1 00:00:10,000 --> 00:00:13,400 Speaker 1: Hello, and welcome to another episode of the Odd Thoughts Podcast. 2 00:00:13,480 --> 00:00:16,840 Speaker 1: I'm Tracy Alloway and I'm Joe Wise. Joe, what is 3 00:00:16,880 --> 00:00:19,560 Speaker 1: going on in China right now? That is a good question, 4 00:00:19,680 --> 00:00:22,520 Speaker 1: and it's it's a question we actually haven't been talking 5 00:00:22,560 --> 00:00:26,000 Speaker 1: about enough. Lots of focus on energy, lots of focus 6 00:00:26,079 --> 00:00:30,200 Speaker 1: on Europe, Mac Road, the FED recession. But my understanding 7 00:00:30,240 --> 00:00:32,680 Speaker 1: is that things aren't great in China either. I feel 8 00:00:32,720 --> 00:00:36,760 Speaker 1: like in a normal year where everyone wasn't distracted by 9 00:00:36,960 --> 00:00:40,040 Speaker 1: domestic US inflation and the question of whether or not 10 00:00:40,520 --> 00:00:43,559 Speaker 1: interest rate hikes are going to spark a recession, I 11 00:00:43,600 --> 00:00:46,800 Speaker 1: feel like China would be taking center stage with everything 12 00:00:46,840 --> 00:00:50,320 Speaker 1: that's going on. But it feels like it's sort of 13 00:00:50,360 --> 00:00:53,280 Speaker 1: been tangential. Like you hear a little bit about what's 14 00:00:53,320 --> 00:00:57,000 Speaker 1: going on, but people like aren't really focused on it. Well, 15 00:00:57,160 --> 00:01:00,080 Speaker 1: I would see it feels contained in a way, you know. 16 00:01:00,240 --> 00:01:03,640 Speaker 1: So obviously, one of the big stories is the country's 17 00:01:03,680 --> 00:01:08,080 Speaker 1: ongoing commitment to COVID zero, which obviously has a negative 18 00:01:08,120 --> 00:01:11,679 Speaker 1: impact just on sort of economic activity sort of measured broadly. 19 00:01:11,720 --> 00:01:14,960 Speaker 1: But then there are other things happening. The real estate 20 00:01:15,040 --> 00:01:18,679 Speaker 1: sector seems very troubled, with more and more people basically 21 00:01:18,720 --> 00:01:21,160 Speaker 1: refusing to pay mortgages on houses that have yet to 22 00:01:21,160 --> 00:01:23,840 Speaker 1: be completed. You know, that's a big story. There's a 23 00:01:23,880 --> 00:01:26,760 Speaker 1: big drought happening, a really intense heat waves, so they're 24 00:01:26,760 --> 00:01:30,080 Speaker 1: having their own weather climate stress. But yeah, I still 25 00:01:30,120 --> 00:01:33,120 Speaker 1: don't totally get how it all fits together, right. I 26 00:01:33,120 --> 00:01:37,200 Speaker 1: feel like people have been warning of a Chinese property 27 00:01:37,240 --> 00:01:40,720 Speaker 1: bust for so long and it hasn't happened that we've 28 00:01:40,720 --> 00:01:43,720 Speaker 1: all sort of become a nerd to the idea that 29 00:01:43,760 --> 00:01:47,480 Speaker 1: it could actually happen. And maybe we're seeing the beginnings 30 00:01:47,560 --> 00:01:49,960 Speaker 1: of it, but again, maybe we're not. Because China is 31 00:01:50,040 --> 00:01:53,600 Speaker 1: very good at coming in and rescuing particular sectors when 32 00:01:53,640 --> 00:01:55,640 Speaker 1: it needs to. That's the key thing. And of course 33 00:01:55,680 --> 00:01:58,640 Speaker 1: we've talked about, say ever Grant a few times on 34 00:01:58,800 --> 00:02:02,080 Speaker 1: the show. So there are are these busts that happened, 35 00:02:02,120 --> 00:02:04,320 Speaker 1: and they're all these troubles, but it always seems like 36 00:02:04,400 --> 00:02:07,200 Speaker 1: in the past that the government has been able to 37 00:02:07,320 --> 00:02:11,880 Speaker 1: use its balance sheet to prevent some like wholesale collapse. Yeah, 38 00:02:11,919 --> 00:02:14,959 Speaker 1: but now, of course we know that she and Ping 39 00:02:15,600 --> 00:02:18,760 Speaker 1: is on a mission to pop a lot of bubbles 40 00:02:18,800 --> 00:02:22,040 Speaker 1: in the Chinese economy to crack down on certain sectors 41 00:02:22,040 --> 00:02:25,560 Speaker 1: that he thinks are not economic or efficient, and so 42 00:02:25,720 --> 00:02:28,240 Speaker 1: maybe it's different this time, but maybe it isn't. So 43 00:02:28,520 --> 00:02:30,440 Speaker 1: let's see, let's find out. I have to say, we 44 00:02:30,480 --> 00:02:33,520 Speaker 1: really do have the perfect guest to discuss this. We 45 00:02:33,560 --> 00:02:35,560 Speaker 1: are going to be speaking with Tom or Like. He's 46 00:02:35,600 --> 00:02:38,760 Speaker 1: the chief economist at Bloomberg Economics. He is also the 47 00:02:38,840 --> 00:02:42,880 Speaker 1: author of China The Bubble That Never Pops, so we 48 00:02:42,919 --> 00:02:44,680 Speaker 1: get to ask him if it is going to pop 49 00:02:44,720 --> 00:02:47,200 Speaker 1: this time. There is a second edition of the book 50 00:02:47,320 --> 00:02:50,280 Speaker 1: coming out in September, so it really is a great 51 00:02:50,320 --> 00:02:52,800 Speaker 1: time to catch up with him. Tom, thanks for coming 52 00:02:52,800 --> 00:02:55,040 Speaker 1: back on all thoughts. Great to be here, Thanks for 53 00:02:55,080 --> 00:02:58,800 Speaker 1: having me, Tracy J. So maybe just to set the scene, 54 00:02:59,000 --> 00:03:02,200 Speaker 1: let's start with the big question, which is I think 55 00:03:02,280 --> 00:03:05,720 Speaker 1: most people at this point know that China's economy is heavily, 56 00:03:05,800 --> 00:03:10,480 Speaker 1: heavily reliant on real estate and properties. Something like of 57 00:03:10,560 --> 00:03:14,560 Speaker 1: total GDP is accounted for it by real estate. How 58 00:03:14,600 --> 00:03:17,880 Speaker 1: did that come to be? Why is China's economy so 59 00:03:18,240 --> 00:03:22,480 Speaker 1: leverage to this one particular sector. That's a really good question, Tracy, 60 00:03:22,840 --> 00:03:25,680 Speaker 1: And there's a bunch of factors at work. So the 61 00:03:25,720 --> 00:03:29,600 Speaker 1: first thing to think about is the strength of fundamental demand. 62 00:03:29,880 --> 00:03:34,680 Speaker 1: So remember that in the eighties and early nineties, China 63 00:03:34,760 --> 00:03:38,600 Speaker 1: did not have a private property market. If you lived 64 00:03:38,600 --> 00:03:42,320 Speaker 1: in a city, you almost certainly lived in a dilapidated 65 00:03:42,640 --> 00:03:47,600 Speaker 1: government apartment or dingy house. And so when the private 66 00:03:47,640 --> 00:03:51,240 Speaker 1: market sprang into life in the late nine there was 67 00:03:51,440 --> 00:03:55,960 Speaker 1: enormous pent up demand for real estate. Adding to that, 68 00:03:56,600 --> 00:04:01,200 Speaker 1: China's households have enjoyed decades of strongly rise incomes, and 69 00:04:01,240 --> 00:04:03,640 Speaker 1: of course, when your income rises, one of the first 70 00:04:03,720 --> 00:04:06,760 Speaker 1: things you want to do is buy somewhere nice to live. 71 00:04:07,680 --> 00:04:10,760 Speaker 1: And China has had an urbanization boom, with hundreds of 72 00:04:10,800 --> 00:04:14,119 Speaker 1: millions of people moving from the countryside to the cities. 73 00:04:14,480 --> 00:04:17,400 Speaker 1: So the first reason why real estate has been so 74 00:04:17,480 --> 00:04:20,800 Speaker 1: important in driving China's growth is just that there's been 75 00:04:21,000 --> 00:04:25,680 Speaker 1: enormous demand for real estate. The second contributing factor is 76 00:04:25,720 --> 00:04:30,000 Speaker 1: that speculators got in on the game. China's investors don't 77 00:04:30,040 --> 00:04:33,520 Speaker 1: have brilliant options. There isn't much of a kind of 78 00:04:33,560 --> 00:04:36,960 Speaker 1: retail financial market. There aren't a lot of money market 79 00:04:37,040 --> 00:04:39,800 Speaker 1: funds and things like that you can park your cash in. 80 00:04:40,040 --> 00:04:42,520 Speaker 1: If you put your money in a bank deposit, very 81 00:04:42,520 --> 00:04:45,480 Speaker 1: often the interest rate is below the level of inflation, 82 00:04:45,600 --> 00:04:48,520 Speaker 1: so you're essentially losing money if you put your money 83 00:04:48,560 --> 00:04:52,039 Speaker 1: in the stock market. It's a roller coaster. So a 84 00:04:52,120 --> 00:04:55,359 Speaker 1: lot of investment funds went into real estate, and that 85 00:04:55,480 --> 00:05:01,800 Speaker 1: speculative demand added substantially to the fundamental demand. By some estimates, 86 00:05:01,960 --> 00:05:06,080 Speaker 1: as much as of property in China is sold to 87 00:05:06,120 --> 00:05:10,159 Speaker 1: speculators who hold it empty hoping for capital gains. So 88 00:05:10,240 --> 00:05:14,840 Speaker 1: those factors together drove China's real estate boom and pushed 89 00:05:14,880 --> 00:05:18,880 Speaker 1: its contribution to GDP. Taking account of all the construction activity, 90 00:05:19,320 --> 00:05:22,320 Speaker 1: all of the impact on steel and punkrey and home 91 00:05:22,400 --> 00:05:24,960 Speaker 1: electronics and furniture in a car to put in the 92 00:05:25,000 --> 00:05:30,400 Speaker 1: garage up to that number which Tracy mentioned. So my understanding, 93 00:05:30,680 --> 00:05:33,120 Speaker 1: and this is just that we've had, you know, we've 94 00:05:33,240 --> 00:05:36,400 Speaker 1: we talked