by Andrew

What I’ve been listening to lately

  • François Houle – In Memoriam. On this new release, the Canadian clarinetist leads a multinational sextet through beautifully arranged pieces. The New Orleans-style front line of clarinet, trumpet, trombone is unusual these days, but perfectly suits the alternately elegiac and rousing tone. Consistently excellent.
  • Duke Ellington – Happy Reunion. An undeservedly obscure piece of Ellingtonia: two sessions recorded in Chicago over 1957-58 when Duke was passing through, with different subgroups of the full orchestra. The small-group playing here is relaxed and beautiful, and the sound more open and spacious; it’s too bad there’s only just over half an hour of material. The CD is out of print but not hard to find (I got mine for $1 from the clearance bin at Amoeba Records.)
  • Joe Lovano – Trio Fascination. The prolific saxophonist Lovano has tacked between more traditional and more avant-garde styles throughout his career. For me this 1998 album, with jazz elders Dave Holland on bass and Elvin Jones on drums, sits at a very pleasing point on that spectrum: it’s intimate and melodic but also forceful and varied.
  • Augustus Pablo – El Rockers. Pablo was given top billing on what is generally considered the best single dub reggae album, King Tubbys Meets Rockers Uptown, though like most dub it was really a group effort. If you want more of those wondrous spaced-out dub instrumentals, the reissue label Pressure Sounds has put together two compilations of Pablo material from the same period, this one and the earlier In Fine Style. Both are absolutely top-notch.
  • Natural Information Society – Since Time Is Gravity. A new record from Joshua Abrams’ minimalism-jazz-trance-world ensemble is always an event; the group has created one of the most distinctive sound worlds in contemporary music. Their latest brings in Chicago saxophone legend Ari Brown and some other ringers to fill out the large and ever-shifting ensemble. The choir of horns creates an even richer mass of shifting sounds, always solidly anchored by Abrams’ guimbri (a North African bass lute). Enchanting.
by Andrew

China wants those low-end industries after all

The usual goal of industrial policy is to, by supporting or protecting a particular industry, allow it to more quickly achieve the economies of scale necessary to be competitive. China has plenty of experience with this type of industrial policy: witness how it has scaled up in the manufacturing of solar power, lithium batteries, and electric vehicles to a size that dominates global markets. But the official rhetoric on industrial policy is now turning to a different and less well-trodden path: pursuing economies of scope as well as scale. Or, to put it in less technical terms: China’s government wants to preserve and improve competitiveness in a wide range of different industries, not just specialize in the most profitable ones. It sounds like a simple change, but it’s a significant one for China’s trading partners.

As is usual in China today, the signal of this change in priorities has been delivered by the man at the top, Xi Jinping. At the May meeting of the Central Commission on Financial and Economic Affairs, one of many steering groups he chairs, Xi laid out his vision of a “modernized industrial system.” He explained that such a modernized system has three key characteristics: it is “complete” ( 完整, also translated as “comprehensive”), “advanced” (先进) and “secure” (安全). The most novel of these objectives is “completeness,” and Xi briefly explained what that objective means in practice: “We must keep promoting the transformation and upgrading of traditional industries, and not take them as ‘low-end industries’ to be simply eliminated.”

On its surface, this could sound like one of the invocations of the importance of blue-collar manufacturing jobs now common in other countries on both the populist right and left. In fact, this statement is an intervention in a specific Chinese policy debate that clearly indicates a reversal of the previous direction. China’s turn toward high-technology-focused industrial policy well predates Xi, and actually began in the prior administration of General Secretary Hu Jintao and Premier Wen Jiabao (see Barry Naughton’s excellent short history of industrial policy for more).

In the mid- to late 2000s, “upgrading the industrial structure” was a regular buzzword, and official support for “emerging” and “strategic” industries ramped up. At the same time, though, the government tried to restrict resources going to less-desirable industries, usually defined as those that are highly polluting, energy-intensive, or in excess capacity. These efforts reached a peak in 2008; here is some representative language in Wen’s government work report from that year:

It is essential to appropriately control the scale of fixed asset investment and improve the investment structure. We will maintain strict control over the availability of land, credit and market access, and pay particular attention to strengthening and standardizing supervision of new projects to ensure they meet all the conditions for launching. Haphazard investment and unneeded development projects in energy intensive and highly polluting industries and industries with excess production capacity will be resolutely stopped, and market access will be tightened and capital requirements will be increased for industries whose development is discouraged. Work on illegal projects will be resolutely stopped.

In this vision of industrial upgrading, there is both positive and negative discrimination: the government pursues policies that favor high-end industries and disfavor low-end industries. Such a vision is based on ideas of national specialization and integrated global trade. It’s influenced by the “flying geese” model originally articulated by a Japanese scholar and popular among development economists in the 1980s and 1990s. The idea is that, as nations advance up the technological ladder, they leave behind production of low-value or commoditized products, which then creates opportunities for lower-income countries to industrialize by making those goods. Nations at different income levels specialize in making different kinds of products, and by trading with each other everyone becomes better off.

