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In the past decade China has transformed itself into a high-value producer of sophisticated goods, threatening jobs in Europe and the rest of Asia. Today on the show, the FT’s Beijing bureau chief Joe Leahy joins Katie Martin and Rob Armstrong to discuss his three-part series on China’s new economy. Also, they go short prediction markets, long exit rows and long Xi Jinping’s chances of re-election.
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Read a transcript of this episode on FT.com
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Pushkin
When you think of China's role in the global economy, you might think of it as the place
that makes low-value stuff for the world. It makes widgets, it makes the basics,
and it does that quickly, cheaply, and on a huge scale. And that makes it hard for other
countries to make widgets and basics, because we just can't beat China on price or speed.
But it's also made life much cheaper for all of us over the years, as we load up on
bargain goods that are made in China. People who are very upset about this include a Mr Donald J. Trump.
But actually, that image of China is really out of date. In fact, China is absolutely crushing
it as a superpower in super-high tech industries, including electric vehicles and solar.
Today in the show, what does that mean for the rest of the world? And also, how might China
emerge as the big winner from the war in Iran? This is Unhedge, the markets and finance
podcast from the financial times, and Pushkin. It's Martin and markets columnist at the FT
in sunny but chilly London. With me, down the line from New York City, back from his
Jolly in Switzerland, we have a somewhat jet-lagged Robert Armstrong. Rob say hi.
Hi. What time is it right now? I don't know. Maybe you can check your cuckoo clock. Did you purchase
a cuckoo clock while you were there? I'll take that as a no. But excitingly, with me in the studio,
hit in London, I also have our man in Beijing. Jolly, he, Joe, thanks for coming in.
Thanks, Kelly. I spotted you in the newsroom in London and I thought, aha, I'm going to kidnap
Jolly and make you talk about China. Joe, I read the excellent China Shock 2 series that you and
several colleagues put together. It is a tapestry of many threads. Can you kind of give us the
summary? Yeah, thanks very much, Rob. So the series really describes our China's moving up
into very high tech industries and really hitting the economies of other producers such as
Europe and Southeast Asia. And the reason we thought of doing this series was that we thought that
the world really needs to wake up and take notice of this is one of the trends, perhaps one of the
most important trends of the decade. It's not about the widgets anymore, it's about the solar panels
and all of that good stuff. What's the deal here? Yeah, I mean, this is something that's been
coming slowly. And I think during COVID, people sort of lost touch with China for a while.
Right. And during that period, I mean, even before that, China had set its sights on these
high tech items. And it's not just solar panels and green stuff, it's machine tools as well.
So very high quality machine tools. You name it. China is actually producing it these days and
it's creating a shock for Europe and also for Southeast Asia and all countries that have an
industrial base are being challenged. How long you've been out there? How much has it changed
since COVID? I've been there since the end of COVID. I got there in 22
and was locked down for a while and even almost put in one of those COVID camps at one point.
Thank God, it didn't happen to me, but it has, it's just going very fast this process. I think when
I arrived there, I was surprised like most people at the number of electric vehicles, beautiful,
very high quality electric vehicles on the streets of Beijing. Yeah, I hear Beijing and Shanghai are
quiet. Yeah, exactly. That was one of the first things I noticed. I used to go to China in the 90s
and then the 2000s. And it was always very noisy with trucks and motorbikes like in E-City.
And now it's just strangely quiet. It's kind of almost surreal. It's just humming along on all those
EVs. And so as you say, like it's getting good at the high end stuff, like part of this series that
you've just been involved in this China Shock 2.0 series is like the rest of the world is waking
up to this. What does it mean? How much should this bother Rob Armstrong and his ilk out in
the States? Well, I think the States don't need to be bothered because they already got
de-industrialized by China Shock 1.0. But I think the interesting thing is China,
since they came out with this plan made in China 2025 in 2015. And they targeted all of these
sectors from shipbuilding, trains, supercomputers, everything. And they're sort of gradually meeting those
targets. And now, squaring their sights at all of the industries that Europe traditionally has
been very good at. Germany, for example, it's economy, it's manufacturing base. It's been
based around a couple of things. One of them is its car industry, which is so-called all around
like Europe and the UK and all over the place. But also, German industry is very much about
selling high-end stuff to China, like manufacturing equipment to China, heavy industrial stuff to
China. That whole equation seems to be getting a little bit out of joint now. Then it's kind of the
same picture in Southeast Asia, if I'm not mistaken, right? Yeah, the Southeast Asia case is
particularly interesting because these are developing economies that had hoped to continue down the
path of industrial progress. But China's essentially doing everything. It's doing everything from
textiles and shoes all the way to EV exports, power machinery, everything. So there's really
nothing left for these countries to do, and they're losing jobs. If it is the case, Joe,
the China is focusing on high value but subsidized and state mandated production. And along with those
EVs and machine tools, it is exporting to the rest of the world. It's essentially exporting
unemployment to the rest of the world. Why doesn't this end in a terrible political conflict?