about ever grant a few times last year. 95 00:05:36,440 --> 00:05:39,520 Speaker 1: But my understanding is that there's this broader problem of 96 00:05:40,200 --> 00:05:44,880 Speaker 1: real estate developers essentially running into financial trouble, running into 97 00:05:44,920 --> 00:05:50,800 Speaker 1: operational trouble, having a difficult time delivering on houses that 98 00:05:50,880 --> 00:05:54,480 Speaker 1: it's sold, that that they pre sold essentially, and now 99 00:05:54,680 --> 00:05:57,159 Speaker 1: the people who bought those mortgages saying, look, you haven't 100 00:05:57,160 --> 00:05:59,680 Speaker 1: delivered the house that I bought. I'm not sure that 101 00:05:59,760 --> 00:06:01,679 Speaker 1: time aiming of when you're going to deliver those times, 102 00:06:01,880 --> 00:06:04,039 Speaker 1: so I'm not going to pay. Is that an accurate 103 00:06:04,320 --> 00:06:07,359 Speaker 1: characterization of it? And how big is this movement that 104 00:06:07,440 --> 00:06:09,560 Speaker 1: we're seeing where people are saying we're not paying our 105 00:06:09,600 --> 00:06:12,719 Speaker 1: mortgage right now? Yeah, I think that's completely right, Joe. 106 00:06:12,839 --> 00:06:17,760 Speaker 1: For the last few decades, given the very strong demand, 107 00:06:18,320 --> 00:06:22,400 Speaker 1: given the continually rising prices in China's real estate sector, 108 00:06:23,160 --> 00:06:26,839 Speaker 1: the best strategy for real estate developers was just to 109 00:06:26,920 --> 00:06:30,560 Speaker 1: build as much as possible as quickly as possible. And 110 00:06:31,279 --> 00:06:34,960 Speaker 1: in executing on that strategy, many of China's real estate 111 00:06:34,960 --> 00:06:40,080 Speaker 1: developers engaged in some sharp practices. One of those sharp 112 00:06:40,120 --> 00:06:45,440 Speaker 1: practices was selling homes off the plan, so not selling 113 00:06:45,440 --> 00:06:47,840 Speaker 1: a home they'd already built, but selling a home they 114 00:06:47,839 --> 00:06:51,680 Speaker 1: were promising to build, and then taking the funds from 115 00:06:51,680 --> 00:06:55,159 Speaker 1: those pre sales and instead of using them to complete 116 00:06:55,160 --> 00:06:59,640 Speaker 1: the project, using them to buy land to start another project. Now, 117 00:07:00,240 --> 00:07:02,840 Speaker 1: as long as the demand was there, as long as 118 00:07:02,839 --> 00:07:05,240 Speaker 1: they could sell that second project, and as long as 119 00:07:05,279 --> 00:07:07,520 Speaker 1: they could get access to bank finance, as long as 120 00:07:07,520 --> 00:07:09,840 Speaker 1: the banks were willing to loan the money to fill 121 00:07:09,840 --> 00:07:13,760 Speaker 1: in any short term shortfalls. That strategy worked really well, 122 00:07:14,920 --> 00:07:18,280 Speaker 1: but what's happened in the last two or three years 123 00:07:18,720 --> 00:07:21,320 Speaker 1: is that the government has stepped in and said, no, 124 00:07:22,040 --> 00:07:25,480 Speaker 1: this is not a sustainable trajectory for the real estate sector. 125 00:07:26,240 --> 00:07:30,480 Speaker 1: We need real estate developers to get their finances in order, 126 00:07:30,960 --> 00:07:33,880 Speaker 1: and we're going to cut off sources of finance for 127 00:07:33,960 --> 00:07:37,440 Speaker 1: real estate developers that we think have engaged in too 128 00:07:37,440 --> 00:07:40,760 Speaker 1: many sharp practices, that have borrowed too much money, that 129 00:07:40,800 --> 00:07:44,760 Speaker 1: have too much leverage. At the same time, the fundamental 130 00:07:44,880 --> 00:07:48,800 Speaker 1: demand story which has driven China's real estate boom has 131 00:07:48,880 --> 00:07:53,200 Speaker 1: kind of come to an end. China's demographics have become 132 00:07:53,200 --> 00:07:55,679 Speaker 1: a drag, and of course, when you have less people, 133 00:07:55,800 --> 00:08:01,160 Speaker 1: you need less accommodation. China's urbanization story it's not quite over, 134 00:08:01,400 --> 00:08:04,800 Speaker 1: but it's not delivering the same impetus that it was 135 00:08:04,920 --> 00:08:07,800 Speaker 1: ten years certainly not the same impetus it was delivering 136 00:08:07,800 --> 00:08:10,680 Speaker 1: twenty years ago. And what that means is the real 137 00:08:10,800 --> 00:08:14,000 Speaker 1: estate developers who took money to build a project and 138 00:08:14,000 --> 00:08:17,400 Speaker 1: then use that money to start another project, now I 139 00:08:17,440 --> 00:08:20,000 Speaker 1: find they don't have enough funds to finish the houses 140 00:08:20,040 --> 00:08:23,840 Speaker 1: they promised to finish. So this actually leads into a 141 00:08:23,960 --> 00:08:26,400 Speaker 1: question I wanted to ask, So, we have the situation 142 00:08:26,440 --> 00:08:30,880 Speaker 1: where something like se of all Chinese property sales are 143 00:08:30,960 --> 00:08:34,640 Speaker 1: pre sales, so for units that are going to be constructed, 144 00:08:35,160 --> 00:08:39,920 Speaker 1: and people have pinpointed that or pointed to that as 145 00:08:40,120 --> 00:08:42,839 Speaker 1: a source of weakness for a while, and even the 146 00:08:42,920 --> 00:08:46,320 Speaker 1: Chinese government, as you just mentioned, basically started cracking down 147 00:08:46,320 --> 00:08:49,440 Speaker 1: on it and saying this is problematic. So how much 148 00:08:49,600 --> 00:08:53,559 Speaker 1: of the current situation where you have this mortgage boycott, 149 00:08:53,920 --> 00:08:57,400 Speaker 1: people refusing to pay um the money that they owe 150 00:08:57,440 --> 00:09:00,480 Speaker 1: to developers for houses that are under construction, and you 151 00:09:00,559 --> 00:09:04,360 Speaker 1: have house prices deteriorating, and you have property developers under pressure, 152 00:09:04,760 --> 00:09:09,720 Speaker 1: how much of that is engineered by the Chinese authorities 153 00:09:09,760 --> 00:09:14,840 Speaker 1: themselves as part of property sector reform versus things that 154 00:09:14,920 --> 00:09:18,079 Speaker 1: are maybe a little bit more macro, maybe outside of 155 00:09:18,120 --> 00:09:22,120 Speaker 1: their control, such as the impact of the pandemic or 156 00:09:22,160 --> 00:09:24,920 Speaker 1: you know, interest rates and things like that. So it's 157 00:09:24,920 --> 00:09:27,520 Speaker 1: a complicated picture, Tracy, and I think you have to 158 00:09:27,520 --> 00:09:31,160 Speaker 1: give China's government some of the blame for allowing the 159 00:09:31,240 --> 00:09:34,600 Speaker 1: situation to get to the point which it has, also 160 00:09:34,679 --> 00:09:38,600 Speaker 1: some of the credit for attempting to move ahead of 161 00:09:38,640 --> 00:09:41,920 Speaker 1: a crisis, right to try and tamp down the problem 162 00:09:42,080 --> 00:09:44,680 Speaker 1: before it really blows up. And of course, like all 163 00:09:44,720 --> 00:09:47,559 Speaker 1: governments in the world, they've been the victims of bad luck. 164 00:09:47,960 --> 00:09:52,520 Speaker 1: The COVID pandemic hasn't made anything easier. It certainly hasn't 165 00:09:52,559 --> 00:09:55,480 Speaker 1: made dealing with a real estate crisis and easier. So 166 00:09:55,720 --> 00:09:58,040 Speaker 1: it's not easy to put a sort of size and 167 00:09:58,120 --> 00:10:02,320 Speaker 1: scope on this problem. Hin as government has clearly decided 168 00:10:02,360 --> 00:10:06,840 Speaker 1: that the mortgage boycott is a sort of extremely sensitive issue, 169 00:10:07,160 --> 00:10:10,160 Speaker 1: and so they're actually making it rather hard to get 170 00:10:10,160 --> 00:10:15,000 Speaker 1: a handle on it. There aren't good numbers from private 171 00:10:15,040 --> 00:10:18,800 Speaker 1: real estate information companies, for example, who would be positioned 172 00:10:19,000 --> 00:10:21,800 Speaker 1: to tell us exactly how many delayed projects there are. 173 00:10:21,880 --> 00:10:24,200 Speaker 1: But we've got a super smart team on the ground 174 00:10:24,440 --> 00:10:27,400 Speaker 1: and they've done some fancy footwork with the data that 175 00:10:27,559 --> 00:10:31,080 Speaker 1: is available to try and put a magnitude on the 176 00:10:31,120 --> 00:10:34,120 Speaker 1: size of the problem. So the starting point of their 177 00:10:34,120 --> 00:10:38,200 Speaker 1: calculations is the fact that on average, it takes about 178 00:10:38,280 --> 00:10:42,760 Speaker 1: three years to finish a property project. And if we 179 00:10:42,800 --> 00:10:46,480 Speaker 1: look at the historical data in general, if you have 180 00:10:47,000 --> 00:10:51,880 Speaker 1: a hundred projects started in year one, then in year four, 181 00:10:52,320 --> 00:10:56,079 Speaker 1: three years later, eighty of those projects will be completed. 