WEBVTT - The Four Big Structural Forces Holding Back China's Economy 0:00:10.160 --> 0:00:13.720 Hello, and welcome to another episode of the odd Locks podcast. 0:00:13.840 --> 0:00:17.880 I'm chill, Why isn't and I'm Tracy Alloway, Tracy very 0:00:17.880 --> 0:00:19.239 weak economic data. 0:00:19.079 --> 0:00:21.319 Out of China. Yeah, to put it. 0:00:21.360 --> 0:00:24.919 Start starting very directly now, The data has been very weak. 0:00:25.040 --> 0:00:30.160 I have a collection of paraphrased headlines here. So we're 0:00:30.200 --> 0:00:34.559 recording this on August sixteenth, and we just saw an 0:00:34.560 --> 0:00:37.680 emergency rate cut from China. They also announced that they 0:00:37.720 --> 0:00:41.640 would stop publishing the urban youth unemployment rate, which is 0:00:41.880 --> 0:00:42.839 never a good. 0:00:42.680 --> 0:00:45.559 Sign when you just announced that a certain data right 0:00:45.680 --> 0:00:47.599 that people have been tracking for years suddenly will not 0:00:47.600 --> 0:00:48.599 be published anymore. 0:00:48.400 --> 0:00:52.239 Yet exactly and a particularly politically sensitive data point two, 0:00:52.479 --> 0:00:56.160 Retail sales are coming in extremely weak, so rising less 0:00:56.200 --> 0:00:58.960 than three percent a year. They used to be in 0:00:59.040 --> 0:01:02.320 double digits. We have deflation setting in which is something 0:01:02.320 --> 0:01:04.679 we spoke about on the episode we did with Richard Ku. 0:01:05.240 --> 0:01:09.680 Manufacturing is contracting at exports are falling, the un is 0:01:09.760 --> 0:01:13.360 dropping against the dollar. Bank loans at a fourteen year 0:01:13.520 --> 0:01:14.720 low last month. 0:01:15.080 --> 0:01:15.800 Camera. 0:01:16.040 --> 0:01:18.399 I did. I Yeah, I know it's surprising, but I did. 0:01:18.440 --> 0:01:20.640 Actually, I'm not surprised, I'm friend. 0:01:20.840 --> 0:01:23.160 I did actually put together the data points because they're 0:01:23.240 --> 0:01:26.200 so startling. And again, if you compare it with all 0:01:26.280 --> 0:01:29.640 the excitement from earlier in the year about China reopening, 0:01:29.680 --> 0:01:32.640 the end of COVID zero, there was this expectation that 0:01:32.760 --> 0:01:36.039 China was going to end up being a positive catalyst 0:01:36.120 --> 0:01:38.880 for global growth this year, and instead we are potentially 0:01:38.880 --> 0:01:40.240 seeing the exact opposite. 0:01:40.400 --> 0:01:43.000 Yeah, you bring up a good point. I think one 0:01:43.040 --> 0:01:44.560 of the theories is that there would be this big 0:01:44.560 --> 0:01:49.240 inflationary impulse globally from the China reopening, demand for steel, 0:01:49.360 --> 0:01:52.919 demand for various metals, obviously, demand for oil and gasoline, 0:01:53.560 --> 0:01:56.000 and that hasn't picked. You know, there has been this 0:01:56.120 --> 0:02:00.760 pretty mild, sort of mediocre reopening. It has that global 0:02:00.920 --> 0:02:05.520 shockwaves of anything people are talking about exporting deflation or disinflation. 0:02:05.960 --> 0:02:08.079 And then on top of all of the sort of 0:02:08.120 --> 0:02:11.320 like economic weakness that you bring up, there's also the 0:02:11.360 --> 0:02:14.280 sort of like financial market weakness. So there was just 0:02:14.320 --> 0:02:17.679 a story today about one of the companies that sell 0:02:17.800 --> 0:02:21.119 some of these wealth management products missing payments. There's obviously, 0:02:21.160 --> 0:02:23.840 I think it's a country Country gardens, the big developer 0:02:24.120 --> 0:02:27.520 running into a lot of trouble similar similar to the 0:02:27.520 --> 0:02:31.200 weakness we've seen in China evergrand So to your point though, 0:02:31.360 --> 0:02:34.040 just this sort of slew of negative headlines. 0:02:34.280 --> 0:02:37.600 Well, also, I think clearly there is concern that if 0:02:37.600 --> 0:02:40.839 you get real economic weakness in China that could lead 0:02:40.880 --> 0:02:44.399 to something bad for the global economy, just in terms 0:02:44.440 --> 0:02:47.360 of real business activity. But I think there's also this 0:02:47.560 --> 0:02:52.440 financial channel that is probably the one that's likely to 0:02:52.480 --> 0:02:53.799 be the most problematic. 