Beddoes: China is Uninvestable for Outsiders

Summary

The video transcript discusses the current economic challenges faced by China, highlighting a significant property bust, slowing growth, deflation, and a collapse in both foreign and domestic confidence. Despite setting an ambitious growth target of 5%, doubts persist regarding the feasibility without a detailed stimulus plan, leading to concerns about a prolonged economic malaise similar to Japan's experience. Additionally, it touches on Xi Jinping's consolidation of power, the diminishing technical competence in economic policy, rising unemployment among youth, and the geopolitical tensions with the US. The transcript also explores Europe's potential as an investment destination amid these challenges, particularly focusing on Germany's economic integration with China and the shift towards electric vehicles.

Takeaways

• 👎 The Chinese economy is in a weak state, facing a significant property bust, deflation, and loss of confidence in both domestic and foreign investment.
• 📈 China set an ambitious 5% growth target, same as last year, but there are doubts about achieving it due to lack of stimulus package details.
• 🌍 Xi Jinping's increased control and focus on national security over economic strategies have raised concerns about the direction of China's economic policies.
• 📝 References to Xi Jinping in economic reports suggest a centralization of power, with limited public communication from other officials.
• 🚫 The technocratic skill of Chinese economic policymakers, once highly regarded, is now questioned amidst current economic challenges.
• 💁‍♂️ High unemployment among young Chinese and disillusionment with future prospects are eroding domestic confidence.
• 🛡️ Sino-US tensions remain high, with both Trump and Biden administrations advocating tough stances on China, affecting international investment views.
• 💰 Foreign investors face challenges in China due to domestic issues and geopolitical tensions, making some sectors less investable.
• 🖥 Europe, particularly Germany, faces economic challenges but also opportunities for growth and foreign investment, amidst shifts in global trade dynamics.
• 🛠 The global landscape is changing with the rise of electric vehicles (EVs) and AI, areas where Europe and China are keen to lead despite U.S. controls.

Q & A

What is the current economic situation in China as discussed in the transcript?

The Chinese economy is facing significant challenges, including a property bust, slowing growth, deflation, and a collapse in both foreign and domestic confidence.

What was China's economic growth target for the year, and why is it ambitious?

China set an ambitious economic growth target of 5%, the same as the previous year, despite the lack of a detailed stimulus package and the current economic downturn.

How has Xi Jinping's approach to leadership affected the economic outlook in China?

Xi Jinping has centralized power, focusing more on control and national security rather than economic stimulus or liberalization, which has contributed to concerns about China's economic strategies and future.

What are some of the consequences of the economic situation for the Chinese populace?

The economic downturn has led to high unemployment rates among young people, a sense of disillusionment, and a decline in the expectation of living standards improvements.

How has the perception of Chinese economic policymaking changed according to the transcript?

Previously admired for their technocratic competence, Chinese economic policymakers are now facing skepticism over their ability to manage the current economic challenges effectively.

What impact does the current US-China relationship have on foreign investment in China?

The US-China tension, characterized by higher tariffs and a confrontational stance from the US, has made investing in China more complicated and uncertain for foreign investors.

How does the transcript describe Europe's potential role in the current global economic landscape?

Europe, particularly Germany, is seen as an alternative destination for foreign direct investment and could benefit from its economic ties with China, despite facing its own challenges.

What is the 'small yard with a high fence' strategy mentioned in relation to US policy towards China?

This strategy refers to the US approach of protecting critical sectors from Chinese influence by limiting access and heightening security, indicating a selective but firm stance on engagement.

What challenges does Germany face according to the transcript?

Germany faces significant economic challenges, including its reliance on China as a market, the transition to electric vehicles (EVs), and the need for policies that can stimulate growth.

How does the rise of AI and technology impact the economic rivalry between the US and China, as hinted in the transcript?

The advancement of AI and technology is seen as a wild card that could shift economic dominance, with the US currently in the lead but both Europe and China aiming to enhance their capabilities in this area.