182 00:10:56,520 --> 00:11:00,560 Speaker 1: So three years in there's an eight completion rate. But 183 00:11:00,600 --> 00:11:03,479 Speaker 1: when we look at the data for twenty one and two, 184 00:11:04,000 --> 00:11:06,880 Speaker 1: what we see is that completion rate has dropped all 185 00:11:06,880 --> 00:11:10,800 Speaker 1: the way down to And because we know how much 186 00:11:10,840 --> 00:11:13,280 Speaker 1: it costs to build a house, and because we know 187 00:11:13,880 --> 00:11:17,360 Speaker 1: on average how much of house purchases are paid for 188 00:11:17,679 --> 00:11:22,360 Speaker 1: with mortgages, we can then use that drop from a 189 00:11:22,440 --> 00:11:26,640 Speaker 1: completion rate to a completion rate to calculate the magnitude 190 00:11:26,679 --> 00:11:30,160 Speaker 1: of the problem. And what that calculation tells us is 191 00:11:30,200 --> 00:11:34,200 Speaker 1: that the value of mortgages attached to unfinished properties right 192 00:11:34,240 --> 00:11:38,480 Speaker 1: now is around one point six trillion un That's about 193 00:11:38,480 --> 00:11:42,800 Speaker 1: one point four percent of China's GDP. Now that's already 194 00:11:42,840 --> 00:11:45,520 Speaker 1: really big, certainly big enough to make this a systemic 195 00:11:45,559 --> 00:11:49,480 Speaker 1: issue for China's economy and financial system. If the problem 196 00:11:49,520 --> 00:11:54,400 Speaker 1: is left unaddressed and that fifty completion ratio holds until 197 00:11:54,760 --> 00:11:57,760 Speaker 1: the end of the size of the problem is going 198 00:11:57,800 --> 00:12:00,480 Speaker 1: to go up to four point four trillion UM, which 199 00:12:00,480 --> 00:12:04,000 Speaker 1: will be close to four percent of China's GDP. Wow, 200 00:12:04,880 --> 00:12:08,160 Speaker 1: why is the completion rate followed? How much is the 201 00:12:08,320 --> 00:12:11,800 Speaker 1: change in finances? And how much you know, I don't 202 00:12:11,800 --> 00:12:16,400 Speaker 1: know our Chinese developers are they also facing supply chain 203 00:12:16,880 --> 00:12:20,679 Speaker 1: and commodity constraints like basically everywhere else in the world. 204 00:12:21,520 --> 00:12:25,320 Speaker 1: So I think it is a substantially a financing issue 205 00:12:25,480 --> 00:12:31,120 Speaker 1: for China's developers. In China's government introduced something they called 206 00:12:31,160 --> 00:12:36,000 Speaker 1: the three Red Lines policy, essentially a set of constraints 207 00:12:36,040 --> 00:12:40,120 Speaker 1: on access to credit for China's property developers. One of 208 00:12:40,120 --> 00:12:42,760 Speaker 1: the red lines, for example, was if you don't have 209 00:12:42,880 --> 00:12:45,960 Speaker 1: enough cash or liquid assets to cover all of your 210 00:12:45,960 --> 00:12:49,640 Speaker 1: short term debts, you're not allowed to borrow any more money, 211 00:12:49,880 --> 00:12:54,079 Speaker 1: and that clampdown on access to finance for developers. It 212 00:12:54,240 --> 00:12:57,359 Speaker 1: kind of made it really hard for them to continue 213 00:12:57,360 --> 00:13:01,840 Speaker 1: with that game where they sold projects on plan and 214 00:13:01,880 --> 00:13:04,760 Speaker 1: then use the funds to start another project. But that 215 00:13:04,840 --> 00:13:06,480 Speaker 1: was okay because they could always go to the bank 216 00:13:06,559 --> 00:13:09,520 Speaker 1: to borrow any extra funds they needed to make sure 217 00:13:09,600 --> 00:13:12,840 Speaker 1: everything was completed. So I think access to finance has 218 00:13:12,880 --> 00:13:15,200 Speaker 1: been a really big part of it. But of course 219 00:13:15,200 --> 00:13:19,200 Speaker 1: there are other factors coming into players well. COVID zero 220 00:13:19,640 --> 00:13:23,080 Speaker 1: China's insistence on keeping the sort of COVID rate right 221 00:13:23,120 --> 00:13:26,840 Speaker 1: down in the sort of low single digits obviously means 222 00:13:26,920 --> 00:13:29,720 Speaker 1: that at different points in different parts of the country 223 00:13:29,960 --> 00:13:32,320 Speaker 1: it's just hard to get things done because you can't 224 00:13:32,400 --> 00:13:36,199 Speaker 1: leave your apartment just really quickly. Though, So if it's 225 00:13:36,360 --> 00:13:40,520 Speaker 1: largely a finance problem, what are the drawbacks of yet 226 00:13:40,559 --> 00:13:45,120 Speaker 1: another sort of government intervention telling that having the bank's 227 00:13:45,160 --> 00:13:47,040 Speaker 1: helping the taps to say, here's the money, get to 228 00:13:47,160 --> 00:13:50,680 Speaker 1: get the apartments built. So I think there's a couple 229 00:13:50,720 --> 00:13:53,240 Speaker 1: of things going on, Joe. So the first is a 230 00:13:53,320 --> 00:13:57,320 Speaker 1: kind of a recognition that the fundamental demand story in 231 00:13:57,440 --> 00:14:02,480 Speaker 1: China's real estate sector has changed the demographics. The end 232 00:14:02,520 --> 00:14:06,120 Speaker 1: of the urbanization boom mean, we're just not going to 233 00:14:06,240 --> 00:14:10,000 Speaker 1: go back to the years of rapid growth in real 234 00:14:10,120 --> 00:14:14,440 Speaker 1: estate construction contributing to rapid growth in China's GDP. So 235 00:14:14,480 --> 00:14:18,040 Speaker 1: that's the first reason China's central government are reluctant to 236 00:14:18,080 --> 00:14:21,720 Speaker 1: turn the financial taps back on. The second reason is that, 237 00:14:22,560 --> 00:14:26,040 Speaker 1: in part, the real estate boom has been underpinned by 238 00:14:26,160 --> 00:14:31,320 Speaker 1: moral hazard, the belief by real estate developers and investors 239 00:14:31,360 --> 00:14:34,040 Speaker 1: in real estate that they can take any risk they 240 00:14:34,120 --> 00:14:36,960 Speaker 1: like and if it pays off, they're going to make 241 00:14:36,960 --> 00:14:40,440 Speaker 1: massive profits. And if it doesn't pay off, don't worry. 242 00:14:40,680 --> 00:14:43,240 Speaker 1: The government's going to be in there to backstop our 243 00:14:43,320 --> 00:14:47,800 Speaker 1: borrowing and make sure we stay solvent. So China's government 244 00:14:47,880 --> 00:14:51,440 Speaker 1: is very keen to address that problem of moral hazard. 245 00:14:52,120 --> 00:14:55,800 Speaker 1: That's why they allowed ever Grand to go into default. 246 00:14:56,120 --> 00:14:59,640 Speaker 1: That's why they've allowed another quite large set of property 247 00:14:59,680 --> 00:15:04,240 Speaker 1: developed us to go into default. That said, China's government 248 00:15:04,400 --> 00:15:08,920 Speaker 1: are not crazy. I remember reading Timothy Gaitner's book on 249 00:15:09,120 --> 00:15:13,240 Speaker 1: his experience in the financial crisis, and he says people 250 00:15:13,320 --> 00:15:18,160 Speaker 1: who worry about moral hazard in a financial crisis are 251 00:15:18,200 --> 00:15:21,600 Speaker 1: like people who would allow a house to burn to 252 00:15:21,680 --> 00:15:25,080 Speaker 1: the ground without calling the fire brigade. To teach people 253 00:15:25,440 --> 00:15:28,280 Speaker 1: about the importance of not playing with matches, and I 254 00:15:28,280 --> 00:15:30,920 Speaker 1: think China's government very much sort of hold to that 255 00:15:31,000 --> 00:15:34,600 Speaker 1: general philosophy. They don't see this as a one round game. 256 00:15:35,080 --> 00:15:38,400 Speaker 1: They see it as a multi round game. They've imposed 257 00:15:38,400 --> 00:15:41,640 Speaker 1: a bunch of pain on China's property developers and China's 258 00:15:41,640 --> 00:15:45,560 Speaker 1: property investors by allowing the defaults which have taken place 259 00:15:45,640 --> 00:15:48,400 Speaker 1: so far. I don't think they're going to pursue their 260 00:15:48,440 --> 00:15:51,920 Speaker 1: campaign against moral hazards so far that they tipped the 261 00:15:52,080 --> 00:15:57,080 Speaker 1: entire Chinese economy and financial system into crisis. So just 262 00:15:57,200 --> 00:16:00,680 Speaker 1: on this topic, I mean, we have seen China announce 263 00:16:01,120 --> 00:16:04,160 Speaker 1: quite a few stimulus measures just in the past week, 264 00:16:04,200 --> 00:16:06,560 Speaker 1: and I should mention we are recording this on August, 265 00:16:07,640 --> 00:16:10,960 Speaker 1: and I think it was August or something like that. 266 00:16:11,000 --> 00:16:15,480 Speaker 1: They announced I think nineteen new measures to stimulate the 267 00:16:15,480 --> 00:16:18,600 Speaker 1: economy that are worth more than one trillion u N, 268 00:16:18,880 --> 00:16:22,600 Speaker 1: which is about a hundred fifty billion dollars. And one 269 00:16:22,600 --> 00:16:26,800 Speaker 1: of the things that's in there is allowing local governments 270 00:16:27,200 --> 00:16:31,800 Speaker 1: to raise more money, issue more special bonds, raise more money, 271 00:16:31,920 --> 00:16:36,040 Speaker 1: and allowing them some more leeway to potentially allocate that 272 00:16:36,080 --> 00:16:40,280 Speaker 1: to housing to try to figure out this pre sale problem. 