Latest / Sharp China Podcast / Sharp China: K-Shaped Economic Data And Its Implications; Ma Xingrui News; Closing Window for Open Source AI?; The SCS and International Law

Transcript

Sharp China: K-Shaped Economic Data And Its Implications; Ma Xingrui News; Closing Window for Open Source AI?; The SCS and International Law · Sharp China Podcast

• 0:04
  SPEAKER_01: Hello and welcome to Sharp China.
• 0:06
  SPEAKER_00: I'm Andrew Sharp and you are listening to a free preview of today's episode.
• 0:11
  SPEAKER_01: Hello and welcome back to another episode of Sharp China.
• 0:15
  SPEAKER_01: I'm Andrew Sharp and on the other line, Bill Bishop.
• 0:20
  SPEAKER_01: Bill, how
• 0:21
  SPEAKER_00: you doing?
• 0:21
  SPEAKER_00: Hola, everyone.
• 0:22
  SPEAKER_00: I'm doing well.
• 0:23
  SPEAKER_00: I think we, you know, it looks like it's going to be Spain and maybe Argentina.
• 0:27
  SPEAKER_00: So we're all going to practice our Spanish.
• 0:29
  SPEAKER_00: Yeah.
• 0:31
  SPEAKER_00: There we go.
• 0:32
  SPEAKER_01: I was like, did he just say Ola?
• 0:34
  SPEAKER_01: Okay, Spain.
• 0:36
  SPEAKER_01: Argentina, I'm not ready to concede anything to Argentina.
• 0:39
  SPEAKER_01: I'm officially pulling for England at this point.
• 0:42
  SPEAKER_00: I'm neutral, but I just got to say, I mean, it's messy.
• 0:44
  SPEAKER_00: Come on.
• 0:45
  SPEAKER_00: Between Messi and FIFA, the odds are not low.
• 0:50
  SPEAKER_00: Well, that's true.
• 0:52
  SPEAKER_01: Yeah, bet on like five red cards for the England team later this afternoon.
• 0:57
  SPEAKER_01: I wish these games weren't being played at three o'clock in the afternoon.
• 1:01
  SPEAKER_01: That's one World Cup take because it feels like less of an event in the middle of
• 1:06
  SPEAKER_01: the day, but FIFA.
• 1:07
  SPEAKER_01: The European audience in the midst of all this.
• 1:09
  SPEAKER_01: Which is fair.
• 1:10
  SPEAKER_01: It is, but we're hosting it, you know?
• 1:13
  SPEAKER_01: You should be catering to the American audience when it's in Europe or the Middle East.
• 1:18
  SPEAKER_01: I think 2030 is the Middle East.
• 1:19
  SPEAKER_01: No, 2034 is the Middle East.
• 1:21
  SPEAKER_01: It will be played in primetime in those countries.
• 1:23
  SPEAKER_01: That would be my guess anyways.
• 1:25
  SPEAKER_01: In any event, I look forward to the World Cup final.
• 1:29
  SPEAKER_01: Whoever the second team is, does look like Spain's probably the team to beat at this point.
• 1:35
  SPEAKER_01: Really, really impressive against Spain.
• 1:37
  SPEAKER_00: So boring, but yeah, so we're recording at 11 a.m. Eastern time on Wednesday.
• 1:41
  SPEAKER_00: So the second semifinal is what, four hours.
• 1:45
  SPEAKER_01: Right.
• 1:45
  SPEAKER_01: It will be set by the time you are listening to this podcast.
• 1:49
  SPEAKER_01: We will begin not with soccer,
• 1:52
  SPEAKER_01: but with Reuters who wrote Wednesday,
• 1:54
  SPEAKER_01: China's economy expanded at its slowest pace in more than three years in the second.
• 1:59
  SPEAKER_01: ... ... ... ...
• 2:26
  SPEAKER_01: The data adds pressure on Beijing to deliver more stimulus,
• 2:30
  SPEAKER_01: but many analysts say a closely watched end of July meeting of
• 2:34
  SPEAKER_01: the Communist Party's Politburo may not flag major steps due to concerns
• 2:40
  SPEAKER_01: over ballooning debt.
• 2:41
  SPEAKER_01: Jane Ho,
• 2:42
  SPEAKER_01: who runs a European goods importing business in eastern China,
• 2:46
  SPEAKER_01: says her income has roughly halved since the beginning of the year
• 2:50
  SPEAKER_01: as her firm's sales have dropped.
