Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe. Wisn't Joe? There is
Speaker 1: a big event coming up, very very soon. It is
Speaker 1: the National Congress of the Chinese Communist Party, something that
Speaker 1: is held every five years, which means it is de
Speaker 1: facto already a big event, but it's even bigger this
Speaker 1: year because it is happening amidst Really, how do I
Speaker 1: describe this a set of challenges for both the Chinese
Speaker 1: government and the Chinese economy. Yeah, I mean, look, you
Speaker 1: say every five years, and so five years ago was
Speaker 1: during the Trump administration, and of course at the time,
Speaker 1: you know, trade tensions were obviously ratcheting up under Trump.
Speaker 1: But it feels like today in any of the sort
Speaker 1: of tensions and long term challenges facing the economy, the
Speaker 1: Chinese economy today, or the Chinese political system, everything seems
Speaker 1: like it's probably tenfold more intense and more ambiguous than
Speaker 1: where it was, say, five years ago. Right, So, there's
Speaker 1: a lot of speculation around exactly what She shin Ping
Speaker 1: has in store for this particular congress. There are questions
Speaker 1: over whether or not China might ratchet down some of
Speaker 1: its COVID zero policies, although I have to say we
Speaker 1: did just see an editorial from the People's Daily in
Speaker 1: defense of those policies, so that seems unlikely. But there
Speaker 1: is this broad question mark over what's going on with
Speaker 1: the Chinese economy and the government. Can it withstand all
Speaker 1: these pressures on real estate from the strong dollar politically
Speaker 1: and maintain some of the restrictions that it's had going
Speaker 1: for I mean, really, what two or three years now? Yeah,
Speaker 1: I mean there's so many things. You mentioned the real estate,
Speaker 1: you mentioned, the COVID zero questions, and the other big
Speaker 1: thing that is very new and it's something that we
Speaker 1: haven't talked about in a while but will be very
Speaker 1: familiar to odd lots of listeners, and that is the
Speaker 1: growing restrictions on technology transfer, particularly semi conductors. Some very
Speaker 1: aggressive moves from the Biden administration to restrict the export
Speaker 1: of certain technologies related to chips to China. That is
Speaker 1: a huge deal. Of course, we know that China has
Speaker 1: domestic ambitions, but we see semi conductor stocks they've been
Speaker 1: plunging lately. That's a huge story. Right. So China technology
Speaker 1: hasn't been a major issue since we had that big
Speaker 1: government crackdown, but it feels like the semiconductor angle is
Speaker 1: heating up again. So we are going to be combining
Speaker 1: all of this, all these headwinds, all these big questions,
Speaker 1: these big issues, and speaking to one of our all
Speaker 1: time favorite Odd Lots guests. We are going to be
Speaker 1: talking to Dan Wong. He is, of course, a technology
Speaker 1: analyst over at Gabaquelle Dragonomics, and he's left his farmhouse
Speaker 1: in unn to Uh to come into the New York
Speaker 1: studio and walk us through everything that's happening in China
Speaker 1: right now. Have we ever recorded an episode with no
Speaker 1: we have in studio? We go, what is this web?
Speaker 1: We haven't? We did? We did one in the upstairs studio.
Speaker 1: I think we did for TV. I've never been I've
Speaker 1: never recorded Odd Lots in person. Really well, I think
Speaker 1: Dan has taken the clear lead. Anyway, we should probably
Speaker 1: talk about what we're gonna talk about. Dan. Thanks for
Speaker 1: coming on. It's great to be here in person, Joe,
Speaker 1: and you're a lot skinnier in person than the Internet
Speaker 1: takes me to believe. I think that was an insult
Speaker 1: believe that Dan. I'm going to start with a very
Speaker 1: broad question, but how would you describe the state of
Speaker 1: China's political economy right now? There's no way around it,
Speaker 1: Tracy that it is pretty bad. Um. So right now
Speaker 1: China is presently going into the third year of the
Speaker 1: zero and uh, it's not very clear when or if
Speaker 1: they can re emerge pretty quickly from that. China's economy
Speaker 1: is in the worst shape in decades, caused partly by
Speaker 1: COVID zero, and I would say mostly by the property downturn.
Speaker 1: Property is a very very substantial part of the Chinese
Speaker 1: economy by some measures over of the marginal growth, and
Speaker 1: so it is really difficult for China's economy to do
Speaker 1: well as a whole when property sector isn't doing well.
Speaker 1: So the economy is being battered by COVID zero mostly
Speaker 1: on the consumption side. The property downturn is affecting general
Speaker 1: sentiment at large. Uh. And maybe the only thing that
Speaker 1: has been going fairly well has been China's production side um,
Speaker 1: mostly intended for exports, but even that is starting to soften.
Speaker 1: And think there isn't too much choice left in the
Speaker 1: squeeze for China's economy and exports to go really well
Speaker 1: when most of the rest of the world isn't going
Speaker 1: to be doing too well, especially if Europe and the
Speaker 1: US soften in terms of economic growth too. So I
Speaker 1: mean this sort of sets the stage for the National Congress,
Speaker 1: which I mentioned in the intro, that's set to begin
Speaker 1: on October six What is actually on the agenda? And
Speaker 1: I mean sort of like background methodology question, but how
Speaker 1: do you how do we know what's on the agenda?
Speaker 1: And how are these things sort of formulated by the party,
Speaker 1: how do they actually pick priorities. The most important event
Speaker 1: in China every five years is the Party Congress. On
Speaker 1: October sixteenth will have the twentie Party Congress. And it's
Speaker 1: a really great question about methodology, tracy, because in general,
Speaker 1: our rule of thumb should always be that the Communist
Speaker 1: Party is a total black box, and they are. They
Speaker 1: have a very good sense of omerta that makes it
Speaker 1: pretty difficult for outsiders really to know what's going on,
Speaker 1: and the insiders don't really talk to the outsiders, so
Speaker 1: it becomes a little bit challenging for us to you know,
Speaker 1: even interpret the results even when they come out. So
Speaker 1: what I'm watching out for are three big items on
Speaker 1: the agenda that will determine a lot of the future
Speaker 1: based on, you know, mostly what happens in terms of personnel.
