China’s economic game of dominoes

The bird is free and the swamp notes are free as well. Through the US elections, the newsletter will be free to read. I want to use this note to talk about the amazing global events of the past week, and in particular the future trajectory of China, because Ed and I will be covering the mid-term elections next week.

If we had doubts about the US-China tech decoupling, the past few days have cleared them up, as I explore in my column today. As the EU needs to reserve its subsidies for its European manufacturers, the president of France called for a Buy European Act like the Americans. I think the world would be better off if there were more regional hubs of production and consumption.

There are bumps in a new paradigm. How China's economy will perform over the next few years is one of the biggest issues. I was on a very interesting conference call about the economic future of China last week, and one participant noted that both foreign and domestic investors in China dumped a lot of short-term risk assets, but foreign fixed-income investors didn't

This tells us something. Wealthy Chinese are afraid of the more authoritarian nature of the regime. They are running for the hills, perhaps realizing that the whole "to get rich is glorious" thing is now being counterbalanced by Chinese style populism. It's not good for people with Chinese characteristics.

Chinese investors think that the lack of economic expertise in the new leadership team will lead to conflict in Taiwan. It would be very expensive for everyone, but especially for China. There are a lot of short term issues about to pop in the Chinese real estate story. The finances of provincial governments are being challenged by the unraveling of a credit bubble built on the real estate industry. The Chinese New Year is on January 22 and these governments will be under pressure to pay workers. Fuel is added to the fire by that.

If Beijing starts allowing local government debt to go bust, it raises questions over the entire Belt and Road Initiative, which is built on lending for infrastructure development, in the hope that it will be profitable in the long-term. What if the debt goes bad too? Financial pressures for emerging markets of energy inflation and a stronger dollar could make that a real possibility. The dominoes of the Chinese economic model begin to fall internationally.

There is a counter case. China makes it through this period of turmoil and then uses the speed of decision making inherent in authoritarian regimes to bolster its own technology needs and achieve regional supply chain independence. More state control creates an outcome oriented system that is well positioned to carry out the needs of the economy. The US and Europe have to figure out the nuances of a new economic pathway that needs to be agreed upon by the electorate.

I think the former scenario is more likely due to the exodus of business talent. I don't rule out the latter. Do you have feelings for both ways? Do you think it's a good idea to buy europe? I would love to hear your thoughts on how India will fit into the new regionalism at some point in the future. Here, you can choose what you want to answer, and I hope you rest up for the exams.

Recommended reading

There are so many great pieces to choose from that I am going to do an all-FT callout.

• One of my favorite pizza places in NYC is John's of Bleecker Street, and Matthew Garrahan wrote a great lunch there with Jon Stewart. The profile is very sharp and funny.

• The state of the new world order is summed up in this column by the author.

• Josh Chaffin's profile of Ron DeSantis is the best profile yet of a likely Republican presidential candidate.

• Knowing what you want in life, not how to get it, is the most important skill. I found this column very moving and sobering, as it shows how many of us slip through life and let decisions happen instead of taking them. I want to be more honest with myself about this in the future.

The Swamp Notes Live event will take place on November 10. You can register here if you want to be reminded closer to the date.

I don't know if China's growth is going through a period of managed slowing or if it is derailing. This is India's chance to become the fastest growing economy in the world, a feat it did once before. India took a piece of the tech supply chains that are moving out of China. Apple's sales have been very disappointing, but southern India makes a lot of the iPhone 14. India is in a good position to replace China. China is hitting a demographic middle-income trap due to its younger age profile. It has a lot of entrepreneurs. India's domestic vaccine, Covaxin, is considered to be more effective than China's indigenous vaccine. India is operating as if the Chinese epidemic is over because of zero- Covid restrictions.

Things are looking up for India according to all of this. You shouldn't underestimate its ability to make a mistake. India's vulnerabilities are becoming painfully apparent as the world blindly grapples with the age of polycrisis. Its exposure to climate change is one of these. Indians are more likely to die from heat and humidity combined than any other country. The situation is going to get worse. As time goes on, India's secular pluralism is being targeted by its neo-fascist politics. Its current account is shaky in a world of high energy and food prices. India is too large and self-sufficient to be on the watch list. It is surrounded by countries like Pakistan.

The world is reglobalising more than it is deglobalising according to my opinion. I would go long on India and short on China because India should be a beneficiary of this. Without a lot of conviction.

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A word from our swampians.

The Democrats seem unable to learn or break out of their entrenched positions. Is it any wonder that the Latino community has moved towards the Republicans? Gail Berney is a Democrat and not a member of any political party.