Why the U.S. Can’t Break Up with China — ft. Alice Han

27:28Yeah, my issue is that we are now attaching the value of people's retirement accounts to a company that makes money on trading CumRocket and Fortcoin. That's a good point. I respect the fact that when you go to parties, you're like the guy, you're like the 26-year-old that doesn't like crypto. Literally, that's like no one knows what to make of you. You might as well start singing show tunes. Does none of what I say resonate with you? Or do you think I'm being pedantic? Or what do you think? I like what you're saying because I find that I'm a little bit taken in by, you know what it is? I think that people my age, and because I desperately want to reach young men and I'm going through a midlife crisis, so I want to feel younger than I am, that I try to be a little bit hipper and younger.

28:19And I mean, look at me, I'm dressed like an aging skateboarder right now. I look fucking ridiculous. But I think a lot of people want to be seen as younger and hipper. And so they embrace crypto because it makes them feel young. Yeah, for me, it's like a combination of that and Beanie Babies. Like, we're just buying and selling Beanie Babies and driving up the price. And again, I don't want to outlaw Beanie Babies, but I don't think Beanie Babies and platforms whose main way of making money is by taking fees off of Beanie Babies being traded, I don't think that should be in people's 401ks. Let me put it this way.

28:58If this shit ends really badly, I think a lot of us are going to have our head in our hands and go, well, of course it did. Of course it did. Which, again, feels so 2008 to me. And most importantly, this whole conversation has inspired my favorite line from a song in the aughts, and that is, I'm so 2008, you're so 2000 late. I love that line. Was that Black Eyed Peas? I don't know. That's Boom Boom Pow. If it's not Tom Petty or Tom Petty, I don't care what it is.

29:30We'll be right back after the break for our conversation with Alice Hahn. If you're enjoying the show so far, be sure to give the ProfitU Markets feed a follow wherever you get your podcasts.

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32:04Welcome back. Here's our conversation with Alice Hahn, China economist and director at Green Mantle. Alice, where does this podcast find you? I'm in London, but the weather is getting warmer, which is nice. I'm going to head to Ibiza and a couple of warm places for conferences, which is good. That's fun. Yeah, I've heard. Unfortunately, I leave just in time for the nine days of nice weather in London. I know. So let's bust right into it. I'm just curious to give us sort of the state of play in China on the ground, the citizens, businesses, and government officials in their response to the trade war and tariffs.

32:43And what is the general vibe, if you will, in their response and perception of what is going on? Well, it's a great question, Scott. And I was actually in China a month ago at a track two dialogue between Australia and China. So I had the chance to meet with government officials and talk to people on the ground. Barring obviously what has happened in the last 44 hours, I would say that when I was there in the midst of the huge tariff hikes, 50 and then 100 percent on top of the 30 percent or more after Liberation Day, what the vibe was on the ground was that China will defend its position at all costs.

33:16There was a revival of Cold War II Korean war rhetoric about being able to defend against U.S. hegemony. But more importantly than that, there was a confidence that they had the fiscal monitor capacity to offset some of the shock. Now, with tariffs risking at the height of 145%, this was going to be a very daunting task. But I was struck by the fact that, A, the policymakers had spent the last eight years not only aggressively rerouting trade through third-party countries, but finding ways to cushion the blow, as they saw in Trade War One. And secondly, there was this feeling on the ground that there was going to be more policy support, especially for the private sector, for the tech sector.

33:55I saw tech executives being more positive and ebullient about the future pathways more so than in any time since 2018. So that was the feeling on the ground. Obviously, I would say in the last 24 hours, we're seeing remarkable improvement in sentiment, I would say, because we now have a complete diminishing of the risk that was being held for Chinese companies and as well as the Chinese macro situation, which was these exorbitant tariffs. So I would say I was struck by how confident China felt. And comparatively speaking, when I'm in the U.S. or speak to my American counterparts, the reaction is very dismal on the ground.