• 2:52
  SPEAKER_01: An apartment she rents out has been without a tenant for more than six months,
• 2:57
  SPEAKER_01: a reflection of China's huge housing oversupply and prolonged property crisis.
• 3:04
  SPEAKER_01: So a lot of information there and some specific anecdata at the end of that Reuters report.
• 3:12
  SPEAKER_01: The data is not good.
• 3:14
  SPEAKER_01: What will you be watching over the next few weeks and maybe months as the system renews?
• 3:19
  SPEAKER_01: So no, the
• 3:21
  SPEAKER_00: data is not great.
• 3:22
  SPEAKER_00: The range they gave, the target range for GDP growth this year was 4.5% to 5%.
• 3:28
  SPEAKER_00: So they're still within that.
• 3:30
  SPEAKER_00: For the first half, they're in that range.
• 3:32
  SPEAKER_00: But if they continue it, if 4.3%, obviously, then for the rest of the year, they won't be.
• 3:39
  SPEAKER_00: But is the data that dire that they're suddenly going to roll out what
• 3:47
  SPEAKER_00: so many continue to hope for?
• 3:48
  SPEAKER_00: Stimulus!
• 3:50
  SPEAKER_00: Probably not.
• 3:51
  SPEAKER_01: Right, pivot from the Grin and Barrett approach of the last year.
• 3:54
  SPEAKER_01: A lot of this,
• 3:55
  SPEAKER_00: I think,
• 3:55
  SPEAKER_00: is within the range of what they can tolerate,
• 3:58
  SPEAKER_00: especially given the turmoil that's coming from the war in the Middle East.
• 4:04
  SPEAKER_00: Earlier this week,
• 4:06
  SPEAKER_00: at the end of July,
• 4:08
  SPEAKER_00: there's the Politburo meeting,
• 4:09
  SPEAKER_00: and that Politburo meeting is usually to sum up the recent economic activity
• 4:13
  SPEAKER_00: and provide any additional tweaks to planning for the balance of the year.
• 4:20
  SPEAKER_00: Mm-hmm.
• 4:35
  SPEAKER_00: Yeah, two weeks from now, basically.
• 5:00
  SPEAKER_00: This print sort of materially changes the trajectory of their current policies.
• 5:05
  SPEAKER_00: And so I think that people who are following closely,
• 5:08
  SPEAKER_00: I don't think we're particularly surprised.
• 5:11
  SPEAKER_00: So, you
• 5:12
  SPEAKER_00: know, they're just going to kind of grind it along.
• 5:15
  SPEAKER_01: Expect more of the same from the party.
• 5:18
  SPEAKER_01: And when we look at the data, the consumption remains weak.
• 5:23
  SPEAKER_01: The property market remains a complete mess.
• 5:27
  SPEAKER_01: High-tech manufacturing expanded 13.3%.
• 5:30
  SPEAKER_01: Equipment manufacturing 9.3%.
• 5:31
  SPEAKER_01: Digital product manufacturing 12.3%.
• 5:34
  SPEAKER_01: Integrated circuit production rose 23.1%.
• 5:43
  SPEAKER_01: Lithium battery output, 39.3%.
• 5:47
  SPEAKER_01: Robot production, 28% industrial robot production.
• 5:51
  SPEAKER_00: So they can point to the new quality productive forces,
• 5:55
  SPEAKER_00: parts of the economy that are doing well.
• 5:56
  SPEAKER_00: They can point to...
• 5:58
  SPEAKER_00: The trade data from yesterday where exports are booming,
• 6:01
  SPEAKER_00: especially around just some of the high tech related exports.
• 6:05
  SPEAKER_00: And so again, it's not all doom and gloom.
• 6:07
  SPEAKER_00: And I think from the policy maker perspective, they're like, okay, again, it's within the range.
• 6:13
  SPEAKER_00: Retail sales are low,
• 6:17
  SPEAKER_00: but they were actually, I think they came in 1%, a little better than expected.
• 6:20
  SPEAKER_00: And then they're talking up and they're pushing this idea of services retail sales,
• 6:24
  SPEAKER_00: and those were stronger.
• 6:25
  SPEAKER_00: And so, again, I think you can look at it and say, oh my God, the sky's falling down.
