WEBVTT - Derek Scissors on Beige Book Data (Radio)

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<v Speaker 1>The China Beije Books November flash data shows the economy

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<v Speaker 1>barely treading water, and a lot of this is tied

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<v Speaker 1>to some of the restrictions and lockdowns with the COVID

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<v Speaker 1>nineteen strategy in China. And let's get to Derek Scissors,

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<v Speaker 1>the chief economists at the China Beije Book. Derek, you know,

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<v Speaker 1>we have to talk a little bit about these comments

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<v Speaker 1>from the outgoing Vice Premier Sun chun Lan, because these

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<v Speaker 1>are some of the first comments that we've heard about

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<v Speaker 1>changing policy as a result of of the virus being

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<v Speaker 1>less dangerous than before. So it seems like that's the

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<v Speaker 1>cover here. They're talking about, Oh macron, as it becomes

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<v Speaker 1>less severe, a change in policy is only natural, and

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<v Speaker 1>she has been Sun, she has been synonymous with the

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<v Speaker 1>ferociously tough stance that China has taken on this virus.

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<v Speaker 1>So so interested in your thoughts whether or not this

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<v Speaker 1>is something that sticks or you know, part of the

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<v Speaker 1>policy that really does fluctuate a lot in China. Well,

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<v Speaker 1>I do think if we think about COVID policy in

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<v Speaker 1>December um it's going to be different than COVID policy

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<v Speaker 1>was in September. So I think that's fair and we're

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<v Speaker 1>getting signals of that, and there are lots of reasons

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<v Speaker 1>for it. The question is more hot, will it be

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<v Speaker 1>different enough to help the economy the very early returns

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<v Speaker 1>in November. The answer is no. The economy was quite

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<v Speaker 1>weak in November. That's even compared to a week October

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<v Speaker 1>or fairly week November of last year. Um. One of

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<v Speaker 1>the reasons in our survey was given by firms that

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<v Speaker 1>they had rising COVID cases. So, you know, one of

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<v Speaker 1>the questions is, well, maybe it's the restrictions that are

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<v Speaker 1>the problem. But of course if people are sick, as

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<v Speaker 1>we know in this country where we don't have the

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<v Speaker 1>same restrictions, it affects, you know, economic activity. So is

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<v Speaker 1>it COVID zero or is it COVID But either way,

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<v Speaker 1>the economy was weak in November and consuming COVID cases

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<v Speaker 1>are likely to rise. There's a risk of it being

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<v Speaker 1>weak in December and January as well. M of GDP

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<v Speaker 1>orts next state of that GDP numbers coming out of China, yeah,

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<v Speaker 1>those are going to be bad. In reality, I don't know.

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<v Speaker 1>We had a lot of people, including in the Chinese government,

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<v Speaker 1>saying the fourth quarter was going to be better because

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<v Speaker 1>they didn't really like the third quarter for obvious reasons. Um,

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<v Speaker 1>on the ground, we have two bad months in we

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<v Speaker 1>have no no, no change in trend at the end

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<v Speaker 1>of November. This includes the official pmys. It's not just us.

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<v Speaker 1>I think the fourth quarter is going to be poor.

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<v Speaker 1>Maybe they can at that point say the first quarter

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<v Speaker 1>of next year will be better. But the next set

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<v Speaker 1>of GDP numbers, if they're accurate, are going to be

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<v Speaker 1>quite weak. And how much is the housing crisis keeping

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<v Speaker 1>people from getting out and spending? Yeah, I mean that

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<v Speaker 1>that actually the the the the spending side from the government.

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<v Speaker 1>The loosening of fiscal UH policy at least with regard

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<v Speaker 1>to housing and monetary policy generally, that might eventually help. Um,

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<v Speaker 1>there's certainly different credit conditions now. Credit conditions have loosened

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<v Speaker 1>right now, it hasn't hit yet. We you know, we're

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<v Speaker 1>still in the in the in the situation of of

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<v Speaker 1>everyone trying to recover from the damage in housing, both

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<v Speaker 1>on the producers side and the consumer side. Uh. It

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<v Speaker 1>may be that government action to boast of the market

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<v Speaker 1>will have an impact, maybe not in December, but in January, February. Yeah,

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<v Speaker 1>you say you're seeing some signs of life and the

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<v Speaker 1>credit markets. Can you tell us about what you're detecting, Well,

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<v Speaker 1>you just you see. Uh, it's always worrisome when firms

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<v Speaker 1>borrow more because you don't know whether they're borrowing because

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<v Speaker 1>of opportunities or they're borrowing because they really need the money. Um,

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<v Speaker 1>But you are seeing a pickup in borrowing, so either way,

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<v Speaker 1>there's there's more interest in that on that side. And

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<v Speaker 1>and cost came down, so we had we had a

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<v Speaker 1>period where firms did not want to borrow. We kept

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<v Speaker 1>talking about stimulus, stimulo stimulus, and firms didn't want to borrow.

