Speaker 1: This is Bloomberg Opinion. I'm Vonnie Quinn. This week a
Speaker 1: lone boycott in China and a rebranding for an old company.
Speaker 1: Julie Ran and Brooks Southerland Coming up first though, to
Speaker 1: John Authors, as we review Europe's difficulties, the Tory party
Speaker 1: leadership race, and US market performance. So, John, we are finally,
Speaker 1: as you say, at the heavy heights of zero percent
Speaker 1: in Europe, and we may even go to one percent
Speaker 1: by year end. It sounds insane to say this, the
Speaker 1: heavy heights of zero percent. We did get a fifty
Speaker 1: basis point increase. Yes, it's the first increase in more
Speaker 1: than a decade, and on many levels this really breaks
Speaker 1: the mold for the way the ECB has been behaving
Speaker 1: more or less its entire existence. First of all, it's
Speaker 1: breached its own prior guidance basically told us it was
Speaker 1: going to be raising by twenty five, and then it
Speaker 1: raised by fifty. It's also saying in as many words
Speaker 1: that there is no forward guidance coming. They don't know
Speaker 1: what the data is going to be, and they don't
Speaker 1: therefore know what the interest rates are going to be.
Speaker 1: They've taken guidance quite a lot more seriously than the
Speaker 1: other central banks over the years, and they are now
Speaker 1: putting everything on being able to remain flexible. Well. As
Speaker 1: you point out, European Central LINKA has so much more
Speaker 1: to deal with than other central banks. Obviously, it's a
Speaker 1: conglomeration of countries. Just for comparison Burpses right now, Germany's
Speaker 1: tenure yields at one point to Italy's is at three
Speaker 1: point five, and that's one of the things that the
Speaker 1: ECB has to deal with. It's possibly the single most important,
Speaker 1: given that we now have an election coming up in
Speaker 1: Italy and the last time we had an Italian election
Speaker 1: it's caused an almighty mess. This time. All the punditory
Speaker 1: at the moment says that the Brothers of Italy, who
Speaker 1: despite their name are led by a woman, Georgie M. Meloney,
Speaker 1: seemed most likely to form a government or to provide
Speaker 1: the prime minister, and they are ultimately fairly directly descended
Speaker 1: from Benito. With Saloni's Fascist Party, members have been urged
Speaker 1: not to make the Roman salute in public anymore. This
Speaker 1: is not going to go down well in the rest
Speaker 1: of Europe. It was bad enough when you had the
Speaker 1: League as part of the government. If it comes to pass,
Speaker 1: that will really amp up the tension much further. But
Speaker 1: it's all of a piece, right, and this is part
Speaker 1: of what we're seeing all over the world. So you're
Speaker 1: seeing these more extreme parties get into government and hous
Speaker 1: other maybe less extreme parties, partially because of economic concerns
Speaker 1: and economic difficulties in Italy has been in trouble for
Speaker 1: a long time. Yes, I think where Italy is different
Speaker 1: from some of the others and dangerously so. It really
Speaker 1: is very much of an aging country and growth has
Speaker 1: been very slow for some decades now. It actually overtook
Speaker 1: Britain at one point in the in the years after
Speaker 1: the war, it did have a boom. It has been
Speaker 1: languishing for a long time. One of the reasons Mario
Speaker 1: Dragi took the helm right because he was a technocrat
Speaker 1: and he had been at the helm of the E
Speaker 1: C B. And there was hope that he might be
Speaker 1: able to turn things around. But ultimately he didn't know,
Speaker 1: and they've had a succession of attempts. Romano Prodi came
Speaker 1: in to rescue after Berlusconi during the crisis ten years ago,
Speaker 1: very reminiscent of Greece in fact. Yes, so the ECB
Speaker 1: came up with this something that almost sounds like a vaccine.
Speaker 1: It's the transmission protection instruments. What is it? It seems
Speaker 1: to be a promise from the ECB that it's not
Speaker 1: going to let spreads get too wide, and that it
Speaker 1: will buy bonds or it's not ruling out in the
Speaker 1: private securities as well, to keep the different economies within
Speaker 1: Europe in line with each other. How is this not
Speaker 1: history rhyming a little bit? We had this before. Yes,
Speaker 1: this time is different, I would say, because the ECB
Speaker 1: is trying to give itself more discretion than it had before.
