but the only way they know to reduce prices is to crush wages and if they do that, well, the internal market isn’t what it needs to be. (This is what FDR and Keynes realized, which is why New Deal and post-war capitalism emphasized having wages rising faster than inflation. It created a robust market.)

Offshoring anything another country doesn’t already know how to make is stupid, because when you offshore the locals learn how to make what you offshore and eventually they make it themselves for themselves and compete with you. “Friendshoring” can’t work, it can only crate new competitors with lower costs.

The days of the West’s absolute advantage are over. We threw it away for a few decades of high profits funneled to elites, and now we must learn to compete on comparative advantage again, something we mostly don’t have and aren’t used to being necessary.

It’s the bed we made and we have to lie in.

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China Builds A Temporary Bridge In Seven Days: Baltimore Will Take Years To Rebuild Theirs

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On April 17, 2024

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I know I’m a broken record on this, but it’s important. China is dynamic. They’re higher tech in general than America or Europe and they have an engineering culture and a belief in technology which we have lost.

The ability to do this sort of thing just doesn’t exist outside of China, to the best of my knowledge. They’re not just better than everyone else, they’re miles better.

It will take years for Baltimore to build a new bridge. Perhaps they should hire a Chinese company to build a temporary one in the meantime.

The Chinese have automated delivery vehicles all over the place. Robots in retail outlets and restaurants. The world’s largest high speed rail network.

The future doesn’t happen in America any more, it happens in China. According to people who visit, there’s also essentially no homelessness.

More than that China is willing to regulate: when delivery workers were abused, China stepped in and mandated better treatment. They also, publicly, built recreation and rest stations for them. During the pandemic they put up temporary hospitals in a week.

And more and more they design at home. This is similar to the switch from Britain to America in the 19th century: at first the Brits kept the design jobs, but increasingly they moved to the US. Of course in that case it was helped by the immigration of engineers and scientists, especially Scottish ones, but the Chinese are doing just fine, now, without a lot of Europeans and Americans. (Though there’s still an idealization of whites, if you’re an engineer or a scientist who wants a job in China and can speak Mandarin, you’ll have a job fast.)

It’s not our world any more. It’s the Chinese.

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Why China Is Wise Not To Sanction The West

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On March 27, 2024

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The West has sanctioned China repeatedly, most notably in chip production technologies, but not just in those.

It has backfired, with China quickly building its own chip manufacturing capacity, though they still have a ways to go to entirely catch up. Huawei has also created their own phone OS, cutting the Google/Apple duopoly, and Apple sales are crashing, while the government is telling all government departments not to use Intel or AMD chips.

But China has largely not replied with its own sanctions. The reason is obvious: as long as they don’t, the US remains dependent on China for a vast swathe of goods. The reason chips were sanctioned is that it was one of the only areas where the West was ahead of China (the others are biotech and arguably aviation, though given Boeing’s problems, that’s an arguably.)

If China sanctioned the West, the West would have to re-shore a vast swathe of manufacturing: if not back to Europe and the US, at least to reliable allies. It would become stronger, as Russia did under sanctions.

It would also be in a far better position to wage war. Right now, in a US/China war, the US would be swiftly be crippled by its need for manufactured goods it can only get from China.

To put it simply, the US is far more dependent on China than vice-versa, and China wants to keep it that way.

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US Sanctions On China’s Chip Industry Have Completely Backfired

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On February 16, 2024

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The highlight:

According to SEMI’s market research group, China isn’t slowing down. SEMI is forecasting China’s capacity to keep growing at a significant rate over the next few years. For 300mm, SEMI expects China to have 29% of the worldwide capacity in 2026, increasing from 21% in 2022 (Figure 2). The 200mm capacity is expected to grow from 16% to 24%. And foundry capacity is expected to reach 42% in 2026 up from 27% in 2022, outpacing the Taiwan foundry capacity expansions.

China has its goal set on being more chip-independent and spending less than $300 billion a year on importing semiconductors. To accomplish these goals, they are spending a lot of money on fabs and equipment, and in some cases forming JVs to get the right chips for their industries. So, will the European and US CHIPS Acts help to increase Europe’s and the US’s capacity? A little, but as Peter Wennink recently commented, the EU chip goal is unrealistic. I’ll add in as is the CHIPS Act in the US. China has a significant head start and it will take significant investment by the EU and US to catch up, and it is unlikely politicians and shareholders will continue to fund the exercise to reach the desired goal of 20%. (my bold)

The chart:

As for the fabricators which chips are manufactured with, well, China bought tons overseas just before the sanctions hit, BUT:

The bad news for equipment companies outside of China is that due to sanctions against foreign companies selling certain types of equipment, as well as China trying to create an independent chip market, Chinese semiconductor equipment companies are seeing above-market growth. Naura Technology, AMEC, and ACM Research at mid-year of 2023 are seeing 68%, 27%, and 47% growth respectively over 2022.  Most of this is driven by the China market.

The Chinese, pre-sanctions, were not pushing indigenous chip capacity. Chinese companies preferred American, Taiwanese and US chips, seeing them as more reliable than domestic alternatives.

A chip act might have made sense IF the US was genuinely going to re-shore production, far beyond chips or IF it was going to go to war within the next two to three years.

As it is, all it will accomplish in the end is losing the Western absolute advantage in chips and transferring the market leading position to China.

Which brings us to this beautiful, semi-related bit of news:

The effect of anti-Russia sanctions was to make Russia into the world’s fifth largest economy while massively ramping up their weapons production and overall growth rate. Germany has slipped to sixth and Russia is now a firm Chinese ally. It is true that America is making more money by supplying Europe with expensive fossil fuels, but by any rational assessment, anti-Russia sanctions strengthened America’s self-declared enemies, and weakened its allies.

In other words, the policy that Daleep was the architect of was a disaster. Yet he is lauded as capable rather than as a complete fuckup. To be fair, I suppose, he was undoubtedly following orders, but he owns the orders he follows unless he objected to them and predicted their failure.

All of this applies, times ten, to anyone involved in the anti-China sanctions, which have backfired catastrophically.

America, land of the highly paid incompetent fuck up.

 

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Western China Economic News Is Totally Deranged

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On February 8, 2024

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So, the New York Times has a headline:

China Deflation Fears Raised By Falling Prices For Food and Cars

No. China’s growth is fine, and some products dropping in price is also fine. Car prices are dropping fast because China has a competitive market for car production: they have hundreds of car companies. That is driving tech improvements and price competition. This is a good thing, it is not based on “no one has enough money to spend so everyone has to drop prices” which is what caused the Great Depression (the deflationary episode that makes everyone quake.)

I think that China is making a mistake with car production, because of climate change, but it’s not even slightly an indication of the possibility of the bad type of deflation.

As for food, China’s importing more and is coming out of a period where they have multiple huge disease outbreaks and culls for both pork (the primary meat in China) and chicken (the second most common.)

Lower food prices are a good thing as long as wages are increasing, which they are.

The constant drum-beats of doom about the Chinese economy are propaganda driven insanity. The Chinese economy is still growing faster and is overall stronger than any Western economy.

If you want a summary of what the Chinese are doing (deliberately deflating housing prices and switching investment into manufacturing, among other things), I wrote a long summary article last year on the Chinese economy’s transition last year. Read it, because you won’t find this out from any Western mainstream media source, except possibly the Financial Times (and even then, not put together properly.)

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