Speaker 1: Hello, and welcome to another episode of the odd Locks podcast.
Speaker 1: I'm chill, Why isn't and I'm Tracy Alloway, Tracy very
Speaker 1: weak economic data.
Speaker 2: Out of China. Yeah, to put it.
Speaker 1: Start starting very directly now, The data has been very weak.
Speaker 3: I have a collection of paraphrased headlines here. So we're
Speaker 3: recording this on August sixteenth, and we just saw an
Speaker 3: emergency rate cut from China. They also announced that they
Speaker 3: would stop publishing the urban youth unemployment rate, which is
Speaker 3: never a good.
Speaker 1: Sign when you just announced that a certain data right
Speaker 1: that people have been tracking for years suddenly will not
Speaker 1: be published anymore.
Speaker 3: Yet exactly and a particularly politically sensitive data point two,
Speaker 3: Retail sales are coming in extremely weak, so rising less
Speaker 3: than three percent a year. They used to be in
Speaker 3: double digits. We have deflation setting in which is something
Speaker 3: we spoke about on the episode we did with Richard Ku.
Speaker 3: Manufacturing is contracting at exports are falling, the un is
Speaker 3: dropping against the dollar. Bank loans at a fourteen year
Speaker 3: low last month.
Speaker 1: Camera.
Speaker 2: I did. I Yeah, I know it's surprising, but I did.
Speaker 1: Actually, I'm not surprised, I'm friend.
Speaker 3: I did actually put together the data points because they're
Speaker 3: so startling. And again, if you compare it with all
Speaker 3: the excitement from earlier in the year about China reopening,
Speaker 3: the end of COVID zero, there was this expectation that
Speaker 3: China was going to end up being a positive catalyst
Speaker 3: for global growth this year, and instead we are potentially
Speaker 3: seeing the exact opposite.
Speaker 1: Yeah, you bring up a good point. I think one
Speaker 1: of the theories is that there would be this big
Speaker 1: inflationary impulse globally from the China reopening, demand for steel,
Speaker 1: demand for various metals, obviously, demand for oil and gasoline,
Speaker 1: and that hasn't picked. You know, there has been this
Speaker 1: pretty mild, sort of mediocre reopening. It has that global
Speaker 1: shockwaves of anything people are talking about exporting deflation or disinflation.
Speaker 1: And then on top of all of the sort of
Speaker 1: like economic weakness that you bring up, there's also the
Speaker 1: sort of like financial market weakness. So there was just
Speaker 1: a story today about one of the companies that sell
Speaker 1: some of these wealth management products missing payments. There's obviously,
Speaker 1: I think it's a country Country gardens, the big developer
Speaker 1: running into a lot of trouble similar similar to the
Speaker 1: weakness we've seen in China evergrand So to your point though,
Speaker 1: just this sort of slew of negative headlines.
Speaker 3: Well, also, I think clearly there is concern that if
Speaker 3: you get real economic weakness in China that could lead
Speaker 3: to something bad for the global economy, just in terms
Speaker 3: of real business activity. But I think there's also this
Speaker 3: financial channel that is probably the one that's likely to
Speaker 3: be the most problematic.
Speaker 2: So if you think about.
Speaker 3: China as in many ways a giant hoarder of financial assets,
Speaker 3: the big question now is what are they going to
Speaker 3: do with those financial assets. Do they have to, for instance,
Speaker 3: start selling off some FX reserves in order to support
Speaker 3: the UN Are they maybe going to buy fewer US treasuries?
Speaker 3: So I think that is definitely one aspect of this
Speaker 3: that is really worth exploring.
Speaker 1: So many interesting elements right now we have, so we
Speaker 1: have to dive deeper into what is going on right
Speaker 1: now with the Chinese economy and what types of policy
Speaker 1: response is we might get or we might not get there.
Speaker 1: I always see, you know, there's like a furious debate
Speaker 1: always on Twitter. It's like why don't they just why
Speaker 1: doesn't the government just give more money to households, sort
Speaker 1: of like the Richard Ku conversation, the sort of you know,
Speaker 1: got to boost domestic demand, what's the reluctance to do that? Like,
Speaker 1: all these sort of different questions, So I think we
Speaker 1: really need to dive into them further.
Speaker 2: Let's do it.
Speaker 4: Well.
Speaker 1: I'm very excited because I think we have the perfect
Speaker 1: guest to discuss this. We're going to be speaking with
Speaker 1: songmans Zoe lu. She is the Maurice Greenberg Fellow for
Speaker 1: China Studies at the CFR, and she is also the
Speaker 1: author of a new book, Sovereign Funds, How the Communist
Speaker 1: Party of China Finances its global ambitions. Thank you so
Speaker 1: much for coming on, Lots.
Speaker 4: Thank you Joe and the Chasy for having me. And
Speaker 4: I'm a big fan of the lots.
Speaker 1: Very very kind of you to say, you know, why
Speaker 1: don't we just start off like super simply in your view,
Speaker 1: why hasn't China seen a more robust recovery since the
Speaker 1: lifting of the COVID restrictions?
Speaker 4: Well, I would say that actually I have always been
Speaker 4: a contrarrian.
Speaker 1: Oh good, I like this already.
Speaker 4: I you know, if in November last year, I put
Speaker 4: out a piece on foreign policy basically made an argument
Speaker 4: to say that the zero COVID is the least economic
Speaker 4: challenging problem that present decision ping was facing that day,
Speaker 4: and even the party. In this case, it would be
Speaker 4: the party. And even if the party decided to read
Speaker 4: to remove zero COVID policy the next day, the economy
Speaker 4: won't rebound sustain a robust to rebound very quickly. Hu.
