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Jun 22 17 tweets 6 min read Read on X
The EV sector industrial subsidy figures released last week by @CSIS are inflated by at least ~$80B, mainly from poor assumptions made to calculate the NEV Sales Tax Exemption that (i) don't pass the sanity check and (ii) are out-of-whack with disclosed actuals amounts.

🧵 https://www.csis.org/blogs/trustee-china-hand/chinese-ev-dilemma-subsidized-yet-striking
As disclosed in the CSIS analysis, the Sales Tax Exemption assumption is based on a very simple premise:

To incent purchases of NEVs (new energy vehicles i.e. BEVs+PHEVs) over ICE vehicles, most NEVs are exempt from the sales tax exemption, which is assumed to be 10%. Image
$39.5B of Sales Tax Exemption in '23 thus implies that there were at least $395B worth of NEVs sold in China based on CSIS assumptions.

Since we know how many NEVs were sold (~7.9M passenger and ~0.3M commercial), we can back out the implied average selling price (ASP).Image
CSIS discloses ASP assumption of ¥1.2M for large commercial vehicles. This would imply ~$54B in commercial vehicle NEV sales in '23, leaving $341B for light passenger vehicles.

Based on ~7.9M passenger NEVs sold in '23, this implies an ASP of $43k (¥310k). Image
This does not pass the sanity check, nor is it consistent with CSIS' own assumptions (passenger NEV ASP is ¥250k).

e.g. the best-selling models in China are compact and mid-size NEVs with ASPs in the ¥120-250k range.
In any case, we can also cross-check this assumption with actual disclosed figures.

The Ministry of Finance disclosed last year cumulative NEV Sales Tax Exemptions through 2022 of ~¥200 billion (~$29B) + another ~¥115 billion (~$16B) in 2023.

This suggests the CSIS estimate for Salex Tax Exemptions is overstated by 2.5-2.6xhttps://www.gov.cn/zhengce/202306/content_6888094.htm
Factoring in more accurate assumptions that are more in line with these actuals, I have done my own analysis on Chinese EV sector assumptions and arrived at ~$147B, ~$83B lower than the CSIS estimate. Note: the difference in Sales Tax Assumption estimate accounts for ~$64B of the difference. The remaining difference comes from the Buyer's Rebate which is also overestimated, although much more in the ballpark. I have copied assumptions for infrastructure subsidies, R&D and government procurement.
Based on this, more interesting is what happens going forward IMO.

Per below, the NEV Sales Tax Exemption has been extended for 4 more years, but like the Buyer's Rebate before gradually eases out.

For example, the maximum exemption halves in 2026 to ¥15k per NEV.
https://www.gov.cn/zhengce/202306/content_6888094.htm
https://www.adamasintel.com/china-ev-buyers-get-four-more-years-tax-breaks-as-us-incentives-fall-flat/
I've taken the EV sector subsidies analysis out through 2030 assuming the Sales Tax Exemption is retired after this current program ends.

As you can see avg. subsidies per vehicle continue to fall gradually, from $2,700 in '23 to <$200 by '30. Image
If we take the model even further out to 2040, China will have spent ~$330B in total subsidies on the EV sector.

Paired against ~704M cumulative NEV sales through 2040, this would average out cumulatively to a subsidy of ~$468 per vehicle.
I think the lesson here is pretty clear and does not need overstated subsidy estimates to make the point.

The key to any successful industrial policy subsidy program is providing support to a domestic industry to achieve scale and profitability so subsidies can be gradually withdrawn over time.

The last point is key. If industrial policy and subsidies cannot achieve industry scale and self-sustaining profitability, you end up with a non-competitive sector that continues to suck up fiscal resources indefinitely.
The development of the Chinese EV sector has followed this principle.

Subsidies per car have fallen from >$20k per vehicle to ~$2k per vehicle over the last decade and will be effectively completed by 2027. Image
The question for Western policymakers is not about the need to develop and retain an EV industry using industrial policy and subsidies, like China has done. That should be pretty clear, the answer is yes.

It is about execution of said industrial policy. Specifically, are we seeing aggregate subsidies per NEV go down over time at a satisfactory pace?
Remember there are other new industries beyond EVs.

That China is a few years away from withdrawing subsidies from EVs just means that those fiscal resources will soon be available to support development of other future industries.