Outlines

00:00

📉 China's Economic Downturn and Leadership Control

The first paragraph discusses the current economic situation in China, emphasizing its significant downturn, with a notable property bust, deflation, and collapsing confidence both domestically and from foreign investors. The ambitious growth target of 5% set by the government is viewed with skepticism due to the lack of detail on any significant stimulus package, raising concerns about the feasibility of achieving such growth. Additionally, the narrative points to Xi Jinping's consolidation of power, with increased references to him in official reports and a noticeable absence of the traditional premier's press conference, indicating a shift towards centralized control and away from open dialogue. The economy's weakness, coupled with Xi's focus away from economic stimulus towards national security and a confrontational stance with the United States, poses questions about China's future economic direction and the global implications of its strategies.

05:03

🌍 Global Implications of China's Position and Europe's Opportunity

The second paragraph expands on the global geopolitical context, noting the challenging environment for foreign investors in China amid domestic economic issues and rising geopolitical tensions, particularly with the US. The concept of a 'small yard with a high fence' is mentioned as a metaphor for the US's protective stance against China. The paragraph then shifts focus to Europe, suggesting it as a potential alternative for foreign investment, especially given Germany's economic ties with China and the broader European market's current undervaluation. The discussion highlights Germany's challenges, particularly with the automotive industry's transition to electric vehicles (EVs) and Europe's potential to capitalize on emerging growth areas, despite the dominance of the US in certain sectors and China's ambitions to compete.

Keywords

💡Chinese economy

The Chinese economy refers to the economic structure and performance of China. In the video, it is described as being in poor shape, characterized by a significant property bust, slowing growth, deflation, and a collapse in both foreign and domestic investment. The discussion highlights the challenges China is facing, including a lack of consumer confidence and uncertainties about achieving ambitious growth targets without clear strategies for economic stimulus.

💡Deflation

Deflation is the decrease in the general price level of goods and services. It is mentioned as one of the current economic conditions in China, indicating a period where the economy is experiencing reduced consumer spending and investment. Deflation can exacerbate economic downturns as consumers and businesses may delay purchases in anticipation of lower prices in the future, further slowing down the economy.

💡Stimulus package

A stimulus package consists of government spending and tax cuts intended to stimulate an economy by boosting demand and supply. The video script touches on the anticipation and subsequent absence of a significant stimulus package from the Chinese government to address the current economic downturn, contrasting it with past actions where China effectively used such measures to maintain economic growth.

💡Technocratic competence

Technocratic competence refers to the ability of technical experts or technocrats to manage an economy based on their expertise and knowledge. The video script praises the historical technocratic competence of Chinese economic policymakers, particularly during the global financial crisis, highlighting their skillful implementation of stimulus measures to sustain growth. However, it questions whether this competence can help overcome current economic challenges.

💡Xi Jinping

Xi Jinping is the General Secretary of the Communist Party of China and President of the People's Republic of China. The video discusses his increased amassing of power and control over China's political and economic directions. It suggests Xi's focus is more on national security and confrontation with foreign nations rather than on economic reforms or stimulus, which could be affecting China's ability to address its economic issues effectively.

💡Investor confidence

Investor confidence refers to the level of trust investors have in the potential for returns on their investments within a particular market or economy. The script describes a significant collapse in both foreign and domestic investor confidence in China, attributed to the current economic conditions and uncertainties about the government's policies and global geopolitical tensions.

💡US-China tensions

US-China tensions refer to the increasingly competitive and confrontational relationship between the United States and China, especially regarding trade, technology, and geopolitical influence. The video script highlights the backdrop of heightened tariffs and geopolitical rivalry, impacting investors' perceptions and decisions regarding investments in China.

💡Economic growth target

An economic growth target is a goal set by a government for the annual rate of growth in the country's Gross Domestic Product (GDP). The video mentions China setting an ambitious growth target of 5%, despite the lack of clarity on how this target will be achieved amidst current economic struggles and without a substantial stimulus package.

💡Unemployment

Unemployment, particularly among young people in China, is highlighted in the video as a significant concern. High levels of unemployment contribute to a sense of disillusionment among the younger generation, who fear they will not experience the same improvement in living standards as their parents did, further undermining consumer confidence and economic prospects.

💡Geopolitical environment

The geopolitical environment refers to the global context in which a country operates, including its relationships with other nations and the international tensions or alliances that may affect its economic policies and performance. The video script discusses how the tense geopolitical environment between China and the US, characterized by trade wars and confrontations, poses additional challenges for China's economy and foreign investors.

