In a recent assessment highlighted by BlackRock CEO Larry Fink, the importance of capital markets in addressing critical challenges of the mid-21st century was underscored. Chief among these challenges is ensuring retirees’ financial security amidst increasing longevity, necessitating greater retirement savings. Additionally, there’s a pressing need to address infrastructure demands amid rapid decarbonization and digitization. Fink’s insights, outlined in his annual chairman’s letter, serve as a poignant reminder of the profound shifts reshaping the global economic landscape (source).
The rise of China as a powerhouse in innovative sectors such as renewable energy and electric vehicles cannot be ignored. With one-in-six people globally projected to be over the age of 65 by mid-century, the demand for sustainable investments to secure retirement wealth is escalating. China’s dominance in critical industries raises questions about the implications of a potential “decoupling” for Western investors. Disengaging from China’s growth trajectory could prove disastrous for Wall Street, as highlighted in detailed analyses of the post-Ukraine conflict landscape.
During her visit to Guangzhou, China, on April 5th, Treasury Secretary Janet Yellen underscored the Biden administration’s apprehensions, citing her recent trip to Suniva, a solar cell manufacturer in Norcross, Georgia. Yellen recounted how Suniva and similar companies faced closure due to their inability to compete with China’s exports sold at artificially reduced prices. Stressing the need to prevent a recurrence, Yellen emphasized the significance of supporting domestic industries. Despite Suniva’s closure in 2017, the company is now reinitiating production, buoyed by subsidies from the Biden administration’s Inflation Reduction Act.
The Biden administration’s aggressive legislative agenda aims to bolster clean energy and semiconductor sectors through substantial financial backing. However, concerns linger over the potential consequences of excessive government intervention. Critics warn that such measures could result in soaring deficits, inflation, and unsustainable investments in non-competitive manufacturing assets. These challenges could undermine the returns expected from a well-functioning capital market, potentially burdening the administration with interest rate expenses surpassing USD 1 trillion over the next decade—a figure exceeding the annual defense budget of approximately USD 800 billion (source).
Can America wrestle the mantle of global industrial development champion from China while upholding the existing American “rule-based order”? China’s dominance in industrial indigenous innovation spending mirrors America’s supremacy in global military expenditures. Scott Kennedy, a prominent China scholar at the Center for Strategic and International Studies (CSIS), estimates that in 2019, China outpaced the United States in industry policy spending by a staggering 12-fold, relative to GDP. These subsidies encompassed a spectrum of support mechanisms including research and development funding, tax breaks, favorable financing terms, discounted land prices, government procurement preferences, and various investment incentives. China’s playbook offers valuable lessons for America. Firstly, it underscores that subsidies alone are insufficient to drive effective industrial policy. Secondly, challenging China in sectors it prioritizes demands substantial financial commitments, likely necessitating a degree of protectionism that risks compromising America’s unique competitive advantage as a capitalistic free market economy。 (source)
China’s legal challenge before the World Trade Organization alleges that certain subsidies extended by the Biden administration for electric car purchases breach international trade regulations. A 2022 report by the Center for Strategic and International Studies reveals that China’s industrial subsidies in 2019 were double the size of those provided by the U.S. in dollar terms. Brad Setser, a senior fellow at the Council on Foreign Relations and former Treasury Department official in the Obama administration, emphasized the escalating concerns over overcapacity in key sectors. China’s massive investments in solar cell and battery production, coupled with its burgeoning auto exports, signal a shift in global trade dynamics (source).
Having supported its automakers for over two decades, China now boasts a formidable car industry, commanding 60% of global electric vehicle sales, according to the Paris-based International Energy Agency. However, despite this success, Chinese companies are reportedly churning out approximately 10 million more electric vehicles annually than domestic demand can absorb, driving them to seek overseas markets. This pattern extends beyond the automotive sector, with similar dynamics observed in industries like solar panels, batteries, and steel. Eswar Prasad, an economist at Cornell University, voiced concerns over China’s strategy, warning that if domestic demand fails to keep pace with production, the nation may increasingly rely on foreign markets to sustain its industries (source).
China remains unyielding in its stance, refusing to take concrete actions to address American apprehensions. Beijing contends that its provision of inexpensive solar panels and other eco-friendly products contributes significantly to the global fight against climate change. However, the Chinese government acknowledges the pressing issues of manufacturing overcapacity and subdued consumer spending, recognizing them as hurdles to achieving sustainable economic growth. Notably, in 2022, only 60-70% of China’s GDP translated into available household incomes, a figure starkly contrasting with America’s 98%. This disparity underscores the challenges China faces in stimulating domestic demand (source).
Encouraging China to boost domestic consumption of green technologies could serve its multiple strategic objectives. It would not only mitigate capital outflows, potentially benefiting the American economy, but also safeguard against the utilization of Chinese low-cost goods by American industries, supported by Beijing’s subsidies. Ultimately, such measures would bolster the strategic competitiveness of China’s domestically industry value chain. However, failing to address these challenges poses a genuine security risk to sustainable returns in the American capital market and the necessary increase in retirement wealth (source).
No wonder John Paulson, a prominent Republican megadonor and potential contender for the Treasury secretary post under a prospective Donald Trump administration, has cautioned against the perils of a US-China “decoupling.” The implications are clear: to overlook this risk is to court a fundamental threat to America’s capital markets, a danger that could have far-reaching consequences for retirement security. “We don’t want to decouple from China,” Paulson told the Financial Times in an interview. “China is the second-largest economy in the world. We need to have a good economic and political relationship with them.” (Source)
In the realm of financial foresight, a hawkish stance toward China, driven by the noble goal of boosting domestic consumption of green technologies, carries profound implications for American capital markets and, consequently, retirement security. This posture not only risks exacerbating China’s efforts to curtail capital outflows into the American economy but also hampers America’s ability to tap into China’s extensive array of low-cost goods and value chains, crucial for fortifying the strategic competitiveness of American industry.