We are blind to China in the west. Its like a submarine to us. I have some small visibility into China. I am aware they are heavily struggling economically. Their semiconductor industry is on fire. The small players are almost all gone. The big players are being propped up by the government with massive cash injections. China has some new technology that will allow them to lithograph 7nm with unknown level of yield. Reports vary, on yield. The truth is impossible to know, from my perspective. My guess is, their yield is not great. 7nm is a good node. If they can create semidonductors in volume at this node, it will be difficult for Korea and the US to compete. Even with Samsung at 5nm, the advantage is not all that strong. Future nodes, however, should pull Korea into a definitive lead. I have no idea what is going to happen to the US semiconductor industry. Someone needs to roll over with a crash cart and paddles. I can't tell if Xi's popularity is in trouble. No one can. Chinese will pretend to support their government under any circumstance, regardless of their point of view. Dark times lay ahead. And yet, some of what is happening is positive. Time will tell.
Even with a good node, the actual architecture is what counts, and that is where I hear China struggles... for now. If the government wants it bad enough, and the civilians put up with it, massive money will be thrown at the problem and the gap will close soon enough. China's strength comes from the fact that Xi can make stuff happen quickly that D.C. could only dream of. It's also China's weakness: all decisions are being made by Xi, and dictators make mistakes like everyone else. Bad things happen when mistakes are made and the people did not have a say in the matter.
Huawei sprouted a CPU out of thin air. Its ARM based. What are the odds they are paying licencing on every CPU produced? Russia now has their own CPU (Baikal). Also ARM based. What are the odds Russia is paying proper royalties to ARM? Lol.
Reports from China suggest their economy is in absolute free fall. A total blood bath. I don't want to see China suffer but I'd like to see Xi's head on a pike.
The 5 nano bragging turned out to be done with stockpiled Taiwanese wafers. As so often happens, Chinese state news turns out to be bollox.
On Friday, Taiwan voted in a sovereignist by a comfortable margin. I've been reading what I can about Chi-wan politics and they seem destined for war. A year ago, the thought was an invasion would take place in 2027 but recently I've heard that time line is accelerated. Whatever the case, it is destabilizing to all of Asia. Xi is trying to bully Philippines, as well. US and Britain are gearing up to fight this war. China are employing Russianesq tactics of the occasional obnoxious act in attempt to provoke a conflict. War seems inevitable.
I have quite a few friends in China but they aren't allowed to speak freely so I can only get information from them when they visit the west. Housing prices are well down. Some reports are that housing is in freefall with people leaving the big cities (the big 6) in mass, in favor of more affordable living. Other reports suggest a mild, but concerning, correction that is not restricted to the big 6. It is certain, there are RE problems in China and this is a barometer of their economic well being. It might be difficult to understand what this means without knowledge of how the Chinese real estate market is structured. Dreadnought sized companies buy vast tracts of land and build housing for people 15,000~35,000 units at a time. Where we build a high rise apartment, they build 6 to 16 identical towers. Apartments aren't all the same but they will build 10s of thousands that are identical before commissioning a new design to do it again. It is an extremely efficient model. The developer (half owned by the government) requests a piece of land, the government evicts the owner, the property is developed, the former farmer is given a unit and allowance for the rest of his life, and the project is sold off. They do this, along with some comically ridiculous RE projects, using massive leverage. This is how they have been able to pull 750 million people from poverty in two decades. It's astonishing to see how far they have come. They have modern and comfortable cities. It's a tremendous success story of improving living conditions for a significant portion of the planet. There was so much money, they could build entire cities on spec, have the project fail, and keep operating. These problems hurt Chinese builders but they survived. They simply cannot survive high interest rates or much deflation at all. Who would have thought extreme leverage could be dangerous? If this RE development system fails, it will be an unimaginable shock to the country and an epic humanitarian crisis. We will see how it plays out. I desperately hope for China to navigate out of this problem. This is the biggest factor that could affect western democracies today. We've already seen China become more competitive. Much of their state-level bluster has turned out to be dry wind. I'm glad to see a tiny amount of re-shoring but most of what we see is production migrating from China to India. India is a far worse place to depend on than China. Watching us volunteer to be economically decimated is heartbreaking. We are truly morons.
Hi TomB16, Could you please explain how would Chinese RE system failure affect western world? And also, why do you think that moving production to India is worse idea?