34:30So it's been a tale of two very different stories. Well, just to that point, didn't Trump blink? I mean, at the end of the day, didn't she basically say, bitch, I'm on top, for lack of a better term, and win? I completely agree with you, Scott. Even though I always like to be contrarian, especially in conversations with intelligent people like you and Ed. I would say that China has become James Dean in that film, Rebel Without a Cause. It won the game of chicken because it had escalation dominance and it had more political appetite to increase the tariffs. And Trump clearly didn't. He had to listen to the Bill Ackmans, the billionaires of the world, who were reminding Trump not only was this going to hurt his base, but shelves would be completely empty.

35:15And I think that he caught an eye to that and he was very much convinced by that. So the Chinese, I think, feel very vindicated in their strategy, which was to do tit-for-tat tariffs, like-for-like. And in the last 24 hours, that position has been successful for China. We've seen Trump obviously blink on these tariffs. And I could foresee even more negotiations downward if these fentanyl talks move swimmingly, which Bessett, for instance, thinks they will. Alice, the reductions that we're seeing on these tariffs, 145%, 30%, those are the US tariffs on China. China bringing theirs down from 125 % to 10%.

35:50Those are supposed to last only 90 days while talks continue. And the thing that I can't really figure out is like, what are we even talking about with China? Like, what deal is supposed to be made? What are we trying to get from China? And what is China trying to get from us? Like, can you give us some color on what these talks are even about and what the goal of these talks would be? Trump ultimately wants a big, beautiful deal. He was pen pals with Nixon back in the 80s. He amized the fact that Nixon went to China and made this big, beautiful deal. So he ultimately wants to see a deal. The people around him, I would say Jameson Greer, for instance, really cares about trade imbalances and market reciprocity.

36:34He will want to reduce the deficit. He will want to increase segmental or sectoral specific tariffs on certain Chinese products, especially in dual use or very tech competitive industries. I could see that happening up to 100 % or more in some of these sectors. And similarly, he will want market reciprocity. Besant is in the same camp, I would say. He would want to see China reducing its restrictions on foreign, especially American investments going into China, allowing more equal participation for US investors in China. And similarly, China buying more American products. So it's not a surprise that Besant said, We had a great deal in phase one.

37:14I think that they will go back to aspects of that, ask China to increase agro purchases and purchases of energy products, and similarly, find ways for China to reduce the subsidies on certain goods, which they believe to be unfair trade practice. Elsewhere, I think that Trump really cares about fentanyl. He will want to see some kind of cooperation on China reducing the subsidies for the precursors to fentanyl. I'm a bit more optimistic now that there could be some kind of cooperation that would enable that discussion to happen. And on the Chinese side... Could you break down, sorry, I just want to, because the fentanyl thing is so confusing.

37:49Could you explain to us, like, what is the actual connection between China and fentanyl? Like, in what sense is China propping that up? So China subsidizes industries that produces the precursor chemicals for fentanyl. effectively creating these cheap fentanyl products that then get flooded into the American market. Now, China says it's cracked down on fentanyl itself exports to the US, but the precursor chemicals are still being produced by China. So I could foresee more collaboration on that front for China to, again, reduce or even cut off all exports of those chemical components. And that would be seen as a win for Trump and for his political base.

38:30On China's side, all that they care about is that they want to achieve a degree of supply chain self-sufficiency, especially when it comes to the harder areas like semiconductors. They want to keep growing and not have these huge trade risks that Trump poses. And they want to extract geopolitical concessions potentially in the long term over Taiwan. That is a long term game. But I think the two first priorities are how do we grow stably and how do we maintain supply chain dominance and resilience? Does rebalancing the trade deficit really get in the way of those goals for China? Like, I'm just trying to think about what a big, beautiful deal looks like for America.

39:12And it sounds like we sort of rebalance the deficit in terms of trade. China just buys more of our stuff. They also get their act together on fentanyl, whatever that would look like. In what sense does that get in the way of China's goals? I actually don't think it gets in the way of China's goals because I think it is in China's interest to rebalance. They've said this for over two decades now, but when push comes to shove, they've been faced with some kind of slowdown or economic crisis, be it JFC, be it COVID, be it Trade War One, and they've walked back on some of these rebalancing efforts.