Speaker 4: And the reason it comes from what I characterize as
Speaker 4: the four d's demand that demographics and decoupling. At that
Speaker 4: time it was decoupling on now is the.
Speaker 1: Risking this is great, the four d's.
Speaker 2: I think it's like the four d's of the apocalypse.
Speaker 1: Yeah, no, that's really I feel like if you want
Speaker 1: to like have your thing, that's like a really demand debt, demographics, undecoupling.
Speaker 1: I'm writing these down, So this.
Speaker 3: Is exactly what I wanted to ask you, because I
Speaker 3: remember even in twenty eighteen, twenty nineteen, there were concerns
Speaker 3: and a lot of discussion about a slowdown in China's
Speaker 3: economic growth, and then COVID happened, and we sort of
Speaker 3: forgot about a lot of the structural issues that we
Speaker 3: had been talking about, and then lo and behold, in
Speaker 3: twenty twenty three, it feels like a lot of these
Speaker 3: structural problems are coming back to haunt the Chinese economy.
Speaker 3: Can you dive a little bit further into what those
Speaker 3: issues are?
Speaker 4: Yeah, sure, I would argue that a lot of these
Speaker 4: structural problems exactly as to what you were describing, Tracy,
Speaker 4: it seemed that during COVID, we were from both inside
Speaker 4: China and outside China, we were overwhelmed by the sudden
Speaker 4: pause of the economy because of the shutdown factories and
Speaker 4: all that, And it seemed that temporarily the pause of
Speaker 4: the economy covered up the structural problems that had been
Speaker 4: embedded into the Chinese economic growth model. And then once
Speaker 4: the Party suddenly exit the zero COVID policy, given you know,
Speaker 4: the consumption pattern that we have observed here in America
Speaker 4: or in Europe, people started to realize, oh, okay, so
Speaker 4: this is a one point for billing market and people
Speaker 4: are going to spend, and that would be powerful and inflationary,
Speaker 4: you know, but you know, short term revengeful expenditure would
Speaker 4: not necessarily overcome the long term structural problems that have
Speaker 4: dragged the Chinese economy, even just from GDP terms. You know,
Speaker 4: if we think about the Chinese economy. There are different
Speaker 4: ways that you can argue that the Chinese economy has picked.
Speaker 4: I mean, I'm not necessary that category. But if we
Speaker 4: just imagurate from GDP perspective or in terms of export
Speaker 4: as a percentage of GDP, the Chinese economy already picked.
Speaker 4: You know, China surpass the Germany back in two thousand
Speaker 4: ten to become the largest trading of the largest exporting
Speaker 4: economy in the world and has at its height export
Speaker 4: as a percentage of GDP was about thirty percent and
Speaker 4: has since then plateaued. And the decrease right now is
Speaker 4: about twenty something percent. And if you think about GDP growth,
Speaker 4: the double double digital growth period already ended. So from
Speaker 4: that perspective, what we actually observe goes back to the forties.
Speaker 4: The problem with demand is not necessarily at you know,
Speaker 4: I'm not talking about the ultimated demand. I'm specifically talking
Speaker 4: about the house the consumption component of demand for a
Speaker 4: long period of time. You know, yes, you can, we
Speaker 4: can make it the argument to say household consumption as
Speaker 4: a percentage contributing to the Chinese GP is you know,
Speaker 4: is about forty percent. Yet it has been low and
Speaker 4: you know, global average I'm not even talking about you know,
Speaker 4: the OECD level. I'm talking about like a global average
Speaker 4: it's about sixty percent of a GDP, whereas the Chinese
Speaker 4: forty percent. We can make it the argument to say, well,
Speaker 4: the China household consumption has been a drag on the
Speaker 4: Chinese economy. However, up until twenty twelve. By the end
Speaker 4: of twenty twelve, actually household consumptions contribution to GDP growth
Speaker 4: at least has been on an upward trajection. In other word,
Speaker 4: the growth of household consumption has been positive. You know,
Speaker 4: you see Chinese people do discretionary vacations and all that,
Speaker 4: but that has changed since two thousand thirteen. And if
Speaker 4: we just actually in between Presence Jimping's two terms, the
Speaker 4: second term was even worse than the first term.
Speaker 1: So let's go further into that. A, why has it
Speaker 1: gotten worse? And then b you know, there's all this
Speaker 1: talk it's like, why don't they just do household stimulus?
Speaker 1: There's some version of that, and people are sort of bemused,
Speaker 1: maybe is the word. It's like, why isn't the Communist
Speaker 1: party more willing to extend support directly to the people,
Speaker 1: and you know, rebalancing things a why did it get worse?
Speaker 1: But why is there this reluctant to do something like
Speaker 1: what we did in US just sort of print money
Speaker 1: and give it to people.
Speaker 4: You know, Joe, that's an excellent, excellent question. You make
Speaker 4: me think about the why aspect of it, right, yea,
Speaker 4: So fundamentally, ber are I would argue about it. There
Speaker 4: are two aspect of why there has been a decreasing
Speaker 4: household consumption. The first one is, obviously you can't empirically
Speaker 4: observe from the data, there has been a decline in
Speaker 4: household income growth and household income growth up until President.