Sure. Economic problems in China bring with them deflation. Their deflation is our gain, since we are sourcing products from them. Also, economic problems will have the effect of devaluing their currency which make Chinese exports more attractive. In short, I believe the west is mostly winning the economic war with China. As for India, this is a political line of thought so I'm sure my point of view is controversial here. Still, India is less stable and trustworthy than a China which has been destabilized by Xi. India has actually been pretty good for services. Their record on goods is significantly less so. They have limited respect for established process so it wouldn't surprise me to see legislative change that renders foreign manufacturing uneconomical, even after significant investment in that manufacturing. They also aren't in the same league for intellectual capital as China. To be fair, India has a massive amount of engineers and scientists but not to near the same level as China.
Evergrande Group has been ordered to liquidate with over $330B in debt. this is china's largest RE developer. It is starting to seem clear China is in far worse shape than they were letting on. This is a big domino that is going to topple a whole lot of smaller dominos. I'm surprised Xi would allow this to happen but 18 months ago he said there would be no bailout of RE if it fails. Now the shoe has dropped we will see what happens. The scarry thing is that dictators often use war to change the subject from their own failure.
What does this mean? In China, this means that money will be harder to come by, projects that run on credit will become more expensive and more difficult. A lot of smaller companies that depend on Evergrande will fail. Outside of China, projects in nearly every country are going to struggle or fail. When you read that Dubai is building the world's biggest napkin holder, it is almost certainly being built by China. Projects in South East Asia are all done by China. Initially, the hit will be relatively small. Evergrande is largely a Chinese problem. Over time, the fire will spread. How many engineering companies are going to be mortally wounded by the Evergrande failure? That is going to hurt other Chinese RE companies and some of them are doing international projects. How bad will it be? The truth is, we don't know. This is like wondering what will happen when GM fails. When GM goes down, it will take more than just themselves with it. How are we impacted directly? Every western financial institution of significance has some exposure to this. HSBC, for example, has about 14B USD in liability. They have now halted these mortgages. BlackRock has a ton of exposure. BlackRock will soon be known as RedRock. HSBC has been "reducing their exposure" to Chinese RE. What that means is repackaging bags of shit as investment grade instruments and selling them to people who did not understand the risk they were taking. There is going to be a lot of knock-on. There will be less liquidity in global markets. The truth is, I could not pretend to quantify the impact of this and I don't believe many people understand it enough to do so. I have no way to know if this is an existential threat or a glitch. What I do know is major losses such as this are carried by investors like us.
As best I can tell, the only non-Chinese company that can sell cars in China right now is Tesla. Actually, Tesla is doing reasonably well given the Chinese economic crisis. Sales of other foreign brands has fallen to near zero. Companies can't even sell factories to Chinese builders. I think this is why GM is moving EV production to China. They can't sell cars to Chinese and they can't sell the Chinese plants so the plan is to repurpose those idle plants to build cars for North America. The optics of this aren't good, to say the least. I'm sure governments will resist doing anything as long as they can but there will be pressure to disallow Chinese vehicle sales here, at some point. If we block domestic brands from building vehicles in China for export to North America, we will bankrupt those companies much faster than they would otherwise fail. Personally, I think brands like BYD will be blocked from international markets in the near future (less than one year from now). This is the beginning of de-globalization and the Chinese as a dominant power.
I'm currently in South East Asia, spending time with some friends. Most of these friends are Chinese. Word is, China is in far worse condition that anyone suspects. Big problems. Keep in mind, it is a sample group of about 15 people. One of the people I have been spending time with is a significant sized importer of Asian goods into the us. He tells me prices are dropping quite a bit. His family are all in China and I have a lot of respect for his opinion. He said conditions now are worse than the Mao Zedong era. If that is remotely true, brace for impact.
The China Observer indicates Evergrande left 1.5M properties unfinished when it declared bankruptcy. A few projects were transferred to local developers at the end of 2023 but there is no sign of work resumption, at this time. In 2008, the North American economy was closer to breaking completely than nearly anyone realizes. Further, very few even know what that means. We are now approaching an opportunity to fond out what that means. I don't know how bad of will get but economic conditions on China are already rough. The cost of services in North America is going to continue to rise forever. With the problems in China, we will likely see a situation where durable goods will drop in price, or stay the same for a long time, while services inflate.
We went to a birthday party a few days ago with about 40 people from mainland China (all except us) and they paint a wild picture. Houses not selling at any price in the big 6 (6 largest Chinese cities). RE prices way down in the smaller cities. Farmers essentially starving. They had 3 EV car companies go bankrupt, last week. Apparently, there is another hundred, or so, to go. The two biggest Chinese EV builders are BYD and Nio. Nio has never made a profit. The only companies not losing money are Tesla and BYD. I know they have a billion people so a few million displaced people isn't as significant as it sounds but I believe China is reeling from an economic disaster. There literally is no good news out of China.
