By weaker do you mean making large factories (not tesla) making high-grade technical components in a clean factory environment, do you mean packed shopping mall- Including the largest Apple Store, do you mean clean streets? I wish the US economy was this weak...
The true corporate default rate in China is very high indeed. You are not seeing this properly in the stats or on the streets of Shanghai because at every level of the communist party, instructions are being given to the banks to arrange quiet bail outs and back door nationalisations. Sometimes these are big bail outs, more often they’re very low scale at cities and companies you’ve never heard of.
The money-go-round still works because defaulted assets are shuffled around the economy, in large part using repos or off balance sheet shadow banking products. The destination is in large part domestic retail and institutional savers but they’re also recycled internationally through the asset management sector and bond market in Hong Kong.
At some point, the deadweight of carrying these assets in the financial sector slowly suffocates the money creation mechanism, which then directly impacts GDP growth and household incomes available for consumer products. At its worst, it causes the collapse of banks (see Baoshang Bank) and insolvency of local governments (see Tianjin).
Given most of the debt mountain is local currency, the simple ultimate fix to this is to print print print, so you can capitalise bad banks and take the toxic debt off the banking sector’s balance sheet. This was done effectively in 1999 through a handful of huge state owned Asset Management Companies, and many times elsewhere around the world in recent decades.
The problem here is a) the sheer scale of the bad debt problem is unimaginable in the history of modern finance, combined with b) China’s highly managed currency float which distorts every aspect of our globalised economy.
The impossible triangle of fixed exchange rates means the managed float would have to break, sending the yuan tumbling, which would have the potential to cause stagflation globally. It would also imply the socialisation of China’s foreign currency corporate debt, making even China’s very large sovereign FX reserves suddenly potentially vulnerable.
All in all it’s a giant pickle of proportions that are quite impossible to comprehend. The Chinese leadership are smart and know all this. They’ve tried to stop the problem from growing by first cracking down on corruption (which admittedly carried wider political benefits). Then by 2018 a more serious attempt was made to deflate the bubble, evidenced by halting growth in shadow banking products and banking sector assets.
The US then launched its trade war. In the view of many, this was a deliberate geopolitical boot to the neck, timed quite precisely. So China is now pumping again, with renewed (albeit modest) growth in assets across both banks and shadow banks, and with newly announced or accelerated infrastructure projects (but with vastly diminishing returns). This should keep the party going a while longer yet but your guess is as good as mine for how long.
Given the importance of Tesla’s mission, it was peak hubris from Musk not to have cheaply raised a massive cash buffer in 2018 / early 2019 when these risks were most immediately evident. Adam Jonas may be wrong on many things but he was dead right on this. Those here most scathing of him and Wall St would do well not to flippantly dismiss everything he and his colleagues say.
None of which is to say that Tesla does not have a massive market to sell into in China. But never forget that this is in large part because the authoritarian government of a centrally planned economy is legislating to underpin demand for EVs. It is however pure naivety to think that this market is quasi infinite regardless of underlying economic strength, or that the beneficial regulatory regime would certainly survive a severe economic downturn in China.
What Tesla have been very smart in achieving is the 100% owned Shanghai plant, which far better insulates them from global trade wars, declining consumer incomes in China and changes in regulatory support. This was at the expense of the 10k Model 3 a week from Fremont but will over time prove a strategic masterstroke.
