Ian Welsh

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

Category: China Page 5 of 11

As China Rises, Europe Falls

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On January 3, 2023

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Some interesting news in the semiconductor wars:

Now, ASML had indeed opposed US restrictions. They said explicitly that in the case of sanctions, China would learn how to make the machines themselves.

Europe’s technological lead is being destroyed by following US policies. Energy intensive firms are fleeing Europe because US energy prices are much lower (this is due to sanctions on Russia and the sabotage of the Nord Stream pipelines) and following US sanctions on China means that China just learns how to make what Europe supplies them now.

It’s sort of rocket science, actually. As you may remember, the US banned China from the International Space Station, so China just built its own and now looks likely to have a base on the moon before the US.

Woops.

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China, to repeat myself, is the world manufacturing floor. Mercedes moved their auto-design center to China. When the US took the lead over the UK in manufacturing, the UK retained its tech lead for about 20 years, but it did lose it.

Repeated sanctions on any area where the West has the lead, whether space, aerospace, semis or anything else only provide a perfect complete tariff to a country with millions of engineers and scientists and more manufacturing capacity than any other country in the world. They speed up, not slow down, the day when China will both have the tech lead and the manufacturing base.

Back in the late 90s and the early 2000s I warned, repeatedly, against transferring the manufacturing floor to China. That was the decision point, that was when it could have been stopped.

Sanctions against key points only make sense if you’re going to either go to war or move massively back to industrial policy, and the West is not going to do either of those things. I’m not sure a full move to industrial policy would even work, but it’s certainly what should be done. However, it could only be done if you were willing to crash real-estate and securities prices by about two-thirds, because the cost-structure matters.

What Europe should be doing is aligning itself with the rising power, China, or remaining a neutral bloc and negotiation places where they will keep the tech lead with China, as part of specialization. China wants trading partners and they see benefits in not having to rush every tech sector out of fear of sanctions. The US is both going down and fundamentally, at a policy level, willing to feast on Europe to slow its decline. Euro elites though they were part of a trans-Atlantic elite, but they only sort of were. When push comes to shove, American elites will let Euro elites swing. Generations of dominance have created an American elite willing to almost anything, or perhaps even anything, to retain dominance.

Europe has hitched itself to the wrong ship, and trusted the wrong nation, thinking that being a satrapy is the same as being an equal ally, and they have joined a cold war that will hurt them more than help them.

They will pay the price.

 

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A Map Showing The Two Main Geopolitical Blocs

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On December 28, 2022

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Yeah, it is mostly this simple:

This is pretty much the map for UN resolutions aimed at Russia, too.

As I’ve noted before the bottom line is that if you are a developing country, China offers cheaper loans and cheaper and faster development work like ports, airports, hospitals, roads, railways, schools and even cities. If you aren’t close to them, they don’t care about your internal politics, either.

I remember reading an interview with a minister of an African state who said approximately, “every time a western minister visits us we get a lecture, every time a Chinese official visits we get a new hospital.”

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As for sanctions, well, everyone’s scared of them, and everyone in that green zone knows that they could be sanctioned at the drop of the hat and that the sanctions never go away. Even if they don’t approve of some things Russia or China does, they don’t want the precedent of more and more sanctions and they want to belong to a monetary system which won’t lock them out.

Afghanistan is a particularly “amusing” case: when the US pulled out it then sanctioned Afghanistan and froze its foreign reserves. There was an immediate famine effecting millions. Biden is a perverse evil genius: by ending a war he was able to kill FAR more people than if he’d left troops in country.

Then there is Iran, where a treaty was signed under Obama which would remove sanctions. Iran kept its side, but the US pulled out anyway under Trump, and lo! Biden did not reverse him. Even the Europeans disagreed with that one.

China simply offers a better deal now than the West, and there’s a couple centuries or more of resentment towards Europe and America and Japan. Most countries would rather be allied with China.

And that’s why this map is fairly close to what the cold war map will look like. A few “green” countries will cut deals with the West, but most will go with China and Russia. And why wouldn’t they?