Highlights

The Chinese economy is currently facing significant challenges, including a major property bust, slowing growth, deflation, and a collapse in both foreign and domestic confidence.

China has set an ambitious growth target of 5% amid economic uncertainties, without detailing any major stimulus package.

There's increasing concern about the depth of China's economic problems, leading to speculation about a possible prolonged period of economic stagnation.

Xi Jinping's consolidation of power and the focus on his leadership raise questions about China's economic strategy and governance.

China's technocratic prowess in economic policymaking, once seen as exemplary, is now under scrutiny as the country faces unprecedented economic challenges.

The Chinese government's shift towards national security and away from economic stimulus reflects a change in priorities under Xi Jinping's leadership.

High unemployment rates among young Chinese and a sense of disillusionment reflect a broader crisis in confidence and a departure from the era of rapid economic growth and improvement in living standards.

The geopolitical tension between China and the US, marked by higher tariffs and a confrontational stance, complicates the economic outlook for China.

Foreign investors face a challenging environment in China due to domestic economic issues and geopolitical tensions.

The concept of a 'small yard with a high fence' highlights the US strategy of protecting key sectors from Chinese influence.

Certain sectors in China are becoming less attractive to foreign investors due to increased controls and uncertainties.

Europe, especially Germany, faces economic challenges and opportunities in light of its complex relationships with China, Russia, and the shift to electric vehicles.

Europe could emerge as an alternative destination for foreign direct investment, offering potential bargains and growth areas despite longstanding pessimism about its economic prospects.

The transition to electric vehicles and the digital economy represents both a challenge and an opportunity for global economic realignment, with Europe and China positioning themselves differently.

US dominance in technology and innovation is a significant factor in the global economic landscape, with implications for China's ambitions and Europe's strategies.

Transcripts

So you have actually a piece right now in The Economist about China.

What do you make of what's going on economically right now in China?

What do we know? Well, right now, the Chinese economy is

really not in very good shape. We know that we it's in the middle of a

very big property bust. Growth has been slowing.

It's slipped into deflation. There's a tremendous loss of confidence.

Investment. Foreign investment has collapsed.

Domestic confidence has collapsed. It feels pretty bad.

And so there were a lot of signals, a lot of questions with with this week

coming of, you know, would that be some sign that there'd be a big stimulus from

the government to try and kind of get the economy going again?

And as you said, what we got was an ambitious growth target, 5%, which is

the same that they had last year. But last year, remember, China was

coming out of its really strict pandemic lockdown and there was an expectation

that the economy would rebound as controls were lifted.

It didn't actually rebound that much this year.

No one is quite sure how they're going to get to 5%, particularly because there

was not much detail of any sort about a big stimulus package.

In fact, the opposite. And so increasingly, I think there's a

lot of worry about the depth of the problem that the Chinese economy is in.

Is this you know, is this a kind of Japan style multi year, perhaps

multi-decade malaise? Is it something they can fix in the

short term? No one really knows.

And compound that with the fact that Xi Jinping has amassed ever more power

around himself. One of the really striking things about

this week's gathering and this is this gets into kind of Kremlinology of what's

going on in China. But the premier who traditionally gives

a press conference at the end of this meeting, this time, that's not going to

happen. No one apparently can speak, you know,

other than the word of Xi Jinping and the report, the working report of what

was what's coming for the Chinese economy has more and more references to

Xi Jinping. So he's asserting a lot of control.

There are ambitious targets. Not clear how to get there.

And this in an environment where the economy is really very weak and consumer

confidence is very, very low. So it's pretty bad, actually.

No news coverage you just had this year. But I think they also indicate they're

not going to have until further notice. They're not either.

If they're not and, you know, kind of what do you make of that?

Because one of the interesting things in China and I'm I'm not a China X, but I

have a fantastic China team, but I go there pretty regularly.

I'm going there again next month. All through the years that I've been

going there, it has been true that the kind of technocratic competence of

Chinese economic policymakers has been really exemplary.

