This week on the Trivium China Podcast, host Andrew Polk is joined by Trivium’s Head of Geopolitical Analysis Joe Mazur to unpack one of the most consequential – and potentially misunderstood – issues emerging from the recent Xi-Trump summit: Taiwan.
While both Washington and Beijing have publicly insisted that little changed during the meeting, Joe argues that several comments from President Trump may signal a meaningful shift in how the White House approaches Taiwan – one that could introduce greater uncertainty into an already delicate cross-strait equilibrium.
The conversation explores:
Why Trump’s comments on Taiwan have generated concern despite official claims of policy continuity
Whether the administration is beginning to treat arms sales to Taiwan as a broader negotiating tool in US-China relations
How Beijing may interpret Trump’s increasingly transactional approach to Taiwan
Why even a simple phone call between Trump and Taiwan leader Lai Ching-te could trigger a major response from China
The key signals analysts should watch for to determine whether Beijing’s Taiwan policy is truly changing
Then, in the second half of the episode, Andrew is joined by Trivium’s Head of Markets Research Dinny McMahon to examine an emerging priority in Beijing’s economic strategy: “producer services.” While the term may sound obscure, Dinny argues it sits at the heart of China’s effort to move up the global value chain and build world-leading companies.
Their discussion covers:
What producer services are and why Chinese policymakers are suddenly focused on them
How Beijing hopes to create more Chinese versions of companies like Apple and NVIDIA
Why Xi Jinping increasingly sees services as a way to strengthen – rather than replace – manufacturing
The role of design, engineering, R&D, logistics, and branding in China’s next stage of industrial development
How producer services could help address China’s youth unemployment challenge
Whether AI will undermine Beijing’s plans to create more high-value white-collar jobs
Taken together, the two conversations offer a window into how China’s leaders are thinking about both the country’s most sensitive geopolitical challenge and the next phase of its economic transformation.
Transcript
Andrew Polk: Hi, everybody. Welcome to the latest Trivium China Podcast, a proud member of the Sinica Podcast Network. I’m your host, Trivium Co-Founder Andrew Polk, and I am joined today by Trivium’s Head of Geopolitical Analysis and Research, Joe Mazur. Joe, how are you doing, man? Good to have you back on the pod.
Joe Mazur: I’m doing great. I’m in a good mood. Tired, but happy, basically.
Andrew: I appreciate it, man. Well, I appreciate you joining me late. For our listeners, it’s 8.40 p.m. in Beijing, where Joe is, on May the 27th; 8.40 a.m. in the U.S., where I am. So, Joe, appreciate you sticking on late for this, man.
Joe: Yeah, happy to do it so I can enjoy your august company.
Andrew: Well, we are going to talk a little bit more about sort of the Xi-Trump meeting. We want to get beyond the Xi-Trump meeting. We’ve done sort of two podcasts. This will be the third that’s sort of relevant. But the big reason I wanted to have Joe on is he wrote a piece for our subscribers about Donald Trump’s kind of comments and the wider U.S. administration’s comments on Taiwan, as well as, of course, China’s perspective on Taiwan, which hasn’t really changed much.
But arguing that while they are saying that U.S. policy hasn’t changed, there actually seems to have made some pretty major adjustments if seen through. And we’re not sure, we’ll get into the details, of course, but not sure whether some of these adjustments were Donald Trump just speaking off the cuff or whether we should really be thinking about a change in U.S. policy, but any kind of changes in that sort of unstable equilibrium can obviously cause quite a bit of chaos. So, it was a great piece. I wanted to get Joe in and talk us through it.
And then for listeners, on the second half of the pod, I’m going to talk to our Head of Markets Research, Dinny McMahon, about a piece he wrote on producer services, which sounds like a snooze fest but is actually really important. We think Beijing is investing on this. And when we talk about producer services, what we’re talking about is trying to build companies like, for example, Apple, who do a lot of really good design work that then goes into their industrial processes and makes everybody want to buy an iPhone, right?
So, this is services that industrial producers can do to make their products and brands more competitive globally. So this is China wanting to build really strong global brands. So that’ll be interesting as well. So, stick around for that. But before we get into all of it, of course, we have to start with a customary vibe check. Joe, I know it’s late in Beijing, but how’s your vibe right now?
Joe: Yeah, I’m going to say the vibe is quiet, too quiet. I think in the aftermath of the Trump meeting and the Trump trip, you had that initial, you know, crazy rush of analysis. And then since then, I mean, obviously, stuff is still popping off in Iran. And so, we’re waiting to see what happens there. But sort of in the directly China-adjacent policy verse, it’s been just sort of like back to the pre-2019 days of just kind of writing about developments day by day at a fairly steady pace instead of perpetually drinking from the fire hose. So yeah, that’s my vibe is quiet, too quiet.
Andrew: It’s a strange feeling, right? You’re like, oh, when are we going to get…?
Joe: Yeah, it’s suspicious.
Andrew: Well, that actually reminds me. We should have said this on the pod before, but for listeners who are also readers of Trivium’s work, there’s a good chance that at some point over the past 10 years, can you believe we’ve been doing this 10 years? That’s crazy. And Joe, you’ve been with us since 20…
Joe: 2019.
Andrew: 2019.
Joe: 2019, yeah.
Andrew: So you’ve been doing it for seven years with us. There’s a good chance that if you’ve ever chuckled, there’s a good chance that you’ve chuckled at something we’ve written because we try to like view a little bit of humor. And if you’ve ever chuckled at something we’ve written, there’s like a 90% chance that that line was written by Joe Mazur. He’s not only our chief geopolitical analyst, but also our punter in chief, I guess. For example, he’s had a lot of bangers over the years, but for example, he was the one who came up with the title of our weekly a couple weeks ago, which was, this state visit could have been an email, which I then also have to point out to listeners who may not know, that joke was also made on Saturday Night Live, basically verbatim. And so, we’re waiting on our royalty checks.
Joe: Yeah, the lawsuit’s pending.
Andrew: Yeah, exactly. But that’s a little inside baseball for listeners. But you have Joe Mazur to thank. So, Joe, thanks for your wit and witticisms over the years as well.
Joe: Yeah, it’s the very least I can do.
Andrew: That’s my vibe today, Joe, it’s thankful for your humor. How about that?
Joe: I do like that. I can live with that.
Andrew: Great. Well, great vibe check. Love a little inside baseball. Want to get to the meat of the discussion, of course, but we also have to do the quick housekeeping as well. First, a quick reminder that we’re not just a podcast here. Trivium China is a strategic advisory firm that helps businesses and investors navigate the China policy landscape. That, of course, includes policy towards China, Western capitals like D.C., London, Brussels, and others. So, if you need any help on that front, either policy towards China or Western capitals or domestic policy in China, that may impact your business or your fund, reach out to us at hq@triviumchina.com.