Speaker 1: It's really putting much more of its own credibility on
Speaker 1: the line. We have general criteria for when they would react,
Speaker 1: to do with how unwarranted the widening of spreads might be,
Speaker 1: how disorderly it might be. But those are described in words,
Speaker 1: not numbers, and it's going to be down to the
Speaker 1: Central Bank itself to fix the Other thing that's fascinating, though,
Speaker 1: is that you know, it's ten years since I had
Speaker 1: to spend most of my life covering this the o
Speaker 1: m T S. I had forgotten the existence of our
Speaker 1: m T S and and they were never actually used.
Speaker 1: The fascinating thing about Mario Dragi saying he would do
Speaker 1: whatever it takes. He never needed to the market in
Speaker 1: going it was market, yes, but it's there on the
Speaker 1: books as an opportunity. And Leguard said that that's part
Speaker 1: of their toolkit that they reserve the right to use,
Speaker 1: that they may well use. So that's a fairly directed
Speaker 1: mission that we're very close to the kind of existential
Speaker 1: worries about the Euro that we had a decade ago.
Speaker 1: The big difference this time is if you look at
Speaker 1: Italian spirits compared to Spain or Portugal, it really is
Speaker 1: an Italy problem now rather than a peripheral economies Portugal
Speaker 1: and Spain ten your yield in the in the two
Speaker 1: two and a half percent range, whereas we're talking to
Speaker 1: another presentative point for Italy at least. Yes, but unfortunately
Speaker 1: Italy is the biggest of those economies. But this is
Speaker 1: now very much a drama that focuses on Italy itself.
Speaker 1: We also have, unfortunately the issue that Italy is particularly
Speaker 1: dependent on Russian energy, which is another thing that the
Speaker 1: ECB has to deal with. As you point out, you're
Speaker 1: three things were Italy energy and europe banking system, which
Speaker 1: as we know, is weaker than that of the United
Speaker 1: States right now, has been since the financial crisis and
Speaker 1: even before Energy John, just a brief word on that. Yes,
Speaker 1: I mean I am not using this word lightly. We
Speaker 1: saw natural gas in Germany over the last two years
Speaker 1: skyrockets natural gas. Yes, the north Stream pipeline, which had
Speaker 1: been closed for maintenance, possibly with air quotes around maintenance,
Speaker 1: has reopened and some supplies are flowing. I think the
Speaker 1: read through that most people are taking is that puting
Speaker 1: his demonstrated very clearly that he can turn off supply
Speaker 1: if he wants to have a surprised that everybody took
Speaker 1: that so literally. It's you know, and and that's that's
Speaker 1: still very much of a risk that he might do
Speaker 1: it again. That the sort of almost mafia like comment
Speaker 1: that if you don't help me get this part, it's
Speaker 1: going to have to come down to only twenty percent
Speaker 1: of capacity next week. Yeah, that's that's not encouraging. You
Speaker 1: don't want to be in Russia's vice, that's for sure. So,
Speaker 1: as you point out on a recent piece on British positions,
Speaker 1: are going to give us some light relief in a
Speaker 1: hot summer for anyone out there who hasn't yet seen Yes,
Speaker 1: Prime Minister or Armando Yanuchi is the thick of it, which,
Speaker 1: by the way, was the inspiration for Viev. I'm sure
Speaker 1: everyone knows that. Then you're welcome, because you've got a
Speaker 1: great summer ahead. We've got have a great summer ahead
Speaker 1: in Britain because we have two candidates now. John talked
Speaker 1: to us about Liz trust She is, I guess, part
Speaker 1: of a long line of politicians that swing according to
Speaker 1: wherever the weather veins take er. She grew up a
Speaker 1: liberal in protesting Margaret Thatcher at one point, and now
Speaker 1: she has embraced Taurism. Yes, I'm not so startled by
Speaker 1: the fact that when she was at school she was
Speaker 1: among the crowds going macky Maki, making out out out.
Speaker 1: That's that was very much the thing all young people
Speaker 1: in Britain at that time have felt like doing. What
Speaker 1: is more intriguing is that as a young adult into
Speaker 1: twenties she was a very active member of the Liberal Democrats.