Speaker 1: And I should say that the Party Congress is really
Speaker 1: an internal party meeting. It is not so much just
Speaker 1: lay out anything in terms of the specifics of policy choices.
Speaker 1: The Party Congress is mostly for a way for the
Speaker 1: party to celebrate itself, determine the personnel, and then figure
Speaker 1: out what's going on in the next five years. And
Speaker 1: so I think there are three big questions on the
Speaker 1: agenda for this Party Congress. In particular, the first will
Speaker 1: be whether Seeing King, the China top leader, will be
Speaker 1: China's top leader for the next five years. Now, consensus
Speaker 1: is that she will almost certainly have a third term,
Speaker 1: and I am totally with consensus. I think it is
Speaker 1: very very unlikely that she will be removed or somehow
Speaker 1: retired in some sort of party decision. The second big
Speaker 1: question that I think we should um, you know, pay
Speaker 1: attention to, it's just exactly the composition of the personnel selected,
Speaker 1: both in terms of the Pollock Bureau Standing Committee as
Speaker 1: well as the Pollock Bureau at large. And then we
Speaker 1: will have some idea of who is going to be
Speaker 1: the premier, and then some suggestions of who is going
Speaker 1: to be vice premier in charge of the economy, as
Speaker 1: well as a lot of other things. And so the
Speaker 1: third big question that I think we have to watch
Speaker 1: out for, and really maybe this is the most important question,
Speaker 1: is whether China's top leader, ce j Ping um annoints
Speaker 1: any successors to be the future leader of China. And
Speaker 1: right now I think this is one of the big
Speaker 1: debates that Um. You know, perhaps she will allow some
Speaker 1: younger personnel in so that he is not China's top
Speaker 1: leader for a while, or maybe he is just goes
Speaker 1: on ruling for a very long time. The last thing
Speaker 1: I'll stress about um the party congress is again, the
Speaker 1: Communist Party is a big black box. It is really
Speaker 1: difficult for us to interpret what goes on. And there
Speaker 1: are now some questions among China watchers, the people who
Speaker 1: follow the politics and read the tea leaves really closely.
Speaker 1: Some of them contend that well, it may not even
Speaker 1: matter who is premier, whether that is someone like one
Speaker 1: Young who is seen as a reformer, or someone like
Speaker 1: Hutran Hua who might not be so closely associated with s.
Speaker 1: The important thing here is that she has become all powerful.
Speaker 1: He has been able to steamroll all opposition, And it
Speaker 1: is possible that personnel doesn't matter so much because there
Speaker 1: is now one guy who controls everything and that's the
Speaker 1: most important thing. So just on the premier point, the
Speaker 1: existing premier is Lead Ka Ching, and he has said
Speaker 1: this is going to be his last term as premier
Speaker 1: and that's why we're talking about potentially choosing new ones.
Speaker 1: But he has this reputation for you know, there's the
Speaker 1: lead kitchen index, um of course, and he has the
Speaker 1: reputation of sort of opening up China to foreign investment
Speaker 1: and foreign capital. Does that go away as he exits?
Speaker 1: I don't think China will lose its openness towards foreign
Speaker 1: capital or its friendliness read large towards multinationals that are
Speaker 1: willing to invest in China with this personnel change. I
Speaker 1: think in general in China, where you sit is what
Speaker 1: you stand for, and there will be someone standing up
Speaker 1: for a lot of these economic interests. So Um, again,
Speaker 1: the party is a bit of a black box. It
Speaker 1: could be that lekas Young is shuffled into some other position,
Speaker 1: like the leader of the Legislature. That's one of the
Speaker 1: possibilities floating out there. In that case, he would still
Speaker 1: have some influence. China is a pretty discretionary system in
Speaker 1: which the levers of power are not exactly always very legalistic,
Speaker 1: and a lot of it comes down to have power
Speaker 1: and influence. So I suspect that there will be some
Speaker 1: substantial remnants of least influence, especially given that the economy
Speaker 1: is just such an important part of, you know, the
Speaker 1: Communist Party's message towards its own legitimacy. I want to
Speaker 1: get to the various things that will be discussing all
Speaker 1: of the issues facing China, but sort of one more
Speaker 1: housekeeping question on the Congress itself. Is it a is
Speaker 1: it a vote? What everyone comes together? How do they
Speaker 1: decide on things? What is the sort of process by
Speaker 1: which the meeting turns into policy or priority? So they
Speaker 1: make the longest speeches on earth, That's the only thing
Speaker 1: you need to know. I think part of it is
Speaker 1: whoever can withstand the super long speeches, especially by see
Speaker 1: they get to decide the vote. Um I've heard, don't
Speaker 1: they say like in a communist countries? That isn't that
Speaker 1: the sort of reputation that historically communist countries have had
Speaker 1: long speeches? So lack of democracy or lack of transparency
Speaker 1: is sort of counteracted by they say a lot of stuff. Yes,
Speaker 1: that's right. It's a very opaque way of getting around
Speaker 1: this transparency issue. You know, a lot of it comes
Speaker 1: down to basically the China's top party leadership getting together,
Speaker 1: whether that is people currently on the Central Committee, there
Speaker 1: is the party elders, the retired people, the previous premiers
Speaker 1: in general secretaries have some way of casting their vote
Speaker 1: and influencing their decisions, and there is a formal way.
