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Our Co-CIO’s Reality Check on US-China Decoupling

Written by Jeff Xu, Co-CIO (China)


The prospect of a US-China decoupling has been one of the top concerns of LHG's capital partners. To address this concern, our China research team has performed an in-depth study on the subject.

Some key points from the study are summarized below.


(English translation)


Part I. External factors of China's economic rise:


1. The rise of China's economy has caused profound changes in the global political and economic order, and these changes have brought about a series of imbalances in the global order.


2. Entering the 21st century, within the linear GDP growth rate, China's manufacturing sector has entered a non-linear high-speed growth. It is during this period of time that China has grown into the "world factory".


3. China's economic miracle is the direct result of three conditions happening simultaneously. First is China's accession to the WTO, thus enabling smooth access to the global market. But what really matters are the other two conditions: one is that the Western world has entered the era of innovation-driven economy, which has brought about large-scale outsourcing of manufacturing processes, and it was looking for countries that can undertake outsourcing on a global scale; the other is China's land finance system (the privatization of land to support local government’s fiscal revenue), which has enabled China to obtain the most powerful ability to undertake outsourcing from the West in a unique way.


4. But the coupling of these conditions is not repeatable at all, so it is not a replicable model for other countries.


5. The development of China's manufacturing industry, combined with the innovative economy of the West, has had a profound impact on the global economic and trade structure, and has also had a profound impact on the economic and political order of various countries.


6. China's economic rise is highly dependent on the innovation economy of Western countries, so it can also be said that it is another round of (world-level) technological leap, which has contributed to further changes in China's economic and social structure.


7. This round of technological transition is mainly information technology. With the advent of the era of innovation economy, it has promoted a management revolution, brought changes in the organizational form of enterprises, and made large-scale outsourcing of production possible and necessary.


8. To deal with the "post-shortage economy era", companies that can outsource the manufacturing process and devote themselves to creativity and brand building will have a greater opportunity to occupy the top of the value chain. This is the secret of success for companies like Apple. And once you start to enter the era of innovation economy, you must continue to strive for innovation, otherwise companies will be easily eliminated.



Part II. Establishment of supply chain system


1. For the Chinese contractor, there are two conditions that must be met at the same time: first and foremost, the production process must be efficient, otherwise there will be no chance to undertake the contracting task. The premise of efficiency is specialization; the second condition, that is, the production process must be flexible, and the premise of flexibility is that it cannot be specialized, and the inability to specialize will make the production efficiency poor, and there will be no chance at all in the first place. These two conditions must be satisfied simultaneously, but they are contradictory to each other, which brings about a structural problem.


2. The only way is to satisfy the two conditions of flexibility and efficiency at the same time, is to place them at two different levels. In order to have dynamic reorganization within the supply chain network, it is necessary to have distributed decision-making and distributed operation, which cannot be designed by a centralized brain. Because the speed of market changes in the era of innovation economy exceeds any centralized processing capacity, the operation of the supply chain network can only be based on the natural market equilibrium process.


3. At its initial stage of establishing a complete supply chain network, there must be a sufficient number of companies, each with its unique division of tasks, that grow up almost simultaneously to form a complete supply chain network with its own operational capabilities; if companies with such a deep distribution of tasks cannot grow up almost at the same time, no one can survive.


4. A prerequisite for so many companies to grow simultaneously is whether there are enough well-built, large-scale industrial development zones with well-established infrastructure (this can also be classified as urbanization in a broad sense), and at the same time, there is no corresponding industrial capacity in it.


5. This means (in a broad sense) that urbanization precedes industrialization, but this is contrary to the usual historical rhythm in which industrialization drives urbanization.

6. China just followed a reverse historical rhythm: (in a broad sense) urbanization developed before industrialization. The fundamental reason lies in China's land finance, and the development of land finance is directly related to the 1994 tax-sharing reform.


7. Therefore, it can be said that China's economic miracle is entirely dependent on the general trend of the world. China's independent decision-making has a certain role in it, but it is more of a temporal coupling, and China follows the trend. China's economic rise is deeply embedded in the development process of the world economic order. It can be said that China's economic rise and the transformation of the Western economy are the same process. We cannot discuss China issues outside of the world economic order; similarly, as China's economic rise becomes a reality, we cannot discuss the prospects of the world economic order without China's influence.



Part III. The operation of the world economy is inseparable from the supply chain system centered on China


1. China's advantages as a super-sized country are fully demonstrated here. In the years of reform and opening up, especially after the implementation of land finance, a large number of infrastructures have been established, and the logistics potential of a super-sized country has been fully released; On the other hand, China's large population resources – individuals constitute China's huge team of engineers and skilled workforce, enables the supply chain network to function.