• 6:32
  SPEAKER_00: But in reality,
• 6:33
  SPEAKER_00: I think from the perspective of the policymakers,
• 6:35
  SPEAKER_00: they're like, it's not great, but it's not terrible.
• 6:39
  SPEAKER_00: And we're going to...
• 6:40
  SPEAKER_00: It's not necessarily dire.
• 6:41
  SPEAKER_00: We can tweak here and there.
• 6:42
  SPEAKER_00: I mean, on the trade side, if there were...
• 6:47
  SPEAKER_00: They need the exports.
• 6:48
  SPEAKER_00: The export engine is propping up a lot of growth.
• 6:52
  SPEAKER_00: And so that's why- It's carrying everything right now.
• 6:55
  SPEAKER_00: And a lot of it's high tech and
• 6:57
  SPEAKER_01: AI driven,
• 6:58
  SPEAKER_01: just like America's economic growth has been over the last couple of years.
• 7:02
  SPEAKER_00: So it's one of the reasons they're so focused on blunting any EU efforts
• 7:07
  SPEAKER_00: to impose more tariffs or trade barriers.
• 7:11
  SPEAKER_00: And the auto market in China, the domestic market is down.
• 7:16
  SPEAKER_00: They got rid of subsidies.
• 7:18
  SPEAKER_00: They pulled forward a bunch of demand.
• 7:19
  SPEAKER_00: They pulled back on the subsidies.
• 7:20
  SPEAKER_00: And so, of course, the domestic market is going down.
• 7:23
  SPEAKER_00: But the export market is taking over.
• 7:25
  SPEAKER_00: It's filling the gap in a lot of ways.
• 7:27
  SPEAKER_01: That story continues to be absolutely incredible to me.
• 7:31
  SPEAKER_01: I'll read this tweet from Michael Dunn.
• 7:41
  SPEAKER_01: Chinese car exports, 2020, 1 million exports.
• 7:43
  SPEAKER_01: 2022, 3.1 million exports.
• 7:45
  SPEAKER_01: 2024, 7.9 million exports.
• 7:46
  SPEAKER_01: 2026, 12 million exports.
• 7:48
  SPEAKER_01: Japan.
• 7:56
  SPEAKER_01: Demand's highest export number ever was 6 million.
• 7:59
  SPEAKER_01: 12 million is more than America's annual production of cars.
• 8:04
  SPEAKER_01: Global car demand throughout this period has been flat.
• 8:08
  SPEAKER_01: So Chinese exports, the gain is...
• 8:11
  SPEAKER_01: And in the domestic market, you mentioned the drop and the subsidies.
• 8:16
  SPEAKER_01: The domestic market for automobiles is down 20% year over year.
• 8:19
  SPEAKER_01: BYD still leads the domestic market,
• 8:21
  SPEAKER_01: but their sales domestically are down 45.9%, which is just a staggering number.
• 8:41
  SPEAKER_01: How does subsidies play into that story and the drop that we're seeing?
• 8:45
  SPEAKER_00: You saw in the US when they had the EV credits and tax breaks, it's just the cars are cheaper.
• 8:51
  SPEAKER_00: So people are going to buy while they're the various subsidies or various breaks
• 8:56
  SPEAKER_00: to get the car cheaper.
• 8:58
  SPEAKER_00: And then once you pull them off...
• 9:00
  SPEAKER_00: One, they don't look like a good deal anymore.
• 9:01
  SPEAKER_00: And two, you most likely have pulled a lot of the demand forward.
• 9:04
  SPEAKER_00: There were a couple of interesting articles in the Chinese press yesterday from Yitai.
• 9:08
  SPEAKER_00: One was that the sales of used cars in China approached those of new vehicles for
• 9:13
  SPEAKER_00: the first time ever in the first five months.
• 9:15
  SPEAKER_00: Which again,
• 9:15
  SPEAKER_00: I think is a sign that, okay,
• 9:17
  SPEAKER_00: the new cars aren't,
• 9:18
  SPEAKER_00: you know, the subsidies are gone, used cars are a little cheaper.
• 9:21
  SPEAKER_00: That is maybe a reflection of sort of the state of some of the consumers.
• 9:25
  SPEAKER_00: The other was that they talked about like BYD is launching one of its new models.
• 9:31
  SPEAKER_00: They went into how several companies now,
• 9:34
  SPEAKER_00: at least PRC automakers,
• 9:35
  SPEAKER_00: are now launching their overseas models first because as
• 9:38
  SPEAKER_00: an industry association executive had said,
• 9:44
  SPEAKER_00: sometimes they can charge at least three times higher overseas than in China.