Speaker 1: I think a very good explanation is by Lingley of
Speaker 1: the University of Vienna. So I think I'm encouraged readers
Speaker 1: to look at that piece to figure out what are
Speaker 1: the exact mechanics here. So I know Joe was kind
Speaker 1: of joking about transparency through speeches, but one of the
Speaker 1: things that we actually learned from you on an ad
Speaker 1: Blots episode, I mean, you emphasize this point that every
Speaker 1: China investor should be reading the speeches and the publications
Speaker 1: that the Chinese Communist Party actually puts out. And they
Speaker 1: do have this magazine called Seeking Truth that they put
Speaker 1: out regularly, and it does have interesting policy suggestions and
Speaker 1: ideas in it, and there was one that came out
Speaker 1: recently that had I think a previously unpublished speech by
Speaker 1: She where he was really talking about I guess building
Speaker 1: up China's external influence. How important is that idea as
Speaker 1: as we approached the Congress, Like, is this something that
Speaker 1: China is serious about? And how do you see it
Speaker 1: going about actually building up that external influence? Sure? Well, Tracy,
Speaker 1: just to put a little bit of nuance on my point,
Speaker 1: I think that investors should be aware of what are
Speaker 1: the major pronouncements of the Communist Party, especially speeches by She,
Speaker 1: But I think it would be a little bit much
Speaker 1: to try to read all of them. Now, I did
Speaker 1: read every issue of Tillshare, the magazine that translates into
Speaker 1: Seeking Truth, and I'm afraid it broke me and it
Speaker 1: was just far too much communist fbh um to process.
Speaker 1: But I think it would be a good rule of
Speaker 1: thumb to, you know, try to have some sense of
Speaker 1: what's going on in this magazine and how the party
Speaker 1: is communicating to its insiders and the pert echelons of
Speaker 1: the leadership. Now, presidency has talked about making China have
Speaker 1: greater influence abroad, and that is a recurring message from him.
Speaker 1: I believe it was sometime last year that presidency said that, um,
Speaker 1: what China should do is to make the country's image
Speaker 1: more credible and more lovable. And what has he done
Speaker 1: subsequently really to make China's image much more lovable. Well,
Speaker 1: there hasn't been a very substantial shift in policies in
Speaker 1: any direction. So on the credibility side, you know, it's taken, um,
Speaker 1: you know, kind of a battering, given how much the
Speaker 1: economy has suffered this year. And has China become a
Speaker 1: lot more lovable recently, Well, it's a little hard to
Speaker 1: see what the standards are, but we haven't seen China
Speaker 1: create a lot of let's say, anime skits on the
Speaker 1: Japanese style or you know, really anything that um, you know,
Speaker 1: makes China very broadly appealing. There isn't that much culture
Speaker 1: that the rest of the world has really gotten. So um,
Speaker 1: I think I chalk it up to presidency saying something
Speaker 1: important because he is always talking about these sort of things.
Speaker 1: But on any level, China's image has gotten worse over
Speaker 1: the last five years, over the last ten years since
Speaker 1: the start of his term, especially given China's various alleged
Speaker 1: human rights abuses in Hong Kong. In Sin Yang in Tabat,
Speaker 1: as well as the alignment with Russia earlier this year
Speaker 1: when Presidency declared a no limits friendship with President Putin.
Speaker 1: So by any measure, I wouldn't say that it has been, um,
Speaker 1: you know, a very big priority for the Communist Party
Speaker 1: really to win hearts and minds abroad. Since you mentioned
Speaker 1: the alignment with Putin, where how would you summarize China's
Speaker 1: stands on the war today and the in particular, both
Speaker 1: the war itself and then the sort of trajectory of
Speaker 1: the relationship with Russia. I think it can be best
Speaker 1: described as tacit support for Russia's invasion of Ukraine. The
Speaker 1: Communist Party would never come out and say, yes, we
Speaker 1: support this special military operation, this pretty aggressive invasion in
Speaker 1: any explicit terms, um. But the diplomatically and rhetorically, I
Speaker 1: think it is fairly clear that Beijing is aligned with Moscow. Now,
Speaker 1: what hasn't very obviously happened is that China has not,
Speaker 1: um in any big way try to help Russia work
Speaker 1: around these extraordinary U S sanctions that block a lot
Speaker 1: of technologies to Russia. Has not very broadly provided much
Speaker 1: financial support, to say nothing of military support, and there
Speaker 1: are some signs that Beijing is not terribly pleased that
Speaker 1: it has shackled itself to Russia, which is not doing
Speaker 1: very well in the war. And so there are some
Speaker 1: rhetorical support, there is some public sentiments support rallied by
Speaker 1: the Party and support of Russia, but there has not
Speaker 1: been any substantial material and financial support. And so that's
Speaker 1: why I think, you know, it is kind of a
Speaker 1: diplomatic gesture and not anything broader. So why don't we
Speaker 1: talk a little bit more about what's going on domestically,
Speaker 1: because you know, of course there are plenty of foreign
Speaker 1: issues to keep us busy, but there's a lot going
Speaker 1: on within China itself. And you already mentioned dan COVID zero.
Speaker 1: This has been going on for three years now. I
Speaker 1: guess the question that a lot of people would ask
Speaker 1: at this point is what exactly does Shi shin Ping
Speaker 1: and the Chinese authorities, what do they get out of
Speaker 1: the COVID zero policy three years on? That's uh an
Speaker 1: extremely important question. So the first thing I should say
Speaker 1: is that COVID zero has proved exhausting to a lot
Speaker 1: of folks in China. There are um a lot of
Speaker 1: public expressions of discontent for COVID zero. That to say
Speaker 1: nothing of going abroad that makes it difficult to leave
Speaker 1: one's own hometown or um to travel to business centers
Speaker 1: like Beijing, Shanghai or shin Jin. A lot of people
Speaker 1: are really sick of having to have no notice and
Speaker 1: be locked in their apartment compounds for a few days
Speaker 1: at a time, perhaps weeks at a time. And many
Speaker 1: people are sick of going on the train somehow being
Speaker 1: declared a close contact with others and then having to
Speaker 1: quarantine en route to whatever one's destination is. So it
Speaker 1: is pretty important to understand why China is still so
Speaker 1: committed to zero COVID. And I think if I had
Speaker 1: to try to read the mind of the polit bureau here,
Speaker 1: I would say something like this, that the Chinese government
Speaker 1: keeps saying that it's most important job is to protect lives.
