10/1 TBC Insider Digest
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Insider Digest 10/1/21: Chinese Government’s Role in Economic Development (Continued)
Housekeeping / Announcements:
Refer an Insider! Do you have anyone you think would enjoy being part of Tech Buzz China Insider? If so, you can either send them to the Quiz (currently a 55% passing rate) or directly to the signup form (only available for referrals from Insiders like you so please do not share publicly!). For a limited time only, we are offering a $10 OFF coupon for Golden Week, China’s National Holiday week! The code is “YOUAREGOLDEN” at checkout.
Meanwhile, we’ll still have our Friday morning meetup this week on Discord, please do join us! I’ll take the first 10-15 minutes to summarize what I think are key takeaways from the Lan Xiaohuan book and how you can apply it to your investment / business decisions in China. As always, it is 9AM EST / 9PM Asia time inside the app.
This Week’s Posts: That’s right. I didn’t leave you hanging … this week is the second half of the book on Chinese government and their role in economic development. The summaries for each chapter are below. Find them helpful? Have any feedback? Please let me know!
Chapter 5: Urbanization and Inequality
In 1980, only 20% of Chinese citizens lived in cities, by 2019 it was over 60%, meaning a net influx of 500mm people. But if we go by hukou (residency permits) alone, then that number is just 44%, meaning over 200mm are living in cities but don't have the hukou there, and cannot enjoy the local education system, etc. because all those public services are provided based on hukou. By 2017, the CCP had pointed out that the main contradiction in China is between the citizens' wish for a beautiful life and the country's uneven development.
This is the first change in "main conflict" since 1981 when back then the contradiction between the growing material and cultural needs of the people and the backward social production. This means the main aim of economic policy has changed.
By end of 2018, China's total debt is 258% of GDP, same as America, more than Germany (173%), and much more than some developing countries such as Brazil (158%) and India (123%). And China's debt also grew faster than these countries, 5.5x in 10 years (vs. GDP growth of 2.8x during the same period). China has less government debt than developed countries, but more corporate debt (154% in China vs 75% in US and 58% in Germany). This is because equity capital markets are underdeveloped & the percentage of equity vs. debt fundraising is low (total equity markets just ~7Trn RMB).
Chapter 7: Domestic and International Imbalance
China's rise has benefitted from globalization, but that rise has also hit the world pretty hard. After ascending to the WTO in 2001, China has been the world's factory, and value-added manufacturing exceeded that of the US in 2010, becoming first in the world. By 2019, China accounts for 28% of the world, and quality has increased so that 30% were considered "high tech products," or 25% of the world. This astounding success has also resulted in major domestic economic imbalance: heavy production, heavy investment, relatively lighter social benefits, consumption, meaning that there is under-consumption, so all the goods that cannot be consumed internally must be exported. Which brings us to a second problem: unstable international demand and trade conflicts. In the last 20 years, as seen in the graph below (China: black line, G7: black dash, RoW: gray dash), G7 share of exports declined from 62% to 37% and China's increased from 5% to 28% while other countries remained roughly the same. Of course trade wars would arise, this would be expected.
Chapter 8: Government and Economic Development
Developing countries are behind precisely because they don't have a lot of the same hard / software of developed countries, ie market mechanisms. Thus they generally will need to go a different route in terms of development. This book is about how China did things differently, not blindly copying Europe or America. Effective resource allocation is the core of economic development and it depends on competition. China started off with a state-planned economy, so the government controls vast resources, and it will be like this for a long time.
Alright, we’re going to try something new! Some of you have mentioned that it’s too hard for you to keep track of Discord messages given the volume of activity. We’re going to try to highlight the most interesting posts from the week, and documents shared. So please click through below to the exact message that you missed:
tarmotamm: Alibaba and Tencent are opening up to each other, and who is the winner?
Anton: China’s alternative energy and battery storage capacity is emerging faster than we can share!
Documents & Links:
Yunfei: Goldman on New Paradigm in China
Yiulok: Meeting memo from Beijing regulators meeting with gaming companies (Chinese)
James: Barry Naughton on the summer of 2021 (YouTube)
hc-72: How Evergrande hid its debt
tarmotamm: A follow up on Evergrande's topic being (possibly) censored
Please join us there, I think you’ll enjoy it, as it’s quickly become the most active part of TBCI!
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