Good morning. Today is the first edition of what we hope will be a long-term regular feature of this newsletter: Working with our favorite experts in markets, finance and economics. The idea is to introduce Unhedged readers to the best thinkers in our field and introduce ourselves to new audiences.

Frankly, Ethan and I have no idea why our first collaborator would agree to work with us. Adam Tooze Is a serious big man. He is a professor at Columbia University and a well-known author of political economy, with books on Covid, the financial crisis, world wars, and more.his chart book Combining a deep historical background with a meticulous attention to economic data and the news of the day, the newsletter is a must-read.

Our work with Adam will take place today and the next two Thursdays. Today’s topic: China is under pressure. Recent events have raised (not for the first time) questions about the sustainability of China’s economic model. Can China make the necessary adjustments to sustain growth, and should global investors go with the flow?

Adam believes that with a few strings attached, the answer is yes. Ethan and I think that as long as there are one or two rules, the answer is no. To illustrate these points, we swap places: Adam gives his point below.To see the unhedged view, follow this link Go to Chart Book. Tell us who got it right: [email protected] and [email protected].

Adam Tooze: China’s Economic Transformation

The common starting point for Chartbook and Unhedged is that China is still the big deal when it comes to the world economy and financial markets.

That’s not to say that Russia’s invasion of Ukraine wasn’t a dramatic shock, and the risk of escalation wasn’t dire. The impact on energy and food prices will be felt globally. But China is a whale. A severe crisis there and a prolonged slowdown will affect every market and almost every economy in the world. China is also more financially connected to the rest of the world’s economies than Russia and Ukraine. China’s economic growth is the driving force behind what remains the world’s major geopolitical confrontation in the 21st century, the one between Beijing and Washington.

As such, the question of China’s growth prospects is a crucial question for both policymakers and investors. This is especially urgent given signs of severe stress in China’s economy and financial markets.

as you can in today’s chartRobert and Ethan took a pessimistic stance largely influenced by the ideas of Michael Pettis and George Magnus.

Their short-term view is relatively optimistic. As they told me in the exchange email:

The government will employ monetary, fiscal and regulatory solutions sufficient to prevent the crisis. Currently, the risk of a financial or economic crisis is fairly low.

They are pessimistic about medium-term growth prospects. Following Pettis, Unhedged believes that China will not be able to achieve the 5.5% target without continuing to increase its debt. Combined with demographic headwinds, they come to a stark conclusion: In the long run, they expect China’s growth to gradually slow and its economic relationship with the West to be increasingly shaped by geopolitics domination of factors. Martin Wolf earlier this week.

Now, if this becomes the prevailing opinion – of course it is Get a compelling point of view – It has a huge impact. Fundamental adjustments have been discussed in the policy community for some time. Are we now on the verge of witnessing a real economic decoupling between China and the West?

This will be a historic breakthrough in global economic development. Looking back 20 years, this moment will be a turning point.

It’s a big macro call to say the least. So, let’s step back a bit and look at this scene.

***

Let’s start with what Chartbook and Unhedged agree on. Despite Evergrande’s $300 billion bankruptcy, the risk of an immediate 2008-style crisis in China is slim.

But instead of continuing to focus on the medium-term outlook, let’s stop at the importance of this. After all, what China is doing is shocking. Through the “three red lines” credit policy, it is preventing a huge boom in real estate. Since the reform in 1998, China’s real estate industry has grown from nothing. Currently valued at 55 tons. That was the fastest accumulation of wealth in history. It’s a financial reflection of China’s urban population surging by more than 480 million in a few decades.

Throughout the history of modern capitalism, the housing boom has been associated with the creation of credit. Works by Òscar Jordà, Moritz Schularick and Alan M. Taylor It has been shown that accompanied by a major financial crisis.

Real estate booms don’t usually end with a whimper. They ended with a bang. They ended in a major banking crisis.

So if we all agree that Beijing will stop the largest real estate boom in history without triggering a systemic financial crisis, it is doing something truly remarkable. It is setting new standards for economic policy.

What should Western investors think? Frankly, it’s not easy to tell because investors have never dealt with a regime that has tried anything like that.

Could this be what policy might look like if financial stability is really taken seriously? Why don’t we applaud loudly if we look in the mirror?

