1 00:00:06,400 --> 00:00:10,039 Speaker 1: Welcome to Kobe Time, a podcast series on Markets and 2 00:00:10,050 --> 00:00:14,329 Speaker 1: Economies from Devis Group Research. I'm BA chief economist. Welcoming 3 00:00:14,340 --> 00:00:19,370 Speaker 1: you to our 104th episode today. It's all about China. 4 00:00:20,030 --> 00:00:23,100 Speaker 1: While in the US, you have this whole story of 5 00:00:23,110 --> 00:00:27,770 Speaker 1: resilient economic growth and still sticky inflation, which has combined 6 00:00:27,780 --> 00:00:31,559 Speaker 1: to create this narrative of interest rates going higher for longer. 7 00:00:31,680 --> 00:00:35,169 Speaker 1: The opposite is the case in China. Uh post pandemic 8 00:00:35,180 --> 00:00:39,700 Speaker 1: rebound has been underwhelming. Financial markets are listless and prove 9 00:00:39,709 --> 00:00:41,299 Speaker 1: that inflation momentum is muted 10 00:00:41,869 --> 00:00:45,388 Speaker 1: what to make of China's near and medium term outlook 11 00:00:45,400 --> 00:00:47,990 Speaker 1: in the context of all that. Well, we have a 12 00:00:48,000 --> 00:00:50,810 Speaker 1: seasoned expert with us to talk about all this. 13 00:00:51,098 --> 00:00:55,020 Speaker 1: Santiago Milan is a member of Wellington Management's Global Macro 14 00:00:55,029 --> 00:00:58,409 Speaker 1: strategy group. Wellington is one of the world's largest asset 15 00:00:58,419 --> 00:01:02,470 Speaker 1: managers with over a trillion dollars of client assets under management. 16 00:01:02,520 --> 00:01:06,339 Speaker 1: Santiago leads their efforts in thematic analysis and sector based 17 00:01:06,349 --> 00:01:10,639 Speaker 1: macro research for China and other Asian countries. He's an 18 00:01:10,650 --> 00:01:14,559 Speaker 1: active participant in investment strategy groups focusing on both debt 19 00:01:14,569 --> 00:01:17,979 Speaker 1: and equity markets. Santiago Milan, welcome to COVID 20 00:01:17,989 --> 00:01:18,410 Speaker 2: Time. 21 00:01:19,510 --> 00:01:22,199 Speaker 2: Thank you. It's my pleasure to be here. Uh 22 00:01:22,209 --> 00:01:24,620 Speaker 1: So good to talk to you, Santiago, you and I 23 00:01:24,629 --> 00:01:29,019 Speaker 1: met almost 15 years ago and uh we have met 24 00:01:29,029 --> 00:01:31,500 Speaker 1: in multiple places in Asia. I was just thinking, I 25 00:01:31,510 --> 00:01:33,540 Speaker 1: think we were on a trip to the Philippines once 26 00:01:33,550 --> 00:01:35,639 Speaker 1: I met you in Hong Kong many times. Great to 27 00:01:35,650 --> 00:01:36,660 Speaker 1: have you on the podcast. 28 00:01:37,730 --> 00:01:40,160 Speaker 2: Thank you. Yeah. No, it's great to see you. And 29 00:01:40,169 --> 00:01:42,190 Speaker 2: it's been quite an adventure over the years. 30 00:01:42,620 --> 00:01:46,769 Speaker 1: Indeed. You are talking to me from Boston, but that 31 00:01:46,779 --> 00:01:50,269 Speaker 1: has not been your address the past decade and a half. 32 00:01:50,279 --> 00:01:53,720 Speaker 1: So reflect on what you have been doing the past 33 00:01:53,730 --> 00:01:54,540 Speaker 1: decade and a half. 34 00:01:55,900 --> 00:01:59,809 Speaker 2: Sure, so well, it's been definitely an interesting decade. I 35 00:01:59,819 --> 00:02:04,769 Speaker 2: would say that I've been observing uh from almost a 36 00:02:04,779 --> 00:02:08,820 Speaker 2: front row seat, all of these changes and development that 37 00:02:08,830 --> 00:02:12,820 Speaker 2: has been happening in China and in Asia more broadly. 38 00:02:13,279 --> 00:02:16,320 Speaker 2: And China has changed a lot in 15 years when 39 00:02:16,330 --> 00:02:18,229 Speaker 2: I arrived in Hong Kong, 40 00:02:18,529 --> 00:02:21,800 Speaker 2: China was at the tail end of a spectacular boom 41 00:02:21,809 --> 00:02:25,779 Speaker 2: in the economy that had begun with China's accession to 42 00:02:25,788 --> 00:02:29,448 Speaker 2: the WTO and uh lots of reform and opening the 43 00:02:29,460 --> 00:02:33,149 Speaker 2: economy was booming, asset prices were booming everything the stock 44 00:02:33,160 --> 00:02:36,059 Speaker 2: market had more than tripled in three years. And the 45 00:02:36,070 --> 00:02:39,059 Speaker 2: world's leaders all came to Beijing 46 00:02:39,320 --> 00:02:45,750 Speaker 2: for the 2008 Olympics, that vibe was one of pervasive optimism. 47 00:02:45,758 --> 00:02:49,139 Speaker 2: And this carried through even through some of the doubts 48 00:02:49,149 --> 00:02:53,478 Speaker 2: of the global financial crisis. And indeed China did uh 49 00:02:53,490 --> 00:02:56,210 Speaker 2: do a lot of the heavy lifting to get the 50 00:02:56,220 --> 00:02:58,380 Speaker 2: world out of the GFC. 51 00:02:58,929 --> 00:03:02,478 Speaker 2: The economy actually did deliver since then when I arrived 52 00:03:02,490 --> 00:03:07,258 Speaker 2: in Hong Kong. Uh China's GDP was $3.5 trillion. It 53 00:03:07,270 --> 00:03:11,059 Speaker 2: was the fourth or fifth largest economy in the world. 54 00:03:11,070 --> 00:03:16,579 Speaker 2: Since then, China's GDP has grown fivefold. It's now $17 55 00:03:16,589 --> 00:03:18,720 Speaker 2: trillion plus. Um 56 00:03:19,250 --> 00:03:21,630 Speaker 2: and China was supposed to grow a lot, it did 57 00:03:21,639 --> 00:03:27,070 Speaker 2: grow a lot, however, not everything was as expected. In particular, 58 00:03:27,080 --> 00:03:30,800 Speaker 2: one would expect with this type of, of performance that 59 00:03:30,809 --> 00:03:33,978 Speaker 2: I just described that. Well, asset prices would have done 60 00:03:33,990 --> 00:03:36,330 Speaker 2: fantastic and guess what they didn't 61 00:03:36,830 --> 00:03:41,300 Speaker 2: in part for, for uh structural reasons. But also because 62 00:03:41,309 --> 00:03:44,639 Speaker 2: of uh this fact that I mentioned, which was that 63 00:03:44,649 --> 00:03:48,679 Speaker 2: the asset prices were in a huge bubble in 2007, 64 00:03:48,690 --> 00:03:53,059 Speaker 2: early 2008, the stock market in those 15 years has 65 00:03:53,070 --> 00:03:57,300 Speaker 2: actually been flat or slightly up or down depending on 66 00:03:57,309 --> 00:03:58,639 Speaker 2: how you measure it. 67 00:03:58,850 --> 00:04:03,360 Speaker 2: Hs CE I which is the index of China mainland 68 00:04:03,369 --> 00:04:09,720 Speaker 2: listed companies in Hong Kong is actually down almost 40%. 