China Shock 2.0

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Pushkin

When you think of China's role in the global economy, you might think of it as the place

that makes low-value stuff for the world. It makes widgets, it makes the basics,

and it does that quickly, cheaply, and on a huge scale. And that makes it hard for other

countries to make widgets and basics, because we just can't beat China on price or speed.

But it's also made life much cheaper for all of us over the years, as we load up on

bargain goods that are made in China. People who are very upset about this include a Mr Donald J. Trump.

But actually, that image of China is really out of date. In fact, China is absolutely crushing

it as a superpower in super-high tech industries, including electric vehicles and solar.

Today in the show, what does that mean for the rest of the world? And also, how might China

emerge as the big winner from the war in Iran? This is Unhedge, the markets and finance

podcast from the financial times, and Pushkin. It's Martin and markets columnist at the FT

in sunny but chilly London. With me, down the line from New York City, back from his

Jolly in Switzerland, we have a somewhat jet-lagged Robert Armstrong. Rob say hi.

Hi. What time is it right now? I don't know. Maybe you can check your cuckoo clock. Did you purchase

a cuckoo clock while you were there? I'll take that as a no. But excitingly, with me in the studio,

hit in London, I also have our man in Beijing. Jolly, he, Joe, thanks for coming in.

Thanks, Kelly. I spotted you in the newsroom in London and I thought, aha, I'm going to kidnap

Jolly and make you talk about China. Joe, I read the excellent China Shock 2 series that you and

several colleagues put together. It is a tapestry of many threads. Can you kind of give us the

summary? Yeah, thanks very much, Rob. So the series really describes our China's moving up

into very high tech industries and really hitting the economies of other producers such as

Europe and Southeast Asia. And the reason we thought of doing this series was that we thought that

the world really needs to wake up and take notice of this is one of the trends, perhaps one of the

most important trends of the decade. It's not about the widgets anymore, it's about the solar panels

and all of that good stuff. What's the deal here? Yeah, I mean, this is something that's been

coming slowly. And I think during COVID, people sort of lost touch with China for a while.

Right. And during that period, I mean, even before that, China had set its sights on these

high tech items. And it's not just solar panels and green stuff, it's machine tools as well.

So very high quality machine tools. You name it. China is actually producing it these days and

it's creating a shock for Europe and also for Southeast Asia and all countries that have an

industrial base are being challenged. How long you've been out there? How much has it changed

since COVID? I've been there since the end of COVID. I got there in 22

and was locked down for a while and even almost put in one of those COVID camps at one point.

Thank God, it didn't happen to me, but it has, it's just going very fast this process. I think when

I arrived there, I was surprised like most people at the number of electric vehicles, beautiful,

very high quality electric vehicles on the streets of Beijing. Yeah, I hear Beijing and Shanghai are

quiet. Yeah, exactly. That was one of the first things I noticed. I used to go to China in the 90s

and then the 2000s. And it was always very noisy with trucks and motorbikes like in E-City.

And now it's just strangely quiet. It's kind of almost surreal. It's just humming along on all those

EVs. And so as you say, like it's getting good at the high end stuff, like part of this series that

you've just been involved in this China Shock 2.0 series is like the rest of the world is waking

up to this. What does it mean? How much should this bother Rob Armstrong and his ilk out in

the States? Well, I think the States don't need to be bothered because they already got

de-industrialized by China Shock 1.0. But I think the interesting thing is China,

since they came out with this plan made in China 2025 in 2015. And they targeted all of these

sectors from shipbuilding, trains, supercomputers, everything. And they're sort of gradually meeting those

targets. And now, squaring their sights at all of the industries that Europe traditionally has

been very good at. Germany, for example, it's economy, it's manufacturing base. It's been

based around a couple of things. One of them is its car industry, which is so-called all around

like Europe and the UK and all over the place. But also, German industry is very much about

selling high-end stuff to China, like manufacturing equipment to China, heavy industrial stuff to

China. That whole equation seems to be getting a little bit out of joint now. Then it's kind of the

same picture in Southeast Asia, if I'm not mistaken, right? Yeah, the Southeast Asia case is

particularly interesting because these are developing economies that had hoped to continue down the

path of industrial progress. But China's essentially doing everything. It's doing everything from

textiles and shoes all the way to EV exports, power machinery, everything. So there's really

nothing left for these countries to do, and they're losing jobs. If it is the case, Joe,

the China is focusing on high value but subsidized and state mandated production. And along with those

EVs and machine tools, it is exporting to the rest of the world. It's essentially exporting

unemployment to the rest of the world. Why doesn't this end in a terrible political conflict?

