Welfare for whom?
Charts this week 12
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I recently left China, moved away after years making my life there. Seasons change and mine changed. I’m not one for why I left China explainers. Please don’t expect or ask for one. Anyway, this is the reason for the lack of postings.
“There are no solutions. There are only trade offs.” - Thomas Sowell
Today I’m going to write about a realization I had. The main ingredient was Michael Pettis’ and Matt Klein’s explanations about China and the global trading system (balance of payments). Other sources were my experience living in China and books I’ve read over the years.
Underpinning this realization is the idea that a country cannot have a fixed competitive advantage in manufacturing—temporary, yes, but not fixed. This is mainly because manufacturing doesn’t rely on natural endowments (like resources, climate, or location). Manufacturing is a knowledge-intensive industry.
As an industry, manufacturing benefits greatly from technology and (temporary?) global environmental factors, such as the following:
An open, safe and easily insured global trading environment,
Modern digital technologies to allow ultra large-scale operations (perhaps allowing increasing returns to scale!),
Standards and software to share, collaborate and send designs,
Plastics - light weight and malleable material that’s easy to transport,
Continued advances in automation (scale, again),
Digital communications networks to send information (orders, instructions) and capital ($$$), and
Open trading partners to absorb exports.
Welfare for whom?
The realization is that China’s system is actually one of massive welfare, conveniently not the kind Xi worries about when he warns against “welfare-ism”. China’s is a corporate1 welfare system. (Note: check footnote 1 for why “corporate” isn’t a great term for China.) Another term for this is industrial policy, but I think there’s a spectrum that goes something like this:
ZERO INDUSTRIAL POLICY → → INDUSTRIAL POLICY → → CORP. WELFARE
Money and resources (including a “clean environment”) are accumulated by the Chinese State and redistributed to businesses for their use. And before some people get upset—”businesses” includes foreign companies and their suppliers (foreign company benefits from cheaper inputs).
I see the symptoms everywhere I look, with stories about local governments reviving bankrupted Electric Vehicle companies (for the local jobs), “hidden debts”2, weak household consumption, poor consumer confidence…