Xi’s vision of “completeness” or “comprehensiveness” does away with this. Rather than allowing China’s low-end industries to shift to other, lower-income countries, and then importing those products, the idea is to maintain the ability to produce the full range of goods within China. Low-end industries are not abandoned but become targets for technological upgrading in order to preserve their competitiveness. As the Chinese economist Xu Zhaoyuan explained in an exegesis of Xi’s remarks:

We cannot allow traditional industries to transfer abroad too quickly. This requires continuous strengthening of policy support for the upgrading and transformation of traditional industries, improving product innovation and efficiency to enhance their competitiveness, while also continuously reducing the cost burden of the real economy, especially reducing various transaction costs. 

The background assumption is clearly no longer that nations can specialize to take advantage of an open global trading system, but rather that they need to minimize external dependencies and vulnerability to trade disruption. The Chinese economist Yu Yongding called it part of China’s response to the US decoupling campaign:

Re-emphasizing the importance of comprehensiveness is a reaction to the new geopolitical reality. While China cannot and should not produce everything – autarky is impossible for a modern economy – it should be able to quickly launch or increase production of critical goods, as needed.

China does indeed have a very broad range of manufacturing competence: according to Yu, “China ranked among the world’s top three exporters (by volume) in 2,400 of 4,000 categories of intermediate goods traded globally between 2017 and 2020.” More simply, there are very few goods that China does not make. I looked at China’s exports broken down by 4-digit HS code; out of 1,241 categories, there were zero exports in fewer than 50, a share that has remained largely constant over the past decade.

In a sense, then, achieving a “complete” industrial industrial system would just mean maintaining the status quo. On the other hand, as China is probably only a few years away from qualifying as a “high-income” country on the World Bank’s definition, one might expect that rising incomes would have at least some impact on China’s cost structures and competitiveness in making in different products.

As is often the case with these high-level slogans, it’s not totally clear what the practical implications of Xi’s policy shift are going to be. It would not be that unreasonable for Xi to say, “I don’t think we should have government policies that actively try to shut down particular industries, because those industries employ Chinese people and earn money and there’s just no good reason to get rid of them.” It would be somewhat less reasonable, certainly from the perspective of China’s trading partners, for Xi to say “Instead of just subsidizing the high-tech industries of the future, I think we should subsidize every single industry that China has so that China can have a comparative advantage in making everything.”

At the least, the rhetoric of “completeness” does not offer a lot of hope that other countries are going to be able to benefit from China’s growth by selling it stuff. The “flying geese” theory is now criticized, not totally unfairly in my view, for contributing to the hollowing-out of industry in the US and other high-income countries. But it did offer a basis for mutually beneficial trade with the developing world: as high-income countries lost competitive advantage in some industries, the low-income countries gained it, and could use those industries to raise their own incomes.

China these days is trying to knit together a coalition of other developing countries also opposed to US dominance of the global system. But its official economic theory does not offer much of a basis for what it likes to call “win-win” ties with other developing countries. China wants to keep producing itself all the stuff that poorer developing nations in Africa, Asia and elsewhere might want to sell it. China acknowledges a need to import necessary raw materials, and that’s about it. Is this maximum mercantilism really an attractive vision for an alternative global economic order?

by Andrew

The political position of the private sector

Are China’s private-sector businesspeople unhappy about living under a Communist government? That is the increasingly explicit contention of some commentators on China’s current economic troubles. The idea is that Xi Jinping has reversed the Communist Party’s recent historical accommodation with the private sector, leaving entrepreneurs fundamentally uncertain about their future prospects. If business owners do not believe they can earn a profit without risk of intervention or confiscation by the government, then they will not invest, and the economy will not grow. As Adam Tooze put it in a typically thoughtful overview of this school of thought, the key contention is that “the problems of China’s economy are political and though they center on Xi they go beyond him and concern the entire system.”

Bill Bishop’s Sinocism newsletter of July 19 has a useful summary of some of the Party’s recent ideological pronouncements that “may have caused some skepticism in the private sector.” Among the most explicit was a 2020 document (English translation here) that detailed measures to “continuously strengthen the Party’s leadership over the private economy” and “educate and guide private economy practitioners to…unswervingly listen to and follow the Party.” While the document also discusses the Party’s duty to support private businesses and respond to their concerns, it is fair to say that it does not envisage a hands-off relationship in which the private sector is allowed to go about its own affairs.

Xi’s politicization of the private sector’s role in Chinese society is often contrasted, implicitly or explicitly, with the high-level accommodation of the interests of the private sector that existed under previous leaders. In 2001, Jiang Zemin famously welcomed private entrepreneurs into the ranks of the Communist Party and pledged that the Party would respect and support their interests, under his slogan of the “Three Represents.”

This dramatic ideological shift has sometimes been interpreted by critics on the left, inside and outside China, as a “neoliberal turn” in which the state served as the handmaiden of private capitalists. In reality, Jiang’s concerns were not so different from Xi’s: his goal was also to ensure that the private business sector would not evolve into a political opposition (in general, Jiang’s role in setting the fundamental parameters of China’s post-1992 political economy is often underrated).