39:47So I think it's in China's interest, and policymakers are realizing this. When I was in China a month ago, they were starting to say that overcapacity was an issue and that they needed to do more to rebalance. I had never heard them say that before. In previous days, They were saying this was free market competition and the West should be so happy to have cheap Chinese renewable technologies, green technologies. The fact that they're saying that seems to me to suggest that they need to rebalance. They realize that and that actually this is an opportunity for China potentially to buy more American products to address some of that trade imbalance that the U.S.

40:21is rightly, I think, complaining about. And find ways to maybe even invest in the U.S. if Trump and the Republicans allow it. to create manufacturing jobs in the US because China has the logistical, the manufacturing know-how. So I think that the Chimerica relationship has the ability to have a second chapter in its relationship and not go through a full-scale divorce or decoupling. But again, it all comes down to politics, Ed. And that is where I'm not so sure. Yeah, I was going to say, I mean, the way you lay it out, it sounds like a kiss and makeup between the US and China is actually very easy.

40:57I mean, based on everything you've just described there, our goals are not really at odds with each other. So I guess my main dumb question is, what's getting in the way? Like, what's the problem? Why can't we just figure this out? The problem on the Chinese side is that they cannot countenance a massive slowdown in the economy. So instead of going through the, I would say, the American model, for instance, 1930s depression or even World War II, where you saw a massive crisis that then enabled the consumer share of GDP to continue to rise rather than the manufacturing share of GDP, which is why America is now a consumer and services-led economy.

41:39The Chinese are unwilling to countenance that. They don't even want to have a Japanese-style lost decades, which is a slow version of what we saw in America. So instead, they want to walk on this tightrope between rebalancing a little bit here and there through subsidies for consumer goods, like the trade-in appliances. And at the same time, they will increase Chinese exports, increase potentially infrastructure spending on certain infrastructure. And this means that they have this impossible task of balancing the two because ultimately they don't want to go full on in the rebalancing mode, which is something that they recognize that they need to do.

42:15That is a structural bug in the system and it's going to be very hard to shake for political reasons. On the US side, why they can't kiss and make up is because we have different parties with different interests. As we mentioned, Trump wants a big, beautiful deal. As I've said before, he's the biggest dove in a house full of hawks. Besant wants to make sure that people around him and Wall Street are happy, that the markets are happy. And Jameson Greer wants to have a more level playing field. People like Navarro and Lutnik are a bit more crazier, I think, and don't really know what they want to do, which is why we saw the April 2nd tariffs.

42:52So we have really heterogeneous outcomes coming out of the U.S., which, again, is deeply, deeply confusing, not just for us, but for the Chinese as well. My sense is, I mean, it's pretty clear what my bias is. I'm not an enormous fan of the current U.S. president. But when I have I've spoken to some I have some data here. I've spoken to or anecdotal evidence. I've spoken to some European companies who are contemplating working with not only Chinese companies, but divisions of these Chinese companies, including their cloud units, and working with these units that they would have never considered before.

43:26So distinct of how this trade war calms down, isn't this just an enormous opportunity and gift for Chinese companies who are now getting meetings they otherwise wouldn't have had the opportunity to get in Europe and Latin America? I mean, I completely agree. I think Latin America was always going to be under Lula in China's camp. It's not a surprise that Lula is now in Beijing signing a trillion dollars of deals in Chinese investment in Brazil and purchases of Brazilian agricultural products as China, again, tries to diversify away from the US towards Latin America. But I think the real winner is going to be the ability to launch a successful Trump offensive with Europe.

44:04I think Europe was very sickened by Trump's treatment of Zelensky in the Oval Office and its behavior towards Europe, not just Trump, but Vance, their behavior towards Europe since then. And I think Europe, as is its historical want, is going back to strategic autonomy. It's trying to hedge between these two superpowers, China and the US. And I think in this current climate, it is probably veering more towards China on trade, because it sees China as the adult in the room. And I think what's going to be interesting, Scott, at the end of June is two really important meetings. We're going to have NATO at the end of June and then the China-EU summit at the end of June now in Beijing, not in Brussels, because they ultimately wanted to show respect to Xi Jinping, who originally couldn't make it.