273 00:16:40,320 --> 00:16:44,440 Speaker 1: So how effective will that measure be? And to the 274 00:16:44,520 --> 00:16:49,120 Speaker 1: point of this tension between stimulating the economy and reinflating 275 00:16:49,640 --> 00:16:52,960 Speaker 1: a bubble, is there a possibility that local governments just 276 00:16:53,000 --> 00:16:56,440 Speaker 1: start unleashing a torrent of credit that makes the problem 277 00:16:56,480 --> 00:16:59,600 Speaker 1: worth Maybe one way of thinking about this is thinking 278 00:16:59,600 --> 00:17:05,320 Speaker 1: about two extremes, right, So one extreme is do nothing, 279 00:17:06,560 --> 00:17:11,760 Speaker 1: allow the mortgage boycotts to continue increasing, allow more and 280 00:17:11,800 --> 00:17:16,439 Speaker 1: more real estate developers to go into bankruptcy, allow that 281 00:17:16,560 --> 00:17:20,080 Speaker 1: to spill over into a massive increase in non performing 282 00:17:20,119 --> 00:17:24,160 Speaker 1: loans in the banks, and allow that ultimately to sort 283 00:17:24,200 --> 00:17:29,520 Speaker 1: of metasta size into a Chinese version of the US 284 00:17:29,560 --> 00:17:34,240 Speaker 1: subprime crisis and Great Recession, right, So that's one extreme. 285 00:17:35,200 --> 00:17:38,040 Speaker 1: At the other extreme, you've got something which looks like 286 00:17:38,119 --> 00:17:41,560 Speaker 1: China's response to the Great Financial Crisis, the global financial 287 00:17:41,600 --> 00:17:44,480 Speaker 1: crisis in two thousand and eight, where they opened the 288 00:17:44,560 --> 00:17:48,920 Speaker 1: credit taps and delivered that massive stimulus which got the 289 00:17:49,000 --> 00:17:52,719 Speaker 1: Chinese economy going again and got the global economy going again, 290 00:17:53,280 --> 00:17:56,560 Speaker 1: but put them on this unsustainable trajectory where they had 291 00:17:56,600 --> 00:17:59,400 Speaker 1: to keep on borrowing more and more money to pay 292 00:17:59,440 --> 00:18:03,600 Speaker 1: for more more over capacity in real estate, over capacity 293 00:18:03,680 --> 00:18:08,120 Speaker 1: in industry. So neither of those extremes are particularly attractive. 294 00:18:08,920 --> 00:18:12,439 Speaker 1: What's China trying to do right now? They're attempting to 295 00:18:12,560 --> 00:18:15,760 Speaker 1: have find a kind of a middle path between the two. 296 00:18:16,080 --> 00:18:19,280 Speaker 1: And that's why we're having this sort of drip drip 297 00:18:19,359 --> 00:18:24,240 Speaker 1: of what I would call sort of relatively small stimulus 298 00:18:24,240 --> 00:18:29,720 Speaker 1: announcements PBC cutting interest rates a little bit, local governments 299 00:18:29,760 --> 00:18:32,760 Speaker 1: being able to issue a few more bonds to pay 300 00:18:32,800 --> 00:18:36,040 Speaker 1: for infrastructure, and perhaps provide a little bit of support 301 00:18:36,280 --> 00:18:38,760 Speaker 1: to the real estate sector. It's not what the market 302 00:18:38,840 --> 00:18:41,080 Speaker 1: wants to hear. They want to hear that kind of 303 00:18:41,119 --> 00:18:44,640 Speaker 1: shock and or stimulus announcement like they heard from Wen 304 00:18:44,720 --> 00:18:47,120 Speaker 1: Jiaobao at the end of two thousand and eight. They're 305 00:18:47,160 --> 00:18:50,480 Speaker 1: not going to get that shock and or stimulus announcement. 306 00:18:50,960 --> 00:18:55,600 Speaker 1: China doesn't want to restart another unsustainable boom, but neither 307 00:18:55,840 --> 00:18:58,679 Speaker 1: is the kind of nightmare scenario of a do nothing 308 00:18:58,880 --> 00:19:02,200 Speaker 1: Chinese government which allows the real estate sector to melt 309 00:19:02,200 --> 00:19:05,880 Speaker 1: down going to play out. You mentioned the banks. What 310 00:19:06,000 --> 00:19:10,680 Speaker 1: position are the banks in to recognize these types of losses? 311 00:19:10,800 --> 00:19:13,040 Speaker 1: And one of the things that I occasionally hear from 312 00:19:13,040 --> 00:19:15,359 Speaker 1: people in China is that, oh, it's not such a 313 00:19:15,359 --> 00:19:17,760 Speaker 1: big deal because a lot of the pre sales lending 314 00:19:17,840 --> 00:19:19,960 Speaker 1: was done by regional banks, or a lot of the 315 00:19:20,000 --> 00:19:22,679 Speaker 1: property lending, I should say, was done by regional banks, 316 00:19:22,960 --> 00:19:26,480 Speaker 1: which no one ever really regarded as safe anyway, So 317 00:19:26,560 --> 00:19:29,320 Speaker 1: it's not that much of an issue. So this is 318 00:19:29,560 --> 00:19:32,400 Speaker 1: this is potentially a big problem for China's banks. If 319 00:19:32,400 --> 00:19:36,639 Speaker 1: we think about the history of financial crises, real estate 320 00:19:36,880 --> 00:19:39,879 Speaker 1: often plays a very significant role. It was real estate 321 00:19:40,080 --> 00:19:45,720 Speaker 1: which kicked off the meltdown in Japan's economy, which ended 322 00:19:45,800 --> 00:19:50,119 Speaker 1: Japan's development miracle and pushed them into that lost decade 323 00:19:50,160 --> 00:19:54,399 Speaker 1: of low growth and falling prices. Of course, it was 324 00:19:54,400 --> 00:19:58,080 Speaker 1: the subprime crisis here in the United States, which kicked 325 00:19:58,080 --> 00:20:02,320 Speaker 1: off the Great Recession, and real estate also played a 326 00:20:02,320 --> 00:20:06,120 Speaker 1: big role in the Asian financial crisis back in so 327 00:20:06,520 --> 00:20:09,719 Speaker 1: problems in real estate do have a track record of 328 00:20:10,040 --> 00:20:14,000 Speaker 1: spilling over into the financial system, and China's financial system 329 00:20:14,160 --> 00:20:17,400 Speaker 1: is heavily exposed to real estate. There are a lot 330 00:20:17,480 --> 00:20:21,280 Speaker 1: of loans to households to buy homes. There are a 331 00:20:21,280 --> 00:20:24,280 Speaker 1: lot of loans to property developers, and a lot of 332 00:20:24,320 --> 00:20:27,240 Speaker 1: loans which are not directly to the property sector are 333 00:20:27,320 --> 00:20:32,919 Speaker 1: collateralized by property or land, which means a drop in 334 00:20:32,960 --> 00:20:37,160 Speaker 1: property prices or land prices would affect those loans as well. 335 00:20:38,080 --> 00:20:41,080 Speaker 1: So there's a substantial risk there. How should we think 336 00:20:41,080 --> 00:20:43,440 Speaker 1: about how that risk is going to impact I think 337 00:20:43,440 --> 00:20:48,199 Speaker 1: it's useful to think about two different types of Chinese banks. 338 00:20:48,720 --> 00:20:51,040 Speaker 1: At the top of the kind of chain, you've got 339 00:20:51,080 --> 00:20:54,080 Speaker 1: the big state owned banks, the I C, B c 340 00:20:54,359 --> 00:20:58,399 Speaker 1: s and C cbs and A B c's of the world. 341 00:20:58,760 --> 00:21:04,119 Speaker 1: They are extremely well funded and they have a huge 342 00:21:04,160 --> 00:21:09,679 Speaker 1: capital buffer. They are also diversified around the country, which 343 00:21:09,720 --> 00:21:13,080 Speaker 1: means that problems in a particular city or a particular 344 00:21:13,160 --> 00:21:16,080 Speaker 1: province aren't going to be good news. For them, but 345 00:21:16,160 --> 00:21:19,280 Speaker 1: they're not going to affect their entire loan book. I 346 00:21:19,320 --> 00:21:21,640 Speaker 1: don't think we're going to see problems for China's big 347 00:21:21,680 --> 00:21:24,720 Speaker 1: state owned banks. At the other end of the spectrum, 348 00:21:24,760 --> 00:21:29,440 Speaker 1: you've got small city banks. Now, small city banks tends 349 00:21:29,480 --> 00:21:33,640 Speaker 1: to have a much less stable funding base, they tend 350 00:21:33,640 --> 00:21:36,639 Speaker 1: to have a smaller capital buffer, and they tend to 351 00:21:36,680 --> 00:21:42,280 Speaker 1: be heavily exposed to lending in their own city. And 352 00:21:42,320 --> 00:21:45,800 Speaker 1: that means it's pretty easy to imagine a scenario where 353 00:21:45,800 --> 00:21:48,879 Speaker 1: you've got a city with a bunch of stalled property projects, 354 00:21:48,880 --> 00:21:51,919 Speaker 1: with a bunch of mortgage boycotts going on, with a 355 00:21:51,920 --> 00:21:54,600 Speaker 1: city bank that doesn't have good funding, that doesn't have 356 00:21:54,640 --> 00:21:57,760 Speaker 1: a strong capital buffer, and which runs into problems. We're 357 00:21:57,800 --> 00:22:01,560 Speaker 1: not quite there yet, but I wouldn't be surprised if 358 00:22:01,600 --> 00:22:04,639 Speaker 1: in the next one to three years we saw a 359 00:22:04,680 --> 00:22:07,880 Speaker 1: bunch of small city banks that needed a capital injection 360 00:22:24,800 --> 00:22:28,080 Speaker 1: on a pivot off of real estate a little bit 361 00:22:28,240 --> 00:22:30,920 Speaker 1: and talk about you know, the story of the world 362 00:22:31,200 --> 00:22:35,679 Speaker 1: right now is clearly commodity scarcity, and most of the 363 00:22:35,720 --> 00:22:40,199 Speaker 1: attention is focused on Europe and this soaring price of 364 00:22:40,240 --> 00:22:43,080 Speaker 1: power there, but it's really it's not just a Europe story. 365 00:22:43,160 --> 00:22:45,960 Speaker 1: A lot of developed markets everyday their story is about 366 00:22:46,040 --> 00:22:50,680 Speaker 1: some sort of rationing or export curbs or rolling blackouts 367 00:22:50,840 --> 00:22:53,800 Speaker 1: or surging price of price of food. I feel like, 368 00:22:54,160 --> 00:22:56,520 Speaker 1: you know, just sort of big picture, what is China's 369 00:22:56,560 --> 00:23:00,840 Speaker 1: commodity position? How much is that story affecting the Chinese 370 00:23:00,840 --> 00:23:03,600 Speaker 1: economy right now? Or to what degree is the is 371 00:23:03,680 --> 00:23:06,200 Speaker 1: China insulated from it? You know, Joe I would almost 372 00:23:06,200 --> 00:23:09,840 Speaker 1: flip that question around and think about how what's happening 373 00:23:09,880 --> 00:23:13,560 Speaker 1: in China right now is impacting the global commodity story. 