We’d love to have a conversation with you and see how we can support your business or your fund. Otherwise, if you’re interested in receiving more Trivium content, check out our website, again, www.triviumchina.com, where we have a bunch of different subscription options. We’ve got free options, paid options, options for markets, options for tech, options for the general China watcher/sort of corporate executive that needs to know the lay of the land. So, check that out. You’ll definitely find the China policy intelligence option you need on our website. And finally, please do tell your friends and colleagues about Trivium.
As always, we always say it, everybody says it, but it is true — the more you tell people about our podcast, the more you tell people about our company, the more we grow, and we appreciate it a lot. And it really means a lot in terms of a recommendation from a trusted colleague. It goes a lot further than just seeing Trivium randomly on the internet or in the news or whatever. So, please don’t hesitate to do that.
All right, that’s the intro. Joe, why don’t you kick us off? Just set the stage for us in terms of maybe some of the commentary that happened. Okay, I talked a little bit with Jon Czin last week about kind of Taiwan’s role in the Xi-Trump meeting, but why don’t you tell us a little bit about that and maybe some of the comments that were made by Trump himself and the administration afterwards, and then we can get into the analysis of it all.
Joe: Yeah, so during the meeting, I guess I should back it up first, in the lead-up to Trump’s visit, I think there was a lot of, obviously, maybe anxiety, a lot of questions about what the meeting would herald for Taiwan. I think that there was kind of this concern that Trump would sell out Taiwan for a song and a dance and then give away some kind of major concession in exchange for something that wasn’t really that important. And I think those anxieties were maybe not unfounded, but I think always kind of on the unlikely end of things to happen, especially in the context of this visit where expectations were fairly low going in.
And it ended up being more of a get-to-know-you, an icebreaker, the beginning of a process rather than the culmination of one. And so, as it was, Xi Jinping brought it up and said that it’s the most important issue. Taiwan is the most important issue in U.S.-China relations. And if it’s not handled appropriately, it could lead to conflicts. And it’s just a really sort of forceful restatement of China’s long-held position on Taiwan and where Taiwan fits in the broader U.S.-China relationship. So, no surprise there from the Chinese side. I mean, it really kind of put me in mind of somebody trying to get a concept through to a particularly dull student, really just trying to hammer this point out — This is serious. We need to take it seriously.
In the initial reactions from the American side also gave the impression that nothing much had changed. You had Marco Rubio talking to, I forget who it was, I think it was CNBC maybe, if I’m wrong about that, my mistake, but basically saying that no, there had been no policy change on Taiwan. And then Trump himself speaking to the Fox News, he was asked point-blank, “Has anything changed?” He said no. He said, I will tell you this, he made that comment about, “I don’t want anybody going independent.” I don’t want to be in a position of fighting a war 9,500 miles away from the U.S. And I think that was broadly in keeping with U.S. policy, depending on kind of your reading and your inclination.
You could argue that that was sort of a less ambiguous position than in the past. He was saying, I really don’t want anyone going independent. That’s maybe closer to opposing independence, which is the language that China wanted, as opposed to not supporting independence. I mean, kind of this whole thing is sort of a semantic minefield. There’s a lot of very, very small nuances of language that carry a lot of meaning, especially on the Chinese side. But then you’re also dealing with Donald Trump, who is somebody who doesn’t tend to use words very precisely, who tends to speak off the cuff.
And so, without being dismissive, and just saying, oh, he doesn’t know what he’s talking about, you are put in a difficult position of having to parse, what does Trump mean when he says X? How does he feel about Y? And so, I mean, if you just kind of look at that portion of the interview, the comments from Marco Rubio and from Donald Trump, it suggests that there is broad continuity on American Taiwan policy, right? Nothing has really changed. But later on in the interview, Trump said a number of things that kind of do indicate that maybe certainly he views Taiwan in a different light than previous administrations, and that he might be willing to act on it in kind of a different way from previous administrations.
Andrew: Yeah, just quickly, sorry, before you go on there, a quick comment, and I don’t want to interrupt your flow. But I think it’s very Trump in a way, where sort of it’s kind of all things to all people when he says, “I’m not looking to have somebody go independent,” that’s the exact quote, which, if you’re someone who’s arguing for continuity, you’re saying, “Yeah, of course, he doesn’t support independence.” And then if you’re China, maybe you hear he opposes independence. But I’m not looking to have somebody go independent, as you say, is not the most precise language in the world. So, that’s what kind of brings us to this situation where the administration and people in the administration, who also probably don’t really know what Donald Trump is thinking, can very clearly make the argument, you know, it’s continuity, nothing’s changed. The president was very clear.
But then there’s everything else that you’re about to say that supports maybe actually something different is afoot. So sorry, I just wanted to throw that in there quickly.
Joe: Yeah, well, so I’ll start with the language that we already know about or the cause that we already know about, which is that Trump has this massive chip on his shoulder about Taiwan having “stolen” the U.S. semiconductor industry, right? This is something that he’s talked about frequently. He imposed tariffs on Taiwan kind of as part of Liberation Day, but kind of the specific view to bringing semiconductor manufacturing back to the U.S. And now you see TSMC opening plants in Arizona. But clearly in the Trumpian world of dealmaking, he feels that that Taiwan has, in effect, screwed the U.S. as far as that goes.
So, that’s something to kind of think about, whereas previous administrations view Taiwan in the security context, maybe like an ideological context, if previous administrations felt that they had been screwed by Taiwan on semiconductors, I think that was a thought they kept to themselves. And so, I mean, that’s something to kind of consider as we talk about what we’re going to talk about next. But then when he was asked about the arms sale, this pending arms sale to Taiwan, which was kind of on the docket before the visit and was held off on because simply the visit would not have happened. It’s this record-breaking $14 billion arms sale to Taiwan that was up for discussion.
He was asked about that, and he said, “I’m holding that in abeyance. It depends on China. It’s a very good negotiating chip for us.” Now, that’s different. That’s unprecedented. I want to caveat it by saying, yes, every administration ever has kind of read the room with regards to U.S.-China relations and approved or not approved or held off on arms deals to Taiwan kind of on that basis. But to explicitly call it a negotiating chip and to say it depends on China, that’s putting a level of agency on China in regard to this arms deal that, as far as I know, China’s never been part of the discussion to that extent, at least sort of in an acknowledged way.
