China has leapfrogged the West - Louis Gave

In an interview with Wealthion (Interview here) Louis Gave discusses various aspects of the Chinese and US economies, as well as global trade and investment, in an interview. We agree with many of his views and where we differ, we comment below. We hope you find it useful.

China's Economic Transformation

Gave says that China's economy was primarily driven by real estate for around 20 years, with 20 million people moving from farms to cities annually, necessitating significant infrastructure and real estate investment.

Prescient Palimpsest comment: When the World Bank cites how capitalism lifts billions of people out of poverty, it is important to note that 80% over the last half century were in China. The idea that laissez-faire capitalism (capitalism that runs free and unchecked) raised people out of poverty appears to be a myth.

However, this model was disrupted in 2018 when the US restricted semiconductor exports to China. In response, the Chinese government shifted its focus to industrial self-sufficiency, directing bank loans away from real estate and towards industry. This led to China making significant advancements in various industries.

Gave notes, "the government told the banks look banks no more loans to real estate and from now on you're only lending to uh to Industry". Gave refers to what he calls the Chinese entrepreneurial 'hunger games', where there may be one hundred and fifty start ups are supported by banks and around five survive and make it.

He observes that while foreign commentators focused on the real estate collapse, China was "lead frogging the West in Industry after industry".

Gave highlights China's progress in areas such as "Autos, industrial robots, solar panels, nuclear power plants, batteries, trains, Road building [and] tractors". Having achieved industrial independence, China is now shifting towards boosting consumption. Gave says, "you've gone from a focus of amongst policy makers of we need to be self-sufficient industrially on everything to now all of a sudden the focus being we need to boost consumption".

Gave points out a joke in China about the West: ‘In the West you change politicians, but do not change policies; in China we keep the politicians, but we change the policies.’

Prescient Palimpsest comment: This is a really big idea. Market commentary in the 1990s and 2000s was always about the bad loans in state owned enterprises and state banks. However, when you look at it differently, the Chinese state utilises banks as utilities that lend - their role is to direct the money supply where required, and the result, as observed by Gave, is that the Chinese consumer benefits, whilst state banks wear the losses of bad loans. Chinese capitalism encourages innovation and competition that serves the consumer. The Chinese joke about how the West doesn’t change policies is of course a jibe at Western lobbying and corruption and it is worth thinking about, for many a true word is spoken in jest.

Chinese Industrial Policy

China's industrial policy involves the government setting strategic goals, such as EV production, and then local authorities and banks provide funding to numerous companies, which then compete fiercely, eventually leading to a few dominant players.

Gave explains, "Xi Jinping at the top says hey guys the future is EV and we got to produce EVs and then basically every mayor of every major town every provincial Governor every party secretary picks up his phone uh to his local bank and says hey Bank the big man (Xi Jinping) just said we need to do EVS so you're going to give a loan to my EV maker".

He contrasts this with the Western approach of subsidies and picking winners, which he argues leads to less competition and higher prices.

Prescient Palimpsest comment: For anyone who looks at Silicon Valley and believes was built by kids being innovative in their parents’ garage, the role of the state in the 1960s and 70s in laying the ground work for tech in the US is worth exploring. Similarly, the Chinese state seems to be seeding various new industries proactively, with great success. Further, there is a major argument that in the West we have oligopolies - behind the array of drinks on supermarket shelves are really two or three major drinks companies (Diageo, Coca-Cola (that owns Costa, and many other brands), LVMH, etc).

Chinese Consumer

Gave points out that China's consumer spending is difficult to compare with the US due to differences in healthcare expenditure. He notes that China's industrial capacity has outpaced consumption.

He says, "China is producing today roughly 6 million cars more than it can consume".

While China's consumption is high, with the country consuming more beef, fish and smartphones than the US, there is still room for consumption to grow relative to its production capacity.

The Chinese government is now focusing on stimulating domestic consumption.

China's Trade Surplus

China has a massive trade surplus, around $1.1 trillion per year, which is unprecedented.

Gave observes, "the biggest Trade Surplus you'd ever seen in the world were two to thirty billion; you know Japan at their top Germany at their top so this ($1.1 trillion) is an enormous outlier".

This surplus is not being reinvested domestically due to uncertainty among Chinese entrepreneurs, who are instead buying gold, keeping cash offshore, or leaving it in banks.

Gave states, "all these guys are making tons and tons of money and they don't know what the rules of the game is going to be for the next six months 12 months two years five years so they get all this money and they do one of three things...they buy gold...they keep their cash offshore...[or] the rest of the money I think is coming back to China...sitting at the bank".

The surplus is also not being invested in Western real estate as it was in the past, due to fears of asset seizures, following the confiscation of Russian assets.

Prescient Palimpsest comment: Currency controls and the capacity for Chinese entrepreneurs and billionaires to take their wealth out of the country plays a big part of the criticism of China by laissez-faire capitalists. That said, China witnessed the 1997 Asian currency crisis, and the effects of speculative inflows and then the subsequent destructive outflows that lead a country to the IMF table. It is a different approach, that does not let Chinese billionaires buy yachts and park them in Monaco, but its results seem to be undeniable. It provides currency stability (through the peg to the USD), and directs investment inward. It also explains why Chinese bond yields are falling, as money flows into bonds).

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