The historian Frank Dikötter, in his recent book China After Mao: The Rise of a Superpower, points out that while the Three Represents did open Party membership to entrepreneurs, it also began a push to extend Party cells into private businesses:

Although few people knew exactly what the formulation meant, the general idea was that the party should not dilute its own political power and must ensure it remained in the vanguard of every area of life. This included the country’s ‘advanced culture’ as well as the ‘fundamental interest of the majority of the people’. A third principle posited that the party should ‘represent the foremost production forces’.

Foreign experts gasped with admiration, as the Three Represents included a decision to end a ban on party membership for private business people. But in typical Orwellian doublespeak, the campaign was designed to extend the hand of the state, not retract it, most of all in the private sector. Since tens of thousands of state enterprises were becoming shareholding companies, shedding millions of jobs along the way, the party insisted on maintaining control. The Three Represents meant that party cells must be established even within private businesses, subjecting them to closer party supervision.

Some of Jiang Zemin’s comments from the time on the issue of the Party and the private sector are reproduced in Volume III of his Selected Works. In May 2000, he visited Nanjing, Suzhou and Shanghai–some of the historical centers of China’s private businesses–and held discussions about “Party building,” meaning the establishment of Party cells in private businesses. Here are a few of the key passages, which also highlight the need to ensure private companies support the Party line:

There are nearly 1.5 million private enterprises and more than 31 million individual industrial and commercial businesses (getihu) nationwide, employing more than 82 million people. In terms of either economic strength or the number of people, the weight is not light. … This has raised a new topic for us, which is how to strengthen the party’s leadership in these fields, and effectively unite and organize the masses in these fields around the party. …

It is necessary to promptly carry out the work of party building in non-public economic organizations. Carrying out party building work in non-public enterprises is a new field. In recent years, some places have actively explored and achieved some results. But in general, the development is very uneven, obviously lagging behind the requirements of the development of the situation. According to incomplete statistics, currently 83.3 percent of private enterprises in the country have no party members, and only 1.4 percent of the total number of enterprises have established party organizations. …

Today’s private business owners have developed under our Party’s reform policy and the call to get rich first, and many of them are laborers. The Party organization should actively do a good job of uniting, educating, and guiding them in accordance with policy, unite them around the Party organization, and make them support the establishment of Party organizations in enterprises, support the Party’s various policies, operate enterprises according to the law, care for and protect employees’ rights and interests, and contribute to the country and society.

Surveys by the All-China Federation of Industry and Commerce document that the share of private companies with a Party cell rose sharply after the initial launch of the Three Represents slogan in 2000. Xi has also emphasized Party-building in the private sector, and has presided over a lot of political messaging and actions designed to enforce the idea that private businesses have a duty to be loyal to the Party and support the Party’s policies. But this is not a new idea, and private businesses have had a couple of decades, if not more, to get used to it.

To me, the historical evidence suggests Xi’s ideology probably does not differ a lot from his predecessors in terms of the private sector’s political position in Chinese society. And therefore I’m not sure that such ideological messaging is the real problem affecting private business in China today. What I do think is different under Xi, and where he has created instability and uncertainty, is his articulation of the goals that China’s political system is trying to achieve.

As Xi has repeatedly said, sometimes with evident frustration for those who still have not gotten the message, what he is trying to do is reorient China’s political system away from the pursuit of economic growth at all costs. From his perspective, that pursuit created a lot of political problems that need to be corrected: corruption, waste, loss of Party discipline.

But one of the political benefits of the orientation toward economic growth is that it offers a fundamental assurance that the interests of the Party and the interests of private businesses are aligned. If growth is the goal, then ultimately the Party wants companies’ revenues and profits to go up, and that is the same thing the companies want. If growth is not the goal, then the Party’s interests and the interests of private businesses can diverge. And that prospect could reasonably trouble businesses who understand their political position.

by Andrew

Stimulus is never just temporary

As China’s data continue to disappoint, there is a persistent theme in much of the outside commentary on its economic woes: that China is for some reason failing to take the “obvious” step of sending stimulus checks to households. The implicit argument is that the US handed out massive subsidies directly to households, got a great post-pandemic recovery and everything turned out fine. China did not deliver subsidies to households, and that’s why everything is very much not fine.

Why is China, still, not taking this course in spite of the positive example of the US? Of course, an obvious answer is that the people in charge don’t think the US example was that positive, and anyway aren’t particularly prone to think of the US as a model to emulate. The merits of the pandemic fiscal-policy response are still pretty contested in the US. Plenty of people think of the stimulus as a fiscally irresponsible gamble that ultimately had pretty disruptive macroeconomic effects, because of the huge interest-rate increases that were required to bring inflation under control; my perception is that many people in China share these views. Still, the case for stimulus is probably getting stronger rather than weaker at the moment as China falls further away from potential growth and full employment.

