WEBVTT - Bloomberg Wall Street Week - May 19th, 2023 0:00:00.560 --> 0:00:03.760 This is Bloomberg Wall Street Week. We turn our attention 0:00:03.880 --> 0:00:08.320 to the markets this week. USCPI, Nembor's reinforcing concerns about inflation, 0:00:08.480 --> 0:00:11.600 the financial stories that shape our worth, a really different 0:00:11.640 --> 0:00:14.560 reaction to market. Some more indications of just how hot 0:00:14.600 --> 0:00:16.079 the US economy really is. 0:00:16.079 --> 0:00:18.440 Through the eyes of the most influential voices. 0:00:18.720 --> 0:00:21.680 Katherine Keating, CEO of B and Y, Moan, Ryan Winhand 0:00:21.720 --> 0:00:24.480 a Bank of America, Sam Zell Sharman and founder of 0:00:24.560 --> 0:00:25.960 Equity Group Investments. 0:00:25.960 --> 0:00:29.920 Bloomberg Wall Street Week with David Weston from Bloomberg Radio. 0:00:30.240 --> 0:00:34.000 Don't blame me, whether it's risking a national default or 0:00:34.120 --> 0:00:37.400 driving banks to failure, It's got to be someone else's fault. 0:00:37.920 --> 0:00:41.400 This is Bloomberg Wall Street Week. I'm David Weston. This 0:00:41.479 --> 0:00:44.400 week Econa is Gled Hubbard on the damage being done 0:00:44.400 --> 0:00:46.960 by the fight over the federal deficit that were a 0:00:47.040 --> 0:00:50.320 layer of Edelman Global Advisory. On what China stands to 0:00:50.400 --> 0:00:51.919 gain from US turmoil. 0:00:52.240 --> 0:00:55.640 How do they build relations either with the United States 0:00:55.920 --> 0:00:59.200 to keep those markets open or can they find new markets? 0:00:59.360 --> 0:01:02.360 And Catherine Judge of Columbia and whether we need all 0:01:02.400 --> 0:01:04.160 of those regional banks after. 0:01:04.000 --> 0:01:06.920 All we're seeing very real questions about the regional bank 0:01:06.959 --> 0:01:09.520 business model. 0:01:20.640 --> 0:01:23.160 This week, Global Wall Street was looking for someone to 0:01:23.240 --> 0:01:26.600 step up and take some responsibility, like for the failure 0:01:26.600 --> 0:01:29.720 of three major regional banks, and the former head of 0:01:29.800 --> 0:01:32.240 Silicon Valley Bank was there to help as he found 0:01:32.280 --> 0:01:35.200 a host of culprits other than himself, like the FED 0:01:35.480 --> 0:01:36.520 and social media. 0:01:37.080 --> 0:01:40.560 I believe that svb's failure was brought about by a 0:01:40.680 --> 0:01:43.560 series of unprecedented events, but. 0:01:43.640 --> 0:01:46.200 The chair of the Senate Banking Committee had a decidedly 0:01:46.400 --> 0:01:50.040 different view. We know your banks were fatally mismanaged. The 0:01:50.120 --> 0:01:51.800 next obvious question is why. 0:01:52.120 --> 0:01:54.840 The simple answer the same answer we find to most 0:01:54.920 --> 0:01:57.040 questions about big bank failures. 0:01:57.280 --> 0:01:59.280 Because the executives were getting rich. 0:01:59.480 --> 0:02:02.160 And when it comes the debt ceiling, Republicans and Democrats 0:02:02.200 --> 0:02:04.800 picked up the theme of pointing fingers at everyone but 0:02:05.080 --> 0:02:08.000 themselves for the risk of the United States flirting with 0:02:08.120 --> 0:02:10.079 renigging on its debt for the first time in two 0:02:10.200 --> 0:02:13.720 hundred and thirty four years. As President Biden has put 0:02:13.720 --> 0:02:17.000 the onus on Republicans, and Speaker McCarthy continues to point 0:02:17.000 --> 0:02:18.680 his finger at President Biden. 0:02:18.919 --> 0:02:21.040 Do we have obstacles, Yes, we have a big obstacle 0:02:21.040 --> 0:02:21.720 in the White House. 0:02:21.919 --> 0:02:24.560 But even as the two sides blamed one another, they 0:02:24.600 --> 0:02:27.480 did find some room for optimism. 0:02:27.200 --> 0:02:30.040 Confident that will get the agreement on the budget that 0:02:30.200 --> 0:02:31.919 America will not gault. 