Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Welcome to Marin Talk's Money, the podcast in which people
Speaker 2: who know the markets explain the markets. I'm mere in
Speaker 2: Sumset Web. This week we focus on China and how
Speaker 2: the West relationship is changing with the world's second largest economy.
Speaker 2: My guest is Diana Choilever. Diana is a leading expert
Speaker 2: on China's economy and politics. She's a chief economist at
Speaker 2: a Nodoeconomics, at independent macroeconomic, political, and geopolitical forecasting company.
Speaker 2: She set up herself in twenty sixteen to look at
Speaker 2: China and its global impact. She's also a Senior Fellow
Speaker 2: on the Chinese economy with the Asia Society Policy Institute's
Speaker 2: Center for Chinese Analysis.
Speaker 3: I started off by asking.
Speaker 2: How to look at the most important relationship in the world,
Speaker 2: that between China and the US.
Speaker 3: Diana, Hi, thank you so much for joining us today.
Speaker 4: Him Merrin, it's my pleasure.
Speaker 2: How does it look at the moment the most important
Speaker 2: relationship in the world, You could probably say the one
Speaker 2: between the US and China and the trade relationship between them.
Speaker 1: Well, look, I mean these are the existing hegemon and
Speaker 1: the expiring hegemon locked in a relentless and I would
Speaker 1: say escalating context for global supremacy. And of course, the
Speaker 1: most important event on the horizon that will shape certainly
Speaker 1: the next few years, if not longer, is the US
Speaker 1: presidential election. From the perspective of the Chinese side, She
Speaker 1: Jimpin is in control and has doubled down on his vision.
Speaker 1: And I would argue that even irrespective of whether a
Speaker 1: Trump or Harris wins, this contest will continue, but the
Speaker 1: shape of it will probably change depending on who is
Speaker 1: the next US president.
Speaker 2: Okay, well, let's talk first about about she doubling down
Speaker 2: on his vision. Let's what is that vision and what
Speaker 2: do you mean by doubling down on it?
Speaker 1: Well, look, coming he's been in power for two terms
Speaker 1: and now he is coming into you know, is into
Speaker 1: his unprecedented third term. And our analysis and other economics
Speaker 1: suggests that there is no feasible.
Speaker 4: Sort of grouping that can.
Speaker 1: Challenge him, so he's likely to be there for another
Speaker 1: five years. And finally, he's sort of taken him ten
Speaker 1: years to have his people in charge after a relentless
Speaker 1: anti corruption campaign that went on.
Speaker 4: And is still going on.
Speaker 1: So he now is his opportunity to really put in
Speaker 1: practice what has been talking about from the very start
Speaker 1: of becoming the Communist Parties General secret and she is
Speaker 1: really taking this second part now and putting the reforms
Speaker 1: in action to achieve a more equitable society. Because of course,
Speaker 1: China grew very fast as a result of them reforms.
Speaker 1: It industrialized at the breakneck speed and now oh is
Speaker 1: the global manufacturing club of the world.
Speaker 4: Certain mean low value act.
Speaker 1: And meanwhile, the inequality between both income and wealth between
Speaker 1: Reich and poor and China has exploded as well.
Speaker 4: So he's come up.
Speaker 1: With the idea of really common prosperity, which essentially is
Speaker 1: redistributing income. And it's a big question mark whether that
Speaker 1: will succeed as an economic policy because it changes fundamentally
Speaker 1: the incentive driving in China. Another very key feature of
Speaker 1: what he did is to basically put national security as
Speaker 1: the overriding objective, and that is really a priority. Economic
Speaker 1: growth and economic development is subjugated to this all encompassing
Speaker 1: idea of security, and he.
Speaker 4: Has focused on a supply side.
Speaker 1: Transformation of the economy, which is probably the most successful
Speaker 1: I would argue part of his vision and certainly the
Speaker 1: one where I see him likely to kind of get
Speaker 1: some productivity gains out of this transformation. But then really
Speaker 1: the big question is that if as a true Marxist Leninist,
Speaker 1: he really is all about frugality, despises consumption and sort
Speaker 1: of the excessive consumerism in the US, whether without the
Speaker 1: demand side, without the change is needed to get genuine
Speaker 1: Chinese consumption, even destructural reforms on the supply side, whether
Speaker 1: those will be able to carry the day by themselves.
Speaker 2: I mean, this is the thing that and assume we've
Speaker 2: been waiting for forever, is the sort of rise and
Speaker 2: domestic consumption, but it never quite seems to happen. We
Speaker 2: continually see China get getting rich or not quite rich
Speaker 2: enough by being a mass exporter, but we don't see
Speaker 2: it coming from internal demand and internal consumption.