Speaker 1: That is unusual. It's also very unusual that she was
Speaker 1: actually quite a coherent and persuasive supporter of remaining in
Speaker 1: the EU during the y and the fact that she
Speaker 1: has been accepted and is generally regarded in the party
Speaker 1: now as the hard line Brexity he candidate. When both
Speaker 1: Penny more than the last person she eliminated, and Risci
Speaker 1: Sunac her other opponents, actually did vote for Brexit when
Speaker 1: she didn't, that is really a very strange development. It's
Speaker 1: amazing how politics can work that way. Not only that,
Speaker 1: but she voted Remain. But yet she was one of
Speaker 1: the politicians loyal to Boris Johnson right at the bitter end.
Speaker 1: She apparently didn't want him to go, even at the
Speaker 1: very end. Yes, I think that there's certainly an element
Speaker 1: of trying to position herself Risci Sunac the year her
Speaker 1: competitor was one of the two ministers whose resignations a
Speaker 1: couple of weeks ago really did precipitate the end of
Speaker 1: Boris Johnson. He had stayed loyal for a long time.
Speaker 1: But there is still this sense among those who like
Speaker 1: Boris and he has a certain degree of personal popularity
Speaker 1: with the party in the country, that that he is
Speaker 1: one of the traitors, that he is the brutus figure
Speaker 1: who put the dagger in. And the more she can
Speaker 1: suggest that she is the one who didn't want Boris
Speaker 1: to go, who was loyal. The more that could well
Speaker 1: help her in this particular electorate over the next two
Speaker 1: months was seventy five thousand Conservative Wary members are going
Speaker 1: to vote. How much of it will be on personality
Speaker 1: and just the types of things we've been enumerating, and
Speaker 1: how much will be on economic policy because Richie Sonac
Speaker 1: and let's trous have very different economic policies. Again, they
Speaker 1: certainly have been presenting very different economic policies in the
Speaker 1: last few days. I don't see any particular evidence this
Speaker 1: Trust was the Chief Secretary to the Treasury, which the
Speaker 1: junior minister below Chancellor of the Exchequer at one point,
Speaker 1: and so is Rischie Soonak. I'm not aware of any
Speaker 1: great change in Conservative economic policy between the two, but yes,
Speaker 1: as it stands, and I think this is the fascinating part.
Speaker 1: The clear policy difference between them is on macro economics,
Speaker 1: and really because in Britain's case, because you, Europe has
Speaker 1: just swallowed up all politics on the right of the
Speaker 1: spectrum ever since that chair. This really is the first
Speaker 1: time there has been a direct head on arguments over economics,
Speaker 1: over over how to run the economy in a generation.
Speaker 1: What is very interesting here is that you might see
Speaker 1: the completion of the trend of the reversal of the
Speaker 1: traditional parties of the right and left. You've already seen
Speaker 1: that to some extent in the US, where the Trumpist
Speaker 1: Republican Party is now getting prepared to be more aggressive
Speaker 1: with the private sector even than the Democrats are that
Speaker 1: they were very happy to spend huge amounts of money
Speaker 1: and not fund it, etcetera. They seem to have completed
Speaker 1: this transition to being what we have never previously thought
Speaker 1: of as right wing economics. Richie Sunac doesn't like deficits.
Speaker 1: He spent a huge amount of money on COVID, but
Speaker 1: his emphasis is on tax raises if necessary to try
Speaker 1: to bring the deficits down. A city slash all Street background. Oh,
Speaker 1: he was Goldman Sax, followed by Chris Holmes, Hedge Fund,
Speaker 1: the Children's Investment Fund. He had quite a gold plated
Speaker 1: City of London financial career. So he is basically arguing
Speaker 1: for what you might call the orthodox cy that's been
Speaker 1: around pretty much since Thatcher. Without the great belief that
Speaker 1: tax cuts in their own right will pay for themselves,
Speaker 1: which you would have thought would go down better with
Speaker 1: the party members. But as you say, we are seeing
Speaker 1: this shift now now exactly that is what will be
Speaker 1: one of the points that will be very interesting the
Speaker 1: conservative membership. I think the average age is something like sixty,
Speaker 1: and they tend to be small c conservative, So you
Speaker 1: would traditionally have thought the sun approach would be more
Speaker 1: popular with that electorate than Liz trust saying let's cut taxes,
Speaker 1: and this sounds like early Ronald Reagan and then those
Speaker 1: tax cuts will pay for themselves as people un least
Speaker 1: their energy. That is a big difference in approach, both
Speaker 1: the saying the other one is left wing or socialist.