44:46So I think this is going to be a real stress test for transatlantic relations. And it could mean that we see further reduction in trade and non-tariff barriers between the EU and China come end of June, which is something that Trump won't be very happy about. He's already saying that the EU could be nastier than China. So I think that the EU is next in the firing line, so to speak. And just moving to the broader Chinese economy, there were reports that felt legitimate that China, this came, the threat of a trade war came at a terrible time for China. That China has some real structural economic issues.

45:19Distinct of the tariff war, talk about the state of the Chinese economy right now. I would say, Scott, the state of the economy is a story of two really divergent Chinese pathways. Number one is what I would call a structural macro slowdown. And that is driven, as you mentioned, Scott, by these challenges, the real estate sector being one of them. But also the fact that private consumption remains remarkably weak, only 40 percent of GDP compared to 70 percent or more in the U.S. and it's structurally going to be very challenging for the government to try to rapidly rebalance and increase the consumption share of GDP, which I'll get to in just a bit.

45:56But its over-reliance on exports, I think, will remain a theme moving forward. It needs to have that export engine, the over-capacity engine, to maintain growth. As long as it has these GDP targets, it will need to have a degree of over-capacity. And I think in this environment of weak and low interest rates, which are favoring the exporters, this is going to continue the financial repression story that we've seen for households for decades. What I would say, though, in sort of counterbalancing towards this is what I would say is a bullish tech story or bullish tech side to China's growth. And I think that this is going to potentially increase some of the rebalancing towards consumption.

46:35The reason I say that is because not only are we seeing more services, some of this geared towards AI and the usage of AI in health care, in elderly care, in retail and manufacturing. But we see these tech companies come up with really inventive ways and to create new markets. I'm optimistic that Chinese tech will be very, very resilient and it will find more ways to be even more self-sufficient and have supply chain resilience. But it could create more products and services that, again, could boost consumption, reduce the cost of certain services and goods. So I'm bullish on some parts of the tech story and bullish in some parts of the consumption boosting story.

47:12But I see these structural challenges still in play. And that means a net disinflation or environment for the rest of the world because China needs to produce more. And if the US is not going to buy it, then it's going to have to export to other economies, maybe the European market, for instance. So it's two very different pathways for China. But I come out from this trade war feeling that the Chinese policymakers have more resolve to, again, expedite some of these structural trends towards consumption. And in case of of backlash against overcapacity to reroute through these third parties. We saw 20 percent year-on-year increases to exports to ASEAN.

47:49I think that this will continue to gear up as they try to avoid any future tariffs from the Americans. Stay with us.

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50:27We're back with Profty Markets. My sense is that China, even before this tariff or trade war, was divesting away from the U.S. I believe the percentage of their exports had fallen from 24 % to 17%. Is that a concerted strategy that we just, they're not good partners and we need to divest away from the United States? Is that, is it, is it, which I think is a terrible thing. I think the less, the less inextricably linked we are, the more likely we are to declare war on each other or, or take bigger risks with each other. But could we see that 17 % number drop to single digits in the next few years?

51:07So Scott, I love this question because I think we always need to look beyond the data. So back in 2018, we saw the US share of Chinese exports being 20%. It's now around 14%, if not under. That is not the full story because the Chinese surplus, trade surplus to the US has increased quite a bit since 2018. So what we've actually seen is that China is rerouting its trade through other parties in Latin America and Southeast Asia to, again, they call it tariff washing, to avoid some of these tariffs or restrictions that the Americans have put into place. So that number, I think, again, is a bit of a misleading number.

51:46And again, we shouldn't forget that if we just look at the trade imbalances, China is a bigger trade surplus-running country with the rest of the world and the US than it was in 2018. Again, it's a sign that it doubled down on this export engine because, as you mentioned, Scott, consumption wasn't doing well, local governments were debt-ridden and needed to pay their debt burdens, and the real estate sector was suffering. So I think Chimerica has become even bigger. The divorce settlement has become even bigger. But what Trump has shown today, or rather yesterday, is that he can't afford this divorce settlement because China keeps increasing the stakes.