0:02:32.160 --> 0:02:35.760 But despite all the disagreement and the urgency, President Biden 0:02:35.800 --> 0:02:38.359 thought things were going well enough that he could head 0:02:38.400 --> 0:02:41.120 over the G seven meetings in Horotiaa, Japan at the 0:02:41.200 --> 0:02:43.360 end of the week, though he did promise to get 0:02:43.400 --> 0:02:44.600 back by Sunday. 0:02:44.919 --> 0:02:47.959 The nature of the presidency is addressing many of the 0:02:48.040 --> 0:02:51.520 critical matters all at once, So I'm confident we're going 0:02:51.600 --> 0:02:54.880 to continue to make progress toward avoiding default. However, I'm 0:02:54.919 --> 0:02:55.960 cutting my trip short. 0:02:57.919 --> 0:03:01.639 Then. On Friday, Morgan Stanley ce James Gorman surprise Wall 0:03:01.680 --> 0:03:04.240 Street by announcing to shareholders that he would be stepping 0:03:04.280 --> 0:03:07.280 down at CEO within the next twelve months, raising questions 0:03:07.280 --> 0:03:10.280 about how he's yet to be named successor may change 0:03:10.320 --> 0:03:13.400 the direction of a firm Gorman led so successfully. 0:03:16.080 --> 0:03:19.160 He's built the firm through all kinds of acquisitions. He's 0:03:19.200 --> 0:03:21.560 been a brilliant acquirer. Much of it has been through 0:03:21.680 --> 0:03:25.560 through acquisition. And so maybe now you translate an act 0:03:25.600 --> 0:03:29.000 from an acquisitive CEO to a managing CEO. Puts all 0:03:29.040 --> 0:03:30.320 these disparate pieces together. 0:03:31.400 --> 0:03:33.600 Markets on the hold did pretty well this week, and 0:03:34.000 --> 0:03:36.200 the S and P five hundred added another one point 0:03:36.200 --> 0:03:38.640 sixty five percent, taking it to forty one ninety one, 0:03:38.880 --> 0:03:42.080 well above almost all of our Wall Street week elves 0:03:42.200 --> 0:03:44.960 who actually moved the other way in their median call 0:03:45.040 --> 0:03:46.840 for the year end, taking it down to an even 0:03:46.920 --> 0:03:49.840 four thousand. The NANZNAK did even better than the SMP, 0:03:50.200 --> 0:03:52.520 up over three percent for the week, while the yield 0:03:52.520 --> 0:03:55.120 on the ten year Treasury added twenty one basis points, 0:03:55.320 --> 0:03:57.840 ending the week at three point six eighty six. To 0:03:57.840 --> 0:03:59.960 take us through the week, we welcome now at Leash 0:04:00.120 --> 0:04:04.360 living Bny Mellon, head of Investment Strategy and Equity Advisory Solutions, 0:04:04.480 --> 0:04:08.400 and Gerard Cassidy, RBC Capital Markets, head of US bank 0:04:08.600 --> 0:04:10.560 Equity Strategy. Welcome to both of you. Great jy, have 0:04:10.560 --> 0:04:12.240 you at leash. Let's start with you. Do we have 0:04:12.280 --> 0:04:14.280 a rally going on in the SMP. They're up now 0:04:14.320 --> 0:04:15.760 flirting with forty two hundred again. 0:04:16.200 --> 0:04:18.440 Look, I think I think the market is expecting that 0:04:18.520 --> 0:04:22.200 forty two hundred ceiling to hold here if the s 0:04:22.240 --> 0:04:24.479 andp manages to get through it. There's a little bit 0:04:24.480 --> 0:04:27.479 of you know, blue sky out there simply because that's 0:04:27.480 --> 0:04:31.080 where all the hedges are so expectation that we're essentially 0:04:31.120 --> 0:04:34.520 fair valued here. Most of Wall Street says this is, 0:04:34.600 --> 0:04:37.600 you know, we're fairly valued here. You can't get much higher. 0:04:37.839 --> 0:04:39.920 And as you know, when all the bears say the 0:04:39.960 --> 0:04:42.200 same thing and all the strategists say the same thing, 0:04:42.240 --> 0:04:44.680 the market tends to go in the other direction. So 0:04:45.440 --> 0:04:47.919 in part, the market rallied so hard this week on 0:04:48.000 --> 0:04:51.000 the expectation that the debt ceiling was going to be 0:04:51.160 --> 0:04:52.600 taken care of by this weekend. 