Speaker 1: I wouldn't say either of them were. Basically one is saying,
Speaker 1: if you want to raise taxes, you're a socialist, and
Speaker 1: the other is saying, if you want to borrow more money,
Speaker 1: you're a socialist, which is a little immature. Well, that
Speaker 1: wouldn't be the first time that we had seen imature
Speaker 1: going on in all sorts of politics, not just particularly British.
Speaker 1: Have to ask you though about the US before we
Speaker 1: let you go. Obviously, Federal Reserve meeting next week, and
Speaker 1: we've seen this nice rally. As you point out, the
Speaker 1: direction of the market and its breadth, both consistent with
Speaker 1: what we might expect to see if a major low
Speaker 1: we're near. And yet you're saying it's not compelling enough
Speaker 1: to just buy diving into the market. Yes, well, I
Speaker 1: mean it's risky to be out of the market altogether.
Speaker 1: Don't don't ever saying that. I'm suggesting, don't be in
Speaker 1: at all. But in terms of making very big assets
Speaker 1: allocation calls to move from cash into stocks or from
Speaker 1: bonds stock at the moment, I don't see a good
Speaker 1: case to do that, because we still don't have our
Speaker 1: arms around exactly how bad the effect on profits is
Speaker 1: going to be, and we don't know how bad the
Speaker 1: economy is going to be. If inflation, it's not about
Speaker 1: where it peaks, it's about how quickly it comes down. Really,
Speaker 1: if inflation is still, say five percent at the end
Speaker 1: of this year, which is plenty conceivable, then rates are
Speaker 1: going to have to stay higher for longer than is
Speaker 1: currently embedded in prices, and that would suggest stocks herself,
Speaker 1: it's not going to come down to two this year.
Speaker 1: If it's down at three and a half percent by
Speaker 1: the end of the year, then you would get very
Speaker 1: much greater confidence that no, I don't. But that's the
Speaker 1: point I'm making, that that that we really need to
Speaker 1: find out how quickly inflation can be brought under control.
Speaker 1: If I had to take an over Under this point,
Speaker 1: I think the market is underestimating the risks that we
Speaker 1: continue to have inflation even if the economy isn't doing great.
Speaker 1: That underestimating the risks that even the economy is slowing,
Speaker 1: the fit can't bring rates down. I'm not certain that's
Speaker 1: going to happen, but that seems to me to be
Speaker 1: a real risk. And until we can establish that that's
Speaker 1: not going to happen, that, you know, I'm barking at
Speaker 1: the moon on that one, I would be cautious about
Speaker 1: going all in on the stock market. Well, keep at
Speaker 1: least a little powder dry, if not a lot of
Speaker 1: powder dry. Just okay, that's always a good idea, John
Speaker 1: Authors there, don't forget. You can also listen to Bloomberg
Speaker 1: Opinion as a podcast on Apple, Spotify, or wherever you
Speaker 1: get your podcasts. This week, General Electric revealed a new
Speaker 1: name for its power business, ver Nova. The rebranding coming
Speaker 1: as GE prepares to split into three over the next
Speaker 1: couple of years. The renaming reveals, though, a deeper question
Speaker 1: for the industrial behemoth and for companies more broadly, just
Speaker 1: how old is too old? We're joined by Book Sutherland.
Speaker 1: Not many companies around as long as GE hundred and
Speaker 1: thirty years, and a deglomeration has been underway for some time.
Speaker 1: Can you explain why GE needed to undertake this man
Speaker 1: less task? You know, I think this is a company
Speaker 1: that for a while now has been too complicated for
Speaker 1: its own good. Made a lot of arguments for many years,
Speaker 1: but they were borrowing technology between the different businesses that
Speaker 1: you know, the ability to have executives jump around between
Speaker 1: their diversified portfolio made them stronger management teams. And that
Speaker 1: all has been turned on his head in recent years,
Speaker 1: just given the challenges that has faced and I think
Speaker 1: investors have grown increasingly frustrated with the negative surprises that
Speaker 1: have come out of the company, from the fifteen billion
Speaker 1: dollar shortfall and insurance to the cash crunch and the
Speaker 1: power business or recently the renewable energy business is having difficulties,
Speaker 1: and I think investors just are ready for a cleaner,
Speaker 1: simpler story, right, and the stock still not far off
Speaker 1: its financial crisis lows. The CURRENCYEO that are called decided
Speaker 1: to split into three back in November, and at the
Speaker 1: time you loaded the approach, where are we now with us?
