China’s economic game of dominoes

The bird is free, as is Swamp Notes! The bulletin will be free to read online over the next two weeks, through the US election. Ed and I will be turning to mid-term contests across the country in our special daily Swamp Notes coverage next week, but before that, I’d like to use this note to ring in about the incredible world events of the past week, and especially China’s future trajectory.

If we had any doubts about the technological decoupling between the United States and China, the past few days have clarified it, as I explore in my column today, which also examines what is likely to happen. then produce in this process. The regionalization of the global economy accelerated when French President Emmanuel Macron took the opportunity to call for a Buy European Act “like the Americans”, because the EU must “reserve itself”. [our subsidies] for our European manufacturers”. I actually agree with that; I think the world would ultimately be a healthier place economically and politically more balanced if there were more regionalized and even localized centers of production and consumption.

In the short term, however, we all know that with a new paradigm comes bumps. Perhaps one of the most important concerns the performance of the Chinese economy over the next few years. I was on a very interesting conference call on China’s economic future last week, and one participant pointed out something very telling: During last week’s market rout, foreign and domestic investors in China sold a lot of short-dated risky assets, but foreign fixed-income investors did not give up as many longer-dated Chinese bonds, while domestic investors gave up almost everything.

What does this tell us? For starters, wealthier Chinese are afraid of the more authoritarian and top-down nature of President Xi Jinping’s regime. They’re running for the hills, perhaps realizing that the whole “getting rich is glorious” thing is now tempered with a heavy dose of Chinese-style populism (a topic I covered a while ago, here ). Not good for capitalists, even those with Chinese characteristics.

Chinese investors may also believe that Xi’s new leadership team’s lack of economic expertise, coupled with its more reactionary and nationalistic approach, will sooner or later lead to conflict in Taiwan. It would be extremely costly for everyone, but particularly for China. At the same time, huge short-term problems are about to appear in the history of Chinese real estate. As most people know, an unprecedentedly large credit bubble built on the real estate sector is collapsing and straining the finances of provincial governments. Chinese New Year is January 22 and these governments will be under pressure to pay workers before they go home to see their families. This will add fuel to the fire.

If Beijing starts letting local government debt plummet, it raises questions about the whole Belt and Road Initiative, which relies on loans for infrastructure development, in hopes that ‘it will be profitable in the longer term and attract countries to China. economic orbit. But what if that debt, too, starts to deteriorate? This is a real possibility given the financial pressures on emerging markets from energy inflation and a stronger dollar. Then you start to see the dominoes of the Chinese economic model crumble not only domestically, but also internationally.

There is, as always, a counter-argument. China survives this period of turbulence, manages a kind of “soft” decoupling with the United States (with many exemptions for various products), then takes advantage of the speed of decision-making inherent in authoritarian regimes to strengthen its own technology needs and ultimately achieve regional supply chain independence. In this paradigm, increased state control creates an executive, results-oriented system well positioned to carry out a playbook for known economic needs. Meanwhile, the United States and Europe must stumble and understand the nuances of a new economic path that must be accepted by the electorate in a messy democratic process.

I’m slightly inclined to think the first scenario is more likely (in part because so much business talent is leaving the country). But I don’t rule out the latter. Ed, do you have strong feelings anyway? What do you think of Buy Europe? Also, since you are a veteran of India, I would love to hear your thoughts on how India will soon feature in the new regionalism. Feel free to choose what you want to answer here, and I hope you can rest for the midterms!

Recommended Reading

I’m doing an all-FT legend this week because there are so many great pieces to choose from.

• Matthew Garrahan wrote a great lunch with the FT with American comedian Jon Stewart at one of my favorite NYC pizzerias, John’s of Bleecker Street. The profile is both hilarious and extremely sharp.

• Josh Chaffin is doing what must be the best profile yet of likely 2024 Republican presidential candidate Ron DeSantis.

• Janan Ganesh is on the point that knowing what you want in life, not necessarily how to get it, is the most important skill. I found this column very moving, and also sobering – it’s amazing how many of us stumble through life and let decisions happen, rather than actively making them. I will try to be more thoughtful and honest with myself in the future.

And finally, all Swampians should tune in to our Swamp Notes Live event on Thursday November 10th. We’ll get back to you closer to the date, but you can sign up here.

Edouard Luce responds

Rana, I’m not sure if Chinese growth is derailing or going through a controlled downturn. Either way, it’s India’s chance to take the lead as the fastest growing economy in the world (a feat it’s already achieved once before, between 2013 and 2018 ). India has already taken a slice of the revamped tech supply chains leaving China. Much of the iPhone 14 is now made in South India for example (although Apple’s sales so far have been very disappointing). On paper, India is well placed to supplant China. It has a much younger age profile than China, which faces a middle-income demographic trap. He has a much more impressive entrepreneurial base. It should be noted that India’s national vaccine, Covaxin, produced by Bharat Biotech, is considered more effective than either of the native Chinese vaccines. As Xi continues to impose stifling zero Covid restrictions on much of China, India is operating as if the pandemic is a thing of the past.

All this suggests that things are finally looking up for India. But you should never underestimate its ability to crash. As the world blindly grapples with what Adam Tooze calls the age of polycrisis (Swampians should read his Weekend FT article on this), India’s vulnerabilities are becoming painfully apparent. One is its exposure to catastrophic climate change. Indians suffer from “web bulge” temperatures – the point at which heat and humidity combined become deadly – more than any other country. And this is bound to get worse. Its policies become increasingly neo-fascist over time, which explicitly targets India’s fundamental strength – secular pluralism. And its current account looks fragile in a world of soaring energy and food prices. India is fortunately too large and self-sufficient to feature on the growing list of emerging markets. But it is surrounded by countries that are, including Pakistan and Sri Lanka.

In my opinion, the world is reglobalizing more than it is de-globalizing. India should benefit from this, which is why I would be long India and short China. But without much conviction.

Your reactions

And now a word from our Swampians. . .

In response to Why Democrats Still Have No Idea About ‘Hispanics’:
“Democrats seem unable to learn or come out of their entrenched positions. I saw a report that said Republicans had set up outreach centers in ‘minority’ communities, including immigrant communities , who helped obtain citizenship. With steps like this, is it any wonder that segments of the Latino community have drifted toward Republicans? As Will Rogers foresight noted: “I’m not a member of any organized political party; I am a democrat.'” —Gail Berney, Duchess County, New York