0:02:53.880 --> 0:02:54.959 So if you think about. 0:02:54.800 --> 0:03:00.760 China as in many ways a giant hoarder of financial assets, 0:03:01.120 --> 0:03:02.560 the big question now is what are they going to 0:03:02.639 --> 0:03:05.280 do with those financial assets. Do they have to, for instance, 0:03:05.280 --> 0:03:08.680 start selling off some FX reserves in order to support 0:03:08.720 --> 0:03:11.680 the UN Are they maybe going to buy fewer US treasuries? 0:03:11.919 --> 0:03:14.640 So I think that is definitely one aspect of this 0:03:14.880 --> 0:03:16.320 that is really worth exploring. 0:03:16.800 --> 0:03:19.959 So many interesting elements right now we have, so we 0:03:20.080 --> 0:03:23.519 have to dive deeper into what is going on right 0:03:23.560 --> 0:03:27.239 now with the Chinese economy and what types of policy 0:03:27.360 --> 0:03:30.360 response is we might get or we might not get there. 0:03:30.680 --> 0:03:32.520 I always see, you know, there's like a furious debate 0:03:32.520 --> 0:03:34.639 always on Twitter. It's like why don't they just why 0:03:34.639 --> 0:03:37.240 doesn't the government just give more money to households, sort 0:03:37.280 --> 0:03:40.440 of like the Richard Ku conversation, the sort of you know, 0:03:40.720 --> 0:03:43.920 got to boost domestic demand, what's the reluctance to do that? Like, 0:03:43.920 --> 0:03:45.720 all these sort of different questions, So I think we 0:03:45.800 --> 0:03:47.600 really need to dive into them further. 0:03:47.720 --> 0:03:48.280 Let's do it. 0:03:48.480 --> 0:03:48.640 Well. 0:03:48.680 --> 0:03:51.480 I'm very excited because I think we have the perfect 0:03:51.480 --> 0:03:53.320 guest to discuss this. We're going to be speaking with 0:03:53.640 --> 0:03:56.840 songmans Zoe lu. She is the Maurice Greenberg Fellow for 0:03:57.000 --> 0:04:00.200 China Studies at the CFR, and she is also the 0:04:00.240 --> 0:04:03.480 author of a new book, Sovereign Funds, How the Communist 0:04:03.480 --> 0:04:07.000 Party of China Finances its global ambitions. Thank you so 0:04:07.120 --> 0:04:08.720 much for coming on, Lots. 0:04:09.080 --> 0:04:11.160 Thank you Joe and the Chasy for having me. And 0:04:11.280 --> 0:04:13.080 I'm a big fan of the lots. 0:04:13.200 --> 0:04:15.800 Very very kind of you to say, you know, why 0:04:15.840 --> 0:04:18.760 don't we just start off like super simply in your view, 0:04:19.240 --> 0:04:23.520 why hasn't China seen a more robust recovery since the 0:04:23.720 --> 0:04:25.600 lifting of the COVID restrictions? 0:04:26.040 --> 0:04:28.640 Well, I would say that actually I have always been 0:04:28.680 --> 0:04:29.400 a contrarrian. 0:04:29.560 --> 0:04:30.960 Oh good, I like this already. 0:04:31.200 --> 0:04:34.719 I you know, if in November last year, I put 0:04:34.720 --> 0:04:39.000 out a piece on foreign policy basically made an argument 0:04:39.120 --> 0:04:43.240 to say that the zero COVID is the least economic 0:04:43.360 --> 0:04:46.920 challenging problem that present decision ping was facing that day, 0:04:46.960 --> 0:04:49.719 and even the party. In this case, it would be 0:04:49.760 --> 0:04:52.440 the party. And even if the party decided to read 0:04:52.600 --> 0:04:56.520 to remove zero COVID policy the next day, the economy 0:04:56.560 --> 0:05:00.280 won't rebound sustain a robust to rebound very quickly. Hu. 0:05:00.920 --> 0:05:04.200 And the reason it comes from what I characterize as 0:05:04.200 --> 0:05:10.960 the four d's demand that demographics and decoupling. At that 0:05:11.000 --> 0:05:12.720 time it was decoupling on now is the. 0:05:12.720 --> 0:05:14.960 Risking this is great, the four d's. 0:05:15.120 --> 0:05:17.680 I think it's like the four d's of the apocalypse. 0:05:17.839 --> 0:05:20.200 Yeah, no, that's really I feel like if you want 0:05:20.240 --> 0:05:26.560 to like have your thing, that's like a really demand debt, demographics, undecoupling. 