Speaker 4: Before President came to power, household growth was income growth
Speaker 4: was significantly faster than after he came to power, and
Speaker 4: his again his second term was worse on average than
Speaker 4: his first term. So that's one aspect in terms of
Speaker 4: income household income growth. And then the second aspect of
Speaker 4: it would be household balance sheet detioriation. And a lot
Speaker 4: of this comes down to housing market property value depreciation
Speaker 4: because of control on real estate policies and all that. Now,
Speaker 4: the reason why beer has been a reluctant in terms
Speaker 4: of stimulant basically provide stimulus checks to Chinese household it's
Speaker 4: not that Chinese economists have not thought about that option.
Speaker 4: You actually do see people do that on Chinese social
Speaker 4: media when they realize that, oh, you know what, my
Speaker 4: cousins in America be just a lineup, become just a
Speaker 4: lineup or waiting their ho and then male would come in,
Speaker 4: you know, stimulus check. You know some students were even
Speaker 4: getting stimulus check. And then the problem becomes well, historically
Speaker 4: there has not been this kind of president, but no
Speaker 4: president does not necessarily stop the government from inventing one. Right,
Speaker 4: And the deeper problem, I would argue is the politics.
Speaker 4: The politics simply would not necessarily work. Part of that
Speaker 4: is because empowering. This is probably deeper in the Chinese
Speaker 4: political philosophy in the sense that well, you know, it's
Speaker 4: a depending up on how which political scientists or political
Speaker 4: economists you are talking to. Some people would say, oh,
Speaker 4: you know, Chinese system is authoritarian capitalism or fragmented capitalism
Speaker 4: or fragmented authoritarianism and things like that. But fundamentally, what
Speaker 4: we observe is that the Chinese economic growth model has
Speaker 4: been built upon financial repression, and at the center of
Speaker 4: the financial repression or the Chinese banks and who controls
Speaker 4: the bank is essentially the Chinese government led by the
Speaker 4: Chinese Commedies and Party. Yeah. Other word, the Chinese commedies
Speaker 4: to Party has always been at the center of a
Speaker 4: capital allocation, and by empowering the household or for that matter,
Speaker 4: the private sector, it basically dilute or potentially remove their relevancy.
Speaker 3: Interesting, this is exactly what I wanted to ask you,
Speaker 3: and I just did a thread on Twitter that made
Speaker 3: a similar point. But how much of this is a
Speaker 3: political economy problem in the sense that both on the
Speaker 3: business side and the consumption side, where we've seen the
Speaker 3: Communist Party be sort of well be controlling in many ways. So,
Speaker 3: for instance, on private business, we've had the property crackdown,
Speaker 3: the tech sector cracked down, and that would apparently seem
Speaker 3: to perhaps make people more reluctant to do their own
Speaker 3: startups and things like that. And then on the household side,
Speaker 3: it does feel like you have a reluctance from the
Speaker 3: party to sort of empower the individual at the risk
Speaker 3: of losing some of their own power and perhaps the
Speaker 3: collective power.
Speaker 4: I am a political economist, so I would argue the
Speaker 4: answer is yes is yes, you are rights and from
Speaker 4: an intellectual perspective. I do think this is a political
Speaker 4: economy problem, because if you look at the history of
Speaker 4: the Chinese economic growth since nineteen forty nine, it's not
Speaker 4: that the economy has never experienced shocks. Actually, the Chinese
Speaker 4: system experienced a lot of shocks from even in the
Speaker 4: nineteen fifties. You experience the Chinese economy experienced the Great
Speaker 4: Leap forward, and when the Communists took over, they also
Speaker 4: destroyed a lot of the banking systems in Shanghai and
Speaker 4: elsewhere established by the Perierlist. Right, So, and then there
Speaker 4: was also revolution and all that, but then there is
Speaker 4: also the sudden stop of the cultural revolution. In other word,
Speaker 4: the Chinese economic political economic system a is not short
Speaker 4: of crisis, or for that matter, man made crisis. And secondly,
Speaker 4: the Chinese political economic system was also not unfamiliar with
Speaker 4: sudden reverse or sudden policy corrections. And what that means
Speaker 4: for today, that basically means the growth, the rapid growth
Speaker 4: of the Chinese economy has fundamentally been led by the
Speaker 4: government and the party, and it's just a degree of
Speaker 4: party state involvement. Now if we think about the rise
Speaker 4: of dnaping. He corresponded to the rapid rise of China
Speaker 4: and all that. But if we remember what actually made China,
Speaker 4: the starting point of China's rapid growth was not necessary. Yes,
Speaker 4: it was nineteen seventy eight the clear signal that Chinese
Speaker 4: reform and opened up. But then there was a Chiamen
Speaker 4: and the China was put under sanctions and all that.
Speaker 4: And then nineteen ninety two he made this famous southern tour.
Speaker 4: You know, he toured Shinzen and all those places, and
Speaker 4: he gave a clear signal during his speech when he
Speaker 4: was touring the south southern part of China. And I
Speaker 4: was just recently revisited his speech, so I remember, this
Speaker 4: is something that I learned very recently. This is why
Speaker 4: I read his speech so many times. So he cited
Speaker 4: this one example, this rich person. Apparently he was one
Speaker 4: of the if not the earliest. He was one of
Speaker 4: the earliest Chinese entrepreneur to make one hundred million um.
Speaker 4: He was the founder of this sunflower seed company called
Speaker 4: Shasguas or idiot sunflower seed when idiots the sunflower seeds
Speaker 4: yes or food sunflower seeds shats guads.