Speaker 1: And I want to, you know, take that statement at
Speaker 1: face value, and if I can, you know, try to
Speaker 1: imagine what it would be like for COVID zero to
Speaker 1: run loose in China. I think that would be a
Speaker 1: very big catastrophe. Indeed, So if we take a look
Speaker 1: at you know, the US, and let's say we have um,
Speaker 1: you know, except the number of a million people dead
Speaker 1: from COVID. Use that as the benchmark. You know, I
Speaker 1: wonder how many deaths there would be in China if
Speaker 1: somehow there was you know, let let let loose. And
Speaker 1: I want to say, you know, it's perfectly plausible to
Speaker 1: me that this could be north of ten million deaths.
Speaker 1: And here the very rough, simple calculation here is that
Speaker 1: China has four times the number of the population of
Speaker 1: the US, and then let's say one quarter in the
Speaker 1: medical capacity of the U S you get to sixteen
Speaker 1: times the level of possible fatalities. But then you reduce
Speaker 1: that a bit because you know, um Asia can be
Speaker 1: in China in particular, can be pretty different of how
Speaker 1: the the US manage things. And so you know, if
Speaker 1: you're thinking about a rough benchmark of a possible ten
Speaker 1: million debts, this becomes a really unacceptable to the Party.
Speaker 1: And I think no party official, season Ping, least of all,
Speaker 1: will ever put his hand up and say that, you know,
Speaker 1: we are willing to accept this as the price of
Speaker 1: you know, letting people run free. And I think the
Speaker 1: Party has judged that COVID has not been only a
Speaker 1: public health crisis in the world, and especially in the
Speaker 1: U S. That's not only triggered in economic crisis and
Speaker 1: um financial problems as well, it has also been a
Speaker 1: political disaster for the US, in which very polarized country
Speaker 1: is somehow even more at each other's throats, I think
Speaker 1: is what the Chinese would think, in which the Republicans
Speaker 1: and the Democrats are even more disdainful of each other.
Speaker 1: And that is um just maybe something that the Communist
Speaker 1: Party is able to appreciate, especially that um you know,
Speaker 1: maybe makes sense less sense to us today. As you mentioned,
Speaker 1: there's obviously a lot of frustration among people who have
Speaker 1: to deal with these restrictions and the unpredictability of them.
Speaker 1: But I assume, I mean, there's also an economic cost,
Speaker 1: and presumably they can't go on literally forever. So what
Speaker 1: is the cost the longer, the longer the COVID your
Speaker 1: policies are maintained, and then what does the ultimate way
Speaker 1: out is there? Is it a accepting of a m
Speaker 1: R and a vaccine from a foreign drug manufacturer? Like
Speaker 1: what is what is a possible path out ultimately, Well,
Speaker 1: the cost is has not really been apparent until two
Speaker 1: I would say that China was pretty okay with the
Speaker 1: cost of COVID in when it UM was able to
Speaker 1: produce and nobody else was in manufacturing all sorts of goods,
Speaker 1: and so actually regained a lot of the share of
Speaker 1: the global economies manufactured exports. And in one Beijing had
Speaker 1: felt so confident in itself that it had the confidence
Speaker 1: to smash a lot of its most profitable companies as
Speaker 1: well as trying to tackle systematic risks and property and
Speaker 1: really the cost came home this year when O Macron
Speaker 1: proved devastating to a lot of Chinese cities, and that
Speaker 1: it is an ongoing UM rise in cases UM as
Speaker 1: we speak right now, Joe, Right now, the Chinese economy
Speaker 1: is not doing well, mostly because of the pretty UM sector,
Speaker 1: but also zero COVID isn't helping. It is really crushing consumption,
Speaker 1: and then also the UM it is contributing to a
Speaker 1: general exhaustion among people that they are locked down very
Speaker 1: very often. Now, what is the way out? Well, I
Speaker 1: think that it would be a fairly long time. We
Speaker 1: would have a lot of warning before we can see
Speaker 1: that China is on its way out. And I am
Speaker 1: not predicting that there will be very substantial loosening after
Speaker 1: the Party Congress I think that would be a fantasy
Speaker 1: to think that somehow, a week from now China just
Speaker 1: acides it won't do anymore lockdowns. I think it is
Speaker 1: a little bit more plausible that there will be more
Speaker 1: movement in March after the National People's Congress, which turns
Speaker 1: party decisions into law, and there might be a little
Speaker 1: bit more movement. And I think the really two things
Speaker 1: to look for are things we would have a lot
Speaker 1: of warning. And first, the party has to feel very confident.
Speaker 1: And it's um therapeutics as well, it's its vaccines. Now,
Speaker 1: I'm not sure that Beijing will allow the imports of
Speaker 1: a lot of m R and a vaccines um, but
Speaker 1: I think it is possible that they help that big
Speaker 1: are the inhaled vaccines, which are much much easier to
Speaker 1: administer and possibly more effective in blocking transmission, as well
Speaker 1: as the severity of the disease um. And then that
Speaker 1: is something we would be able to see months ahead
Speaker 1: of time, because there would be a very very big drive.
Speaker 1: Even if they are able to vaccinate one to three
Speaker 1: percentage points of the population, you know, it will take
Speaker 1: you know, at least a month or two or three
Speaker 1: before many people are able to get shots in arms
Speaker 1: or shots in um noses inhaled and then I think
Speaker 1: they are also waiting a little bit for the therapeutics
Speaker 1: to be better so that they don't have something like
Speaker 1: two million people debt. And maybe, you know, the last
Speaker 1: thing to watch out for is that, you know, we
Speaker 1: have to consider that Beijing has spent nearly three years
Speaker 1: now terrifying people about this virus that a lot of
Speaker 1: people in China are very very scared about to mask.
