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Germany & China Sitting In A Tree K.I.S.S.I.N XI

There’s some big stuff going on at the moment. Ignoring all the chat about inflation, interest rates, and the usual (increasing?) ineptitude of politicians, the world is slowly changing.

One of the things we've focused heavily on over these past few years is the decoupling of China and the West, along with the changes in China's economic model.

What’s up with China’s property market?
Evergrande, the real estate darling of China. At first glance, it appears like a straight-A student. However, it would take a prudent investor just five minutes of legwork to reveal that this company is, in fact, a troubled child.

This slow moving tanker of a turnaround is underway. Property is now for living in, not for speculation, and just yesterday China's state media were preparing the public for further price falls 👇

Editorial: Actively prepare for the revaluation of risky assets (Yicai China)
The report emphasizes that what lies behind the simultaneous development of housing, not speculation and rent-purchase is a deep understanding of economic and social changes. Investors need to be actively prepared for real estate pricing revaluation.
In addition, the current housing price based on financial attribute valuation raises the cost of economic and social operation, lowers the market’s marginal rate of return on investment, and exacerbates the lack of effective demand in the housing market, making it difficult to maintain high housing prices. Valuation is a matter of time, and the earlier the revaluation, the less harm and drag on the economy and society.

And new priorities have been affirmed too. 👇

Still no end to Zero Covid...

The economy will continue to be Xi's Achilles heel. 👇

When Will China’s Economy Overtake The US?
Never. Honestly. Stop asking. Xi’s congress speech was just more of the same

Especially as he moves China towards an even more loyalist, political future 👇

Politics Will Determine China’s Economic Future During Xi’s Third Term
Xi Jinping received a rare third term as head of the Chinese Communist Party and elevated his loyalists to its top leadership body. Here’s what that means for China’s economy.
The content of Xi’s speech to the party congress suggests that he is determined to lessen China’s economic vulnerability to global disruptions.
He referenced China’s “self-reliance in technology” five times, the need for “strengthening supply-chain reliability, resilience, and security” three times, and China’s “national security” twenty-six times.
None of these narratives appeared as strongly in his report to the nineteenth party congress in 2017. In addition, this year, Xi called for a “diversified and stable international economic system” and reiterated his ambition for China to exert more influence in setting international rules and standards.
The World Is Decoupling From China
Will China cease to be the world’s manufacturer?

So, not only is the world 'decoupling' from China, but China is 'decoupling' from the world. Or at least, strategically re-prioritising and re-positioning...

Where everything ends up is anyone's guess. When two economies (US & China) are so dominant and heavily interlinked, it's impossible to rip that apart in a year or two. Everyone else tags along for the ride.

If you want to know more about how this all happened, this is an excellent read 👇

The end of the system of the world
A critical point has been reached; decoupling is for real this time.

China's not necessarily decoupling from all of the west, it's mainly from the US.

There's more than just politics underpinning this. Business interests are also playing out. US companies may pull away from China, under duress from their government.

Not Germany's BASF. They're investing billions into China (including this) 👇

BASF to build Neopentyl Glycol plant at Zhanjiang Verbund site in China
Hong Kong SAR, China – October 11, 2022 – BASF will invest in a new world-scale Neopentyl Glycol (NPG) plant with an annual production capacity of 80,000 metric tons at its new Zhanjiang Verbund site, China. With the new NPG plant expected to come on stream in Q4 2025, BASF’s global NPG capacity wil…

While moving away from Europe... 👇

Germany’s In Deep Scheiße
it’s hard to see how Germany gets through this without some serious long-term scars. A short recession would be an amazing outcome that only the most optimistic could entertain.

Politics and economics aren't always a good mix. Germany doesn't seem ready to get tough with China. Just this week, they've allowed Cosco to take a major stake in the Hamburg port...

German go-ahead for China’s Cosco stake in Hamburg port unleashes protest
The German cabinet allowed China’s Cosco to buy a stake in a terminal in the country’s largest port on Wednesday in a decision pushed through by Chancellor Olaf Scholz that triggered unprecedented protest within the governing coalition.

And they're apparently ready to hand over a chip firm, ignoring the advice of their own Federal Office for the Protection of the Constitution... 👇

While the US and China are ready to increasingly go their separate ways, Europe, and especially Germany has some big decisions to make. Can they play both sides, and be friends with everybody?  

After all, China is Germany's top trading partner 👇

The People’s Republic of China is again Germany’s main trading partner
According to preliminary results, goods worth 246.1 billion euros were traded between Germany and the People’s Republic of China in 2021 (exports and imports).

It's messy. Politicians don't always get what they want, regardless of their nationality. Economics often beats politics.

Take semiconductor production for example. As Brad lays out in the below thread, the costs to make chips at 'home' in the US is far higher.

Across 10 years, Goldman estimates that the cost of a new fab would be 44% higher in the US than Taiwan.  

So far, there's been no real co-ordination to any of this decoupling. More a statement that "this cannot continue" from both the US & China. What comes next? What replaces the old system?

Noah's theory of two blocs is an interesting one 👇

In fact, whether the non-China bloc coordinates on policy is really the big question regarding the new world-economic order. Together, the U.S., Europe, and the rich democracies of East Asia comprise a manufacturing bloc that can match China’s output and a technological bloc that can exceed China’s capabilities. With the vast populations of India and other friendly developing countries on their side, they can create a trading and production bloc that will be almost as efficient as the old Chimerica system.

It feels a little idealistic though. Can there be enough trust to encourage friendly nations to ditch China, relatively speaking, in favour of the US? 👇

But this will take coordination and trust on economic policy that has been notably absent so far. The U.S. will have to put aside its worries about competition with Japan, Korea, Germany or Taiwan — and vice versa.

Absent a war, or serious conflict, it seems improbable that such a complete solution could be found. Long Lockheed Martin? 😬