"Over-capacity" politicized, Alibaba revived? Yellen's food diplomacy, Xi-Ma, Vietnam - Week in Review #15
"Over-capacity" politicized, Alibaba revived? Yellen's food diplomacy, Xi-Ma, Vietnam - Week in Review #15
Hi folks, welcome to another issue of my weekly review, where I personally review events of the past week (or weeks) that I believe will have a lasting impact beyond news cycles. In some weeks, instead of a review of events, I may go for a long-form essay that aims to give you some practical insights into contemporary China.
Again, for who I am and why I write, please check here. For what unique things I can bring to the table, check here.
Let’s dive straight into today’s topics.
The profound
#1 “Over-capacity” becomes political
The issue of China’s “over-capacity” has been hanging around for quite some time. At Baiguan, we commented a while back on how this has been reshaping global supply chains, and how this has also brought opportunities to “under-capacity” “Belt & Road” countries.
But this week marked the moment when this word became politicized. According to Reuters:
The last day of U.S. Secretary Janet Yellen's trip to China coincided with the strongest retort yet from Beijing officials over her claims that China is flooding global markets with cheap goods, particularly in the new green industries.
As Yellen laid out plans to formalise dialogue with China over excess industrial capacity in electric vehicles (EVs), solar panels and batteries, saying Washington would not accept U.S. industry being "decimated", the Chinese finance ministry issued a statement saying it had already "fully responded" to her concerns.
Beijing is fighting hard against this narrative. I like this comment from
:Overcapacity claims touched a nerve - Xinhua has started a commentary series titled "the Real Narrative of Chinese Production Capacity from a Global Perspective" to push back on the overcapacity claims. The volume from state media is directly proportional to how much they are worried about damage to their economy over this issue, and based on what appears to be increasing overcapacity of angry commentaries, they are very worried.
“Over-capacity” in itself is an economic term. But, it’s one thing when analysts and academics talk about this issue, but another when the Treasury Secretary of the United States of America starts to talk about it. Clearly, this may be a harbinger of imminent protectionist policies to come. So while on the surface it looks like a childish war of words, the reality is this is part of the economic warfare that will only get more serious day by day.
I would also argue that this over-capacity, if true, also brings benefits for global consumers. One side of the reality is that the Chinese manufacturers are involuntarily giving away huge subsidies to global consumers, while only earning pennies for ourselves. I use the word “involuntary” because almost all of the Chinese companies also suffer from this over-competition. We just can’t help ourselves. This is not an ideal situation for us either, just a reality that we need to live with. I also believe it is in China’s self-interests to get out of this over-capacity issue, by boosting domestic consumption as well as moving further up on the global value chain and offering more innovative and differentiated products.
So, over-capacity? Maybe. Is it something really bad, something to be criticized? Probably not. Does China like over-capacity? Of course not. More trade barriers on their way? Get prepared for the onslaught.
So what China will do is 1) fight this war of narratives as hard as possible in order to cushion the blow of more trade pressures from the US and EU and 2) figure out a way to get out of this damned overcapacity ASAP.
I also love this tweet by
by the way:
The Interesting
#2 Did Alibaba finally revive from setbacks?
Joe Tsai, the co-founder of Alibaba, made a widely-shared “mea culpa” interview with Mr. Nicolai Tangen, the CIO of Norges Bank, the Norwegian Sovereign Wealth Fund. In the interview, Joe admitted that for the last couple of years, Alibaba made the mistake of not listening to users, thereby allowing space for competitors like Pinduoduo to take it by surprise.
A few days later, Jack Ma also wrote a letter on Alibaba’s internal message board, aiming to further boost morale. He wrote:
This year, amid the many doubts and pressures on the company internally and externally, I saw the birth of a strong and brave Alibaba team.
The questions in investors’ minds must be: is Alibaba’s epic slide finally ending?
I think, first of all, it’s too early to tell. Second, if anything, all those interviews and morale-boosting speeches are counter-productive and eventually meaningless.