Speaker 3: And that's the big challenge, isn't it.
Speaker 1: Oh No, absolutely, and the Chinese have talked about rebalancing
Speaker 1: the economy to more more consumption for a long time,
Speaker 1: and to be fair, there was some rebalancing between about
Speaker 1: twenty twelve and twenty eighty, largely because of demographics. You know,
Speaker 1: China used to have this endless cheap labor, which it
Speaker 1: stopped heavy by about then. First the migrant labor force
Speaker 1: started shrinking. Then the overall labor force right is shrinking,
Speaker 1: so labor got more bargaining power, and wages as a
Speaker 1: share of GDP started rising in China, and that did
Speaker 1: lead to an increase in the share of consumer spending
Speaker 1: in GDP. And so I've always said that perversely, the
Speaker 1: initial impact of the bad demographics was quite positive for
Speaker 1: what China needed.
Speaker 4: But now if you look at wages as a share
Speaker 4: of GDP.
Speaker 1: In China, they're the same as in the US, so
Speaker 1: they've kind of caught up on that front. And meanwhile,
Speaker 1: if you look at overall houseboat.
Speaker 4: Income as a share of GDP in China, you.
Speaker 1: Will see that it's the income from assets that is missing.
Speaker 1: You know, the US overall household income is much higher
Speaker 1: share of GDP because of income from assets.
Speaker 4: And they are the so called.
Speaker 1: Financial repression of the Chinese households. The fact that the
Speaker 1: authorities controlled at the end of the day, the interest rates,
Speaker 1: the capital account and have not developed capital markets sufficiently,
Speaker 1: and they are constantly channeling these domestic savings into their
Speaker 1: preferred industries at low cost, so that development has actually
Speaker 1: went in overdrive in the last few years.
Speaker 2: Yeah, okay, so just because let's step back a little bit,
Speaker 2: so that Chinese consumer can't really expect to see wages rising,
Speaker 2: particularly in less GDP were to expand, right, because there
Speaker 2: are wages are already a perfectly reasonable percent of GDP
Speaker 2: relative of the West. The problem is that, well Chinese
Speaker 2: households have a reasonable amount of savings, they can't get
Speaker 2: the kind of return on those savings that makes them
Speaker 2: more expense So the very difficult to invest abroad. The
Speaker 2: Chinese equity market hasn't been particularly engaging, and most people
Speaker 2: will keep their money in various deposit instruments that will
Speaker 2: pay a relatively low interest rate. And that's the financial
Speaker 2: repression you're talking about, that it's not possible to use
Speaker 2: your savings to increase your wealth particularly Yes, I mean
Speaker 2: I you know, Pernicketee, we're pro Prenickete.
Speaker 1: Well, I like to distinguish between savings and wealth, because
Speaker 1: one is a flow, the other one's a stock. I'm
Speaker 1: talking about you know here wealth. They just can't get
Speaker 1: enough of a return on their wealth, and perversely, as
Speaker 1: a result, they save excessively out of their income, and
Speaker 1: that is by far a huge determinant of this excessive
Speaker 1: desire to save in China. The other reasons like the
Speaker 1: la of social security, safety net, proper unemployment provisions, et cetera,
Speaker 1: et cetera, play a part, but they are not.
Speaker 4: The overriding calls of these saving.
Speaker 2: And this has quite an interesting side effect, which is
Speaker 2: that if interest rates fall in China, people tend to
Speaker 2: feel they need to save more rather than rather than less.
Speaker 1: Absolutely, you know it's when you think about interest rates
Speaker 1: arising them cutting them. What this does is actually effectively
Speaker 1: redistribute income in a society. And then it depends as
Speaker 1: to what the outcome will be whether the heat to
Speaker 1: the income and spending of those that you know of
Speaker 1: the basically savors outweighs or doesn't outweigh the boosts of
Speaker 1: income and spending of the borrowers. And in an economy
Speaker 1: like the UK or the US, because of their structure,
Speaker 1: because of the lack of financial depression, the causation always
Speaker 1: is towards lower interest rates leads to higher demands, but
Speaker 1: in China, because of its different structure, it actually is
Speaker 1: the other way around. But Marin I just went to
Speaker 1: a two week trip to China a month or so ago,
Speaker 1: talking to a lot of policy makers, you know, sharing
Speaker 1: the views that's actually contrary to what they're doing.
Speaker 4: They should be.
Speaker 1: Raising interest rates now, and I can tell you that
Speaker 1: that idea is way too unconventional and unlikely to be adopted.
Speaker 3: It's interesting, isn't it.
