1
00:00:05,080 --> 00:00:08,399
Speaker 1: Hello, and welcome to Stephanomics, the podcast that brings the

2
00:00:08,440 --> 00:00:11,680
Speaker 1: global economy to you. My name is Tom Orlick. I'm

3
00:00:11,720 --> 00:00:15,360
Speaker 1: the chief economist for Bloomberg and this Halloween Week with

4
00:00:15,440 --> 00:00:18,959
Speaker 1: regular hosts Stephanie Flanders, busy putting the finishing touches to

5
00:00:19,040 --> 00:00:22,720
Speaker 1: her modern monetary theory costume, I'm stepping in as master

6
00:00:22,800 --> 00:00:26,320
Speaker 1: of Ceremonies. In keeping with the spirit of the season,

7
00:00:26,600 --> 00:00:29,360
Speaker 1: we have a Frankenstein's Monster of a show for you,

8
00:00:29,800 --> 00:00:33,199
Speaker 1: stitching together some of the scariest risks in the global economy.

9
00:00:33,880 --> 00:00:36,680
Speaker 1: In a bit, we'll hear from Logan Rights of Rhodium

10
00:00:36,760 --> 00:00:39,720
Speaker 1: Group and Bloomberg's own David Chu on why the ghost

11
00:00:39,720 --> 00:00:43,280
Speaker 1: time problem that has long haunted China's economy is coming

12
00:00:43,320 --> 00:00:47,320
Speaker 1: to a head. To start, though, Bloomberg's own Tom Hancock

13
00:00:47,560 --> 00:00:50,400
Speaker 1: has gone trick or treating at the Hong Kong headquarters

14
00:00:50,400 --> 00:00:53,200
Speaker 1: of ever Grandy, one of the developers that built all

15
00:00:53,200 --> 00:01:04,720
Speaker 1: that empty property. Let's see what candy he collected. Yeah,

16
00:01:08,040 --> 00:01:11,399
Speaker 1: I've come to the headquarters of China Evergrand Group in

17
00:01:11,480 --> 00:01:15,400
Speaker 1: Hong Kong, the epicenter of a burgeoning debt crisis that

18
00:01:15,520 --> 00:01:19,320
Speaker 1: the sharply slowed growth in the Chinese economy. The sides

19
00:01:19,360 --> 00:01:22,920
Speaker 1: of the twenty six story building are plastered with advertisements

20
00:01:23,200 --> 00:01:28,679
Speaker 1: for Evergrands luxury property developments, but it's the headquarters itself

21
00:01:28,760 --> 00:01:31,720
Speaker 1: which has been up for sale this year. Evergrand tried

22
00:01:31,760 --> 00:01:34,480
Speaker 1: to raise two billion dollars by selling it off to

23
00:01:34,520 --> 00:01:39,080
Speaker 1: pay debt, but the deal hasn't progressed. Evergrand staff who

24
00:01:39,160 --> 00:01:42,120
Speaker 1: walked the lobby's marble floor and take elevators to their

25
00:01:42,160 --> 00:01:46,600
Speaker 1: offices face an uncertain future. In a cafe next to

26
00:01:46,640 --> 00:01:50,600
Speaker 1: the building's lobby, Evergrand staff meet over covees or soft

27
00:01:50,640 --> 00:02:01,960
Speaker 1: piano music plays. More than a month after entering its

28
00:02:01,960 --> 00:02:05,080
Speaker 1: acute phase, the financial drama at the company that had

29
00:02:05,120 --> 00:02:09,520
Speaker 1: been China's largest property developer until recently is far from over.

30
00:02:10,320 --> 00:02:13,560
Speaker 1: After waiting about a month for an interest payment, some

31
00:02:13,720 --> 00:02:17,160
Speaker 1: of Evergrand's dollar bond holders received their money over the weekend,

32
00:02:17,560 --> 00:02:21,320
Speaker 1: allowing the company to avoid a default for now, but

33
00:02:21,400 --> 00:02:25,560
Speaker 1: investors have little insight into how long Evergrand can continue

34
00:02:25,639 --> 00:02:28,960
Speaker 1: to pay its bills. The bonds initially had a bit

35
00:02:29,000 --> 00:02:32,280
Speaker 1: of a pop and then sort of very quickly came

36
00:02:32,320 --> 00:02:35,680
Speaker 1: back down to almost unchanged. On the day. That's Monica

37
00:02:35,760 --> 00:02:40,240
Speaker 1: saw of Triatic Capital an asset manager UM. I think

38
00:02:40,480 --> 00:02:44,160
Speaker 1: that UM it made made sense for them to pay

39
00:02:44,240 --> 00:02:47,400
Speaker 1: this just pretty much about a day before the end

40
00:02:47,400 --> 00:02:49,639
Speaker 1: of the grace period in order to kick the can

41
00:02:49,720 --> 00:02:53,520
Speaker 1: down the road while they figure out a comprehensive resolution

42
00:02:53,639 --> 00:02:58,400
Speaker 1: to this. This whole Osaka, like many in the market south,

43
00:02:58,440 --> 00:03:02,360
Speaker 1: sees the hand of China's government behind the scenes. Evergrand

44
00:03:02,440 --> 00:03:06,160
Speaker 1: status as China's biggest dollar bond issue means whether it

45
00:03:06,200 --> 00:03:09,520
Speaker 1: pays its bills will help determine how easy it is

46
00:03:09,680 --> 00:03:13,680
Speaker 1: for other Chinese companies to access overseas lending in the future.