0:05:26.560 --> 0:05:28.640 I'm writing these down, So this. 0:05:28.720 --> 0:05:31.279 Is exactly what I wanted to ask you, because I 0:05:31.360 --> 0:05:35.680 remember even in twenty eighteen, twenty nineteen, there were concerns 0:05:35.760 --> 0:05:39.039 and a lot of discussion about a slowdown in China's 0:05:39.160 --> 0:05:41.960 economic growth, and then COVID happened, and we sort of 0:05:42.320 --> 0:05:45.159 forgot about a lot of the structural issues that we 0:05:45.360 --> 0:05:48.919 had been talking about, and then lo and behold, in 0:05:48.960 --> 0:05:51.160 twenty twenty three, it feels like a lot of these 0:05:51.320 --> 0:05:55.440 structural problems are coming back to haunt the Chinese economy. 0:05:55.600 --> 0:05:59.200 Can you dive a little bit further into what those 0:05:59.240 --> 0:05:59.800 issues are? 0:06:00.360 --> 0:06:03.680 Yeah, sure, I would argue that a lot of these 0:06:03.800 --> 0:06:07.120 structural problems exactly as to what you were describing, Tracy, 0:06:07.560 --> 0:06:10.840 it seemed that during COVID, we were from both inside 0:06:10.920 --> 0:06:14.440 China and outside China, we were overwhelmed by the sudden 0:06:14.520 --> 0:06:17.640 pause of the economy because of the shutdown factories and 0:06:17.720 --> 0:06:22.440 all that, And it seemed that temporarily the pause of 0:06:22.480 --> 0:06:27.560 the economy covered up the structural problems that had been 0:06:28.440 --> 0:06:33.520 embedded into the Chinese economic growth model. And then once 0:06:33.839 --> 0:06:39.440 the Party suddenly exit the zero COVID policy, given you know, 0:06:39.480 --> 0:06:41.919 the consumption pattern that we have observed here in America 0:06:42.040 --> 0:06:45.440 or in Europe, people started to realize, oh, okay, so 0:06:45.520 --> 0:06:48.480 this is a one point for billing market and people 0:06:48.560 --> 0:06:52.440 are going to spend, and that would be powerful and inflationary, 0:06:53.320 --> 0:06:56.599 you know, but you know, short term revengeful expenditure would 0:06:56.640 --> 0:07:01.159 not necessarily overcome the long term structural problems that have 0:07:01.560 --> 0:07:05.360 dragged the Chinese economy, even just from GDP terms. You know, 0:07:05.400 --> 0:07:07.440 if we think about the Chinese economy. There are different 0:07:07.480 --> 0:07:10.560 ways that you can argue that the Chinese economy has picked. 0:07:10.800 --> 0:07:14.800 I mean, I'm not necessary that category. But if we 0:07:14.960 --> 0:07:18.680 just imagurate from GDP perspective or in terms of export 0:07:18.920 --> 0:07:21.840 as a percentage of GDP, the Chinese economy already picked. 0:07:21.880 --> 0:07:24.720 You know, China surpass the Germany back in two thousand 0:07:25.440 --> 0:07:28.840 ten to become the largest trading of the largest exporting 0:07:28.880 --> 0:07:33.160 economy in the world and has at its height export 0:07:33.200 --> 0:07:35.600 as a percentage of GDP was about thirty percent and 0:07:35.720 --> 0:07:38.920 has since then plateaued. And the decrease right now is 0:07:38.920 --> 0:07:42.280 about twenty something percent. And if you think about GDP growth, 0:07:42.360 --> 0:07:47.320 the double double digital growth period already ended. So from 0:07:47.360 --> 0:07:51.120 that perspective, what we actually observe goes back to the forties. 0:07:51.480 --> 0:07:55.800 The problem with demand is not necessarily at you know, 0:07:55.840 --> 0:07:58.600 I'm not talking about the ultimated demand. I'm specifically talking 0:07:58.640 --> 0:08:02.880 about the house the consumption component of demand for a 0:08:02.920 --> 0:08:05.240 long period of time. You know, yes, you can, we 0:08:05.280 --> 0:08:08.000 can make it the argument to say household consumption as 0:08:08.040 --> 0:08:11.520 a percentage contributing to the Chinese GP is you know, 0:08:11.680 --> 0:08:15.600 is about forty percent. Yet it has been low and 0:08:15.800 --> 0:08:18.840 you know, global average I'm not even talking about you know, 0:08:18.920 --> 0:08:21.640 the OECD level. I'm talking about like a global average 0:08:21.680 --> 0:08:24.520 it's about sixty percent