Speaker 2: I mean, when you look at that dynamic in China
Speaker 2: and then you look over to the West, one begins
Speaker 2: to wonder if maybe that's a dynamic we might start
Speaker 2: to see here as well as state provision for various
Speaker 2: things for and people become increasingly concerned about their retirement
Speaker 2: that perhaps you know, the less you get on your savings,
Speaker 2: the more you want to save, rather than the other
Speaker 2: way around. I mean, it's perfectly intuitive that that could
Speaker 2: happen here too.
Speaker 4: Yes, it is.
Speaker 1: It depends on the structure of what people's wealth is
Speaker 1: invested in. I would argue there was this development in
Speaker 1: the US and the UK peculiarly that happened post the
Speaker 1: COVID pandemic because housecoats were given all this handouts to
Speaker 1: smooth the transition, and then interest rates were jacked up
Speaker 1: simultaneously and all of a sudden that was quite stimulative.
Speaker 1: But of course, in the context of an equity market
Speaker 1: that went roaring ahead. Ideally, if it wasn't for the
Speaker 1: Magnificent Seven and AI and all of that simultaneously happening,
Speaker 1: we probably wouldn't have had the same equity market dynamic,
Speaker 1: and then the outcome as a whole might have been different.
Speaker 1: But in combination with the equity market shooting up, and
Speaker 1: that moves to the income of the savers post giving
Speaker 1: them handouts, really under the whole consumer stone in the US.
Speaker 2: I mean, it's unlikely that China's behavior will change as
Speaker 2: a result of the US election, but depending on who wins.
Speaker 2: There's so many things going on in the US politically
Speaker 2: in terms of how the US views China, and we're
Speaker 2: already in a bit of a cold war.
Speaker 3: We've got a trade wark going on, but with digital war, etc.
Speaker 2: So there's a lot of conflict here, a lot of difficulty,
Speaker 2: a lot of geopolitical change. How do you see that
Speaker 2: going forward?
Speaker 1: Well, one thing is clear, and that is that there
Speaker 1: is bipartisan consensus in the US on the need to
Speaker 1: be tough on China. So whoever comes to power politically
Speaker 1: will not have much leeway to be soft.
Speaker 4: On China if you'd like.
Speaker 1: And also all the surveys seem to suggest that kind
Speaker 1: of there is also popular support for the US government
Speaker 1: to be tough on Chi. Now, if Kamala Harris were
Speaker 1: to win, the assumption is that it will be just
Speaker 1: the innuation of.
Speaker 4: The Biden playbook.
Speaker 1: And I would argue that maybe that's a little bit
Speaker 1: too simplistic at this point.
Speaker 4: Of course, the problem is that we don't know as
Speaker 4: much about anything, and and.
Speaker 1: You know, trying to assess her is tricky. But what
Speaker 1: does come through is that when you look at sort
Speaker 1: of her career, the issue of human rights and more
Speaker 1: of a I would argue conviction would certainly great on China.
Speaker 1: I think if she sort of keeps that part of
Speaker 1: what she values and it's someone who puts it forward
Speaker 1: in it in her communication and dealings with.
Speaker 4: China, that would be quite problematic for.
Speaker 1: China because this is, at the end of the day,
Speaker 1: a battle of ideology, and the Chinese hate losing faith,
Speaker 1: and so anything that kind of doesn't take the sensibility
Speaker 1: into account tends to be quite confrontational.
Speaker 4: I think what is also.
Speaker 1: Very clear, and that is irrespective of who Kamala Harris is,
Speaker 1: is the fact that the Europeans and probably other allies
Speaker 1: of the US will feel calmer about it because and
Speaker 1: more wheeling to basically engage with the US in a
Speaker 1: more longer term constructive fashion, because during the Biden years,
Speaker 1: everyone was petrified by the likelihood of a second Trump
Speaker 1: residency and that really held back kind of a furthering ahead,
Speaker 1: the relationship building, the lion strengthening. That was the most
Speaker 1: successful part of Biden's for an policy. So I would
Speaker 1: argue that with the hef to the democratic machine be
Speaker 1: behind Kamala, even if she turns out to not be
Speaker 1: an amazing president, it would still provide more security because
Speaker 1: she would be more likely to be re elected. You know,
Speaker 1: a return of Trump or Trump like figure after a
Speaker 1: Kamala presidency, if that were to happen, is less likely
Speaker 1: in my view, and that would allow for this more
Speaker 1: really strengthened alliance pushback, and that strengthened alliance pushback we
Speaker 1: need to see transcend into the economic sphere because so
Speaker 1: far Biden has been focusing too much on the military
Speaker 1: side of things and on the technology side of things,
Speaker 1: and the IRA Act if you could think.
Speaker 4: About word's name for an act from the US.