47
00:03:13,919 --> 00:03:17,919
Speaker 1: So the payment of this coupon, I would assume does

48
00:03:18,040 --> 00:03:21,800
Speaker 1: involve the government, including the p POC, in order to

49
00:03:22,760 --> 00:03:26,000
Speaker 1: maintain stability of the whole financial system. I think that

50
00:03:26,080 --> 00:03:29,800
Speaker 1: much is sort of clear to the market. The heart

51
00:03:29,840 --> 00:03:33,440
Speaker 1: of evergrands troubles are its high debt burden. It counts

52
00:03:33,440 --> 00:03:37,120
Speaker 1: more than three hundred billion dollars in liabilities and a

53
00:03:37,200 --> 00:03:43,200
Speaker 1: slowdown in sales attributable to the Chinese state itself. According

54
00:03:43,240 --> 00:03:47,080
Speaker 1: to Juning, a former advisor to China's Central Bank, the

55
00:03:47,200 --> 00:03:51,040
Speaker 1: Chinese government is trying to reduce the economy's dependence on

56
00:03:51,160 --> 00:03:55,480
Speaker 1: real estate. He argues that a constant expectation of rising

57
00:03:55,480 --> 00:04:00,000
Speaker 1: prices among households has created a bubble that threatens financial stability.

58
00:04:00,040 --> 00:04:03,040
Speaker 1: Team but in the process of trying to deflate the

59
00:04:03,040 --> 00:04:07,600
Speaker 1: bubble by slowing housing sales, officials are undermining the finances

60
00:04:07,720 --> 00:04:11,600
Speaker 1: of huge companies like ever Ground, that in turn creates

61
00:04:11,640 --> 00:04:15,120
Speaker 1: a threat to financial stability. If you crack down the bubble,

62
00:04:15,880 --> 00:04:19,359
Speaker 1: you would create a financial brisks on its own. But

63
00:04:19,440 --> 00:04:22,400
Speaker 1: if you don't, you wouldn't be able to convince the

64
00:04:22,480 --> 00:04:25,440
Speaker 1: market that you really minute. I think that's the here

65
00:04:25,480 --> 00:04:30,080
Speaker 1: in challenge Chinese regulate or Chinese comment phase. Evergrund sales

66
00:04:30,120 --> 00:04:34,800
Speaker 1: fell by a whopping nine percent during China's October holidays,

67
00:04:35,160 --> 00:04:38,240
Speaker 1: usually a peak period for home buying, as the government

68
00:04:38,279 --> 00:04:42,520
Speaker 1: told banks to limit mortgage lending and buyers also worried

69
00:04:42,600 --> 00:04:48,159
Speaker 1: about ever grounds ability to complete its construction projects. Juning

70
00:04:48,200 --> 00:04:51,279
Speaker 1: believes that Beijing will continue to try to slow housing

71
00:04:51,320 --> 00:04:55,680
Speaker 1: sales until households lads their expectations that the government will

72
00:04:55,720 --> 00:04:59,000
Speaker 1: always step in to support house prices. I think the

73
00:04:59,120 --> 00:05:02,520
Speaker 1: end of it is to have the market, have the

74
00:05:02,600 --> 00:05:08,120
Speaker 1: household to have been fairly study explanation of the housing part,

75
00:05:08,720 --> 00:05:11,440
Speaker 1: but I don't think we're reaching that point yet, Evergrand

76
00:05:11,520 --> 00:05:14,880
Speaker 1: needs to focus more on selling off its considerable assets

77
00:05:15,040 --> 00:05:17,960
Speaker 1: to keep servicing its huge debt pile, since it has

78
00:05:18,040 --> 00:05:21,359
Speaker 1: less money coming in the door from home bias. The

79
00:05:21,440 --> 00:05:25,200
Speaker 1: trouble is it's having difficulties finding any bias for those

80
00:05:25,240 --> 00:05:29,039
Speaker 1: as well. Evergrand has also tried to sell its property

81
00:05:29,080 --> 00:05:33,320
Speaker 1: management arm, which charges homeowners fees for organizing services like

82
00:05:33,400 --> 00:05:36,520
Speaker 1: security and cleaning. It hoped that that would bring in

83
00:05:36,720 --> 00:05:40,479
Speaker 1: two point six billion dollars, but talks about that also

84
00:05:40,680 --> 00:05:46,800
Speaker 1: ended without a deal. Evergrand's founder and chairman, Wakayan, has

85
00:05:46,880 --> 00:05:50,000
Speaker 1: always been a risk taker. He was born into grinding

86
00:05:50,040 --> 00:05:52,440
Speaker 1: poverty in the central province of her Nan in the

87
00:05:52,520 --> 00:05:56,480
Speaker 1: nineties fifties and founded his property company just as China

88
00:05:56,640 --> 00:05:59,760
Speaker 1: began to create a commercial housing market in the late

89
00:05:59,839 --> 00:06:04,799
Speaker 1: night nineties. Two decades later, in seventeen, he was China's

90
00:06:04,800 --> 00:06:08,760
Speaker 1: second richest man. So far, Way has been low key

91
00:06:08,800 --> 00:06:13,920
Speaker 1: about the details of Everground's finances, avoiding media engagements. However,

92
00:06:14,400 --> 00:06:17,159
Speaker 1: local press accounts suggest he is sticking with the kind

93
00:06:17,160 --> 00:06:21,320
Speaker 1: of big, bold bets that have defined his career. The

94
00:06:21,400 --> 00:06:24,760
Speaker 1: Securities Times reported that Way plans to scale down real

95
00:06:24,839 --> 00:06:28,560
Speaker 1: estate operations and won't buy much land for another ten years.