My suspicion is that part of Chinese policymakers’ reluctance to use direct transfers to households as a short-term stimulus stems from a fear of setting a fiscally destabilizing precedent. If debt-financed transfers failed to generate a sustainable recovery, the money would be wasted. But if transfers succeeded in generating a good burst of growth, that could have even bigger longer-term effects. It would mean that, the next time China falls short of potential growth and full employment, the political pressure to roll out household transfers again would be overwhelming. What started as a one-off policy response could become entrenched as the expected response to any growth slowdown, and would add to government deficits and debt over many years rather than just one.

Why should this hypothetical possibility be a serious concern for Chinese policymakers? Because it is exactly what happened after the 2008 financial crisis. An unprecedented global shock led to an unprecedented policy response, as the central government encouraged local authorities to use off-balance-sheet borrowing to fund a wave of public works projects. If that had been a one-off measure, it would have been a powerful example of effective and unorthodox policymaking. Instead, the infrastructure stimulus institutionalized fiscal irresponsibility on a massive scale: a decade and a half on, the off-balance-sheet local borrowing is even bigger relative to the economy than it was in 2008, according to IMF estimates. It would be hard to find a better example of Milton Friedman’s quip that “nothing is so permanent as a temporary government program.”

China’s political system therefore does not have a good track record of being able to take away the punch bowl in good economic times in order to be able to share out more punch in the bad times. The dubious legacy of the 2008 stimulus means that China now needs fiscal consolidation to get long-term debt dynamics under control–at exactly the moment that it once again faces a shortage of aggregate demand.

Striking the right balance between the structural and cyclical issues is indeed quite difficult. Maybe the right answer is in fact that the cycle needs more attention at the moment, because a failure to address the loss of growth momentum would allow hysteresis to set in and create even more long-term costs for the economy. But it is perhaps understandable that the people inside China’s system are reluctant to experiment with new forms of fiscal stimulus before they have gotten the old ones under control.

by Andrew

What I’ve been listening to lately

  • Natural Information Society – descension (Out of our Constrictions). Joshua Abrams’ minimalism/trance/jazz outfit is one of my favorite current groups, and I’m still catching up to everything they’ve put out. This is a recent live recording, with Evan Parker sitting in. The sonic combination of Parker’s soprano sax and Jason Stein’s bass clarinet is naturally reminiscent of the great Coltrane/Dolphy band, but this group is more about interplay and rhythm than expansive individual solos.
  • James Brown – The Payback. This 1973 album features more laid-back, hypnotic grooves than I’m used to hearing from James Brown. My all-time favorites are probably still the relentlessly catchy and more uptempo numbers on the compilations In The Jungle Groove and Motherlode, but I was pleased to put these tracks into the mix too.
  • Greg Osby – Inner Circle. Osby was responsible for one of the best turn-of-the-century jazz albums, The Invisible Hand, on which he enlisted jazz elders Andrew Hill and Jim Hall. Recorded around the same time but with a band of all younger players, this album is also excellent. With its complex tunes and Stefon Harris’ vibes opening up the sound, the session feels like a fresh update of some of the modernist Blue Note releases of the 1960s.
  • Ella Fitzgerald – Sings The Duke Ellington Songbook. I feel like I’m committing heresy when I confess I don’t really love Ella’s string of songbook albums that much: the orchestrations are mostly just too stiff and middlebrow for me. The Ellington songbook album, though, is a revelation: it’s the Duke himself and the band backing her up, and you can’t get jazzier than that. A true classic.
  • Darondo – Let My People Go. I was pretty surprised to hear some of these totally unknown yet wonderfully soulful funk tracks come across the stereo in the bar downstairs from my office in Beijing. Darondo was a mysterious figure who recorded little and subsequently vanished from view, which is too bad: he gets close to the exalted level of Al Green, or Sly Stone’s solo records.
by Andrew

The persistence of markets under Mao

What accounts for the extraordinary rise of China’s private sector after the economic reforms that followed Mao’s death? The 1980s were a pivotal decade for China in many ways, as the rapid growth of the private sector transformed the structure of a still officially socialist economy. In 1987, Deng Xiaoping famously said that the explosion of private-sector activity in the countryside in particular came as a surprise to him:

In the rural reform our greatest success — and it is one we had by no means anticipated — has been the emergence of a large number of enterprises run by villages and townships. They were like a new force that just came into being spontaneously. …If the Central Committee made any contribution in this respect, it was only by laying down the correct policy of invigorating the domestic economy. The fact that this policy has had such a favourable result shows that we made a good decision. But this result was not anything that I or any of the other comrades had foreseen; it just came out of the blue.