So, that’s very interesting. And it’s worth keeping in mind that the Taiwan Relations Act requires the U.S. to provide or to sell weapons to Taiwan to provide for its defense. It’s not a favor that the U.S. is doing for Taiwan. I mean, it is in the sense that it’s something that Taiwan needs, but it is law-bound to do this. And to then kind of say, “Oh, well, it’s a negotiating chip,” again, there’s probably always been some level of wheeling and dealing on sort of the security dimension. But in terms of kind of making it a broader negotiating chip, that is something that I don’t think we’ve seen before.
Andrew: Yeah. And can you just, for listeners, be a little bit clearer on what you mean by China has not been kind of brought in in this way? I mean, you mean the considerations of what China wants have not played into U.S. conceptions of how many arms to sell to Taiwan and when. Is that right?
Joe: Well, what I mean is that previous administrations will have said, “Okay, we’re at a critical moment in U.S.-China relations. Better hold off for now. Or we don’t think this is a particularly sensitive sale, so we’re going to go ahead and do it.” There have been those internal discussions. But what it sounds like to me, and again, you’ve got to take Trump’s commentary with a grain of salt and with the understanding that he is kind of imprecise and inexact. It sounds like he’s offering China kind of a proactive role at the negotiating table saying, “What we do depends on the deal that you strike with us.”
Now, when he says a negotiating chip, that’s open to interpretation, right? Does that mean a negotiating chip in defense terms, in commercial terms? Is potentially a little bit more worrying. But it’s to explicitly call these deals a negotiating chip, I think, certainly represents a departure from what a U.S. president is willing to certainly admit. But I think also just in terms of the logic that he approaches the Taiwan issue with, that seems new to me.
Andrew: Yeah. Okay. And then you’ve also noted that Beijing is also signaling that future U.S.-China dialogues may depend on how the White House proceeds with this sale as well. So, what has China been signaling from their side around that?
Joe: Yeah. So, the reports that I’ve seen says China reportedly has made the hosting of an upcoming U.S. Defense Department delegation contingent on the way the Trump administration handles this possible $14 billion arms sale. So, meaning that the delegation will likely go ahead so long as the arms sale does not. And what has been reported is that this visit is going to pave the way for a future trip by Defense Secretary Pete Hegseth, which, first of all, is interesting in the fact that he’s planning a trip back to Beijing so soon after having just left.
And again, to be clear, China kind of making diplomatic contact contingent on what the U.S. does with regard to Taiwan, that’s also not new. But what’s interesting is that, shortly after this was reported, Acting Navy Secretary Hung Cao, I’m not sure how he pronounces it, he told Congress that the administration was pausing the sale in order to preserve weapon stocks for use in the Iran war. Now, that might be exactly what’s going on. Maybe they do need those weapons for Operation Epic Fury, but it’s also quite convenient that at the same time, these effectively kick the can down the road on this arms deal at a moment when China’s saying, don’t do it.
So, again, it’s a little bit murky. It’s hard to say whether or not this was a direct response to that Chinese admonishment, but certainly it could be read that way.
Andrew: Yeah, the optics certainly are not good. And it does strain credulity, let’s say, to say we want to make sure we’ve got these extra weapons around. When he also says in the statement, he says, we have plenty, but we’re just being double cautious.
Joe: Yeah, we have plenty. We don’t need to save any, but we’re going to save some up. So it’s just, I don’t know, and again, how much of this is a sort of Trump administration posturing and how much the issues are actually at play, I think, is a little bit hard to parse. But yeah, the optics are interesting, to say the least.
Andrew: So then, all right, next step, there’s a few more developments to go through. I guess let’s put those in the context of is this kind of good news or bad news if you’re sitting in Beijing, sitting in Zhongnanhai, thinking about Trump’s transactional approach. I think, obviously, the leadership in Taipei is worried that they’ll get, as you said, kind of traded away for some other interests. But at the same time, the transactional approach can make Trump quite mercurial, or at least feed into his mercurial aspects. So talk to us about kind of maybe how Beijing is thinking about this, and then kind of the very last development that may be raising their eyebrows.
Joe: Yeah. So, I mean, based on everything that we’ve talked about so far, that all sounds like good news from China’s perspective, the fact that or the possibility that you could make a concession on something less important. I mean, in the context of China’s policy priorities, ultimately, almost nothing is more important than getting what it wants on Taiwan. So, I think the idea that you could craft some kind of package so enticing that you could negotiate a reduction in U.S. support for Taiwan certainly seems like good news, right?
The problem is what Trump said on Air Force One on his trip back to the U.S., which is he was asked by journalists about what he discussed about Taiwan. He said he had a very good understanding. He said no one understands Taiwan better than me or something to that effect. And then said that he planned to call, I have to find the quote…. I would have to speak to the person right now who’s running Taiwan to discuss the arms sale.
Andrew: Which is just such a hilarious phraseology.
Joe: Yeah, it’s 100% guaranteed he forgot his name. And in case you were wondering, yes, we’re talking about Taiwan’s leader, Lai Ching-te. He’s a pretty important player in kind of this whole drama. But, you know, that person who’s running Taiwan, he sounds like he could be out of the mainland’s Taiwan affairs office, to be honest. Okay, so here’s why that’s a problem, though.
Andrew: Sorry, sorry. I also maybe think to give Trump some credit here, like I think that’s also probably like it’s been drilled in his brain. You don’t refer to him as the leader or the president, right? Because there’s one giant two system or whatever. So, maybe his way of kind of remembering that piece of it, but also not knowing how to refer to the guy in real time and so just say whoever’s running Taiwan. In that way, it’s pretty clever.
Joe: If that’s the case, I could almost sympathize with him a little bit because who amongst us hasn’t been in a situation where we’re talking about, oh, you know, the guy with the thing? But anyway, the problem is, if you call that guy who’s running Taiwan, that’s unprecedented. Because no sitting U.S. president has ever talked to a leader of Taiwan since the U.S. normalized relations with China in 1979. And so that would be like the biggest protocol breach you could imagine. And Trump has already gotten close to this once before. Because as president-elect, I think shortly after he was elected in 2016, the then leader of Taiwan, Tsai Ing-wen, called him and he accepted the phone call.
And that one, I can kind of almost, you know, maybe his team wasn’t kind of in place yet to advise him on the ins and outs of China policy, I don’t know, but he’s already come close to sort of breaking that taboo. But to do so as a sitting second-term president, that’s sort of a, from China’s perspective, an absolute no-no, a massive protocol breach. And something that I think that they’re going to feel compelled to respond to, certainly verbally, perhaps with a military drill, which is kind of their want whenever they feel that Taiwan is trying to cross one of their red lines. And that speaks to the fact that this transactional, unpredictable way that Trump treats Taiwan and many other things, for that matter, cuts both ways.
So, if you have the ability as China’s influence the outcome in your favor, but there’s also the possibility that he’s going to do something that goes completely against your interests and confers undue dignity from China’s perspective on this leader. So it is quite dangerous. And I think the irony…. Oh, sorry. Go ahead, Andrew.