96
00:06:29,120 --> 00:06:34,520
Speaker 1: The new focus designing and manufacturing electric vehicles. The company

97
00:06:34,560 --> 00:06:37,120
Speaker 1: got into the new energy vehicle's business a couple of

98
00:06:37,200 --> 00:06:40,400
Speaker 1: years ago, but as yet to manufacture a single car.

99
00:06:41,960 --> 00:06:44,919
Speaker 1: Everground faces more tests in the coming weeks as the

100
00:06:44,960 --> 00:06:48,560
Speaker 1: grace periods on more bonds expire. The fate of one

101
00:06:48,600 --> 00:06:51,760
Speaker 1: of the world's largest real estate firms and the world's

102
00:06:51,760 --> 00:06:55,919
Speaker 1: biggest real estate market still hangs in the balance. For

103
00:06:55,960 --> 00:07:09,559
Speaker 1: Bloomberg News, I'm Tom Hancock in Hong Kong. Scary stuff

104
00:07:09,560 --> 00:07:14,360
Speaker 1: forever grandy bond holders and with ever grandy emblematic broader

105
00:07:14,400 --> 00:07:18,880
Speaker 1: problems in an overbuilt, an over leverage property sector. Scary

106
00:07:18,880 --> 00:07:22,520
Speaker 1: stuff also for China's economy and financial system as a whole.

107
00:07:23,120 --> 00:07:25,880
Speaker 1: To get into those broader issues, I'm joined now by

108
00:07:25,960 --> 00:07:29,360
Speaker 1: Lugan Right, a director at Radium Group and veteran analyst

109
00:07:29,440 --> 00:07:33,080
Speaker 1: of China's financial system, and Bloomberg's David Chew, both of

110
00:07:33,120 --> 00:07:36,200
Speaker 1: them dialing in from Hong Kong. Logan, let me start

111
00:07:36,240 --> 00:07:39,800
Speaker 1: with you. Why is a downturn in real estate potentially

112
00:07:39,880 --> 00:07:42,640
Speaker 1: such a big problem for China. I think it's a

113
00:07:43,520 --> 00:07:47,160
Speaker 1: it's a big problem largely because just of the size

114
00:07:47,520 --> 00:07:52,160
Speaker 1: of the property sector within China's economy, which most analysts

115
00:07:52,280 --> 00:07:58,360
Speaker 1: estimate between twenty of GDP. Overall property sales in China

116
00:07:58,720 --> 00:08:02,680
Speaker 1: in terms of just the pre construction sales are as

117
00:08:02,760 --> 00:08:06,120
Speaker 1: high as fifteen point seven trillion u N over the

118
00:08:06,200 --> 00:08:10,800
Speaker 1: last um year, of the last twelve months. And so

119
00:08:11,200 --> 00:08:15,800
Speaker 1: if you hypothetically look in the future and if property

120
00:08:15,840 --> 00:08:19,640
Speaker 1: sales decline by let's say over the next year and

121
00:08:19,760 --> 00:08:23,360
Speaker 1: prices are down by say ten percent um, that's a

122
00:08:23,440 --> 00:08:27,760
Speaker 1: huge gap that it's very difficult for developers to make up.

123
00:08:27,800 --> 00:08:30,239
Speaker 1: It's a gap as high as three point five percent

124
00:08:30,280 --> 00:08:33,880
Speaker 1: of g d P. It is not a an imbalance

125
00:08:33,960 --> 00:08:36,800
Speaker 1: that is easily remedied by policy. So this is one

126
00:08:36,840 --> 00:08:39,920
Speaker 1: reason that the you know, the potential costs of such

127
00:08:39,960 --> 00:08:45,120
Speaker 1: a property downturn that exemplified by ever grands difficulties are

128
00:08:45,160 --> 00:08:47,679
Speaker 1: so significant. And it's not just a growth risk we're

129
00:08:47,720 --> 00:08:50,480
Speaker 1: talking about here, is it a slump in the property

130
00:08:50,520 --> 00:08:53,560
Speaker 1: sector could mean defaults on loans and end up in

131
00:08:53,559 --> 00:08:56,960
Speaker 1: a financial crisis, a Lehman movement for China, if you

132
00:08:57,000 --> 00:09:02,119
Speaker 1: will lugan, how could that plan? The more likely scenario

133
00:09:02,440 --> 00:09:05,760
Speaker 1: that we would be concerned about in terms of financial

134
00:09:05,800 --> 00:09:10,760
Speaker 1: distress in China stems through local governments and the difficulties

135
00:09:10,760 --> 00:09:16,800
Speaker 1: of property developers continuing to um slow down their purchases

136
00:09:16,800 --> 00:09:20,559
Speaker 1: of land, which would add to financial stress among China's

137
00:09:20,559 --> 00:09:24,040
Speaker 1: local governments which depend heavily upon land sales for revenue

138
00:09:24,400 --> 00:09:28,400
Speaker 1: and repaying their own significant debt burdens. So what you

139
00:09:28,440 --> 00:09:30,680
Speaker 1: could see is if you have a continued slow down

140
00:09:30,679 --> 00:09:34,720
Speaker 1: in land purchases, you could have a rise in financial

141
00:09:34,760 --> 00:09:38,920
Speaker 1: distress at smaller banks that lend to these local government

