GOOD MORNING FROM LONDON
23 JANUARY 2024
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#1 CHINA EVS TO FLOOD EUROPEAN MARKET?
#2 CHINA BIRTH RATE FALLS
#3 KEY CHINESE SCIENTIST LEAVES US FOR CHINA
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#1 CHINA EV’S TO FLOOD EUROPEAN MARKET
THE ECONOMIST
Is China about to unleash another wave of deindustrialisation on the rich world? About 1m American manufacturing workers lost their jobs to Chinese competition in 1997-2011, as the country integrated into the global trading system and began shipping cheap goods overseas. This “China shock” has since been blamed for everything from rising deaths among working-class Americans to the election of Donald Trump. The rejection of liberal attitudes to trade also explains why politicians embrace industrial policy today. Now China’s carmakers are enjoying an astonishing rise. That stokes fears of another ruinous shock. In fact, the successes of Chinese cars should be celebrated, not feared.
Just five years ago China shipped only a quarter as many cars as Japan, then the world’s biggest exporter. This week the Chinese industry claimed to have exported over 5m cars in 2023, exceeding the Japanese total. China’s biggest carmaker, BYD, sold 0.5m electric vehicles (evs) in the fourth quarter, leaving Tesla in the dust. Chinese EVs are so snazzy, whizzy and—most important—cheap that the constraint on their export today is the scarcity of vessels for shipping them. As the world decarbonises, demand will rise further. By 2030 China could double its share of the global market, to a third, ending the dominance of the West’s national champions, especially in Europe.
This time it will be even easier for politicians to pin the blame for any Western job losses on Chinese foul play. A frosty geopolitical climate will feed the sentiment that subsidised production unfairly puts Western workers on the scrapheap. And there have certainly been subsidies. Since the launch of its “Made in China” agenda in 2014, China has brazenly disregarded global trading rules, showering handouts on its carmakers. It is hard to be precise about the value of the underpriced loans, equity injections, purchase subsidies and government contracts Chinese firms enjoy. But by one estimate, total public spending on the industry was in the region of a third of EV sales at the end of the 2010s. These subsidies come on top of the ransacking of technology from joint ventures with Western carmakers and Western and South Korean battery-makers.
The temptation will therefore be for rich-world policymakers to shield their carmakers from the onslaught of state-backed competition. In October the European Commission opened an investigation into Chinese cars. President Joe Biden is said to be considering increasing tariffs on them, even though America’s carmakers, protected by a 27.5% levy and handouts from the Inflation Reduction Act, currently face little Chinese competition. Yet locking out Chinese cars would be a mistake. The potential gains to the West from a ready supply of cheap, green vehicles are simply enormous—and dwarf the cost of disruption and the dangers it brings.
One reason is that the market for cars is going to be upended, regardless of trade with China. In 2022, 16-18% of new cars sold around the world were electric; in 2035 the EU will ban the sale of new cars with internal-combustion engines. Though firms are retaining their workers as they switch to making EVs, the process is less labour-intensive. Much as the first China shock was responsible for less than a fifth of total manufacturing job losses occurring at the time—many of which were attributable to welcome technological advances—so too there is a danger of confusing disruption caused by the shift to EVs with that caused by Chinese production of them.
Next consider the gains from letting trade flow. Vehicles are among people’s biggest purchases, accounting for about 7% of American consumption. Cheaper cars mean more money to spend on other things, at a time when real wages have been squeezed by inflation. And Chinese cars are not only cheap; they are better-quality, particularly with respect to the smart features in EVs that are made possible by internet connectivity. Nor does the existence of a carmaking industry determine a country’s economic growth. Denmark has among the world’s highest living standards without a carmaker to speak of. Even as cars roll off Chinese assembly lines, the economy is spluttering—in part because it has been so distorted by subsidies and state control.
Last, consider the benefits to the environment. Politicians around the world are realising just what a tall order it is to ask consumers to go green, as a backlash against costly emissions-reductions policies builds. EVs, too, are currently more expensive than gas-guzzling cars (even if their running costs are lower). Embracing Chinese cars with lower prices could therefore ease the transition to net-zero emissions. The cheapest EV sold in China by BYD costs around $12,000, compared with $39,000 for the cheapest Tesla in America.
