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Glenn Profile picture
@GlennLuk
Jul 21 • 9 tweets • 3 min read • Read on X
I think foreigners — especially Americans — do not fully appreciate China's predilection for large, capital-intensive infrastructure projects because most do not know what it was like to live in a place starved of God-given natural endowments.
While we marvel at the economic benefits of a navigable Mississippi River system, bountiful arable land enabling "amber waves of grain", and "purple mountain majesties above the fruited plain" and rich stores of oil & gas + other useful commodities ...

readwriteinvest.com/p/america-the-…
... China trudged through the 20th century in relative poverty, cursed by a dearth of natural endowments like arable land and commodities relative to its huge population.

But it recognized the potential for capital-intensive infrastructure development to convert non-productive regions to productive ones.
There are now many examples of successful infrastructure projects that have achieved this; to follow I will list some examples from different infrastructure categories to illustrate.

Chinese policymakers equate infrastructure development with scaling the development ladder on the way to becoming a fully developed society with high quality of life. When viewed in this context, its predilection for capital-intensive infrastructure should be wholly unsurprising. And safe to say it is unlikely to turn its back on this development model anytime soon.
1⃣ Historically, deserts were barren, inhospitable places that could not support much biological life.

Now solar PV infrastructure can turn non-productive desert land into a highly productive energy producing region.

2⃣ Windy steppe regions were also quite barren and did not support heavy population densities.

Now modern wind turbines can turn relatively non-productive regions in places like Inner Mongolia into energy powerhouses.

3⃣ Landlocked mountainous provinces like Guizhou were historically very poor because of difficult access.

Bridges and tunnels remove these access barriers and enables Guizhou to benefit from increased trade with the rest of the country and the world.

4⃣ Regions like the "roof of the world" in Tibet were also historically poor because of the extreme mountainous terrain.

But massive hydro projects like this tap into these extremes (in this case, a massive elevation drop making it ideal for hydro power).

5⃣ China is not blessed with significant petroleum and natural gas reserves relative to its huge population.

But the infrastructure-driven push to electrify transportation (e.g. electric vehicles, HSR, local metro) blunts these natural disadvantages.

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More from @GlennLuk

Glenn Profile picture
Jul 23
If you ever played Civilization, 👇 is the equivalent of discovering tech that allows you to upgrade a desert tile into an energy-producing one.

Affordable solar PV production has the same effect as discovering oil in the Middle East and then multiplying it by 10x. Image
~830B barrels of proven reserves in the Middle East has effective energy equivalent of around 11,300 GW of solar PV that produce over a 25-year useful life.

At 14 km2/GW, this would take up desert space of ~158,200 km2, which is less than a quarter of China’s portion of the Gobi Desert.

Moreover, regular maintenance and replacement means this infrastructure would produce energy in perpetuity, while the Middle East oil fields run out or become more costly/difficult to extract (even with improved extraction technology).
China is currently deploying solar PV at a run rate of 300+ GW per annum, which means at just current run rates it can deploy this volume of solar PV in 37 years.

Remember it also took multiple decades to develop the vast oil fields in the Middle East starting in the 30s and 40s.
Read 7 tweets
Glenn Profile picture
Jul 23
Pettis’ theories and models have a clumsy track record of falling apart upon closer inspection by trained specialists in their fields of study.
The above is an example from economics.

He also did it here with misapplication of “inclusive-extractive” framework.
More examples:
Read 5 tweets
Glenn Profile picture
Jul 5
I had written a deep dive on known issues in the measurement of China’s GDP and how misleading it was to frame the discussion around the GDP accounting identity, especially if the way those numbers are calculated differed wildly from country to country.

In light of the recent discussion of China’s under-counted consumption 👇, it was worth re-upping these pieces.
Part I provided relevant background on the technicalities of GDP measurement and the historical development of Pettis’ “Over-investment Thesis” and the critical role of the GDP accounting identity on determining “imbalances” in China’s economy.

readwriteinvest.com/p/tyranny-of-t…
In Part II, I examined several areas where China’s consumption was being under-counted relative to other countries, such as imputed rent.

Adjusting for these would bring China’s consumption figures to ~50%, which is not far off global averages.

readwriteinvest.com/p/tyranny-of-t…
Read 10 tweets
Glenn Profile picture
Jul 3
Essentially, the key takeaway of this study is something many have already long known/suspected:

China’s per capita consumption of real goods and services is very much in line with countries at a similar level of per capita GDP + the reason why it is low as a % of GDP is because it is measured more conservatively.

(This is also suggests that China’s overall GDP is also under-counted, in direct contradiction to what many believe)
Even though Chinese households are verifiably consuming everything from food to cars to education services in real per capita terms at or higher to comparable economies like Mexico + sometimes close to or even exceeding fully developed economies like Japan, cultists will insist that consumption is lagging on the basis of flimsy accounting identities.
These are some key comparison charts that show the consumption measurement distortion.