69 00:04:09,729 --> 00:04:13,339 Speaker 2: From the day I arrived in Hong Kong to the 70 00:04:13,350 --> 00:04:17,719 Speaker 2: day I left in Hong Kong. So economy grew by 71 00:04:17,730 --> 00:04:22,738 Speaker 2: five times stock market did nothing qualitative changes, however, have 72 00:04:22,750 --> 00:04:26,230 Speaker 2: been huge and I think they're even bigger than the 73 00:04:26,238 --> 00:04:27,238 Speaker 2: uh quantity 74 00:04:27,335 --> 00:04:33,605 Speaker 2: changes. What are these qualitative changes? Well, first, the infrastructure 75 00:04:33,615 --> 00:04:38,425 Speaker 2: stock has uh flourished in an unbelievable way when I 76 00:04:38,436 --> 00:04:43,286 Speaker 2: got to Hong Kong. Um The the first uh high 77 00:04:43,295 --> 00:04:47,805 Speaker 2: speed rail line was just being inaugurated from Beijing to Tianjin. 78 00:04:47,815 --> 00:04:51,565 Speaker 2: I remember I wrote it and it was really exciting now, 79 00:04:51,575 --> 00:04:54,864 Speaker 2: uh the country has by far the largest high speed 80 00:04:54,876 --> 00:04:55,726 Speaker 2: rail network 81 00:04:55,932 --> 00:05:00,411 Speaker 2: in the world. Uh 50 or so, Chinese cities have 82 00:05:00,421 --> 00:05:05,291 Speaker 2: subway systems and this connectivity infrastructure is massive and it 83 00:05:05,302 --> 00:05:09,592 Speaker 2: has all been developed in the last 15 years. Education 84 00:05:09,601 --> 00:05:14,231 Speaker 2: has also changed dramatically. When I uh got to Hong Kong, 85 00:05:14,242 --> 00:05:19,441 Speaker 2: there were around 2 million um graduates uh from higher 86 00:05:19,451 --> 00:05:24,252 Speaker 2: education every year. This year, it will be 11 million. 87 00:05:24,678 --> 00:05:28,619 Speaker 2: And finally, I'll mention one thing among many others that 88 00:05:28,630 --> 00:05:33,109 Speaker 2: have changed dramatically, the development of the service economy. And 89 00:05:33,119 --> 00:05:36,029 Speaker 2: I remember when I got uh to to Hong Kong 90 00:05:36,040 --> 00:05:39,420 Speaker 2: and and started uh having discussions about what was the 91 00:05:39,428 --> 00:05:41,469 Speaker 2: future of the Chinese economy. 92 00:05:41,678 --> 00:05:45,600 Speaker 2: There were many, many doubts about whether China would or 93 00:05:45,609 --> 00:05:51,390 Speaker 2: could develop a uh really serious and successful service economy 94 00:05:51,399 --> 00:05:55,190 Speaker 2: and indeed it has it's already there, there are challenges 95 00:05:55,200 --> 00:05:57,290 Speaker 2: and we can talk about them. But those are my 96 00:05:57,299 --> 00:06:01,390 Speaker 2: observations in the rear view mirror time to look forward. 97 00:06:03,019 --> 00:06:06,928 Speaker 1: Indeed, uh Santiago, I do wanna talk about some of 98 00:06:06,940 --> 00:06:09,910 Speaker 1: the structural challenges with you in the latter part of 99 00:06:09,920 --> 00:06:12,909 Speaker 1: this podcast, but let's stay with the near term for 100 00:06:12,920 --> 00:06:15,420 Speaker 1: the time being. So what's your sense of China and 101 00:06:15,428 --> 00:06:18,549 Speaker 1: macro at this point? So economic momentum for the second 102 00:06:18,559 --> 00:06:22,829 Speaker 1: half of this year uh underwhelming worrisome. Where, where do 103 00:06:22,839 --> 00:06:23,368 Speaker 1: you stand? 104 00:06:24,790 --> 00:06:29,070 Speaker 2: Yeah, absolutely. I think that um um it, it's, it's 105 00:06:29,079 --> 00:06:33,099 Speaker 2: very difficult to really calibrate uh a, a message that 106 00:06:33,109 --> 00:06:37,420 Speaker 2: uh targets an audience uh accurately. And the reason is 107 00:06:37,428 --> 00:06:42,339 Speaker 2: that the spectrum of beliefs about the Chinese economy is very, 108 00:06:42,350 --> 00:06:45,859 Speaker 2: very wide. But I agree with uh I think what 109 00:06:45,869 --> 00:06:49,420 Speaker 2: you um suggested, which is that there is a lot 110 00:06:49,428 --> 00:06:51,140 Speaker 2: of pervasive pessimism. 111 00:06:51,709 --> 00:06:56,320 Speaker 2: Um I think that pessimism is uh has a, a 112 00:06:56,329 --> 00:07:01,760 Speaker 2: grain of truth. Uh But I wouldn't really go overboard 113 00:07:01,769 --> 00:07:06,679 Speaker 2: with uh a narrative that suggests that China will collapse 114 00:07:06,690 --> 00:07:08,578 Speaker 2: or that China will face 115 00:07:09,470 --> 00:07:13,809 Speaker 2: a Japan like scenario in the future. Most importantly, because 116 00:07:13,820 --> 00:07:19,470 Speaker 2: China is still not a developed economy. Um But one 117 00:07:19,480 --> 00:07:22,290 Speaker 2: thing to keep in mind is that the policy and 118 00:07:22,299 --> 00:07:27,970 Speaker 2: institutional objectives of the Chinese government have changed significantly and 119 00:07:27,980 --> 00:07:32,640 Speaker 2: this goes to a burning question and a frustration I 120 00:07:32,649 --> 00:07:34,329 Speaker 2: would say for the analy 121 00:07:34,410 --> 00:07:37,750 Speaker 2: community and the investment community and some of the business community, 122 00:07:37,760 --> 00:07:41,980 Speaker 2: which is, you know, why aren't the policy makers as 123 00:07:41,989 --> 00:07:46,970 Speaker 2: worried as we are? Uh We read headlines about a 124 00:07:46,980 --> 00:07:53,720 Speaker 2: youth unemployment rate above 20%. Um We uh see the, 125 00:07:53,730 --> 00:07:58,940 Speaker 2: the the economic activity indicators come in uh worse than 126 00:07:58,950 --> 00:08:03,049 Speaker 2: expected uh month after month, what's going on? Why aren't 127 00:08:03,059 --> 00:08:03,880 Speaker 2: they worried? 