Speaker 1: All of that has fed into both and you know,
Speaker 1: not really progressing in Asia with any kind of economic
Speaker 1: offer that betters the Chinese one. All of that, you
Speaker 1: know there is is likely put it that might change
Speaker 1: under Kamala Harris uh And so that would that would
Speaker 1: just be a much more efficient alliance network fighting with
Speaker 1: the kind of authoritarian led grouping sort of spearheaded by China.
Speaker 4: Now Trump will be a totally different story.
Speaker 2: You think, yees a better story, a better story or
Speaker 2: a worse story.
Speaker 1: It's undoubtedly a worse story, just because.
Speaker 4: America cannot do it by itself.
Speaker 1: And I but what I mean to do it is
Speaker 1: stand up to the authoritarian regimes around the world. And
Speaker 1: Trump is all about America first, and he is not
Speaker 1: going to be to be building effective alliances quite the contrary.
Speaker 1: And I also worry that having been there during his
Speaker 1: first term, he sort of learned the rules of the
Speaker 1: game and he will be more effective at pushing through
Speaker 1: his ideas that all these sort of guys that were
Speaker 1: around him in the first term, that kind of what
Speaker 1: they're doing national service, you know, those will be there
Speaker 1: this time around. Everyone has burned their fingers of what
Speaker 1: it's like to work for Trump. I wonder whether he
Speaker 1: will have you know, if he had the sort of
Speaker 1: C and D teams last time around this time, I
Speaker 1: don't know what's you know Z, and I don't know
Speaker 1: eminem teams he might have around him. So the quality
Speaker 1: of the overall machine might come down and he will
Speaker 1: be more used to manipulating it for his own or
Speaker 1: sort of pushing through his own ideas. So yes, I
Speaker 1: worry that presidency would actually probably weaken America's position.
Speaker 5: Okay, but either way, can we expect this ongoing rise
Speaker 5: and protectionism on going reduction in the progress of the
Speaker 5: trading relationship?
Speaker 2: And one thing that we talked about I think all
Speaker 2: that time ago, and we've been talking about ever since,
Speaker 2: this is reassuring the idea that big companies are either
Speaker 2: moving their manufacturing out of China into other countries or
Speaker 2: they're moving their manufacturing back in to the US. Some
Speaker 2: people say that's happening, and show us large amounts of
Speaker 2: data showing it is happening. Some people say it was
Speaker 2: not happening, shows large amuns of data saying that it
Speaker 2: isn't happening.
Speaker 3: How do you see that?
Speaker 1: I mean, first of all, the last couple of years,
Speaker 1: I've argued that I see it as an iceberg because
Speaker 1: whoever is the couple in moving away from China has
Speaker 1: plans to do so is keeping it quiet. So I
Speaker 1: always argue that we'll see it in the data when
Speaker 1: already it's hit right because they know that if they
Speaker 1: are now, if they'll offend at least one side, if
Speaker 1: not both. They also fear repraisal from the Chinese authorities.
Speaker 1: You know, wasn't these companies have to be a major
Speaker 1: tax bill or whatever. So you know, in my conversations
Speaker 1: with business leaders, it's clear that everyone is really finally
Speaker 1: got their head around the fact that this is a
Speaker 1: geopolitical fracture. If you remember we had the China plus
Speaker 1: one strategy a while back, it was largely because cots
Speaker 1: went up in China. All that wage growth that we
Speaker 1: talked about was positive for China, but the manufacturer goods
Speaker 1: became more expensive to produce in China. There is the
Speaker 1: issue of you know, the direction of the cost of
Speaker 1: capital energy market. So costs in China were going up
Speaker 1: and people were looking to diversified. Before the trade war,
Speaker 1: the Truns trade warjack to import tariffs, and again that
Speaker 1: was perceived as a cost issue. So when people relocate
Speaker 1: to Vietnam for manufacturing, do they really think that when
Speaker 1: push comes to sheff, Vietnam is going to stay in
Speaker 1: the Western sphere of influence. So for a long time,
Speaker 1: it was again a response to the trade war, that
Speaker 1: those people in the business world thought it was just
Speaker 1: not going to progress because it didn't make any economic sense.
Speaker 1: And you know, I had to explain that it wasn't
Speaker 1: the economics in the driving seat. In fact, you know,
Speaker 1: the whole clash of the economics was in the driving
Speaker 1: seat during the financial crisis, and then that resulted in
Speaker 1: the political backlash that built up the sort of prices
Speaker 1: of the Trump like figures, the popularist Then that lends
Speaker 1: to enabling this non economic change out of which we
Speaker 1: will all be worse.
Speaker 3: Not will be worse off, but most secure.
Speaker 4: Well, we are not.