You can see how despite official measured per capita GDP in nominal terms at roughly half, real per capita consumption of most categories in China exceeds Mexico. Image
Image
Read 9 tweets
Glenn Profile picture
Jun 21
Others have now raised this topic a few times, so allow me to share some thoughts on the BYD (and broader) supply chain financing story:

1⃣ BYD's high payables number actually reflects the strength of its underlying business model and market dominance for two key reasons (ability to extract favorable supplier terms; how that number is driven in part by rapid expansion in production capacity)

2⃣ Establishing industry norms that forces larger players like BYD to adhere to standard payment terms (voluntarily or involuntarily) is a positive step forward for the whole industry, leading to more efficient overall financing approach.

3⃣ BYD and other market leaders that also run large negative working capital balances are generally not a risk of insolvency by adhering to new industry norms as they are generally under-leveraged (with traditional debt financing) and will simply plug the financing hole with more traditional debt and equity financing. In BYD's case, I expect all or most of it to be to replaced with debt (long-term bonds).https://www.ft.com/content/e6ae000d-d506-4a21-898e-213002234ee2
1⃣ BYD's high payables figure reflects strength of its underlying business model and is in part a reflection of its rapid growth in production capacity

While the high payables figure has been portrayed as a potential weakness (with some even raising the idea that BYD is insolvent), actually it reflects the opposite.
BYD uses its scale to extract favorable terms from its suppliers. It trades volume for pricing as well as non-pricing advantages, like extended payment terms. It does this because that's what extremely competitive companies do: they try to exploit every advantage they have over the competition.

As BYD has only gotten bigger and more powerful, it has maintained its ability to sustain structural negative working capital state on its balance sheet.

Companies that can maintain negative working capital are often extremely competitive. This is a very desirable business model to run for rapidly growing companies because as revenue grows, working capital becomes a source of funding.

Amazon's marketplace business was an example of this. Amazon collects payment upfront and then pays out sellers later. This leads to a negative working capital balance, which is effectively a very low-cost form of growth financing for its marketplace business.

Ability to maintain negative working capital is even more rare in a capital-intensive businesses like the car sector. That reflects just how dominant BYD has become.

This doesn't mean it's a good thing for the industry overall (and I'll touch on this in the next point), but it does reflect on the increasing dominance of BYD individually.
Read 13 tweets
Glenn Profile picture
Jun 19
People have a tendency to compress complex, multi-decade stories into simple narratives that follow cause-and-effect storylines, often ones that tie into pre-existing narratives. This creates the risk of dangerous over-simplification.

In this case, the prevailing narrative goes something like this:
▪️ "China failed to build a competitive auto industry for decades."
▪️ "Then Tesla entered the market and became the magic fix that enabled China to develop a globally competitive car industry."
▪️ "Therefore, we should apply the same magic fix to our own industry."

In my view, this is a dangerous over-simplification. Reducing the story to a simple cause-and-effect narrative often leads to blissfully naive solution sets that fail to address the core issue: how do we re-industrialize America?

Believing that simply inviting Chinese car companies into the U.S. will serve as a "magic fix" — just as Tesla supposedly was for China — misses the mark, for two key reasons:

1. The "magic fix" narrative is a gross oversimplification of five decades of development in China's auto and broader industrial/manufacturing sectors.

2. The fundamental challenges China faced over those decades are very different from the ones the U.S. faces today.

None of this is to say that inviting Chinese automakers to invest FDI in the U.S. cannot be part of a LT solution**. But it must be done thoughtfully — and only in tandem with addressing core domestic issues — if the goal is truly to re-industrialize this country in a meaningful way.

** Of course, all of this assumes they even find the risk/reward decision to commit long-term capital to the U.S. in today’s geopolitical climate remotely attractive compared to FDI opportunities elsewhere.
1⃣ First, let me go through several points that were brought up in the excerpted sections of the interview as well as the post to show how reality was much more complex than presented**

** I full interview is not out and I haven't seen it, so perhaps there will be more nuance there; this is mainly a reaction to how the narrative on the rise of China's auto industry has been grossly oversimplified and in certain cases, simply wrong.
"The impact was brutal. When Tesla's Model 3 launched in 2020, it quickly became China's best-selling EV. BYD's total vehicle sales actually fell 7.7% that year to just 427,000 units."

This excerpt suggests that Tesla's market entry in China was the direct cause-and-effect reason why BYD's sales declined in 2020.

This is wrong. It may have played a minor role, but there were many other reasons why BYD's vehicle sales declined.
Read 35 tweets

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