Speaker 1: Compliance in China is still very high, and people are
Speaker 1: reluctant to you know, get the virus and you know,
Speaker 1: run free. And so I think what we'll see is
Speaker 1: months and months of propaganda and messaging saying it's no
Speaker 1: big deal. Guys. You know, the virus is endemic now,
Speaker 1: the flu has evolved to be more transmissible and less severe,
Speaker 1: and um, you know, it's time for us to open
Speaker 1: up and rejoin the world. I'm not really expecting for
Speaker 1: that to happen the beginning of next year, and I'm
Speaker 1: not even sure I would be very confident that it
Speaker 1: can happen at the end of next year and the
Speaker 1: end of what are the long term consequences to China's
Speaker 1: economy of prolonged COVID zero policies, I mean basically prolonged closures. Right,
Speaker 1: you mentioned consumption. The Party has been trying to shift
Speaker 1: the economy more towards consumption in a way from manufacturing
Speaker 1: for years, and it seems, if anything, this particular COVID
Speaker 1: zero policy has kind of put some of that into reverse,
Speaker 1: are you agree? And the UM they are much more
Speaker 1: focused on UM, you know, trying to boost recovery in
Speaker 1: terms of production, and China has always been much more
Speaker 1: of a supply side economy. And it has been fairly
Speaker 1: remarkable that there was a big divergence between the West's
Speaker 1: response to the economic crisis that is created by COVID UM,
Speaker 1: and that was to send a lot of stimulus checks
Speaker 1: and direct support to different households so that they are
Speaker 1: able to get through this difficult time. China has sent
Speaker 1: almost no direct stimulus to households. It has not increased
Speaker 1: UM welfare benefits in any substantial way. Instead, China has
Speaker 1: been laser focused on trying to make sure that production
Speaker 1: can continue, probably because you know, the American consumers can
Speaker 1: spend all of their new money from the government on
Speaker 1: Chinese goods, and so that has been a lot of
Speaker 1: its strategy for quite a long while. Now spill over stimulus,
Speaker 1: it's still that's right, that's right, um, And so you know,
Speaker 1: the longer HERM, I think the costs are mostly going
Speaker 1: to be political on China. UM Beijing has snipped off
Speaker 1: a lot of these people to people exchanges such that
Speaker 1: it is really difficult for businesses, for students to enter
Speaker 1: the country, and UM, you know, I think this is
Speaker 1: why also a little bit of why UM Beijing has
Speaker 1: felt pretty okay with the costs of the COVID zero.
Speaker 1: The costs are political, not exactly economic, so they are
Speaker 1: kind of unseen, and so it kind of feels that, well,
Speaker 1: it can continue this. But I think the long term
Speaker 1: costs on China from being cut off from the rest
Speaker 1: of the world is absolutely catastrophic. And um, there's going
Speaker 1: to be far less understanding and willingness to engage after
Speaker 1: this year. So, speaking of China's relationship with the rest
Speaker 1: of the world, perhaps when the Biden administration came into office,
Speaker 1: I don't know, but perhaps it was some thought that
Speaker 1: maybe okay, Trump had a very hawker stance on China
Speaker 1: and maybe that would get relaxed. But instead of anything
Speaker 1: it seems to have ratcheted up and in particularly over
Speaker 1: the last several days on the subject of chips, which
Speaker 1: we touched on in the very beginning, and my sense
Speaker 1: is that the latest moves to restrict UH chip exports
Speaker 1: or the export of chip technology into China has some
Speaker 1: pretty real teeth. You see it in chip stocks. But
Speaker 1: everything's sort of been tumbling lately. But my impression is like,
Speaker 1: this is pretty real and significant, So why don't you
Speaker 1: just sort of to start give us your high level
Speaker 1: overview of what's been announced and the significance of it.
Speaker 1: I really agree with your framing. Joe. I spent the
Speaker 1: last week in Washington, d C. Trying to get a
Speaker 1: handle of what are the most hawkish actions that could
Speaker 1: come out of the Biden administration on China, and certainly
Speaker 1: the chips action announced by the Department of Commerce's Bureau
Speaker 1: of Industry and Security on Friday represent I think a
Speaker 1: fairly big blow. This was a thirty nine h order
Speaker 1: consisting of eight parts that very substantially restrict semi conductors.
Speaker 1: And this very long order has been so complex that
Speaker 1: even a lot of lawyers I know are scratching their
Speaker 1: heads and trying to make head or tails of this.
Speaker 1: So at a first cut, I think this looks like
Speaker 1: a very traumatic order. And um, the three things that
Speaker 1: I would really highlight in that are important in this order.
Speaker 1: Our first controls on chips themselves. So a lot of
Speaker 1: the most advanced chips that are important for supercomputers UM
Speaker 1: as well as a lot of the most advanced chips
Speaker 1: that are important for supercomputers are now being cut off
Speaker 1: from China. That's the first item. The second item consists
Speaker 1: of controls on semiconductor production equipment, and the Commerce Department
Speaker 1: has been fairly clear that if you're shipping semiconductor production
Speaker 1: equipment that is below fourteen sixteen nanometers or less to
Speaker 1: China above hight levels for nand memory tips, as well
Speaker 1: as below eighteen nanometers have pitched or less um for
Speaker 1: d RAM, then you need to get a license from
Speaker 1: the U S Department of Commerce with the presumption of denial.
Speaker 1: And then the third most important, highly novel control announced
Speaker 1: by Commerce is your license requirement on US persons from
Speaker 1: being able to support the development of China's advanced semiconductor industry.
