Semiconductors will not save China's Economy

As we move into 2024, a lot of critical decisions will be made. Resources are limited, and funds pushed in one direction means less funding for other things.

The Chinese government really seems to be trying to have it both ways. A strong statement about Taiwan, claiming that 'reunification' is inevitable and definitely implying that war may result otherwise, is followed up with an admission that China's economic situation is in turbulent waters.

The Taiwan statement, admittedly, was not as aggressive as we've come to expect from Xi Jinping, but we can certainly intuit that nothing has changed, the goals and potential methods are still the same as they've always been.

Along with that, the recent removal of multiple generals (who now in all likelihood face shaunggai methods, the stripping of their assets, and quite possibly long terms of imprisonment) caps a year in which multiple high-profile government leaders have been brought down, the perfect ending to the latest purge, if indeed it is an ending at all. In all likelihood, the "anti-corruption" efforts will only end when the economy requires it.

It should be unnecessary to go over the ways that these efforts hurt the economy. Officials and businesspeople can't function when they have the administration on their backs. If the anti-corruption people come into your sector, they are going to target people and take them down, it's China they don't need much to get that job done. There are absolutely no legal niceties for businesspeople, and officials only have the barest of formal processes to protect them.

The anti-corruption brigade will certainly have the best statistics, the most results and an exceptional conviction rate, but they will not produce one unit of economic output.


Investment in semiconductor plants is a very long-term bet, and not without risk. Long-term bets are not wise when funds are short, and right now funds are very short. Long-term investments should be made when economic growth is strong, not when economic growth is weak, as in the present.

China still seems to think it can invest its way out of any difficulty; the leadership will be disabused of this notion sooner or later. The gains from industrial and infrastructure investment, along with housing, have run their course.

Additionally, by directing the flow of lending from essentially one decision-making source, China may undermine its own initiative. Some investment in semiconductors could lead to profit, too much investment in semiconductors may undermine this narrow window of opportunity completely. Big investments will be easier to make, while small, targeted investments may be wiser, but much harder to identify. Further, by moving as a pack, the various investment vehicles bid against each other for resources and then must compete against each other for sales.

This piece on the most recent semi-conductor investment is unintentionally hilarious because it mentions that this is the first investment made by the entity since...its last leaders were brought down by corruption. Directed lending, indeed.


There is only one way forward at this point, and that is consumption-support investment. If China wants to boost household consumption, it must support that higher level of consumption.

Consumption support is in short supply today. Consumers are suffering from declining house prices and concern about whether their wealth-management funds are healthy. With expectations of future price declines, they are unwilling to invest. Their savings accounts are receiving an all-time low in interest, but there are few safe opportunities that are more attractive.

Apartment values are decreasing, and there is no reasonable way to stop them, because of overbuilding. Households will feel poorer, and the government must manage this change. If households feel they have less assets, they will reduce spending. If their expectations of future income are not strong, then consumption will not be able to quickly recover.

What can the government do? Consumption support can be delivered in the form of a reduction in household taxation. Support can be provided through free services such as public transportation. Anything that puts money back in the hands of common people will effectively be consumption support. Recent reductions in food prices, while deflationary, are still consumption support.

Rents can be reduced by imposing a tax on empty apartments, and tax breaks on decoration costs for buyers. Many people have finished apartments that are empty, with the plan to sell them at higher prices. Buyers planning to live in an apartment usually want a 'new' apartment, so oftentimes the apartments are left completely vacant, so that the buyer will have control over the style of the apartment. Now, few will expect to be able to sell, so nudging owners to get their apartments available on the rental market will yield the highest economic benefit possible under current circumstances.

All these measures create quality growth, because they improve the quality of life of people. Recently China has reduced the interest rate that household savers receive, twice, in an attempt to spur consumption, but this will have the opposite effect. Reducing the saving interest rate just makes households feel poorer. The effect might seem minor, but an improved savings rate would be an important signal of the government's focus.

Free child care. Free kindergarten. Free health care for pregnant women. These transfers to households are policies that will lessen the burden on consumers and bring back confidence in the future.

For years the government has felt empowered to use the purchasing power of the people to benefit the country, (or to score political points), at the expense of people's pocketbooks. Every ban on Australian beef or American soybeans is a leveraging of the needs of the people. Little thought was given to the increasing prices for Chinese consumers that result.

It is time for the focus to be on pocketbook issues. Consumers will spend when they feel the environment is stable.

The people don't want or need to read that the CCDI has moved into the premises of its next victim-firm. They want the government to focus on their problems and improve their lives.

China's leadership unfortunately wants to project power abroad without nurturing the source of that power at home. China will be a rich country and be able to throw its weight around only when the people are at least moderately wealthy. A country with perhaps half its population living on 150 dollars or less a month is not a rich, powerful country. The key to becoming a rich and powerful nation is to build up the incomes and living standards of the people.