of a GDP, whereas the Chinese 0:08:24.600 --> 0:08:27.280 forty percent. We can make it the argument to say, well, 0:08:27.320 --> 0:08:30.440 the China household consumption has been a drag on the 0:08:30.480 --> 0:08:36.440 Chinese economy. However, up until twenty twelve. By the end 0:08:36.480 --> 0:08:41.560 of twenty twelve, actually household consumptions contribution to GDP growth 0:08:41.720 --> 0:08:45.160 at least has been on an upward trajection. In other word, 0:08:45.720 --> 0:08:48.760 the growth of household consumption has been positive. You know, 0:08:48.760 --> 0:08:53.240 you see Chinese people do discretionary vacations and all that, 0:08:53.559 --> 0:08:59.400 but that has changed since two thousand thirteen. And if 0:08:59.400 --> 0:09:03.680 we just actually in between Presence Jimping's two terms, the 0:09:03.800 --> 0:09:06.960 second term was even worse than the first term. 0:09:07.520 --> 0:09:11.520 So let's go further into that. A, why has it 0:09:11.559 --> 0:09:14.199 gotten worse? And then b you know, there's all this 0:09:14.559 --> 0:09:17.320 talk it's like, why don't they just do household stimulus? 0:09:17.320 --> 0:09:21.840 There's some version of that, and people are sort of bemused, 0:09:21.880 --> 0:09:24.720 maybe is the word. It's like, why isn't the Communist 0:09:24.720 --> 0:09:28.280 party more willing to extend support directly to the people, 0:09:28.360 --> 0:09:31.880 and you know, rebalancing things a why did it get worse? 0:09:31.960 --> 0:09:35.200 But why is there this reluctant to do something like 0:09:35.240 --> 0:09:37.080 what we did in US just sort of print money 0:09:37.120 --> 0:09:37.840 and give it to people. 0:09:38.640 --> 0:09:42.959 You know, Joe, that's an excellent, excellent question. You make 0:09:43.000 --> 0:09:44.880 me think about the why aspect of it, right, yea, 0:09:45.040 --> 0:09:47.560 So fundamentally, ber are I would argue about it. There 0:09:47.559 --> 0:09:50.640 are two aspect of why there has been a decreasing 0:09:50.640 --> 0:09:54.760 household consumption. The first one is, obviously you can't empirically 0:09:54.800 --> 0:09:58.040 observe from the data, there has been a decline in 0:09:58.360 --> 0:10:03.559 household income growth and household income growth up until President. 0:10:04.000 --> 0:10:09.000 Before President came to power, household growth was income growth 0:10:09.120 --> 0:10:12.880 was significantly faster than after he came to power, and 0:10:13.000 --> 0:10:16.760 his again his second term was worse on average than 0:10:16.760 --> 0:10:19.480 his first term. So that's one aspect in terms of 0:10:19.559 --> 0:10:22.600 income household income growth. And then the second aspect of 0:10:22.640 --> 0:10:27.080 it would be household balance sheet detioriation. And a lot 0:10:27.120 --> 0:10:30.560 of this comes down to housing market property value depreciation 0:10:30.800 --> 0:10:35.560 because of control on real estate policies and all that. Now, 0:10:35.840 --> 0:10:39.720 the reason why beer has been a reluctant in terms 0:10:39.720 --> 0:10:45.199 of stimulant basically provide stimulus checks to Chinese household it's 0:10:45.280 --> 0:10:49.280 not that Chinese economists have not thought about that option. 0:10:49.559 --> 0:10:52.760 You actually do see people do that on Chinese social 0:10:52.760 --> 0:10:55.280 media when they realize that, oh, you know what, my 0:10:55.400 --> 0:10:58.800 cousins in America be just a lineup, become just a 0:10:58.840 --> 0:11:01.480 lineup or waiting their ho and then male would come in, 0:11:01.960 --> 0:11:04.840 you know, stimulus check. You know some students were even 0:11:04.840 --> 0:11:10.760 getting stimulus check. And then the problem becomes well, historically 0:11:10.800 --> 0:11:15.040 there has not been this kind of president, but no 0:11:15.240 --> 0:11:18.959 president does not necessarily stop the government from inventing one. Right, 0:11:19.440 --> 0:11:23.000 And the deeper problem, I would argue is the politics. 