In other words, can China expect the rest of the world to stand for this industrial policy?

I mean, that's a great point, Robert. I think if you talk to European business leaders in China,

this is something that they're constantly warning the Chinese about. They're like, this is unsustainable.

Our politicians are not going to accept this on a long-term basis. Maybe the European companies will

transfer more jobs to China, but at some point politicians will react against it. I mean,

we already have Trump in the US. I mean, what are we going to get in other countries? Same thing

in Southeast Asia. They've been very good in the past at blocking imports that they don't want,

but this is very pervasive and very hard to resist.

Rob, is this cutting through in the States, or is there still a perception that China's just

there for the widgets and putting the little screws in the iPhones? Oh, I think it's absolutely

coming through. Though, of course, it has a powerful political overlay in the United States,

where people talk about how every bit of Chinese technology is also a piece of surveillance

technology that has a role to play in the great power battle between the United States

and China. I actually have a question for Joe on this topic, which is there is a characterization

of China's economy that says it's extremely different from other industrialized high-tech

economies in the world, in that it's not competitive in the same sense. In other words,

the targets set by and for the companies are not profit so much as market dominance,

employment, creating security for China itself. Is that an accurate characterization or

there are kind of subtleties that broad brush miss? I think it's both. I mean, it is absolutely

a different kind of economy from other market economies, if you like. We know that at the local

government level, there's huge subsidies and we go through that in our China 2.0 series.

I think it's between three and nine times more subsidized than OECD, normal OECD economies.

So the subsidies are huge and also they set these targets, these growth targets, so the local

officials need to meet those targets. So they're investing in production. If you produce in a certain

area, that local government collects some of that value-added tax. So that's another incentive for

local governments to set up production and not close it down. So you have all of this this

weird sort of nexus between your local government, central government sets the targets,

pops money in through local government bonds, local governments take this money, follow their

production targets and then they set up this production capacity and then don't let it shut down,

even if it's not making money. So Michael Pettis calls Chinese companies competitive but not

necessarily efficient. Right. And what about that surveillance point? Do you hear that a lot that

oh you know this is very sneakily spying on the rest of the world using other sorts of technology?

The very big Chinese companies do have a Communist Party representative on the board.

So if the party says okay we need you to do something for us or the MSS Ministry of State

Security says we need you to do something for us, they have to do it. Setting all that aside,

I don't know it's a kind of it's a big deal. This model it might be kind of alien to us in like

you know the UK or the US but kind of works, gotta hand it to them. So like China I think I'm

right in saying accounts for like a third of the spending in the entire world on green energy.

Like it's become an absolute superpower in green energy. Give us a sense of the scale of this

thing like how quickly is it rolling this out? Yeah I mean it is enormous and I was just

looking before that I think China has production capacity for solar panels that's double

global demand at the moment. So this system this is what it does it's it's very good at producing

that actually producing production capacity if you like you know. Where are they putting the other

half of the panels? Is there like a gigantic warehouse in central China full of unused solar panels?

One of those ghost cities. Yeah in the ghost cities maybe. There is one I think I've been looking

for this. Where is this warehouse? So just to ask you a question it is an incredibly formidable

system in that sense that just you know if they say they want to produce something they're going

to produce it. That flip side of that is the waste and also you know the domestic demand is not

there. What are they going to do about the domestic demand ultimately? That's the question I wanted to

ask you if I may Joe. Does this system create the kind of prosperity that I'm sure the party also

wants to see? In other words does it fulfill that the economic side of the deal for the growing Chinese

middle class or working class? So I think it has provided huge prosperity over the past 40 to

50 years. The question is really are they going to get to sort of a middle income status and can

they go beyond that? And I think that's what the party now is trying to do with this going to

high tech industries that were once you know the realm of Europe or the US. They're trying to go up

up the chain and they believe that there's going to be some sort of trickle down effect and they

can double per capita income by 2035. But I think traditional economists don't really see a clear

path from from what they're doing now to that fully prosperous economy that you're talking about

they rob. So the solar panels that are not sitting in a massive warehouse somewhere in central China

where are they going? Because it's interesting right that the whole world is kind of beholden

to Saudi Arabia because it produces an awful lot of oil. If you assume for now that China

is the Saudi Arabia of green energy does that give China long term a different sort of geopolitical

cloud. You know I gather like there are parts of Pakistan for example that just getting

carpeted in this like Chinese solar tech and that must bring with it a certain diplomatic kind of

you know relationship and a certain geopolitical power or am I over-interpreting?