Speaker 1: More secure because we're in that middle space where the
Speaker 1: existing hegemon sort of can't really fulfill all their security obligations.
Speaker 4: Around the world.
Speaker 1: We saw you know, America moving out of Afghanistan, watching
Speaker 1: the retreat as well, we saw essentially, you know, our
Speaker 1: hegemon that's struggling to provide the global security puts as
Speaker 1: it used to, and we see a China that is
Speaker 1: not yet ready and doesn't yet want to step in.
Speaker 1: So what this leads is a vacuum for middle powers
Speaker 1: to pursue their ownly using practicals. And so I would
Speaker 1: argue that put in this invasion of Ukraine was one
Speaker 1: such act, and in fact, it is that invasion of
Speaker 1: Ukraine that finally woke up I think the business elite
Speaker 1: around the world that the issue here about how strategized
Speaker 1: going forward is about the geopolitics.
Speaker 4: Not about where it's lower cost.
Speaker 1: And so that whole dynamics is really now playing out,
Speaker 1: and I would.
Speaker 4: Argue it will end up, you know, ideally.
Speaker 1: Into a peaceful biplocation into two trading blocks that are
Speaker 1: big enough within themselves to to kind of counteract each other,
Speaker 1: and they find a way to interact within with each other.
Speaker 4: Okay, But of course we have the.
Speaker 1: Issue of Taiwan, and that's a really torny one to
Speaker 1: sort of wish, you know, that that's.
Speaker 4: In the way of this being a peaceful.
Speaker 2: By for Okay, I want to I want to come
Speaker 2: to come back to US manufacturing, but let's do Taiwan first.
Speaker 2: How high do you think the risk is there and
Speaker 2: what happens in Taiwan and the relationship between Taiwan and China.
Speaker 4: So we've been looking at that issue. I mean a
Speaker 4: while back when we started.
Speaker 1: Arguing that you know, we're into the era of the
Speaker 1: Great decoupling.
Speaker 4: We split it in trade war Techboard Taiwan War.
Speaker 1: And I remember, you know, three four years ago, when
Speaker 1: I went around clients and was saying, look, you know,
Speaker 1: you should start considering this risk. I had blank either
Speaker 1: stairs or looks of disbelief.
Speaker 4: Now, probably the French point was when.
Speaker 1: The Economnes published an article with sort of the front
Speaker 1: page of the magazine saying, Taiwan the most intelous place
Speaker 1: on Earth that I think is on the radar. But
Speaker 1: I would say still this risk, and actually not so
Speaker 1: much even of the final flash point or event, but
Speaker 1: just what's happening in the build up to it is
Speaker 1: really underappreciated out there. And the reasoning is that if
Speaker 1: you believe that the Communist Party and she's in pink
Speaker 1: itself and turn to the Chinese people and say, look, guys,
Speaker 1: we've said this is an existential issue, it's been in
Speaker 1: our plan to reunify. It's being the reason for the
Speaker 1: distance of our party. But they don't want to sell
Speaker 1: let's forget about it. Then of course there's no conflict,
Speaker 1: but nothing that has gone on suggests that this is
Speaker 1: on the agenda. Then there are the Taiwanese themselves, which
Speaker 1: have now really developed the Taiwanese identity. I went to
Speaker 1: observe the elections in Taiwan earlier in the year, and
Speaker 1: it was amazing to see that kind of young democracy
Speaker 1: and the passion and importance that these elections meant to people.
Speaker 1: And it was also interesting to see that they chose,
Speaker 1: you know, a lot of people we spoke to chose
Speaker 1: to vote for William live for the presidency, but then
Speaker 1: vote for the KMT for the legislature to kind of
Speaker 1: have checks and balances, suggesting that they really after the
Speaker 1: status quo of sort of no change, you know, not
Speaker 1: announcing independence, but you know, not becoming part of China.
Speaker 1: China to the election results differently, it just sort of
Speaker 1: saw an opportunity to keep pushing. In some ways, it's
Speaker 1: better for the short term probability of conflict because they'd
Speaker 1: rather do it peacefully, but they've always said that if
Speaker 1: they can't do it peacefully, they'll do it militarily, and
Speaker 1: they've been preparing for it and accelerating those preparations, and
Speaker 1: the whole gray zone.
Speaker 4: Activity and strangulation.
Speaker 1: Of Taiwan and the US on the other side, it's
Speaker 1: final sort of third major player into this. They have
Speaker 1: also engaged actively now in preparing to withstand China's efforts
Speaker 1: to potentially take over Taiwan.
Speaker 4: So this relationship has turned into.