And if you think back, you think back to the great financial crisis when China

did a really big stimulus. They were technocratic, clear, really

clear about what they needed to do to keep their economy going, to keep it

strong. And there were those years of tremendous

growth. Growth obviously has now slowed, but

there was still a view that kind of technically they knew what to do to

achieve the growth targets, because in the end, the kind of legitimacy of this

regime has always hinged on the fact that it has provided for material

prosperity. And, you know, the social contract, if

you will, had always been You put up with an authoritarian government, you

put up with all of those strictures. But you have you know, China is being

made great again and China's Chinese prosperity is rising.

That's really shifted. I mean, you see it, for example, with

the high levels of unemployment amongst young people.

You sense the sense of disillusionment. People, young Chinese now know that they

are not going to see the remarkable increase in living standards that their

parents saw. So there is a sense of loss of

confidence. At the same time, there's this very

clear clampdown from Xi Jinping not only amassing power around himself, but but

really shifting the focus towards national security, towards a, you know,

a great Chinese state in conflict with or at least confrontation with the

United States. That's what he's focused on.

He is not I don't think he's not very interested in economics.

He's very statist. He doesn't believe in stimulus.

He's got he's got a very kind of, you might even say, economically illiterate

view of what the economy needs. But he's not focused on that.

And so the question is, is all of these ingredients together?

How does China actually get out of its malaise?

What does that mean we should do as investors, as readers of The Economist,

what do we do? Because back in the days of the Cold War

with the Soviet Union, you could pretty much avoid the Soviet Union.

Economically. It was not that big a player globally.

China is the second largest economy in the world.

It's hard to say. We're just not going to invest in China.

We're not going to deal with China. We have to.

Well, there's two separate things here and one which we haven't talked about

yet, which is all of this is against a backdrop of very real tension between

China and the US and actually a very different approach to China in the US.

I mean, much higher tariffs, much greater confrontation.

I mean, one of the you know, I think this is one of the areas where there's

the least difference between former President Trump and President Biden

Being tough on China is one thing that unites everyone in this country.

There is if we have a President Trump will certainly have.

Much higher tariffs. Even if you have another if President

Biden wins, you're still not going to have a sort of big change to China

policy. That means that it has become a very

different environment. And so if you are a foreign investor

looking at China, not only do you have all of the domestic things that we've

just talked about, you have it against a backdrop of a kind of geopolitical

environment where investing in China is a tricky thing to do.

Remember, Jake Sullivan, the national security adviser, talked about a small

yard with a high fence. That would be the way that the U.S.

would approach what it wants to protect from from China.

Will the yard maybe be getting bigger and the fence may be getting higher?

So what are the what are the new kind of strictures?

What are the new controls coming? So I think it's only a slight

exaggeration to say that China has sort of become an investable foot for

outsiders in in certainly in many sectors.

And finally, what about Europe? Because Europe is at the end of a

conversation now. Yeah.

What about you? Well, my role is in part because Europe

a historic opportunity. Germany has been very economically

intertwined with China, has benefited from that relationship.

At the same time, Europe could be an alternative destination for foreign

direct investment. Yeah.

And Europe is relatively cheap now. You know, Europe, Germany.

The interesting adage about Germany, right, was that it always outsourced its

security to America, its gas supply to Russia and its market to China.

Germany has a big challenge, a very big challenge, in part because it's, you

know, for a lot of its mightiest companies, China was the biggest market,

but also because frankly, the whole EV shift and the shift to EVs is a really,

really big challenge for Germany, said Germany.

Germany is itself in quite a big economic mess.

And there's a kind of question of is it capable of doing the policies that are

needed to really push its growth. But there are, you know, I think it will

do. And I think Europe is in some ways

European kind of you know, people have been so downbeat about Europe's

prospects for such a long time that actually there are you know, there are

bargains to be found. There are growth areas in Europe.

The big thing that I'm sure you talk about on the show the whole time I and

how I will kind of transform all of this.

That's the bit of the wild card because it's sort of the US is clearly dominant

right now. Can there be a quick adoption and can

there be strength in those areas in Europe?

And of course, what is trying to do that?

China's is hoping, hoping and pushing for that.

But it is that is the area where the controls from the US are really making a

difference.