All these look good to outsiders, especially to outside, foreign investors. But the problem with Alibaba is not whether investors like it or not. It’s whether the users, the merchants, and the employees working for it like it or not. Does making nice speeches make these key stakeholders like Alibaba more? I highly doubt it.
If Joe Tsai really cares about user experience, instead of talking with Nicolai Tangen, the right choice may be talking with an actual user, or an actual merchant instead. If Jack Ma really cares about Alibaba, instead of writing nice letters, he should jump back in and practice what he preaches. Instead, what users, merchants, and employees have seen is just two billionaires with no actual skin in the game anymore doing some nice philosophical work.
And I think, ironically, this sums up the core problem of Alibaba for the last few years. It’s not just Alibaba doesn’t pay enough attention to users. It’s this: the first generation of founders became rich, smug, and could only think through their new moneyed lens. Instead of remembering that a vast number of Chinese consumers who live outside the proverbial “5th Ring Road of Beijing” have their own particular needs, they turned to vanity projects like Hema supermarket where a swarm of Alaska king crabs were marketed to middle-class Chinese families.
The real clients in their minds became the fund managers and wealthy investors, which they themselves also became. Thus, Jack Ma betrayed his own famous motto: “Customer first, employee second, investor third”. He would not admit this in words, but he has already shown it through his choice of action.
All this comes not from me as a commentator, but from me as an entrepreneur. “Show, not tell” should be one of the basic tenets of good management. If you are not willing to get your hands dirty yourself, you’d better not make a nice speech about it. This is a plain and simple idea. A Napoleon making a nice speech in Paris while his troops were dying for him in Waterloo, would not significantly boost morale.
So my conclusion is that I am afraid playing tunes that investors like to hear won’t make Alibaba closer to solving its real problem.
#3 Southeast Asia elites’ changing perception of China vs the U.S.
This is a very interesting study, with some surprising results to me. The most widely cited graph is this:
The notable points are:
The countries that have ongoing border disputes with China, Vietnam, and the Philippines will side with the US by a large margin.
Muslim countries (Malaysia, Indonesia, Brunei) had a huge bump in the popularity of China, very likely linked to China’s stance on the situation in Gaza.
Singapore, a predominantly ethnic Chinese city-state, would still overall choose to side with the US. Singaporeans are clear-eyed. Despite what I perceive to be a real affinity for China, they still clearly know who the real boss is in the world.
More Thai elites will side with China now, a marked shift from a year ago. I am not exactly sure why. The case of Myanmar is also interesting. A pariah of the international community, I would imagine it to side with China. But no. Why? I don’t know either. If you have any insights about it, please let me know.
The Under-reported
#4 China-Vietnam
You may not have noticed, but this past week has been a diplomatic whirlwind week in Beijing. I believe on Monday, by Beijing’s voluntary choice or not, all of the following people were in Beijing at the same time:
Janet Yellen
Sergei Lavrov, Russia’s foreign minister
Princess Sirindhorn of Thailand
Vuong Dinh Hue, Chairman of the National Assembly of Vietnam
and Ma Ying-jeou, former leader of Taiwan
Among those, I think the most under-appreciated visit was the one by Vuong of Vietnam.
Let me show the press release on the Vietnamese side:
National Assembly Chairman Vuong Dinh Hue met with Chinese President Xi Jinping in Beijing on Monday as part of his ongoing official visit to China.
Xi, also General Secretary of the Communist Party of China (CPC) Central Committee, was the first Chinese leader to host the Vietnamese NA leader in the visit, showing the importance that China attaches to bilateral relations as well as to the Vietnamese delegation’s visit.
….
For his part, Xi affirmed that China supports Vietnam's development, stability and success in socialism building in accordance with the country's situation. He underlined that the agreement reached by two countries’ top leaders in building a Community of a Shared Future has a strategic meaning, opening up a new period for bilateral cooperation based on six major directions of higher political trust, more substantial defence-security cooperation, deeper practical collaboration, stronger social foundation, closer multilateral coordination, better controlled and resolved differences, thus positively contributing to peace and development in the region and the world.