If one is stuck subsidizing old industries indefinitely this just means less fiscal resources available to spur development of new ones.
This is not the first time I’ve seen highly questionable assumptions in CSIS analysis on China.

Its analysis of COMAC development costs was even more egregious and off by 6-14x.

These numbers influence policy and decision-making. Isn’t it important that we get them right?
Bad analysis does enormous disservice to our policymaking.

13 years ago, Chinese NEV industry subsidies were scoffed at as “wasted investment”.

Instead of breeding complacency, maybe we should have taken them seriously. Catching up will be that much harder as a result.
Another interesting datapoint from this analysis:

~2/3rds of NEV sector subsidies were focused aimed at stimulating the consumer demand side with <1/3rd focused on production.

Nascent industries require coordinated stimulation of both supply and demand.

This also contradicts prevailing narratives about how China "focuses disproportionately on the supply-side at the expense of households/consumers".Image

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More from @GlennLuk

Nov 18
There are two main data points that support the China “weak domestic demand” claim:

1️⃣ The trade surplus it runs, measured by Customs

2️⃣ Consumption as a % of GDP

These “kernels” of objective truth are then conflated with Bigger Ideas to support an ultimately flawed narrative. Image
1️⃣ Customs trade data doesn’t capture all holistic trade

The most commonly cited data showing persistent Chinese surpluses is customs data reported by GACC, China’s customs department.

Some live examples/references: Image
Image
Image
In some cases, “weak demand” proponents even focus only on the manufactured goods trade, which ignores the large structural deficit China has in primary goods trade like oil, natural resources and food products.
Read 21 tweets
Nov 14
IMO conflating mfg goods with holistic global trade here.

China runs a mfg. goods surplus of ~$1,763B.

But it runs a structural deficit in *every other key trade category.

(moreover, the mfg. goods figure itself is likely overstated relative to underlying fund flows)
This is what’s excluded from the above number:

1️⃣ $909B of primary goods imports (food, natural resources)
2️⃣ $241B services (mainly travel/tourism)
3️⃣ $386B profits of foreign firms operating in China

As well as a 4️⃣ $258B “factoryless manufacturing” adjustment. Image
1️⃣ China has a large structural deficit in natural resources (iron ore, petroleum) and food (soybeans, corn).

e.g. China imported $332B of petroleum and $272B of ore during the period.

This brings the net goods surplus to $854B for the 12 months ending 6/30/2024, per GACC.
Read 17 tweets
Nov 13
This resonated with me.

The concentration of gains from technology advances suggests that it needs to be packaged with well-thought-out distributional policy …
… lest the disruptive effects of tech gains lead even more disruptive and less optimal societal-level outcomes that can paradoxically torpedo ability to capture future tech progress.
This can also be generalized beyond tech to other complex trends like global outsourcing that come with similar negative externalities (disruptive effects on communities).
Read 9 tweets
Nov 12
There’s a shocking level of naivete embedded here (Rubio interview) when you walk through the practical & operational implications of trying to move this type of manufacturing.

Who is going to be responsible for setting up the factories in these locales? Image
First, remember these aren’t Gigafactories — the U.S. wants more of those, not less.

These are labor-intensive export processing factories: The ones that were offshored from this country over the last half-century, pre-dating China’s rise as a manufacturer.
Second, we are not talking about large-scale electronics factories like those run by Foxconn.

These countries are small and don’t have the scaled workforce that you need to make the unit economics work.

We are talking product categories like clothing and toys.
Read 19 tweets
Nov 10
Billy moneyballs Chinese structural reform

Guys, you’re still trying to fight demographics and replace 350 million retiring workers.

I told you, we can’t do it, and we can’t do it.

Now, what we might be able to do is recreate them.

Re-create it in the aggregate.Image
How much GDP did these workers generate last year? Image
Fifty-eight point eight trillion renminbi. Image
Read 23 tweets
Nov 10
China’s non-college-educated working-age population (maroon line below), a proxy for “blue-collar” work (farming, manufacturing, construction, services) shrinking at ~19M per year through 2040 …

… while the “attended college” population increases at ~10.6M per year.
So China needs to shed blue-collar work like labor-intensive export-processing jobs while creating new “white-collar” jobs that are a better fit for college graduates.
This drives so much of the timing and pace of structural reform, particularly in policy intervention related to industry and sectoral transition.
Read 59 tweets

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