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<v Speaker 1>It just didn't work, um. And one of the reasons

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<v Speaker 1>was with high cost. So both both the quantity of

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<v Speaker 1>borrowing and the cost of borrowing have have eased in November.

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<v Speaker 1>That's not going to have an immediate effect. It wasn't dramatic,

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<v Speaker 1>but it is a change in direction for credit markets.

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<v Speaker 1>How serious of a problem might deflation be going for word, Yeah,

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<v Speaker 1>that's a that's a very good question. Um. You know,

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<v Speaker 1>everyone's focused on while they're loosening COVID zero and there's

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<v Speaker 1>a stock market rally and this will help the economy,

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<v Speaker 1>and we don't see that yet, and you know at

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<v Speaker 1>some point it will. But until then, we we have

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<v Speaker 1>weakening prices across the board. That's producer prices, sales prices, wages,

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<v Speaker 1>et cetera, and our survey um. And it's getting to

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<v Speaker 1>the point where there's the potential for not just disinflation

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<v Speaker 1>but deflation. So there's kind of a race going on

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<v Speaker 1>with economic weakening versus what we think is going to

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<v Speaker 1>be improvement at some point next year, you know, which

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<v Speaker 1>is that improvement going to hit before we get into

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<v Speaker 1>a deflationary situation. You made a point earlier about it's

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<v Speaker 1>all very well to exect COVID zero, but then people

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<v Speaker 1>call in sick and that fixed productivity as well. But

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<v Speaker 1>you know, what are the implications for the rest of

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<v Speaker 1>the world in terms of supply chains? Well, I think

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<v Speaker 1>the long term implication of looser COVID zero. I remember

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<v Speaker 1>a lot of people thought COVID zero was going to

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<v Speaker 1>loosen after the party the National People of Congress next March,

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<v Speaker 1>and so it was to happen in April or May

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<v Speaker 1>or something like that. And the long term implication, you know,

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<v Speaker 1>should be regained trust and supply chains, not immediately, um.

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<v Speaker 1>But you know, but but it will happen. The short term,

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<v Speaker 1>I think you still have to worry about Chinese supply chains.

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<v Speaker 1>COVID is unlikely to get better in China, whether COVID

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<v Speaker 1>zero is still in place or not during the winter months,

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<v Speaker 1>and so I think the next several months are going

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<v Speaker 1>to see tough supply chain conditions, even as you can

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<v Speaker 1>look forward to maybe, hey, the second half of next year.

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<v Speaker 1>You know, we should have a better, better partners in China.

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<v Speaker 1>Derek is someone who's watched China for a long time.

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<v Speaker 1>How surprised were you by the protests that erupted over

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<v Speaker 1>the weekend? Uh? And I know they've gone away pretty quickly,

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<v Speaker 1>that that's the nature of things sometimes in China, But

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<v Speaker 1>it did send a strong message. Do you think that

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<v Speaker 1>that message is in any part um the reason why

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<v Speaker 1>we're seeing some modest tweaks to the COVID policy. I

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<v Speaker 1>definitely think it's part of it. I think you you

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<v Speaker 1>kept not having, as you just said, we now have

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<v Speaker 1>a senior official who is associated with COVID zero saying

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<v Speaker 1>oh things are different. You kept not having that validation

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<v Speaker 1>at the top end of the leadership um. You know,

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<v Speaker 1>there was all this talk and rumors and and and

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<v Speaker 1>people making comments with the top end of the leadership

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<v Speaker 1>did not weigh in. I think when you add some

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<v Speaker 1>political stress here with we want these these protests to

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<v Speaker 1>go away quickly, let's throw very standard for the Communist Party,

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<v Speaker 1>throw protesters a bone. You're not giving them exactly what

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<v Speaker 1>they want, but you're giving them something to pacify them.

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<v Speaker 1>So I do think the protests added to the pressure

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<v Speaker 1>such that you have senior leadership now saying we hear you,

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<v Speaker 1>we don't need to keep this policy exactly the way

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<v Speaker 1>it's been in place. Yeah, it's quite interesting, So a

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<v Speaker 1>lot to unfold here going forward. Derek, thanks very much

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<v Speaker 1>for being with us. Derek Scissors, chief ugonomists at the

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<v Speaker 1>China Beige Book