374 00:23:13,760 --> 00:23:17,879 Speaker 1: So let's imagine that China was running a repeat of 375 00:23:17,920 --> 00:23:21,720 Speaker 1: its two thousand and eight massive stimulus play and getting 376 00:23:21,720 --> 00:23:25,359 Speaker 1: the economy back growing at six percent a year now. 377 00:23:25,640 --> 00:23:29,399 Speaker 1: If that happened, it would drive enormoust demand for energy, 378 00:23:29,520 --> 00:23:34,000 Speaker 1: in almost demand for metals, in almost demand for agricultural commodities, 379 00:23:34,359 --> 00:23:37,080 Speaker 1: and the biggest problem for the rest of the world 380 00:23:37,200 --> 00:23:41,320 Speaker 1: right now, high inflation driven in part by high commodity prices, 381 00:23:41,600 --> 00:23:43,919 Speaker 1: would be a lot worse. China is not running a 382 00:23:43,920 --> 00:23:46,840 Speaker 1: repeat of its two thousand and eight stimulus play. That 383 00:23:46,920 --> 00:23:50,439 Speaker 1: means growth is very weak. Second quarter we had actually 384 00:23:50,440 --> 00:23:54,240 Speaker 1: a contraction in GDP. Most people think the rebound in 385 00:23:54,280 --> 00:23:56,239 Speaker 1: the second half of the year is going to be 386 00:23:56,320 --> 00:23:59,280 Speaker 1: tepid at best. And what that means is China's commodity 387 00:23:59,320 --> 00:24:02,880 Speaker 1: demand just isn't where the markets expected it to be 388 00:24:03,040 --> 00:24:06,480 Speaker 1: a few months ago. That's one of the factors weighing 389 00:24:06,560 --> 00:24:11,960 Speaker 1: on energy prices, metals prices, agricultural commodity prices. So that's 390 00:24:11,960 --> 00:24:14,000 Speaker 1: actually making the biggest problem for the rest of the 391 00:24:14,040 --> 00:24:16,840 Speaker 1: world right now, the inflation problem a little bit easier 392 00:24:16,880 --> 00:24:20,520 Speaker 1: to grapple with, Tracy, you know, to timas point, something 393 00:24:20,520 --> 00:24:22,640 Speaker 1: I've been thinking about is, you know, all these US 394 00:24:22,760 --> 00:24:27,000 Speaker 1: retailers talk about how much excess inventory they have right now, 395 00:24:27,480 --> 00:24:30,040 Speaker 1: and in a way, you know, these hard lockdowns then 396 00:24:30,080 --> 00:24:32,639 Speaker 1: we saw in China, it's almost like kind of comes 397 00:24:32,880 --> 00:24:36,320 Speaker 1: almost at a fortuitous time in the sense that this 398 00:24:36,440 --> 00:24:39,159 Speaker 1: is not a time where you know, retailers want to 399 00:24:39,200 --> 00:24:41,240 Speaker 1: have a lot of like inventory or stuff coming in 400 00:24:41,280 --> 00:24:43,720 Speaker 1: from China. Well, this was actually going to be my 401 00:24:43,760 --> 00:24:48,160 Speaker 1: next question, which is, how does the FEDS inflation fight 402 00:24:48,440 --> 00:24:51,320 Speaker 1: and the fact that they seem to be even more 403 00:24:51,359 --> 00:24:54,960 Speaker 1: explicitly now trying to take a chunk out of consumer 404 00:24:55,040 --> 00:24:58,119 Speaker 1: demand to bring down prices, how is that going to 405 00:24:58,160 --> 00:25:01,080 Speaker 1: impact the Chinese economy at a time when it's already 406 00:25:01,160 --> 00:25:03,800 Speaker 1: quite fragile. It's a great question. I think you kind 407 00:25:03,800 --> 00:25:05,840 Speaker 1: of hid it in your in your introduction to the 408 00:25:05,920 --> 00:25:10,400 Speaker 1: To the Whole podcast. In normal circumstances, if China's economy 409 00:25:10,760 --> 00:25:13,680 Speaker 1: contracted like it did in the second quarter of the year, 410 00:25:14,240 --> 00:25:17,959 Speaker 1: if China's real estate sector was in crisis like it is, 411 00:25:18,119 --> 00:25:20,159 Speaker 1: then we'd all be waking up every day and seeing 412 00:25:20,200 --> 00:25:23,720 Speaker 1: that on the top of our Bloomberg terminal, checking the 413 00:25:23,840 --> 00:25:28,680 Speaker 1: un fixing that exactly, and we're not right. We're wondering 414 00:25:28,720 --> 00:25:31,120 Speaker 1: what your own Powell is going to say at Jackson Hole. 415 00:25:31,240 --> 00:25:33,159 Speaker 1: We're wondering if the European Central Bank is going to 416 00:25:33,240 --> 00:25:36,960 Speaker 1: deliver an outsize hike. So, at least on the sort 417 00:25:36,960 --> 00:25:39,800 Speaker 1: of the pr front, the sort of the inflation challenge 418 00:25:39,800 --> 00:25:41,520 Speaker 1: which the US and the rest of the world is 419 00:25:41,560 --> 00:25:43,840 Speaker 1: facing and which is absorbing all the attention of the 420 00:25:44,000 --> 00:25:47,040 Speaker 1: global financial markets, is actually doing China a bit of 421 00:25:47,040 --> 00:25:50,200 Speaker 1: a favor. They're in a crisis and they wants watching. 422 00:25:50,400 --> 00:25:53,560 Speaker 1: In a broader sense, though it is not good news 423 00:25:53,560 --> 00:25:56,760 Speaker 1: for China. China is going to spend certainly the rest 424 00:25:56,800 --> 00:26:01,280 Speaker 1: of this year and very likely several years ahead, working 425 00:26:01,320 --> 00:26:04,800 Speaker 1: through the problem of overcapacity in the real estate sector, 426 00:26:05,480 --> 00:26:09,600 Speaker 1: also grappling with COVID zero, and how ultimately to exit 427 00:26:09,840 --> 00:26:11,960 Speaker 1: from COVID zero. All of these things are going to 428 00:26:12,040 --> 00:26:14,359 Speaker 1: be bad news for domestic demand. Now, what do you 429 00:26:14,400 --> 00:26:18,359 Speaker 1: want when domestic demand is weak? You want external demand. 430 00:26:18,440 --> 00:26:21,320 Speaker 1: You want export demand to be super strong to provide 431 00:26:21,320 --> 00:26:25,000 Speaker 1: a buffer. Clearly, that's not going to happen. The FED 432 00:26:25,160 --> 00:26:29,120 Speaker 1: is very aggressively focused on tightening to bring inflation under control. 433 00:26:29,760 --> 00:26:32,119 Speaker 1: Very likely that's going to tip the U S economy 434 00:26:32,320 --> 00:26:37,399 Speaker 1: into recession. Same story in Europe. China's two x big 435 00:26:37,600 --> 00:26:41,400 Speaker 1: biggest export destinations are both going to be contracting at 436 00:26:41,440 --> 00:26:44,399 Speaker 1: exactly the moment China really needs them to be booming. 437 00:26:45,080 --> 00:26:47,520 Speaker 1: Talk to us a little bit more about the COVID 438 00:26:47,600 --> 00:26:51,080 Speaker 1: zero restrictions, because I feel like these are the things 439 00:26:51,160 --> 00:26:55,040 Speaker 1: the backdrop against which all of this economic drama is 440 00:26:55,080 --> 00:26:59,119 Speaker 1: actually happening. And this is a choice made by the 441 00:26:59,200 --> 00:27:03,880 Speaker 1: Chinese authority is to have very very restrictive COVID zero 442 00:27:03,920 --> 00:27:08,520 Speaker 1: policies to prevent free movement of goods and people, to 443 00:27:08,720 --> 00:27:10,840 Speaker 1: be very gung ho when it comes to lockdowns and 444 00:27:10,880 --> 00:27:14,199 Speaker 1: things like that. What's the motivation there and at what 445 00:27:14,400 --> 00:27:17,560 Speaker 1: point would you expect those to start to ease off 446 00:27:17,600 --> 00:27:20,280 Speaker 1: a bit. So, if we were having this conversation at 447 00:27:20,320 --> 00:27:24,520 Speaker 1: the end of or the end of, China would look 448 00:27:24,600 --> 00:27:28,760 Speaker 1: pretty clever on its management of its domestic COVID outbreak. 449 00:27:29,359 --> 00:27:32,880 Speaker 1: They contained the virus, saved a bunch of lives, and 450 00:27:32,920 --> 00:27:35,879 Speaker 1: they got the economy growing again. They were the only 451 00:27:36,000 --> 00:27:39,800 Speaker 1: major economy in the world to have a v shaped recovery. 452 00:27:39,920 --> 00:27:42,800 Speaker 1: From where we are heading further into the second half 453 00:27:42,800 --> 00:27:46,760 Speaker 1: of China is looking much less clever. Here in the 454 00:27:46,840 --> 00:27:51,159 Speaker 1: US and in Europe. At enormous expense in human life, 455 00:27:51,280 --> 00:27:55,040 Speaker 1: the population has a measure of immunity from the virus, 456 00:27:55,520 --> 00:27:58,520 Speaker 1: partly because many people have got sick and then recovered, 457 00:27:58,600 --> 00:28:01,440 Speaker 1: so they have natural immunity. Partly because we have this 458 00:28:01,520 --> 00:28:05,399 Speaker 1: sort of more advanced and effective mRNA vaccines, so normal 459 00:28:05,440 --> 00:28:08,040 Speaker 1: life has resumed. I'm I'm recording this Odd Lots of 460 00:28:08,040 --> 00:28:10,960 Speaker 1: podcast from the Bloomberg office. I dropped my children off 461 00:28:10,960 --> 00:28:14,560 Speaker 1: in school this morning. In China, because the population hasn't 462 00:28:15,080 --> 00:28:18,919 Speaker 1: experienced a wave of COVID infections, and because they've stuck 463 00:28:18,920 --> 00:28:22,719 Speaker 1: with their domestic vaccines and not imported or developed their 464 00:28:22,760 --> 00:28:26,679 Speaker 1: own version of mr NA. The population is COVID naive. 