Speaker 1: A dynamic, and that's the danger because China now knows
Speaker 1: that the timing, which before used to be in its
Speaker 1: own hands. Whenever we are ready, we kind of, you know,
Speaker 1: we'll get there. The US or the rest of the
Speaker 1: world wasn't really paying attention in the first part of
Speaker 1: the Nazis. They now don't have that luxury, so they
Speaker 1: are kind of racing against time. Not just from the
Speaker 1: perspective of Chiding being you know, our analysis suggest that
Speaker 1: he wants to be the leader that enters China's history
Speaker 1: books as the one that unified, so not only raising
Speaker 1: against his sort of lifespan, but real racing against American
Speaker 1: efforts to push back.
Speaker 4: So as such, it is a very dangerous place.
Speaker 1: All the activity that goes on does raise the risk
Speaker 1: of an accident, but it's also really from the perspective
Speaker 1: of both investors and business executives. It's how this gray
Speaker 1: zone activity and the escalation the response, how will that
Speaker 1: play out? And what are the implications of those dynamics.
Speaker 1: I think it's rather underappreciated.
Speaker 2: Okay, And these are all questions which we cannot possibly
Speaker 2: know the answers. So for a lot of investors, the
Speaker 2: easiest thing to do is simply pretend it's not happening.
Speaker 1: Yes, I mean I you know, in telling two investors,
Speaker 1: I do really see how they struggle to internalize geo
Speaker 1: political thinking in their process. And you know, we've done
Speaker 1: a lot of work to try and help them because
Speaker 1: it's not something that you can quantify easily, but it
Speaker 1: does involve judgment, and it involves then getting the confidence
Speaker 1: in their providers because you know, generally sort of they
Speaker 1: think that these are things that cannot be forecast, but
Speaker 1: it's not the case.
Speaker 4: These are things that can be forecast. You know.
Speaker 1: This is the reason why years ago we set up
Speaker 1: a separate service that was sort of has now measured
Speaker 1: the probability or the risk of conflict over time.
Speaker 2: So if you had to put a number on it,
Speaker 2: what is the risk of conflict over the next say,
Speaker 2: five years around Taiwan.
Speaker 1: At the moment, we put it at seventy percent, so
Speaker 1: that in our brackets, this is a likely event.
Speaker 3: Yeah, that is a very high probability.
Speaker 1: Yes, and it started at being ten percent in twenty nineteen,
Speaker 1: at the start of twenty nineteen when we started doing
Speaker 1: the safe percise. But you know, if we can sort
Speaker 1: of assuage the fear of everyone from a short term perspective,
Speaker 1: our three to six month outlook is currently fifty percent
Speaker 1: probability of an accident happening, but only fifteen percent of
Speaker 1: an outright action that would be constituted an act of
Speaker 1: war or a military confrontation.
Speaker 3: So massively reassuring dian I.
Speaker 4: To be honest, we still have time.
Speaker 1: That's how it's reassuring. We still have time for things
Speaker 1: to potentially change.
Speaker 2: And do you genuinely think or do you think that
Speaker 2: the rest of the world has any appetite get involved
Speaker 2: in that or is it one of those things where
Speaker 2: there'd be a big build up and then America and
Speaker 2: the rest of the world would basically go, Actually, we
Speaker 2: haven't got the appetite for this.
Speaker 3: This is too much for us. We're standing back.
Speaker 1: It's certainly one of these scenarios, and again it will
Speaker 1: be determined by who's going to be in charge at
Speaker 1: the White House.
Speaker 2: Yeah yeah, Okay, let's go back from this frightening bit,
Speaker 2: back to the earlier discussion we just started having about
Speaker 2: about all these various conflicts trade, ward, tech war, etc.
Speaker 2: Leading to something of a manufacturing renaissance in the US
Speaker 2: because with an attempt to shift chip production, renewable energy production,
Speaker 2: et cetera over to the US, and that in for
Speaker 2: American workers, that's a good thing, right.
Speaker 1: Yes, it is, absolutely and I think it you know,
Speaker 1: it does make for a more if you'd like, resilient
Speaker 1: globals because even without the issue of national security, we
Speaker 1: had stretched globalization in terms of the integrated supply chains
Speaker 1: to an extent that even an ecological disaster could have
Speaker 1: been quite disruptive. And that I think became clear with
Speaker 1: the COVID pandemic, where in which accelerated this development from
Speaker 1: the nationalists.
Speaker 3: But it also made it clear, didn't it.
