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Weekend Reads

China Can’t Evade the Iron Laws of Economics [[link removed]]

China’s centralized political economy has for years relied on government investment to spur “high speed” growth. As Beijing seeks to shift to “high quality” growth, John Lee [[link removed]] explains in the Wall Street Journal [[link removed]] why Chinese President Xi Jinping is poised to preside over a new phase of failure.

Read Lee’s key points below, or read the full article here. [[link removed]]

Key Insights

1. Xi seeks to spur high quality economic growth by supporting handpicked firms in high-tech and green sectors.

Xi’s theory is that the government can achieve high quality growth by supporting handpicked firms in high-tech and green sectors that will improve the quality of China’s economy. Although that reasoning is seductive, the Chinese political economy is too flawed for it to work. China’s earlier approach to solar panels is instructive. In the previous decade, Chinese entities with the support of the government and lending institutions bought international solar companies and invited leading foreign firms to establish operations in China. At great expense, and even before Xi’s era, the Chinese strategy to bolster a given sector has been to acquire, develop, or steal world-class technology and capabilities, support the creation of entire supply chains inside the country, eliminate overseas competition, and subsequently dominate domestic and global markets.

2. Xi’s plan will fail because there is no escaping the iron laws of economics.

The massive assistance that the government provided to Chinese firms on solar led to a predictable oversupply of panels domestically and in global markets. Even as global demand fell, Chinese companies ramped up production of panels to remain in business, and this was possible only due to even more subsidies worth billions of dollars. China did achieve its objective of dominating the global solar panel industry. But applying this state-led approach to an ever-expanding list of advanced and green sectors will only worsen the problems of overcapacity, indebtedness, and inefficiency that Xi is seeking to alleviate.

3. The only way China can achieve sustainable growth is by rapidly increasing private consumption—but Xi’s ambitions prevent him from doing so.

Beijing is trying to upend classical trade economics by achieving rising wages for all while also dominating exports of high-tech and high-value products and services. This goes against China’s own experience, in which it became an exporting superpower thanks to lower-cost inputs than those of its competitors. If Xi really wanted to supercharge growth in productivity, wages, and household income, he could do it through the systematic transfer of economic access and opportunity away from state-owned firms and nominated national champions toward the much more efficient and innovative private sector. But this would foster a powerful independent business class and undermine Beijing’s greater goal of further centralizing power and economic activity under his command.

Quotes may be edited for clarity and length.

Read here. [[link removed]]

Go Deeper

China Is a Dangerous Outlier in the Global Energy Arena [[link removed]]

Thomas Duesterberg [[link removed]] joins Miles Yu [[link removed]] to explain why China’s energy and environmental struggles will heavily constrain the Chinese Communist Party’s ambitions on China Insider [[link removed]].

Listen here. [[link removed]]

Deterring China: Imposing Nonmilitary Costs to Preserve Peace in the Taiwan Strait [[link removed]]

A static deterrence-by-denial approach is no longer sufficient to deter China. John Lee [[link removed]] and Lavina Lee lay out a strategy [[link removed]] to impose economic and political costs to change Beijing’s calculus about invading Taiwan.

Read the report. [[link removed]]

Deterring an Axis of Aggressors: A Conversation with H.R. McMaster [[link removed]]

H.R. McMaster [[link removed]] and Jeremy Hunt [[link removed]] discuss the growing cooperation among China, Russia, Iran, and North Korea and what the US can do to counter this axis and protect American prosperity.

Watch the event, read the transcript, or listen here. [[link removed]]

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