transcript

Speaker 1:
[00:06] 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 But actually, that image of China is really out of date.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 Unhedged, the markets and finance podcast from the Financial Times and Pushkin. Katie Martin, a 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.

Speaker 2:
[01:24] Hi. What time is it right now?

Speaker 1:
[01:27] 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 here in London, I also have our man in Beijing, Joe Leahy. Joe, thanks for coming in.

Speaker 3:
[01:42] Thanks, Katie.

Speaker 1:
[01:43] I spotted you in the newsroom in London and I thought, aha, I'm going to kidnap Joe Leahy and make him talk about China.

Speaker 2:
[01:52] 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?

Speaker 3:
[02:05] Yeah, thanks very much, Rob. So the series really describes how China is 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.

Speaker 1:
[02:28] It's not about the widgets anymore. It's about the solar panels and all of that good stuff. What's the deal here?

Speaker 3:
[02:34] 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.

Speaker 1:
[02:42] Right.

Speaker 3:
[02:44] 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 know, you name it, China's 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.

Speaker 1:
[03:09] How long have you been out there? How much has it changed since COVID?

Speaker 3:
[03:13] I've been there since the end of COVID. I got there in 22. I 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.

Speaker 1:
[03:38] Yeah, I hear Beijing and Shanghai are like quiet.

Speaker 3:
[03:41] 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 East City. And now it's just strangely quiet. It's kind of almost surreal.

Speaker 1:
[03:53] 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? Like, how much should this bother Rob Armstrong and his ilk out in the States?

Speaker 3:
[04:16] Well, I think that the States don't need to be bothered because they already got deindustrialized by China Shock 1.0. I think the interesting thing is, you know, China, since they came out with this plan made in China 2025 and 2015, and they targeted all of these sectors from shipbuilding, trains, supercomputers, everything, and they sort of gradually meeting those targets. And now, square in their sights, all of the industries that Europe traditionally has been very good at.

Speaker 1:
[04:44] Germany, for example, its economy, its manufacturing base has been based around a couple of things. One of them is its car industry, which is sold cars 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, and it's kind of the same picture in Southeast Asia, if I'm not mistaken, right?

Speaker 3:
[05:12] 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 is 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.

Speaker 2:
[05:36] If it is the case, Joe, that 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?

Speaker 3:
[06:11] 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? And 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.

Speaker 1:
[06:48] Look, Rob, is this cutting through in the States, or is there still a perception that China is just there for the widgets and putting the little screws in the iPhones?

Speaker 2:
[06:56] 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. And 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 are there kind of subtleties that broad brush miss?

Speaker 3:
[08:02] 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 3 and 9 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 weird sort of nexus between the local government, the central government. Central government sets the targets, pumps 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.

Speaker 1:
[09:06] 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?

Speaker 3:
[09:15] 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.

Speaker 1:
[09:28] Setting all that aside, I 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, got to hand it to them. So like China, I think I'm right in saying it 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?

Speaker 3:
[09:58] Yeah, I mean, it is enormous. And I was just looking before, I think China has production capacity for solar panels. It's double global demand at the moment. So this system, this is what it does. It's very good at producing, at actually producing production capacity, if you like, you know.

Speaker 2:
[10:14] 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.

Speaker 3:
[10:27] In the ghost cities, maybe, there is one. I think I've been looking for this. Where is this warehouse? So just to answer your 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. The 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?

Speaker 2:
[10:50] 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 the economic side of the deal for the growing Chinese middle class or working class?

Speaker 3:
[11:12] 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 a 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 the chain and they believe that there's going to be some sort of critical down effect and they can double per capita income by 2035. But I think traditional economists don't really see a clear path from what they're doing now to that fully prosperous economy that you're talking about there, Rob.

Speaker 1:
[11:50] 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? I gather there are parts of Pakistan, for example, that are just getting carpeted in this Chinese solar tech, and that must bring with it a certain diplomatic relationship and a certain geopolitical power, or am I overinterpreting?

Speaker 3:
[12:33] I think it is, and 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.

Speaker 1:
[12:43] It must be all over Australia, surely. One thing you've got a lot of is sunshine.

Speaker 3:
[12:47] Yeah, I think on my father's roof, I'm not sure whether they're Chinese ones, but there's some solar panels on there. So, it is definitely, it gives China a huge advantage in this area, and it goes beyond just 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 this is definitely giving China 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 become dependent. Or should we have quotas, you know, take maybe 50% from China and then buy the other 50 from somewhere else?

Speaker 1:
[13:37] Funnily enough, Joe, that was my next question. Like, yeah, 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 will buy Chinese cars now. We all buy Chinese energy infrastructure now. It's a very tricky one for Europe, as you say, because the German car industry is such an important part of 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 it closed.

Speaker 3:
[14:16] I like dishwashers.