What about the risks? The threat to industry from cheap imports is usually overblown. The lesson from the rise of Japanese and South Korean carmakers in the 1980s is that competition spurs local firms to shift up a gear, while the entrants eventually move production closer to consumers. Already, BVD is opening a factory in Hungary and many Chinese carmakers are scouting for sites in North America. Meanwhile the likes of Ford and Volkswagen are racing to catch Chinese firms. Last year Toyota said a breakthrough in its “solid state” technology would let it slash the weight and cost of its batteries.
Another worry is national security. Depending entirely on China for batteries, whose importance to electrified economies will go far beyond cars, would be risky. It is also possible that EVs which are filled with chips, sensors and cameras could be used for surveillance. (China has banned even locally made Teslas from some government properties.) But so long as presidents and spooks can travel in vehicles made in the West or by its allies, there is little reason to fear consumers sporting Chinese wheels; they can adjudicate personal-privacy concerns themselves and locally made cars will be easier to inspect.
Policymakers should therefore curb their protectionist instincts and worry only in the unlikely event that Western carmakers implode altogether. A hefty market share for Chinese carmakers that invigorates wider competition, however, is not to be feared. If China wants to spend taxpayers’ money subsidising global consumers and speeding up the energy transition, the best response is to welcome it.
GRAHAM PERRY COMMENTS;-
The Economist says;-
“The successes of Chinese cars should be celebrated, not feared… By 2030 China could double its share of the global market, to a third, ending the dominance of the West’s national champions, especially in Europe… The temptation will therefore be for rich-world policymakers to shield their carmakers from the onslaught of state-backed competition… Yet locking out Chinese cars would be a mistake… there is a danger of confusing disruption caused by the shift to EVs with that caused by Chinese production of them…
“…And Chinese cars are not only cheap; they are better-quality, particularly with respect to the smart features in EVs that are made possible by internet connectivity… Embracing Chinese cars with lower prices could therefore ease the transition to net-zero emissions. The cheapest EV sold in China by BYD costs around $12,000, compared with $39,000 for the cheapest Tesla in America… What about the risks? The threat to industry from cheap imports is usually overblown…
“Another worry is national security. Depending entirely on China for batteries, whose importance to electrified economies will go far beyond cars, would be risky. It is also possible that EVs which are filled with chips, sensors and cameras could be used for surveillance… A hefty market share for Chinese carmakers that invigorates wider competition, however, is not to be feared.”
This is a surprise. The Economist – fully aware of a likely surge in UK market share of China produced EVs – lines up against any form of UK protectionism designed to prevent China from obtaining market share for their EVs. China has made rapid advances with their EV development and with attractive prices for the UK consumer it is quite likely that sales of China’s EVs will surge. Members of Parliament representing UK EV producing constituencies will come under pressure from constituents to oppose imports from China’s BYD.
BYD is a Chinese multinational conglomerate manufacturing company that produces gasoline and electric cars, battery-powered bicycles, buses, trucks, monorail trains and buses, solar panels, and face masks. The company was founded by Wang Chuanfu in February 1995 and has its headquarters in Shenzhen, Guangdong, China
There is one significant omission in the Financial Times article – the absence of any reference to a key investor in BYD – Warren Buffett’s Berkshire Hathaway. In late June 2023, BYD’s Hong Kong-listed shares hit a record high of HK$331.4 ($42). That was about 41 times the price Berkshire paid 14 years ago.
Since the summer, Berkshire has been on a BYD stock-selling spree. Based on the latest exchange filing, the conglomerate has sold more than 49 million BYD shares in the past four months.
It’s not clear how much Berkshire has profited from the sale. But the average price of each share in the five deals disclosed by the company since August was around HK$205 ($26). Using that average, Berkshire might have bagged a net profit of $1.2 billion by offloading the 49 million shares, assuming a purchase price of HK$8, according to a calculation by CNN Business. The conglomerate’s current stake in BYD is worth $3.9 billion, based on the latest stock price.
It is not just that Buffett has put his weight behind an entrepreneur of special skill and has been rewarded with a significant increase in the value of his investment but that he rejected Washington’s policy of de-coupling from China and pressed ahead with his support for Mr Wang Chuanfu’s entrepreneurial spirit. An example of the profit motive defeating political obstruction. Buffett’s experience will be viewed with alarm in the White House but with encouragement on Wall Street.