Speaker 2: And name.
Speaker 4: At that time out of jealousy or some other or
Speaker 4: other reasons. There were some voices among Chinese people or
Speaker 4: policy makers to say, this guy becomes so rich, we
Speaker 4: need to take him down. And in his in his speech,
Speaker 4: don't some things that I'm aware of, these kind of recommendations,
Speaker 4: but we cannot do that. He stracked it down. And
Speaker 4: the reason he also explained why he the party cannot
Speaker 4: do that. He said, if we punished him, that would
Speaker 4: send a terrible signal. It would make people think that
Speaker 4: we changed our policy of reform and open up. And
Speaker 4: there are so many instances that we can do things
Speaker 4: and make people think we changed our policies, and we
Speaker 4: cannot do that. So from his perspective, you know, the
Speaker 4: part the big risk, as he charakrized it, is to
Speaker 4: make mistakes to make people think that we changed our policy.
Speaker 1: Can I ask sort of I don't know, maybe it's
Speaker 1: a devil's advocate question or I don't know how to
Speaker 1: characterize it, but you know, obviously there's this big household
Speaker 1: debt overhang that you're talking about. It seems from the outside,
Speaker 1: and it seems from any commenters like a pretty unhealthy
Speaker 1: real estate market in terms of the level of UH speculation,
Speaker 1: the level of costs et cetera. It also seems as
Speaker 1: though the government would like to sort of find a
Speaker 1: way to get out of that trap where like so
Speaker 1: where it's not all about, you know, not everything revolves
Speaker 1: around the cost of housing or buying a new apartment.
Speaker 1: Is there an argument to be made that stimulus direct
Speaker 1: to households today under the current economic structure would just
Speaker 1: sort of further fuel a real estate bubble or real
Speaker 1: estate demand, and that until the sort of domestic economy
Speaker 1: has shifted in some way more such that it's not
Speaker 1: out of that dynamic, that it doesn't make sense to
Speaker 1: boost demand for those reasons.
Speaker 4: First of all, I would say household demand for properties
Speaker 4: or for housing in China is on a perpetual decline
Speaker 4: for two reasons. The first reason is that from empirical data,
Speaker 4: we can't observe that China's urbanization rate has picked. And secondly,
Speaker 4: demographic goes back to one of the four the.
Speaker 1: Third year demographs demographics.
Speaker 4: As of last year, Chinese population growth for the first
Speaker 4: time declined, and there are some numbers saying that actually
Speaker 4: now India's population is more than Chinese population. So from
Speaker 4: the it's not just the population decline on its own
Speaker 4: is not necessarily causing an immediate shock or negative shock
Speaker 4: on housing demand, but is actually the lower family formation
Speaker 4: rate and the idea that people, for whatever, for cultural reasons,
Speaker 4: is very expensive to get married for fancy you know,
Speaker 4: banquet and all that. But you know, it's also very
Speaker 4: expensive to risk kids in China, especially in big cities.
Speaker 4: So from that, so those are the two structural reasons
Speaker 4: why demand for housing is on a perpetual decline in China.
Speaker 4: Even if the government gives simulus checks to the Chinese household,
Speaker 4: in the current mix of policy environment, I would not
Speaker 4: necessarily be confident that the Chinese household are going to
Speaker 4: a b incentivized to spend or be think that this
Speaker 4: is a good time to buy house. And the reason
Speaker 4: there are two reasons. The first reason is negative confidence
Speaker 4: shock and the second is a deflationary policy environment. And
Speaker 4: the negative policy the negative confidence part of that comes
Speaker 4: from you know, people's material feeling up that their household
Speaker 4: balance sheet deteriorated, as being filed by the Chinese people
Speaker 4: as well. You know, I can impurely observe the value
Speaker 4: of my house went lower, and yet I am still
Speaker 4: paying a lot of mortgage. So you see, well, there
Speaker 4: is early mortgage payment which the banks is not the
Speaker 4: banks are not happy about it. And then on the
Speaker 4: other hand, as the Chinese GDP grow slows down, you know,
Speaker 4: three percent last year despite record a high export last year.
Speaker 4: And then on top of that we see the move
Speaker 4: out or the redistribution of global supply chains and international
Speaker 4: multinational multinationals become less you know, bullish about the Chinese
Speaker 4: market than you know, high paying jobs being there. There
Speaker 4: are less high paying jobs being created, so Chinese people
Speaker 4: becomes like, well, wait a moment, I don't think I'm
Speaker 4: going to make more money. Therefore, they are not going
Speaker 4: to be a sign to spend. They are going to
Speaker 4: be more incentivized to save. Not because of good environment,
Speaker 4: about because of lack of confidence and then deflationary policy
Speaker 4: environment is because people are waiting. Well, it seems that
Speaker 4: as fround the beginning of this year, the government has
Speaker 4: put out so many policies to incentivize people to spend
Speaker 4: or for that a matter of support the housing market.
Speaker 4: And there is this popular saying if you don't buy,
Speaker 4: if I don't buy, the housing price persone meter next
Speaker 4: week is going to be cheaper by two hundred again.
Speaker 3: So everyone weighs on strike right to try to get
Speaker 3: a lower price. I think this is such a good
Speaker 3: point because historically a lot of Chinese growth has been
Speaker 3: driven by infrastructure investment and housing, and it feels like
Speaker 3: infrastructure has kind of run its course. China does have
Speaker 3: a lot of great infrastructure right now, and at the
Speaker 3: same time, housing the other sort of twin engine of growth.