Speaker 1: They're still sticking with the same plan. One issue is
Speaker 1: that it takes a while. I mean, he is a
Speaker 1: very big, complicated company. It's untangling. It is a mammoth task.
Speaker 1: And so they announced the break up plan in November.
Speaker 1: The first of the spinoffs is not scheduled to happen
Speaker 1: until early twenties three. That will be the health care
Speaker 1: business um and then they plan to spin off the
Speaker 1: combination of their gas power, renewable energy, and digital assets
Speaker 1: in early leaving behind an aerospace business. You're talking about,
Speaker 1: you know, a multi year timeline and there is a
Speaker 1: lot of space in between, and within that, we have
Speaker 1: a volatile economic environment and that just makes it really
Speaker 1: difficult for investors to make the decision to own ge
Speaker 1: right now while it's going through this process. They think
Speaker 1: it seems like there's a lot of investors out there
Speaker 1: who would rather wait and owned shares and some of
Speaker 1: these independing companies than stick around for what is bound
Speaker 1: to be a messy unraveling. Now I'm quoting from one
Speaker 1: of your recent columns. If the lesson of g e
Speaker 1: s past is that it was too bold and it
Speaker 1: should have been cautious, the lesson of the present maybe
Speaker 1: that the company is too cautious about letting go of
Speaker 1: its legacy when it should be bolder. What do you
Speaker 1: mean by letting go of its legacy? Book? They came
Speaker 1: out this week with the branding for these new companies,
Speaker 1: and they are going to be called Healthcare, ke e, Eero, Space,
Speaker 1: and ge Vernova is the last one being the combination
Speaker 1: of the gas power, wind turbine and digital assets that
Speaker 1: I've described. I think it's surprising to me that they're
Speaker 1: keeping the g E name with these businesses. Again, this
Speaker 1: isn't a hundreds and thirty year old company. It has
Speaker 1: a very long legacy. It is well known for commercializing
Speaker 1: modern lighting, being a powerhouse behind jet engines. GE had
Speaker 1: a hand in developing a gem engine that takes off
Speaker 1: every two seconds. They power a third of the world's electricity.
Speaker 1: So there's a lot of history there, But recently that
Speaker 1: name has not really resonated in a good way with investors,
Speaker 1: and so you know, if this breakup is meant to
Speaker 1: be a reinvention of the company. In my mind, it
Speaker 1: would be a good time to really give these businesses
Speaker 1: an independent identity, to let them escape from the legacy
Speaker 1: g E pass and carve out their own future for sure.
Speaker 1: And Larry called what's his reasoning behind it? Has he
Speaker 1: given a presentation on what he's expecting to happen once
Speaker 1: these spin offs actually happen, you know? I think Larry
Speaker 1: Colpe is a big believer in de centralized management, and
Speaker 1: he's done a lot of this within the confines of
Speaker 1: the current g structure, pushing more accountability down into the businesses.
Speaker 1: But there's obviously only so much that you can do
Speaker 1: when you are still a conglomerate, and so this is
Speaker 1: sort of the natural evolution of that, where these businesses
Speaker 1: will be empowered to make their own decisions when it
Speaker 1: comes to capital allocation in terms of day to day operations,
Speaker 1: debt management, whatever it might be. I think there is
Speaker 1: a strong track record of industrial spinoffs proving that when
Speaker 1: management is properly incentivized and focused on just one business,
Speaker 1: it's beneficial for the company. And so I think that's
Speaker 1: the end goal here, and nothing about the branding changes
Speaker 1: that goal by any means. But it will still have
Speaker 1: that E name um and so you know, the company
Speaker 1: says that they did as of it, they got feedback
Speaker 1: from their customers employees that wanted them to keep the name.
Speaker 1: I think that if you look at some of the
Speaker 1: other industrial breakups that have happened, there is some value
Speaker 1: and letting go and starting fresh will be interesting to
Speaker 1: see what happens as we go to twenty three and
Speaker 1: twenty four, what happens generally with these spinoffs books. It's
Speaker 1: going to be interesting to see how this one slaves out.
Speaker 1: So there was a time period where you know, all
Speaker 1: spin offs essentially did well. They were very hot and
Speaker 1: people liked them, and then you know, in recent years
Speaker 1: it's kind of gotten more into flitting hairs in the
Speaker 1: industrial sector. That is not what is happening with g E.
Speaker 1: These are obviously very distinct businesses a very separate markets.