I think it isn't especially with this crisis we've seen a lot of demand for green energy products.

I mean for instance in Australia we've seen EV demand go through the roof just in the last year.

There must be all over Australia surely. One thing you've got under of this sunshine.

Yeah and I think on my father's roof I'm not sure whether they're Chinese ones with this

there's some solar panels on there. So it is it's it's definitely it gives China a huge advantage

in this area and it goes beyond just the the power that the solar panels produce themselves.

You can also use them to produce green hydrogen for instance which in the future can be used as a

green fuel for aviation and all kinds of things. So I think it's um this is definitely giving China

that that geopolitical cloud. Now the question for Europe and other places is do we want to be

dependent on China and we just give up on making our own solar panels and be dependent on China

because the technology will evolve as well you'll you'll become dependent or should should we

have quotas you know take maybe 50% from China and then by the the other 50 for themselves.

Finally enough Joe that was my next question like yeah what what do we do do we just say okay

because of its unique economic model China has just built up an unassailable lead here and I guess

we all buy Chinese cars now we all buy Chinese energy infrastructure now it's a very tricky one for

Europe as you say because like the the the German car industry is such an important part of

the German manufacturing and German industrial base but for example as part of this series one of

the things I was reading was there's effectively an abandoned dishwasher factory in Spain this

podcast loves dishwashers as you may know and and it closed it's a whole thing Joe I'll fill you

in later and it closed and that led to the loss of hundreds of jobs and along comes a Chinese

battery company called Hithium which might take over this this facility and it's pushed there in

part because Trump has stepped back from a lot of the kind of green energy initiatives that were

started under Joe Biden so all of a sudden the US is not such a a favorite place to do business

anymore maybe they come into Europe instead and look that's a lot of jobs for the people in and

around this this old dishwasher facility in in Pamplano in Spain I believe and maybe a lot of that

does involve buying not just Chinese stuff and goods but Chinese know how is Europe comfortable with

that yeah I think the the key thing here especially this Hithium case is do you want to just buy

stuff and bring it in and then you just become completely independent or do you want to have

Chinese companies come in and invest in Europe and set up this capacity in Europe and I think a

lot of people in Europe would argue let's have the Chinese come in invest here under certain rules

and there's the industrial accelerator act that we mentioned in that piece as well which is designed

to get Chinese companies to come and invest but also transfer a bit of technology use local

employees there's a whole bunch of kind of rules around that which is similar in a way to what

China did to European companies and American companies when they first went to China

I want to pick your brains on where China is with regards to the situation in Iran so you know

on paper China is the world's biggest oil importer so this should be like an unmitigated disaster

what's happened in Iran for China but it went into this crisis with massive reserves of oil

like it's got oil coming out of his ears and only about six percent of its energy consumption

is exposed to problems in the state of hall moves so well played China is there a world in which

China emerges as somehow you know the winner as a result of this war not just because

it's already got plenty of its own oil thanks very much not only because it can make the solar panels

that everyone has finally woken up to the fact that we need them but also because this gives China

I guess a different sort of geopolitical cloud across Asia which is as Rob and I were just talking

about in the last podcast we recorded the other day like emerging Asia is really under the

caution from this energy crisis so where does China fit into all of that stuff yeah I think China

China could have let's say a good oil shock crisis out of this if external demand suffers as we've

just been talking about you know China's exports will go down but because Chinese exports are so

competitive they can gain even more market share and in the long run they'll probably keep it so