Speaker 3: There are a lot of doubts about it, as you
Speaker 3: just like out perfectly. I want to go back to
Speaker 3: something you said earlier. I've never heard anyone phrase it
Speaker 3: quite like this, but I think it's absolutely correct, the
Speaker 3: idea that the Chinese economy is sort of predicated on
Speaker 3: financial repression and that introduces inherent limitations in a situation
Speaker 3: like this. Can you talk a little bit more about
Speaker 3: how you see that working.
Speaker 4: Sure, you know there are so many people talk about
Speaker 4: financial repressions, and obviously people you know, Tracy, you are
Speaker 4: absolutely right. A lot of infrastructure and housing have been
Speaker 4: the twined growth engine for the Chinese economy because they
Speaker 4: drive up aggregate demand and they also drive up global
Speaker 4: commodity prizes. And to say that it's not that the
Speaker 4: China built too much infrastructure or for the matter too
Speaker 4: much housing is that the over built it to the
Speaker 4: extent that if population growth, population keep growing, or more
Speaker 4: international companies move into China, or there are more demand
Speaker 4: for factories because of entrepreneurs and all that growing supply
Speaker 4: growing demand. The whole idea is, this is the Chinese
Speaker 4: policy maker's mentality. As long I build it, as I
Speaker 4: provided the infrastructure, they will come. Right. But now the
Speaker 4: problem is international companies are not coming for a variety
Speaker 4: of reasons, and a lot of the reasons goes back
Speaker 4: to my quote about dun shaping reasons. The Chinese leaders
Speaker 4: have simply made policy choices and policy decisions, created a
Speaker 4: huge uncertainty and signaled even if they did not have
Speaker 4: the intention, but at least from our observation, they created
Speaker 4: the signal that perhaps the Chinese government or the Party
Speaker 4: changed their policies with regard to reform and open up.
Speaker 4: So a lot of these boil down to yes, you know,
Speaker 4: the Party is still very much out of the center
Speaker 4: of capital allocation. Ye. In this whole idea of financial repression,
Speaker 4: this whole idea is to use high savings that Chinese
Speaker 4: people tend to save, and these high savings is being
Speaker 4: channeled through Chinese banking system. And you know, the two
Speaker 4: the four biggest banks are stayed owned and through lower
Speaker 4: depositors saving rate, lower depositors rate, they are able the
Speaker 4: banks are able to lend cheaply to support state owned
Speaker 4: enterprises or channel credit to sectors that are prioritized by
Speaker 4: the government. And it's many people you know who follows China,
Speaker 4: especially stayed on enterprises. They are familiar with this idea
Speaker 4: of the government has these guidelines or government guidelines for
Speaker 4: prioritized prioritized sectors. Every five years or so, they would
Speaker 4: update it, right, you know.
Speaker 1: So we've talked about household demand, We've talked about debt,
Speaker 1: talked about demographics. There was actually a headline just yesterday
Speaker 1: and Reuter's China's fertility rate drops her record low one
Speaker 1: point zero nine into.
Speaker 3: The one headline I left off.
Speaker 1: You had to save one for me. I appreciate that,
Speaker 1: which is so obviously still going, you know, in the
Speaker 1: wrong direction. And I want to talk about, you know,
Speaker 1: the actual topic of your book. But I think maybe
Speaker 1: there's the fourth D in your four D framework, the decoupling,
Speaker 1: and so obviously I mean, I think there's some like
Speaker 1: sort of intuitions like okay, like US or global multinationals
Speaker 1: maybe like less inclined to invest in China. Obviously the
Speaker 1: sort of growing trade tensions that started under Trump and
Speaker 1: really have continued or maybe even ratcheted higher under Biden.
Speaker 1: But how do you think of that we're decoupling? What
Speaker 1: does it mean to you?
Speaker 4: Like?
Speaker 1: How do you how would you define it?
Speaker 4: Honestly? I felt decoupling at the individual. First of all, Joe,
Speaker 4: I appreciate that you asked me, you know how I
Speaker 4: feel about it? Because people have people are very confused
Speaker 4: about what is decoupling or what are talking about the
Speaker 4: risking and there is actually no formal definition about what
Speaker 4: they are at a personal level. The moment during COVID,
Speaker 4: the moment I realized I cannot get a plan from
Speaker 4: New York to go back to Shanghai or Beijing. For me,
Speaker 4: that is a sign of decoupling. And right now there is,
Speaker 4: if I am correct, there is still no direct flight
Speaker 4: between New York and Beijing or Shanghai, and the flight
Speaker 4: right now, I think there are concrete policies that you know,
Speaker 4: the concrete initiatives in the evasion industry between US and
Speaker 4: China and to increase the flight, but still very below
Speaker 4: pre pandemic level. So what we are we can concretely
Speaker 4: observe less and the less people to people communication. And
Speaker 4: from economic sense obviously or political economy sense, decoupling obviously
Speaker 4: means or for that you know right now we're talking
Speaker 4: about the risk is very much a Western term if
Speaker 4: we view it from China or Chinese as a maker's perspective,
Speaker 4: because this is the term that they condemn a lot.
Speaker 4: You see Premier Letiang in the China in the summer,
Speaker 4: devils intandians that you know, decoupling is a terrible idea,
Speaker 4: is a false prefaces and all that. But decoupling really,
Speaker 4: I understand it from the perspective of supply chain diversification.