0:04:52.600 --> 0:04:54.400 By that's want to talk about it, not just this 0:04:54.480 --> 0:04:56.520 week but this year so far. Isn't the SMP up 0:04:56.520 --> 0:04:59.000 something like nine percent something along those lines? So what 0:04:59.120 --> 0:05:01.120 he is doing that is because the earnings came in 0:05:01.160 --> 0:05:04.000 better than the expectations which had been taken down. Or 0:05:04.080 --> 0:05:05.040 is it because of the Fed. 0:05:05.279 --> 0:05:07.240 So there's a couple of things going on. The first 0:05:07.240 --> 0:05:09.279 thing is there's actually a lot of liquidity in the 0:05:09.320 --> 0:05:13.960 system because johnet Yellen at Treasury has been adding liquidity 0:05:14.040 --> 0:05:16.240 to the system to pay the US bills, which is 0:05:16.320 --> 0:05:20.560 helping stock prices and specifically NAZAG prices as well. 0:05:21.160 --> 0:05:23.080 Gerard, let's turn to you on the question of the banks. 0:05:23.120 --> 0:05:26.000 Because that liquidity we're getting from the Fed to some extent, 0:05:26.520 --> 0:05:29.679 if I can call it, there reversal quantitative tightening because 0:05:29.680 --> 0:05:31.440 of what happened in the wake of Silicon Valley Bank 0:05:31.480 --> 0:05:33.320 and the other banks. Should we expect that to keep 0:05:33.320 --> 0:05:34.960 going out of the bank's going to keep drawing down 0:05:35.000 --> 0:05:35.720 in that liquidity. 0:05:36.400 --> 0:05:38.640 I really it's going to be interesting. It's a great 0:05:38.760 --> 0:05:42.960 question because the deposit flight is over. We know from 0:05:43.040 --> 0:05:45.479 what we saw in the middle of March when the 0:05:45.720 --> 0:05:50.279 Silicon Valley signature and the First Republic banks failed. Now 0:05:50.360 --> 0:05:53.840 First Republic technically failed obviously not in March, but at 0:05:53.920 --> 0:05:56.760 the end of April early May. And I would say 0:05:56.800 --> 0:05:59.800 that the deposits that we saw today they came out 0:06:00.040 --> 0:06:02.680 set afternoon with the H eight data, and what you 0:06:02.720 --> 0:06:05.440 saw with the H eight data was depositor down slightly 0:06:05.480 --> 0:06:09.080 for the larger banks. Smaller banks generally flatted down, and 0:06:09.160 --> 0:06:11.680 so there's really no need to have to pull down liquidity, 0:06:11.920 --> 0:06:15.080 even though we still have, of course discount window borrowings 0:06:15.279 --> 0:06:18.960 and the backstop borrowings with the bond portfolios from the FED. 0:06:19.160 --> 0:06:21.920 So there's plenty of liquidity, is Lesha pointed out, and 0:06:21.960 --> 0:06:24.080 I think that the banks are certainly going to benefit 0:06:24.120 --> 0:06:25.440 from that as we go forward. 0:06:26.080 --> 0:06:29.120 The failure of three major regional banks may be in 0:06:29.200 --> 0:06:33.000 the rear view mirror, but the questions and the effects linger. 0:06:33.320 --> 0:06:35.760 As Chryston Slock of Apollo points out this week with 0:06:35.839 --> 0:06:38.200 one of his charts, this one on what it has 0:06:38.279 --> 0:06:41.600 meant for the borrowing costs of all regional banks. 0:06:43.360 --> 0:06:47.120 What's noteworthy is what has happened to bank funding costs 0:06:47.120 --> 0:06:51.040 since Cdiconvelly Bank collapsed. Most importantly, when you look at 0:06:51.080 --> 0:06:54.880 the bank IG index for oes credit spreads, which you 0:06:54.920 --> 0:06:58.560 can split into regional banks and into diversified banks meaning 0:06:58.680 --> 0:07:02.520 large money center banks, it shows you that funding costs 0:07:02.680 --> 0:07:05.919 further out meaning five to ten years, have increased about 0:07:06.000 --> 0:07:08.680 two hundred basis points for regional banks, whereas they have 0:07:08.800 --> 0:07:12.360 only increased about fifty basis points for diversified banks. It 0:07:12.400 --> 0:07:16.600 does signal that the market is still asking some questions 0:07:16.600 --> 0:07:18.760 about what will happen in the longer run, but the 0:07:18.800 --> 0:07:22.559 fact that funding costs further out are still permanently higher 0:07:23.200 --> 0:07:26.480 is raising some questions about how long time will it 0:07:26.520 --> 0:07:30.480 take before this banking crisis that we're going through is 0:07:30.520 --> 0:07:31.040 going to be. 0:07:31.000 --> 0:07:34.000 Over, and to