0:11:23.240 --> 0:11:26.679 The politics simply would not necessarily work. Part of that 0:11:26.840 --> 0:11:31.960 is because empowering. This is probably deeper in the Chinese 0:11:32.000 --> 0:11:34.600 political philosophy in the sense that well, you know, it's 0:11:34.600 --> 0:11:38.200 a depending up on how which political scientists or political 0:11:38.200 --> 0:11:40.480 economists you are talking to. Some people would say, oh, 0:11:40.520 --> 0:11:44.880 you know, Chinese system is authoritarian capitalism or fragmented capitalism 0:11:45.080 --> 0:11:50.040 or fragmented authoritarianism and things like that. But fundamentally, what 0:11:50.160 --> 0:11:54.160 we observe is that the Chinese economic growth model has 0:11:54.200 --> 0:11:57.600 been built upon financial repression, and at the center of 0:11:57.640 --> 0:12:01.760 the financial repression or the Chinese banks and who controls 0:12:01.800 --> 0:12:04.880 the bank is essentially the Chinese government led by the 0:12:04.960 --> 0:12:07.840 Chinese Commedies and Party. Yeah. Other word, the Chinese commedies 0:12:07.880 --> 0:12:11.560 to Party has always been at the center of a 0:12:11.600 --> 0:12:16.520 capital allocation, and by empowering the household or for that matter, 0:12:16.640 --> 0:12:23.199 the private sector, it basically dilute or potentially remove their relevancy. 0:12:23.800 --> 0:12:26.839 Interesting, this is exactly what I wanted to ask you, 0:12:26.880 --> 0:12:29.480 and I just did a thread on Twitter that made 0:12:29.480 --> 0:12:31.680 a similar point. But how much of this is a 0:12:31.720 --> 0:12:36.120 political economy problem in the sense that both on the 0:12:36.160 --> 0:12:40.480 business side and the consumption side, where we've seen the 0:12:40.520 --> 0:12:45.120 Communist Party be sort of well be controlling in many ways. So, 0:12:45.400 --> 0:12:48.520 for instance, on private business, we've had the property crackdown, 0:12:48.800 --> 0:12:52.400 the tech sector cracked down, and that would apparently seem 0:12:52.520 --> 0:12:56.040 to perhaps make people more reluctant to do their own 0:12:56.040 --> 0:12:59.840 startups and things like that. And then on the household side, 0:13:00.120 --> 0:13:02.760 it does feel like you have a reluctance from the 0:13:02.800 --> 0:13:06.800 party to sort of empower the individual at the risk 0:13:06.840 --> 0:13:10.200 of losing some of their own power and perhaps the 0:13:10.280 --> 0:13:11.200 collective power. 0:13:12.400 --> 0:13:16.599 I am a political economist, so I would argue the 0:13:16.600 --> 0:13:21.000 answer is yes is yes, you are rights and from 0:13:21.040 --> 0:13:24.120 an intellectual perspective. I do think this is a political 0:13:24.200 --> 0:13:28.400 economy problem, because if you look at the history of 0:13:28.440 --> 0:13:33.160 the Chinese economic growth since nineteen forty nine, it's not 0:13:33.320 --> 0:13:38.880 that the economy has never experienced shocks. Actually, the Chinese 0:13:38.920 --> 0:13:41.839 system experienced a lot of shocks from even in the 0:13:41.960 --> 0:13:46.280 nineteen fifties. You experience the Chinese economy experienced the Great 0:13:46.440 --> 0:13:49.760 Leap forward, and when the Communists took over, they also 0:13:50.280 --> 0:13:54.000 destroyed a lot of the banking systems in Shanghai and 0:13:54.520 --> 0:13:59.040 elsewhere established by the Perierlist. Right, So, and then there 0:13:59.160 --> 0:14:02.400 was also revolution and all that, but then there is 0:14:02.440 --> 0:14:05.920 also the sudden stop of the cultural revolution. In other word, 0:14:06.120 --> 0:14:11.559 the Chinese economic political economic system a is not short 0:14:11.840 --> 0:14:16.160 of crisis, or for that matter, man made crisis. And secondly, 0:14:16.600 --> 0:14:21.560 the Chinese political economic system was also not unfamiliar with 0:14:22.280 --> 0:14:26.720 sudden reverse or sudden policy corrections. And what that means 0:14:26.720 --> 0:14:31.640 for today, that basically means the growth, the rapid growth 0:14:31.720 --> 0:14:36.520 of the Chinese economy has fundamentally been led by the 0:14:36.520 --> 0:14:41.280 government and the party, and it's just a