Andrew: Well, I was just going to say, you know, speak to how China may think about the idea that, I mean, maybe Trump calls up Lai and says, “Hey, cool it.” Basically kind of gives him, for lack of a better way of putting it, like the kind of PRC talking points and says, “I don’t want this headache.” And sort of like we understand he did with the Japanese prime minister when Japan and China’s most recent spat or more than spat was kicking off, you know. So, there’s also totally the possibility that if Trump and Lai were to speak, it would somehow be in Beijing’s interests.
But kind of speak to that possibility. That’s still probably not a risk worth taking from China’s standpoint, right?
Joe: Yeah, that’s correct. I think you’re right. If he does call Lai, he probably will do so and just say, “Hey, chill out,” which is effectively the same thing that China has been trying to say to Lai, along with a lot of other messaging as well. But even so, again, going back to kind of the China is very conscious of protocol, its use of phraseology kind of in general. I mean, how much of our time do we spend kind of parsing, okay, they use this character and not that character, which they changed from last year. But especially around something as sensitive as Taiwan, every protocol, every bit of language matters.
And even if Trump does just get on the phone to Lai and just essentially repeat Chinese talking points, that’s still going to be unacceptable, right? I conclude this piece by telling everyone not to panic, which I feel like I spend a lot of my time, and we as a company spend a lot of our time telling people not to panic about Taiwan, and I think that’s still true. But the problem here is that so much of the way that these three parties act is kind of guided by norms and precedents. And when you start diverging from those norms and precedents in favor of one party or the other, it creates instability that wasn’t there before. It blurs where the lines are, and it could possibly lead to miscalculations.
It could lead to one side or another taking risks. And so, I think that one thing that we also say to clients a lot is that China has a lot more tolerance for the status quo in cross-strait relations than many people give it credit for, right? The line that we always use, which I think is a great line, is that it’s a risk to be managed, not an opportunity to be seized. And I think that when U.S. policy is consistent, they say their piece, China says their piece, that’s when cross-strait relations tend to be at their most stable. Now, obviously, Taiwan is an agent in all this too. I don’t want to discount Taiwan’s agency. But ultimately, the mainland is going to behave in a fairly predictable way. Taiwan is going to behave in a fairly predictable way within the context of their two-party system. Trump is, if anyone’s not going to behave predictably, it’s going to be him.
Andrew: So I want to press on that a little bit, the piece on Taipei’s perspective and what they might do. You know, you make a great point that I keep calling this an unstable equilibrium, which means if anything gets knocked, like an unstable equilibrium like holds temporarily, but it’s very fragile, right? And so, to your point, if any one actor changes their approach, it can change the risk calculation, the approach of another actor, which then kind of can spiral or can just change the entire calculus for everybody.
But you wrote in your piece that also specifically if Trump and Lai were to talk, but even if they aren’t, if it now becomes more actively negotiated, well, Taiwan has cards to play as well in terms of not only around the potential arms sale, but a closer relationship with Washington via potentially saying to Donald Trump, well, we will invest in and help you build a U.S. semiconductor industry, right? So kind of talk through how you think about that piece of it.
Joe: Yeah, I mean, that’s basically it, is that when it’s a negotiation, you’ve got essentially, I think, possibly the way that Trump views this, there are two bidders. China’s made its spiel, maybe there’s going to be sort of economic inducements that China offers to get Trump to behave in a certain way. But Taiwan has leverage, too. I mean, one point that I probably should have made clearer at the outset about this arms sale, the problem is its size, right? This is going to be a record-breakingly huge arms sale, and it’ll be the second one in a row, if I’m not mistaken, because the one in December was, I believe, around $11 billion, which was record-breaking for the time, right?
So, maybe Taiwan has an incentive to say, all right, well, China is… I mean, they’re not going to frame it as quite such a one-to-one, and the auction analogy is just sort of a, it’s not really how it’s going to happen. It’s more just kind of a way of thinking about it. Taiwan could say, “All right, well, we want to purchase even more arms. We want to do an even bigger, more beautiful deal.” And such a big, beautiful deal is exactly the kind that’s going to worry China, right? And Trump is a fickle guy when it comes to international relations. I mean, remember, I guess about a year ago, kind of his back and forth with Putin and Zelensky.
And one was on the outs and the other was in the good books. And then within a week, it changed, right? And so again, this is maybe a little bit of a different situation. But at the same time, Taiwan has agency to kind of make its own case for why the U.S. should sell it bigger arms packages, why the U.S. should hear it out as an active participant kind of in this three-party equilibrium. Again, the rebuilding of the U.S. semiconductor industry is something that would, I think, massively, does massively appeal to Trump.
And again, it’s very hard to say what specific contours this will have going forward or what specific approach Taiwan or China will lead with to get more of what they want from Trump. But if everything’s a negotiation, then negotiations have been over. And that does imply a level of flexibility, a level of unpredictability that I think perhaps hasn’t existed for quite some time.
Andrew: Yeah. And one final question on the negotiation point, which, from China’s perspective, which is going into this meeting, I myself and a lot of people have thought that potentially China would try to link some sort of offer on the Iran situation in terms of pressuring Iran to do more of a ceasefire or find an off ramp for the war or open the Strait of Hormuz or whatever to some sort of softening of language on Taiwan. And I saw that you all, I think, started by you had an internal Slack chat about this, but I also saw Ryan Hass at Brookings talking online about that was never going to happen because China doesn’t want the Taiwan issue linked with other issues because it is a non-negotiable.
Just by saying like, “Oh, we’ll give you some on Iran if you give us some on Taiwan,” sort of almost like reduces the primacy of the Taiwan issue in terms of the Chinese approach. And so, he was saying like, they don’t negotiate with this. And I don’t know if your internal conversation was sparked by Ryan’s comments, but I thought that was a really good point by him. And I just know you guys also talked about it, wanted to see where you landed on it.
Joe: Yeah, it was kind of a topic of debate. I think the question that we posed was that, from China’s perspective, does kind of agreeing to treat it in a transactional way cheapen China’s position or harm China’s position. And so we discussed it a bit. And I think there is precedent for China treating the Taiwan issue as something that is transactional. I think probably the best example that you can see is the fact that China has, in a lot of respects, bought off a lot of countries that previously recognized Taiwan, kind of recently in Central America and the Pacific.
I guess you could argue that it required those countries to make the first move before it reaped the benefits of Chinese investment that was linked to that. And I would have to look into it to see how explicitly China linked its uptick in aid to revoking recognition from Taiwan. But I mean, there’s an obvious quid pro quo at play there. You know, I think the Iran question is maybe different because that’s a huge wasp’s nest, which China wasn’t really eager to wade into anyway. But I think that, certainly, the Chinese side is going to be studying what they could conceivably give and what they could conceivably get.