take us through what has happened to 0:07:34.080 --> 0:07:36.240 regional banks in the wake of those three failures. We 0:07:36.240 --> 0:07:39.520 welcome now Professor Catherine Judge. She's professor at the Columbia 0:07:39.560 --> 0:07:41.640 Law School, where she's also a vice dean. So professor, 0:07:41.680 --> 0:07:44.080 thank you so much for being with us. We understand 0:07:44.080 --> 0:07:46.960 we have these three major regional bank failures. We're looking 0:07:46.960 --> 0:07:48.680 sort of in the review mirror to learn what went 0:07:48.720 --> 0:07:50.680 wrong and what can we do to avoid it next time. 0:07:50.880 --> 0:07:53.239 So what's your take basically on what went wrong? 0:07:54.040 --> 0:07:56.920 A number of things went wrong. First, we made meaningful 0:07:56.960 --> 0:08:00.760 changes in the regulatory scheme governing large regional banks with 0:08:00.840 --> 0:08:03.600 the benefit of hindsight, that was clearly in error. We've 0:08:03.600 --> 0:08:06.640 had three large regional banks fail, all in ways and 0:08:06.680 --> 0:08:10.040 imposed significant hits to the deposit Insurance Fund. So clearly 0:08:10.120 --> 0:08:13.640 the deregulation was a problem. The banks themselves were a problem. 0:08:13.720 --> 0:08:15.400 It looks like they were taking a lot of risks 0:08:15.440 --> 0:08:18.400 without understanding those risks, without appropriately hedging those risks and 0:08:18.440 --> 0:08:21.920 managing those risks, and there were also shortcomings in supervision. 0:08:22.280 --> 0:08:25.120 It does look like some of this should have been identifiable. 0:08:25.280 --> 0:08:29.120 Some that was identified, but supervisors didn't act quickly enough 0:08:29.120 --> 0:08:32.800 and aggressive enough in escalating the concerns in ways that 0:08:32.840 --> 0:08:37.040 actually would have resolved the situations before we had such 0:08:37.080 --> 0:08:37.840 messy failures. 0:08:37.960 --> 0:08:40.840 We've heard a lot about interest rate risk, which is 0:08:40.840 --> 0:08:43.280 a terrible thing to have. Obviously we've just seen. At 0:08:43.280 --> 0:08:45.240 the same time, given what the FED was doing, it 0:08:45.280 --> 0:08:47.520 shouldn't have come to as a surprise to the banks 0:08:47.800 --> 0:08:50.440 or to the supervisors that those were interest rate risks. 0:08:50.440 --> 0:08:52.640 I mean, we were raising interest rates like at an 0:08:52.720 --> 0:08:53.720 unprecedented pace. 0:08:53.920 --> 0:08:55.960 We were, and the FED really did signal that. And 0:08:56.000 --> 0:08:58.560 again there was a long period of low for long 0:08:59.000 --> 0:09:00.920 and a period where ways were going up more slowly. 0:09:01.160 --> 0:09:03.080 But first of all, interest rate risk is a classic 0:09:03.200 --> 0:09:05.880 bank risk. I mean, in my very basic banking classes, 0:09:05.920 --> 0:09:07.800 I go back to the SNL debacle and I show 0:09:08.120 --> 0:09:10.640 how a changing interestrate environment affects the value of. 0:09:10.600 --> 0:09:13.520 All assets that banks hold. So this is what banks. 0:09:13.240 --> 0:09:16.000 Are in the business of doing. And as you just 0:09:16.040 --> 0:09:19.000 pointed out, the FED really did signal this. They said, look, 0:09:19.000 --> 0:09:21.880 we're really worried about inflation. They're concerns about inflation, and 0:09:21.920 --> 0:09:23.640 we're going to tighten as long as we need to 0:09:23.640 --> 0:09:26.520 to really get that inflation under control. So both the 0:09:26.559 --> 0:09:29.959 amount of interestrate risk the lack of hedging around that 0:09:30.080 --> 0:09:32.719 risk looks like a really inappropriate way of. 0:09:32.679 --> 0:09:35.040 Managing those risks. Is there also a potential flaw in 0:09:35.080 --> 0:09:38.280 the business model? That is to say, you're taking deposits 0:09:38.320 --> 0:09:40.600 that by definition people can have whenever they want, so 0:09:40.600 --> 0:09:43.199 you're getting funding that is very very short term, and 0:09:43.240 --> 0:09:46.720 you are necessarily putting in longer term investments such as 0:09:46.720 --> 0:09:49.560 thirty year mortgages. But also, as we learn treasuries, it 0:09:49.600 --> 0:09:51.960 does that inherently put a lot of banks at risk. 0:09:53.080 --> 0:09:53.679 Yes and no. 0:09:53.920 --> 0:09:56.040 So I mean the business of banking is to engage 0:09:56.080 --> 0:09:57.280 in maturity transformation. 