degree of 0:14:41.760 --> 0:14:45.520 party state involvement. Now if we think about the rise 0:14:45.520 --> 0:14:49.400 of dnaping. He corresponded to the rapid rise of China 0:14:49.480 --> 0:14:55.440 and all that. But if we remember what actually made China, 0:14:55.880 --> 0:15:00.280 the starting point of China's rapid growth was not necessary. Yes, 0:15:00.320 --> 0:15:03.240 it was nineteen seventy eight the clear signal that Chinese 0:15:03.240 --> 0:15:05.680 reform and opened up. But then there was a Chiamen 0:15:06.280 --> 0:15:08.520 and the China was put under sanctions and all that. 0:15:09.000 --> 0:15:14.160 And then nineteen ninety two he made this famous southern tour. 0:15:14.360 --> 0:15:16.440 You know, he toured Shinzen and all those places, and 0:15:16.520 --> 0:15:21.040 he gave a clear signal during his speech when he 0:15:21.120 --> 0:15:23.560 was touring the south southern part of China. And I 0:15:23.720 --> 0:15:26.440 was just recently revisited his speech, so I remember, this 0:15:26.480 --> 0:15:29.000 is something that I learned very recently. This is why 0:15:29.000 --> 0:15:31.760 I read his speech so many times. So he cited 0:15:31.800 --> 0:15:35.640 this one example, this rich person. Apparently he was one 0:15:35.640 --> 0:15:38.680 of the if not the earliest. He was one of 0:15:38.680 --> 0:15:43.400 the earliest Chinese entrepreneur to make one hundred million um. 0:15:43.520 --> 0:15:46.680 He was the founder of this sunflower seed company called 0:15:46.960 --> 0:15:52.520 Shasguas or idiot sunflower seed when idiots the sunflower seeds 0:15:52.600 --> 0:15:57.720 yes or food sunflower seeds shats guads. 0:15:56.720 --> 0:16:00.080 And name. 0:16:00.920 --> 0:16:03.760 At that time out of jealousy or some other or 0:16:03.880 --> 0:16:07.040 other reasons. There were some voices among Chinese people or 0:16:07.080 --> 0:16:09.680 policy makers to say, this guy becomes so rich, we 0:16:09.920 --> 0:16:13.040 need to take him down. And in his in his speech, 0:16:13.560 --> 0:16:16.960 don't some things that I'm aware of, these kind of recommendations, 0:16:17.240 --> 0:16:22.280 but we cannot do that. He stracked it down. And 0:16:22.480 --> 0:16:26.240 the reason he also explained why he the party cannot 0:16:26.280 --> 0:16:29.800 do that. He said, if we punished him, that would 0:16:29.960 --> 0:16:34.400 send a terrible signal. It would make people think that 0:16:34.520 --> 0:16:38.880 we changed our policy of reform and open up. And 0:16:39.040 --> 0:16:42.120 there are so many instances that we can do things 0:16:42.160 --> 0:16:45.160 and make people think we changed our policies, and we 0:16:45.320 --> 0:16:48.840 cannot do that. So from his perspective, you know, the 0:16:48.880 --> 0:16:52.560 part the big risk, as he charakrized it, is to 0:16:52.800 --> 0:17:10.359 make mistakes to make people think that we changed our policy. 0:17:12.920 --> 0:17:14.600 Can I ask sort of I don't know, maybe it's 0:17:14.600 --> 0:17:18.399 a devil's advocate question or I don't know how to 0:17:18.480 --> 0:17:22.720 characterize it, but you know, obviously there's this big household 0:17:22.720 --> 0:17:25.280 debt overhang that you're talking about. It seems from the outside, 0:17:25.320 --> 0:17:28.600 and it seems from any commenters like a pretty unhealthy 0:17:28.800 --> 0:17:32.320 real estate market in terms of the level of UH speculation, 0:17:32.440 --> 0:17:36.119 the level of costs et cetera. It also seems as 0:17:36.200 --> 0:17:39.199 though the government would like to sort of find a 0:17:39.240 --> 0:17:42.000 way to get out of that trap where like so 0:17:42.119 --> 0:17:44.840 where it's not all about, you know, not everything revolves 0:17:44.880 --> 0:17:47.360 around the cost of housing or buying a new apartment. 0:17:47.800 --> 0:17:50.959 Is there an argument to be made that stimulus direct 0:17:50.960 --> 0:17:55.679 to households today under the current economic structure would just 0:17:56.000 --> 0:17:59.400 sort of further fuel a real estate bubble or real 0:17:59.480 --> 0:18:03.080 estate demand, and that until the sort of domestic economy 0:18:03.080 --> 0:18:05.560 has shifted in some way more such that it's not 0:18:05.720 --> 0:18:08.760 out of that dynamic, that it doesn't make sense to 0:18:08.960 --> 0:18:10.480 boost demand for those reasons. 