I think they’ll proceed with tremendous caution, and I don’t think that they’re going to wade into other sort of geopolitical hornets’ nests with the expectation that suddenly the U.S. will change position on Taiwan, especially because Trump is sort of unreliable as far as that goes. He doesn’t always do what he says. But I think that there is some scope for China buying into this transactional approach and maybe kind of thinking about what it can give in exchange for some kind of concession.
Andrew: Yeah, good points, all good points. Last question, then. You’ve touched on it a little bit, which is to say kind of how we think about this with clients, and to say it’s more of a risk to be managed but an opportunity to be seized. But why don’t you just wrap up with any sort of concluding thoughts around how people, generally, listeners, clients should be thinking about this issue, particularly in light of everything we’ve just said with potentially new variables introduced here. I think we’ve still both believe it’s still pretty low risk that Xi Jinping is going to “ try to take Taiwan.” But give us a good framing for how we should be thinking about this issue.
Joe: I would say just kind of look for any indication that precedents are being broken. In recent years, China’s had a fairly standard playbook when it comes to what it sees as provocation. They’re emanating from Taiwan or related to Taiwan initiated by another party. And that’s usually to hold the drill. There’s usually some statement from the Taiwan Affairs Office. And that’s usually as far as it goes. I think if we start seeing kind of an increase in the scope, a difference in the type of drills that are being conducted, that’s certainly something to monitor. That in and of itself is not necessarily time for crisis panic mode, but it is something to monitor. I think the biggest thing is to keep an eye on the language coming out of Beijing.
This is something that we focus on every two sessions, every kind of important anniversary with Taiwan. We’re always checking to see if there’s been any kind of change in language, right? Right now, it’s about peaceful reunification, but also never accepting Taiwan independence, and kind of all the set phrases. If those set phrases begin to change, then that’s maybe an indication that Chinese policy is changing. That is almost always how it goes to the major shift in policymaking in China is that it’s presaged by a change in the language used to talk about it.
From the U.S. side, obviously monitor what the U.S. government is saying and what Donald Trump is saying. I think that our listeners, if they’re basically familiar with the sensitivities around Taiwan, they’re going to have a decent sense of what is taboo from China’s perspective and whether or not Trump is pushing that envelope, whether he’s violating those taboos.
So that’s maybe kind of a very general response for how to think about it and how to approach it. But for right now, really, the only thing that makes sense to do is to continue to monitor the situation and just sort of have an understanding of what’s precedent and what’s not.
Andrew: Yeah, that’s a really good frame. And I think people would be well to sort of anchor their analysis or thinking around this in those changes in language and/or lack thereof. Right. I think that’s one of the issues, right, is every time Xi Jinping says something about Taiwan, it’s often reported as if it’s the first time he said it or it’s new. And then we go back, and it’s like the same thing he said for 15 years or whatever. And this is a problem, as I often say to new analysts at Trivium, just because it’s the first time you’ve seen the language doesn’t mean it’s the first time the language has appeared. I say that to clients as well, right? So anyway, I think that’s sort of...
Joe: I’m still impressed by it, but especially when I was new at Trivium, I remember Trey in particular just has this memory bank of precedent. He’s like, oh, well, I said, oh, this is an interesting new development, and he said, “Well, actually, this was first heralded in 2013 in X document.” I’m like, okay, well, you know, so Trey’s got an incredible memory for that kind of thing. And it really does help to have been around for a while in this space and to kind of know what’s new and what’s not.
Andrew: Totally. And that’s where the institutional knowledge of a company like Trivium matters a lot. And, you know, we won’t get into the whole AI thing, but AI, I think, can’t really do that yet. So, hopefully we can stay one step ahead. Joe, thanks so much for the time today, especially late in your evening. I appreciate it, man. This was excellent.
Joe: Yeah, my pleasure. Happy to do it.
Andrew: And for listeners, please stick around now for my conversation with Dinny McMahon about producer services, China’s investment in them, and kind of the goal of building global brands and globally competitive companies. It’s going to be an interesting conversation on that front as well. Stick around.
I’m joined now by Trivium’s Head of Markets Research and frequent podcast guest, Dinny McMahon. Dinny, how are you doing?
Dinny McMahon: Good, mate. Good to see you.
Andrew: Yeah, great to have you on.
I already warned the listeners about this at the top of the episode, but we are going to get pretty wonky here. I mean, we always get wonky, but this one’s going to be especially wonky, talking about some of Dinny’s most recent research, specifically on what the Chinese refer to as producer services, which again, sounds boring. Don’t just turn off the podcast. It’s much more interesting than you actually think. I already kind of flagged at the top. This is like, think of Apple doing design work to make the iPhone amazing so that everybody wants to buy it.
So it’s like services that sort of feed into the industrial process that create really strong global brands. And I hope I’m not stealing too much of your thunder, but that’s kind of what we’re going to talk about that today. Any kind of introductory remarks up top from you to set the stage here, Dinny?
Dinny: No, mate, you just made them. I got nothing. We can all go home now.
Andrew: I’m trying to keep people interested. Come on.
Dinny: Well, first you tell them it’s boring, but don’t turn off. And then you’re like, I better roll this back. Let’s try and keep them interested.
Andrew: All right. So let’s get into it. So last year, government agencies became increasingly focused on promoting consumer services as a key to boosting household consumption. That definitely made a lot of sense at the time, right? China is now at an income level where people are spending more on services than physical goods, or they’re getting closer to that level where people are spending more and more on services. And that, of course, includes health, education, travel, entertainment, etc. But as I just flagged, this year we’ve seen an interesting expansion into how Chinese officials at the highest level are talking about services. It’s not just about consumer services, it’s about the producer services idea. So, Dinny, why don’t you give us a little bit more flavor about what producer services are, even though I stole a little bit of thunder?
Dinny: I mean, producer services, when it comes down to it, they’re just services that businesses use, and they make up a pretty significant amount of any developed economy. I mean, the Chinese sort of say that the EU and the U.S., it accounts for between 40 and 50% of their economies. I think it’s using a bit too much of a generous definition there. But however you cut it, business or producer services are a really important part of a developed economy. Now, China divides these things up into 10 categories, but the short version is that it includes things like logistics and transport warehousing, financial services, and leasing.
For some reason, the Chinese sort of divide those into two different categories, but it’s broadly speaking, anything finance-related. It’s human resources and education. It’s marketing and accounting and consulting and e-commerce, software design, communications, research and development, industrial design. If you kind of think of businesses as broadly falling into two buckets, either they’re producing something physical or they’re involved in services. And that’s kind of what it comes down to. I mean, you look at the Chinese economy, and the history of the past 40 years has been making stuff.
