WEBVTT - Stephen Engle on Evergrande (Audio)

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<v Speaker 1>Joining us for some live discussion. Is Steven Angel, Bloomberg's

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<v Speaker 1>chief North Asia TV corresponded, It's a pity we're not

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<v Speaker 1>here to talk about Nancy Pelosi because I wanted to

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<v Speaker 1>ask you the question of whether or not, Well, you

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<v Speaker 1>don't know yet because she hasn't, um, you know, she

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<v Speaker 1>hasn't actually made the decision yet to go to Taiwan

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<v Speaker 1>or not. But the question would have been, is Nancy

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<v Speaker 1>Pelosi in the process of inadvertently handing China a big win?

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<v Speaker 1>We're not meant to be talking about that. We're meant

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<v Speaker 1>to talk about now. Let's let's talk about China Everground,

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<v Speaker 1>because there will be another time once we know what

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<v Speaker 1>happens with Pelosi. Strip I don't know, just teasing it,

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<v Speaker 1>teasing it. Yeah, but ever Ground, Okay, this is a

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<v Speaker 1>big story. So they didn't come through with this preliminary restructuring,

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<v Speaker 1>which I think a lot of people doubted was coming anyway. Um,

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<v Speaker 1>but what's the significance of it or asset sales as

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<v Speaker 1>part of, of course, what would likely be China's largest

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<v Speaker 1>ever debt restructuring, you know, three hundred billion dollars in liabilities,

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<v Speaker 1>twenty billion dollars in dollar bonds among those total liabilities. Uh.

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<v Speaker 1>And the sheer size of every grand's death has left

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<v Speaker 1>obviously global investors worried that any collapse, if I'm going

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<v Speaker 1>to use the C word, could spark financial contagion and

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<v Speaker 1>curb you know, growth. You know, we we have those

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<v Speaker 1>p m I numbers that look pretty bad on the

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<v Speaker 1>manufacturing front. We know, of course the COVID zero has

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<v Speaker 1>a dampening effect on growth in the first half of

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<v Speaker 1>this year. Uh. We we have to watch this. This

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<v Speaker 1>is not just dollar bond holders not getting their coupons paid.

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<v Speaker 1>This is potential systemic risk to banks and other parts

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<v Speaker 1>of the economy. But yeah, I think we've spoken to

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<v Speaker 1>someone in this Bloomberg story saying the whole pyramid is

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<v Speaker 1>collapsing now. So things really kind of worse than they

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<v Speaker 1>were even a year ago. Steve, I don't want to

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<v Speaker 1>call the Chinese economy a pyramid, but I get where

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<v Speaker 1>you're going there. Um, there's there's a big problem because

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<v Speaker 1>the there's no other sector of the Chinese economy that

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<v Speaker 1>has as large as of an exposure to the property

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<v Speaker 1>sector than drumroll, please, banking seven point seven trillion dollars.

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<v Speaker 1>I think it was the last count five point eight

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<v Speaker 1>trillion US dollars and outstanding mortgages in the banking system

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<v Speaker 1>in China, and another one point nine trillion dollars of

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<v Speaker 1>loans to those developers. So there, if there's a contagion

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<v Speaker 1>through the property sector with ever Grand at the top

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<v Speaker 1>of that pyramid going down into the banks, SMP and

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<v Speaker 1>Deutsche Bank, among others are saying that there could be

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<v Speaker 1>between six and a half to seven percent of those

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<v Speaker 1>outstanding mortgages at risk, and that's gonna be a big

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<v Speaker 1>problem obviously for the Bank's tricky to see how the

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<v Speaker 1>contagion would work in China, given that the banking sector

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<v Speaker 1>is essentially a state backed banking sector. That's the key. Yeah,

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<v Speaker 1>And and the government obviously could print money and step

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<v Speaker 1>and step in. But one definite sidebar to this is

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<v Speaker 1>the reverse wealth effect, because people in the past in China,

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<v Speaker 1>over the past say fifteen years, have been buying real

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<v Speaker 1>estate and seeing their wealth expand, and now it's going

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<v Speaker 1>the other direction, and so they're spending less. Absolutely, look

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<v Speaker 1>in the last twenty years or so, and I lived

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<v Speaker 1>in China and lived in Beijing, and I owned a

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<v Speaker 1>property there as well. There was a one way bet

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<v Speaker 1>essentially in property, and they've never really seen a big crash. Yes,

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<v Speaker 1>the property market in China has, you know, peaks and valleys,

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<v Speaker 1>it always does, and they reined in and there's policy,

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<v Speaker 1>but again, this has been a pretty much of one

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<v Speaker 1>way bet. It's unbelievable some of the wealth creation by

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<v Speaker 1>property from property. But all things come to an end.