2. In fact, the scope of this supply chain network has gone beyond China’s border and is based on the entire East Asia region around the China Sea. China imports a large number of parts and semi-finished products from other East Asian and Southeast Asian nations/regions, completes the overall assembly in China, then exports them to the world. The entire East Asia has been integrated into a huge manufacturing cluster.


3. The so-called large-scale trade surplus of China with developed countries is actually a surplus formed by China representing the entire East Asian manufacturing cluster, which includes a large-scale deficit formed by China's import of parts and semi-finished products from many Southeast Asian countries and regions. In recent years, part of the manufacturing industry has shifted from China to Southeast Asia. This is not a real transfer, but a process of internal structural restructuring of the supply chain network within the East Asian manufacturing cluster.



5. However, the supply chain network itself as a whole will not be substantially affected, and the overwhelming scale of China in this supply chain network relative to other countries makes the reconstruction of the supply chain always centered on China.


6. After incorporating the element of supply chain management capability, we will find that the price of labor and land is actually not the most decisive factor in manufacturing costs. This is also the reason why China's manufacturing industry can develop more rapidly in the 21st century when labor and land costs have risen substantially compared with the 1980s.


7. With the rise of China's economy, the middle-income trap may have been eliminated. The so-called middle-income trap is nothing but an empirical summary of the economic development process of a series of developing countries in Latin America and Southeast Asia since the middle and late 20th century.





Part IV. From " center and periphery " to "dual-cycles"


1. The international economic and trade structure is gradually transforming from the "center and periphery" structure described by Immanuel Wallerstein's world system theory to the "dual-cycles" structure, that is, the economic and trade relations between China and Western countries form the first-degree cycle: China exports manufactured goods to Western countries, and imports technology, capital, and various high-end services from the West; the economic and trade relations between China and other non-Western countries form the second-degree cycle, and China’s exports to developing Asian, African and Latin American countries export finished products and import raw materials from them. These two fundamental cycles are connected primarily through China.



(Original Chinese)


面对现实:LHG联席首席投资官中美脱钩的可行性研究报告提纲


一、中国经济崛起的外部因素:


1、中国经济的崛起引起了全球政治经济秩序的深刻变迁,这些变迁更在全球秩序当中带来一系列失衡。

2、进入21世纪,在线性的GDP增长速度内部,中国的制造业部门却进入非线性的高速增长,中国也正是在这个时间阶段内成长为“世界工厂”的。

3、中国的经济奇迹是因为两个或者三个条件的时间耦合。第一个条件是中国加入WTO(世界贸易组织),因而得以顺畅地进入到全球市场。

4、真正重要的是另外两个条件:

一个是西方世界进入创新经济的时代,带来了制造业流程的大规模外包,在全球范围内寻找能够承接外包的对象;另一个是中国的土地财政,让中国以一种令人意外的方式获得了最为强大的承接外包能力。

5、但这些条件的耦合完全不具有可重复性,所以它不足以成为一种其他国家可复制的模式。

6、中国的制造业发展,结合于西方的创新经济,给全球经贸格局带来了极为深远的影响,进而对各国的经济和政治秩序也产生深远影响。

7、中国的经济崛起,高度依赖于西方国家创新经济的拉动,因此也可以说是又一轮(世界层面的)技术跃迁,促成了中国的经济和社会结构的进一步变化。

8、这一轮的技术跃迁,主要是信息技术,它伴随着创新经济时代的到来,促成了一场管理革命,带来企业组织形式的变迁,使得生产上的大规模外包成为可能与必须。

9、应对“后短缺经济时代”能够将制造过程外包,自己轻装上阵致力创意与品牌打造的企业,将有更大的机会占据价值链的顶端,这就是类似于苹果这样的公司成功的秘诀。而一旦开始进入创新经济时代,就必须持续不断地拼创新,否则很容易被淘汰。

10、新技术使得这场管理革命成为可能,发包方与承包方构成了工业链条的两端;大规模外包使得人类历史上出现了一个新事物,生产过程与价值增值过程在某种意义上分离了。


二、供应链体系的建立

1、对于承包方来说,有两个条件必须同时满足:第一,生产过程必须有效率,否则不会有机会承接到发包任务。有效率的前提是专业化;第二个条件,即生产过程必须要有弹性,有弹性的前提是不能专业化,而不能专业化会使得生产的效率欠佳,一开始就根本不会有机会拿到订单。这两个条件必须同时满足,但它们又是彼此矛盾的,这就带来了一个结构性的问题。