It’s building infrastructure and housing, it’s manufacturing, and it’s industrial. And producer services are sort of the gel that kind of fits in between all that. I mean, it exists in significant volumes, but just hasn’t had the same sort of attention, and China hasn’t really had the of need as they increasingly will in the future.
Andrew: Yeah. Well, and I think the piece specifically around logistics has come very much to the fore, not just in China, but globally, right? Recently, in particular, because of all the geopolitical machinations that have occurred over the past several years, including, well, I don’t know if you’d call this geopolitics, but the pandemic, Russian invasion of Ukraine, and then the Iran war and all this stuff about supply chain. It’s like, yeah, we can make this stuff, but we got to be able to procure the things we need as inputs. And then we got to get the stuff to market, right? And so, especially in a crunch time, I just think logistics really jump out as something that becomes particularly important.
I think Chinese companies are pretty good at this individually, but the logistics industry, for example, is super fragmented in China. And so, anyway, that’s one that jumps out at me as like very tangibly in a way associated with production and delivery of goods to market. But anyway, that’s kind of a side. Tell us why, you know, I just mentioned some geopolitics that may have put stuff like this on the radar, but why do you think it’s on your radar and Chinese officials’ radar all of a sudden?
Dinny: Well, this year it’s sort of been turning up in a lot of high-level documents. So, it first got a shout-out in the 15th five-year plan, which was released in March, which said that one of the goals of the next five years is to strengthen the weak links in production-oriented services across the entire supply chain. So, I mean, that kind of set the stage. And then after that, you’ve just kind of had a quick succession of the very highest levels of government officials, you know, sort of pushing hard about just how important this thing is. So, nearly April, there was a national-level services industry conference that was chaired by Premier Li Qiang. Xi Jinping wasn’t there, but he kind of sent notes or instructions.
A couple of weeks after that, there were guidelines published by the state council on expanding and improving the quality of services. I mean, all of this is service-related. It’s not just producer services, but 12 months ago, anything that was services-related was all about consumer services. And now the two producer and consumer are getting equal billing in all of these documents and meetings. And then the PBOC in May sort of chimed in and sort of seemed to be promising that they’d provide financial support to help with weaknesses of production-oriented services.
And look, just beyond that, there’s kind of been this full court press in the Chinese media, in the People’s Daily, in Qiushi, in the Economic Daily, all talking about the importance of services overall, but with this sort of new and very heavy focus on producer services.
Andrew: Okay, so you’ve set the stage, but can you walk us through what you think the goal is in terms of what officials are trying to achieve here in the producer services area? You mentioned this national conference, where Xi Jinping did not attend, but he sent comments in which he said that he wants to see the development of major Chinese service brands. Does that mean he wants to see like a Chinese Goldman Sachs, Chinese FedEx, WPP? What does he talk about when he says that?
Dinny: I don’t think he’d mind seeing any of those things. But what he really wants, I mean, this isn’t about creating financial behemoths or logistic behemoths. I mean, some of China’s big logistics companies seem to be sort of on track to do that themselves anyway. But what he really wants and kind of what the leadership, broadly speaking, wants is they want Chinese apples and Chinese NVIDIAs. Now, I know this is where things get a little-
Andrew: I thought you meant like Chinese apples that you eat. But, sorry. Okay, I’ll stop.
Dinny: You should write that one down, mate. You should use that at every opportunity.
Andrew: I literally thought that’s what you meant when you said Chinese apples.
Dinny: Yeah, maybe I need to come up with another example. But they want things like Chinese NVIDIAs, right? And this is where things get a little bit confusing because companies like Apple and NVIDIA, they actually make things. So when you think about them, you don’t think of them as being services companies. You think of them as being manufacturers to some extent. But the thing is, the value of what they produce isn’t in the manufacturing. It’s in the design. It’s in the technology, the R&D. It’s in the engineering. And those are producer services.
And this is something that comes up a lot in the Chinese press. You see this example used time and time again. They point to mobile phones, and they say, look, about 60% of the actual value of a phone is in those intangible qualities and the design and the engineering and the technology. It’s all wrapped up in the patents. And I think it’s quite a sort of an important example for China because the world’s phones are literally manufactured in China. And there’s been a big issue for years that such a, at least a decade ago, such a relatively small percentage of the value add that goes into the manufacturer or the assembly of the iPhone in China actually accrues to China because all the kind of the really valuable components traditionally have come from elsewhere, and sort of gradually China has kind of clawed a bigger and bigger part of the value of an iPhone.
But their point now is that, look, companies like Apple capture the lion’s share of the value of something like that. And it’s not because of the manufacturing. It’s because of the sort of the services sign of things, where no one’s actually making anything, but they’re coming up with ideas. And that’s really at the heart of what’s going on here. So, in developed economies, when we hear business services, our minds typically go straight to things like finance and accounting and marketing, logistics, even management. But when Beijing talks about producer services, they’re actually talking about manufacturing still, right?
So, China’s manufacturing dominance is relying less and less on cheap labor. Both the manufacturing process itself is becoming more technical as it requires fewer and fewer people and more and more robots or sort of machines. And at the same time, the nature of the products China is manufacturing is becoming more technologically advanced. And so. Beijing’s vision of maintaining manufacturing dominance increasingly relies on research, design, and engineering. And a recent Xinhua column kind of summed it up like this, what it said is… “It’s necessary to better leverage the role of the service industry as a catalyst for technological innovation and a value multiplier for manufacturing.”
And I think that kind of gets to the heart of this thing. Ultimately, when they’re talking about producer services, it’s not kind of the sort of typical stuff that we think about. It’s about doubling down on manufacturing and being able to sort of capture or retain a dominance in manufacturing as China moves into more advanced production processes and more advanced manufactured goods.
Andrew: Yeah, that makes a lot of sense and totally jibes with how I think Xi Jinping and other senior Chinese leaders think about the economy and how they want the economy to evolve. And also, unlike in the West where we sort of see we’ve wanted our economy to evolve more towards services, I think primarily for two reasons. One, because like the jobs are less labor-intensive, right? So, it’s like easier on people if they want to do those jobs more. More people want to do those jobs in a modern economy, in modern society. And then on top of that, they are higher value-added, right? You can charge more for them as opposed to often when you’re making widgets, for example, the margin you can charge on those, if it’s kind of a commodity item, it’s very low.
And so a lot of times the service is what makes products unique. But instead of treating an evolution towards services as an in and of itself, as the West does, China, you’re saying, is saying all roads lead back to manufacturing. We only want to invest in services insofar as it supports our manufacturing juggernaut. And we don’t want to hollow out the manufacturing sector so that we become a services economy. We’ll do the services in service of our core focus, which is manufacturing.