128 00:08:04,290 --> 00:08:07,500 Speaker 2: And I think there are two answers there. The first 129 00:08:07,510 --> 00:08:14,160 Speaker 2: one is that the uh authorities actually frankly uh don't 130 00:08:14,170 --> 00:08:19,299 Speaker 2: see the type of negativity that the markets see they 131 00:08:19,385 --> 00:08:22,334 Speaker 2: are very focused on the medium term and in the 132 00:08:22,345 --> 00:08:26,744 Speaker 2: medium term, uh they feel that uh that, that, that 133 00:08:26,755 --> 00:08:30,355 Speaker 2: there needs to be a lot of patience and uh they, 134 00:08:30,364 --> 00:08:35,195 Speaker 2: they are uncomfortable with the type of breakneck uh uh 135 00:08:35,205 --> 00:08:40,674 Speaker 2: infrastructure driven growth that was there in the past, the 136 00:08:40,684 --> 00:08:43,973 Speaker 2: one that I mentioned, for example, that allowed China to 137 00:08:43,984 --> 00:08:46,135 Speaker 2: do a lot of the heavy lifting for the world 138 00:08:46,145 --> 00:08:48,815 Speaker 2: to get out of the global financial crisis. 139 00:08:49,349 --> 00:08:52,359 Speaker 2: And uh you know, and I know that you wanted 140 00:08:52,369 --> 00:08:54,960 Speaker 2: to stick to the short term, but I'll mention one 141 00:08:54,969 --> 00:08:57,840 Speaker 2: long term issue because I think it is very relevant 142 00:08:57,849 --> 00:09:00,780 Speaker 2: to the short term. And that is that I think 143 00:09:00,789 --> 00:09:01,479 Speaker 2: China 144 00:09:01,780 --> 00:09:06,890 Speaker 2: is right now in the process of uh shifting uh 145 00:09:06,900 --> 00:09:11,020 Speaker 2: or making its third big shift or big change in 146 00:09:11,030 --> 00:09:16,869 Speaker 2: the policy stance in the institutional priorities of uh the 147 00:09:16,880 --> 00:09:20,409 Speaker 2: uh of uh of, of, of the government and of development. 148 00:09:20,880 --> 00:09:24,228 Speaker 2: And uh what, what is the third? Well, the first 149 00:09:24,239 --> 00:09:29,289 Speaker 2: one was essentially the revolution itself, the establishment of communism 150 00:09:29,299 --> 00:09:33,510 Speaker 2: from the revolution in 1949. All the way until reform 151 00:09:33,520 --> 00:09:38,809 Speaker 2: and opening all of the economic activity in China was 152 00:09:38,820 --> 00:09:41,070 Speaker 2: politically developed, determined 153 00:09:41,489 --> 00:09:45,460 Speaker 2: that led China to a situation in the seventies where 154 00:09:45,469 --> 00:09:50,119 Speaker 2: its GDP per capita was lower than sub-saharan Africa. Its 155 00:09:50,130 --> 00:09:53,829 Speaker 2: um uh industrial share of the economy was lower than 156 00:09:53,840 --> 00:09:58,339 Speaker 2: North Korea and it was very clear that the uh 157 00:09:58,349 --> 00:10:02,880 Speaker 2: some of the development objectives of uh the the policymakers 158 00:10:02,890 --> 00:10:05,460 Speaker 2: were not going to be met. And this led to 159 00:10:05,469 --> 00:10:10,359 Speaker 2: the second big period of uh or institutional framework 160 00:10:10,455 --> 00:10:13,325 Speaker 2: which was reform and opening. And we know what that 161 00:10:13,335 --> 00:10:17,445 Speaker 2: was all about. It was about letting market forces enter 162 00:10:17,455 --> 00:10:22,325 Speaker 2: the economy and unleash massive amounts of economic activity. It 163 00:10:22,335 --> 00:10:27,344 Speaker 2: worked very well in achieving development itself and growth itself. 164 00:10:27,354 --> 00:10:31,525 Speaker 2: But around 10 years ago, again, China found itself with 165 00:10:31,534 --> 00:10:36,104 Speaker 2: a bunch of externalities to that model that its policymakers 166 00:10:36,114 --> 00:10:39,325 Speaker 2: didn't particularly like. Um 167 00:10:39,619 --> 00:10:43,630 Speaker 2: And what are those externalities? They are massive uh uh 168 00:10:43,640 --> 00:10:50,070 Speaker 2: environmental damage. They are a big, big inequality by some measures. 169 00:10:50,080 --> 00:10:54,489 Speaker 2: Uh Chinese income inequality and also wealth inequality are even 170 00:10:54,500 --> 00:10:59,559 Speaker 2: bigger than the United States. Uh And also uh one 171 00:10:59,570 --> 00:11:04,250 Speaker 2: other externality was uh that the uh open markets and 172 00:11:04,341 --> 00:11:09,111 Speaker 2: uh access to uh uh uh these types of opportunities 173 00:11:09,122 --> 00:11:13,551 Speaker 2: created pockets of wealth that combined with pockets of power 174 00:11:13,622 --> 00:11:19,711 Speaker 2: that uh created a degree of political uh uncomfortableness that 175 00:11:19,721 --> 00:11:23,410 Speaker 2: the the that the leadership was not happy with. And 176 00:11:23,421 --> 00:11:28,891 Speaker 2: so now we are in the third big era of 177 00:11:28,921 --> 00:11:28,971 Speaker 2: uh in 178 00:11:29,064 --> 00:11:34,693 Speaker 2: institutions, policy making and governance. And let's call it the 179 00:11:34,703 --> 00:11:38,113 Speaker 2: era of common prosperity for lack of a better word. 180 00:11:38,304 --> 00:11:42,733 Speaker 2: And we don't really know what this era really means 181 00:11:42,744 --> 00:11:46,713 Speaker 2: just like in the beginning of reform and opening, we 182 00:11:46,723 --> 00:11:49,882 Speaker 2: didn't know what it would be like, right. Now we 183 00:11:49,893 --> 00:11:52,814 Speaker 2: are crossing the river by feeling the stones if you 184 00:11:52,823 --> 00:11:53,443 Speaker 2: will 185 00:11:53,785 --> 00:11:58,176 Speaker 2: to determine what uh the new era of common prosperity means. 186 00:11:58,184 --> 00:12:02,815 Speaker 2: But one thing we know for sure, the um emphasis 187 00:12:02,825 --> 00:12:06,916 Speaker 2: on growth uh at any cost and the emphasis on 188 00:12:06,926 --> 00:12:11,895 Speaker 2: material advancement is not there. And that answers a lot 189 00:12:11,905 --> 00:12:17,466 Speaker 2: of this frustrating question. Why aren't the policymakers as worried 190 00:12:17,476 --> 00:12:18,415 Speaker 2: as the market? 191 00:12:19,849 --> 00:12:25,270 Speaker 1: Fascinating uh you know, characterization Santiago would I would assume 192 00:12:25,280 --> 00:12:29,780 Speaker 1: that that lack of clarity runs beyond the analyst community 193 00:12:29,789 --> 00:12:33,900 Speaker 1: and spills over into the day to day Chinese population. 