142
00:09:38,920 --> 00:09:43,079
Speaker 1: financing vehicles, which have really lad the expansion in China's

143
00:09:43,080 --> 00:09:46,280
Speaker 1: debt over the past decade, which were also essential to

144
00:09:46,360 --> 00:09:51,320
Speaker 1: the funding um the investment that has taken place. David Chew,

145
00:09:52,440 --> 00:09:55,560
Speaker 1: You've worked inside the People's Bank of China, and not

146
00:09:55,720 --> 00:09:58,440
Speaker 1: just inside the People's Bank of China, but inside the

147
00:09:58,440 --> 00:10:02,680
Speaker 1: financial stability vision of China's Central Bank, the group which

148
00:10:02,720 --> 00:10:06,359
Speaker 1: cares most and focuses most on this kind of problems.

149
00:10:07,200 --> 00:10:10,720
Speaker 1: How do you think China's policymakers are thinking about what's

150
00:10:10,760 --> 00:10:13,200
Speaker 1: going on with ever Grandy and some of the broader

151
00:10:13,320 --> 00:10:18,640
Speaker 1: risks that Logan has described for China's financial sector. The

152
00:10:18,760 --> 00:10:22,960
Speaker 1: banking sector is the key, particularly the big banks are

153
00:10:22,960 --> 00:10:27,439
Speaker 1: the key. They are the natural firewall for the financial

154
00:10:27,480 --> 00:10:32,840
Speaker 1: crisis or financial risks because they have the guarantee from

155
00:10:32,880 --> 00:10:36,040
Speaker 1: the government. So for example, if you're deposit the money

156
00:10:36,080 --> 00:10:40,040
Speaker 1: into i CBC, that means you are you are depositing

157
00:10:40,160 --> 00:10:43,480
Speaker 1: it with with the with the government, so that is

158
00:10:43,880 --> 00:10:46,760
Speaker 1: the SEBC. Under the big banks, they are steign credit

159
00:10:47,280 --> 00:10:52,120
Speaker 1: so that this makes them a natural firewall during a

160
00:10:52,800 --> 00:10:58,040
Speaker 1: credit crisis or credit risk. Remember what happened thirty years

161
00:10:58,040 --> 00:11:02,160
Speaker 1: ago in ninety nineties, hialized banks used that to have

162
00:11:02,280 --> 00:11:06,680
Speaker 1: at pent on the Rachel but the banks was still surviving.

163
00:11:07,040 --> 00:11:10,520
Speaker 1: And that tells us how confident that people are to

164
00:11:10,800 --> 00:11:14,480
Speaker 1: the banking sector. So the principle for us is even

165
00:11:14,480 --> 00:11:17,199
Speaker 1: the banking sector remains good and this do have the

166
00:11:17,280 --> 00:11:21,520
Speaker 1: credibility things will be good. So data is the the

167
00:11:21,559 --> 00:11:36,600
Speaker 1: most ultimate backdop or backstorm for for the all the argument, logan,

168
00:11:36,640 --> 00:11:39,680
Speaker 1: help me out with one crucial question before we get

169
00:11:39,720 --> 00:11:45,760
Speaker 1: back to the substance of this ever grand or ever grandy.

170
00:11:46,240 --> 00:11:49,360
Speaker 1: I've heard both the translations I've been What I hear

171
00:11:49,400 --> 00:11:52,680
Speaker 1: most often is ever grant, But you know, technically it's

172
00:11:52,679 --> 00:11:55,400
Speaker 1: a you know, it's und do so it's a question

173
00:11:55,480 --> 00:11:58,400
Speaker 1: of whatever English and translation prefer, the Chinese will still

174
00:11:58,400 --> 00:12:02,280
Speaker 1: operate historic. I went with ever Grand, but ever Grandy

175
00:12:02,440 --> 00:12:05,120
Speaker 1: seems to have much more of a dramatic flourish to it,

176
00:12:05,200 --> 00:12:06,920
Speaker 1: So I think I'm going to put the accent on

177
00:12:07,000 --> 00:12:11,520
Speaker 1: the going forwards fair fair enough, So so Logan and

178
00:12:11,720 --> 00:12:14,839
Speaker 1: David makes an important point, doesn't he There is a

179
00:12:14,880 --> 00:12:19,080
Speaker 1: powerful firewall in the financial system in China, which is

180
00:12:19,080 --> 00:12:22,560
Speaker 1: the credibility of the big banks. And as long as

181
00:12:22,559 --> 00:12:25,319
Speaker 1: the I C, B c s and the China construction

182
00:12:25,360 --> 00:12:30,040
Speaker 1: banks of the world a solid it's difficult to imagine

183
00:12:30,320 --> 00:12:34,520
Speaker 1: a systemic crisis in China. Do you agree with that point?

184
00:12:34,760 --> 00:12:38,439
Speaker 1: And what could happen in your view to start eroding

185
00:12:38,920 --> 00:12:43,120
Speaker 1: confidence not just in a property developer or a local bank,

186
00:12:43,440 --> 00:12:47,960
Speaker 1: but in the giant state banks which dominate the system.