And I think that’s just a powerful point. And just so I wanted to kind of pause on that for a second. But it’s still a pretty significant pivot in terms of how authorities think about services. Because previous to now, they’ve been pretty reluctant to lean into services, right? So, kind of talk us through how that evolution has happened.
Dinny: Yeah, it’s funny. Beijing’s kind of gone back and forth on services. So, in the 13th five-year plan, so that was two plans ago, the period 2016 to 2020, they seem to be moving more in the direction of what you just described. Western developed economies typically look like, you know, the natural evolution to white-collar services jobs, kind of as an end to itself. It’s kind of a natural evolution. It’s fine. It’s just the way things are. And so, in the 13th five-year plan, Beijing actually set a goal for increasing the service sector’s share of GDP to increase it from, I think it was 50.5% of the economy to 56% of the economy by 2026.
And, of course, this wasn’t just producer services. It was also consumer services as well. But the idea here was that this was a way of restructuring the economy away from its reliance on manufacturing and exports, and also kind of investment in housing and whatnot. So, it was a deliberate decision. It was kind of, okay, we’re now at a certain stage of development. We can do this. It’s a way of supporting economic activity at a time where we really can’t rely on other parts of the economy anymore. However, at the end of that five-year period, Beijing clearly had a sort of a road to Damascus epiphany and decided that it was no longer that enthusiastic about this sort of restructuring towards services.
Now, economic orthodoxy holds that the potential for productivity gains in services is far smaller than in manufacturing. Manufacturing is typically more capital-intensive than services, which really means that productivity improvements are easier to achieve through like constantly upgrading machinery and tinkering with the production process. Raising service productivity with capital, on the other hand, it just doesn’t generate the sort of same sort of long-term productivity growth. And so, for example, if you take a hospital, right? You can raise productivity in a hospital by equipping every examination room with an ultrasound machine, or you can raise the productivity of a supermarket by introducing self-checkout terminals.
But these are sort of like one-off step changes. It’s not kind of the continuous improvements in processes or small changes in technology that you can see on a factory floor, which kind of generates sort of constant increase in productivity. And so, over the last five, six years, we’ve seen that Beijing’s vision of its economic transformation is entirely wrapped up in manufacturing. And the reason is because it sees manufacturing as the way to deliver on the promise of new quality productive forces, which is really what it comes down to is manufacturing will deliver productivity gains in a way that no other part of the economy will.
And in particular, it will deliver it in a way that services can’t. And so, what we saw in the 14th five-year plan, so that was 2021 to 2025, is that Beijing pivoted away from services because they were like, “Okay, this is going to result in a slowdown of economic growth far greater than what we’re willing to accept because it’s not going to deliver the productivity gains.” And instead, they pretty much drew a line in the sand and said, “We are going to maintain manufacturing share of GDP.” And they more or less did that over the five-year period.
Manufacturing’s contribution to the economy has declined marginally since the beginning of that five-year period, but it’s more or less the same. And then we had the new five-year plan just being released. The goal is to maintain, keep the manufacturing sector, ensure that it maintains a reasonable share of the economy, and additionally to build a modern industrial system with advanced manufacturing at its backbone. So, we don’t know exactly what constitutes a reasonable share, but I don’t think that they’re enthusiastic to sort of see it meaningfully decline as a share of the overall economy. So, this sort of pivot back to producer services, talking about just how important it is, is really interesting because they’ve gone from seeing services as a drag on productivity, and by extension economic growth. And now they see it as being essential to delivering productivity growth.
But that productivity growth is still centered on manufacturing. It’s just that services are the tool that will deliver it.
Andrew: That’s interesting. I was going to say, in a way, it’s like dressed up in a lot of Chinese Communist Party speak, but it’s actually a very sort of traditional economic focus. Like you said, my chief economist, when I used to work at the Conference Board, used to always say the only truly sustainable way to grow your economy is through consistent improvements in productivity. There’s diminishing returns to capital. Your labor force only can do so much. It will start to age, particularly in China. But if you keep improving your productivity, you can do that forever, right? And so, in a way, that’s a really kind of old school, classical economic focus of Xi Jinping.
I guess what most economists, Western economists would probably take issue with is that most don’t think that you can engineer it, productivity growth in the way that China’s trying to do. So obviously they’re taking a unique approach, but I don’t know, it just strikes me that focusing in on productivity is really kind of what a Western classical economist would prescribe for most policymakers. So, that’s interesting. I don’t know, any thoughts on that before we move into the employment piece?
Dinny: No, no, look, I think you’re right. But I mean, I think we’ve talked about this a little bit before. Sure, China is razor-focused on productivity, but all the benefits that are supposed to come from higher productivity are things like higher wages and income. It’s supposed to be more profitable firms that can create a bigger tax base. And so far, at least over the last couple of years, we haven’t seen any of that sort of stuff, largely because you’ve kind of seen a race to the bottom in terms of prices as firms try to maximize market share. And you’ve kind of got these issues of involution and overcapacity, which leads to firms not having the money to sort of deliver on bonuses or it’s kind of resulting in job insecurity because the corporate profits aren’t there.
The tax base is sort of idled. The vision is right. Productivity will deliver a more prosperous China. But there are certain caveats that go with that. And at the moment, China’s just not realizing any of the real benefits from it.
Andrew: Good point. So, next, I want to tease out a little bit an observation that you made in your piece that you wrote, which is the basis for all this stuff. So if you don’t subscribe to Trivium Markets, go to our website, subscribe to Trivium Markets, you can access the piece. But in that piece, you talked about how this will have pretty important and interesting implications for the employment side of things. Can you walk us through that?
Dinny: Yeah, well, we’ve repeatedly argued that Beijing ultimately wants to boost household consumption, despite the fact that it’s really not doing anything meaningful on that front. And it talks about it all the time, hasn’t really done anything for the last few years. But it actually wants to boost household spending, and it wants to build more robust domestic demand off the back of households. But it wants to do those things through higher-paying jobs, not through income and wealth redistribution, or at least not through wealth redistribution until it has the tax base to pay for it, which is not at the moment.
So the challenge is that while innovation and industrial upgrading are kind of turbocharging manufacturing, well, at least the goal is it’ll turbocharge manufacturing productivity and output, at the moment, that isn’t necessarily translating into a proportional increase in manufacturing jobs, right? I mean, that’s the great irony. It’s like, who’s supposed to benefit from this kind of more advanced manufacturing machine when that manufacturing machine just doesn’t need as many blue-collar workers as they used to. And so in areas such as textiles and electronic manufacturing, so much of it’s being automated. And so, you just don’t need as many blue collar workers.