194 00:12:34,190 --> 00:12:36,789 Speaker 1: Uh And would you say that uh sort of, you know, 195 00:12:36,799 --> 00:12:39,659 Speaker 1: frustration or lack of clarity as to where things are 196 00:12:39,669 --> 00:12:42,679 Speaker 1: going is one of the reasons why we haven't seen 197 00:12:42,690 --> 00:12:46,900 Speaker 1: a big post pandemic bump uh because that, that uncertainty 198 00:12:46,909 --> 00:12:51,489 Speaker 1: clouds people's animals, ferrets and exuberance and therefore, yeah, I 199 00:12:51,500 --> 00:12:53,709 Speaker 1: can go out now, but I don't think I'm going 200 00:12:53,719 --> 00:12:57,400 Speaker 1: to spend a lot of money or plan for a major, 201 00:12:57,409 --> 00:12:59,099 Speaker 1: you know, expansion of my company. 202 00:13:00,690 --> 00:13:04,859 Speaker 2: Absolutely. I think that's a, that's, that's very much right. Obviously, the, 203 00:13:04,869 --> 00:13:07,919 Speaker 2: the the whole picture is a mosaic that is complex 204 00:13:07,929 --> 00:13:10,780 Speaker 2: and includes more than just this. But this ingredient I 205 00:13:10,789 --> 00:13:15,869 Speaker 2: think is very, very important. Um You see that the 206 00:13:15,880 --> 00:13:18,880 Speaker 2: uh on, on this uh area, the government is not 207 00:13:18,890 --> 00:13:20,859 Speaker 2: exactly standing still. 208 00:13:21,179 --> 00:13:25,309 Speaker 2: Uh Yes, there are changes and those changes create uncertainty, 209 00:13:25,330 --> 00:13:28,450 Speaker 2: but you do see parts of the leadership, for example, 210 00:13:28,460 --> 00:13:34,669 Speaker 2: the Premier Li Chang um frequently uh approaching the private 211 00:13:34,679 --> 00:13:41,840 Speaker 2: sector and uh other uh constituents in the economy, trying 212 00:13:41,849 --> 00:13:43,809 Speaker 2: to reassure them that the role of 213 00:13:43,880 --> 00:13:49,330 Speaker 2: the private sector will still be uh well. Uh the 214 00:13:49,340 --> 00:13:53,450 Speaker 2: the the almost the core of the Chinese uh development, 215 00:13:53,460 --> 00:13:58,348 Speaker 2: producing the bulk of the employment, producing the bulk of 216 00:13:58,359 --> 00:14:02,809 Speaker 2: the consumption and therefore the bulk of the momentum for 217 00:14:02,820 --> 00:14:06,450 Speaker 2: the uh Chinese economy. With that said 218 00:14:06,900 --> 00:14:09,969 Speaker 2: um II I, you know, back to your point on, 219 00:14:09,979 --> 00:14:14,549 Speaker 2: on the issue of confidence, it's important to remember that 220 00:14:14,559 --> 00:14:20,549 Speaker 2: the three years of COVID and GEOPOLITICAL conflict and also 221 00:14:20,559 --> 00:14:28,270 Speaker 2: political transition were quite traumatic uh for the Chinese consumer 222 00:14:28,280 --> 00:14:32,369 Speaker 2: and business environment much more. So I would say than 223 00:14:32,465 --> 00:14:35,455 Speaker 2: for the rest of the world, this is not just 224 00:14:35,465 --> 00:14:39,315 Speaker 2: about the lockdowns, this is also about some of these 225 00:14:39,325 --> 00:14:44,174 Speaker 2: signals about changes in institutions. I would say one big 226 00:14:44,184 --> 00:14:47,575 Speaker 2: one that the markets of course were very much affected 227 00:14:47,585 --> 00:14:51,825 Speaker 2: by uh was the regulation uh of the uh uh 228 00:14:51,835 --> 00:14:55,815 Speaker 2: uh uh I would say of uh certain areas of 229 00:14:55,825 --> 00:14:57,974 Speaker 2: private services including 230 00:14:58,229 --> 00:15:03,640 Speaker 2: uh platform uh internet companies. And of course, uh the 231 00:15:03,650 --> 00:15:09,320 Speaker 2: uh private education sector and those two things among others 232 00:15:09,330 --> 00:15:14,719 Speaker 2: uh got people very, very nervous about the overall direction 233 00:15:14,729 --> 00:15:18,880 Speaker 2: of the Chinese economy. And now we are again, I 234 00:15:18,890 --> 00:15:21,580 Speaker 2: would say in this process of discovery 235 00:15:21,666 --> 00:15:25,435 Speaker 2: of what the true environment is like. My assessment of 236 00:15:25,445 --> 00:15:31,286 Speaker 2: this is that the true environment is definitely not as 237 00:15:31,296 --> 00:15:34,645 Speaker 2: it was in the era of reform and opening. So 238 00:15:34,656 --> 00:15:38,255 Speaker 2: it certainly is different but it probably is not as 239 00:15:38,265 --> 00:15:41,666 Speaker 2: negative as some of the more negative narratives that there 240 00:15:41,676 --> 00:15:44,995 Speaker 2: are out there and probably not as negative or 241 00:15:45,101 --> 00:15:48,151 Speaker 2: very likely not as negative as what some of the 242 00:15:48,161 --> 00:15:52,031 Speaker 2: more depressed areas of the Chinese stock market are suggesting 243 00:15:52,041 --> 00:15:55,192 Speaker 2: in particular, I would point to these Hong Kong listed 244 00:15:55,202 --> 00:16:00,901 Speaker 2: Chinese stocks that are owned mostly by international investors which 245 00:16:00,911 --> 00:16:03,992 Speaker 2: are trading at some of the lowest valuations depending on 246 00:16:04,002 --> 00:16:07,581 Speaker 2: how you measure it in 20 years, sometimes more than 247 00:16:07,591 --> 00:16:08,452 Speaker 2: 20 years, 248 00:16:09,409 --> 00:16:13,440 Speaker 1: right? So what does that mean for the financial markets 249 00:16:13,450 --> 00:16:17,210 Speaker 1: in the near term do is is a valuation attractive 250 00:16:17,219 --> 00:16:20,359 Speaker 1: because it's low or the valuation is not attractive because 251 00:16:20,369 --> 00:16:22,059 Speaker 1: the low evaluation is telling us something 252 00:16:23,520 --> 00:16:27,000 Speaker 2: you have to ask a difficult question, didn't you? Uh 253 00:16:28,909 --> 00:16:32,210 Speaker 2: Yeah, I think, I think um uh well, you know, 254 00:16:32,219 --> 00:16:34,390 Speaker 2: the first thing I would say is that if you 255 00:16:34,400 --> 00:16:37,940 Speaker 2: look at equities, um uh there is a very, very 256 00:16:37,950 --> 00:16:42,619 Speaker 2: big uh segmentation in the market offshore and onshore. Uh 257 00:16:42,630 --> 00:16:46,460 Speaker 2: My view is that the offshore equities are simply too 258 00:16:46,469 --> 00:16:49,859 Speaker 2: cheap even if we factor in uh uh the the 259 00:16:49,869 --> 00:16:55,940 Speaker 2: the fact that the the the developments are actually concerning. 