52:22Coming out of this war, we tend to talk about who loses or gains more. And I think a lot of people are coming to the conclusion that over the medium and the long term, China is probably going to get the better of the deal. But distinct of what's good or bad for the U.S. or China with respect to this tariff war, who do you think are the other big winners and losers? It feels like Europe will be a big winner because it seems like the Chinese are excited or ambitious to establish better relations with them. But are there other nations in Southeast Asia that vis-a-vis this trade washing, or I think that's the term used, are just sort of unnatural winners here, are going to do really well?

52:55Like trade off of selling bullets to the warring parties, so to speak? Yeah, that's a great question. I think in Southeast Asia, it has to be India because Apple and other companies are going to continue to diversify the supply chains and find alternatives for their components outside of China. And this is already happening. I think this wraps up quite exponentially the plans to, again, move some of the factory processes to India. I think Vietnam and Indonesia and Malaysia, again, when it comes to final assembly or even manufacturing, will be beneficiaries. We've already seen massive greenfield investments from Chinese companies.

53:33I think that that continues in those countries in particular. So we should see a ramp up of their manufacturing output going to developed economies, including the U.S. And in Latin America, I think Brazil is going to be a huge beneficiary. It's not a surprise that Lula is in Beijing signing that deal. We've seen in the last few years Brazil overtake the U.S. in terms of being the biggest exporter of wheat, soy, and corn to China, which is their biggest market. So I think some of the Latin American agro-producers are going to be beneficiaries of this as China again tries to diversify away from the US.

54:07And similarly, I think that Europe could extract certain concessions. This is why I'm bullish at the end of June that there could be some kind of a deal over EVs or even Chinese investment in Europe. There's been discussion about potentially launching price minimums to get rid of these tariffs, this 40 % and onwards tariffs on Chinese EVs that the Europeans have imposed. And similarly, I could see the Chinese being more lenient on some of these tech transfer details for Chinese companies to effectively enable IP transfer to their European counterparts and partners when they establish factories in Europe, especially relevant for batteries and other EV components.

54:44So I'm bullish that there are some beneficiaries in all these different regions. But again, I think that America had its chance, Trump under Trump, to really squeeze China when it comes to trade and even some of these tech sanctions. But again, because Trump blinked, I think he rendered that null and void. So Alice is the Chinese analyst for GreenMantle and advises people at the highest level around their investments and their strategies. I've been actively looking at European and Chinese stocks, and I'm absolutely fascinated with BYD. I just can't, you know, I see these TikToks of every single, you know, I see the performance of a car that seems to be superior to cars that cost four times more.

55:31I'm curious what you think of BYD, what it says about Chinese manufacturing, if it has the same, talk about the BYD phenomena. What do people locally think of the brand? And what does it say about the state of kind of Chinese manufacturing right now. And I'm fascinated with this company. I would love to get any color you might have on it. Well, Scott, you should, you know, I've got people in the region, so you should definitely go and visit. We can get you into an EV if you want in China very soon and give it a test drive. But on the ground, I mean, it's one of the huge success stories. And I think that they've pressed play on autonomous driving, which is potentially going to give them even more upside when they begin to roll that out in China and then globally.

56:14And beyond that, I was reading an interesting diagram of the way in which BYD is involved in so many different industries. And this is a way in which I think Chinese manufacturing can be seen as more competitive and advantageous, is the fact that you've got companies like Huawei and BYD that don't just produce cars or smartphones. They're involved in LIDAR. They're involved in AI. They're involved in semiconductor to R &D, the fact that you have companies that are basically like the Intel's or even the Ford's or the Tesla's of the world doing many different parts of logistics and components, I think is deeply, deeply impressive.

56:50And I could see them being extremely competitive outside of China in other countries outside of the US. Obviously, the US will continue to have restrictions on China, but I could see definitely more upside for these companies like BYD moving forward. And to your point, Scott, if you look at the forward multiples, I was looking at it today on Chinese companies, they're around 12, still very low by historical standards and much lower than Japan and India. I could see a lot of upside in Chinese tech companies moving forward. Last question from me, Alice, sort of similar to Scott's question. The predominant theme so far this year has been basically sell America, question mark.

