Various pieces of news over the past week have emphasized the importance of the letter K, which is shorthand for the state of the economy, indicating one section is doing well—hi-tech, robots, AI, EVs etc—and another section ain’t doing well at all—that is the “real economy”. The property market remains in the doldrums, consumer spending remains low, stocks are not doing well with some Top-K spike exceptions and the reported youth unemployment rate was up again… and the anecdotal evidence is not encouraging either.

We have discussed this all before, but it comes down to basic issues such as the rebalancing of the economic cake between state and households and between state and private enterprise, the advantages of diversity vs those of control, and the importance of reviving the sense of blues skies both amongst the populace and private entrepreneurs and investors.

Each of these would involve systemic policy decisions that look unlikely, and it would seem that longer term, the system is of the view that the status quo can be maintained, and systemic weaknesses offset—in broad terms—with hi-tech and AI. The passing of former economic policy czar Zhu Rongji last week reminds us of the choices that exist, and for long-term stability and prosperity, it would seem wise for China to be harmoniously a part of the world with the middle class and those with assets embraced and incentivized. Hi-tech will enhance production, but not necessarily consumption. And as jobs get eaten up by AI, how will household incomes be maintained? Some form of Universal Basic Income? That seems unlikely in the context of China. One thing is for sure and that is that the gig economy will continue to expand.

Have a good weekend, and consider buying a motorcycle, and of course a helmet.

In the fascinating and not too transparent history of modern China, Zhu Rongji, who died this week at the age of 97, played a central role and along with several others in some ways represented an alternative approach to the current direction of China’s system and its relationship with the rest of the world. That is not to say that he would have advocated a change to the most fundamental element—the position of the party. He would not. But his impact in terms of the shift of China from the Mao era and into the 21st Century, was crucial.

He was number two in Shanghai, under Jiang Zemin, during the troubles in the late 1980s and he became the premier of China on the retirement of Li Peng in 1998 and took control of the economy. Under his leadership, China joined WTO and underwent dramatic changes in both the economy and society. He was a reformist and oversaw a remaking of the State-owned sector, which resulted in much corruption and millions of workers being thrown out of work. But it was, in a way, positive corruption, in that it energized change, and the high-speed development of the economy in that era also meant that were many other jobs for the newly unemployed as construction and factory workers etc. The corruption was there because the economic boom created vast new flows of money while transparency and accountability remained unchanged, but the basic idea that Zhu and his boss Jiang promoted in the 1990s and into the early years of the 21st century was that China could be integrated into the world and could embrace a new middle class without fundamentally threatening the position of the party. This is and remains the core question, and the other side took the view after a deep analysis of the fall of the Soviet Communist Party that this position was incorrect, that it would ultimately threaten the system. They wouldn’t countenance it. Who was right? History one day will decide.

It will be interesting to see how the leadership addresses the question of remembrance and the conclusions that are reached and reflected on in the state media in terms of the role that Mr. Zhu played, and by extension the approach he took. Regardless, his revolutionary credentials were impeccable. He was born in Hunan, the home of Mao, and he joined the party in 1949. He had the reputation of being a leader beyond reproach, to put it politely, and he is said to have declared on taking office: “I have prepared 100 coffins—99 for corrupt officials, and one for myself.” There was a story in the early 2000s during the construction of the Three Gorges Dam that he called together the bosses of all the construction companies involved and told them that if the dam failed, they would all be executed. That kind of approach really gets people’s attention.

To sum up the contributions in life of somebody like Mr. Zhu in the context of the system is really difficult. But his contribution to making China what it is today in terms of all of the positives of economic dynamism, the improvement in the living standards of such a huge proportion of humanity and efforts to integrate China into the world, he stands amongst one of the great Chinese leaders of the modern age.

RIP and have a great weekend.

China has reason to be proud of having created a bureaucracy system dating back to the Song dynasty a thousand years ago, and beyond. It is a system at least partly based on meritocracy, it is true, but it is also susceptible to other forces, including ignorance, loyalty, selfishness and “just following orders” syndrome. This centralized system, a prime replacement candidate these days, it would seem, for the Western governance model, has an enormously focused impact when there is a single clear goal in place – the creation of a high-speed rail network, the expansion of solar/wind power generation capacity. But just as with the “nose swab” economy that developed during the COVID era, there is also the problem of bureaucratic inertia. How to stop something that is being blindly auto-implemented when it’s not working but nobody is checking?

A case-in-point right now is China’s state grid. A truly breakthrough system in so many ways. But… the latest news, from the SCMP in Hong Kong, is that the way the national grid has been built, a mad race by officials to bring huge amounts of solar and wind energy online in line with instructions from the Center, has resulted in huge amounts of waste. This in no way detracts from the positives of what is happening—the China system is absolutely right to build out renewable energy capacity, and the super high tension transmission network that can transport electricity over huge distances. But, says the SCMP, “China wasted enough wind and solar power in the first half of this year to cover all new electricity demand” due to bottlenecks in grid absorption.