260 00:16:56,429 --> 00:17:02,739 Speaker 2: Um I uh frequently describe uh the valuation for these 261 00:17:02,750 --> 00:17:06,540 Speaker 2: stocks as the inverse of a bubble. Why is that 262 00:17:06,550 --> 00:17:11,099 Speaker 2: a useful concept? Well, a bubble on the upside typically 263 00:17:11,109 --> 00:17:14,819 Speaker 2: forms because the market recognizes a fundamental, 264 00:17:14,905 --> 00:17:20,574 Speaker 2: mentally structurally positive aspect of a market or an industry. 265 00:17:20,795 --> 00:17:24,415 Speaker 2: The internet today, what we're doing today actually, right now 266 00:17:24,425 --> 00:17:28,535 Speaker 2: in this conversation is probably 20 times better than what 267 00:17:28,545 --> 00:17:31,675 Speaker 2: anyone imagined in the year 2000. And yet it was 268 00:17:31,685 --> 00:17:33,295 Speaker 2: time to sell stocks. 269 00:17:33,800 --> 00:17:37,050 Speaker 2: Um back to the China example, I think the market 270 00:17:37,060 --> 00:17:41,069 Speaker 2: did recognize that there are some reasons for concern. As 271 00:17:41,079 --> 00:17:44,069 Speaker 2: I said there, this is a big change in institutions. 272 00:17:44,079 --> 00:17:47,020 Speaker 2: This is a big change in the policy stance, lots 273 00:17:47,030 --> 00:17:51,160 Speaker 2: of uncertainty is involved. But the way that these stocks 274 00:17:51,170 --> 00:17:52,050 Speaker 2: are trading 275 00:17:52,790 --> 00:17:56,919 Speaker 2: at uh you know, single digit uh trend pe s 276 00:17:56,930 --> 00:18:01,349 Speaker 2: and valuations that are lower than they have been in 277 00:18:01,359 --> 00:18:05,890 Speaker 2: a multiple decades suggests to me that this is overdone 278 00:18:06,069 --> 00:18:10,869 Speaker 2: and that uh there is upside in uh the offshore stocks, 279 00:18:10,880 --> 00:18:14,930 Speaker 2: the onshore stocks are much more complicated on the surface. 280 00:18:14,939 --> 00:18:18,890 Speaker 2: They look in my view basically fairly valued. 281 00:18:19,270 --> 00:18:22,319 Speaker 2: But the problem is that once you open up the 282 00:18:22,329 --> 00:18:26,149 Speaker 2: hood and you see uh you, you have a look 283 00:18:26,160 --> 00:18:30,000 Speaker 2: at the stocks that uh investors actually like that bottom 284 00:18:30,010 --> 00:18:34,380 Speaker 2: up analysts uh find quality in, you find that lots 285 00:18:34,390 --> 00:18:38,339 Speaker 2: of these stocks are actually again in a segmented market 286 00:18:38,349 --> 00:18:42,619 Speaker 2: trading at very very high valuations. And so it is 287 00:18:42,630 --> 00:18:47,399 Speaker 2: a very difficult job to be a China stock picker, 288 00:18:49,199 --> 00:18:51,400 Speaker 1: right? I mean, like just this year, I mean, we've 289 00:18:51,410 --> 00:18:56,099 Speaker 1: seen China bank stocks and telecom stocks rally uh something 290 00:18:56,109 --> 00:18:57,989 Speaker 1: that they haven't done in a very long time. And 291 00:18:58,000 --> 00:19:00,790 Speaker 1: the darlings of recent years, the tech stocks in particular 292 00:19:00,800 --> 00:19:06,810 Speaker 1: have done absolutely nothing. Uh onshore or offshore. Um Santiago earlier, 293 00:19:06,819 --> 00:19:11,188 Speaker 1: you were talking about authorities have begun to make overtures 294 00:19:11,199 --> 00:19:14,589 Speaker 1: to market participants saying that, you know, the 295 00:19:15,349 --> 00:19:18,589 Speaker 1: tumult of recent years, you know, it's behind us, things 296 00:19:18,599 --> 00:19:21,640 Speaker 1: are gonna be constructive, private sector has an important role. 297 00:19:21,660 --> 00:19:25,780 Speaker 1: So go out innovate, invest, we're, we're behind you. So 298 00:19:25,790 --> 00:19:30,000 Speaker 1: let's talk about the whole regulatory backlash of the last 299 00:19:30,010 --> 00:19:33,198 Speaker 1: couple of years. And is it indeed your sense that 300 00:19:33,209 --> 00:19:33,839 Speaker 1: it is where 301 00:19:34,020 --> 00:19:36,229 Speaker 1: reflection point that they are not gonna be as much 302 00:19:36,239 --> 00:19:41,329 Speaker 1: backlash going forward? Um I sort of think you sort 303 00:19:41,339 --> 00:19:45,709 Speaker 1: of touched upon the services sector, particularly education tach for me, gaming, 304 00:19:45,719 --> 00:19:48,410 Speaker 1: crypto other things come to mind and of course, general 305 00:19:48,420 --> 00:19:51,688 Speaker 1: data privacy issue a around which, you know, some tech 306 00:19:51,699 --> 00:19:56,670 Speaker 1: companies have been uh really, really, you know, uh hurt by, 307 00:19:56,680 --> 00:20:01,270 Speaker 1: by the uh regulatory uh out. Uh I was gonna 308 00:20:01,280 --> 00:20:03,650 Speaker 1: say overreach, but rather regulatory action. 309 00:20:03,839 --> 00:20:08,010 Speaker 1: So where are we with respect to the whole regulatory framework? 310 00:20:08,650 --> 00:20:09,199 Speaker 2: Hm. 311 00:20:09,969 --> 00:20:13,560 Speaker 2: Yeah. No, that's a great question. Um My view uh 312 00:20:13,569 --> 00:20:17,978 Speaker 2: you know, as, as, as, as typical is that, you know, 313 00:20:17,989 --> 00:20:19,899 Speaker 2: it's a, it's a, it's a mixed bag. I I 314 00:20:19,910 --> 00:20:24,339 Speaker 2: would say that um the, the, the place I would 315 00:20:24,349 --> 00:20:29,719 Speaker 2: start is that the regulation of these sectors was inevitable 316 00:20:29,729 --> 00:20:33,530 Speaker 2: and it's not in just inevitable in China, it's inevitable 317 00:20:33,540 --> 00:20:35,679 Speaker 2: pretty much everywhere else in the world. 318 00:20:35,969 --> 00:20:40,169 Speaker 2: A lot of the regulatory steps that really got the 319 00:20:40,180 --> 00:20:46,030 Speaker 2: market spooked were very similar types of data regulation and 320 00:20:46,160 --> 00:20:51,180 Speaker 2: anti monopoly regulation. Uh That for example, Europe has now 321 00:20:51,189 --> 00:20:54,239 Speaker 2: with that said, the elephant in the room is that 322 00:20:54,250 --> 00:20:58,619 Speaker 2: Europe has no world class internet companies and it is 323 00:20:58,630 --> 00:21:02,050 Speaker 2: probably no coincidence that they have strong regulation and no 324 00:21:02,060 --> 00:21:03,939 Speaker 2: world class internet companies. 