On the issue of state subsidies and the suggestion that BYD is a roaring success only because of State support we should await the outcome of the European Union’s investigation into BYD’s support from the Chinese Government. State subsidies are presented by Biden as an interference with the principles of fair trade but Biden, on taking office, made clear that he would stick to Trump’s arbitrary policy of high tariffs and taxes on Chinese imports into the US. China knows that this is politics at work.
As this Column has previously written, China is not the USSR of the late 1980’s. China will not concede to US attempts to compel China to “fall into line”. There is a significant change in the balance of power in world politics and the US does not know how to curb China’s progress. The US is confused, mystified, unsettled and uncertain. Buffett can see which way the wind is blowing. And Biden? He has more in common with King Canute than with Adam Smith.
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#2 BAD NEWS/GOOD NEWS
THE FINANCIAL TIMES
“China’s demographic collapse is accelerating. Births fell to a record low in China in 2023, speeding up its population decline. The potential economic drag prompted Chinese stocks to fall after the figures were announced on Wednesday, along with weak property data.
This shift has serious implications for the country’s economic status. It stymies a 2020 forecast that China would soon surpass the US as the world’s largest economy.
But it is not all bad news. Some sectors stand to benefit from Beijing’s new policies to cope with changing demographic trends. The country’s population fell more than 2mn to 1.41bn last year, according to government data. The drop, which was more than double that of the previous year, results from both the lowest number of babies being born since the founding of the People’s Republic of China in 1949 and the highest death rate since 1974.
A big worry is falling labour supply and, as a result, higher wages. China already faces worker shortages in its manufacturing sector as younger workers shun factory jobs. Average wages in China have more than doubled in the decade to 2022, outpacing those in south-east Asian countries such as Thailand and Vietnam.
Yet the sheer size of China’s elderly population — a fifth of the country’s population was 60 or older as of 2022 — should mean new growth sectors that should start to attract more funding. Beijing this week seized the initiative with a plan to develop a “silver economy” that caters to senior citizens with tailored products and services, a market estimated to be worth trillions of dollars.
Health-related consumption, ranging from medical devices to pharmaceuticals, would account for the biggest share of spending among the older age group. That push would provide a welcome boost for the biggest local biotech and pharma groups, including Jiangsu Hengrui, WuXi Biologics, Shanghai Fosun Pharma and Sinopharm.
These were hurt by an industry slowdown as the Covid-19 effect wore off. Shares of WuXi are down 60 per cent in the past year, while Fosun fell almost 40 per cent. Part of the problem was that in August the sector became a target for an unprecedented anti-corruption campaign by Beijing.
Another overlooked sector has been robotics. As the need for automation in the manufacturing sector grows, top local robotics groups, including Siasun Robot & Automation and China Shanghai Step Electric, would be leading beneficiaries. Shares of the latter, on an enterprise-value-to-sales basis, at present stand at just 2 times, a discount to global peers.
The impact of China’s shrinking population will reverberate around the global economy. But it should also create the next wave of investment opportunities as government spending shifts to match changing demographic and consumption trends.”
GRAHAM PERRY COMMENTS;–
First, the bad news; China’s birth rate fell to a record low in 2023 speeding up its population decline. This development will likely delay the year in which China’s economy becomes the biggest economy in the world which is a blow to China’s pride.
The announcement was accompanied by weak property figures reflecting the damage done to China’s economy by the excesses of Evergrande, County Garden and other companies in the property sector.
China’s population was too large in the 1960’s and couples were discouraged from having two or more children unless they were a national minority in origin in which case larger families were permitted to enable the particular national minority to maintain its identity and increase its numbers.
In line with world trends, couples married at an older age; wives sought work to increase the family income and relied upon elderly parents to assume household chores. The policy worked; population growth stabilised and even began to fall. None of this is a surprise because trends have been monitored by the authorities. The issue looking ahead is at what level do the planners hope population figures will stabilise.
In the meantime a fall in birth rates is not all bad news. The authorities are focusing on the over 60s and the emergence of a “silver economy” concentrating on the health and pharmaceutical sectors. The FT article does note that shares in WuXi Biologics and Fosun Pharma were respectively down 60% and 40% because the focus of Xi Jinping’s anti-corruption sector was on the health sector – a reminder of the importance of Xi’s key policy pursuit.