• 9:48
  SPEAKER_00: So you have this massive involution problem in China where even when they are making
• 9:54
  SPEAKER_00: the sales, the margins are low, but then you can turn around and sell them overseas.
• 9:58
  SPEAKER_00: And even with the shipping costs and some tariffs,
• 10:00
  SPEAKER_00: you still make a ton more money because you can charge more in the other markets.
• 10:05
  SPEAKER_01: So the path to salvation, again, is all exports.
• 10:10
  SPEAKER_00: So one of the ways to fight involution is to export away from it, right?
• 10:14
  SPEAKER_00: And then that is certainly,
• 10:15
  SPEAKER_00: I think,
• 10:16
  SPEAKER_00: something that the policymakers and other markets that are concerned about,
• 10:19
  SPEAKER_00: say, EU or Germany is concerned about its own industry.
• 10:24
  SPEAKER_00: They probably should be paying a lot of attention to the fact
• 10:26
  SPEAKER_00: that these guys can charge a lot more outside in Germany,
• 10:30
  SPEAKER_00: say, than in China because of the market dynamics.
• 10:32
  SPEAKER_00: That doesn't seem great.
• 10:34
  SPEAKER_00: No kidding.
• 10:35
  SPEAKER_01: Well, and it really,
• 10:36
  SPEAKER_01: it's such a fascinating historical moment because obviously Dunn refers back
• 10:42
  SPEAKER_01: to Japan and the surge in Japanese exports 25,
• 10:47
  SPEAKER_01: 30 years ago, or I guess now 40 years ago at this point.
• 10:49
  SPEAKER_01: We're all getting old.
• 10:50
  SPEAKER_01: Yeah.
• 10:52
  SPEAKER_01: Right now, you look at China and it's like two completely different economies.
• 10:57
  SPEAKER_01: The domestic economy is a mess and seems to be contracting in all sorts of ways.
• 11:07
  SPEAKER_00: It's also not collapsing.
• 11:08
  SPEAKER_00: It's messy, I would
• 11:10
  SPEAKER_01: call it.
• 11:10
  SPEAKER_01: Okay, fair enough.
• 11:11
  SPEAKER_01: Messy and not necessarily trending in positive directions
• 11:15
  SPEAKER_01: as we sit here recording this in the middle of July.
• 11:17
  SPEAKER_00: Certainly large parts of the economy are not trending in positive directions.
• 11:22
  SPEAKER_01: Right.
• 11:23
  SPEAKER_01: But then on the other hand,
• 11:24
  SPEAKER_01: you have this manufacturing powerhouse that is continuing to eat sector after sector
• 11:30
  SPEAKER_01: after sector and is exporting out unemployment issues to the rest of the world.
• 11:36
  SPEAKER_01: And all of it is happening in plain sight.
• 11:40
  SPEAKER_01: And it's going to be interesting to see whether countries have the mettle to respond
• 11:44
  SPEAKER_01: to any of this because like the export numbers,
• 11:47
  SPEAKER_01: I mean, Germany's export numbers in June were insane.
• 11:51
  SPEAKER_01: You published them on cynicism earlier in the week here.
• 11:55
  SPEAKER_01: And the numbers to Germany have been insane consistently for years now.
• 12:00
  SPEAKER_01: And now I guess the question is whether any of these markets actually respond.
• 12:06
  SPEAKER_01: Well, it's political.
• 12:07
  SPEAKER_00: It's political, Will.
• 12:08
  SPEAKER_00: And it's also that the Chinese have built up a pretty effective toolkit to respond
• 12:16
  SPEAKER_00: or reciprocate.
• 12:16
  SPEAKER_00: Yeah.
• 12:17
  SPEAKER_00: So, you know, the EU,
• 12:19
  SPEAKER_00: for example,
• 12:20
  SPEAKER_00: they can talk tough and all about all the things they want to do to deal with,
• 12:24
  SPEAKER_00: you know, what some of them are
• 12:25
  SPEAKER_01: calling structural problems.
• 12:29
  SPEAKER_00: But then the Chinese can cut off rare earths.
• 12:31
  SPEAKER_01: And it is a structural problem.
• 12:33
  SPEAKER_01: It's just very clear that the PRC either can't or won't restructure what's happening here.