325 00:21:04,619 --> 00:21:08,989 Speaker 2: The strong regulation in China, I think is unlikely to 326 00:21:09,000 --> 00:21:12,770 Speaker 2: eliminate the internet companies altogether as it did in Europe 327 00:21:12,780 --> 00:21:17,050 Speaker 2: or the big ones at least because uh China is 328 00:21:17,060 --> 00:21:20,689 Speaker 2: essentially a protected market and it is very difficult for 329 00:21:20,699 --> 00:21:25,550 Speaker 2: foreigners to compete in that market because of the obvious reasons. 330 00:21:25,839 --> 00:21:26,469 Speaker 2: Um 331 00:21:26,910 --> 00:21:30,880 Speaker 2: But uh nevertheless, uh you know, it's, it's, it's important 332 00:21:30,890 --> 00:21:34,099 Speaker 2: to uh to realize that these regulations are there and 333 00:21:34,109 --> 00:21:36,979 Speaker 2: it's not, they're not going to go away with that 334 00:21:36,989 --> 00:21:42,060 Speaker 2: said um within the bird cage if, if you will 335 00:21:42,069 --> 00:21:43,400 Speaker 2: of these regulations, 336 00:21:43,660 --> 00:21:48,109 Speaker 2: uh there is uh no reason why these companies cannot 337 00:21:48,119 --> 00:21:51,020 Speaker 2: continue to grow and to grow a lot. It's going 338 00:21:51,030 --> 00:21:54,329 Speaker 2: to be a more competitive landscape than it is in 339 00:21:54,339 --> 00:21:59,390 Speaker 2: other places. Valuations definitely need to adjust for these, for 340 00:21:59,400 --> 00:22:03,030 Speaker 2: this new reality, but they have already a adjusted. 341 00:22:03,550 --> 00:22:07,000 Speaker 2: And the last thing that I would say is that 342 00:22:07,010 --> 00:22:10,189 Speaker 2: the government seems to be kind of of two minds 343 00:22:10,199 --> 00:22:15,599 Speaker 2: about the service sector and service driven GDP growth. On 344 00:22:15,609 --> 00:22:20,839 Speaker 2: the one hand, uh lots of the leadership recognizes that 345 00:22:20,849 --> 00:22:25,719 Speaker 2: the service sector is essentially the engine of job creation 346 00:22:25,729 --> 00:22:30,069 Speaker 2: in China. In fact, manufacturing employment in China peaked around 347 00:22:30,079 --> 00:22:33,060 Speaker 2: a decade ago, has been coming down ever since. 348 00:22:33,380 --> 00:22:37,079 Speaker 2: Uh manufacturing output continues to rise because of automation and 349 00:22:37,089 --> 00:22:42,119 Speaker 2: other things. Um And uh you know, this role uh 350 00:22:42,130 --> 00:22:47,329 Speaker 2: as an employment creator is very uh important and valued 351 00:22:47,339 --> 00:22:51,290 Speaker 2: by the, the leadership. And they are uh are very unlikely, 352 00:22:51,300 --> 00:22:54,589 Speaker 2: I would say to kill this goose that lays golden 353 00:22:54,599 --> 00:22:55,930 Speaker 2: eggs in that sense. 354 00:22:56,349 --> 00:22:58,390 Speaker 2: And the last thing that I would say is that 355 00:22:58,400 --> 00:23:03,239 Speaker 2: there's also a recognition by the leadership that the service sector. 356 00:23:03,250 --> 00:23:10,520 Speaker 2: And I would say this interconnected digital uh service uh sector, 357 00:23:10,530 --> 00:23:11,300 Speaker 2: the world of platform, 358 00:23:11,380 --> 00:23:15,430 Speaker 2: platform economies and so on virtual worlds. Um uh It 359 00:23:15,439 --> 00:23:21,089 Speaker 2: is very, very important to essentially uh do something very 360 00:23:21,099 --> 00:23:25,439 Speaker 2: basic but critical for economic development, which is to enlarge 361 00:23:25,449 --> 00:23:26,329 Speaker 2: the market. 362 00:23:26,750 --> 00:23:30,959 Speaker 2: The market is much, much bigger when uh there is 363 00:23:30,969 --> 00:23:36,280 Speaker 2: so much connectivity when uh each individual supplier has access 364 00:23:36,290 --> 00:23:39,958 Speaker 2: to not just a handful of customers around their neighborhood, 365 00:23:39,969 --> 00:23:45,359 Speaker 2: but to a huge national market. And uh therefore, uh 366 00:23:45,454 --> 00:23:49,563 Speaker 2: the the the the the service sector in general and 367 00:23:49,734 --> 00:23:55,444 Speaker 2: digital interconnected services in particular are something that uh is 368 00:23:55,454 --> 00:24:00,864 Speaker 2: unlikely to be crushed by the government. The heavy lifting 369 00:24:00,875 --> 00:24:04,064 Speaker 2: of the regulation in my view is already done. 370 00:24:04,969 --> 00:24:09,180 Speaker 1: So, speaking of digital services uh that this year is 371 00:24:09,189 --> 00:24:12,390 Speaker 1: all about large language models. And A I and we 372 00:24:12,400 --> 00:24:15,160 Speaker 1: have seen amazing run up in still a group of 373 00:24:15,170 --> 00:24:18,900 Speaker 1: stocks in the US around that narrative seem to be 374 00:24:18,910 --> 00:24:21,979 Speaker 1: missing that in the context of China. Although like if 375 00:24:21,989 --> 00:24:24,910 Speaker 1: I follow South China Morning Post, there are 376 00:24:25,410 --> 00:24:28,300 Speaker 1: stories that are coming out about how companies from Alibaba 377 00:24:28,310 --> 00:24:30,780 Speaker 1: or Baidu are sort of bringing in various layers of 378 00:24:30,790 --> 00:24:34,239 Speaker 1: A I capability. The authorities are engaging the private sector 379 00:24:34,250 --> 00:24:38,489 Speaker 1: and setting up some degree of thinking and uniform standards 380 00:24:38,500 --> 00:24:41,650 Speaker 1: about A I. Um but somehow or the other, it's 381 00:24:41,660 --> 00:24:44,959 Speaker 1: not really catching the global investors interest. 