Of course, the township and village enterprises–which is to say, private companies avant la lettre–did not actually come out of nowhere. They drew on China’s long traditions of commercial enterprise, and people’s experience with living and operating in a market economy before it was suppressed in the 1950s. In an interesting new paper, “Markets under Mao: Measuring Underground Activity in the Early PRC” (the link is currently open-access), Adam Frost and Zeren Li offer quantitative evidence to suggest that hidden market activities continued at scale even through the height of the Maoist period:

There was already substantial market-based activity prior to the launch of economic reforms. Even after the “socialist transformation” of the Chinese economy was ostensibly complete, Chinese citizens continued participating in “underground market activity,” i.e. private acts of exchange that occurred outside of systems of planned allocation and distribution and which were intentionally concealed from the state. A broad host of actors, ranging from rural people who “abandoned farming to take up commerce” to merchants who specialized in the illicit wholesale trade of ration certificates, devised novel strategies to evade state control and engaged in consensual private transactions. While these individuals often filled critical voids in the economy, they were collectively maligned as “speculators and profiteers” and, for three decades, were the recurring targets of mass campaigns. Yet, even at the height of the Cultural Revolution when anti-capitalist sentiments reached their zenith, “speculation and profiteering” were never wholly suppressed.

The authors use local administrative documents recovered from flea markets to compile data on 2,690 cases of “speculation and profiteering” that authorities prosecuted in two areas, the rural county of Chun’an in Zhejiang and the city of Zhenjiang in Jiangsu. These records often list what items the “speculators” were accused of selling, and at a what price. The value of the transactions was usually pretty substantial:

The mean case value (i.e. the estimated total value of activity described in each case) is about 334 yuan for Chun’an and 362 yuan for Zhenjiang. To put these figures into perspective, in 1955 the national average income was 102 yuan for an urban worker and 94 yuan for a rural farmer, and income levels remained stagnant for most of the 1960s and 1970s. In other words, the mean case involved activity that represented three years’ worth of consumption for the mean worker. Given that prosecuted individuals probably succeeded in concealing some portion of their gains, this figure is likely only a fraction of the true quantities of goods, cash, and ration certificates involved in each case.

The authors use various assumptions to estimate the total size of underground market activity from these figures. The results depend so much on assumptions that the exact figures are not particularly meaningful, but the range of estimates is consistent with contemporary estimates of the “shadow economy” of illegal transactions in most countries–perhaps suggesting that Maoist China was more economically normal than its ideology would indicate. This finding is also interesting:

We observe that the average spread between the purchase and resale price of items in underground market transactions was relatively low and remained so throughout the entire period of observation. There was, on average, no more than a 19% mark-up on items that were bought and resold in underground markets. These figures suggest that the maximum perceived risk of capture was low, even during the height of the Cultural Revolution.

The low black-market premium also suggests these kind of underground transactions were widespread enough that the scarcity value was not extreme, and that underground traders faced enough competition that they could not charge exorbitant prices. The repeated campaigns against “speculation and profiteering” that generated these administrative documents therefore do not seem to have been particularly successful. When the formal prohibitions on these private transactions were lifted in the post-1978 reforms, many Chinese people had plenty of experience with trading and business that could be quickly put to use.

Frost and Li’s account lines up with my own thinking about the reasons for the early success of China’s economic reforms–although when I pondered this question before, I focused more on the fact that China did not actually spend that much a time as a full-fledged socialist economy (see my previous post, “How long was China Communist?“). The time from the forced nationalization of private firms in the mid-1950s to the re-legalization of urban and rural private sectors in the early 1980s was barely three decades. By contrast, socialist prohibitions on private enterprise in the Soviet Union lasted two full generations, long enough to wipe out any previously existing base of skills and knowledge formed in the private commercial economy (which was not that developed in tsarist Russia anyway).

These two explanations seem fully complementary to me: China’s socialist prohibitions on private transactions were neither complete enough to truly stamp out market-based activities, nor did they last long enough to for the population of people with experience running businesses in a market economy to die off. Once the state began to tolerate markets again, the hidden traditions of private enterprise could come out into the open.

by Andrew

Peak globalization and China’s EV exports

The rise of electric vehicles is one of the most interesting and consequential changes in the world’s industrial structure to come along in some time. Among other things, it has enabled the Chinese government to fulfill its long-held dream of becoming a globally competitive producer of passenger cars; in a very short period of time, China has become a major exporter of electric vehicles. The International Energy Agency has some useful summary statistics in its Global EV Outlook:

China is a leading exporter of electric cars, representing over 35% of electric car exports, as well as of batteries. Europe is China’s largest trade partner for both electric cars and their batteries. Indeed, over the past year the share of electric cars sold in the European market coming from China increased from about 11% in 2021 to about 16% in 2022.

Over the past five years, the share of global electric car exports coming from China has increased more than eightfold, with China becoming the largest exporter in 2021 and the gap further widening in 2022. The share of electric car exports from the United States peaked in 2019 and has since fallen below the levels exported from China, Korea and Europe.