465 00:28:27,080 --> 00:28:29,840 Speaker 1: That's just a really big problem for China's government. But 466 00:28:30,000 --> 00:28:34,040 Speaker 1: now the decision has been to prioritize public health, so 467 00:28:34,080 --> 00:28:37,280 Speaker 1: they're sticking with the COVID zero strategy. Even when they 468 00:28:37,359 --> 00:28:40,280 Speaker 1: see a handful of cases break out in a particular city, 469 00:28:40,720 --> 00:28:45,040 Speaker 1: that city is locked down. That's pretty successful at saving lives. 470 00:28:45,720 --> 00:28:48,560 Speaker 1: It's a bit of a catastrophe for the economy. We 471 00:28:48,600 --> 00:28:51,440 Speaker 1: saw a contraction in the second quarter of this year. 472 00:28:52,120 --> 00:28:55,520 Speaker 1: It's entirely possible looking into the second half that will 473 00:28:55,520 --> 00:28:58,760 Speaker 1: see more cases in more major cities. Those cities will 474 00:28:58,760 --> 00:29:01,880 Speaker 1: be locked down, will see a further blow to growth. 475 00:29:02,640 --> 00:29:05,680 Speaker 1: Looking forward, I think the kind of the consensus expectation 476 00:29:05,960 --> 00:29:09,720 Speaker 1: is that at the Party Congress in the fall, President 477 00:29:09,800 --> 00:29:13,000 Speaker 1: Hijinping will get a third term in charge of the country, 478 00:29:13,200 --> 00:29:17,000 Speaker 1: and at that point, with that third term secured, the 479 00:29:17,000 --> 00:29:20,000 Speaker 1: attention of the government will shift towards how to exit 480 00:29:20,440 --> 00:29:24,080 Speaker 1: from COVID zero. One reason to kind of query or 481 00:29:24,280 --> 00:29:27,360 Speaker 1: or have some questions about that consensus view is what's 482 00:29:27,400 --> 00:29:30,680 Speaker 1: happening with vaccines. As far as I'm aware, China hasn't 483 00:29:30,760 --> 00:29:34,200 Speaker 1: moved to secure the one point four billion m r 484 00:29:34,320 --> 00:29:37,280 Speaker 1: n A doses it would need to give its population 485 00:29:37,360 --> 00:29:41,479 Speaker 1: the maximum protection ahead of opening up. Neither do they 486 00:29:41,480 --> 00:29:44,600 Speaker 1: seem to have their own domestic alternative, and that failure 487 00:29:44,680 --> 00:29:47,320 Speaker 1: to sort of move ahead aggressively on the vaccine front 488 00:29:47,560 --> 00:29:50,040 Speaker 1: raises some questions about what their end game is on 489 00:29:50,120 --> 00:29:53,120 Speaker 1: COVID zero. How long can it be sustained? Just the 490 00:29:53,160 --> 00:29:58,320 Speaker 1: economic damage that comes from retailers or restaurants or anything 491 00:29:58,360 --> 00:30:01,600 Speaker 1: in person in major cities seeing their demand and get 492 00:30:01,600 --> 00:30:04,680 Speaker 1: crushed the way it is, where they have so much uncertainty, 493 00:30:04,840 --> 00:30:09,120 Speaker 1: like does this do permanent supply side damage to the 494 00:30:09,200 --> 00:30:11,960 Speaker 1: Chinese economy? To have like such a long I mean, 495 00:30:12,000 --> 00:30:14,800 Speaker 1: we're we're facing in the US and as you mentioned, 496 00:30:15,160 --> 00:30:18,320 Speaker 1: we took a major loss of human life and a 497 00:30:18,320 --> 00:30:21,880 Speaker 1: lot of people got sick but bed because we sort 498 00:30:21,880 --> 00:30:24,360 Speaker 1: of made the choice to reopen very quickly and we're 499 00:30:24,360 --> 00:30:27,640 Speaker 1: still feeling the shocks of it, would intuitively seem like 500 00:30:27,680 --> 00:30:30,720 Speaker 1: a very long term damaging thing to have this much 501 00:30:31,480 --> 00:30:35,480 Speaker 1: supply side degradation and halt of so many businesses. Yeah, 502 00:30:35,520 --> 00:30:37,680 Speaker 1: I think that's completely right, Joe. So when we think 503 00:30:37,720 --> 00:30:41,360 Speaker 1: about sort of China's economy kind of broadly understood, we 504 00:30:41,400 --> 00:30:45,600 Speaker 1: think about a bunch of imbalances that have to be addressed. 505 00:30:45,840 --> 00:30:53,320 Speaker 1: So too much emphasis on industry, not enough emphasis on services, 506 00:30:53,360 --> 00:30:59,600 Speaker 1: too much investment and exports, not enough consumption, too much debt. 507 00:31:00,000 --> 00:31:03,280 Speaker 1: The state sector is too big, the private sector small, 508 00:31:03,320 --> 00:31:07,000 Speaker 1: private sector firms are too small. COVID lockdowns make all 509 00:31:07,040 --> 00:31:12,480 Speaker 1: of those imbalances worse. COVID lockdowns are a disaster, but 510 00:31:12,560 --> 00:31:18,120 Speaker 1: the services sector. COVID lockdowns hammer consumption whilst they leave 511 00:31:18,360 --> 00:31:24,640 Speaker 1: industrial output broadly untouched. COVID lockdowns require an increase in 512 00:31:24,760 --> 00:31:28,280 Speaker 1: debt to keep businesses solvent, and state owned enterprises, which 513 00:31:28,320 --> 00:31:30,800 Speaker 1: tend to be bigger and have better access to finance 514 00:31:31,320 --> 00:31:34,800 Speaker 1: a better place to survive COVID lockdowns than they're smaller 515 00:31:34,840 --> 00:31:40,160 Speaker 1: private sector rivals. So is the Chinese gonna economy going 516 00:31:40,200 --> 00:31:44,200 Speaker 1: to fall over tomorrow because of COVID lockdowns? I didn't 517 00:31:44,200 --> 00:31:46,000 Speaker 1: think so. I think one of the lessons of the 518 00:31:46,080 --> 00:31:50,040 Speaker 1: last two or three years is that actually pretty resilient 519 00:31:50,600 --> 00:31:53,880 Speaker 1: can be locked down and reopened. But certainly the longer 520 00:31:53,880 --> 00:31:57,320 Speaker 1: this goes on, the worst those imbalances are going to get, 521 00:31:57,520 --> 00:32:00,920 Speaker 1: and the higher the cost ultimately of unwind those unbalances 522 00:32:00,960 --> 00:32:04,520 Speaker 1: will be. So I have a big picture question based 523 00:32:04,560 --> 00:32:07,280 Speaker 1: on that, which is, how much of the problems that 524 00:32:07,360 --> 00:32:12,080 Speaker 1: we've been discussing, so the impact of COVID restrictions, impact 525 00:32:12,120 --> 00:32:16,880 Speaker 1: of lockdowns and COVID zero policies, and the influx of 526 00:32:16,880 --> 00:32:19,640 Speaker 1: money that has gone into the real estate sector as 527 00:32:19,640 --> 00:32:22,600 Speaker 1: you described at the beginning of this conversation, how much 528 00:32:22,640 --> 00:32:26,720 Speaker 1: of that could be fixed by strengthening China's social safety 529 00:32:26,800 --> 00:32:30,240 Speaker 1: nets such that people didn't have to put all their 530 00:32:30,320 --> 00:32:33,680 Speaker 1: savings into property because there were was, you know, a 531 00:32:33,760 --> 00:32:39,200 Speaker 1: government funded retirement option or national healthcare and things like that. 532 00:32:39,240 --> 00:32:43,960 Speaker 1: Are stronger healthcare services, I should say so. One of 533 00:32:44,000 --> 00:32:49,760 Speaker 1: the fundamental imbalances in China's economy is the imbalance in 534 00:32:49,800 --> 00:32:55,000 Speaker 1: the drivers of demand. Consumption plays a relatively small role 535 00:32:55,480 --> 00:33:01,360 Speaker 1: in driving demand. Investment and exports play a substantially larger 536 00:33:01,480 --> 00:33:07,360 Speaker 1: role in driving demand. Now, why is consumption weak? Well, 537 00:33:07,440 --> 00:33:11,160 Speaker 1: an important reason, as you suggested, Tracy, is because of 538 00:33:11,160 --> 00:33:16,120 Speaker 1: the absence of a social safety net. Because Chinese households 539 00:33:16,560 --> 00:33:20,720 Speaker 1: feel like they need to protect themselves against the risk 540 00:33:20,960 --> 00:33:27,000 Speaker 1: of unemployment or illness, or provide some funding to fall 541 00:33:27,040 --> 00:33:31,280 Speaker 1: back on when they retire, they save a substantial share 542 00:33:31,280 --> 00:33:35,760 Speaker 1: of their income. That saving goes into paying for investment, 543 00:33:36,400 --> 00:33:39,480 Speaker 1: and it also means they have less money to pay 544 00:33:39,800 --> 00:33:44,560 Speaker 1: for consumption. Now, there are other factors at work as well. 545 00:33:45,320 --> 00:33:49,880 Speaker 1: The one child policy has been an important driver of 546 00:33:49,960 --> 00:33:53,920 Speaker 1: that imbalance. If you have only one child, you just 547 00:33:54,000 --> 00:33:56,600 Speaker 1: spend less because you don't need such a big house, 548 00:33:56,640 --> 00:33:58,160 Speaker 1: you don't need to buy so many clothes, you don't 549 00:33:58,160 --> 00:33:59,600 Speaker 1: need to buy so much food, you don't need to 550 00:33:59,600 --> 00:34:03,000 Speaker 1: spend so much money on tutoring and so on. And 551 00:34:03,440 --> 00:34:06,000 Speaker 1: because you only have one child, you're worried they won't 552 00:34:06,000 --> 00:34:07,800 Speaker 1: be able to support you in your old age, so 553 00:34:07,880 --> 00:34:12,080 Speaker 1: you also save more. Financial repression has played a role 