382 00:24:46,739 --> 00:24:49,109 Speaker 2: Yeah, I think that's uh that's interesting. I mean, to 383 00:24:49,119 --> 00:24:51,890 Speaker 2: your point, uh uh there are places where it is 384 00:24:51,900 --> 00:24:56,319 Speaker 2: catching in interest and in particular in the shares when 385 00:24:56,329 --> 00:25:00,250 Speaker 2: you look at certain comp companies that are geared towards this, 386 00:25:00,260 --> 00:25:03,649 Speaker 2: some of which you mentioned, um uh they, they have 387 00:25:03,660 --> 00:25:07,959 Speaker 2: performed quite well. Uh But uh but I, I definitely 388 00:25:07,969 --> 00:25:11,349 Speaker 2: agree that overall there isn't that sense of hype? 389 00:25:11,839 --> 00:25:16,290 Speaker 2: Um I, I would say that uh that, that, that 390 00:25:16,300 --> 00:25:19,030 Speaker 2: a lack of hype uh does not mean that there 391 00:25:19,040 --> 00:25:23,989 Speaker 2: is an absence of uh the A I uh development 392 00:25:24,000 --> 00:25:28,560 Speaker 2: in China. I think it's important to remember that the 393 00:25:28,569 --> 00:25:30,689 Speaker 2: IP for A I 394 00:25:30,920 --> 00:25:35,930 Speaker 2: uh is uh very much uh uh well, well, China is, 395 00:25:35,939 --> 00:25:40,290 Speaker 2: is a, a very, very uh important player in generating 396 00:25:40,300 --> 00:25:44,260 Speaker 2: the IP. If you look at, for example, the proportion 397 00:25:44,270 --> 00:25:50,699 Speaker 2: of cited peer reviewed papers uh in the top 1%. 398 00:25:50,949 --> 00:25:55,640 Speaker 2: Um China is uh I I think number one or 399 00:25:55,650 --> 00:25:57,510 Speaker 2: close to number one. 400 00:25:57,949 --> 00:26:00,889 Speaker 2: And if you look at, as you said, uh the 401 00:26:00,900 --> 00:26:04,938 Speaker 2: development of the A I, uh there are multiple companies 402 00:26:04,949 --> 00:26:06,699 Speaker 2: that are doing this. 403 00:26:07,089 --> 00:26:10,760 Speaker 2: Um One thing to keep in mind is that China 404 00:26:10,790 --> 00:26:15,530 Speaker 2: as it was with other digital services is going to 405 00:26:15,540 --> 00:26:20,719 Speaker 2: take a much more conservative attitude towards the regulation of this. 406 00:26:20,849 --> 00:26:25,159 Speaker 2: And perhaps a lot of what is uh keeping uh 407 00:26:25,170 --> 00:26:29,739 Speaker 2: the well the overall participants and the investors from reaching 408 00:26:29,750 --> 00:26:33,479 Speaker 2: a stage of euphoria is the uncertainty about 409 00:26:33,550 --> 00:26:38,968 Speaker 2: what that regulation means. I understand that. And as you 410 00:26:38,979 --> 00:26:42,880 Speaker 2: might guess, you know, my opinion lands somewhere in the middle, 411 00:26:42,890 --> 00:26:45,839 Speaker 2: I don't think that a hype around A I in 412 00:26:45,849 --> 00:26:52,709 Speaker 2: China is merited because there is uncertainty. But I also 413 00:26:52,719 --> 00:26:56,359 Speaker 2: hear a lot of pessimism that China will fall far 414 00:26:56,369 --> 00:26:59,938 Speaker 2: behind the rest of the world in A I because 415 00:27:01,030 --> 00:27:03,819 Speaker 2: of some of these issues and also because of the 416 00:27:03,829 --> 00:27:07,680 Speaker 2: geopolitical issues having to do with semiconductors. And my view 417 00:27:07,689 --> 00:27:11,129 Speaker 2: is that um uh in, in the medium term, uh 418 00:27:11,140 --> 00:27:16,300 Speaker 2: China will continue to be at the forefront of these developments. 419 00:27:16,310 --> 00:27:20,900 Speaker 2: Uh and we will see uh huge amounts of applications 420 00:27:20,910 --> 00:27:21,859 Speaker 2: of A I. 421 00:27:22,130 --> 00:27:26,109 Speaker 2: Uh One last thing um is that uh A I 422 00:27:26,119 --> 00:27:30,760 Speaker 2: in China is also uh much more present than in 423 00:27:30,770 --> 00:27:34,739 Speaker 2: other parts of the world in things like city management, 424 00:27:34,750 --> 00:27:40,040 Speaker 2: smart cities. Uh And uh this is probably under recognized 425 00:27:40,119 --> 00:27:45,790 Speaker 2: uh how much efficiency uh gains there are from this, 426 00:27:45,800 --> 00:27:48,719 Speaker 2: in particular, in a world that tends to look at 427 00:27:48,729 --> 00:27:53,698 Speaker 2: these headlines through the uh dark, darker side of the 428 00:27:53,709 --> 00:27:57,390 Speaker 2: narrative which uh relates to control of the population and 429 00:27:57,400 --> 00:27:58,010 Speaker 2: so on. 430 00:27:58,810 --> 00:28:02,280 Speaker 1: Santiago, not now, but rather six years ago, I was 431 00:28:02,290 --> 00:28:06,439 Speaker 1: using Ride hailing apps in Shanghai and they had simultaneous translation. 432 00:28:06,680 --> 00:28:09,219 Speaker 1: Uh And uh I was sort of, you know, reading 433 00:28:09,229 --> 00:28:11,900 Speaker 1: about the way uh the 434 00:28:12,260 --> 00:28:16,449 Speaker 1: supply of ride hailing cars were managed through their A 435 00:28:16,459 --> 00:28:20,889 Speaker 1: I framework uh calibrating toward, you know, rush hour versus not, 436 00:28:20,900 --> 00:28:22,958 Speaker 1: I mean, these things, they have been all hats at 437 00:28:22,969 --> 00:28:25,579 Speaker 1: it for a while. Um So I fully agree with 438 00:28:25,589 --> 00:28:28,729 Speaker 1: you that uh the, the layers of application, it's not 439 00:28:28,739 --> 00:28:32,229 Speaker 1: like something that began or ending with Chad GP T 440 00:28:32,239 --> 00:28:33,810 Speaker 1: they've been at it for a while. 441 00:28:36,729 --> 00:28:39,890 Speaker 2: Yeah, that's right. Uh you know, image recognition is a 442 00:28:39,900 --> 00:28:43,310 Speaker 2: huge part of A I. And uh you know, China 443 00:28:43,319 --> 00:28:48,790 Speaker 2: was there from the beginning. Uh their uh companies uh and, 444 00:28:48,800 --> 00:28:53,079 Speaker 2: and their institutes were um you know, at the, at 445 00:28:53,089 --> 00:28:58,010 Speaker 2: the forefront of uh their competitions in image recognition, for example, 446 00:28:58,020 --> 00:29:00,430 Speaker 2: which was uh you know, one of the first big 447 00:29:00,439 --> 00:29:04,250 Speaker 2: steps in the development of A I and now I, I'll, 448 00:29:04,260 --> 00:29:05,430 Speaker 2: I'll give you an example 449 00:29:05,880 --> 00:29:10,349 Speaker 2: um of something that I saw recently. Uh in, in China, 450 00:29:10,359 --> 00:29:15,930 Speaker 2: which was um a, a uh, a service that allows 451 00:29:15,939 --> 00:29:21,250 Speaker 2: for companies that uh do the maintenance and the checking 452 00:29:21,260 --> 00:29:23,229 Speaker 2: of uh power lines 453 00:29:23,530 --> 00:29:27,260 Speaker 2: uh to do this without people. It used to be 454 00:29:27,329 --> 00:29:30,380 Speaker 2: that you had to have armies of thousands of people 455 00:29:30,390 --> 00:29:34,420 Speaker 2: that would physically climb each utility pole and check to 456 00:29:34,430 --> 00:29:36,439 Speaker 2: make sure everything is. All right 457 00:29:36,670 --> 00:29:43,660 Speaker 2: now with uh computer vision and image recognition and artificial intelligence. 