Speaker 1: But I do think, you know, you might see some
Speaker 1: new investors taking a look at the companies that maybe
Speaker 1: weren't interested in owning the g E of the past,
Speaker 1: even if they liked the healthcare business, because then they
Speaker 1: also got an aerospace business and insurance headaches and you know,
Speaker 1: whatever else it might be. I think, you know, you
Speaker 1: might also see some re shuffling among the AIMA list community.
Speaker 1: Right now ges covered by a multi industrial analysts. It's
Speaker 1: not going to be a multi industrial company in a
Speaker 1: few years time, so that may bring some different types
Speaker 1: of perspectives into the fault um. And so you know,
Speaker 1: I do think they're changing their profile with this breakup
Speaker 1: and potentially attracting different kinds of people. Brook Sutherland. There
Speaker 1: to China now with all of its woes from COVID
Speaker 1: to growth to this mortgage payer boycott. There's also, of
Speaker 1: course the prospect of a call between President Biden and
Speaker 1: she in the coming days. That would be the first
Speaker 1: since March. Let's get to Schuli Wren. It appears there
Speaker 1: may be a bit of a rap proschment on the cards,
Speaker 1: with a call between President Biden and China's Chies and
Speaker 1: Ping in the coming days. That's the first between the
Speaker 1: leaders since March. Also a council trip to Taiwan for
Speaker 1: a House speaker Nancy Pelosi, which likely has something to
Speaker 1: do with diplomacy and maybe even deference to China. Let's
Speaker 1: get straight to Shuli Wren. Shuli China is grappling with
Speaker 1: a whole range of its own economic and COVID woes.
Speaker 1: Right now, talk to us a little bit about where
Speaker 1: China is growth wise for this year. I hope there
Speaker 1: is growth at all in China. I mean, with the
Speaker 1: whole COVID A zero UH city lockdowns, it's very very
Speaker 1: hardful China's economy to to not any positive growth. So
Speaker 1: so for this court between US and the Chinese president,
Speaker 1: presidents actually has an incentive to play nice, to try
Speaker 1: to you know, to drop export carrots. So so I'm
Speaker 1: pretty positive on this book. Right. So, if we remember
Speaker 1: the former president Donald Trump had imposed charles and more
Speaker 1: than three billion dollars in Chinese imports. Obviously the Biden
Speaker 1: administration is trying to do everything it can to bring
Speaker 1: down inflation in the United States before the midterms, but
Speaker 1: also to appear to be bringing down inflation with everything possible.
Speaker 1: What kinds of outcomes could we see from this call
Speaker 1: that would make any difference to either economy. I think
Speaker 1: the benefits for China can be quite large, actually, because
Speaker 1: exports during the pandemic was the strongest economic suit for
Speaker 1: the Chinese economy. So if there is progressing this talk,
Speaker 1: the exports can lift China's economy by I don't know,
Speaker 1: like a one percentage point. As for us, there has
Speaker 1: been a lot of study done by economists. They say
Speaker 1: that the effect on inflation is not going to be
Speaker 1: very big. I guess Biden has to be seen doing
Speaker 1: something right. It's almost a perception thing more than anything else,
Speaker 1: because we all know that food and shelter are the
Speaker 1: two main components that are driving off inflation here in
Speaker 1: the United States, and there's not much that you know,
Speaker 1: tarifs on Chinese goods will do for that. But China
Speaker 1: growth itself is running up against a whole array of problems,
Speaker 1: including the COVID zero policy, which continues and indeed cases
Speaker 1: are low in comparison with countries like the United States,
Speaker 1: but at the same time the economy has been very
Speaker 1: much hurt. You have a column talking about redlines versus zero.
Speaker 1: COVID explained to us a little bit what you mean
Speaker 1: in terms of putting those two side by side. So
Speaker 1: the Chinese government has some very big, top top down
Speaker 1: policies in recent years. One is COVID zero, right, and
Speaker 1: then the other one is playing off of the Presidentshijin
Speaker 1: King mentor that housing is to be living, not to
Speaker 1: be speculated, um, and then like what they did two
Speaker 1: years ago was setting up the so called free byline
Speaker 1: basically restricting developers access to financing. That could have worked,
Speaker 1: but you cannot have both because one problem we are
Speaker 1: seeing is that you know, the developers, of course they're indebted.