2、唯一的办法是把弹性与效率这两个条件放到不同位阶上来满足。供应链网络内部不断动态重组的配套关系,一定是分布式决策、分布式运转,绝不是一个中央集权式的大脑能设计得出来的。因为,创新经济时代市场的变化速度超出了任何中央集权式的处理能力,供应链网络的运转便只能是基于自然的市场均衡过程。

3、在其起始阶段,一定要有足够数量的、分工足够深的企业近乎同时成长起来,形成一个具有自身运转能力的供应链网络;倘若专业化分工如此深的企业不能近乎同时成长起来,就谁也存活不下去。

4、这么多企业近乎同时成长起来的一个前提要求就是,是否有足够多建设得非常好、规模很大、基础设施已经非常到位的工业开发区(这也可归为广义上的城市化)已经建设起来,而且里面没有相应的工业能力进驻。

5、这意味着(广义的)城市化要先于工业化,但这与通常的工业化拉动城市化的历史节奏是相反的。

6、中国刚好走了一个反向的历史节奏:(广义的)城市化先于工业化发展起来。其根本原因在于中国的土地财政,土地财政的发展与1994年的分税制改革直接相关。

7、因此可以说中国的经济奇迹,完全是依托于世界大势而成,中国的自主决策在其中有一定作用,但更多的是一种时间性的耦合,中国顺势而为。中国的经济崛起深刻地内在于世界经济秩序的发展过程之中,可以说,中国的经济崛起和西方经济的转型,是同一个过程。我们无法外在于世界经济秩序来讨论中国问题;同样,随着中国的经济崛起成为现实,我们也无法脱离开中国的影响力来讨论世界经济秩序的前景。



三、世界经济的运转离不开以中国为中心的供应链体系


1、中国作为超大规模国家的优势于此尽显。改革开放这些年,尤其是实行土地财政之后的这些年中建立起大量的基础设施,超大规模国家的物流潜力得到充分释放;中国超大规模的人口资源,这些个体构成了中国庞大的工程师队伍和熟练工人队伍的来源,使得供应链网络能够运转起来。

2、实际上,这个供应链网络的范围已经超出中国,是以整个环中国海地区的东亚为单位的。中国从其他东亚、东南亚国家和地区大量进口零部件、半成品,在中国完成总体组装再向全世界出口,整个东亚被整合为一个巨大的制造业集聚区。

3、所谓中国对于发达国家大规模的贸易顺差,实际上是中国代表整个东亚制造业集聚区而形成的顺差,其中包含着中国从诸多东南亚国家和地区进口零部件、半成品而形成的大规模逆差。近年来部分制造业从中国向东南亚转移,这并不是真正意义上的转移,而是东亚制造业集聚区的供应链网络内部结构性重构的过程;

4、此时真正有效的分析单位不再是国家经济,而是微观层面的企业经济,以及超国家层面的供应链经济。

5、但供应链网络本身作为一个整体,不会受到本质性的影响,而中国在这个供应链网络当中相对于其他国家的压倒性规模,使得供应链的重构始终会以中国为中心

6、把供应链管理能力这个要素纳入进来之后,我们会发现劳动力、土地的价格事实上已经不是制造业成本中最为决定性的要素了。这也是中国在劳动力和土地成本较之20世纪80年代已经大幅上升的21世纪,制造业却能更快速发展的原因所在。

7、伴随着中国经济的崛起,中等收入陷阱,这个问题可能已经被取消了。所谓中等收入陷阱,只不过是对20世纪中后期以来拉美、东南亚等一系列发展中国家经济发展过程的经验性总结。

8、中低端制造业向以中国为中心的东亚制造业集聚区的转移,在这个意义上是终局性的,进得来出不去。

9、基于前述的供应链逻辑,造成了中低端制造业在全球转移的终局性。中国经济崛起的经验,其他不发达国家难以复制,它们已经很难通过工业化而实现现代化,除非是能够有效地参与到中国为中心的庞大东亚供应链网络的东南亚国家。



四、从”中心--边缘“到”双循环“


1、国际经贸结构从沃勒斯坦的世界体系理论所说的“中心、边缘”结构逐渐向“双循环”结构的转型,即中国与西方国家之间的经贸关系构成一个循环(第一循环),中国向西方国家出口制成品,从西方进口技术、资金以及各种高端服务业贸易;中国与其他非西方国家之间的经贸关系构成另一个循环(第二循环),中国向发展中的亚非拉国家出口制成品,从后者进口原材料等,两个循环通过中国而联系起来。


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