In other words, can China expect the rest of the world to stand for this industrial policy?
I mean, that's a great point, Robert. I think if you talk to European business leaders in China,
this is something that they're constantly warning the Chinese about. They're like, this is unsustainable.
Our politicians are not going to accept this on a long-term basis. Maybe the European companies will
transfer more jobs to China, but at some point politicians will react against it. I mean,
we already have Trump in the US. I mean, what are we going to get in other countries? Same thing
in Southeast Asia. They've been very good in the past at blocking imports that they don't want,
but this is very pervasive and very hard to resist.
Rob, is this cutting through in the States, or is there still a perception that China's just
there for the widgets and putting the little screws in the iPhones? Oh, I think it's absolutely
coming through. Though, of course, it has a powerful political overlay in the United States,
where people talk about how every bit of Chinese technology is also a piece of surveillance
technology that has a role to play in the great power battle between the United States
and China. I actually have a question for Joe on this topic, which is there is a characterization
of China's economy that says it's extremely different from other industrialized high-tech
economies in the world, in that it's not competitive in the same sense. In other words,
the targets set by and for the companies are not profit so much as market dominance,
employment, creating security for China itself. Is that an accurate characterization or
there are kind of subtleties that broad brush miss? I think it's both. I mean, it is absolutely
a different kind of economy from other market economies, if you like. We know that at the local
government level, there's huge subsidies and we go through that in our China 2.0 series.
I think it's between three and nine times more subsidized than OECD, normal OECD economies.
So the subsidies are huge and also they set these targets, these growth targets, so the local
officials need to meet those targets. So they're investing in production. If you produce in a certain
area, that local government collects some of that value-added tax. So that's another incentive for
local governments to set up production and not close it down. So you have all of this this
weird sort of nexus between your local government, central government sets the targets,
pops money in through local government bonds, local governments take this money, follow their
production targets and then they set up this production capacity and then don't let it shut down,
even if it's not making money. So Michael Pettis calls Chinese companies competitive but not
necessarily efficient. Right. And what about that surveillance point? Do you hear that a lot that
oh you know this is very sneakily spying on the rest of the world using other sorts of technology?
The very big Chinese companies do have a Communist Party representative on the board.
So if the party says okay we need you to do something for us or the MSS Ministry of State
Security says we need you to do something for us, they have to do it. Setting all that aside,
I don't know it's a kind of it's a big deal. This model it might be kind of alien to us in like
you know the UK or the US but kind of works, gotta hand it to them. So like China I think I'm
right in saying accounts for like a third of the spending in the entire world on green energy.
Like it's become an absolute superpower in green energy. Give us a sense of the scale of this
thing like how quickly is it rolling this out? Yeah I mean it is enormous and I was just
looking before that I think China has production capacity for solar panels that's double
global demand at the moment. So this system this is what it does it's it's very good at producing
that actually producing production capacity if you like you know. Where are they putting the other
half of the panels? Is there like a gigantic warehouse in central China full of unused solar panels?
One of those ghost cities. Yeah in the ghost cities maybe. There is one I think I've been looking
for this. Where is this warehouse? So just to ask you a question it is an incredibly formidable
system in that sense that just you know if they say they want to produce something they're going
to produce it. That flip side of that is the waste and also you know the domestic demand is not
there. What are they going to do about the domestic demand ultimately? That's the question I wanted to
ask you if I may Joe. Does this system create the kind of prosperity that I'm sure the party also
wants to see? In other words does it fulfill that the economic side of the deal for the growing Chinese
middle class or working class? So I think it has provided huge prosperity over the past 40 to
50 years. The question is really are they going to get to sort of a middle income status and can
they go beyond that? And I think that's what the party now is trying to do with this going to
high tech industries that were once you know the realm of Europe or the US. They're trying to go up
up the chain and they believe that there's going to be some sort of trickle down effect and they
can double per capita income by 2035. But I think traditional economists don't really see a clear
path from from what they're doing now to that fully prosperous economy that you're talking about
they rob. So the solar panels that are not sitting in a massive warehouse somewhere in central China
where are they going? Because it's interesting right that the whole world is kind of beholden
to Saudi Arabia because it produces an awful lot of oil. If you assume for now that China
is the Saudi Arabia of green energy does that give China long term a different sort of geopolitical
cloud. You know I gather like there are parts of Pakistan for example that just getting
carpeted in this like Chinese solar tech and that must bring with it a certain diplomatic kind of
you know relationship and a certain geopolitical power or am I over-interpreting?
