Newsletter 42 - October 23, 2020
Welcome to newsletter 42 of Trade War. Tensions in the Taiwan Strait keep growing even as Beijing’s “wolf warriors” clash with Taipei diplomats in far off Fiji. Xi Thought signals the Chinese leader’s continued rise to supreme power while companies scramble to prove their fealty to Xi and the party.
Semiconductors are shaping up to be the next battleground in the U.S.-China tech rivalry. China’s state planner rebukes subsidy-seeking firms as Beijing aims to build its own chip champions. And the earlier Trump-Foxconn promise to bring jobs, technology and money to Wisconsin proves an embarrassing failure while Vietnam’s rural economy flourishes from other tech giants seeking global supply chain diversification.
Choppy waters in the Taiwan Strait
As tensions rise in the Taiwan Strait, I joined a fascinating and frightening discussion on Taiwan’s precarious position in the tense U.S.-China relationship. One bit of good news: choppy waters in the Taiwan Strait make large scale amphibious activity tough this time of year. If you didn’t see it then watch it now.
Xi Thought puts party over business
Xi will further cement his role as the most powerful leader since Mao when he gets his ideology elevated to “Xi Thought” and written into a five-year development plan to be announced by the party later this month, reports Bloomberg News.
“Xi Thought is a way to cement a hold on power by signaling allegiance to his policy objectives in as many places as possible,” Martin Chorzempa, a fellow the Peterson Institute for International Economics, told Bloomberg.
“The hallmark of its impact in the business-economic sphere is an increased role for party committees in companies, a resurgence of state companies in terms of getting access to capital, and tighter controls on especially tech companies to manage content in line with government thinking,” Chorzempa explained.
Consumption powering Chinese growth? Not so fast..
Consumer spending contributed 1.7 percentage points to China’s impressive third quarter’s GDP growth of 4.9 percent but that’s hardly reason for celebration, tweets Peking University finance professor Michael Pettis. Indeed, domestic spending made up less than one-third of growth.
Still, it is moving in the right direction, and compares to a “2.3-percent drag on growth in Q2,” reports the Xinhua news agency.
Pandemic spending drives debt to 269.2% of China GDP
China’s already worrisomely high level of debt reached 269.2 percent of GDP in the third quarter, shows data compiled by Bloomberg.
“The leverage ratio of China’s real economy -- the percentage of debt in households, non-financial enterprises and governments to total GDP -- increased to 269.2%,” reports Bloomberg, “a reflection of the monetary and fiscal steps policy makers have been implementing to shield the economy from the effects of the coronavirus pandemic.”
Bloomberg @businessIs China's rebound sustainable? Here's what you need to know https://t.co/HNNShBmMr8
Pacific battleground for China vs. Taiwan
The remote island of Fiji was the site of the latest eruption in China’s “wolf warrior” diplomacy when an altercation between Chinese and Taiwanese diplomats sent the Taipei representative to the hospital with a mild concussion.
“There’s no such thing as a low-stakes event when it comes to Chinese diplomacy,” writes Bloomberg reporter Peter Martin in an illuminating twitter thread explaining how an innocuous celebration of Taiwan’s national day led to violence.
“The incident in Fiji is particularly sensitive as the Pacific is one of the major battlegrounds for diplomatic influence between Beijing and Taipei,” write Bloomberg reporters Samson Ellis and Cindy Wang.
“After the Solomon Islands and Kiribati switched ties to China in quick succession in 2019, the U.S. stepped in to shore up support for Taiwan in the region, urging Taipei’s last four remaining allies not to follow suit.”
The chip battle is getting nasty
The semiconductor industry is becoming the new battleground for U.S.-China tech rivalry with Taiwan a key player. “For both sides, Taiwan, which is responsible for some 70% of chips manufactured to order, is the new front line,” reports Bloomberg News.
One key reason chips are so important is their “dual-use” nature. “They are the fundamental basis of our qualitative military advantage, from missiles to radars to submarines,” says one former U.S. official.
As Washington further squeezes Beijing with growing restrictions on companies doing business with Huawei—including Taiwan’s TSMC which stopped sales to the Chinese company in September—China has launched a five-year plan for its chip industry that “will lend it the same strategic importance Beijing gave to its atomic bomb program.”
No experience, no technology, no talent
Anxious to get their hands on some state subsidies, Chinese companies are rushing to get into the chips business, reports Caixin.
"They’ve got no experience, no technology and no talent. But that hasn’t stopped a disparate range of firms from charging into the race to be China’s next chipmaking champion, earning a rebuke from the nation’s top economic planner."
Chinese firms flock to U.S. for IPOs
Amidst all the talk about decoupling, a counter trend has emerged: “Chinese firms [are] on track for a record number of IPOs… in the U.S.,” points out the Economist’s Simon Rabinovitch in a tweet.
Foxconn-Trump promises fall flat in Wisconsin…
The amazing story of the Trump-Foxconn debacle in Wisconsin, once touted to be a $10 billion LCD factory employing 13,000 that has gone nowhere, is told in this jaw-dropping story by The Verge.
“Precisely who had power to approve budgets was a mysterious and always shifting matter for the Wisconsin employees; for a time, they say expenses required the approval of a figure referred to exclusively as “Money Mama,” writes The Verge.
“It’s not unusual for either the Trump administration or Foxconn to make announcements that prove hollow. But for Foxconn, the show went on — for two years, the company, aided by the vocal support of the Wisconsin GOP, worked to maintain an illusion of progress in front of a business venture that never made economic sense.”
Foxconn founder Terry Gou’s has quickly come out with a pointed response: “Foxconn will remain committed to the completion and continued expansion of our project and investment in Wisconsin as long as policymakers at the federal, state, and local levels remain committed to Foxconn.”
And Foxconn (the company) responded with its own statement saying it is “disappointed” and that “Foxconn refutes allegations,” it hired employees only to get tax incentives.
…While Vietnam boomtowns rise with supply chain shifts
Boomtowns are appearing in rural Vietnam as tech supply chains shift, says this report by Bloomberg, pointing to key investments by Samsung Electronics Co., which produces about half its smartphones in the north of Vietnam, and Apple contractor Pegatron Corp. which plans a $1 billion factory in the port city of Haiphong.
“Vietnam’s ability to attract more sophisticated manufacturing is accelerating with rising Chinese labor costs, the U.S.-China trade war and logistics vulnerabilities amid the epidemic, which the nation’s Communist leaders have so far successfully curtailed.”
Bloomberg @businessThe shift in the world’s supply chains is touching regions previously left behind, and creating boomtowns in places like rural Vietnam https://t.co/ZicWmyPEXB
Just six Chinese internet companies amount for $2 trillion in market cap notes China tech writer Rui Ma.
Here’s a list that compares the U.S. critical and emerging technologies list to China’s revised strategic emerging industries list.
A commentary on China’s soon-to-be-released 14th Five Year Plan from National University of Singapore East Asian Institute’s Bert Hofman.
“Against the pandering and exonerations of globalization economists since China’s accession to the World Trade Organization in 2001, Roberts instead takes 2001 as a departure point into a parallel universe,” writes Global Asia in a review of my book The Myth of Chinese Capitalism.