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Consequences Of The End of Zero Covid In China

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On December 20, 2022

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Back in November I wrote that China’s Zero Covid policy was the right thing done the wrong way. Briefly after, consequent to some protests against Zero-Covid, China basically abandoned the policy.

The main problem is the same that exists in almost every country: even the most competent elites in the world today are, when not graded on a scale, incompetent buffoons incapable of running anything properly. Zero-Covid should have been about making necessary infrastructure changes to clean air so that over time restrictions could be eased.

This does not mean Zero-Covid did not have benefits: by shifting the oncoming wave downstream, China has significantly decreased mortality. Current protocols mean that Covid is much less deadly than if they’d given up early. A lot more people are vaccinated and the protocols for treating Covid are much better than earlier.

But massive public health measures should have been an opportunity, again, for improving infrastructure.

In the short term I would suggest that this will cause a supply shock, not make one less likely. If you need things made in China, stock up with a two to three month supply.

 

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There will obviously be a wave of hospitalizations in China. Their hospital capacity per capita is much lower than most of the West’s. They do have the ability build temporary hospitals fast, but the choke-point isn’t facilities, it is trained staff. The CCP has plenty of warm bodies they can throw at low skill hospital jobs, but no great surplus of doctors and nurses.

The longer term consequence is the same as the longer-term consequence in the West. The best reason to do Zero-Covid was never about short term deaths, it was about avoiding Long Covid and a population which gets infected over and over again by a virus which screws up immune systems and damages organs, including the brain. The population level effects of Long Covid will be massive. The UK and US already have about 2% of their workforce disabled because of it.

China is a decade out from the start of a demographic crisis, with an aging workforce. Their dependency ratio (the number of people working / number of people not working but who must be supported) will rise and keep rising.

Long Covid will have a devastating effect on the population. There is no particular reason to expect Covid to miraculously disappear. We’ve had chronic serious diseases that lasted for centuries or millennia and the damage Long Covid does is not a serious enough evolutionary disadvantage for there to be significant pressure for its reduction. Indeed, if, as seems to be the case, much of it is related to immune dis-regulation, it’s likely to be selected for.

China’s elites policy was the right one, but public health measures at massive scale are what you do to buy time to clean up the water/air/find a cure. Since no cure has been found for Covid, and there is no cure on the horizon, well, infrastructure needed to be changed.

China isn’t worse about this than most other places. There has been no mass refitting of ventilation infrastructure in almost any major country (Japan seems to be a partial exception).

But it is tragic to see incompetence and short-sightedness destroy the last major uninfected pool of people in the post-Covid world.

China will pay a grave price for this, and Western triumphalism at the end of Zero-Covid is like cheering when the last stronghold falls to an invader. “It was so embarassing that they were holding out when we surrendered so easily.”

Pathetic and sad.

China’s Zero-Covid Is the Right Policy Done Stupid (How China/The West Could Kill Covid)

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On November 29, 2022

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Imagine policy on two axes: Good vs. Bad Policy, and either type of policy done well vs. done badly.

Invading Iraq was Bad Policy, and it was done badly beyond the initial conquest.

Quantitative easing was Bad Policy (unless you were very rich, it was good for the rich and bad for everyone else) and it was done well: It saved the rich then made them much richer. (They aren’t concerned about long term downsides.)

Social Security, Medicare, or Canada’s Universal Health care system (when first created and for a few decades afterwards) was Good Policy done well.

Zero-Covid in China is Good Policy, but in most cities, and generally across the country, it has been done badly. (A lot of these criticism are taken from Naomi Wu, who is worth reading — don’t be fooled by her appearance.)

Understand first that China doesn’t have nearly as many hospital beds, and especially ICU beds, per capita, as most of the West. If Covid gets out of control, a higher percentage of people will die than did in most Western countries. Indeed, probably many more. Even if they only lost as many as the US has so far, we’re talking about five million people or so, but it would easily be double that.

Second, understand that China has an onrushing demographic issue and is still a manufacturing state. They need workers. They fundamentally regard their population as a productive asset, while most Western elites regard their populations as passive assets to be consumed. (One argument for why Japan has handled Covid better than most developed nations is that they need their population. They regard the people as a productive asset.)