The two sides shared the delight at the positive development trend of the Vietnam-China relations, underlining that the two Parties and State have many similarities in ideological foundation and goals of building socialism, both striving for the interests and happiness of the people.
Hue emphasized that developing relations with China is a strategic choice and a top priority in Vietnam’s foreign policy of independence, self-reliance, for peace, cooperation and development, multilateralism and diversification of foreign relations. He affirmed that Vietnam consistently implements the "One China" policy.
Xi pledged that China attaches great importance to relations with Vietnam, hopes and is willing to promote the relations between the two Parties and countries in a deeper and more substantial manner.
The Vietnamese NA Chairman suggested that the two sides strengthen political trust and increase high-level meetings, while promoting exchange and collaboration through the Party, Government, parliament and front channels as well as in important fields such as diplomacy, public security and defence.
He proposed that the two sides enhance their strategic connectivity, create new momentum for bilateral cooperation, focusing on boosting trade, expanding goods import, especially Vietnamese farm produce, strengthening connectivity between Vietnam and major development strategies of China as well as links in railways, highways, sea and air, and promoting cooperation in finance, monetary, and digital transformation.
Hue also proposed that the two sides increase people-to-people exchanges, promoting the role of legislators of the two sides in communications work to create social consensus, thus strengthening cooperation between the two sides in all areas and joining hands with the two Parties and States to properly deal with issues at sea in the spirit of better controlling and settling differences.
Hailing Vietnam’s proposals, Xi affirmed that China is ready to work with Vietnam in maintaining strategic exchanges, increasing meetings at high and all levels as well as exchanges and cooperation through the Party channel, sharing experience and theory in Party building and country governance, fostering practical cooperation, accelerating strategic connections, especially in the fields of railways and smart border gates, and strengthening cooperation in the fields of digital economy, green energy, essential minerals and emerging industries. China welcomes Vietnam's efforts in connecting with China's major inter-regional development strategies.
The press release above is quite similar to the Chinese version. This is unlike after the Xi-Biden call a few days ago, like
wrote in his great essay, “reading the readouts you’d think that Biden and Xi lived in parallel universes where entirely different conversations took place”.I see this meeting as an extension of Xi’s visit to Vietnam last December and represented an ongoing effort by China and Vietnam to 1) manage border disputes and 2) better integrate economically.
It may not be a coincidence that this meeting happened in the same week as the U.S.-Japan-Philippines trilateral summit. It is difficult for China to manage well the tension with the Philippines in the current environment, but if the relationship with Vietnam can be managed well, that’s half of the South China Sea problem solved. So it’s in China’s interests to have one fewer problem and I think the Vietnamese side is not going to waste this opportunity to ask for some hard bargain.
I also have a strong suspicion (though no solid proof) that this new “warming-up” between China and Vietnam is closely linked with Vietnam’s internal political dynamics, which, is going through a huge, Xi-style anti-corruption campaign right now. The Vietnamese president recently “resigned”, and one of the richest Vietnamese was sentenced to death, all under the watchful eyes of Nguyen Phu Trong, the General Secretary of the Communist Party of Vietnam, often dubbed “Vietnam’s Xi”. (Some of the links here are articles on
by , my go-to newsletter for Vietnamese affairs)Honorable Mentions
#5 Yellen’s food diplomacy
Yellen got something really right this time. It’s about food.
Each time she visited China, she managed to create headlines in China about her food choices. During her first visit as the Treasury Secretary last July, she went to a Yunnan restaurant and had some delicious mushrooms (the kind of mushroom that, if not properly treated, could be a potent psychedelic). This time, she went to a Sichuanese restaurant and a classic Cantonese restaurant.
These choices are not trivial. They show that Yellen is a foodie who has some level of appreciation for the “Chinese cuisine”, which, I often insist, is not a real concept, as it’s made up of a dozen highly distinct “cuisines”. But more importantly, they show that Yellen understands a key insight into the Chinese culture: so much of it is about food. I have never seen a culture that values food and culinary experience as much as the Chinese, and not even the French or the Italians can compare. This is our pride, this is the core of our collective existence. If someone comes in now and claims that food makes up half of the Chinese culture, I won’t think that will be an exaggeration.