This is an undeniable success for China’s strategy of building up a complete domestic supply chain for the batteries and other components going into electric vehicles. But it’s a success that has also depended on partnerships with multinational companies. According to EV Volumes, China exported about 580,000 electric vehicles in 2022, of which 407,000, or around 70%, were “Western brands.” (Just to give an idea of the speed of growth, exports in the first half of 2023 have already topped 500,000 units,)

By far the most important of those Western brands is Tesla, which according to the IEA accounted for about 40% of China’s EV exports in 2022. Another 20% of China’s EV exports were from European companies; this should include the Renault-Nissan group and BMW. (The remaining 10% are probably “Western brands” that are Chinese-owned: SAIC owns the British MG brand and makes MG-branded EVs in China, while Geely controls Volvo and Polestar, whose EVs are made in China for export).

The success of China’s EV exports is therefore inseparable from the decisions of multinational companies to make China their base for global EV exports (and of other countries’ willingness to allow a level of Chinese investment in their auto industries that China would not have allowed for foreign investment in its own auto industry).

Those decisions go back some years. BMW’s joint venture in China started making EVs as far back as 2013, started producing the iX3 in 2020 and opened another $2.2 billion EV plant in 2022. The Renault-Nissan group announced an EV joint venture with Dongfeng in 2017; it started out making models for the domestic market, but is also now making the Dacia Spring for export to Europe.

Tesla’s major investment in its Shanghai factory came a bit later, only after China’s decision to remove the requirement that foreign automakers operate through joint ventures. This liberalization took effect in 2018 for EVs and in 2022 for other vehicles. In addition to its direct effects on exports, Tesla’s entry into China is also generally credited with injecting new dynamism into the domestic market:

Despite all that government support, sales of EVs remained weak until 2019, when China let Tesla open a wholly owned factory in Shanghai. “It took this catalyst…to boost interest and increase the level of competitiveness of the local Chinese makers,” said Tu Le, managing director of Sino Auto Insights, a research service specializing in the Chinese auto industry.

Electric vehicles were less than 5% of domestic vehicle sales until 2020, really took off in 2021, and have surged since then to around 30% of domestic sales. According to another analyst:

Tesla’s brand appeal helped nudge more consumers to switch from gas-powered cars. A supply chain built around Tesla now feeds a wave of improving homegrown EV makers. “If you’re China: thank you Tesla for waking up the part of the market which was sleeping, which was retail consumers,” said Bill Russo, founder and CEO of Automobility, a Shanghai-based strategy and investment advisory firm.

The current success of China’s EV industry therefore has to be seen as a success of globalization–the flow of international capital seeking out the most efficient location–not just for domestically focused industrial policy. It’s the interaction between those two factors that has given China’s EV exports their rather unusual composition.

But in 2023, after the trade war, the Ukraine war and the collapse of US-China relations, the international structure of China’s EV exports also looks like the peak of a particular form of globalization that will not be reached again anytime soon. In 2013 or 2017 it was definitely not controversial for a Western multinational to choose China as the global export base for a major new product; in 2023 it certainly would be. In the current political climate it is very hard to imagine Western multinationals making such decisions again without hesitation.

The global rise of China’s EV industry looks like it is just getting started. But the model that kick-started that rise may not be available for repeat use.

by Andrew

Some cadres cannot keep up

Some of Xi Jinping’s most revealing comments about economic policy have come when he is ostensibly not talking about the economy at all. Official media have recently published a speech he gave on March 1, 2022 at the Central Party School, in which he mainly talks about ethics, ideals, responsibilities–the heavy burden that young Communist Party cadres must bear in their careers.

But it also contains some fairly frank remarks about the conduct of local government officials. Xi has made it his mission to reorient China’s political system away from the decentralized pursuit of growth-at-all-costs, and he is frustrated that not everyone is on board:

Most cadres can actively adapt to the new development requirements, but some cadres cannot keep up. Some think that development is about launching projects, doing investments, and expanding scale, and even still regard highly polluting and energy-consuming projects as an important means of promoting economic growth. Some over-borrow to build and blindly expand businesses. Some methods are simple and crude: the “one size fits all” campaign-style reduction in carbon emissions led to large-scale power shortages and seriously affected enterprise production and people’s livelihood. And so on.

The criticism of local-government debts and wasteful investments, long tolerated and even encouraged by the central government, is notable. Later on in the speech he draws on his own experiences in local government to make a broader point:

When I was working in Ningde [in 1988-89], the central government carried out rectification in response to intensifying inflation and the serious problem of duplicate construction. Ningde’s economy was affected as a result, and some cadres didn’t understand and complained. I said that this part of eastern Fujian must comply with the overall design for the whole province and the whole country; if the current macroeconomic adjustment work requires sacrificing some local interests, this should be willingly accepted.

Today, some cadres still have a parochial mentality. When something happens, they think first of departmental interests, local interests, and small-group interests. They play games with the Party Center’s decisions, selectively implementing them, or using fraud to hide their lack of compliance. ….Leading cadres must think about problems and do things from the perspective of the overall situation and strategy. All work must be based on the implementation of the Party Center’s decisions, and cannot damage the interests of the whole for the sake of local interests, or damage fundamental and long-term interests for the sake of temporary interests.