187
00:12:48,000 --> 00:12:51,559
Speaker 1: I mean, I think it's very improbable that giant state

188
00:12:51,600 --> 00:12:56,040
Speaker 1: banks would suddenly lose confidence among the local population. But

189
00:12:56,160 --> 00:13:00,480
Speaker 1: the concern I would have is in state guarantees being

190
00:13:00,640 --> 00:13:05,480
Speaker 1: eroded over time. The issue in China's financial system has

191
00:13:05,559 --> 00:13:09,440
Speaker 1: been that the system expanded when there was a high

192
00:13:09,440 --> 00:13:13,720
Speaker 1: degree of moral hazard um that was pervasive throughout a

193
00:13:13,800 --> 00:13:17,200
Speaker 1: number of different asset markets. So the idea was that

194
00:13:17,440 --> 00:13:21,439
Speaker 1: even when there was financial stress that occurred, investors didn't

195
00:13:21,480 --> 00:13:25,160
Speaker 1: need to protect themselves because they could always count on

196
00:13:25,360 --> 00:13:29,160
Speaker 1: Beijing to step in in the case of any financial stress.

197
00:13:29,240 --> 00:13:32,200
Speaker 1: We saw this during even the stock market meltdown in

198
00:13:33,480 --> 00:13:38,439
Speaker 1: we saw this during the inner bank market turmoil. And

199
00:13:38,520 --> 00:13:43,200
Speaker 1: so that assumption, that track record of interventions over time

200
00:13:43,640 --> 00:13:47,120
Speaker 1: created the impression that there would always be um some

201
00:13:47,160 --> 00:13:50,440
Speaker 1: sort of government support. But that is changing and it

202
00:13:50,520 --> 00:13:53,760
Speaker 1: had to change. In fact, it was natural that that

203
00:13:54,040 --> 00:13:57,880
Speaker 1: guarantee would change because Beijing really had no interest in

204
00:13:58,040 --> 00:14:01,000
Speaker 1: defending these very risky and peri ferral parts of the

205
00:14:01,000 --> 00:14:04,760
Speaker 1: financial system when the shadow banking system, when peer to

206
00:14:04,800 --> 00:14:09,440
Speaker 1: peer lending network started expanding, and as those guarantees have

207
00:14:09,520 --> 00:14:14,000
Speaker 1: been eroded, it causes investors to start questioning where those

208
00:14:14,520 --> 00:14:18,760
Speaker 1: Beijing's guarantees will truly extend, where they will stop looking

209
00:14:18,800 --> 00:14:23,680
Speaker 1: longer term logan, China has to transition away from property

210
00:14:23,840 --> 00:14:28,000
Speaker 1: as a driver of growth. You mentioned that contribution of

211
00:14:28,040 --> 00:14:32,360
Speaker 1: property to GDP that has to come down. That's going

212
00:14:32,400 --> 00:14:35,560
Speaker 1: to be a painful process, isn't it. I would think.

213
00:14:35,600 --> 00:14:38,520
Speaker 1: So the issue is just that when an industry is

214
00:14:38,600 --> 00:14:42,640
Speaker 1: that large, there's no obvious replacement. When something that goes

215
00:14:42,720 --> 00:14:46,240
Speaker 1: from powering the economy becomes a meaningful drag on the economy.

216
00:14:46,640 --> 00:14:49,920
Speaker 1: You can talk about transitioning growth models, but that becomes

217
00:14:49,960 --> 00:14:53,400
Speaker 1: a longer term process, and it requires the costs of

218
00:14:53,440 --> 00:14:56,720
Speaker 1: the previous investment to be to be paid and new

219
00:14:56,760 --> 00:14:59,480
Speaker 1: investment decisions to be made, which which take time to

220
00:14:59,560 --> 00:15:03,320
Speaker 1: be productive. So it does mean that, you know, whatever

221
00:15:03,400 --> 00:15:07,800
Speaker 1: you're thinking about China's long term growth trajectory becoming um

222
00:15:07,840 --> 00:15:10,960
Speaker 1: it probably involves that being a couple of percentage points

223
00:15:10,960 --> 00:15:15,280
Speaker 1: lower in the immediate future. David, the last word to you,

224
00:15:16,000 --> 00:15:20,160
Speaker 1: We've already seen China's economy really screeched to a halt

225
00:15:20,400 --> 00:15:22,840
Speaker 1: in the third quarter. If you look at the quarter

226
00:15:22,960 --> 00:15:27,200
Speaker 1: on court at growth rate just no point two, way

227
00:15:27,240 --> 00:15:29,520
Speaker 1: down from numbers we used to see in the pre

228
00:15:29,680 --> 00:15:34,560
Speaker 1: COVID era. Do you share Logan's view that working through

229
00:15:35,080 --> 00:15:38,480
Speaker 1: these deep problems is going to require a period of

230
00:15:38,560 --> 00:15:42,600
Speaker 1: lower growth. Before answering this question, we should think of

231
00:15:42,680 --> 00:15:46,480
Speaker 1: one thing. It is why the authorities are so tough.

232
00:15:46,960 --> 00:15:50,960
Speaker 1: Could real actate a sector for the past of a

233
00:15:50,960 --> 00:15:54,720
Speaker 1: couple of years. So I think we can we need

234
00:15:54,760 --> 00:15:57,920
Speaker 1: to think of it in the bigger picture, and in

235
00:15:58,040 --> 00:16:02,360
Speaker 1: my mind, I think that the UH, the top leaders,

236
00:16:02,400 --> 00:16:06,760
Speaker 1: they realized that China needs the transition and they are

237
00:16:06,840 --> 00:16:11,520
Speaker 1: willing to UH to endure a period of slower growth

238
00:16:12,080 --> 00:16:14,720
Speaker 1: UH in the next couple of years. That is the

239
00:16:14,800 --> 00:16:18,320
Speaker 1: price for transition. I think that is what in their minds.