Speaker 4: The idea really is really not about getting rid of
Speaker 4: a China simply because of China is on every part
Speaker 4: of your supply chain, How could you possibly get rid
Speaker 4: of China? Right, But it's really about not being overly
Speaker 4: reliant on your one simple supplier. The whole idea of
Speaker 4: you know, eykon one on one used to be economy
Speaker 4: of scale, but now economy of scale become a risk.
Speaker 1: Huh, that's what that's very well put economies of scale
Speaker 1: becoming a risk.
Speaker 3: So why don't speaking of scale, why don't we talk
Speaker 3: about the sovereign wealth funds? Because when you look at
Speaker 3: the numbers of something like CiCe, I mean they're massive.
Speaker 3: With China, numbers are almost always massive. The accumulation of
Speaker 3: this wealth and the fact that it is held by
Speaker 3: these public investment entities, what does that mean in times
Speaker 3: like this? China has you know, billions, possibly trillions of
Speaker 3: dollars worth of FX reserves. I can't remember the exact number.
Speaker 3: I think there's some debate over it now as well.
Speaker 3: But could they tap some of those assets to provide
Speaker 3: support in times of economic slowdown?
Speaker 4: Tracy, that's not excellent point. In times of economic slow down,
Speaker 4: I would say there are opportunities, But in times of
Speaker 4: economic crisis they have done that before. And actually China's
Speaker 4: summer funds initially was not created for geopolitical or geoeconomic
Speaker 4: aspiration power projection. It was created out of crisis. The
Speaker 4: very first time that the Chinese policy makers used foreign
Speaker 4: exchange reserves was to recapitalize the Chinese banks in the
Speaker 4: early two thousands, when the major Chinese state owned banks
Speaker 4: were crippled by non performing loans. At that time, some
Speaker 4: of those banks were suffering from at non performing loans
Speaker 4: as high as higher than twenty or twenty five percent,
Speaker 4: so by definition they were actually they were, you know,
Speaker 4: non solvent. So at that time they decided that they
Speaker 4: created this special policy vehicle called Centraligin and used function
Speaker 4: reserves through Centralkuigan to recapitalize these Chinese banks. They have
Speaker 4: been quite successful. Therefore, when there were a few I
Speaker 4: think it's around twenty fifteen if I remember correctly, there
Speaker 4: was this baushining Hun crisis. It's another medium sized bank
Speaker 4: crisis in China, and a lot of confusion at that time.
Speaker 4: People were saying that, oh, you know, the central bank
Speaker 4: is going to take it over. Actually it's not the
Speaker 4: central bank, it was a Central Oigian. And now when
Speaker 4: a lot of these bad loan managers, our bad debt
Speaker 4: managers are the so called assets stayed owned asset management
Speaker 4: the company, a lot of them are in trouble now
Speaker 4: and the idea is, I wouldn't be surprised, you know,
Speaker 4: Huisin is going to step in and take them under
Speaker 4: on its balance sheet because this is a well established
Speaker 4: channel that Central Cuisine knows how to do it and
Speaker 4: do it successfully.
Speaker 1: Stepping back further, I mean, you know, a lot of
Speaker 1: sovereign wealth funds around the world. I associate with commodity
Speaker 1: real commodity export countries, so obviously the Norwegian Sovereign Wealth
Speaker 1: Fund one of the biggest, the various golf sovereign wealth funds,
Speaker 1: and they tend to be in large part about sort
Speaker 1: of currency stabilization given the inherent volatility of GDP and
Speaker 1: their ex channel. You mentioned, you know, the sort of
Speaker 1: origin of them and the banking crisis. Broadly speaking, what
Speaker 1: purpose do they serve for China like currently sitting aside
Speaker 1: the current economic weakness?
Speaker 4: Ah? Sure? In the Joe, I appreciate that you mentioned
Speaker 4: the origin of summern funds right, because a lot of
Speaker 4: this is sovereign so called Summer and Wells fund. In
Speaker 4: the entire universe of a sovereign Wells fund. As a
Speaker 4: Tracy mentioned earlier, these funds are massive, and the Chinese
Speaker 4: funds are actually see see I see alone it managed
Speaker 4: more than one point three trillion asset, which is larger
Speaker 4: than the size of Mexico's GDP. And I think Mexico
Speaker 4: is like the world seventeenth largest economy or something like that,
Speaker 4: and China has more than that, so broadly speaking, despite that, yes,
Speaker 4: you know, originally these funds were the first time that
Speaker 4: China did. It was to solve a crisis. And then
Speaker 4: as China's reserve accumulation increased, or at least you know,
Speaker 4: Tracy was, there is a debate with regard to how
Speaker 4: we should think about the size of China's foreign exchange asset.
Speaker 4: But if we think about if we think about foreign
Speaker 4: exchange reserves using IMF's narrow definition, China's foreign change reserve
Speaker 4: was at one point peaked at four trillion dollars. Right
Speaker 4: now it's plate held around three trillion, slightly higher than
Speaker 4: three trillion dollars. And as china reserve accumulates faster and more,
Speaker 4: the debate in terms of how to better manage China's
Speaker 4: foreign exchange reserves started, and after President Being came to power,
Speaker 4: in particular, there has been a shift to strategically use
Speaker 4: the foreign change reserves to serve certain foreign policy agenda
Speaker 4: or to finance certain government initiatives, such as the creation
Speaker 4: of the Sale Cow defund to specifically advance or finance
Speaker 4: the belt hand the road initiative.