China becomes even more powerful as a as an as an exporter and as a global manufacturer

as a result of the crisis if it go if the crisis is too harsh then even China's oil reserves will

start to run out and China will have to buy more oil from Russia it'll have to use more coal

because actually even though it's a huge green power it's also still building coal thermal plants

so and that's that's kind of its backbone China has a lot of its own coal and that's why

it's not going to run out of energy right right as a result of this crisis Rob do you think this

was Donald Trump's plan that he would embark on a war of choice and the winner of it would end

up being China I'm going to say that was not the main objective can you tell me Joe why did China

so fortuitously build up its oil reserves did they see into a crystal ball and see that the

straight of hormones was going to be closed or was it just national policy to develop these

immense backup tanks of crude oil let's say let's step back a bit and the party's mentality has

always been to prepare for the worst basically even back in the mal days he he situated factories

way back in the western part of China to protect them against possible nuclear attack and all the

parties always been a huge planner Rob like like we were saying you're just back from the FT

commodities Shindig in in Luzan in Switzerland but La Dida what are people there saying about how

China has played its hand into this Iranian crisis well it was interesting in a way

how China didn't come up that I think represents their preparation for this so to to your point

it was like what's going to become of Malaysia the Philippines Indonesia you know there was more

talk Joe I don't mean this personally there was more talk about Australia's energy problems

than there was about China's energy problems so it was almost like China was conspicuous by absence

in the discussions of the crisis there was a little talk about how you just stood towards this

earlier Katie about how China's reserves may allow them to strike deals with those emerging

power those emerging agent powers who basically don't have a national energy policy

are you saying I'm about already Joe like oh hi Vietnam yeah no sure you can have some

of oil there might be some terms and conditions attached to that is this happening yet

well it's China definitely wants it to happen we I don't know if you saw the one on Taiwan

China often Taiwan to a little bit of help with oil supply which Taiwan politely refused

so Taiwan's going to wake up tomorrow and there's going to be a horse's head in their bed basically

it's possibility but again China has to take over its own needs first and foremost and they are

very conservative on this front and how much Russian oil do they really want you know after

while you don't want to be too dependent on Russia either yeah you think it's not fun being

dependent on China try being dependent on Russia Europe just a little experiment in that and it

turned out badly it didn't work out it worked out very well didn't it yeah absolutely yeah I think

the other interesting geopolitical thing in this for China is China's quite close has been

quite close to Iran although I think they have been frictions between the two of them in more recent

years but China's also close to all of the Gulf states so does a nice job you know actually it's

a good point so it's tricky yeah so how because we've had stories about Chinese companies assisting

Iran with with the war that doesn't probably doesn't go down well with Saudi Arabia which provides

tons of oil to China so China's has to play a pretty delicate game in all of this playing a very

delicate game Joe thank you for sharing your brain and your insight on this because it's something

that Robin I know next to nothing about we are going to be back in just one second with Longshot

Markets move fast get the insights you need in 10 minutes with Barclay's brief a podcast from

Barclay's investment bank each week our experts analyze market themes helping you anticipate what's

next listen to Barclay's brief wherever you get your podcasts okay no it is time for Longshot

that part of the show where we go long a thing we love or short a thing we hate Rob I'll start

with you what you got having just flown it back and forth from Europe the best money you can spend

in travel is paying for the exit row seat I am long that baby fair enough Joe what are you saying

well since we have the Trump she some at next next next month actually I'm going to say that I'm

short Trump for the midterms and Longshot for next year's party congress for a fourth term Longshot

Longshot's in paying spoken market true Beijing correspondent I am again limit short prediction

markets story today that France's weather forecasting service has filed a police complaint

after detecting anomalies in its temperature gauges at an airport in Paris which seems to have

something to do with bets made on sodding polymarket so somebody made an absolute boatload of money

from a bet on the temperature in Paris being 21 degrees C. So what are we doing here guys?

Inside our weather trading dads and granddad the world over it's absolutely nuts like

fixing the weather market is stupid it's corrosive it's bad we need to like this and the pervert

classes these are things that we just need to ban jolly heat all the way from Beijing thank you so

much for joining us and Rob back from from sunny lozanne it's lovely to have you back in New York

listeners we will be back in your ears on Tuesday so listen up then

Unhedged is produced by Jake Harper and edited by Brian Urstad or executive producer is Jake

Goldstein Cheryl Bromley is the FT's global head of audio special thanks to Laura Clark,

Greta Cohn and Natalie Sadler FT premium subscribers can get the unhedged

newsletter for free and a 30 day free trial is available to everyone else just go to

ft.com slash unhedged offer i'm Katie Martin thanks for listening