240
00:16:18,680 --> 00:16:21,880
Speaker 1: So this can explain what happened in the past several

241
00:16:21,960 --> 00:16:25,880
Speaker 1: quarters after China recovered from the COVID nineteen that they

242
00:16:25,920 --> 00:16:29,480
Speaker 1: accelerated the reform and the transition and many of the

243
00:16:29,520 --> 00:16:33,800
Speaker 1: Titan issue Titan policies issued. I think the view it

244
00:16:34,000 --> 00:16:38,240
Speaker 1: a time window for the transition and they are willing

245
00:16:38,280 --> 00:16:41,560
Speaker 1: to pay some price for that. But on the other hand,

246
00:16:41,640 --> 00:16:46,320
Speaker 1: I think they won't allow the growth to to to

247
00:16:46,520 --> 00:16:49,400
Speaker 1: break the bottom line. I think one of the bottom

248
00:16:49,440 --> 00:16:53,720
Speaker 1: line is the employment. So if we see the rise

249
00:16:53,800 --> 00:16:58,520
Speaker 1: of the unemployment, we will see some policies to be

250
00:16:58,880 --> 00:17:03,600
Speaker 1: made to relate to the the economy. Well, if we

251
00:17:03,640 --> 00:17:06,440
Speaker 1: have to sum up such a complex discussion, I guess

252
00:17:06,440 --> 00:17:08,720
Speaker 1: we can say that, Ever, Grandy is probably not going

253
00:17:08,760 --> 00:17:12,080
Speaker 1: to be China's Lehman moment. A financial crisis is not

254
00:17:12,160 --> 00:17:15,760
Speaker 1: an immediate prospect, but a period of lower growth as

255
00:17:15,800 --> 00:17:18,520
Speaker 1: the economy works through the problems of overbuilding and over

256
00:17:18,520 --> 00:17:23,120
Speaker 1: capacity is a very real prospect. David, you logan, right,

257
00:17:23,440 --> 00:17:44,000
Speaker 1: thanks very much, thank you. Well, It's Halloween this Sunday,

258
00:17:44,320 --> 00:17:47,359
Speaker 1: and so in the spirit of the season, we've invited

259
00:17:47,400 --> 00:17:52,280
Speaker 1: Bloomberg Economics best vampire hunters and monster slayers to tell

260
00:17:52,359 --> 00:17:56,119
Speaker 1: us about the biggest risks, the scariest risks facing the

261
00:17:56,119 --> 00:18:00,720
Speaker 1: global economy and markets. Very pleased to be joy by

262
00:18:01,000 --> 00:18:04,040
Speaker 1: chief US economist and a Wall dialing in from Washington,

263
00:18:04,160 --> 00:18:08,719
Speaker 1: d C. Senior UK economist Dan Hansen joining us from London,

264
00:18:08,880 --> 00:18:14,959
Speaker 1: and Chief Emerging Markets economist z Dowd dialing in from Dubai. Zad.

265
00:18:15,160 --> 00:18:18,400
Speaker 1: Let's start with you tell us about the beastly problem

266
00:18:18,560 --> 00:18:22,600
Speaker 1: facing the emerging markets. So we know do things from history.

267
00:18:22,880 --> 00:18:25,560
Speaker 1: We know the first thing is that rising US rates

268
00:18:25,640 --> 00:18:28,960
Speaker 1: have a negative spill over to emerging markets, and the

269
00:18:29,000 --> 00:18:32,320
Speaker 1: second thing is that weaker economies in the developing world

270
00:18:32,560 --> 00:18:36,040
Speaker 1: gets hit harder. We saw that repeatedly in recent years,

271
00:18:36,119 --> 00:18:39,600
Speaker 1: including the two thousand and thirteen Taper tantrum. We saw

272
00:18:39,600 --> 00:18:43,360
Speaker 1: it also in the twenty eighteen emergent market crisis. Now

273
00:18:43,520 --> 00:18:46,720
Speaker 1: US rates are rising, and some emerging markets are vulnerable

274
00:18:46,800 --> 00:18:49,960
Speaker 1: this time around. So who is the most exposed was

275
00:18:50,000 --> 00:18:53,439
Speaker 1: the group of countries that we group under the acronym BEAST.

276
00:18:53,800 --> 00:18:59,280
Speaker 1: These are Brazil, Egypt, Argentina, South Africa and Turkey. These

277
00:18:59,280 --> 00:19:03,280
Speaker 1: economies have law foreign exchange reserves, have high external debt

278
00:19:03,560 --> 00:19:07,720
Speaker 1: and sizeable current account deficits, and the particularly exposed if

279
00:19:07,920 --> 00:19:11,119
Speaker 1: you get any surprises in terms of interest rates in

280
00:19:11,160 --> 00:19:14,760
Speaker 1: the US now, fans of the horror genre will know

281
00:19:15,000 --> 00:19:18,639
Speaker 1: that often the sequel is gorrier than the original. In

282
00:19:18,680 --> 00:19:26,600
Speaker 1: the UK, we had strikes, shortages, garbage, even corpses piling

283
00:19:26,680 --> 00:19:29,399
Speaker 1: up in the street. The crisis was so bad it

284
00:19:29,440 --> 00:19:32,840
Speaker 1: became known as the Winter of Discontent, Dan Hansen, does

285
00:19:32,880 --> 00:19:36,600
Speaker 1: the UK now face winter of discontent? The return? We've

