Morning Wire XX
[0] The G20 summit kicked off today in New Delhi, India.
[1] While President Biden is participating in the two -day meeting, China's president, Xi Jinping, will not be in attendance.
[2] Many are speculating that economic challenges will keep the Chinese leader at home.
[3] In this episode, senior editor Cabot Phillips speaks to strategic economist David Goldman about China's economic condition.
[4] I'm Daily Wire editor -in -chief John Bickley with Georgia Howe.
[5] It's Saturday, September 9th, and this is an extra edition of Morning Wire.
[6] The following is an interview between Daily Wire Senior Editor Cabot Phillips and Asia Times Deputy Editor, David Goldman.
[7] David, thanks so much for making time for us.
[8] Always a player.
[9] Thank you.
[10] All right.
[11] So we'll start.
[12] There have been a number of stories over the last month about China and their economy appearing to be facing a significant downturn.
[13] Just how serious do you think this slump is?
[14] Well, they're certainly having a speed bump, but the economy is still growing.
[15] It's not like the European economy, which is shrinking.
[16] They're in an enormous transition, one of the great retoolings, tried to move away from the old countryside to city migration model with low -skilled heavy industry to a high -tech industry economy.
[17] And a lot of that is reducing the importance of the property sector in the economy.
[18] It's doing 25 % of GDP, and it's been a huge sink for capital.
[19] So making that transition has been messy and nasty.
[20] It hasn't been handled particularly well, in my view, but it's certainly not a crisis.
[21] Yeah, much has been made of China's real estate market.
[22] I want to get to that.
[23] What are we seeing on that front?
[24] And can you elaborate a bit more?
[25] Well, for the past two years, Beijing has been squeezing the property market by cutting off credit from the state banks and imposing restrictions on home buyers, higher down payments, and similar measures.
[26] And finally, a year ago, that began cracking the property market.
[27] The Chinese have 70 % of their household assets in property.
[28] The stock market has been a very poor performer, and the Chinese have been overwhelmingly investors and houses, and for 40 years, given that, they moved 700 million people from the countryside to cities, and the demand for housing has been bottomless.
[29] That's been a terrific one -way back, But it's also reached, it's used by date, some time ago, for one thing, at least in some cities, housing prices are exorbitant and out of the reach of any normal family.
[30] And secondly, the rate of migration has to slow because they've already moved most of the people that they can move.
[31] So the transition is necessary, and because it's been such an enormous part of household investment, it's necessarily going to be painful and disruptive.
[32] but there is no financial crisis in China.
[33] Chinese financial stocks are traded higher than they were at the beginning of the year.
[34] The money markets are completely calm.
[35] Of course, the Chinese currency has been weak, but so has the Japanese yen and many other currencies.
[36] That's not due to what's happening in China.
[37] That's due to the fact that American interest rates are rising.
[38] Do you see this getting worse before it gets better with regard to the real estate market?
[39] Is there a breaking point coming?
[40] Is there a light at the end of the tunnel?
[41] What do you see happening?
[42] That is entirely a political question.
[43] The moment that the Communist Party signals that it's a good time to buy by lifting restrictions and encouraging the banks to put more credit into it and bailing out some of the fleeting local governments, Chinese homebuyers will go back in the market.
[44] This is really a negotiation between people, government, and local governments.
[45] Xi Jinping is on a tear.
[46] trying to take control of the finances of local governments.
[47] Local governments have become fiefdoms unto themselves because they've made their money for many years by selling property, and as land prices rose unidirectionally, that's been a great business for them.
[48] Beijing wants to take power over local finances away from the localities, break up political fiefdoms.
[49] And politics always takes presence in China above economics.
[50] So the point at which Xi Jinping decides that he has enough of the upper hand to bring local governments under political control, the government will signal to people that it's a good time to buy.
[51] And there is a great deal of pent of demand for housing.
[52] Even though Chinese living standards have increased by an enormous margin, 25 times over since 1979, Chinese houses are very small.
[53] people want more houses.
[54] There is demand, and I think it will be resolved politically.
[55] The government's long -term concern is to shift investment away from low -tech, low productivity, real estate investment to high -tech, highly productive investment.
[56] That's the only way they can deal with a declining workforce over time.
[57] So shifting from real estate to trade Chinese exports to the U .S. are now at their lowest level since the early 2000s.
[58] What's behind that dip?
[59] And more specifically, how important is it?
[60] Well, a number of studies, including one by Asia Times, but there's very good work done by the World Bank and others, show that Chinese exports have not really declined.
[61] Resuring has been much more a matter of rearranging the deck fears.
[62] So China is exporting a great two more to Vietnam, Mexico, Brazil, and India, and India, Vietnam, Brazil, and Mexico are exporting more to the United States.