Speaker 1: And this is fairly novel, I think for the U
Speaker 1: S Department of Commerce, to impose law controls on the
Speaker 1: level of US persons. And though so, you know, trying
Speaker 1: to cut off more people to people exchanges in China
Speaker 1: with respected technology that is another big thing. Now, I
Speaker 1: think the caveats to, you know, trying to take a
Speaker 1: maximumly gloomy view. UM is, first of all, you know,
Speaker 1: companies tend to be dynamic actors, and companies have already
Speaker 1: adapted to a lot of US controls by, for example,
Speaker 1: offshoring some of their US production equipment such that they
Speaker 1: are able to ship continued to ship goes to China
Speaker 1: while complying with US regulations. And UM that speaks to
Speaker 1: a broader point, which is that there are a lot
Speaker 1: of lawyers in d C who are very, very clever
Speaker 1: and also pretty well paid, who are able to help
Speaker 1: these companies make sense of these compliance requirements and still
Speaker 1: figure out some way to sell to China, which is
Speaker 1: after all, the biggest market for so many semig natural companies,
Speaker 1: whether we're talking about chips or chip making equipment. And
Speaker 1: so I think the key point here is that this
Speaker 1: is pretty likely to be damaging, but I want to
Speaker 1: reserve a little bit of judgment, and you know, I
Speaker 1: think We'll only really see the real impacts for a
Speaker 1: few months from now, when everybody has had a chance
Speaker 1: to digest these rules. So we have seen some early
Speaker 1: reaction from China. I should say here that we are
Speaker 1: recording this on October eleventh, and we've seen, you know,
Speaker 1: some noises about how these are unfair measures and they
Speaker 1: will hurt the Chinese economic recovery and things like that.
Speaker 1: What kind of response would you expect from China? What
Speaker 1: can they do here? And to a point that we've
Speaker 1: actually discussed before many times on the podcast, it does
Speaker 1: seem like every time there is some sort of technological
Speaker 1: restriction imposed on China by the US, that the narrative
Speaker 1: in China itself is that this will only make us stronger.
Speaker 1: You know, it's sort of a short term challenge that
Speaker 1: we need to overcome, but eventually it will help us
Speaker 1: build up our own domestic technological independence and prowess. Is
Speaker 1: that the same kind of messaging that we're going to
Speaker 1: see here, I expect so, and um China has issued
Speaker 1: a lot of angry words and angry editorials about all
Speaker 1: of these things, but I think it is pretty standard
Speaker 1: for China. It is just a ProForma response, and you know,
Speaker 1: I think there will not be um, you know, very
Speaker 1: obvious responses from Beijing on these regulations for you know,
Speaker 1: to broad reasons. I mean, first, these rules were released
Speaker 1: when the entire country was on a big holiday, and
Speaker 1: I think Presidency Dping has bigger fish to fry rather
Speaker 1: than thinking about semi conductors over the next week. But
Speaker 1: I think Beijing is also aware that, you know, the
Speaker 1: impacts of these regulations will take some months to really
Speaker 1: bear out, and so it's going to see what the
Speaker 1: impact is before it really decides to take its gloves off.
Speaker 1: And what I want to emphasize is that Beijing has
Speaker 1: maintained pretty impressive strategic forbearance against lashing out at US
Speaker 1: companies over the actions of the US government. And I think, um,
Speaker 1: you know, when during President Trump's trade war, many of
Speaker 1: us were expecting that Beijing would finally blow its top
Speaker 1: now and you know, start plunging the knife into American companies,
Speaker 1: whether that is Apple or Intel or Qualcom or any
Speaker 1: other big US company operating in China. And for the
Speaker 1: most part, it has proven itself remarkably restrained, and I
Speaker 1: think it has made the judgment that first of all,
Speaker 1: it really wants more multinational investment into China, and anything
Speaker 1: that hurts these companies would ultimately hurt the country much
Speaker 1: more over the longer term. And second, Beijing has decided
Speaker 1: to really embrace a lot of these companies and hug
Speaker 1: them even closer. And that is a more subtle form
Speaker 1: of retaliation because Beijing recognizes that when you have big
Speaker 1: companies like Apple or Tesla investing more in Shanghai, then um,
Speaker 1: they have a little bit more at stake, and then
Speaker 1: they go back to d C and advocate for a
Speaker 1: better relationship, better business relationship. So Beijing has recognized that businesses,
Speaker 1: big banks, whether that is Black Rock or anyone else
Speaker 1: seeing seeking to tap into China's wealth management. You know
Speaker 1: that big businesses are China's China's last and best friends
Speaker 1: in Washington, d C. And would much rather that these
Speaker 1: businesses are advocating for greater engagement rather than the reverse. Now,
Speaker 1: over the longer term, what I expect is for a
Speaker 1: lot of these regulations too, as you say, Tracy, to
Speaker 1: probably accelerate China's self sufficiency in a lot of different
Speaker 1: technologies over the longer term. Now you can define what
Speaker 1: success means here, and you can define what longer term
Speaker 1: means here when in general I think it is pretty
Speaker 1: difficult for any large country to monopolize key technologies over
Speaker 1: the longer run. These products are technologies, They're not magic,
Speaker 1: and the Chinese task is to reinvent a lot of
Speaker 1: existing wheels. We know that a micron de ramchip can
Speaker 1: exist because there it is. It does exist, and what
Speaker 1: the Chinese have to do is just an order of
Speaker 1: magnitude less difficult than trying to push forward the technological
Speaker 1: frontier and dream up new inventions to novo. And if
Speaker 1: progress and semiconductor slows down, which is a lot of
Speaker 1: consensus now, it just takes far too much money to
Speaker 1: continue building these big new fabs, then at some point
Speaker 1: China will figure out a lot of these things. And
Speaker 1: I expect that these US regulatory actions um will ultimately
Speaker 1: constrain the US businesses and the US position and mostly
Speaker 1: strengthen China's position, but only over the longer run. Just
Speaker 1: one last question on the chips. I mean we were
Speaker 1: talking a little bit about China's you know what it
Speaker 1: means for China. Why now from the Biden administration and
Speaker 1: what is your reading of like, you know, this is
Speaker 1: they're really cranking up the dial. How much is it
Speaker 1: about constraining China's own ambitions versus sort of this broader
Speaker 1: effort and we saw it with the Chips Act to
Speaker 1: bring you know, I guess, reshore and strength and give
Speaker 1: a leg up to domestic players. That's a great question,
Speaker 1: Joe and I Sometimes I find it actually pretty remarkable
Speaker 1: that we've had a change in administration, but there has
Speaker 1: not been very obviously any change I think, at least
Speaker 1: with respect to technology controls as well as other regulatory
Speaker 1: controls on China, for example, with tariffs. And I thought,
Speaker 1: you know, none of us were really expecting that, you know, Biden,
Speaker 1: which has completely reverse course from President Trump's here's and
Speaker 1: you know, just start making China anything like a friendly power. Again,
Speaker 1: I think that card was never on the table. But
Speaker 1: I think it has been fairly remarkable that President Biden
Speaker 1: has proven himself mostly immune to these business concerns that
Speaker 1: you know, they need to sell more in China, engage
Speaker 1: more with this market, fund future R and D, and
Speaker 1: not incentivized the Chinese create their own technology. Now what
Speaker 1: I would point to UM for why there are more
Speaker 1: hawkish actions now, well, I think there are these two
Speaker 1: big events this year that really prompted a lot of
Speaker 1: the U. S. Government to adopt a much more hawkish stance.