The planners have to ensure that government spending takes account of demographic and consumption trends. Life is not plain sailing and China, in particular, is encountering headwinds. As this Column has previously stated there are positive signs – China’s EV surge, the bounce back factor in Huawei’s challenge to the US and signs that the Chinese consumer is reappearing to purchase goods produced in foreign markets. But like the proverbial oil tanker, a change in direction for the economy of China is a big manoeuvre and more time is needed for the economy as a whole to re-arrange its priorities.
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#3 MASTER RESEARCHER IN SOLID MECHANICS JOINS TSINGHUA UNIVERSITY
SOUTH CHINA MORNING POST
“Gao Huajian – who has been honoured with some of the top prizes in solid mechanics over four decades at prominent universities in the US, Europe and Asia – received his appointment letter in Beijing on Saturday.
In a release announcing the appointment, Qiu Yong, Secretary of the University’s Party Committee, said the mechanician was known as a “master researcher” in his field. “We feel very lucky and touched that out of many options, he chose to become a member of the Tsinghua family.”
According to Party Secretary Qiu Yong, Gao is expected to play “an indispensable role” in talent training and innovation, using his international influence to boost its engineering programmes, and eventually “help China achieve scientific and technological self-reliance”.
In a video posted on the university’s official WeChat account on Sunday, Gao said that he had wanted to return to China for a long time.
“I can’t express how thrilled I am to start this new chapter in my life. Tsinghua has so many excellent students. I hope to inspire their confidence and passion so that they can do cutting-edge research,” he said.
Gao, most recently a distinguished professor at Nanyang Technological University in Singapore, has also been a tenured professor at Stanford and Brown universities in the US, and served as director of the Max Planck Institute for Metals Research in Stuttgart.
Gao’s research ranges from materials science to nanotechnology and bioengineering, with a focus on the macro and micro-scale deformation and destruction of materials, structures, and biological systems.
According to the Rodney Hill Prize selection panel, Gao’s work “established new links between solid mechanics and other fundamental fields of study” and “literally redefined the frontiers of modern solid mechanics research”. In recent years, Gao has been working with collaborators to develop novel biomedical materials, including a “smart patch” to help patients recover from heart diseases and nanoparticles that can kill drug-resistant bacteria
Gao and his team have also developed protective outfits for older people which mimic the tough but flexible scales of pangolins and armadillos.
Gao was born into an academic family in Chengdu, in the southwestern province of Sichuan, in 1963, earning his bachelor’s degree from the Xian Jiaotong University at 19 – school was shortened during the Cultural Revolution, he explained to a Singapore newspaper in 2021. He went on to study in the US, receiving his PhD in engineering science from Harvard University in 1988.
During his time at both Stanford and Brown, Gao helped to train dozens of Chinese students. Many of them have returned to China and become leading researchers in their field.
Gao has also given more than 100 talks at Chinese universities and research institutes, and co-authored a large number of papers with domestic scholars.
His memberships have included the national academies of many countries, including the National Academy of Sciences and the National Academy of Engineering of the United States, as well as Germany’s National Academy of Sciences Leopoldina. Gao is also registered as a foreign member of the Chinese Academy of Sciences.”
GRAHAM PERRY COMMENTS;
Gao Huajian is a China national and a top scientist in the Solid Mechanics Sector and he is leaving the US to take up a permanent position at Tsinghua University. Clearly China is proud that Gao has decided to make China his home
Gao is expected to play “an indispensable role” in talent training and innovation, using his international influence to boost its engineering programmes, and eventually “help China achieve scientific and technological self-reliance”.
Three Points;-
First, Gao is a big catch and China is pushing out its collective chest to celebrate the news. His cv is interesting for the reference to the Cultural Revolution which commenced when Gao was aged 3. Despite his education being shortened he climbed the ladder to academic success in China and then in the US
Second, Gao’s work goal is clear – it is to enable China to achieve scientific and technological self-reliance. The term “self-reliance” is used to stress China’s key intention not to be at the mercy of its rivals. This is a political question as well as an economic question. China does not want its progress to be just a matter of ego and scientific achievement – though national pride is important. It focuses always on balanced economic development.
Third, the announcement is made by the Secretary of the University’s Party Committee, Qiu Yong. It is the Party that makes the statement and not the President or Secretary of the University. This is not unimportant and it underlines something that is often missed by readers of China news – the importance of the Party at all levels of Chinese society from village leaders all the way through County and Provincial level to the standing committee of the Politburo. The Party numbers 98m members and membership of the Party is coveted by those selected to join.
GRAHAM PERRY