• 12:40
  SPEAKER_01: Like there's been no indication that they're going that direction.
• 12:43
  SPEAKER_00: But it's working for them.
• 12:44
  SPEAKER_01: Yeah, that's true.
• 12:46
  SPEAKER_00: I think at least from the, again,
• 12:48
  SPEAKER_00: from the perspective of the top leadership,
• 12:50
  SPEAKER_00: I think they think it's working for them.
• 12:52
  SPEAKER_01: Yeah.
• 12:53
  SPEAKER_01: Is it working for everyday Chinese people is a separate question,
• 12:56
  SPEAKER_01: but that is clearly not necessarily animating the decision making.
• 13:00
  SPEAKER_00: So we'll see.
• 13:03
  SPEAKER_00: I mean, there was a quote,
• 13:04
  SPEAKER_00: I think the South Carolina Post quoted the Deputy Director General for Trade
• 13:08
  SPEAKER_00: in Europe,
• 13:09
  SPEAKER_00: Dennis Redene,
• 13:11
  SPEAKER_00: sorry if I pronounced your name wrong,
• 13:12
  SPEAKER_00: that they may need to undertake safeguarding measures like tariffs and quotas
• 13:17
  SPEAKER_00: against sudden import surges because structural rebalancing will not take place
• 13:22
  SPEAKER_00: And I just said,
• 13:26
  SPEAKER_00: I mean, structural revalence is not going to take place after October either.
• 13:29
  SPEAKER_00: I really love your withering commentary.
• 13:33
  SPEAKER_00: No, but I mean, the EU, like they pinned on this, we're going to keep talking till October.
• 13:37
  SPEAKER_00: We're going to punt.
• 13:38
  SPEAKER_00: And then in October,
• 13:39
  SPEAKER_00: somehow magically,
• 13:40
  SPEAKER_00: maybe they'll,
• 13:41
  SPEAKER_00: you know,
• 13:42
  SPEAKER_00: Chancellor Mertz from Germany keeps talking about
• 13:44
  SPEAKER_00: the PRC doing some dramatic revaluation of their M&B.
• 13:47
  SPEAKER_00: I mean, they're in fantasy land.
• 13:49
  SPEAKER_01: No kidding.
• 13:50
  SPEAKER_01: They are in fantasy land and your commentary.
• 13:54
  SPEAKER_01: And I believe Tuesday's newsletter was terrific
• 13:57
  SPEAKER_01: because you did just add there's not going to be restructuring or structural changes
• 14:03
  SPEAKER_01: after October either.
• 14:05
  SPEAKER_01: And Mertz, he's talking about a deal with China and continues to.
• 14:10
  SPEAKER_01: There's probably not going to be a deal with China that resolves any of this.
• 14:15
  SPEAKER_01: And Europe is going to have to One other question here while we're talking about the economy.
• 14:36
  SPEAKER_01: All this reporting,
• 14:37
  SPEAKER_01: including this Reuters report,
• 14:39
  SPEAKER_01: it always mentions the property crisis and the prolonged kind of downturn there.
• 14:46
  SPEAKER_01: At what point, it's been five years of falling housing prices.
• 14:51
  SPEAKER_01: At what point should we stop describing that as a crisis or a downturn
• 14:57
  SPEAKER_01: and just treat it as a permanent structural change?
• 15:01
  SPEAKER_01: All right.
• 15:02
  SPEAKER_01: And that is the end of the free preview.
• 15:04
  SPEAKER_01: If you'd like to hear the rest of today's conversation and get access
• 15:08
  SPEAKER_01: to full episodes of Sharp China each week,
• 15:10
  SPEAKER_01: You can go to your show notes and subscribe to either Bill's newsletter,
• 15:14
  SPEAKER_01: Cynicism,
• 15:15
  SPEAKER_01: or the Stratechery Bundle,
• 15:16
  SPEAKER_01: which includes several other podcasts from me and daily writing
• 15:20
  SPEAKER_01: from my friend Ben Thompson.
• 15:22
  SPEAKER_01: I'm an incredibly biased news consumer, so I think both are indispensable resources.
• 15:27
  SPEAKER_01: But either way,
• 15:27
  SPEAKER_01: Bill and I are going to be here every week talking all things China,
• 15:31
  SPEAKER_01: and we would love to have you on board.
• 15:33
  SPEAKER_01: So check out your show notes, subscribe, and we will talk to you soon.