It is no surprise that, although the public side of Yellen’s visit has been marked by the “over-capacity” controversy, on the personal front, Yellen has garnered some real popularity among average Chinese folks. I think this is a lesson for anyone, a foreign individual, or a foreign brand, to appreciate: if you want to win Chinese hearts and minds, you need to conquer their tongues and bellies.
#6 Xi-Ma meeting
I understand this week’s review won’t be complete without mentioning the meeting between Xi and Ma Ying-Jeou and the youth delegation from Taiwan. However, I fail to notice anything particularly interesting about this event. There is a significant number of people who believe that a war in the Taiwan Straits is on the table, probably in a few years. I strongly disagree with this view, and I may systemically explain my reasoning one day. But I understand this Xi-Ma meeting would not change a bit for this debate. So I will just simply mention it here for the sake of completeness.
Human progress by definition is 'oversupply'. Wealth and abundance is by definition having too much of something. Americans will easily recognise this through daily life the size of their food servings and cars, and more generally consumption as a percentage of GDP.
We started off 100,000 years ago in an environment where safety was undersupplied. Specifically, we solved for safety with technology - agriculture, weapons and productive tools. As a result, humanity prospered and we reached undersupplly of resources between us and we achieved partial solutions through negotiation - military or otherwise. As we progress through each level, the ways we reconfigure ourselves and the world changes.
We are now at a stage where humanity should work together and cooperate to manage undersupply at a planetary level - things like clean air, renewable energy, sustainable food and so forth.
The oversupply of the renewable industry is a huge positive for humanity. The US and other developing nations can leverage the huge manufacturing capacity of China to move towards net-zero at a much lower social cost.
It is something to be celebrated.
On overcapacity in China: It is real, it exists, pick any principal industrial commodity and I will show you the over-capacity in China. Nylon, fertiliser, vitamin c, steel, aluminium, petrochemicals, refined copper, whatever.
One must understand, that China's objective is to feed its downstream industry with the world's lowest priced domestic-produced commodities, in order to gain economic advantage on producing and exporting value-added products. But how would you achieve that? After all, commodity prices equalise globally through trade, right?
China encourages domestic production in order to replace relevant imports. I have seen that happening over and over and over again for a variety of commodities during the past 30 years. I can see a repetitive, undeniable pattern.
In order to prevent domestic and international prices from equalising and to put domestic raw materials into a pressure cooker, China uses fiscal means.
Enter the value-added tax (VAT), implemented in China in the first half of the 1990s. VAT should be a cost-neutral in- and out tax, like it is in most countries that tax added value. Not so in China. In China VAT is versatile tool for manipulating the economy.
The unsuspecting, superficial observer may argue that China's domestic and international raw materials are somewhat similarly priced. However, by China's tax law, VAT is included in all prices in China and it must not be shown separately. China's raw material prices include 13% VAT, which is not refunded upon export, so exporting them becomes only feasible if the domestic-foreign prices gap exceeds 13%. That is the pressure cooker.
Value-added export products produced from the pressure-cooked commodities, however, get the full VAT refunded upon export, like normal WTO members do.
All tricks in the book were used to encourage the build-up of the world's largest and most modern production sites for industrial raw materials and to make sure that they produce more than the domestic market can absorb (there can be no over-production without overcapacity), in order to keep domestic commodity prices low. This space does not suffice to describe how this works in detail.
Initially, when this system was devised in the 1990s, China played no big role in commodities. The concept looked harmless and irrelevant, because China was a small player. Today China dominates basically every commodity in the book, domination defined as >15% world market share - whether as a buyer, as a seller or both.
This fiscal system is at the root the hollowing-out of western economies. If you tackle it, all related problems will vanish. U.S. politicians have no concept of VAT, at best they view it as a subsidy, and EU officials are horrified at the scale of potential market convulsion an abolition of this predatory system could cause, while some Chinese trade officials confided to me they are horrified about the size of the monster they created.