Speaker 1: We hear a lot of news clips on how financially
Speaker 1: distressed the developers are, but they're even more distressed now
Speaker 1: because of the COVID zero lockdown. How can you tell
Speaker 1: any apartment if everyone is stuck at home? Right? And
Speaker 1: then like another problem we're seeing is like in recent days, um,
Speaker 1: some Chinese middle class they're having like a boycott. They
Speaker 1: don't want to pay mortgage anymore because they don't see
Speaker 1: their apartments delivered by the developer developers. Right. This has
Speaker 1: been a fascinating development. So once again we're seeing the
Speaker 1: Chinese populace take matters into their own hands and just
Speaker 1: boycott mortgage payments. Just explain a little bit more of
Speaker 1: the context here. Usually so so in China, like all
Speaker 1: the new you have apartments they are sold based on
Speaker 1: this so called the pre sales model. I think a
Speaker 1: former president Donald Trump did a bench of that himself. Uh,
Speaker 1: like the developers sell the apartments before their developer they're delivered, right,
Speaker 1: So the households they're already starting their mortgage payments, but
Speaker 1: they haven't seen their apartments yet. So right now, the
Speaker 1: developers they said they don't have money to finish the
Speaker 1: projects even though they're already got the whole proceeds. And
Speaker 1: the households are saying, well, wait a minute, why am
Speaker 1: I paying for this if I can now see the apartment.
Speaker 1: That's why they are boycotting. And also there is a
Speaker 1: problem called so um double renting, so they are paying
Speaker 1: rent for their current apartment, they're also paying mortgage um
Speaker 1: um the future apartment that they hope that they can
Speaker 1: move into, right, and that's very expensive, especially during COVID
Speaker 1: zero lockdow when the economy is not very good. I mean,
Speaker 1: in the US is pretty common for uh, you know,
Speaker 1: younger middle class to pay thirty percent of their income
Speaker 1: to rent, So think about that as a benchmark. Like
Speaker 1: the Chinese. Chinese households they're paying like sixty sev of
Speaker 1: the income on two apartments one they can never see.
Speaker 1: That's why they're boycotting. And it's so fascinating because the
Speaker 1: boycolt spread it started small with some prospective residents not paying,
Speaker 1: and then it's spread to several hundred developers properties right July. Yeah,
Speaker 1: it's quite big, and it is really a big issue,
Speaker 1: Like it's probably the biggest issue during the last year
Speaker 1: of property crisis, because we think it's about ten percent
Speaker 1: of China's presow departments that have this issue right now,
Speaker 1: and it's a lot Will they ever be built? Julie, Well,
Speaker 1: the money has gone, like the developers they have throwing
Speaker 1: the toot so so right now, one solution is for
Speaker 1: the government to return the mortgage payments that the house
Speaker 1: some households already have paid and they say, okay, this
Speaker 1: this project is just not going to be built. And
Speaker 1: another solution is to bring the local government of their
Speaker 1: own enter crisis in and then say okay, we'll finished
Speaker 1: this building. So um, it's tough they're trying to figure
Speaker 1: out now. Well, it's really interesting because it started with
Speaker 1: the people and then the government had to endorse the move. Right,
Speaker 1: so the government came out and said, okay, that's fine,
Speaker 1: you can boycott the payments. Were unilaterally declaring that there
Speaker 1: is going to be no payments on x number of properties, right, Yes,
Speaker 1: and uh it makes sense, right like, what can the
Speaker 1: government do? I mean, if I see most of my
Speaker 1: income paign to rent, I can't do it right like
Speaker 1: as a consumer in the past, during the COVID zero era,
Speaker 1: right like, the government has has allowed small businesses not
Speaker 1: to pay, not to repay their loans and the interests
Speaker 1: and so on. So for so they had to expand
Speaker 1: the same policy to mortgage payers. But that's what they're
Speaker 1: doing right now. So surely this COVID zero strategy, which
Speaker 1: continues and is by all accounts, I'm pretty successful in
Speaker 1: terms of the health of the Chinese people with under
Speaker 1: a thousand cases reported over the last few days, is
Speaker 1: does it continue forever? When do zero COVID become something else?