I think it isn't especially with this crisis we've seen a lot of demand for green energy products.
I mean for instance in Australia we've seen EV demand go through the roof just in the last year.
There must be all over Australia surely. One thing you've got under of this sunshine.
Yeah and I think on my father's roof I'm not sure whether they're Chinese ones with this
there's some solar panels on there. So it is it's it's definitely it gives China a huge advantage
in this area and it goes beyond just the the power that the solar panels produce themselves.
You can also use them to produce green hydrogen for instance which in the future can be used as a
green fuel for aviation and all kinds of things. So I think it's um this is definitely giving China
that that geopolitical cloud. Now the question for Europe and other places is do we want to be
dependent on China and we just give up on making our own solar panels and be dependent on China
because the technology will evolve as well you'll you'll become dependent or should should we
have quotas you know take maybe 50% from China and then by the the other 50 for themselves.
Finally enough Joe that was my next question like yeah what what do we do do we just say okay
because of its unique economic model China has just built up an unassailable lead here and I guess
we all buy Chinese cars now we all buy Chinese energy infrastructure now it's a very tricky one for
Europe as you say because like the the the German car industry is such an important part of
the German manufacturing and German industrial base but for example as part of this series one of
the things I was reading was there's effectively an abandoned dishwasher factory in Spain this
podcast loves dishwashers as you may know and and it closed it's a whole thing Joe I'll fill you
in later and it closed and that led to the loss of hundreds of jobs and along comes a Chinese
battery company called Hithium which might take over this this facility and it's pushed there in
part because Trump has stepped back from a lot of the kind of green energy initiatives that were
started under Joe Biden so all of a sudden the US is not such a a favorite place to do business
anymore maybe they come into Europe instead and look that's a lot of jobs for the people in and
around this this old dishwasher facility in in Pamplano in Spain I believe and maybe a lot of that
does involve buying not just Chinese stuff and goods but Chinese know how is Europe comfortable with
that yeah I think the the key thing here especially this Hithium case is do you want to just buy
stuff and bring it in and then you just become completely independent or do you want to have
Chinese companies come in and invest in Europe and set up this capacity in Europe and I think a
lot of people in Europe would argue let's have the Chinese come in invest here under certain rules
and there's the industrial accelerator act that we mentioned in that piece as well which is designed
to get Chinese companies to come and invest but also transfer a bit of technology use local
employees there's a whole bunch of kind of rules around that which is similar in a way to what
China did to European companies and American companies when they first went to China
I want to pick your brains on where China is with regards to the situation in Iran so you know
on paper China is the world's biggest oil importer so this should be like an unmitigated disaster
what's happened in Iran for China but it went into this crisis with massive reserves of oil
like it's got oil coming out of his ears and only about six percent of its energy consumption
is exposed to problems in the state of hall moves so well played China is there a world in which
China emerges as somehow you know the winner as a result of this war not just because
it's already got plenty of its own oil thanks very much not only because it can make the solar panels
that everyone has finally woken up to the fact that we need them but also because this gives China
I guess a different sort of geopolitical cloud across Asia which is as Rob and I were just talking
about in the last podcast we recorded the other day like emerging Asia is really under the
caution from this energy crisis so where does China fit into all of that stuff yeah I think China
China could have let's say a good oil shock crisis out of this if external demand suffers as we've
just been talking about you know China's exports will go down but because Chinese exports are so
competitive they can gain even more market share and in the long run they'll probably keep it so
China becomes even more powerful as a as an as an exporter and as a global manufacturer
as a result of the crisis if it go if the crisis is too harsh then even China's oil reserves will
start to run out and China will have to buy more oil from Russia it'll have to use more coal
because actually even though it's a huge green power it's also still building coal thermal plants
so and that's that's kind of its backbone China has a lot of its own coal and that's why
it's not going to run out of energy right right as a result of this crisis Rob do you think this
was Donald Trump's plan that he would embark on a war of choice and the winner of it would end