These comments reinforced my feeling that Xi’s economic strategy is ultimately political. He is not mainly opposed to the decentralized local pursuit of growth because he thinks it is a sub-optimal way to run the economy, or because it contributes to imbalances and inefficiency–the kind of critiques that economists make. Rather, he doesn’t like it because it has undermined Communist Party discipline and increased corruption. Growth-at-all-costs turns out to have had a high political cost, in the context of China’s top-down Leninist system.

As Joseph Fewsmith’s excellent book Rethinking Chinese Politics argues, this problem was evident from the very beginning of the reform era, and indeed was inevitable given the nature of reform:

There are tensions built into Leninism that reform unleashes. In particular, the role of cadres changes. No longer the object of mass political campaigns to control their behavior or able to use political campaigns to control the behavior of others, local cadres pursue economic development and often self-enrichment. Doing so often requires developing close relations with other cadres and developing ties with economic actors in society. Local networks and corruption are an inevitable consequence of reform. In short, a degree of party dysfunctionality is a part and parcel of reform. Local cadres become less responsive to higher-level commands and conflict with society is a by-product of politically directed economic reform. That reform erodes control and discipline in Leninist systems is wholly predictable. The impact of reform on Leninism was visible from the start.

Xi’s centralizing agenda is perhaps best understood, Fewsmith argues, as an attempt to “reinvigorate” Leninism, pushing back against the loss of Party discipline rather than accepting its inevitable decline into a welter of competing interest groups.

by Andrew

Fear drives industrial policy

Some accounts of the worldwide return of industrial policy treat it as a turn of the tide in the battle of ideas, the victory of a new way of thinking about the best way to manage economies. But it’s clear what has really shifted the position on industrial policy in the US, EU, and elsewhere are security concerns that did not mainly emerge from economic debates.

While it’s customary for people in government to use circumlocutions like competition, challenges, and concerns in public, everyone knows what the real issue is: that the US and China might get into conflict, and if they do that would blow up the global economy. To reduce exposure to that risk, political leaders want national economies to be organized differently than they are now.

The centrality of security fears was also the pattern in an earlier episode of the emergence of interventionist industrial policy, as I was reminded when I recently stumbled across a 2001 paper, “Threat perception and developmental states in Northeast Asia,” by a Chinese social scientist, Zhu Tianbiao. He argues that the distinctive top-down economic policies of Taiwan and South Korea emerged historically as a response to the threats from mainland China and North Korea respectively. He quotes Park Chung-hee, the Korean general who took power in the 1961 coup and instigated the industrialization drive, as saying: “With a strong enemy across the 38th parallel, this economic struggle takes precedence over combat or politics.”

What I thought was useful about the paper was his suggestion that it is only a particular type of perceived security threat that ends up motivating an industrial policy push. Industrial policy makes sense as a response to a security threat only if the threat is severe enough to require direct government involvement in economic decision-making, and long-term enough so that the resulting economic development will have time to achieve some effects. If the security threat is ambiguous or uncertain, it is hard to achieve the political consensus for a major change in economic policy. And in the case of a severe and immediate security threat, that is to say actual combat, the pushing and prodding of industrial policy would be beside the point: there would be wartime mobilization instead.

Zhu argues that it was only after South Korea and Taiwan emerged from the aftermath of conflict, and the US retreated somewhat from Asia, that their distinctive industrial policy took shape.

US support in both cases made it possible to expect that there would be no immediate war, allowing the leaders of Taiwan and South Korea to think in terms of economic development. At the same time, there was uncertainty associated with US support. It was therefore the combination of expected short-term calm and the uncertainty about long-term outside support that gave rise to the quest for economic independence in Taiwan and South Korea, and made rapid industrialization their top priority.

Similarly, he argues, both Taiwan and South Korea shifted away from highly interventionist policies in the 1980s and 1990s when their security threats became less severe. China under Deng Xiaoping became less threatening: the PLA stopped bombing Taiwan’s outlying islands, and the government started courting Taiwanese investors instead. North Korea did not become less threatening, but the credibility of its threats declined as its economy fell further behind the South; the US also stationed more troops in South Korea and conducted regular exercises.

The receding security threats helped open up economic policymaking to different ideas and interest groups. Although China under Mao had a very different response to Cold War-era fears of invasion–the Third Front was much closer to war mobilization–the easing of those security fears also set the stage for its economic liberalization (for more, see my older post China’s security fears and the Cold War economy).

Those historical episodes suggest industrial policy is likely to remain a prominent part of economic policy in Western countries as long as their security fears are elevated. If there’s a silver lining suggested by those precedents, it may be that the focus on industrial policy means governments judge the threat to be severe, but, thankfully, not immediate.

by Andrew

Breaking down China’s manufacturing

I got involved in a Twitter discussion with Brad Setser and others over the nature and causes of China’s high share of global manufacturing. This prompted me to go through some tedious statistical work to establish some basic facts for my own satisfaction. The results are now more or less final, so I am going to outline them here.

