4 min read

In a deep hole

China could take a long time to dig itself out of a deep, dynamic-zero Covid hole; Pelosi's trip to Taiwan was less about democracy and more about chips; and global freight rates are starting to fall.
Cartoon showing Pelosi in Taiwan.
Pelosi called China's bluff. Source.

1—In a deep hole

"In a recent address from Wuhan heavy with symbolism, Xi repudiated the West's embrace of 'herd immunity,' saying the consequences of 'lying flat' against the virus would be unimaginable for China.

'Even if there are some temporary impacts on the economy, we will not put people's lives and health in harm's way,' he said in June in the city where Covid first emerged. 'The epidemic response measures,' he added, 'are correct and effective, and must be upheld unwaveringly.'
...
Covid Zero will remain in place for at least another year because it's now inextricably tied to Xi, said Joerg Wuttke, president of the European Union Chamber of Commerce in China, during a July 20 webinar sponsored by the Peterson Institute.

'My guess is China can at the earliest open up late 2023,' he said. Officials 'are in a deep hole and they keep digging.'"

The above passages are from a long Bloomberg article that covers Xi Jinping's so-called 'dynamic-zero Covid policy', concluding that China is unlikely to reopen to the world anytime soon.

An indefinitely closed China will have large consequences for the world, especially if its manufacturing capacity continues to be affected. The Petersen Institute reported that China's private sector – "which typically accounts for over two-thirds of China's output and four-fifths of urban employment" – is bearing most of the cost of China's widespread lockdowns, and that:

"If lockdowns become widespread again, private economic activity will continue to be depressed, growth will likely remain weak, and unemployment will stay high."

If the economic situation gets bad enough, Xi can "ease some of the economic pain from prolonging Covid Zero indefinitely, including spending more on infrastructure and supporting the property market". But that will only worsen pre-existing structural and resource allocation issues in the economy from the last few times Xi Jinping used those levels to pull China out of an economic hole.

The article wraps up with a comment from Rajan Menon, director of the Grand Strategy program at Defense Priorities, a think tank in Washington:

"The bet they're taking is that somehow Covid Zero will defeat the virus, things will open up some day and economic losses can be recouped. [But] what if that bet is wrong? What is then their Plan B? That is not clear to me or them. They have bet the house on Covid Zero."

You can read the full Bloomberg article here (~10 minute read), and the Petersen Institute's report here (~2 minute read).


2—Hot chips

Nancy Pelosi's visit to Taiwan has certainly stirred up quite a storm, with Chinese drones buzzing over outlying Taiwanese islands and hackers attacking Taiwan's defence ministry website. That's on top of China's well-telegraphed live fire military exercises around Taiwan, which saw the launch of 11 ballistic missiles, and trade sanctions including exports of natural sand – a key component for producing silicon wafers in chip production.

And that's what it all really comes down to – chips. For all the bluster about democracy and standing with Taiwan, the real reason for Pelosi's visit was to ensure the export of Taiwanese chips – specifically, semiconductor chips – to the US continues for at least the next several years.

That's because despite pumping tens of billions of dollars into domestic chip manufacturing, the US is still a long way from getting anywhere close to being able to replace Taiwan's TSMC, executives from which Pelosi met during her brief visit.

According to Stratechery's Ben Thompson, the reason for TSMC's advantage over US producers such as Intel is that several years ago it was able to "accommodate new chip designs that prioritised efficiency over performance", giving it (and Samsung, although it produces mostly for domestic use) a huge scale advantage over the likes of Intel, which at the time believed "shifting to extreme ultraviolet lithography... was much too expensive and difficult to implement":

"There are advanced foundries in Oregon, New Mexico, and Arizona, but they are operated by Intel, and Intel makes chips for its own integrated use cases only.

The reason this matters is because chips matter for many use cases outside of PCs and servers — Intel's focus — which is to say that TSMC matters. Nearly every piece of equipment these days, military or otherwise, has a processor inside. Some of these don't require particularly high performance, and can be manufactured by fabs built years ago all over the U.S. and across the world; others, though, require the most advanced processes, which means they must be manufactured in Taiwan by TSMC."

Check out Ben Thompson's full post here (~12 minute read).


3—About those supply chains

Image showing a tweet with rapidly declining shipping costs.
Are supply chains repairing, is demand slowing, or is it some combination of the two?

4—Further reading...

☢️ "On Friday, the Nuclear Regulatory Commission (NRC) announced that it would be issuing a certification to a new nuclear reactor design... a small modular reactor that can be constructed at a central facility and then moved to the site where it will be operated."

🌍 29 June was Earth's shortest day since the invention of atomic clocks, raising the prospect of a "negative leap second".

💔 Dating app Tinder, after spending $1.7 billion acquiring a Korean metaverse start-up last year, is pausing all investment in the sector due to "uncertainty about the ultimate contours of the metaverse and what will or won't work".

🤣 "Argentina's new Economy Minister Sergio Massa pledged to stop printing money that helps fuel runaway inflation."