Speaker 3: Right, So I remember Brad sets are recently just on
Speaker 3: the debate over the size of FS reserves. Brad Setster
Speaker 3: had a great piece of research about the possibility that
Speaker 3: maybe China has an additional three trillion dollars. I think
Speaker 3: it was worth of assets that aren't necessarily accounted for
Speaker 3: in official statistics. The idea being that if it hadn't
Speaker 3: channeled so much of that money into the Silk Road
Speaker 3: Fund or Belt and Road and programs like that, this
Speaker 3: would be an available pool of cash that it could
Speaker 3: use for other things. What is the political appetite, I guess,
Speaker 3: to move away from using that money to exert Chinese
Speaker 3: influence in other parts of the world, buy up commodities
Speaker 3: things like that, built ports in Africa, whatever, versus maybe
Speaker 3: starting to channel some of it more domestically.
Speaker 4: No, Tracy, that's accellent The point Brad and I wear colleagues,
Speaker 4: and somehow we have done independent research on similar topics
Speaker 4: and all that. His research has always been brilliant and
Speaker 4: uh and and as solid. His charts are fantastic, and
Speaker 4: sometimes I would question the color coding aspect of it,
Speaker 4: but but his charts are great. My estimation of the
Speaker 4: size of shadow reserves or whatever you know. They are
Speaker 4: the assets foreign exchange assets that are not recorded on
Speaker 4: China's official foreign exchange statistics, would would be in ballpark
Speaker 4: in the same proximity to breast asthmate. And in particular
Speaker 4: for a lot of these assets managed by State Administration
Speaker 4: of Foreign Exchange. You know, it's established UH domestic and
Speaker 4: international investment corporations. And my assessment of to what extent
Speaker 4: this would be used to solve to project power globally,
Speaker 4: I would say perhaps in the current global geopolitical environment,
Speaker 4: not so much. And the reason is because this perhaps
Speaker 4: is another point where China's policymakers tend to think differently
Speaker 4: in terms of economic or financial management diversification. It used
Speaker 4: to be the at least starting from two to seven
Speaker 4: to two some thirteen. During this period of time, the
Speaker 4: discussion about diversification of foreign change reserves has been diversified
Speaker 4: away from US treasury is because the yield on US
Speaker 4: strategies was so low and an opportunity for US to
Speaker 4: hold most of our reserves in the US strateury is
Speaker 4: so high. Therefore, we need to diversify in strategic asset overseas,
Speaker 4: such as critical minerals or guests or you know, some
Speaker 4: startup companies and all that, and certain people even put
Speaker 4: out agenda in terms of these are the six areas
Speaker 4: that we need to think about in terms of a
Speaker 4: strategic asset. But now diversification becomes a risk, you know,
Speaker 4: because diversification can not diversify away systemic risk, right and
Speaker 4: for China at this moment, systemic risk becomes being sanctioned
Speaker 4: by the West. This is my assessment. Obviously, you know
Speaker 4: I did not get this from he or anybody. But
Speaker 4: given what Russian given the West collective sanction against the Russia,
Speaker 4: especially the freeze of Russian reserves, now you realize, well,
Speaker 4: who has the largest oarn reserves in the world. It's China.
Speaker 4: And where are most of the reserve invested or most
Speaker 4: of the assets invested or owned by sovereign funds. Most
Speaker 4: of the sovereign funds investing in Europe and America. They
Speaker 4: are not necessarily politically aligned or geopolitically aligned in times
Speaker 4: of geoeconomic contingency such as Taiwan.
Speaker 3: I think that's a very reasonable assumption. You actually brought
Speaker 3: up something that I wanted to ask you about as well,
Speaker 3: which is China's buying of US treasuries, and there is
Speaker 3: a sort of perpetual concern that one day China is
Speaker 3: not going to be there to finance the US deficit.
Speaker 3: I guess how realistic is that concern in an era
Speaker 3: where China is potentially worried about something like sanctions.
Speaker 4: To be honest, I would I'm not surprised that the
Speaker 4: appetite for China to slow down or by less US
Speaker 4: treasuries has exist or has already happened. Part of the
Speaker 4: reason is because the conversation has already started in the
Speaker 4: two thousands, and the people already start. People already realized, well,
Speaker 4: there is opportunity cost of holding US treasuries. At that time,
Speaker 4: the opportunity cost was purely in terms of economic But
Speaker 4: now the problem becomes perhaps there is also geopolitical risk,
Speaker 4: right the diversification, the diversification aspect of it, and then
Speaker 4: the other aspect of the debate comes down to, well,
Speaker 4: perhaps the China would not necessarily want to dump you
Speaker 4: as a treasury enlarge amount too fast, either because ultimately
Speaker 4: any volatility yin US a treasury market, or for that
Speaker 4: no matter the depreciation of US dollar is going to
Speaker 4: inflict a huge pan on the Chinese Central Mexic balance
Speaker 4: sheet as well.
Speaker 1: So I just have one more question, and this is
Speaker 1: going to be one of those questions. It's totally unfair
Speaker 1: because it's actually like incredibly open ended. We could probably
Speaker 1: do another hour on this, but like, you know, it's
Speaker 1: got to be like one question. But you know the
Speaker 1: title of your book, how the Communist Party of China
Speaker 1: or sovereign funds? How the Communist Party of China finances?