286
00:19:36,720 --> 00:19:38,960
Speaker 1: had a year of two halves in the UK. We've

287
00:19:39,000 --> 00:19:41,960
Speaker 1: had a blistering recovery following the end of the lockdown

288
00:19:41,960 --> 00:19:44,639
Speaker 1: earlier in the year, but since then the economy has

289
00:19:44,720 --> 00:19:47,480
Speaker 1: slowed and much of that has been due to, as

290
00:19:47,520 --> 00:19:52,040
Speaker 1: you mentioned, supply constraints both global and domestic as well,

291
00:19:52,119 --> 00:19:54,480
Speaker 1: and they've really hindered the ability of the economy to

292
00:19:54,520 --> 00:19:58,080
Speaker 1: make meaningful further progress. And we've had a look at

293
00:19:58,119 --> 00:20:01,000
Speaker 1: what recent supply disruptions might cost the economy, and we

294
00:20:01,040 --> 00:20:02,960
Speaker 1: think it could knock as much as one point three

295
00:20:03,000 --> 00:20:04,920
Speaker 1: percent off the level of g d P by the

296
00:20:05,000 --> 00:20:07,119
Speaker 1: end of the year, and it could add as much

297
00:20:07,160 --> 00:20:10,239
Speaker 1: as point four percentage point to headline inflation, which as

298
00:20:10,240 --> 00:20:12,159
Speaker 1: we know, is already pretty high in the UK. It's

299
00:20:12,200 --> 00:20:14,399
Speaker 1: running at about three point one percent at the moment,

300
00:20:15,359 --> 00:20:17,960
Speaker 1: and I think if we look ahead, it's important to

301
00:20:18,000 --> 00:20:20,719
Speaker 1: recognize that that loss of growth momentum has occurred at

302
00:20:20,720 --> 00:20:23,640
Speaker 1: a time when more headwinds are appearing on the horizon.

303
00:20:24,200 --> 00:20:27,760
Speaker 1: Inflation is likely to go higher still on energy prices

304
00:20:27,760 --> 00:20:30,760
Speaker 1: this winter, moving above four percent, more than doubling the

305
00:20:30,760 --> 00:20:34,719
Speaker 1: Bank of England's target, and that will crimp real income growth.

306
00:20:35,640 --> 00:20:38,920
Speaker 1: And meanwhile you've got fiscal support being tapered, and there's

307
00:20:39,080 --> 00:20:41,919
Speaker 1: also a risk of a rising unemployment following the end

308
00:20:41,960 --> 00:20:44,960
Speaker 1: of the furlough scheme, which the government's wage support scheme.

309
00:20:45,840 --> 00:20:48,320
Speaker 1: So if we bring all of that together, it's it's

310
00:20:48,320 --> 00:20:50,760
Speaker 1: not hard to see why references to stagflation are on

311
00:20:50,800 --> 00:20:54,160
Speaker 1: the rise um, though we don't think we're quite there yet.

312
00:20:54,720 --> 00:20:57,640
Speaker 1: Our baseline view is that the economy will continue to grow,

313
00:20:58,440 --> 00:21:01,480
Speaker 1: albeit at a significantly lower pace than in earlier in

314
00:21:01,520 --> 00:21:05,000
Speaker 1: the year, And our baseline also sees GDP passing its

315
00:21:05,000 --> 00:21:07,640
Speaker 1: pre virus peak in the first quarter of next year,

316
00:21:07,680 --> 00:21:09,960
Speaker 1: which is a little bit later than we previously envisaged.

317
00:21:15,440 --> 00:21:19,240
Speaker 1: Sometimes in horror films, the problem gets so bad that

318
00:21:19,359 --> 00:21:23,000
Speaker 1: the heroes have to adopt a scorched Earth policy to

319
00:21:23,119 --> 00:21:28,159
Speaker 1: wiping out the villains. Remember Ripley in Aliens promising to

320
00:21:28,240 --> 00:21:31,280
Speaker 1: take off and nuke the entire site from orbit. It's

321
00:21:31,320 --> 00:21:35,119
Speaker 1: the only way to be sure, Anna Wong, was inflation

322
00:21:35,320 --> 00:21:38,480
Speaker 1: in the United States reached that proportion, should we be

323
00:21:38,560 --> 00:21:41,160
Speaker 1: worried that the Federal Reserve will have to lift off

324
00:21:41,320 --> 00:21:44,199
Speaker 1: and nuke the economy from orbit to bring price pressure

325
00:21:44,240 --> 00:21:50,320
Speaker 1: under control. So dud, everybody is worried about inflation here,

326
00:21:50,640 --> 00:21:54,359
Speaker 1: even my my, my nanny is worried about inflation. And

327
00:21:54,400 --> 00:21:58,800
Speaker 1: the risks of inflation moving higher than the FED prediction

328
00:21:59,359 --> 00:22:03,080
Speaker 1: right now seems higher than a couple of weeks ago, indeed.