0:09:57.960 --> 0:09:58.719 So there is a. 0:09:58.640 --> 0:10:01.360 Fragility that exists. On the other hand, it's been pretty 0:10:01.360 --> 0:10:03.959 well managed for a very long time, but then we 0:10:04.040 --> 0:10:07.480 have these periods of significant disruption. One of the things 0:10:07.480 --> 0:10:10.200 that's really striking right now is you look at the 0:10:10.240 --> 0:10:15.160 small community banks and they've actually been remarkably stable. Even 0:10:15.240 --> 0:10:18.520 before the March turmoil, we saw our depositors were leaving 0:10:18.600 --> 0:10:21.640 regional banks, they were leaving the largest banks because they 0:10:21.640 --> 0:10:23.800 just wanted to get a higher rate of interest than 0:10:23.840 --> 0:10:26.240 they were getting on their deposits. But the small community 0:10:26.320 --> 0:10:28.760 banks were really holding on to those deposits and they 0:10:28.880 --> 0:10:32.720 managed to continue to provide meaningful credit. So it's not 0:10:32.920 --> 0:10:36.120 the entire bank business model. I do think we're seeing 0:10:36.280 --> 0:10:38.880 very real questions about the regional bank business model. 0:10:39.200 --> 0:10:41.280 Professor, thank you so much for being on Wall streetetes 0:10:41.320 --> 0:10:46.600 Professor Catherine Judge of the Columbia Law School coming up 0:10:46.640 --> 0:10:49.160 with the fight over the debt ceiling is really costing 0:10:49.240 --> 0:10:51.760 us and what good may still come out of it. 0:10:52.120 --> 0:10:54.880 We'll talk with former Chair of the Council of Economic Advisors, 0:10:54.920 --> 0:10:58.080 Glenn Hubbard of Columbia. That's next on Wall Street League 0:10:58.200 --> 0:10:58.959 on Bloomberg. 0:11:01.960 --> 0:11:06.200 This is Bloomberg Wall Street Week with David Weston from 0:11:06.320 --> 0:11:12.920 Bloomberg Radio. 0:11:13.760 --> 0:11:17.160 China and the United States, what was an afterthought when 0:11:17.160 --> 0:11:20.160 President Nixon went to China in nineteen seventy two has 0:11:20.240 --> 0:11:23.720 now been catapulted to be the most important economic relationship 0:11:23.760 --> 0:11:26.880 in the world, as the Chinese economy has grown more 0:11:26.920 --> 0:11:31.480 than sixfold, trailing behind only the United States, and the 0:11:31.600 --> 0:11:34.400 US helped it get there, leading the move to admit 0:11:34.559 --> 0:11:36.120 China into the WTO. 0:11:36.520 --> 0:11:40.839 Bringing China into the WTO is a win win this station. 0:11:41.679 --> 0:11:44.480 And there's no doubt that US trade with China has 0:11:44.520 --> 0:11:46.840 grown dramatically since the end of two thousand and one 0:11:47.000 --> 0:11:51.080 when China officially joined the WTO. But now the Chinese 0:11:51.120 --> 0:11:54.920 economic juggernaut is showing signs of slowing as the COVID 0:11:54.960 --> 0:11:58.680 lockdown creates uncertainty about what comes next and demographics way 0:11:58.760 --> 0:12:02.480 on growth, not to mention continued tensions with the United States, 0:12:02.559 --> 0:12:07.000 which the wtos O kunja Awala warrants could damage global growth. 0:12:07.440 --> 0:12:10.160 The costs of the world frad went in into two 0:12:10.200 --> 0:12:14.559 trading blocks very high. We've actually done some simulations of 0:12:14.679 --> 0:12:17.439 this at the WQ and we've seen that if we 0:12:17.559 --> 0:12:22.440 break into two tradium blocks, the world global GDP is 0:12:22.480 --> 0:12:25.160 going to decrease like five percent in the longer term. 0:12:25.679 --> 0:12:29.719 And JP Morgan's Jamie Diamond insists we can avoid. 