And then, kind of at the higher end, the new innovative products like electric vehicles, they just require less labor than the products they replace. I mean, firstly, an EV requires far fewer components than a traditional internal combustion engine vehicle does. And secondly, that the degree to which some of these factories of China’s more advanced EV countries are automated, they just need a far fewer people on the factory floor. And so, consequently, blue collar workers are being replaced in China by purple-collar technicians. So, these are the employees who run the machines that do the manufacturing, and they’re far better paid, but they’re just employed in far smaller numbers.
And so, what we’ve seen in China is that manufacturing employment has actually risen over the last few years, sort of riding on this tide of industrial expansion. But you listen to senior government officials speak, and they clearly do not think it’s going to last. They’re worried about future employment, blue-collar employment, particularly as automation intensifies. And certainly, that the scale of or the scope of manufacturing employment doesn’t reflect at all the scope of the expansion or the scale of the expansion of industrial expansion in China. So, it’s certainly not a one for one sort of pairing.
So, the way that producer services come into all of this is that, ultimately, producer services is the way to translate this more efficient, more high value manufacturing into high-paying jobs. And again, Apple is representative of exactly what Beijing would like to achieve. Now, I know I said before that Apple, it does… you know, it makes things. That’s kind of what you think of Apple. It makes phones, it makes iPads. But the thing is the company outsources all of its manufacturing. None of that’s done in-house. And yet, and I think we’ve talked about this on the podcast before, that in the United States, it employs about 90,000 people.
And that’s in the U.S. alone, with the exception of Apple stores. Most of those jobs are white-collar and they’re high-paying because they include software developers, engineers, researchers, product designers, supply chain managers, salespeople, market researchers, marketers, lobbyists. I mean, it’s a long list. People in human resources, finance, lawyers protecting IP, people in government relations. Those 90,000 people, so many of them, probably almost all of them, are in well-paid white-collar jobs. And those jobs aren’t created by low-end manufacturing, which is where profit margins are wafer-thin, but high-end manufactured goods with a high-tech content, the more you have of that, it creates this far more of a space and demand for these high-value, high-paying, white-collar jobs.
And crucially, these are exactly the types of jobs that China needs, not just to kind of boost incomes, become a more consumption-oriented economy, but they’re also the jobs China needs to lower its high rates of youth unemployment, specifically among university grads. Because that youth employment is very much concentrated among college graduates who are entering the job market in record numbers, only to find that the white-collar jobs that they trained for, effectively the ones they were promised, are in short supply. And so, this is really the value of producer services.
It’s a way of translating China’s drive into manufacturing into much higher-paying jobs and also kind of deal with this sort of residual, undealt-with issue of university graduate underemployment and disillusionment.
Andrew: Yeah, well, that all makes sense. And especially our younger listeners who may be graduating from undergrad or grad school may have to forgive me for saying this, but China’s trying to create these high value white collar jobs as a support to the manufacturing sector, you’re saying, but aren’t those exactly the jobs that AI is coming for, that margins are absolutely getting hammered on and are quickly drying up because of the AI revolution, or at least expected to quickly dry up?
Dinny: Yeah, I mean, this is kind of a fly in the ointment. Yeah, this is the great unknown at the moment, to what extent will AI undermine this sort of transition? But with this sort of stuff, China is still in a better position than developed economies because in the U.S. and the EU, AI threatens to wipe out a bunch of jobs in these producer services areas because they are existing mature industries which have probably limited scope to expand. And so, there’s just kind of ripe to sort of take over existing functions. But in China, because these producer services industries are underdeveloped and are likely to expand either with government support or just because of the trajectory of China’s economy, you’re still likely to see job creation, just not as much as might otherwise be the case.
So, let’s say without AI, this drive into producer services may have been the solution to the graduate employment problem over, say, the next decade. It would conceivably deliver a structural shift in the nature and scale of white-collar jobs being created. But with AI, an expansion of producer services will help, but it probably won’t fully fix this problem of disillusioned university grads.
Andrew: So you’re making the case, or at least that I think Beijing probably believes, and it would make as well, that even in the AI age, this is going to be an important pool for new employment for not only young people, but a wide range of folks to support, again, ultimately the manufacturing sector through these higher value service sector jobs. But how do they actually go about this? I mean, this isn’t the housing market or building infrastructure. You can’t just throw out a bunch of credit, pile on a bunch more debt. So, what specifically, from a policy standpoint, is Beijing looking to do to make this reality?
Dinny: Well, the People’s Daily had a column in which it said authorities will need to accelerate the construction of the unified national market, which is effectively the code for removing internal trade barriers, that there’ll need to be flexible deregulation and improving resource allocation, whatever that means. But that sort of stuff isn’t easy. I mean, Lord knows they’ve been trying to build a unified national market for years with fairly mixed success. But I think in terms of industries, I think they’ll concentrate their efforts on industrial design. I think that’s something that’s come up a fair bit. I think we’re looking at policy and funding support for firms that can take scientific research, commercialize it, and customize it.
Now, whether that means in-house support for companies that have already proven they can do this sort of thing, like Huawei or CATL, or whether it’s independent third parties, or both, I don’t know. But I think that’s where Beijing thinks the value is, and that’s where the efforts will go, at least initially.
Andrew: Well, this is one that’s definitely going to be interesting that I think is a kind of a, I don’t know, a pretty big pivot, and certainly could be a big theme for us to continue watching going forward. I mean, kind of this whole conception of the services industry is pretty unique. I mean, wouldn’t you say?
Dinny: Yeah, absolutely. You know, I kind of feel that it’s a big change in formulation of in terms of how they see key parts of the economy. It represents a pivot of how they envision productivity gains and how they think they’re going to keep the manufacturing machine sort of churning over. And I think the question is, I mean, how do they go about it? How do they go about taking this idea of producer services and building up the sort of firms that are needed to deliver these sorts of gains? And so it’s an open question. I think we’ll see more of it. But clearly at the highest level of government, Beijing is putting a lot into this, sort of letting everybody know this is a priority and that it wants to see progress. So yeah, the question is just how do they do it?
Andrew: Well, we’ll be monitoring this and analyzing it as it unfolds, of course, as part of China’s wider economic evolution, economic transition, which we’ve talked a lot about on this pod. So, listeners can stick with us for that. We’ll have more on this in the future, I’m sure. In the meantime, Dinny, thanks for walking us through this. Really interesting stuff. Appreciate it.
Dinny: Yeah, no worries, Andrew. Love talking about this stuff.
Andrew: Yeah. Well, I’m sorry for intimating that it might be a little weedy, but yeah, you did a good job. All right. Thanks again, man, and thanks, everybody, for listening. We’ll see you next time. Bye, everybody.