Speaker 1: The first was Ajing's tacit support of Russia in its
Speaker 1: invasion of Ukraine, in which it really aligned itself with
Speaker 1: while what the West considers to be just a very
Speaker 1: aggressive and hostile act, and that is manifesting also in
Speaker 1: Europe when people are, you know, especially unhappy with China's
Speaker 1: tact support for the Ukraine invasion. And the other big
Speaker 1: event was after Speaker Nancy Pelosi's visit to Taiwan in August,
Speaker 1: a lot of people in Beijing were very upset, and
Speaker 1: then they had these very substantial military naval exercises that
Speaker 1: surrounded the island and that has in turn upset people
Speaker 1: in Washington, D C. That they want to be quite
Speaker 1: a lot more aggressive against China, and so um, you know,
Speaker 1: Washington has already been pretty hostile and unfriendly towards China,
Speaker 1: and then these two actions really sharpened their desire to
Speaker 1: do more against China. And what I find very interesting
Speaker 1: is that, you know, I spent a week in Washington,
Speaker 1: d C. And I think what everyone acknowledges now is
Speaker 1: that the US will continue to create highly novel regulatory measures.
Speaker 1: And the really big one that I'm watching out for
Speaker 1: is the creation of the outbound investment review mechanism. I've
Speaker 1: just been a long threatened to review the investment of
Speaker 1: US firms, whether that is a bank or an investment
Speaker 1: fund or a corporate direct investment UM to set up
Speaker 1: a US government body to be able to see what
Speaker 1: US investors are putting money in in China and then
Speaker 1: possibly have the power to block that transaction. This has
Speaker 1: been um in the discussion for a pretty long time,
Speaker 1: but it looks like the US government will probably create
Speaker 1: from the White House and Executive order on this in
Speaker 1: the next few months. Uh, and then also the US
Speaker 1: Congress will possibly legislate something into a law as soon
Speaker 1: as this year. I'm really to try to restrict either
Speaker 1: the likes of Sequoia and Black Rock from investing in China,
Speaker 1: and or restrict the likes of Apple and Intel from
Speaker 1: investing in China, and that is just going to be
Speaker 1: another big blow to US businesses and stop them from
Speaker 1: deploying capital where they like. M Speaking of investment, you know,
Speaker 1: the last time we had you on I think it
Speaker 1: was in so last year to discuss the annual ten
Speaker 1: episode to discuss the big crackdown on tech companies, and
Speaker 1: at that time, we've seen a number of crackdowns, you know,
Speaker 1: on online education firms, on video games, on the property
Speaker 1: sector that was just starting to ramp up, and we're
Speaker 1: kind of seeing the consequences of that this year. What
Speaker 1: what were the broader lessons that we've learned from those
Speaker 1: crackdowns or what have the sort of longer term impacts been.
Speaker 1: And the reason I'm asking is because it looks like,
Speaker 1: I mean, it looks like we haven't really stopped rolling
Speaker 1: out the crackdowns. Because I see a story right now
Speaker 1: about Chinese liquor shares dropping because of a local report
Speaker 1: about a potential ban on civil servants drinking alcohol, both
Speaker 1: edificial functions and at home. So it seems like these
Speaker 1: are still on the table. So walk us through the
Speaker 1: sort of longer term effect of these now that we're
Speaker 1: a year on and presumably we've we've learned something. Well, Tracy,
Speaker 1: I think it's great to bring up the booze because, um,
Speaker 1: one of my favorite stories was from Bloomberg News um
Speaker 1: a few weeks ago that highlighted that ten Cent is
Speaker 1: no longer now smaller than that liquor company. And so
Speaker 1: you know what is the response here. Instead of boosting
Speaker 1: ten Cent, what they're doing is bashing more the liquor.
Speaker 1: So that's you know, one other way that the government
Speaker 1: is able to use its industrial policy to you know,
Speaker 1: I guess support attack in in this way. Um. Well,
Speaker 1: you know, the longer term of China's tech crackdown is
Speaker 1: I think going to still take a long while to
Speaker 1: to to really figure out. I think, um, one thing
Speaker 1: that is certain is that China's internet platforms have not
Speaker 1: had a good year. Um and UM, things are still
Speaker 1: really really bad. Ten Cent in the Bloomberg story shed
Speaker 1: something like I don't know about six hundred billion dollars
Speaker 1: in value over the last year. It's absolutely enormous. And
Speaker 1: you know, the mood at a lot of these tech
Speaker 1: companies is pretty grim. A lot of Chinese tech workers
Speaker 1: have been unhappy to be bashed by the Chinese government,
Speaker 1: and the Chinese government has also really significantly restrained a
Speaker 1: lot of their activities. And I think we are in
Speaker 1: this new normal now in which it is pretty difficult
Speaker 1: for a lot of China's internet platforms to reach as
Speaker 1: much upside as they did. The the ability to reach
Speaker 1: almost endless profits based on these digital technologies I think
Speaker 1: is at its end, and so you know, I think
Speaker 1: the mood of these companies is not really good, and
Speaker 1: I suspect that even the Chinese government did not really
Speaker 1: intend for this. They wanted to control for a lot
Speaker 1: of these technocratic issues that these UM companies may not
Speaker 1: have handled very well, and they may have tried to
Speaker 1: rein them in politically, and they may have tried to
Speaker 1: shift them over too, so that they're pursuing more strategic
Speaker 1: technologies like aviation as well as semi conductors. But at
Speaker 1: least in the short term, things haven't worked out very well.