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<v Speaker 1>And this you know, you alluded to implicit guarantees from

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<v Speaker 1>the government on on banks and deposits and this and that,

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<v Speaker 1>but there has not been a lot of guarantees for

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<v Speaker 1>homeowners and and and and uh and the developers who

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<v Speaker 1>are overly indebted. And so that's why there's a lot

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<v Speaker 1>of concern about the developers. I think. Heading towards the

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<v Speaker 1>Party congress, though, you're gonna see more policies that are

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<v Speaker 1>going to be backing these mortgage holders who are now

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<v Speaker 1>boycotting because at the end of the day, they do

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<v Speaker 1>not want social unrest tied to this. Let's talk about

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<v Speaker 1>that and what kind of further stimulus we could see

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<v Speaker 1>announced too, because as you mentioned a couple of moments ago,

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<v Speaker 1>we did see weakness coming through once again in the

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<v Speaker 1>China economy in terms of factory activity unexpectedly contracting, and

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<v Speaker 1>all of this not voting very well when we're looking

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<v Speaker 1>to the latter part of the year and very far

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<v Speaker 1>away from these growth targets that they kind of ditched

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<v Speaker 1>last week. Anyway. Yeah, p m I Manufacturing p m

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<v Speaker 1>I as we've just been reporting forty nine. We were

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<v Speaker 1>expecting fifty point three. So that's thirteen basis points essentially

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<v Speaker 1>away from the consensus. That's a lot. So it's in contraction.

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<v Speaker 1>And we only had one blip upwards in June after

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<v Speaker 1>Shanghai came back into the into the fold. It was

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<v Speaker 1>not long lasting. As Bloomberg Economics says, this is an

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<v Speaker 1>abrupt loss of momentum, and the data was grim across

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<v Speaker 1>the board. Pretty you know there their hot takes on

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<v Speaker 1>Bloomberg Economics is pretty grim for sure for the Chinese

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<v Speaker 1>ec of me, what's working the best at the moment

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<v Speaker 1>in China, because there's so many areas where we can

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<v Speaker 1>see fault lines, but yet the country is still growing,

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<v Speaker 1>The economy is still it's still growing. Yeah, it fits

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<v Speaker 1>and starts. Obviously, there's been some you know, of course,

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<v Speaker 1>the property sector, and you have these mortgage boycotts seen

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<v Speaker 1>in more than nineties cities across China. You do also

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<v Speaker 1>have uh various COVID outbreaks and lockdowns. Wuhan was locked

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<v Speaker 1>down again. So but as far as the strength, you

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<v Speaker 1>have to look over at the non manufacturing pm I

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<v Speaker 1>held up pretty well fifty three point eight. That services

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<v Speaker 1>which have come back boy in, I think it was

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<v Speaker 1>April it was down to forty one. Because Shanghai is

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<v Speaker 1>a services based economy really right with manufacturing on the periphery.

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<v Speaker 1>But construction is part of that services non manufacturing p

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<v Speaker 1>m I. So you've seen pick up in construction as

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<v Speaker 1>the government has been encouraging uh these developers at all

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<v Speaker 1>costs get these unfinished apartments completed so people will not revolt.

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<v Speaker 1>As Dave a quick question on what we're hearing in

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<v Speaker 1>Hong Kong as well. I mean, you just got out

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<v Speaker 1>of quarantine. Maybe if you'd waited a couple more months,

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<v Speaker 1>that could have been shorter. Yeah, I don't think my

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<v Speaker 1>boss would give me a couple more months of vacation.

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<v Speaker 1>I think I did my seven days and and you know,

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<v Speaker 1>after the fifth day, you're ready to get out, and

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<v Speaker 1>you've been tested ten times through five days, right, uh

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<v Speaker 1>rap tests rapid engine tests and also the PCRs, so

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<v Speaker 1>you pretty much know you're standing after five days. So

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<v Speaker 1>I'm in all not surprisingly I'm in support of a

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<v Speaker 1>five day quarantine in the hotel. Well, I'm actually zero,

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<v Speaker 1>I'm in supportive. Yeah. The chief executive John Lee told

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<v Speaker 1>the Hong Kong Economic Journal that that they would be

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<v Speaker 1>announcing this very shortly, that they would be cutting the

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<v Speaker 1>required days of hotel quarantine, but he said that they're

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<v Speaker 1>looking at different data to decide on the exact number

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<v Speaker 1>of days to cut. Have you heard anything about that,

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<v Speaker 1>and and also whether or not it's mainland China or

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<v Speaker 1>foreign countries that are affected. First, yeah, I think they're

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<v Speaker 1>going to have a different arrangement for mainland China. Um.

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<v Speaker 1>But as far as the data, they're looking at every

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<v Speaker 1>possible granular data that they have to determine if there

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<v Speaker 1>is a risk of letting people out of hotel quarantine

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<v Speaker 1>with these latest variants, whether it pops up a lot sooner.

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<v Speaker 1>So they'll make the decision, at least publicly, they will

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<v Speaker 1>say this based on their the most readily available data

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<v Speaker 1>that they have right now, up to date data. Okay,

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<v Speaker 1>we will at some point in the near future talk

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<v Speaker 1>about Nancy Pelosi and her trip to Asia, So I'll

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<v Speaker 1>save that for, you know, another another hour. Thanks for

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<v Speaker 1>Steve Stephen Ingol or TV correspondent, This is Bloomberg