329
00:22:03,480 --> 00:22:07,840
Speaker 1: But to me, the scarier scenario is not so much

330
00:22:07,920 --> 00:22:10,919
Speaker 1: inflation running away to the level we have seen in

331
00:22:11,000 --> 00:22:14,480
Speaker 1: nineteen seventies, because for that to happen, the FED has

332
00:22:14,520 --> 00:22:18,040
Speaker 1: to make policy errors for many, many years, and I

333
00:22:18,119 --> 00:22:20,720
Speaker 1: just don't think that's likely. The Fed will move, will

334
00:22:20,840 --> 00:22:24,480
Speaker 1: raise rates next year if inflation runs hotter than much

335
00:22:24,520 --> 00:22:28,560
Speaker 1: hotter than they expected. But the real scary thing is

336
00:22:29,040 --> 00:22:32,320
Speaker 1: what happens to the economy when the Fed does move

337
00:22:32,800 --> 00:22:35,679
Speaker 1: under the new policy framework. The FET is only going

338
00:22:35,720 --> 00:22:38,800
Speaker 1: to move until the labor market is really hot, right,

339
00:22:39,240 --> 00:22:41,320
Speaker 1: So when they do finally start to move, they have

340
00:22:41,400 --> 00:22:45,080
Speaker 1: to move faster and quicker, and the path of FED

341
00:22:45,200 --> 00:22:48,399
Speaker 1: rates will be steeper. And we have had two years

342
00:22:48,440 --> 00:22:53,320
Speaker 1: of very easy conditions monetary conditions. We have many bubbles now,

343
00:22:53,440 --> 00:22:57,720
Speaker 1: we have asset record highs in many asset markets. So

344
00:22:57,960 --> 00:23:01,439
Speaker 1: when the FED brings this party to a halt, it

345
00:23:01,480 --> 00:23:04,080
Speaker 1: will be very hard. And historically the FED does not

346
00:23:04,680 --> 00:23:09,479
Speaker 1: have a very good track or record in engineering soft lending. Okay,

347
00:23:09,680 --> 00:23:13,280
Speaker 1: let's round this section out by talking about perhaps the

348
00:23:13,359 --> 00:23:16,840
Speaker 1: biggest fear out there for some investors, the fear that

349
00:23:17,000 --> 00:23:20,080
Speaker 1: record highs for the stock market are the sign of

350
00:23:20,119 --> 00:23:23,920
Speaker 1: a bubble and that that bubble could burst Z. How

351
00:23:23,920 --> 00:23:26,400
Speaker 1: should we think about that risk? Right? So, the main

352
00:23:26,480 --> 00:23:29,720
Speaker 1: question is whether the stock market is in a bubble

353
00:23:30,040 --> 00:23:34,400
Speaker 1: or not right now, with the SMP hitting record highs.

354
00:23:34,680 --> 00:23:37,879
Speaker 1: So to answer this question, we use an econometric model

355
00:23:38,160 --> 00:23:41,439
Speaker 1: that estimates the large notable bubble based on the speed

356
00:23:41,480 --> 00:23:45,719
Speaker 1: of decoupling of equity prices from their fundamentals, in this

357
00:23:45,800 --> 00:23:49,560
Speaker 1: case is dividends. The method finds that we are on

358
00:23:49,640 --> 00:23:51,679
Speaker 1: the cusp of a bubble. We're not in a bubble

359
00:23:51,760 --> 00:23:55,600
Speaker 1: territory yet, but we are very close now. Economically speaking,

360
00:23:55,680 --> 00:23:58,080
Speaker 1: the direct effect of a sharp correction in the stock

361
00:23:58,160 --> 00:24:01,080
Speaker 1: market on the US economy my not be very large,

362
00:24:01,440 --> 00:24:03,520
Speaker 1: but at a time where we have other risks such

363
00:24:03,560 --> 00:24:07,600
Speaker 1: as the spreading of the coronavirus variant, the rise of

364
00:24:07,680 --> 00:24:11,240
Speaker 1: global interest rates, the slow down the Chinese economy, and

365
00:24:11,280 --> 00:24:16,000
Speaker 1: the disruption and the supply chains. Adding a another risk

366
00:24:16,200 --> 00:24:19,720
Speaker 1: in the form of an assetprise bubble would compand these

367
00:24:19,840 --> 00:24:23,159
Speaker 1: risks and add an additional layer of uncertainty to the

368
00:24:23,160 --> 00:24:27,880
Speaker 1: global economy. Well, Anna, Dan and Zad didn't enter into

369
00:24:27,880 --> 00:24:30,199
Speaker 1: the Halloween spirit quite as fully as I did, But

370
00:24:30,240 --> 00:24:32,320
Speaker 1: then I guess on a show like this, it's really

371
00:24:32,359 --> 00:24:48,320
Speaker 1: economic expertise that counts, and that's about all we have

372
00:24:48,400 --> 00:24:50,880
Speaker 1: time for on this week's Stephonomics. So it's the door

373
00:24:50,880 --> 00:24:54,360
Speaker 1: of the crypt Creaks closed, it only remains for me

374
00:24:54,440 --> 00:24:58,639
Speaker 1: to thank our contributors, Tom Warlock, Logan White and Demon

375
00:24:58,720 --> 00:25:02,639
Speaker 1: Chew as Yeah Dead, The Ghost of Anime, Wong and

376
00:25:02,720 --> 00:25:07,440
Speaker 1: Dan Hank, Song producer Magnus the Thing Henrickson, and executive

377
00:25:07,440 --> 00:25:12,080
Speaker 1: producer Mike the Exorcist Sasso join us next week, when

378
00:25:12,119 --> 00:25:15,560
Speaker 1: regular host Stephanie Flanders will be back, The guest host

379
00:25:15,640 --> 00:25:19,360
Speaker 1: Nightmare will be over, and normal standards of economic analysis

380
00:25:19,800 --> 00:25:22,560
Speaker 1: and editorial judgment will be restored