A third principle to understand: Long Covid would disable a lot of Chinese. That number, today, would probably be around 40-50 million, and would increase every day. Again, in China, people are productive assets, and you especially don’t want working age people disabled.

There is also a moral argument: Stopping people from dying or being disabled is ethically the right thing to do.

Keeping Covid under control via a “Zero Covid” policy is thus firmly in the Good Policy bucket. Even if there are some short- and mid-term economic costs (and actually, in a lot of metrics, China has done better economically than the “let’er’rip” countries) the long-term costs are much more significant.

Now the next thing to understand is that the way most people think of China, in terms of authoritarianism, is essentially wrong. Oh, China is an authoritarian one-party state, for sure, but regional elites have a lot of freedom. Only about 30 percent of the overall government budget is controlled from the center, for example. In the US, that figure is about 45 percent. States and cities are often rich, not poor (i.e., they have discretionary money), but they also have a lot of policy freedom within the guidelines set from the center.

So, different cities have done Zero-Covid differently. In Shenzen, where Naomi Wu comes from, there has been a total of one week in full lockdown. That’s it. Other cities have had more. When Hong Kong and Shanghai lost control in the summer, they had not been doing the same thing as most cities – they, in fact, didn’t lock down early, or totally, but tried a more “Western” approach.

We’re now seeing some fairly significant anti-Zero-Covid protests in some cities, including Beijing. This thread is a fairly good and balanced summary:

The issue isn’t that Zero-Covid is Bad Policy, it is that it has been done stupidly. To pick out a few major points:

One: Surgical masks are still being used. n95 masks are much more effective, and China has the capacity to manufacture them on a mass scale, almost trivially.

Two: Most Chinese homes don’t have p-traps (that little bend in your pipes under your sinks and toilet). P-traps keep water in the trap so that fumes from the sewer system below don’t get into your house. Not only does that mean your home smells better, it’s reduces disease transmission significantly.

Three: There is no mass move to install proper filtration or use of ultraviolet light in ventilation systems.

All of these actions would be low-hanging fruit for China. They can easily manufacture and install p-traps, filtration, and UV: China is the manufacturing capital of the world, and with the construction slow down there are plenty of people who need the work and are capable of doing it with respect to upgrading ventilation. It would be a win/win — more economic activity and an improved chance of achieving Zero-Covid.

Public health methods like testing, track and trace, and lockdowns work, but the real method is to fix the air quality and transmission through structural changes — exactly as we did in the 19th and early to mid-20th century to defeat diseases like Cholera, but with the water and sewage systems. Studies on the effectiveness of filtration, p-traps, n95 masks, proper ventilation, and so on show decreases in transmission that are massive — often over 90 percent.

Public health measures like mass testing and lockdown should be largely temporary; you use them until you figure out how to deal with a disease more permanently. In Covid’s case, that is NOT going to be vaccines. While they are helpful, they are not a silver bullet. Instead, what is required is the infrastructure transformation — make buildings and cities more healthy, thus reducing transmission massively (and in the meantime, for mitigation, move to n95 masks).

China has no excuses here: The science is clear and they have the industrial and installation capacity.

For China to achieve “Zero Covid,” they must move beyond emergency public health measures to permanent fixes. We know how to do it, and they actually have the capacity to do it.

That would be Good Policy, done well.

China’s mistake is trying to control Covid, not end it. The West’s mistake is not even trying to control it, let alone end it.

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The Great Favor the West Is Doing China by Banning Equipment Needed to Make Chips

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On November 7, 2022

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We really are run by fools.

“If you shut out [China] with export control, [they’ll] strive toward tech sovereignty… [Then] they’ll be able to do it all by themselves and the market [for European suppliers] will be gone.”

The great problem in the neoliberal era is that the usual road for tech and industrial catch-up, protectionist tariffs is mostly closed. (This is how Britain, the US, and almost everyone created their industrial base and caught up in tech.)

Despite what a lot of people seem to think, China isn’t a command economy. It’s a capitalist one, albeit with a large state company sector. Letting markets in is explicitly how Deng created the Chinese economic miracle.