Speaker 1: I think that's mostly because the Chinese economy has been
Speaker 1: um really really terrible for the last few months. But
Speaker 1: you know, it's also the case that these tech workers
Speaker 1: are feeling pretty dispirited, and so are the vcs. So Dan,
Speaker 1: you know, as we've been discussing, we do have the
Speaker 1: Party Congress coming up on October six, But beyond that,
Speaker 1: what are you looking at as the sort of next
Speaker 1: flash point when it comes to the Chinese economy or
Speaker 1: the Chinese government. So the big thing right now is
Speaker 1: to go through the Party Congress and we will see
Speaker 1: what sort of personnel announcements are in place. Then I
Speaker 1: think the tu big problems now with China is basically
Speaker 1: at all boils down to first the property mass and
Speaker 1: second zero COVID. And so the property mess is something
Speaker 1: that is mostly a policy induced crisis that I think
Speaker 1: is in Beijing's a bill to resolve. They have all
Speaker 1: sorts of self imposed constraints um not to really boost
Speaker 1: property in part because they're concerned about to morrow hazard issues, um,
Speaker 1: in part because China is close to reaching a structural
Speaker 1: peak in terms of how much it needs additional floor
Speaker 1: space per person. So they've been somewhat reluctant to really,
Speaker 1: um you know, boost confidence again in the property sector.
Speaker 1: But that is something possible that we can watch for.
Speaker 1: That's aging realizes that the economy is quite bad and
Speaker 1: really has to solve this big issue. And then the
Speaker 1: other thing to watch out for is a possibility of
Speaker 1: the end of zero COVID. And I think I'm not
Speaker 1: still not really expecting the country to just completely loosen
Speaker 1: up by the middle of next year, and maybe by
Speaker 1: the end of three there will be something approaching normality.
Speaker 1: But what we do know is that there will be
Speaker 1: very substantial warning in terms of how much the vaccine
Speaker 1: and the therapeutics uptake is boosted, as well as to
Speaker 1: what extent Fijing is coming out with assurances saying that
Speaker 1: this is not a big deal, rather than people Staley
Speaker 1: commentary saying that we must maintain Sarah Covid. All right,
Speaker 1: Dan Wong, it was lovely having you on the show again. Yeah,
Speaker 1: always great to catch up and fantastic to do it
Speaker 1: in person for once. Thank you so much. Always a pleasure,
Speaker 1: Thanks so much. I think we did it in person
Speaker 1: one other times, but I believe you. Thanks so much,
Speaker 1: so Joe. I love catching up with Dan. It's always
Speaker 1: a fun conversation. Although I well, fun might not be
Speaker 1: the right way to describe this one, because it does
Speaker 1: feel like there is a set of challenges building within China,
Speaker 1: particularly in the property sector, and we had that episode
Speaker 1: recently where we sort of dove into some of the
Speaker 1: very specific issues there. But it does feel like there
Speaker 1: are no easy answer at this point, or no easy exits. No,
Speaker 1: and there's so much property obviously, you know, as we
Speaker 1: talked about in the beginning of the conversation, I guess
Speaker 1: everyone is being affected in somewhere or another by the
Speaker 1: ongoing war. China's sort of maybe dismay about how it's going,
Speaker 1: the relationship with Russia, and you know the fact that
Speaker 1: the bind administration has proved to be much more hawkish
Speaker 1: than perhaps people expected, particularly on this tech transfer issue.
Speaker 1: Just an endless series of challenges, not to mention COVID zero.
Speaker 1: The other thing that I do find noteworthy is, you know,
Speaker 1: there are benefits of a centrally planned economy, and we
Speaker 1: saw some of those in the early days of COVID.
Speaker 1: China was able to shut everything down relatively quickly and
Speaker 1: contain the spread, and it was one of the possibly
Speaker 1: the best performing economy in because of that. But there
Speaker 1: are a lot of downsides as well, and it feels
Speaker 1: like some of those are kind kind of coming home
Speaker 1: to roost now. And there are unexpected consequences of you know,
Speaker 1: trying to intervene in domestic industries. And I love the
Speaker 1: example of, you know, crackdown on ten Cent and then
Speaker 1: Mutai shares go up the liquor company, and then you
Speaker 1: need to crack down on the liquor company, and then
Speaker 1: it's like, well, what happens next, it feels almost like
Speaker 1: I'm using too many metaphors. Here are lots of mixed metaphors,
Speaker 1: but it feels a bit whack a mole at this point. Yeah, no,
Speaker 1: it totally does. And again, you know this is helpful
Speaker 1: also just an understanding the process that's about to unfold,
Speaker 1: the People's Congress and having some sense of what to
Speaker 1: watch and how that will turn into a set of
Speaker 1: priorities for the country. So just extremely I thought it
Speaker 1: was fun. I mean, there's the topics are serious, but
Speaker 1: I do genuinely enjoy learning so much from a guest
Speaker 1: like Dan. Yeah. Well, at the very least, we have
Speaker 1: been primed to to watch those ultralong policy speeches, so
Speaker 1: I get ready for that. All right, shall we leave
Speaker 1: it that. Let's leave it there. This has been another
Speaker 1: episode of the Odd Thoughts podcast. I'm Tracy Alloway. You
Speaker 1: can follow me on Twitter at Tracy Alloway and I'm
Speaker 1: Joe wi Isn't Though. You can follow me on Twitter
Speaker 1: at the Stalwart. Follow our guest Dan Wong, He's at
Speaker 1: Dan w Wong. Follow our producer Kerman Rodriguez at Carmen Arman,
Speaker 1: and check out all of our podcasts at Bloomberg unto
Speaker 1: the handle at Podcasts. Thanks for listening.