0:18:10.920 --> 0:18:15.439 First of all, I would say household demand for properties 0:18:15.520 --> 0:18:18.600 or for housing in China is on a perpetual decline 0:18:18.640 --> 0:18:23.800 for two reasons. The first reason is that from empirical data, 0:18:23.840 --> 0:18:29.680 we can't observe that China's urbanization rate has picked. And secondly, 0:18:30.160 --> 0:18:32.160 demographic goes back to one of the four the. 0:18:32.080 --> 0:18:33.920 Third year demographs demographics. 0:18:34.200 --> 0:18:37.280 As of last year, Chinese population growth for the first 0:18:37.280 --> 0:18:40.520 time declined, and there are some numbers saying that actually 0:18:40.600 --> 0:18:44.520 now India's population is more than Chinese population. So from 0:18:44.520 --> 0:18:47.760 the it's not just the population decline on its own 0:18:47.920 --> 0:18:52.440 is not necessarily causing an immediate shock or negative shock 0:18:52.520 --> 0:18:56.080 on housing demand, but is actually the lower family formation 0:18:56.240 --> 0:19:01.440 rate and the idea that people, for whatever, for cultural reasons, 0:19:01.600 --> 0:19:05.000 is very expensive to get married for fancy you know, 0:19:05.240 --> 0:19:08.000 banquet and all that. But you know, it's also very 0:19:08.040 --> 0:19:11.920 expensive to risk kids in China, especially in big cities. 0:19:12.160 --> 0:19:15.600 So from that, so those are the two structural reasons 0:19:15.640 --> 0:19:20.399 why demand for housing is on a perpetual decline in China. 0:19:20.800 --> 0:19:25.000 Even if the government gives simulus checks to the Chinese household, 0:19:25.160 --> 0:19:29.520 in the current mix of policy environment, I would not 0:19:29.640 --> 0:19:34.919 necessarily be confident that the Chinese household are going to 0:19:35.600 --> 0:19:40.280 a b incentivized to spend or be think that this 0:19:40.320 --> 0:19:42.439 is a good time to buy house. And the reason 0:19:42.800 --> 0:19:47.560 there are two reasons. The first reason is negative confidence 0:19:47.640 --> 0:19:53.679 shock and the second is a deflationary policy environment. And 0:19:53.840 --> 0:19:57.720 the negative policy the negative confidence part of that comes 0:19:57.800 --> 0:20:03.760 from you know, people's material feeling up that their household 0:20:03.800 --> 0:20:08.359 balance sheet deteriorated, as being filed by the Chinese people 0:20:08.400 --> 0:20:12.520 as well. You know, I can impurely observe the value 0:20:12.560 --> 0:20:16.280 of my house went lower, and yet I am still 0:20:16.280 --> 0:20:19.080 paying a lot of mortgage. So you see, well, there 0:20:19.119 --> 0:20:22.639 is early mortgage payment which the banks is not the 0:20:22.640 --> 0:20:25.080 banks are not happy about it. And then on the 0:20:25.119 --> 0:20:29.879 other hand, as the Chinese GDP grow slows down, you know, 0:20:30.000 --> 0:20:34.400 three percent last year despite record a high export last year. 0:20:34.680 --> 0:20:37.680 And then on top of that we see the move 0:20:37.760 --> 0:20:41.800 out or the redistribution of global supply chains and international 0:20:42.440 --> 0:20:48.199 multinational multinationals become less you know, bullish about the Chinese 0:20:48.200 --> 0:20:52.200 market than you know, high paying jobs being there. There 0:20:52.200 --> 0:20:55.160 are less high paying jobs being created, so Chinese people 0:20:55.160 --> 0:20:57.360 becomes like, well, wait a moment, I don't think I'm 0:20:57.400 --> 0:20:59.520 going to make more money. Therefore, they are not going 0:20:59.520 --> 0:21:01.359 to be a sign to spend. They are going to 0:21:01.400 --> 0:21:06.560 be more incentivized to save. Not because of good environment, 0:21:06.640 --> 0:21:10.919 about because of lack of confidence and then deflationary policy 0:21:11.000 --> 0:21:14.600 environment is because people are waiting. Well, it seems that 0:21:14.720 --> 0:21:17.120 as fround the beginning of this year, the government has 0:21:17.400 --> 0:21:21.600 put out so many policies to incentivize people to spend 0:21:22.040 --> 0:21:23.960 or for that a matter of support the housing market. 