554 00:34:12,160 --> 00:34:17,040 Speaker 1: as well, so we mentioned earlier on that interest rates 555 00:34:17,080 --> 00:34:20,480 Speaker 1: were often lower than the level of inflation. That's been 556 00:34:20,520 --> 00:34:24,120 Speaker 1: a kind of deliberate government policy aimed at making it 557 00:34:24,200 --> 00:34:28,759 Speaker 1: cheaper to invest, but it also meant that Chinese households 558 00:34:28,800 --> 00:34:32,120 Speaker 1: needed to save more if they wanted to reach their 559 00:34:32,160 --> 00:34:35,840 Speaker 1: target for retirement. So all of these factors are at work. 560 00:34:36,480 --> 00:34:38,640 Speaker 1: The lack of a welfare state is one of them. 561 00:34:38,920 --> 00:34:43,359 Speaker 1: To China's government's credit, over the last twenty years, they 562 00:34:43,440 --> 00:34:47,319 Speaker 1: have been kind of progressively moving into place the kind 563 00:34:47,320 --> 00:34:51,839 Speaker 1: of the elements of a welfare state. So education, it's 564 00:34:51,880 --> 00:34:56,040 Speaker 1: not perfect, but it is now free and universal up 565 00:34:56,080 --> 00:34:59,640 Speaker 1: to the end of high school. The entire country has 566 00:35:00,160 --> 00:35:04,759 Speaker 1: least basic health insurance provided by the state. So it's 567 00:35:04,760 --> 00:35:07,360 Speaker 1: still a problem, but policy, at least in that respect, 568 00:35:07,400 --> 00:35:25,719 Speaker 1: is moving in the right direction. I brought up the 569 00:35:25,840 --> 00:35:29,040 Speaker 1: commodity and power question earlier, and as you noted, in 570 00:35:29,080 --> 00:35:33,919 Speaker 1: a way, the world is fortunate that Chinese demand for 571 00:35:33,960 --> 00:35:36,640 Speaker 1: a lot of industrial or energy commodities or even add 572 00:35:36,640 --> 00:35:38,680 Speaker 1: commodities is not as high as it might have been 573 00:35:39,080 --> 00:35:43,360 Speaker 1: in an alternate policy scenario. One commonality, however, and this 574 00:35:43,400 --> 00:35:45,399 Speaker 1: seems to this is a story that's getting a lot 575 00:35:45,400 --> 00:35:50,239 Speaker 1: more attention, is the effective simply extreme weather on the 576 00:35:50,280 --> 00:35:54,160 Speaker 1: production of energy itself, and that also is worsening things 577 00:35:54,160 --> 00:35:57,800 Speaker 1: in Europe. And there's a terrible heat wave and drought, 578 00:35:58,040 --> 00:36:01,320 Speaker 1: or certainly a heat wave happening in China right now. 579 00:36:01,440 --> 00:36:04,440 Speaker 1: How much is this adding to the pain? How significant 580 00:36:04,480 --> 00:36:06,759 Speaker 1: is this? How much are you watching the effect of 581 00:36:07,120 --> 00:36:11,440 Speaker 1: extreme weather and climate change on China's own ability to 582 00:36:11,840 --> 00:36:16,319 Speaker 1: provide for itself. So China is one of the countries 583 00:36:16,400 --> 00:36:20,320 Speaker 1: in the world which is most at risk from climate change, 584 00:36:20,520 --> 00:36:24,680 Speaker 1: Most of the population or the plurality of the population, 585 00:36:25,160 --> 00:36:28,759 Speaker 1: live on the East coast, which means they're exposed to 586 00:36:28,760 --> 00:36:32,680 Speaker 1: the risk of rising sea levels. A large share of 587 00:36:32,719 --> 00:36:37,640 Speaker 1: the population still work in agriculture. Agriculture, of course, is 588 00:36:37,800 --> 00:36:40,520 Speaker 1: one of the sectors which is most at risk as 589 00:36:40,520 --> 00:36:45,600 Speaker 1: temperatures rise. So thinking on a kind of multi decade trajectory, 590 00:36:45,680 --> 00:36:49,319 Speaker 1: China faces some significant risks from climate change, and that's 591 00:36:49,360 --> 00:36:52,880 Speaker 1: why climate change is one of the few areas where 592 00:36:53,320 --> 00:36:56,120 Speaker 1: China still wants to do business with the United States 593 00:36:56,200 --> 00:36:59,520 Speaker 1: and get some stuff done. The situation right now with 594 00:37:00,000 --> 00:37:03,520 Speaker 1: a high temperatures meaning that there's not enough water supply 595 00:37:03,920 --> 00:37:09,520 Speaker 1: to power hydroelectricity, and that's contributing to power shortages. That's 596 00:37:09,600 --> 00:37:14,080 Speaker 1: an additional negative of China's economy at a moment, where 597 00:37:14,480 --> 00:37:19,040 Speaker 1: with real estate in crisis, with COVID zero imposing some costs, 598 00:37:19,239 --> 00:37:22,080 Speaker 1: they don't need an extra problem to deal with. I 599 00:37:22,080 --> 00:37:24,800 Speaker 1: wouldn't say it was the kind of the dominant narrative 600 00:37:25,000 --> 00:37:27,480 Speaker 1: or the biggest problem that they're facing right now. So 601 00:37:27,760 --> 00:37:30,799 Speaker 1: there is a very big event coming up, which is 602 00:37:30,840 --> 00:37:35,320 Speaker 1: the National Party Congress, the big gathering of China's policymakers 603 00:37:35,840 --> 00:37:41,360 Speaker 1: and Traditionally, when that happens, you often see the government 604 00:37:41,480 --> 00:37:44,240 Speaker 1: start to say or do things that would be expected 605 00:37:44,280 --> 00:37:46,759 Speaker 1: to boost the economy and push up stocks so that 606 00:37:46,840 --> 00:37:50,440 Speaker 1: everyone is fairly happy going into this big event. What 607 00:37:50,480 --> 00:37:55,440 Speaker 1: do you expect from this year's congress? So, Tracy, you 608 00:37:55,480 --> 00:37:57,880 Speaker 1: are in Hong Kong at the same time as I 609 00:37:57,960 --> 00:38:01,080 Speaker 1: was in Beijing, so you know as well as me 610 00:38:01,320 --> 00:38:06,520 Speaker 1: that ahead of these big political events, what China's policymakers want, 611 00:38:06,719 --> 00:38:10,440 Speaker 1: What the Communist Party wants is stability. They want stability 612 00:38:10,440 --> 00:38:13,879 Speaker 1: in the economy, they want stability in the financial markets, 613 00:38:14,160 --> 00:38:16,279 Speaker 1: and this time around they're not going to have it. 614 00:38:16,960 --> 00:38:20,239 Speaker 1: The real estate crisis, I think, is going to run 615 00:38:20,440 --> 00:38:24,800 Speaker 1: for certainly months, and the drag from real estate is 616 00:38:24,800 --> 00:38:28,040 Speaker 1: going to last few years. There's no sign so far 617 00:38:28,440 --> 00:38:31,960 Speaker 1: that the government is willing to exit from COVID zero, 618 00:38:32,040 --> 00:38:35,000 Speaker 1: and when they do ultimately exit from COVID zero, that's 619 00:38:35,040 --> 00:38:37,680 Speaker 1: going to be a very messy and very costly process. 620 00:38:37,960 --> 00:38:41,719 Speaker 1: So my expectation ahead of the Party Congress is that 621 00:38:41,760 --> 00:38:44,160 Speaker 1: we're going to see a sort of a continued drip 622 00:38:44,280 --> 00:38:47,359 Speaker 1: drip of stimulus measures. The government is going to want 623 00:38:47,360 --> 00:38:51,040 Speaker 1: to bring a measure of stability to the real estate sector, 624 00:38:51,560 --> 00:38:54,960 Speaker 1: a measure of stability to the bond and equity markets. 625 00:38:55,120 --> 00:38:57,160 Speaker 1: But they're not going to be able to deliver the 626 00:38:57,239 --> 00:39:00,440 Speaker 1: kind of massive stimulus which will be need. It's kind 627 00:39:00,440 --> 00:39:04,040 Speaker 1: of significantly turn the situation around and create that kind 628 00:39:04,040 --> 00:39:07,200 Speaker 1: of feel good factor which they normally like to have 629 00:39:07,280 --> 00:39:10,000 Speaker 1: heading into these big political events. So I'll just ask 630 00:39:10,080 --> 00:39:13,799 Speaker 1: one more big picture question. But your book China The 631 00:39:13,800 --> 00:39:16,919 Speaker 1: Bubble that Never Popped, and the second edition is coming out, 632 00:39:17,280 --> 00:39:19,640 Speaker 1: and of course the people have been talking about the 633 00:39:19,719 --> 00:39:23,360 Speaker 1: China bubble collapsing for years and years all certainly for 634 00:39:23,400 --> 00:39:25,839 Speaker 1: as long as our career man traces, and as your 635 00:39:25,840 --> 00:39:29,000 Speaker 1: book notes, it never seems to happen. I mean, is 636 00:39:29,040 --> 00:39:31,520 Speaker 1: it does it feel different this time or is this 637 00:39:31,600 --> 00:39:34,960 Speaker 1: like look, China goes has these periods where there's lots 638 00:39:35,000 --> 00:39:38,720 Speaker 1: of stress like many other countries like Europe, like the US, 639 00:39:38,840 --> 00:39:41,640 Speaker 1: and uh, you know, eventually it models through and finds 640 00:39:41,680 --> 00:39:44,520 Speaker 1: way out. Does it feel different this time is well, 641 00:39:44,520 --> 00:39:47,480 Speaker 1: how does it feel compared to other periods of stress 642 00:39:47,480 --> 00:39:50,880 Speaker 1: and turmoil for China's economic history? So it feels worse, 643 00:39:50,960 --> 00:39:54,680 Speaker 1: Joe Um. I think there's a confluence of the factors 644 00:39:54,760 --> 00:39:58,000 Speaker 1: which which you're sort of coming together right now, and 645 00:39:58,040 --> 00:40:01,640 Speaker 1: which will also weigh on China's growth going forward. So 646 00:40:01,680 --> 00:40:05,440 Speaker 1: we've talked about real estate. China has had real estate 647 00:40:05,520 --> 00:40:08,680 Speaker 1: busts in the past, but this one looks more severe. 