Blain’s Morning Porridge 14^th March, 2024: TikTok – opening salvos in a trade war, or a warning about China-Bias?

“The supreme art of war is to subdue the enemy without fighting..”

The US is in a tizz about banning TikTok, taking the first steps towards protectionism, censorship and trade war – which will ultimately benefit no one. Both the US and China face significant economic challenges, and both are large markets. Is conflict the only choice?

Bit of a giggle last night.. My favourite North American news channel is in Canada. (We love Canada here at the Morning Porridge!) They’d invited me on to their show to talk Inflation, Growth and Japan (where interest rates may be hiked to the dizzying level of 0% next week…) But when I joined the call, they asked if minded commenting on TikTok and the US House of Representatives voting to ban them if it’s not immediately sold to a US entity.

Sure… why not… Adaptability and quickness of mind is the mark of an artisan market commentator….

I made the obvious comments about the economic dangers of tit-for-tat protectionism; you can’t get Facebook in China, and China government employees can’t use iPhones, but soon found myself opining: “No One Ever Wins a Trade War. They either solve themselves or develop into something much worse..”

 Just a few moments after the slot ended one of my Canadian chums shot me an email comment about how leading Republican doner Jeff Yass of Susquehanna has nearly half his net worth invested in ByteDance – which owns TikTok. Around 60% of ByteDance is held by US institutional funds like Yass’s, Blackrock and General Atlantic. A further 20% is owned by its’ employees. It claims not to be owned or influenced by the Chinese Government. Another message pointed out the scale of the TikTok economy in the US – apparently some 3-400,000 influencers and businesses depend on it – generating some $24 bln in 2024 according to Oxford Economics.

TikTok certainly has the ear of the younger generations – it’s one of their major sources of news. My son wants me to start TikToking the Porridge. An increasing number of politicians are now using TikTok to garner access to younger voters – although a Bloomberg story says it doesn’t guarantee results; you can get millions of likes and follows from voters under 35, but if they don’t show up at the polling station, you still lose the election! Biden now uses TikTok, and Trump is apparently a supporter (after wanting to ban it) on the basis he will not forgive Facebook for blanking him in 2021.

I suspect there is more to come on this – the Senate will likely go down a rabbit-hole arguing about freedom of speech concerns, the dangers of naming specific companies when social media is a broad field, and exactly how influence across social media can be controlled when US companies like Twitter (nope, not going to call it X) and Meta control such swathes of it… If they ban TikTok today, will Trump ban the Porridge tomorrow?

However, on a broader basis…. Banning ByteDance is all about sending a signal to China – a pretty rude and basic one: Don’t interfere in the US! Fair enough….

The China Conundrum – Investible or Not?

One of the biggest issues in global finance is whether to invest in China or not. As TikTok shows, the US and China are at loggerheads with a high risk the global economy will suffer as they head for some kind of hot or cold trade war.

Although the Chinese markets have shown some stability, and even risen, in recent months, there is plenty to remain nervous around. Anti-China bias towards investment in the Middle Kingdom is considerable – revolving around the following themes:

• A large part of the market – including my own PA investments – got burnt after the multiple crackdowns on entrepreneurs and crashing China tech names.
• The capricious China one-party state is enough to make it un-investible based on the known unknown of how the state may act in the future for many funds.
• For others there is too little transparency on economic numbers (employment data is now a state secret), real growth or on company numbers.
• Many fear geopolitics – how any China investment thesis could collapse on direct conflict with the west over Taiwan.
• Others cite doubts on demographics; how China has got old before it got rich, and the risks of civil unrest if the party can’t generate high value employment for the young , renew high value growth and a resumption of the path towards general prosperity.
• Some believe the inherent corruption that’s been a factor in the Chinese economy since the First Emperor dooms the nation to eternal underperformance in paying real investors – all it has done thus far is exploit its cheapness as a manufacturing hub.

These factors can all be overexaggerated – especially given the degree of Anti-China bias in the media flow.

It makes sense to take a step back, and try to take a pragmatic perspective on the Chinese economy. Whatever the Party would like us to believe, China – like any growing economy – has its fair share of crisis. After 25 years of dramatic growth its suddenly hit the buffers in terms of the three-growth accelerators of the post-communist economy: the bust in property markets, infrastructure spending being reined in by broke local governments, and the once-cheap manufacturing sector reaching a maturity level where it has to rejig for higher value markets.

Unlike in the west, there was no immediate Post-Covid Economic bounce-back. Instead there was a perfect storm of these three crises above. Throw in bank deleveraging after unwise lending, ineffective oversight of local and national spending, overcapacity, and the manufacturing sector being forced into higher-value production (requiring much greater capital) – then the problems for China start to come into focus. Overlay these problems with the “iron-rice bowl compact” between the State and Population – whereby the Party gets to rule if it makes the people prosperous – and it’s clear China is not a riskless proposition.

The result is the current China economic speedbump. In many ways what China faces today is similar to what Japan or Germany faced in the early 1960s after they’d done the immediate rebuild and played catch-up following defeat in the Second World War. What’s different is that China is actively challenging the US for global economic dominance.

My guess is it will force the Party to reconsider its’ global position; being less bellicose on Taiwan, more aware of global geopolitical concerns and acutely aware of economic risks – which clearly includes a trade-war with the USA. (I am sure it will have reassessed the military risks of a Taiwan invasion given the performance of Russia in Ukraine – but the longer they wait, the more difficult it will become.) To keep the nation prosperous and growing, the last thing it needs is a manufacturing crisis on conflict with the west.

The real trade war challenge is going to be how China’s high value manufacturing sector develops in coming years. Xi’s three future growth drivers are Electric Vehicles, Batteries and Renewable Energy – areas that set it up in direct competition with the US, but will very much appeal to other parts of the global market, particularly Europe. These are likely to prove highly competitive markets, forcing China to be pragmatic, efficient and inventive, to build the products the world wants to buy. That’s the big risk for the USA – China becomes as innovative, inventive and design led as US companies were. The next Apple could well be Chinese. (Think about it… Volkswagen was effectively a ruin in 1945 before the British Army rescued it to build staff-cars, and within 20 years the Beetle had become a global design icon!)

The thing is…. the US is a market of around 350 million of the wealthiest consumers in the world. China is a market of 1,450 million of increasingly prosperous consumers. These are significant markets that can’t be ignored.

If the USA decides to raise protectionist barriers (and Trump is proposing 50% China Tariffs) they could further force geopolitical realignments: everyone wants renewables and China dominates the EV and Solar Spaces. Just take a look at what Chinese EVs have done to the Tesla narrative…. (And the largest EV producer BYD isn’t even bothering to sell into the US.)

The long-term investment decision is not whether to bet on the USA or China, but to consider how and what scale to play both. Get over the hump about its investibility. When it comes to China, the issue is When and What. What sectors in China will present the least geo-political and political risks? What industries will prove the least vulnerable and least contentious in an environment where the risks of a Chinese/US trade war remain high?

If there is one thing we know it’s that China’s population is aging, and relatively prosperous. What’s the obvious product sector they require? I might have an answer.. Emails to the usual address.

Out of time, and back to the day job..

Bill Blain

Strategist, Author of the Morning Porridge

Wind Shift Capital