[63] in effect a great deal of our friend shoring countries.
[64] They're simply white labeling Chinese goods to some of the final assembly before shipping them on to the United States.
[65] So the Chinese content of American imports has not declined at all.
[66] The labels have declined as the Chinese rearranged trade flows to get around tariffs and other problems for their imports to the United States.
[67] Those numbers are very hard and have been published by a number of entities, as I said, particularly the World Bank.
[68] So we have seen a concerted effort from Western nations, at least outwardly, to portray a desire to cut imports and business with China.
[69] We've seen executive orders from the Biden White House on restrictions and investing in Chinese technology.
[70] And it does seem to be having an impact as well in the EU with the number of Chinese goods being imported.
[71] Do you think that's sustainable, though, in the long run?
[72] Well, that's entirely up to us.
[73] We would have to invest a great deal in industrial capacity to replace Chinese imports, whether it's direct or indirect imports.
[74] We are not making those investments, support from the very large marquee investments in ship fabrication, capital spending by American industry has been pretty anemic.
[75] So unless we're willing to spend a lot of money, and it's probably in the range of a trillion dollars of CAPEX to replace the capacity.
[76] And that would take a good deal of time.
[77] We're not really going to reduce our dependence on China.
[78] If we want to spend that kind of money for industrial capics, we, I think we'll need some very significant policy changes.
[79] I think we should be doing some of that.
[80] We have an unsustainably high trade deficit, whether it's with China or anyone else.
[81] But so far, we have not taken the kind of measures, which would change that.
[82] You touched on it a bit earlier, but I want to get more into which countries stand to benefit if China does start to lose sway in global exports.
[83] Well, when you say if it does, India has been exporting more to the United States, for example, but India gets one -third of its non -oil imports in China.
[84] Its imports in China have surged, and that includes, for example, telecommunications equipment from the Chinese infantry companies like Wobie and VTE, the local Indian telecom providers simply white label it.
[85] India would not be able to export as much as it does without importing intermediate and capital goods from China.
[86] The same is true in Mexico, which is now with Canada, our largest trading partner.
[87] Mexico exports, the United States, have increased considerably, but China's exports to Mexico have doubled over the past two or four years.
[88] companies are also investing heavily in Mexican manufacturing.
[89] So the rethuring exercise has certainly benefited principally Mexico, Vietnam, and India.
[90] But it hasn't hurt China.
[91] It simply shifted the flows around.
[92] Fascinating.
[93] So shifting a little bit more macro, Bloomberg had a story this week projecting that China would not overtake the U .S. economy until the mid -2040s.
[94] That's later than originally projected.
[95] What do you make of that projection?
[96] Well, it depends how you measure it.
[97] If you measure it in so -called purchasing power parity terms, China is already considerably larger than the U .S. So, for example, a taxi ride from a hotel in Beijing to the airport a month ago cost about $30 for a 45 -minute ride.
[98] That would be three times as much in a major American city.
[99] the cost of hiring the Chinese engineer at an R &D facility in Shanghai is half of hiring a comparably skilled American engineer.
[100] So PPP does matter, and in that sense, China's already larger.
[101] The question is not simply how big the economy is, but the content.
[102] What worries me about China is not the absolute size, however you might measure it, but the fact that China is coming to dominate a number of key industries.
[103] It's now by far the largest auto producer and auto exporter.
[104] Auto was the biggest manufacturing industry in the world with $3 trillion in sales.
[105] And Chinese cars are getting very good, and Chinese manufacturing is getting very skilled.
[106] That's certainly a threat to the American oil industry.
[107] Long term, China will become a major factor in the chip industry, and that will be, challenge to an important sector of the American economy and so forth.
[108] So it was trying to comes up the learning curve.
[109] If we don't go faster of the learning curve, we stand to lose market share and ultimately be relatively poor.
[110] Final question.
[111] This one's shifting gears a bit.
[112] Xi Jinping has indicated that he'll skip out on the G20 meetings this weekend.
[113] What do you make of that decision?
[114] My guess is there are a number of political issues that he doesn't want to deal with directly.
[115] And in Chinese imperial style, he's sending his deputy, Li Chang, the premier, to meet with other countries by way of saying, until you're ready to come on our terms, you don't get to talk to the emperor.
[116] All right, we will leave it there.
[117] David, this was really a fascinating insight.
[118] We appreciate to make time for us.
[119] Always a pleasure.
[120] Thank you for inviting.
[121] Thanks again.
[122] That was Daily Wire Senior Editor Cabot Phillips with Deputy Editor at Asia Times, David Goldman.
[123] And this has been an extra edition.
[124] of Morning Wire.