So China buys a lot from other countries. It is a trading state, and that makes it more difficult to catch up in some techs.

Now, if this was done to, say, Bangladesh, or probably even India, those countries would be screwed — they don’t have the industrial and knowledge base. But China has these things; sure, it wasn’t cost-effective to do all the research necessary to learn how to make this equipment when they could just buy it, and after all, they need to buy some things from their customers.

But if they can’t buy it, they can learn how to make it themselves. Sure, it’ll cost them two or three years. It’ll hurt. But they’ll get over it, and then they can make it for themselves.

The knock-on effect is fun, though: Once China can make this equipment, they can sell it to other countries, which means those countries (Brazil, Iran, India, etc.) don’t need to get it from the West, and sanctions become much less effective because there’s another option on the table.

So by sanctioning China, the West will soon lose its ability to sanction not just China but pretty much the rest of the world.

Fun!

This is also true of the sanctions on aircraft equipment, by the way. China, which has a rather advanced space industry, will learn how to make its own civilian aircraft, and then, instead of everyone having to get aircraft from Europe (Airbus) or the US (Boeing, though Boeing is losing the ability make aircraft), they’ll be able to get it from China (and possibly Russia as well).

Now sanctions like these have their place: You do them just before you’re about to declare war. But if we aren’t going to do that (and there are certainly factions in Washington who do want a war with China soon), then it’s just foolishness.

Let’s hope it’s just foolishness.

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Growth Through Real Estate Bubbles v.s. Sustainable High Income Growth (China)

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On November 4, 2022

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All right. Let’s talk some basic development stuff, primarily in the neoliberal era.

Because industrial policy was disallowed with a few marginal exceptions due to the “rule based order” enforced by a variety of trade agreements and organizations, the traditional route of protecting domestic industries and growing behind tariffs became very difficult to do.

Various countries used different dodges. Russia, to get out of the Yeltsin era collapse, went whole hog into resources: advanced nations had to have oil and natural gas and minerals, and bribed key financial regions like London’s city with huge influxes of resource-money.

China did something different. They opened up partially and let foreign companies in, but they used bureaucracy to keep them under control (as had Japan, in part) and offered foreign elites huge labor arbitrage profits. They bribed the West’s elites with personal wealth, in effect. In exchange they insisted on, generally very strictly, in real technology transfer. Meanwhile, they created a protectionist bubble thru monetary policy, keeping the exchange rate in their favor.

But the other thing they did is what Turkey tried. They created a self-reinforcing property bubble. Municipalities and states built tons of new homes, people flooded in from the countryside to get the new factory jobs and the service and government and construction jobs which supported industry. Prices went up, municipal and state budgets went way up and a virtuous cycle was created, for a time.

Turkey did the same thing, but the problem is Turkey didn’t have an expanding industrial base, and that’s why Turkey imploded sooner.

All bubbles, including property bubbles are time limited. The more of a real economy you have, the longer they can run, but eventually inflation in property becomes too high, and most citizens can’t afford the housing. Meanwhile, inflationary increases in living costs make workers too pricey, and the industrial base begins to suffer.

You can start from three positions.

  1. Like the US or UK or much of the EU you can start with an industrial base and cannibalize it, or..
  2. Like Turkey you can start with a poor but big country and cannibalize an increasing part of your population, plus what little industry and agriculture you have (India is similar, but much larger and managed to get some industrialization out of this strategy), or..
  3. Like China you can build your industrial base at the same time.

Whatever you do, this strategy eventually runs into the roadblock of a cost structure which becomes too high to allow actual productive industries.

At that point, you have to tame the housing market and other out of control costs (medical, food, whatever). If  you don’t, you’re pushed back from 3 to 1, or if you did 2, the artificial prosperity begins to collapse. (India’s calories per capita have spent decades decreasing and someone who spent time there in the 80s, I can tell you Indians weren’t overfed to start with.)

So China’s now in a position where rather than bubbles, especially the housing bubble, being synergistic with industry and improvements in technology, they’re starting to strangle growth.