57:29And that's sort of the economic geopolitical markets question every investor is asking. this year. And it just, you know, brings up this question, like, how is the world order going to shape up? And how did the tariffs going up and then coming down affect all of that? Given everything you've seen this year, the election, the tariffs, the fact that the tariffs just came down, what's happening in the markets, if you had to put your money on one country, and we'll call it over the course of like 20 years, between America and China, which country would you bet on? Well, at the risk of being facetious, Ed, can I say Chimerica, if that country still exists?

58:08Yes, okay. Because the two, again, back to this relationship in which they just reinforce each other because one side's strengths is the other side's flaws. When I think about Chinese tech manufacturing capacity, China is undoubtedly the leader, and I think it will continue to be so. Basically, it's astounding that China has quietly met or even surpassed all of its made-in-China 2025 goals, even though it's not talking about it anymore. I remember back in the day in Tribal One, where there was a huge backlash, China silently achieved many of those goals. And meanwhile, in the U.S., I still think that the U.S.

58:45has a degree of exorbitant privilege. It's going to be very hard to fully rotate out of the U.S. The fact that stocks now, the S &P, are above April 2nd and maybe even will come up to an all-time year-to-date high suggests that people are trying to get back into the U.S. It's not fully convinced that this is the end of U.S. hegemony and that there's still an appetite for U.S. assets. I'm still bullish long-term about the U.S. in terms of its knowledge economy, in terms of immigration. When it gets its act together, like with the COVID vaccine, it does it very, very well. And again, remains a strong consumer-driven economy in the way that China isn't.

59:27So at the risk, again, of sounding facetious, I would say I'd put my money on China-America. It's hard to see any other economy, even EU, competing with that. I think the Europeans, even although people were saying buy Europe earlier this year, have faced a big hurdle with Merz's fiasco, you know, he finally got elected. but it showed underlying weakness in Europe. And I think Europe is next when it comes to tariffs. So I would say China-America, if that's at all possible. That works for me. Alice is a China economist and director at Greenmantle, a global macro and geopolitical risk advisory company.

59:59She graduated in history and economics from Harvard and holds a master's in East Asian studies from Stanford University, where she focused on Chinese political economy and fintech. Alice, always learn so much from you. Thank you for joining us. Alice, just one quick thing. I think it's really important to point out that we discovered you. We discovered you. I know. I was going to say, can I make that publicly known somewhere? I've got so much, I'm against the digital equivalent of fan mail on LinkedIn and whatnot, thanks to you guys. So I really appreciate that. Where I'm headed with this is when Ed needs a job and Scott needs help finding a nursing home.

1:00:41Remember, we discovered Alice Hahn. Lily, your views. We have these like old white guys with all these credentials on the pod. They get like 15 ,000 views. And Alice Hahn comes on and you get 200 ,000 views. No, but I thank you guys. I mean, I'm used to being in the rooms with old white men who are twice my age. It's the norm now. It's the norm. Yeah. Anyways, congrats on all your success. And thanks for your great work on this show. Yeah. Thanks so much, guys. Appreciate it. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Mir Silvario is our research lead.

1:01:20Isabella Kinsel is our research associate. Dan Shallan is our intern. Drew Burrows is our technical director. And Catherine Dillon is our executive producer. Thank you for listening to Property Markets from the Vox Media Podcast Network. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.

1:02:04And the dark flies in my eyes

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1:03:12Support for this show comes from Airbus. It took 100 years for electric vehicles to catch on. Modern solar panels? Half a century. Lithium batteries? Decades to go from their debut to daily use. It's a pattern. Energy tech breaks through, stalls, and then something tips the scales. But for every success, there are even more almosts. So what if there was a breakthrough sitting at this crossroads right now? SAF, or sustainable aviation fuel, could forever change the future of flight. Learn more about how Airbus is contributing to accelerate this journey at fly.airbus.com slash theflightpath.