0:12:29.520 --> 0:12:33.480 American shinea of a lot of common interest climate, nuclear pliferation, 0:12:33.679 --> 0:12:37.960 anti terrorism, global stability, you know, and we have differences. 0:12:38.200 --> 0:12:41.320 You know, we're capitalists, they're not, you know, and it's okay, 0:12:41.679 --> 0:12:43.920 but we could sort that out. But we need to 0:12:44.000 --> 0:12:47.800 keep the Western alliances together, not just around war and Ukraine, 0:12:48.040 --> 0:12:54.800 but the ram strategic economic relationships, including trade. 0:12:54.880 --> 0:12:56.760 And to get an accurate and up to date picture 0:12:56.800 --> 0:12:58.840 of where China is right now. We welcome now a 0:12:58.880 --> 0:13:01.600 true expert in the area is Deborah Lair. She is 0:13:01.679 --> 0:13:04.480 both the vice chair of the Pulse Institute as well 0:13:04.480 --> 0:13:08.000 as the CEO of Edelman Global Advisory. Deborah, thank you 0:13:08.040 --> 0:13:10.200 for coming back to Wall Street. We really appreciate it. 0:13:10.320 --> 0:13:12.480 We now have the G seven meetings that are happening 0:13:12.720 --> 0:13:17.000 this week. China is not physically there, but certainly they 0:13:17.040 --> 0:13:20.040 are an important part of the audience. What is the 0:13:20.080 --> 0:13:22.000 message of the United States and other members of the 0:13:22.000 --> 0:13:24.559 G seven want China to take away from these meetings 0:13:24.600 --> 0:13:25.040 this week? 0:13:26.480 --> 0:13:27.440 David, You're so right. 0:13:27.440 --> 0:13:30.320 They may not be present physically, but certainly China is 0:13:30.360 --> 0:13:34.040 one of the main topics. And it appears that the 0:13:34.120 --> 0:13:37.679 administration is going to work with its allies to try 0:13:37.760 --> 0:13:41.400 and get a united and very strong statement about being 0:13:41.480 --> 0:13:44.320 tough on China, both from a national security perspective, but 0:13:44.440 --> 0:13:47.040 also to coordinate economically. 0:13:47.240 --> 0:13:50.120 This president, she takes a look at his economy right now, 0:13:50.640 --> 0:13:52.520 does he have any doubts do you think at all 0:13:52.600 --> 0:13:55.320 about its growth pattern? Because it was a true economic 0:13:55.360 --> 0:13:56.800 miracle in the history of the world. I don't think 0:13:56.800 --> 0:13:58.880 we've seen anything like it. At the same time, we're 0:13:58.880 --> 0:14:00.800 getting some numbers, including this week we've gotten some of 0:14:00.800 --> 0:14:03.920 our China indicating that growth is really slowing down, and 0:14:03.960 --> 0:14:07.120 some people are even saying maybe China will not after 0:14:07.160 --> 0:14:09.880 all pass the United States in the size of its economy. 0:14:11.080 --> 0:14:13.400 It's been clear for a long time that Chi Jinping 0:14:13.480 --> 0:14:16.160 has been worried about the economy, and one of the 0:14:16.200 --> 0:14:19.440 reasons behind the whole corruption campaign that he started when 0:14:19.440 --> 0:14:22.480 he first came into office is because they couldn't govern 0:14:23.240 --> 0:14:25.600 and they were concerned about the state of the economy. 0:14:26.040 --> 0:14:30.560 And even until today, he's still sending out policy enforcement 0:14:30.600 --> 0:14:35.640 teams to ensure that mayors and governors are actually implementing 0:14:35.680 --> 0:14:40.360 the policies that he has dictated from Beijing. They have 0:14:40.480 --> 0:14:42.920 a lot of reason to be concerned about the economy. 0:14:44.000 --> 0:14:47.640 As we've seen in reports just recently, youth unemployment is 0:14:47.640 --> 0:14:50.840 at an all time high at about twenty percent. Even 0:14:50.880 --> 0:14:52.920 though they've dealt with a lot of the systemic risk 0:14:53.080 --> 0:14:55.600 coming out of the real estate market for the small 0:14:55.640 --> 0:14:59.000 and medium size real estate companies, a number of them 0:14:59.040 --> 0:15:01.920 are going to go bank. This has an impact then 0:15:01.960 --> 0:15:04.720 on the banking system, and while they're not concerned about 0:15:04.720 --> 0:15:07.840 the large banks, they do believe that a number of 0:15:07.880 --> 0:15:10.640 the mid sized banks who are operating in the provinces 0:15:11.080 --> 0:15:13.520 are in facing very difficult challenges. 