The route out (minus mercantalist imperialism, which is long run a loser too) requires you to stop relying on property bubbles, and start strangling your cost structure. The “free” money from asset bubbles has to go away, and you have to create a consumer society: not one like we have now, but one like we had in the post-war liberal era. Housing costs have to be kept at a level where people can buy or rent homes fairly easily: 30% of wages for rent or so, and at most about 5 years wages to buy a small home or condo.

Since the free profits of bubbles and speculation have to go away, companies have to make real money by providing real services and not just count on “real estate always goes up” or (America) “people have to have health care, so we’ll increase prices thru the roof.”

This is the task that China now has. It’s a hard task, akin to getting of hard drugs like heroin or SSRIs or Xanax. It hurts, because the financial pipes are reliant on what amounts to free or easy money.

During this transition, headline GDP and so on will suffer, there is no way around it minus looting expeditions, especially since simply running the printing press (something we’ll talk about in another article) defeats the point, which is making companies earn their money by providing goods and services for small markups at scale. (The post war liberal era worked on 3-4% markups for most mass goods.)

This is where China is. Where America and most of the West is similar: except it’s after destroying much of the industrial base and real consumer economy that doesn’t rely on massive price gouging on items people must have. There is no way to bring the good jobs back for most of the population in the US or UK or Canada or Australia without crushing the cost structure, strangling property speculation and prices and in the US tackling the medical and drug cartels.

China’s making the attempt. A lot of what they’re doing is clumsy and crude (but then, so was the one child law, but it worked even if it caused future problems.) So far the UK and Canada and the US and most of the West are not even trying, which is why you hear more about friend-shoring (aka to cheap places that are Western allies) rather than re-shoring, which can only be done for the goods that are either very high margin or which elites have realized are too militarily strategic to do in other countries.

This is why, as far as I’m concerned, the smart money is still on China, and if it wasn’t for climate change and ecological collapse, I’d consider it a done deal even if it took a couple more decades and a lot of screaming and shooting.

As it is, we’ll see. But China’s at least trying to do the right thing.

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The Rules Based International Order is the Minority

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On October 31, 2022

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I’ve said this for a while, but now we have empirical proof that most of the world likes Russia and China more than the US (h/t Johnstone):

“Among the 1.2bn people who inhabit the world’s liberal democracies, three-quarters (75%) now hold a negative view of China, and 87% a negative view of Russia,” the report reads. “However, for the 6.3bn people who live in the rest of the world, the picture is reversed. In these societies, 70% feel positively towards China, and 66% positively towards Russia.”

However, across a vast span of countries stretching from continental Eurasia to the north and west of Africa, we find the opposite – societies that have moved closer to China and Russia over the course of the last decade. As a result, China and Russia are now narrowly ahead of the United States in their popularity among developing countries.

While the war in Ukraine has accentuated this divide, it has been a decade in the making. As a result, the world is torn between two opposing clusters: a maritime alliance of democracies, led by the United States; and a Eurasian bloc of illiberal or autocratic states, centred upon Russia and China.

Now, what they’re saying without quite saying it is that the Ukraine war correlated with even better public opinion towards Russia and China.

I find the next chunk predictable:

However, what matters may not be so much the presence of democratic institutions, but
rather, whether they are valued and appreciated by citizens. If so, attitudes towardscountries such as Russia or the United States might take into account their potential to assist – or damage – the health of their democracy. For a closer look at Figure 20 reveals anumber of electoral democracies, such as Indonesia, India or Nigeria, in which the public remains sympathetic to Russian or Chinese influence, in spite of a difference in political regime. Thus it is not simply whether democratic institutions exist that countsbut rather, the degree to which they are seen as functional and legitimate.

This seems reasonable, at first glance. Here’s the chart:

Eyeball those nations above and below the 50% mark.

What does the grouping below 50% all have in common? What does the grouping above 50% have in common?

Whether or not they could be considered part of the Westerns sphere. Those above the line are generally not those who have done well under US hegemony and who are not Western allies.