Speaker 1:
[14:18] 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 Hythium, which might take over 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 favorite place to do business anymore. Maybe they come into Europe instead. And look, that's a lot of jobs for people in and around this old dishwasher facility in Pamplona or 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?

Speaker 3:
[15:01] Yeah, I think the key thing here, especially with this Hythium case, is do you want to just buy stuff and bring it in, and then you just become completely dependent? 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 Exhilarator 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.

Speaker 1:
[15:43] I want to pick your brains on where China is with regards to the situation in Iran. So, 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 its ears, and only about 6% of its energy consumption is exposed to problems in the Strait of Hormuz, so well played China. Is there a world in which China emerges as somehow, 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 clout 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 cosh from this energy crisis. So where does China fit into all of that stuff?

Speaker 3:
[16:51] Yeah, I think 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, 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 an exporter and as a global manufacturer as a result of the crisis. 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. They'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 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.

Speaker 1:
[17:40] Right.

Speaker 3:
[17:40] As a result of this crisis.

Speaker 1:
[17:41] 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?

Speaker 2:
[17:49] 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 Strait of Hormuz was going to be closed or was it just national policy to develop these immense backup tanks of crude oil?

Speaker 3:
[18:14] Let's step back a bit and the party's mentality has always been to prepare for the worst, basically. Even back in the Mao days, he situated factories way back in the western part of China to protect them against possible nuclear attack and all that. The party's always been a huge planner.

Speaker 1:
[18:33] Rob, like we were saying, you're just back from the FT Commodities Schindig in Lausanne, in Switzerland, but La-di-da. What are people there saying about how China has played its hand into this Iranian crisis?

Speaker 2:
[18:46] Well, it was interesting in a way how China didn't come up. That, I think, represents their preparation for this. So 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, but 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 gestured 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.

Speaker 1:
[19:40] Are we seeing some of that already, Joe? Like, oh, hi, Vietnam. Yeah, no, sure, you can have some of our oil. There might be some terms and conditions attached to that. Is this happening yet?

Speaker 3:
[19:50] Well, China definitely wants it to happen. I don't know if you saw the one on Taiwan. China offered Taiwan a little bit of help with oil supply, which Taiwan politely refused.

Speaker 2:
[20:00] So Taiwan is going to wake up tomorrow and there's going to be a horse's head in their bed, basically. Exactly.

Speaker 3:
[20:07] It's a possibility, but again, China has to take care of 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 a while, you don't want to be too dependent on Russia either.

Speaker 1:
[20:20] No.

Speaker 2:
[20:20] Yeah, you think it's not fun being dependent on China, try being dependent on Russia. Europe just did a little experiment in that and it turned out badly.

Speaker 1:
[20:31] Didn't work out.

Speaker 3:
[20:31] It worked out very well, didn't it?

Speaker 2:
[20:32] Yeah, absolutely.

Speaker 1:
[20:34] Yeah.

Speaker 3:
[20:34] I think the other interesting geopolitical thing in this for China is, China has been quite close to Iran, although I think there have been frictions between the two of them in more recent years. But China is also close to all of the Gulf states.

Speaker 1:
[20:48] So it does a nice job of that, actually. It's a good point.

Speaker 3:
[20:51] So it's tricky, yeah. So how, because we've had stories about Chinese companies assisting Iran with the war, that probably doesn't go down well with Saudi Arabia, which provides tons of oil to China. So China has to play a pretty delicate game in all of this.

Speaker 1:
[21:06] Playing a very delicate game. Joe, thank you for sharing your brain and your insight on this, because it's something that Rob and I know next to nothing about. We are going to be back in just one second with Long Shot. Okie doke, it is time for Long, Short, 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?

Speaker 2:
[21:31] Having just flown 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.

Speaker 1:
[21:41] Fair enough. Joe, what are you saying?

Speaker 3:
[21:44] Well, since we have the Trump, Xi summit next month, actually, I'm gonna say that I'm short Trump for the midterms and long Xi for next year's party congress for a fourth term.

Speaker 1:
[21:55] Long Xi Jinping, spoken like a 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 hitting 21 degrees C. What are we doing here, guys?

Speaker 2:
[22:24] Insider weather trading. Dads and grandads the world over.

Speaker 1:
[22:29] It's absolutely nuts.

Speaker 2:
[22:30] Fixing the weather market. What are we doing?

Speaker 1:
[22:31] This is stupid. It's corrosive. It's bad. This and the pervert classes. These are things that we just need to ban. Joe Leahy, all the way from Beijing. Thank you so much for joining us. And Rob, back from sunny Lausanne. 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 Erstadt. Our executive producer is Jacob Goldstein. Cheryl Brumley 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/unhedgedoffer. I'm Katie Martin. Thanks for listening.