We know that China has a high share of manufacturing in its GDP, with the sector’s value-added accounting for about 28% of total value-added at last count. This is higher even than other manufacturing champions like South Korea (25%), Germany (21%) and Japan (20%), let alone the relatively de-industrialized economies like the US (11%), UK (10%), Brazil (12%) and South Africa (13%). Since China is such a large economy, accounting for about 19% of global GDP, its manufacturing sector is also very large relative to the world economy. As of 2021, China accounts for 31% of the world total of manufacturing value-added, according to the UN national accounts database.

Why is China’s manufacturing sector so large? In part, China is making goods for its own use, so its large manufacturing sector reflects the growth in China’s own demand. In part, China is making goods for use by others, so its large manufacturing sector also reflects its success as an exporter. We can start answering the question by quantifying the relative contribution of those two factors.

I did this by using the OECD Trade in Value Added (TiVA) database. Among other things, the database breaks down China’s manufacturing exports by whether the value-added originates domestically or abroad (in the form of imported goods and services used to produce exports). Although there is some change over time, about 80% of the value of manufacturing exports ends up contributing to domestic value-added. Once we know the amount of domestic manufacturing value-added generated by external demand, we know that the rest must be generated by domestic demand.

Doing this simple calculation shows that in recent years, about 40-45% of China’s manufacturing output has come from exports, while 55-60% has come from domestic demand. This pattern was established in 2009 by China’s massive property-and-infrastructure stimulus in response to the 2008 global financial crisis. Since then, the level of investment activity in the economy has stayed very elevated. So we can say that China’s manufacturing sector is indeed mainly oriented to domestic demand, but it’s definitely true that the contribution from exports is quite large. A 55-45 split in an economy of China’s size is a pretty significant reliance on external demand. And that reliance has increased more recently. The current edition of the OECD TiVA database ends in 2018; extending the estimates to 2022 shows that the export contribution has probably picked up quite a bit due to the pandemic export boom.

Nonetheless, China’s manufacturing share of GDP has declined since around 2010, meaning that manufacturing value-added has grown more slowly than the rest of the economy. The value-added breakdown shows that most of that slowdown has come from domestic demand, probably investment. What’s surprising is not so much that China’s investment boom has cooled off from the stimulus-driven peaks after the financial crisis, but that the slowdown has been so gradual. From about 2015-19, a slowdown in exports also contributed to the declining manufacturing share, but the pandemic export boom boosted the external demand contribution again. In a counterfactual world without the pandemic export boom, China’s manufacturing share of GDP would most likely be noticeably lower today.

The breakdown between exports and domestic demand can also be used to shed light on China’s share of global manufacturing (using world manufacturing value-added as the denominator rather than China’s own GDP). This shows a steadily rising trend, meaning that while China’s manufacturing growth did slow down relative to the rest of China’s economy, it continued to be faster than manufacturing growth in the rest of the world. But the drivers of the increase shift over time in ways that reveal the changing patterns of growth.

From 2000-2008, China’s share of global manufacturing rose mostly, though not entirely, because of growth in exports: this was the export boom caused by the mass relocation of manufacturing capacity to China after its WTO entry. Export value-added rose to 8.4% from 2.7% of the global total, while domestic value-added rose to 6.1% from 4.3%. From 2008-2019, export value-added rose further to 11.5%, while domestic value-added rose much more, to 16%. Again, this is the post-financial crisis investment boom. Over 2020-21, export value-added rose to 13.9% while domestic value-added rose to 17.4% (the UN database that supplies the global total of manufacturing value-added hasn’t yet updated to 2022).

Whether China can sustain its pandemic-era gains in exports is obviously an important global macro question. Some of that boost was due to surges in demand in the US and elsewhere that are now retreating. But some of it was due to supply-side developments, like China’s emergence as a major vehicle exporter, that could be more durable. Success on the export front would certainly help support China’s share of global manufacturing and its manufacturing share of GDP. But the crucial factor is really whether China can sustain the super-elevated levels of investment that have driven domestic demand for manufactured goods. Given the unwinding of the property boom and the complete buildout of many forms of infrastructure, this seems increasingly unlikely. Broadly, the fading of the post-crisis investment boom is why I think China’s manufacturing share is probably going to decline again (see my earlier post, “Re-de-industrialization“).

Technical note. Making these calculations using the OECD TiVA database was pretty straightforward. Extending them into more recent years using China official data was a bit tricky. The total for China manufacturing value-added in the TiVA database was basically the same as in the NBS national accounts. However, the value of manufacturing exports is not the same; the TiVA database is built on top of international input-output tables that try to make different countries’ trade figures consistent. Usually, the value of China’s manufacturing exports in TiVA is around 80% of the value of manufacturing exports reported by China Customs. I’m not sure what the reason for this is, but it seems to suggest the headline value of manufacturing exports is overstated. Using the Customs value of manufacturing exports generated a residual for domestic manufacturing demand that was implausibly small, so I adjusted it to be consistent with the TiVA data by using the ratio between the Customs figure and the TiVA figure.