up being China I'm going to say that was not the main objective can you tell me Joe why did China
so fortuitously build up its oil reserves did they see into a crystal ball and see that the
straight of hormones was going to be closed or was it just national policy to develop these
immense backup tanks of crude oil let's say let's step back a bit and the party's mentality has
always been to prepare for the worst basically even back in the mal days he he situated factories
way back in the western part of China to protect them against possible nuclear attack and all the
parties always been a huge planner Rob like like we were saying you're just back from the FT
commodities Shindig in in Luzan in Switzerland but La Dida what are people there saying about how
China has played its hand into this Iranian crisis well it was interesting in a way
how China didn't come up that I think represents their preparation for this so to to your point
it was like what's going to become of Malaysia the Philippines Indonesia you know there was more
talk Joe I don't mean this personally there was more talk about Australia's energy problems
than there was about China's energy problems so it was almost like China was conspicuous by absence
in the discussions of the crisis there was a little talk about how you just stood towards this
earlier Katie about how China's reserves may allow them to strike deals with those emerging
power those emerging agent powers who basically don't have a national energy policy
are you saying I'm about already Joe like oh hi Vietnam yeah no sure you can have some
of oil there might be some terms and conditions attached to that is this happening yet
well it's China definitely wants it to happen we I don't know if you saw the one on Taiwan
China often Taiwan to a little bit of help with oil supply which Taiwan politely refused
so Taiwan's going to wake up tomorrow and there's going to be a horse's head in their bed basically
it's possibility but again China has to take over its own needs first and foremost and they are
very conservative on this front and how much Russian oil do they really want you know after
while you don't want to be too dependent on Russia either yeah you think it's not fun being
dependent on China try being dependent on Russia Europe just a little experiment in that and it
turned out badly it didn't work out it worked out very well didn't it yeah absolutely yeah I think
the other interesting geopolitical thing in this for China is China's quite close has been
quite close to Iran although I think they have been frictions between the two of them in more recent
years but China's also close to all of the Gulf states so does a nice job you know actually it's
a good point so it's tricky yeah so how because we've had stories about Chinese companies assisting
Iran with with the war that doesn't probably doesn't go down well with Saudi Arabia which provides
tons of oil to China so China's has to play a pretty delicate game in all of this playing a very
delicate game Joe thank you for sharing your brain and your insight on this because it's something
that Robin I know next to nothing about we are going to be back in just one second with Longshot
Markets move fast get the insights you need in 10 minutes with Barclay's brief a podcast from
Barclay's investment bank each week our experts analyze market themes helping you anticipate what's
next listen to Barclay's brief wherever you get your podcasts okay no it is time for Longshot
that part of the show where we go long a thing we love or short a thing we hate Rob I'll start
with you what you got having just flown it back and forth from Europe the best money you can spend
in travel is paying for the exit row seat I am long that baby fair enough Joe what are you saying
well since we have the Trump she some at next next next month actually I'm going to say that I'm
short Trump for the midterms and Longshot for next year's party congress for a fourth term Longshot
Longshot's in paying spoken market true Beijing correspondent I am again limit short prediction
markets story today that France's weather forecasting service has filed a police complaint
after detecting anomalies in its temperature gauges at an airport in Paris which seems to have
something to do with bets made on sodding polymarket so somebody made an absolute boatload of money
from a bet on the temperature in Paris being 21 degrees C. So what are we doing here guys?
Inside our weather trading dads and granddad the world over it's absolutely nuts like
fixing the weather market is stupid it's corrosive it's bad we need to like this and the pervert
classes these are things that we just need to ban jolly heat all the way from Beijing thank you so
much for joining us and Rob back from from sunny lozanne it's lovely to have you back in New York
listeners we will be back in your ears on Tuesday so listen up then
Unhedged is produced by Jake Harper and edited by Brian Urstad or executive producer is Jake
Goldstein Cheryl Bromley is the FT's global head of audio special thanks to Laura Clark,
Greta Cohn and Natalie Sadler FT premium subscribers can get the unhedged
newsletter for free and a 30 day free trial is available to everyone else just go to
ft.com slash unhedged offer i'm Katie Martin thanks for listening