Speaker 2: When everyone was trying to access various things to do
Speaker 2: with COVID, with the lockdowns with pandemic, it became obvious
Speaker 2: how amazingly extraordinarily dependent the US and much of the
Speaker 2: West had become on Chinese manufacturing, which I think people
Speaker 2: knew in theory pre COVID, but it only became very
Speaker 2: obvious to everybody during that period. Now, let's look, let's
Speaker 2: look briefly at the Chinese equity market. Uh, you know,
Speaker 2: nothing has been more disappointing long term, right, And you've
Speaker 2: been quite successful in spotting the turning points in the market.
Speaker 2: And I know earlier in the year you were less
Speaker 2: underweight than you had been, and now you're back to
Speaker 2: being pretty underweight again.
Speaker 3: Right, what's your feeling here?
Speaker 6: Cheap for a reason, I've been analyzing China for now
Speaker 6: nearly a quarter of a century, and throughout that whole time,
Speaker 6: the equity market performance from a long term perspective has
Speaker 6: been just you know, not reflective of the economic performance.
Speaker 4: Really bad. And then it was always a liquidity play.
Speaker 4: I mean I remember that.
Speaker 1: I kind of, you know, in the first part of
Speaker 1: my career, I was giving advice to people who couldn't
Speaker 1: then didn't invest in China directly, and sort of it
Speaker 1: was all how Chining to impact the rest of the world,
Speaker 1: And it was all you know that the Chinese, so
Speaker 1: the Chinese outsourced their IPOs abroad, and it was kind
Speaker 1: of investing in those Chinese companies abroad. But then in
Speaker 1: the middle of my career I ended up advising Chinese
Speaker 1: fund managers, domestic fund managers from China and sort of
Speaker 1: got the taste of what it was like for them, and.
Speaker 4: It was a totally different ballgame, you know.
Speaker 1: Literally, the longer term horizon was one or two weeks,
Speaker 1: maybe three weeks at most, and it was a whole
Speaker 1: kind of liquidity play that.
Speaker 4: Continues to this day. But then, of course we had.
Speaker 1: Finally the opening up of the financial markets in China,
Speaker 1: and that would have been a good thing if we
Speaker 1: weren't in the grade decoupling. And also what we have
Speaker 1: is Beijing trying now to professionalize them, which again would
Speaker 1: have been a good thing if it wasn't for the
Speaker 1: Great de coupling. So if it wasn't for the grade
Speaker 1: de coupling, Chines it's finally doing the structural changes of
Speaker 1: how its markets worked to make the more reflective of
Speaker 1: the productive potential of their economy and sort of made
Speaker 1: them longer terms, safer assets that households will be willing
Speaker 1: to invest in for the long term because it decided
Speaker 1: that you know, that's better for its common prosperity efvision.
Speaker 1: It's that's the driver house price inflation is two divisive
Speaker 1: where it's equity market better, but again it's liquidity because
Speaker 1: you know, it's it's not changed yet, it's not there yet.
Speaker 1: And on the liquidity front, originally we turned positive on
Speaker 1: equity markets at the start of the year because it
Speaker 1: looked like Western investors were super underweight, so it was
Speaker 1: beginning to be too risky, and also because there was
Speaker 1: this multi equity stabilization. Equity market stabilization fund is one
Speaker 1: of the ideas that were being fed into the Third Planner,
Speaker 1: and I argue that that would unleash greed. And at
Speaker 1: the start of the year also the supply of money
Speaker 1: was growing at a decent rate, and it was again
Speaker 1: entirely liquidity driven that in the event, but in real
Speaker 1: life because the foreign investors started coming through, but that
Speaker 1: national team involvement was not too big. And then host
Speaker 1: the planet they didn't adopt this equity stabilization fund, and
Speaker 1: then on top of it, broad money growth has collapsed.
Speaker 1: So really from a liquidity perspective, now we're in a
Speaker 1: very negative environment for Chinese equities. Domestically, the profit story
Speaker 1: doesn't look like it's going to turn in any major
Speaker 1: way anytime soon. So these valuations are there for a reason.
Speaker 1: And I would actually argue that probably some of these
Speaker 1: valuations are kind of a result of maybe over optimistic
Speaker 1: trend growth projections on a kind of a longer term
Speaker 1: horizon for China. But we did that, you know, just
Speaker 1: to say one thing. We're positive on the dividend payers
Speaker 1: in China. There is real push for distribution and so
Speaker 1: while the overall story has now turned negative things about
Speaker 1: this year, and certainly at the moment we're in that space,
Speaker 1: we do see opportunities there on the dividends side.
Speaker 2: Okay, that's interesting. Now you've partly done what I was
Speaker 2: about to ask you to do. But I was going
Speaker 2: to say, you say to you, could we end with
Speaker 2: you telling me something positive, something you feel deeply optimistic about.
Speaker 4: Well, I don't.