0:21:24.520 --> 0:21:27.640 And there is this popular saying if you don't buy, 0:21:27.760 --> 0:21:31.080 if I don't buy, the housing price persone meter next 0:21:31.080 --> 0:21:34.159 week is going to be cheaper by two hundred again. 0:21:34.640 --> 0:21:36.959 So everyone weighs on strike right to try to get 0:21:37.000 --> 0:21:38.920 a lower price. I think this is such a good 0:21:38.960 --> 0:21:42.840 point because historically a lot of Chinese growth has been 0:21:42.920 --> 0:21:47.760 driven by infrastructure investment and housing, and it feels like 0:21:48.280 --> 0:21:51.600 infrastructure has kind of run its course. China does have 0:21:51.680 --> 0:21:53.760 a lot of great infrastructure right now, and at the 0:21:53.840 --> 0:21:57.680 same time, housing the other sort of twin engine of growth. 0:21:57.960 --> 0:21:59.600 There are a lot of doubts about it, as you 0:21:59.720 --> 0:22:01.959 just like out perfectly. I want to go back to 0:22:02.000 --> 0:22:05.399 something you said earlier. I've never heard anyone phrase it 0:22:05.560 --> 0:22:08.840 quite like this, but I think it's absolutely correct, the 0:22:08.920 --> 0:22:13.000 idea that the Chinese economy is sort of predicated on 0:22:13.160 --> 0:22:18.640 financial repression and that introduces inherent limitations in a situation 0:22:18.840 --> 0:22:21.159 like this. Can you talk a little bit more about 0:22:21.240 --> 0:22:22.640 how you see that working. 0:22:23.040 --> 0:22:26.240 Sure, you know there are so many people talk about 0:22:26.440 --> 0:22:29.760 financial repressions, and obviously people you know, Tracy, you are 0:22:29.760 --> 0:22:36.440 absolutely right. A lot of infrastructure and housing have been 0:22:36.960 --> 0:22:40.560 the twined growth engine for the Chinese economy because they 0:22:40.640 --> 0:22:44.600 drive up aggregate demand and they also drive up global 0:22:44.600 --> 0:22:49.639 commodity prizes. And to say that it's not that the 0:22:49.840 --> 0:22:54.440 China built too much infrastructure or for the matter too 0:22:54.480 --> 0:22:57.960 much housing is that the over built it to the 0:22:58.040 --> 0:23:03.000 extent that if population growth, population keep growing, or more 0:23:03.119 --> 0:23:06.840 international companies move into China, or there are more demand 0:23:06.920 --> 0:23:10.879 for factories because of entrepreneurs and all that growing supply 0:23:11.000 --> 0:23:13.840 growing demand. The whole idea is, this is the Chinese 0:23:13.920 --> 0:23:17.080 policy maker's mentality. As long I build it, as I 0:23:17.240 --> 0:23:20.960 provided the infrastructure, they will come. Right. But now the 0:23:21.000 --> 0:23:25.560 problem is international companies are not coming for a variety 0:23:25.600 --> 0:23:28.920 of reasons, and a lot of the reasons goes back 0:23:28.960 --> 0:23:34.359 to my quote about dun shaping reasons. The Chinese leaders 0:23:34.359 --> 0:23:38.639 have simply made policy choices and policy decisions, created a 0:23:38.720 --> 0:23:42.960 huge uncertainty and signaled even if they did not have 0:23:43.000 --> 0:23:46.840 the intention, but at least from our observation, they created 0:23:46.840 --> 0:23:51.800 the signal that perhaps the Chinese government or the Party 0:23:52.000 --> 0:23:56.040 changed their policies with regard to reform and open up. 0:23:56.320 --> 0:24:00.520 So a lot of these boil down to yes, you know, 0:24:00.640 --> 0:24:02.680 the Party is still very much out of the center 0:24:02.760 --> 0:24:07.120 of capital allocation. Ye. In this whole idea of financial repression, 0:24:07.160 --> 0:24:11.399 this whole idea is to use high savings that Chinese 0:24:11.440 --> 0:24:14.160 people tend to save, and these high savings is being 0:24:14.240 --> 0:24:17.480 channeled through Chinese banking system. And you know, the two 0:24:18.080 --> 0:24:22.200