0:15:14.120 --> 0:15:17.119 If, as you say, Prisionji is concerned about his economy, 0:15:17.320 --> 0:15:19.200 does the West I mean to include both the United 0:15:19.240 --> 0:15:22.680 States and Europe and Japan. Does it represent a potential 0:15:23.200 --> 0:15:25.440 help to him or is it part of the problem 0:15:25.440 --> 0:15:26.360 for him. 0:15:27.240 --> 0:15:30.440 I think this is going to depend on Si jumping himself, 0:15:30.960 --> 0:15:33.760 and if he decides that he wants to be engaged 0:15:33.800 --> 0:15:36.120 with the West, then he needs to take the kind 0:15:36.120 --> 0:15:39.760 of steps to provide market access for companies, to provide 0:15:39.760 --> 0:15:43.640 more consistency. Regulatory risk is one of the biggest challenges 0:15:43.680 --> 0:15:46.120 that we see today because we're not quite sure what 0:15:46.200 --> 0:15:49.160 policies are going to come from the new she administration. 0:15:49.960 --> 0:15:52.960 By the same token, he's very concerned about the export 0:15:53.040 --> 0:15:56.880 markets right now. Exports are really what's driving the Chinese economy, 0:15:57.360 --> 0:16:00.720 and we see weakness in those markets. Certainly is there 0:16:00.760 --> 0:16:04.320 is concerns about a recession ahead and weakness in some 0:16:04.360 --> 0:16:09.440 of their export markets, combined with the politics of trade 0:16:09.440 --> 0:16:11.880 with the United States and trade with the European Union. 0:16:13.320 --> 0:16:15.880 I think that's a real concern that they have to have, 0:16:16.400 --> 0:16:20.040 and so part of it is how do they create 0:16:20.600 --> 0:16:25.800 the confidence at home to unlock consumer demand? And they 0:16:25.800 --> 0:16:28.000 haven't been able to do that yet. They haven't been 0:16:28.040 --> 0:16:30.480 able to get consumers out spending their money in any 0:16:30.480 --> 0:16:33.200 significant way. And at the same token, how do they 0:16:33.280 --> 0:16:37.600 build relations either with the United States to keep those 0:16:37.640 --> 0:16:40.960 markets open or can they find new markets? And part 0:16:41.240 --> 0:16:44.800 of what we're seeing with this more active foreign policy 0:16:45.320 --> 0:16:48.320 by Si Jimping and his new team is how they 0:16:48.320 --> 0:16:51.200 build relations to compensate for some of the challenges that 0:16:51.240 --> 0:16:53.680 they're seeing in their trade with the United States. 0:16:53.800 --> 0:16:56.760 Do you read very much into the increased pattern apparently 0:16:56.800 --> 0:16:59.480 of meetings with US representative with Jake Sullivan meeting in 0:16:59.600 --> 0:17:02.600 Vienna this counterpart we had Nick Burns, US ambassador going 0:17:02.600 --> 0:17:04.800 in to meet with the foreign minister. Do you read 0:17:04.840 --> 0:17:07.040 anything into that because there's talking, Maybe Tony Blinkinn, the 0:17:07.080 --> 0:17:09.359 Secretary of State, would go over, maybe Jennet Yellen. 0:17:10.840 --> 0:17:11.040 Well. 0:17:11.080 --> 0:17:13.760 I hope that this is a recognition that there's concerned 0:17:13.800 --> 0:17:17.399 about the free fall of the bilateral relationship, and both 0:17:17.480 --> 0:17:20.840 sides seem concerned about that. We run the risk of 0:17:20.920 --> 0:17:24.399 being slightly isolated, as we talked about in the G 0:17:24.520 --> 0:17:27.520 seven context. Certainly the Biden administration would like to ensure 0:17:27.520 --> 0:17:30.119 that our allies are moving and lockstep with us on China, 0:17:30.440 --> 0:17:32.480 but we haven't been seeing that necessarily. 0:17:32.920 --> 0:17:34.640 One of the stories has gotten a lot of attension 0:17:34.720 --> 0:17:36.879 in the United States press release is set of the 0:17:36.920 --> 0:17:39.960 curtailment of operations and so of the consulting organizations over 0:17:40.000 --> 0:17:42.840 in China. The cutting off of data. Is there a 0:17:42.920 --> 0:17:44.560 risk that we're going to know even less than we 0:17:44.560 --> 0:17:47.960 did before about what's really going on in the country. 