So, yeah, this looks to me to be a case of “correlation is not causation”. I would gently suggest that what creates the legitimacy of “democratic institutions” is whether they have delivered for people and that those countries under 50% tend to be those who have been inside the Western (US/EU/close allies bubble.)

So, yes, it is actually about the new cold war.

Now remember, China now does most of the world’s development. It isn’t even close. They build the new ports, airports, hospitals, roads, bridges and even cities. Further, they do it cheaper than the West does it.

So, if you’re a developing nation who isn’t inside the “blessed bubble”, even as bad as that bubble has become under neoliberalism, China looks good and America looks… well, not so good, especially since the US has been the primary driver of trade and finance rules which have been very bad for the third world.

This has been going on for a long time, but since the collapse the USSR there hasn’t been another option. China offers one, and Russia is thumbing its nose at a global order that has gone out of its way to screw over the countries which are above that 50% line.

So, I wouldn’t say it’s exactly about “democratic legitimacy” — that legitimacy is a dependent variable and it is associated with America, NATO and to a lesser extent the EU. When a global regime doesn’t deliver it is discredited, and in fact even in countries under the 50% mark, most have been losing trust in “democratic legitimacy” as well. Americans and British will know well of what I speak.

The end result is that most of the world now slightly favors China and Russia and the important part is that trend is likely to continue. There will be a cold war, and most of the world wants to remain neutral or slightly favors China/Russia. On election Lula in Brazil said they would keep trading with both sides and not be drawn into the cold war, but Brazil is one of the founding members of the BRICS (Brazil, Russia, India, China, South Africa) the most important economic bloc that doesn’t include the US. Brazil will remain “neutral” but 31% of Brazil’s exports now go to China and 11% to the US. If the US is stupid enough to push, and military might isn’t determinative, Brazil would be foolish not to go with China.

Power follows industrial capacity and popularity follows treatment. With a few notable exceptions, if you’re a third world country, China treats you better than the US has in ages. As for Russia, well, they may screw with nearby countries, but otherwise they don’t get involved much (remember Syria invited them in, and is a long time ally.) Indians, in particular, remember that Russia was a friend for generations when the US and Europe were not. As for Africa, China has been developing good relations thru trade and development for decades now.

In this cold war, the West is going to be the one isolated, as the above (older) map from the Economist suggests. Yes, they are “neutral” for now, but if forced to choose, don’t assume they’ll choose the current order.

The “rules based international order” is rather small and how it has been run has damaged democratic legitimacy far more than “China” or “Russia”.

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China “To Those Who Have Everything”

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On September 12, 2022

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This is why you don’t give away your manufacturing base. China is “gaining market share in both low and hi-tech sectors.”  It is “now a more important international supplier than Germany, the U.S. and Japan combined.” China’s share of manufacturing exports grew from 17% in the 2017 to 21% in 2021.

The US recently put a ban on sending advanced AI chips to China, and the CHIPS act forbids any company which takes money from setting up new fabs in China, but it isn’t going to matter. Just as China jumped two chip generations (from 11 to 7nm) far faster than any western expert I know of thought they could, they will catch up in AI chips.

Then they will surpass.

As people at least as far back as Adam Smith pointed out, scale matters for efficiency in a lot of industrial processes. China has it. Once the US did, and before that England. Where the manufacturing floor is matters as well, it leads to faster iteration and more understanding of what works and doesn’t: “to those who have everything, more is given.”

America efforts to stem the rise of China aren’t working. The current anti-Russia sanctions are hurting Germany in particular. The entire “globalization” nonsense was a huge mistake for the West, and it will lead to a civilizational transfer of the locus of power from Europe/America to China/Asia unless climate change interferes (which it might.)

But the key thing to understand is that this is accelerating, not slowing down. In the 19th century, Britain deliberately helped America industrialize so its rich could make more money, without looking at the fact that it was a continental power with a larger population. In the late 20th and early 21st century, America did the same with China.

Helping Japan and Korea and Taiwan industrialize or reindustrialize didn’t matter that much: at the end, they are population constrained.

China isn’t. And for a few coins the West’s elites gave another civilization the opportunity to surpass it in perhaps the most important source of power in the post-industrial revolution world.

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