Another grid problem, fundamentally systemic in nature, is the continuing expansion of coal-fired generation ahead of the 2030 carbon deadline. It all points to massive waste which of course is endemic of state-owned structures anywhere in the world. Private investment capitalism has its faults, for sure, and so does transparent representative government, but there is at least more oversight and less chance of massive wastage. We will in due course see how the investments on AI on each side of the Pacific play out: one private driven, the other system-led.

But one way or the other solar is going to overtake fossil fuels in China far faster than it will in the US. And that is a positive for China. But the waste along the way is noteworthy, nonetheless.

Have a great and sunny weekend! And by the way, we are planning on expanding CER content starting very soon. More to follow…

Mr Xi is going to Washington to meet with Mr Trump on September 24, it was just announced. Both leaders have a constant parade of foreign dignitaries who come visit, but these two are special. And the way they interact, in the context of the tricky US-China relationship, is the most extraordinary theater. Trump’s recent visit to Beijing featured a great show of Chinese respect, followed almost immediately by a visit by Mr Putin. Mr T was granted special access to the heart of the exquisite imperial garden that is Zhongnanhai, while Mr X will get to see the construction work on the ruins of the East Wing. Trump’s talks with foreign leaders, seated on either side of an increasingly ornate fireplace, are often exercises in psychological warfare. With many of them, Mr T insults and threatens, but that ain’t going to be how it is with Mr X, who Trump often says he admires greatly. Mr X, for his part, tends to seem aloof. The dynamics are curious and perplexing, and one wonders how they play into the actual discussions on bilateral relations, which become more fraught all the time.

AI is one of the big topics, with the US accusing China of hoovering up all the data and methodology of US AI models. But then again, the US could do the same back, and maybe does, who knows. OpenAI also just announced it had a rogue AI agent that had done the same thing with another US AI model—allegedly on its own volition. We said a few months ago that with regard to the island, the period leading up the mid-terms in November was probably particularly dangerous, but currently there is—famous last words—no sense of anything in the immediate offing. Then again, China is always as it is, until the day when it is not. What Mr T’s real position on the island is, who knows.

There are lots of other topics to discuss, including trade and the Iran war, which just goes on and on, no doubt on balance to the glee of Mr T’s guests on Sept 24. But overshadowing the talks are the mid-terms, and the prospect that there might be enough of a blue tsunami in November to offset the red election machinations to the extent that Trump is somehow restrained, or at least mightily distracted, for the remainder of his term. The mid-terms truly are the most significant thing in prospect for the world at present. And then there is Ukraine, where China’s little brother seems to be having a lot of trouble, despite massive support. So much for the bros to discuss or to avoid discussing!

Meanwhile, the summer proceeds as if none of this mattered. Have a great weekend!

China this week reported the official GDP growth number for Q2, which was a surprisingly low 4.3%, although the aggregated first half number of 4.7% is still within the target range for the year mandated at the beginning of the year, which is between 4.5 to 5%. This seems like a good opportunity to sum up the state of play with China’s economy, and our view is that it is basically bifurcating. On one side, is the high-profile stuff, the batteries, the robots, the AI, the EV car exports, it’s going well. Exports year on year are up 20% and China is racking up trade surplus records regularly. But the real economy that impacts on most of China’s 1.4 billion people is really not in good shape. It’s not so easy to define the state of the economy because transparency is sort of fading ever further. But the heart of China’s economy for the last 30 or 40 years has been the property market, and that market slumped five years ago and even today there is no sign of any substantial recovery. Real estate development investment for the first half compared to last year is down 18%, and new homes prices in June were reported down again, this time 3% from the same time last year. Land sales also continued to decline which has huge implications for local government finances.

The trade surplus in H1 was up a staggering 37% on the previous year. Which sounds great, but it’s actually a negative in many ways in terms of the economies of other countries. The global economy needs to be in good shape for China’s export bonanza to continue.

Consumer spending is crucial, and the State Council just announced new policies trying to boost it. Clearly this is not easy to achieve. Total retail sales of goods & services was up just 3%.

The exchange rate of the RMB is a big issue, and it was up around 3% over the H1 period. The Shanghai stocks market has also done okay, riding on AI stocks and Wall Street exuberance.

The second half of the year is going to be challenging. The domestic problems are proving intractable, and the geopolitical backdrop is getting more complex all the time. Mr. Trump’s address to the American people late this week raises the stakes in terms of the complexity and sensitivity of China-US relations and no matter how it plays out that is going to be messy. 

Have a great weekend anyway.