Speaker 1: Know if it's deeply optimistic, but it is positive from
Speaker 1: the perspective of China's adjustment, and that is that our
Speaker 1: view is that the one is going to go up
Speaker 1: against the dollar.
Speaker 4: Uh.
Speaker 1: And that will be, if you'd like, beneficial for China,
Speaker 1: because it's another way of rebalancing that sort of anulates
Speaker 1: higher real interest rates, and the reasoning there is it's
Speaker 1: more China specific rather than US specific. So yes, of course,
Speaker 1: if the interest rate differential is shrinking as the US
Speaker 1: starts cutting, and China is really kind of bumping at
Speaker 1: the constraint of what it can do with its interest
Speaker 1: rate cuts. Combined with the fact that our exchange rate
Speaker 1: model says that the dollar, the un dollar rate is
Speaker 1: actually fairly valued at the moment two about one percent undervalued,
Speaker 1: that is part of.
Speaker 4: The story, but it is much more a liquidity.
Speaker 1: Story in China, and maybe a fact that finally the
Speaker 1: POPOC sort of acknowledged in one of Pangushan's speeches a
Speaker 1: few months ago. But it has been the case all
Speaker 1: these years is that the broad money growth, the M
Speaker 1: one actually not broad M one growth in China only
Speaker 1: shows for bread deposits. It doesn't have household deposits, so
Speaker 1: and there's been a massive collapse there. So the Chinese
Speaker 1: carry trade, if you'd like, has been largely the export
Speaker 1: as not bringing yuan back, and they will have to
Speaker 1: now because they'll be coming up to the end of
Speaker 1: the year loads of constraints into needing cash, and so
Speaker 1: that is really our dynamics behind sort of a contrarian
Speaker 1: call on the yuan.
Speaker 2: And it's contrarian, yeah, but it is contraying and that
Speaker 2: was fascinating. I love that, like a nice contrarian call
Speaker 2: at the end. But it's still not giving me an
Speaker 2: overwhelming sense of optimism.
Speaker 1: You know, I must tell you, I'm a glass house
Speaker 1: full person, and so for me, it's, you know, well,
Speaker 1: even more depressing to not find much to be optimistic about.
Speaker 1: I would just say that basically, I really have faith
Speaker 1: in the underlying kind of strength of human nature. So
Speaker 1: I think, you know, we'll overcome this difficult period. I
Speaker 1: have that faith one reason why you know, why I'm
Speaker 1: having kids.
Speaker 4: Why bring up any kids into this?
Speaker 1: So I do have any sense that we'll find a
Speaker 1: way through. But it's at the moment it's difficult to
Speaker 1: see how it won't get worse before.
Speaker 4: It gets better. I'm sorry about that.
Speaker 3: That's all right, I'll take it. I'll take it.
Speaker 2: Optimistic about human nature is a good point. Is there
Speaker 2: anything that you would advise retail investors to do now?
Speaker 2: I think no one's rushing out by Chinese exuitis as
Speaker 2: a result of this conversation, is there anything that you
Speaker 2: think the retail investors should be doing now, not just
Speaker 2: in China anywhere else that has caught your eye that
Speaker 2: we can do to be just by gold and forget
Speaker 2: everything else.
Speaker 1: I would argue that the American equity market has the
Speaker 1: long term potential if the US gets you know, it's
Speaker 1: apt in order, and I don't subscribe as much into
Speaker 1: the kind of doomsday view of the US and it's
Speaker 1: debt levels and.
Speaker 4: Get money and all of that.
Speaker 1: So if we have a correction in US equities, which
Speaker 1: I think we are likely to at some point over
Speaker 1: the next twelve to eighteen months, and I would argue,
Speaker 1: irrespective it's US president, then it probably would be a.
Speaker 4: Good time to pile in.
Speaker 1: I think it's also another advice is to really understand
Speaker 1: and begin to understand how interconnected the investments are, so
Speaker 1: you can't shield yourself from investing in the Chinese equity market, let's.
Speaker 4: Say, by not.
Speaker 1: Investing, but by investing elsewhere without realizing how much of
Speaker 1: that index is made up of companies whose revenue is
Speaker 1: so dependent on China or whose costas on China. And
Speaker 1: also don't discount for now China and those dividend airs
Speaker 1: just because everything else looks speak in a deflationary story.
Speaker 4: Even in the case of Japan, there.
Speaker 1: Were twenty companies that did remarkably well despite the Japan
Speaker 1: stage of deflation.
Speaker 3: Excellent. That is very good advice.
Speaker 2: Diana, Thank you so much for being with us today.
Speaker 3: Absolutely fascinating as usual.
Speaker 2: And my pleasure as you so Marrin, thanks for listening
Speaker 2: to this week's Marin Talks Money.
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