Speaker 1: It's global ambition. We've been talking a lot about the financing,
Speaker 1: but what are the global ambitions?
Speaker 2: This is actually another episode.
Speaker 1: I know it's a whole other episode because we are
Speaker 1: probably of a whole series of like, but I do
Speaker 1: think we should like touch on that, like how would
Speaker 1: you summarize the global ambitions of the Chinese Communist Party.
Speaker 4: I think the global ambitions have changed and evolved over time.
Speaker 4: It used to be the case that from dun Shopping
Speaker 4: onward before up until twenty thirteen or the end of
Speaker 4: two thousand twelve, the global ambition has been growing the economy,
Speaker 4: raising out of the people's life standard and so that
Speaker 4: the party can stay in power. And starting from Twosun
Speaker 4: thirteen onward, we started to see there is an inflation
Speaker 4: of the party's ambition, from the Belt and Road initiative
Speaker 4: to the building of shared human destiny, and a lot
Speaker 4: of these reside or resonates with the present. The current leader,
Speaker 4: President Jimpings, continue to search for great ideas and this
Speaker 4: brings me back to Donaping. Don Shaping in his nineteen
Speaker 4: ninety two tour he said, it is okay for us
Speaker 4: to not have new ideas as long as we do
Speaker 4: not the change with our economic reform and open app policy.
Speaker 4: But right now the ambition seems to be changing, and
Speaker 4: it seems to be a moving target with regard to
Speaker 4: figuring out what exactly we are trying to do well.
Speaker 1: I do think maybe we should at some point have
Speaker 1: you back for like an hour, just unlike how this
Speaker 1: is all changing and where it's all going and how
Speaker 1: it's evolving a song with Zoe lud This was a
Speaker 1: fascinating conversation. Really appreciate you coming on up.
Speaker 4: Thank you both for having me and yeah, I'm a
Speaker 4: big thing.
Speaker 1: Thanks much, Tracy. I thought that was great. I need
Speaker 1: to come up with something like the four d's of
Speaker 1: something just like I feel like it's like a calling
Speaker 1: card some big things like it's so good.
Speaker 3: Well, I'm glad you asked that last question about the
Speaker 3: ambitions of China, because I think it hints at the
Speaker 3: fundamental tension here which and Zoe mentioned this, which is,
Speaker 3: for years the party justified its control by promising economic growth.
Speaker 3: So you have that social contract. But I think the
Speaker 3: difficulty now is what if that control is coming at
Speaker 3: the expense of economic growth. You know, if we're talking
Speaker 3: about a lot of these difficulties are in fact a
Speaker 3: political economy problem, then I think it raises that question
Speaker 3: and becomes extremely tricky for the Party to actually navigate.
Speaker 1: I hadn't really thought about that point before, about the
Speaker 1: sort of I guess I would say inherently decentralizing effect
Speaker 1: of more household demand, right that at some level, if
Speaker 1: households have more cash, if they're less financially repressed, et cetera,
Speaker 1: then at some level, like there's a limit of the
Speaker 1: degree of control that political leaders can have about that
Speaker 1: spending and where it goes and how that money is.
Speaker 1: I hadn't really, like, you know, like I sort of
Speaker 1: had this conception that well, maybe for like domestic industrial purposes,
Speaker 1: you know, you know, you want to like prioritize the
Speaker 1: interests of certain exporters or certain certain industries. But just
Speaker 1: the idea of like an inherently like sort of like
Speaker 1: decentralizing effect is one that I hadn't thought about at
Speaker 1: all well.
Speaker 3: And also it sort of highlights the importance of the
Speaker 3: public business entities in China. And this is something that
Speaker 3: I only realized from actually spending time in Beijing, which is,
Speaker 3: you know, a lot of countries have big government buildings
Speaker 3: or monuments of some sort. A lot of the biggest
Speaker 3: buildings in Beijing are the CIC and the other sort
Speaker 3: of state owned enterprises, and if you walk around the
Speaker 3: ring roads of Beijing, you get a real sense of
Speaker 3: their sort of monumental importance to the economy. There is
Speaker 3: a there's physical evidence of it, which you can't really
Speaker 3: appreciate unless you see them.
Speaker 2: The other thing that I thought was really.
Speaker 3: Interesting was the idea of more need for diversification in
Speaker 3: order to offset the decoupling aspect that Zoe talked about.
Speaker 3: But again in times like this where you need more
Speaker 3: money to support the domestic economy, but at the same
Speaker 3: time you're worried about the external environment, and you want
Speaker 3: to diversify away from the US to sort of offset that.
Speaker 3: That also seems really difficult to do so many interesting things. Also,
Speaker 3: can I just say I am now, I'm slightly obsessed
Speaker 3: with idiot melon seeds, and I'm going to go off
Speaker 3: and research.
Speaker 1: I guess I was going to do the same thing.
Speaker 2: Yes, excellent, All right, shall we leave it there?
Speaker 1: Let's leave it there.
Speaker 2: Okay.
Speaker 3: This has been another episode of the Odd Lots podcast.
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 1: And I'm Joe Wisenthal. You can follow me at the Stalwart.
Speaker 1: Follow our guests song leand Zoe Lou at that same name,
Speaker 1: Songwend Zoe Lou. Follow our producers Carmen Rodriguez at Carmen
Speaker 1: Arman and dash Ol Bennett at dashbot, and check out
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Speaker 2: Thanks for listening.