Speaker 1: I so so right now, the whole Chinese economy I
Speaker 1: call the modern day sleeping builty uh replay. So basically
Speaker 1: when they try to hold down to these pop down
Speaker 1: policies and to November, when President Shi Jumping is expected
Speaker 1: to take on the third Trump right and after that,
Speaker 1: the general expectation is that the phoe called COVID, they're
Speaker 1: always going to be relaxed a little bit because this
Speaker 1: is just not sustainable. I mean, we all know how
Speaker 1: contagious on the chrome is really so uh so, like
Speaker 1: that's what they're waiting for, their hoping, you know, like
Speaker 1: another four five months China can continue on and still
Speaker 1: with those city ye lockdowns. I mean, one thousand cases
Speaker 1: doesn't sound like much, but if there's one case as
Speaker 1: more city can just go into a lockdown exactly. There
Speaker 1: are several lockdowns ongoing right now. Yeah, so one thousand cases,
Speaker 1: you like, that number actually is really big because one
Speaker 1: thousand cases can bean you know, quite a city is
Speaker 1: being locked up, which is frightening because that is people
Speaker 1: at home not being able to go to work, and
Speaker 1: the economic activity, as we've seen in the United States
Speaker 1: and elsewhere, when there's a lockdown, economic activity completely shuts down.
Speaker 1: What can President chij and things do otherwise to sort
Speaker 1: of spur economic growth past November? I mean, he also
Speaker 1: will want to look like he's doing as much as
Speaker 1: he can to help the Chinese economy, just as President
Speaker 1: Biden is trying to do at the moment before the interms.
Speaker 1: I think that the market expectation is that the China
Speaker 1: will have to you know, do quantitative eating, like the
Speaker 1: government is already bringing forward next year is found the
Speaker 1: students quota to this year, so if if continues, they
Speaker 1: will have to bring forward the quota from four. Basically,
Speaker 1: you know, flood the economy with a lot of money.
Speaker 1: But I'm not sure how well that works. Like some
Speaker 1: some people say, you know, China needs to send out
Speaker 1: stimulus to checks to people, right, just like the US
Speaker 1: has done. But she didn change. He's funny, he's a
Speaker 1: surprise side person. He Rabiti is Similus tracks to small businesses.
Speaker 1: And we've seen that policy before from she and thing. Yes,
Speaker 1: in twenty he gave quite a bit of money to
Speaker 1: small businesses, but not too people directly, right And as
Speaker 1: you say, it doesn't tend to work, or at least
Speaker 1: it didn't in that case. Would you try the same
Speaker 1: thing again though? He would. But nowaday's small businesses they
Speaker 1: don't want to reopen because they you know, like it's
Speaker 1: suddenly a neighborhood the COVID case, you're in trouble, right,
Speaker 1: like some some small business they just say, I don't
Speaker 1: want to reopen. And surely you're based in Hong Kong
Speaker 1: at the moment, the rules are changing in Hong Kong,
Speaker 1: so this sort of mandatory quarantine and government run facilities
Speaker 1: and so on is going away. The new Chief Executive
Speaker 1: seems to be making moves that look like they might
Speaker 1: be at odds with what the mainland is doing, but
Speaker 1: it may also very much be on purpose. Right, what's
Speaker 1: your sense of the order is that the new Chief Executive,
Speaker 1: John Lee is getting from the mainland. Well, I like
Speaker 1: to be on the optimistic side, but then I'm stuck
Speaker 1: in Hong Kong, so I have to be more optimistic, right.
Speaker 1: I think it's interesting when when she became here for
Speaker 1: the twenty sister Anniversary of July first, he talked about
Speaker 1: the merits of one country, two systems. So now that
Speaker 1: she's been executive and his ministers just talking about Hong
Speaker 1: Kong has this two systems framework going, and you know,
Speaker 1: there is a lot of leeway to do things that
Speaker 1: are different from mainland China. So even though we in
Speaker 1: theories still adhere to COVID zero, I mean what is
Speaker 1: zero is one thousand, zero hundred thousand zero, So they
Speaker 1: are given a little bit lead way and I feel
Speaker 1: that and also present she is the Hong Kong can
Speaker 1: rights from the ashes. I mean he has to talk
Speaker 1: of some policy dividends, right, like we are in ashes
Speaker 1: right now. She has to, you know, let us reopen
Speaker 1: to the rest of the world. Tuli ran there. We're
Speaker 1: now choosing to end all conversations, not with you, though,
Speaker 1: as always we love to hear from you. I'm at
Speaker 1: Bonny Quinn on Twitter, or send your thoughts to v
Speaker 1: Quinn at Bloomberg dot Net. Were produced, as always by
Speaker 1: Eric mollow Till next Time on Bloomberg Opinion. H