648 00:40:08,800 --> 00:40:12,680 Speaker 1: We've talked about COVID zero that's already a drag on growth, 649 00:40:13,000 --> 00:40:15,480 Speaker 1: and there's the big unanswered question of how they exit 650 00:40:15,600 --> 00:40:18,640 Speaker 1: from it. One thing we haven't talked about, but which 651 00:40:18,680 --> 00:40:23,640 Speaker 1: is also really important is China's kind of growing international isolation. 652 00:40:24,600 --> 00:40:28,160 Speaker 1: China is a big exporting country. China is a net 653 00:40:28,200 --> 00:40:33,000 Speaker 1: beneficiary of technology transfer. Big driver of China's growth has 654 00:40:33,000 --> 00:40:37,520 Speaker 1: been learning from or if we're less charitable, stealing advanced 655 00:40:37,560 --> 00:40:40,920 Speaker 1: technologies from other parts of the world. That's just going 656 00:40:40,920 --> 00:40:43,440 Speaker 1: to be much more difficult in the years ahead as 657 00:40:43,520 --> 00:40:49,080 Speaker 1: hostility to China in the US in big European countries increases. 658 00:40:49,280 --> 00:40:53,080 Speaker 1: So all of these factors are sort of hitting China 659 00:40:53,200 --> 00:40:56,640 Speaker 1: right now and threatening to weigh on China in the 660 00:40:56,719 --> 00:40:59,840 Speaker 1: years ahead. At the same time, I think it's important 661 00:40:59,840 --> 00:41:06,640 Speaker 1: to recognize that China retains pretty significant resources for resilience. 662 00:41:07,000 --> 00:41:12,400 Speaker 1: China is at a relatively low stage of development. Gdpe 663 00:41:12,480 --> 00:41:15,719 Speaker 1: per capita in China is still just a third of 664 00:41:15,800 --> 00:41:19,520 Speaker 1: g D peper capita in the United States. That means 665 00:41:19,640 --> 00:41:25,160 Speaker 1: China has continued and substantial room to grow, not by 666 00:41:25,200 --> 00:41:29,440 Speaker 1: sort of doing anything particularly innovative or inventive, but just 667 00:41:29,560 --> 00:41:33,520 Speaker 1: by continuing to kind of move up a technology ladder 668 00:41:33,680 --> 00:41:37,040 Speaker 1: which it can already see in front of it. Don't 669 00:41:37,080 --> 00:41:41,840 Speaker 1: forget that Japan fell over when it's g D peper 670 00:41:41,880 --> 00:41:45,480 Speaker 1: capital was of the level in the United States, so 671 00:41:45,600 --> 00:41:48,280 Speaker 1: China has a long way to go before it reaches 672 00:41:48,320 --> 00:41:54,799 Speaker 1: that level. Secondly, because China's policymakers remain ingenious in their 673 00:41:54,800 --> 00:41:59,480 Speaker 1: capacity to think about inventive solutions to economic and financial problems, 674 00:41:59,640 --> 00:42:02,800 Speaker 1: they can tinue to have a certain amount of space, 675 00:42:03,320 --> 00:42:05,360 Speaker 1: certainly less space than they did in the past, but 676 00:42:05,440 --> 00:42:09,480 Speaker 1: still some space for maneuver as they address those problems. 677 00:42:09,640 --> 00:42:14,960 Speaker 1: And philosophically, China's policymakers, I don't want to see everything 678 00:42:15,320 --> 00:42:18,600 Speaker 1: burned down, right, They would sooner see a bit more 679 00:42:18,880 --> 00:42:23,440 Speaker 1: imbalance than a lot of collections, all right, Tom or Like, 680 00:42:23,560 --> 00:42:26,840 Speaker 1: chief economist at Bloomberg Economics and the author of China 681 00:42:26,920 --> 00:42:29,080 Speaker 1: The Bubble That Never Pops, thank you so much for 682 00:42:29,120 --> 00:42:31,440 Speaker 1: coming back on our thoughts. That was great, great to 683 00:42:31,480 --> 00:42:49,560 Speaker 1: be here. That was great, Tom, Thank you so Joe. 684 00:42:49,640 --> 00:42:52,359 Speaker 1: Clearly a lot of things to pull out of this conversation, 685 00:42:52,520 --> 00:42:55,680 Speaker 1: but I think the overwhelming one is just this tension 686 00:42:55,880 --> 00:43:01,160 Speaker 1: between solving the problem versus recreate hinting the problem in 687 00:43:01,200 --> 00:43:05,440 Speaker 1: some respects or accepting those balances that Tom was describing, Like, 688 00:43:05,480 --> 00:43:08,360 Speaker 1: there does seem to be that fundamental tension though. That 689 00:43:08,520 --> 00:43:11,960 Speaker 1: was actually the most interesting or one of the interesting 690 00:43:12,000 --> 00:43:14,680 Speaker 1: ideas that I hadn't thought about before. The degree to 691 00:43:14,760 --> 00:43:20,400 Speaker 1: which COVID zero policies push back reforms, the degree to 692 00:43:20,480 --> 00:43:24,279 Speaker 1: which they favor s O s over smaller companies, the 693 00:43:24,320 --> 00:43:27,880 Speaker 1: degree to which they favor industry over services, the degree 694 00:43:27,880 --> 00:43:30,640 Speaker 1: to which they forced the private sector into deeper debt, 695 00:43:30,920 --> 00:43:33,839 Speaker 1: the degree to which it diminishes consumption. I hadn't thought about, 696 00:43:33,880 --> 00:43:36,800 Speaker 1: like all of these structural imbalances that we've talked about 697 00:43:36,920 --> 00:43:40,800 Speaker 1: for years with several guests, the degree to which COVID 698 00:43:40,880 --> 00:43:43,240 Speaker 1: zero is like this huge setback on those and COVID 699 00:43:43,320 --> 00:43:47,600 Speaker 1: zero in exacerbating the economic problems that we've just described, 700 00:43:47,640 --> 00:43:50,799 Speaker 1: seems to be creating a double whammy. Right, So, on 701 00:43:50,840 --> 00:43:53,640 Speaker 1: the one hand, it stopped some of the reforms that 702 00:43:53,680 --> 00:43:56,280 Speaker 1: the Chinese government might want to see like the shift 703 00:43:56,880 --> 00:44:00,160 Speaker 1: two services. And on the other hand, it all so 704 00:44:00,400 --> 00:44:03,400 Speaker 1: means that you have to enact stimulus measures, and most 705 00:44:03,440 --> 00:44:06,000 Speaker 1: of Chinese stimulus, you know, it tends to be large 706 00:44:06,040 --> 00:44:10,840 Speaker 1: scale infrastructure projects or more credit to build more houses, 707 00:44:10,920 --> 00:44:14,360 Speaker 1: which is problematic in the current situation. You know what. 708 00:44:14,840 --> 00:44:17,759 Speaker 1: At the end, he gave I thought a follow up 709 00:44:17,800 --> 00:44:20,080 Speaker 1: podcast that we should do with someone that I don't 710 00:44:20,080 --> 00:44:24,040 Speaker 1: think it's gotten enough discussion. Is the long term or 711 00:44:24,080 --> 00:44:27,960 Speaker 1: medium term effects of geopolitical isolation for China, which I 712 00:44:28,000 --> 00:44:30,920 Speaker 1: hadn't really thought of, but as he mentioned, whether it's 713 00:44:31,000 --> 00:44:35,520 Speaker 1: technology transfer however you want to use that term, other 714 00:44:35,640 --> 00:44:39,840 Speaker 1: aspects of just being a country that's heavily dependent on exports, etcetera. 715 00:44:40,120 --> 00:44:43,400 Speaker 1: Like what does it mean for China in ten, five, 716 00:44:43,560 --> 00:44:47,880 Speaker 1: fifteen years to have this sort of you know, basically 717 00:44:48,000 --> 00:44:51,799 Speaker 1: deglobalization in a sense from the Chinese perspective. Yeah, I 718 00:44:51,800 --> 00:44:53,800 Speaker 1: would be totally into that. I think it's an interesting 719 00:44:53,880 --> 00:44:56,040 Speaker 1: question because on the one hand, yes, it's an export 720 00:44:56,080 --> 00:44:59,120 Speaker 1: based economy, they don't want to be completely disconnected from 721 00:44:59,120 --> 00:45:02,839 Speaker 1: the global economy. But on the other hand, there are 722 00:45:02,880 --> 00:45:07,279 Speaker 1: ways in which isolation could benefit China's economic reforms by 723 00:45:07,320 --> 00:45:11,279 Speaker 1: building up technology self sufficiency as you just mentioned, or 724 00:45:11,360 --> 00:45:14,440 Speaker 1: you know, even keeping capital more in the country versus 725 00:45:14,440 --> 00:45:17,880 Speaker 1: having outflows. It's a really interesting question. Let's follow up 726 00:45:17,920 --> 00:45:19,840 Speaker 1: on it, all right, shall we leave it there for 727 00:45:19,880 --> 00:45:22,640 Speaker 1: let's leave it there. Okay, this has been another episode 728 00:45:22,719 --> 00:45:25,400 Speaker 1: of the ad Thoughts podcast. I'm Tracy Alloway. You can 729 00:45:25,440 --> 00:45:28,319 Speaker 1: follow me on Twitter at Tracy Alloway, and I'm Joe 730 00:45:28,320 --> 00:45:31,400 Speaker 1: wisn't Thal. You can follow me on Twitter at The Stalwart. 731 00:45:31,719 --> 00:45:34,920 Speaker 1: Follow our guest tom Orlick. He's at tom Orlick, and 732 00:45:35,040 --> 00:45:37,399 Speaker 1: check out his book, which a new edition is coming 733 00:45:37,400 --> 00:45:40,719 Speaker 1: out of China, The Bubble That Never Pops. Follow our 734 00:45:40,760 --> 00:45:44,759 Speaker 1: producer Kerman Rodriguez at Kerman Armine, and check out all 735 00:45:44,760 --> 00:45:49,040 Speaker 1: of the Bloomberg podcasts on Twitter under the handle at podcasts. 736 00:45:49,200 --> 00:46:13,480 Speaker 1: Thanks for listening year to