Aside from real estate, another domestic factor roiling China’s financial markets: Beijing’s marked disparagement of Chinese platform companies, the world’s second-largest tech cluster. This is also not found anywhere else.

The Biden administration and Congress are now talking about big tech, but so far the results have not been great.This The EU is a serious regulatorbut far less sinister than Beijing.

This will hurt if you go all-in on Chinese tech stocks. But that’s the point. Beijing’s goal is to ensure that gambling on big tech no longer generates monopoly rents. Also, as a long-term policy goal, can people really disagree?

So we have two dramatic, deliberate policy shocks that are unprecedented in the West. Both will cause short-term pain for the sake of long-term social, economic and financial stability.

Then there’s demographics. For obvious reasons, demographics are often viewed as a natural parameter of economic activity. But in the case of China, the shocking fact is that the sudden ageing of the workforce is also a policy-induced challenge. This is the legacy of the one-child policy – the largest and most coercive intervention in human reproduction ever undertaken.

So Beijing’s current challenge is how to deal with two of the world’s most high-profile development policies—the one-child policy and China’s urbanization—and the historic challenge of big tech—not so much a problem unique to China, Rather what is the local performance Shoshana Zuboff calls ‘surveillance capitalism’.

So yes, Beijing has its hands full. This has created turmoil for investors. And, no, the Xi regime has yet to come up with a fully convincing alternative.However, as Michael Pettis argues forcefully, China has a choice. Beijing could adopt a package of policies as an alternative to a debt-fueled infrastructure and property boom.

First, China needs a welfare state commensurate with its economic development.as Brad Sether explained Before he disappears into the boiler room of a Biden administration, the rebalancing of the Chinese economy needs to start with a stronger domestic safety net.

China needs to invest heavily in renewable energy and power distribution to break its dependence on coal.If it needs more housing, it should be affordable. All of these produce more balanced growth. Five percent? Maybe not, but definitely healthier and more sustainable.

Beijing is not unaware of these options, either. In fact, they have been drawn repeatedly. If it has so far not pursued an alternative growth model in a more determined fashion, part of the blame lies with the biases of Beijing’s policy elites. But more important must be the entrenched interests of the infrastructure-construction-local government-credit machine, in other words, the kind of political-economic factors that usually hinder the implementation of good policies.

This problem is all too familiar in the West. In Europe and the United States, this combination of interest groups has also hindered the search for new growth models. In the United States, they are skeptical of the possibility of an energy transition, the possibility of a fit-for-purpose health care system, and any trade policy initiatives involving expanded market access.

Ultimately, political economy determines the conditions for long-term growth. So if you had to bet on a regime that might actually have the ability to break political and economic deadlocks, devalue vested interests and play a “big role” in structural change, which would you choose? US, EU or Xi Jinping’s China?

***

Overall, if you want to be part of a historic economic transformation, China is still the place to go. But there’s no denying that it’s shifting gears. Investors will have to consider a more complex picture of opportunity and risk due to developments at home and abroad. You will need to choose wisely and pay close attention to politics and geopolitics.

Investing in China’s old growth model is certainly a dubious proposition.You have to ask what motivates all the smart people at western banks and asset managers Continue to build your position in Evergrande Even in 2021.

On the other hand, if you want to invest in the green energy transition – a big vision of economic development that the world is currently proposing – you only need to reach out to China, either directly or indirectly through suppliers in the Chinese green energy sector. China will be a battle over the future of climate. It will be a huge driver of innovation, capital accumulation, and profit, and its impact will be felt globally.Notably, this is a key area that both the Biden administration and the EU want “Silo closed” from other regions in conflict with China.

***

At the same time, I am concerned that we may be too focused on the medium term. Given the news from Hong Kong and China, Covid may come back to bite us.

In this regard, China is also trapped by its own success. It has successfully pursued a no-coronavirus policy, but it can only do so in “one country” due to failures in the rest of the world. Now there is a heavy price to pay. Shanghai authorities frantically denied rumors of a city-wide lockdown.

Anyone who shows schadenfreude in this situation can only prove that they have learned nothing. A Hong Kong-style outbreak could mean a horrific death toll, as well as the risk of hatching new and more dangerous variants. Until China finds a way to control the risk, it’s a story to watch. Omicron’s dramatic growth in China will disrupt Full narrative of the past two yearswhich was Beijing’s framework for successfully containing the first wave.

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