0:17:48.600 --> 0:17:51.080 I think there's a large concern about data in many 0:17:51.080 --> 0:17:56.560 different ways. One is China definitely has been limiting access 0:17:57.040 --> 0:18:01.000 by foreigners to data, whether it's economic data, whether it's 0:18:01.080 --> 0:18:04.480 data that they're concerned about on national security purposes. We 0:18:04.520 --> 0:18:07.560 saw the whole issue when ddlisted overseas and they were 0:18:07.560 --> 0:18:10.960 forced to dlist then from the United States. That was 0:18:11.000 --> 0:18:14.919 an issue over national security concerns about the kind of 0:18:14.960 --> 0:18:19.160 data that DD would be sharing. The other thing, obviously, 0:18:19.200 --> 0:18:22.720 one part of that is the access that American or 0:18:22.760 --> 0:18:26.800 foreign consulting firms get to data. But another part of 0:18:26.840 --> 0:18:29.520 it is also what the Chinese are planning to do 0:18:29.920 --> 0:18:30.800 with data. 0:18:31.440 --> 0:18:33.840 Never Finally, what about capital markets? Because there is a 0:18:33.880 --> 0:18:36.960 reposers I understand executive order at the White House to 0:18:37.160 --> 0:18:41.480 limit US investment in Chine, particularly in technology areas. How 0:18:41.520 --> 0:18:44.399 big a threat would that be perceived to be by prison. 0:18:44.240 --> 0:18:49.000 G Well, initially, I think it's very clear that the 0:18:49.040 --> 0:18:52.320 outbound some kind of outbound investment restrictions are going to 0:18:52.320 --> 0:18:54.840 be put in place by the administration. And the big 0:18:54.920 --> 0:18:56.879 question is how broad they're going to be and whether 0:18:57.400 --> 0:19:00.560 they're voluntary initially or if you have to have pre approval. 0:19:01.240 --> 0:19:01.720 And so. 0:19:03.440 --> 0:19:05.280 It's going to be a big test, and it's going 0:19:05.320 --> 0:19:07.640 to be much bigger than just capital markets. It's going 0:19:07.680 --> 0:19:11.200 to actually impact anyone who's looking to invest, even companies 0:19:11.359 --> 0:19:14.439 who might be looking to make acquisitions or invest in 0:19:14.520 --> 0:19:18.080 different sectors in China. Initially the administration is say it's 0:19:18.119 --> 0:19:20.639 going to be limited to just a few categories, but 0:19:21.080 --> 0:19:24.680 subsequent administrations can broaden that. It's going to set an 0:19:24.680 --> 0:19:28.040 interesting precedent, and it, of course is of concern to 0:19:28.119 --> 0:19:31.760 the Chinese in part they've been able to benefit, certainly 0:19:31.840 --> 0:19:36.080 from capital flowing into China these days. There's actually a 0:19:36.080 --> 0:19:40.160 lot of capital in China, and one of the interesting 0:19:40.200 --> 0:19:43.119 statistics that we've seen recently is China has almost one 0:19:43.160 --> 0:19:46.600 thousand billionaires. There's a lot of money in China, and 0:19:46.680 --> 0:19:50.399 more and more money from other countries, particularly from the 0:19:50.400 --> 0:19:54.600 Middle East, is now flowing into China. So it's yet 0:19:54.640 --> 0:19:56.240 to be seen what the impact is going to be 0:19:56.280 --> 0:19:59.440 of these outbound investment. But hopefully when the administration does 0:19:59.480 --> 0:20:02.040 put it in it's not putting it in place in 0:20:02.080 --> 0:20:05.280 a way that disadvantages American companies. 0:20:05.720 --> 0:20:07.480 Deborah, thank you so much. It's always such a treat 0:20:07.480 --> 0:20:09.680 to have you with Wall Street Week. That's debau Lair 0:20:09.880 --> 0:20:13.840 of the Paulson Institute as well as Edelman Global Advisory 0:20:15.800 --> 0:20:18.000 coming up with the fight over the debt ceiling is 0:20:18.080 --> 0:20:21.240 really costing us and what good may still come out 0:20:21.240 --> 0:20:23.560