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Jun 22, 2024 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

Apr 24
A decade it was virtually inconceivable that the relationship between the U.S. and EU would splinter so much that it gave China the opportunity to fill the void.

This would be the trade/economic equivalent of the U.S. splitting China off from the Soviet Union in the 70s.
When Xi Jinping makes statements like "the world is in a turbulent time that is unprecedented in the past century" in 2021 he was likely referring to the possibility that situations like this to arise where China is essentially being handed the opportunity to re-shape global affairs much earlier than anticipated.
This is a complete self-own by the United States — in particular, a Trump administration whose crusade against allies and poorly executed implementation of the latest "reciprocal" tariffs are increasingly being perceived as an "Emperor Has No Clothes" moment for the President and the U.S. nation.
Read 5 tweets
Apr 22
I don’t think people in replies making statements like “Korea will refuse to comply” quite realize that “ask” is a polite prelude to “also ban all RE shipments to Korea due to non-compliance”.

We are in a trade war. Gloves are coming off.
Just as China was forced to adapt to chip export controls by stockpiling restricted equipment, exploiting loopholes, smuggling in the short/medium-term + developing domestic capabilities (upstream SME, building out domestic chip capacity) in the long-term …
… now the U.S. will also have to adapt by resorting to similar efforts on rare earths … smuggling, loopholes, stockpiling in the short/medium run and building out rare earths refining and processing capacity in the long run.
Read 6 tweets
Apr 22
I find it quite ironic how Pettis tries to distance himself from the Trump administration's tariff debacle given the clear influence his thinking and narratives have had in shaping the current obsession with tariffs; in particular, the disproportionate focus on the goods trade.
We can clearly see this focus on the goods trade in the article's headline suggestion/recommendation of implenenting a "customs union like the one proposed by the economist John Maynard Keynes at the Bretton Woods conference" that attempts to enforce balance in (goods) trade.Image
The problem with this recommendation is that global trade in the 2020s looks very different from global trade in the 1940s, which was almost entirely based on physical trade flows of manufactured goods and commodities, as illustrated in this diagram 👇.

Read 15 tweets
Apr 21
Unclear how the U.S. can effectively enforce transshipment:

(i) Comparative advantage drives offshoring of labor-intensive work to developing countries.

(ii) For all practical purposes, offshoring these supply chains out of China will require cooperation from Chinese firms.
U.S. wage levels are too high, which means this type of labor-intensive mfg work is simply not feasible to re-shore to America.

The U.S. lacks "producer power" here: it does not have the supply chain or indigenous human capital / know-how necessary to move these labor-intensive industries to its preferred countries via FDI.
The bulk of relevant human capital & know-how for labor-intensive mfg / export processing resides in China today in Chinese factories.

This gives Chinese factory owners and Beijing significant sway in deciding where to move the factories and how to manage its supply chain.
Read 9 tweets
Apr 18
For China, net exports does a particularly poor job of measuring foreign demand.

It overstates the “reliance on foreign demand” to GDP from two statistical effects.

While somewhat technical in explanation, these are very relevant in the context of trying to figure out which side has leverage in the ongoing trade war.
The first is the structural deficit that China runs on FDI income. Foreign MNCs make for more money in China than Chinese MNCs earning income abroad.

The paradigm example is Apple selling iPhones to Chinese HHs. Apple sells over 40 million iPhones a year to Chinese HHs and has earned over $200 billion in segment GAAP operating income in China over the past decade.
Even though this essentially represents real Chinese domestic demand and an import — with the repatriated earnings supporting high-paying jobs in Cupertino and profits to mainly American shareholders — the profit component of this is captured in FDI income, not the trade figures.
Read 21 tweets
Apr 17
Factoring in redistribution and wealth effects — which most people, including Armand seem to ignore — China and U.S are at roughly *equal levels of socioeconomic inequality but key difference is that China’s trajectory is improving while the U.S.’ is not.
Probably time to re-up this deep dive I did last fall examining China’s socioeconomic inequality that goes beyond wages and takes into account redistribution and wealth effects.
I have not done as deep analysis on U.S. socioeconomic inequality but would note that on a wage basis China’s Gini coefficient is equal or lower than the U.S. especially after factoring in redistributive policies 👇.
Read 9 tweets

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