458 00:29:43,670 --> 00:29:48,050 Speaker 2: This is done in a period of three days using 459 00:29:48,060 --> 00:29:53,569 Speaker 2: three people that manage drones uh remotely. Uh whereas it 460 00:29:53,579 --> 00:29:56,729 Speaker 2: used to take thousands of people uh more than a 461 00:29:56,739 --> 00:29:59,420 Speaker 2: month to do it in the past. So these are 462 00:29:59,430 --> 00:30:02,959 Speaker 2: the types of things that can happen with the development 463 00:30:02,969 --> 00:30:03,839 Speaker 2: of A I 464 00:30:05,260 --> 00:30:08,910 Speaker 1: um Santiago earlier at the very beginning of this conversation, 465 00:30:08,920 --> 00:30:11,219 Speaker 1: when we were talking about you coming to Hong Kong 466 00:30:11,229 --> 00:30:14,229 Speaker 1: 15 years ago and you mentioned that China played a 467 00:30:14,239 --> 00:30:17,819 Speaker 1: very important counter cital role at that time with very 468 00:30:17,829 --> 00:30:20,859 Speaker 1: large stimulus measures just as the world economy was struggling 469 00:30:20,869 --> 00:30:23,969 Speaker 1: under the global financial crisis. But of course, the legacy 470 00:30:23,979 --> 00:30:27,219 Speaker 1: of that big stimulus was uh you know, mother of 471 00:30:27,229 --> 00:30:28,810 Speaker 1: all debt formation 472 00:30:29,079 --> 00:30:32,650 Speaker 1: and that trend has just progressively gotten worse over the 473 00:30:32,660 --> 00:30:34,739 Speaker 1: past decade and a half. So let's talk a little 474 00:30:34,750 --> 00:30:39,050 Speaker 1: bit about China's debt overhang. Um Looking at other countries, 475 00:30:39,060 --> 00:30:42,239 Speaker 1: you used to work on Latin American countries, you've looked 476 00:30:42,250 --> 00:30:46,280 Speaker 1: at other examples around the EM and DM space. What 477 00:30:46,290 --> 00:30:49,050 Speaker 1: are the lessons from other countries with debt management that 478 00:30:49,060 --> 00:30:52,810 Speaker 1: China can sort of embrace to, to deal with this, 479 00:30:52,819 --> 00:30:54,949 Speaker 1: this debilitating problem. 480 00:30:56,589 --> 00:30:59,979 Speaker 2: Yeah. Yeah. No, that, that, that's a very uh good question. 481 00:30:59,989 --> 00:31:02,760 Speaker 2: And it also begs the question, you know, is China 482 00:31:02,770 --> 00:31:07,619 Speaker 2: different uh because of its size because of uh it, its, 483 00:31:07,630 --> 00:31:11,219 Speaker 2: its policy. I would say there are two big lessons 484 00:31:11,229 --> 00:31:14,880 Speaker 2: from other countries. The first one is, don't rely on 485 00:31:14,890 --> 00:31:19,089 Speaker 2: the kindness of strangers to fund your financing gaps. And 486 00:31:19,099 --> 00:31:20,060 Speaker 2: the second one 487 00:31:20,439 --> 00:31:25,209 Speaker 2: is to ensure that you can coordinate the uh players 488 00:31:25,219 --> 00:31:29,890 Speaker 2: uh that are engaged in the distribution of the uh 489 00:31:29,900 --> 00:31:34,050 Speaker 2: of of the debt if it has to be uh restructured. 490 00:31:34,510 --> 00:31:38,380 Speaker 2: Uh China has those two factors. It, its debt is 491 00:31:38,390 --> 00:31:43,489 Speaker 2: owned uh almost entirely domestically, very, very little exposure to 492 00:31:43,500 --> 00:31:48,199 Speaker 2: uh foreign funding. Uh and China is an excess saver 493 00:31:48,209 --> 00:31:52,380 Speaker 2: rather than an importer of savings. And that could be 494 00:31:52,390 --> 00:31:56,540 Speaker 2: problematic in other areas, but it's definitely not a problematic when, when, 495 00:31:56,550 --> 00:31:59,540 Speaker 2: when we think about it in terms of the debt angle. 496 00:31:59,939 --> 00:32:00,500 Speaker 2: Um 497 00:32:01,060 --> 00:32:05,680 Speaker 2: and um uh and, and, and I, I would, I 498 00:32:05,689 --> 00:32:12,069 Speaker 2: would say maybe I'll, I'll finish here. Um China definitely 499 00:32:12,079 --> 00:32:17,119 Speaker 2: does have uh the these uh these factors that uh are, 500 00:32:17,130 --> 00:32:21,150 Speaker 2: are lessons learned from other places, but that doesn't mean 501 00:32:21,160 --> 00:32:23,359 Speaker 2: that the debt isn't a problem, 502 00:32:24,199 --> 00:32:27,569 Speaker 1: right? So I um normally, you know, this is my 503 00:32:27,579 --> 00:32:31,239 Speaker 1: old IMF training that, you know, the the debt dynamic equation, 504 00:32:31,250 --> 00:32:33,969 Speaker 1: which is a function of, you know, your real interest 505 00:32:33,979 --> 00:32:38,030 Speaker 1: rate and real GDP growth rate. If you through financial repression, 506 00:32:38,040 --> 00:32:41,859 Speaker 1: for example, keep interest rates very, very low. So it 507 00:32:41,869 --> 00:32:45,550 Speaker 1: sort of turned negative in real terms, you can afford 508 00:32:45,560 --> 00:32:47,530 Speaker 1: a lot of debt. And I think China by virtue 509 00:32:47,540 --> 00:32:50,540 Speaker 1: of having a somewhat of a closed capital account can 510 00:32:50,550 --> 00:32:53,290 Speaker 1: have monetary policy that is, you know, 511 00:32:53,680 --> 00:32:56,380 Speaker 1: attuned to financial repression while the rest of the world 512 00:32:56,390 --> 00:32:59,089 Speaker 1: is struggling with high interest rates and high inflation. Um 513 00:32:59,099 --> 00:33:01,339 Speaker 1: But the, the bad thing out of all that is, 514 00:33:01,349 --> 00:33:03,609 Speaker 1: of course, you know, you then end up having zombie 515 00:33:03,619 --> 00:33:07,910 Speaker 1: companies like Japan or you stay with a slow burn 516 00:33:08,160 --> 00:33:13,310 Speaker 1: uh as opposed to, you know, recognizing issues quickly uh clearly, 517 00:33:13,319 --> 00:33:16,589 Speaker 1: those authorities don't have an appetite to remove the band aid, right? 518 00:33:16,599 --> 00:33:17,560 Speaker 1: It would be a slow 519 00:33:17,569 --> 00:33:17,989 Speaker 2: burn. 520 00:33:20,050 --> 00:33:23,119 Speaker 2: Um Yes. Uh I, I would say that the, the 521 00:33:23,130 --> 00:33:28,359 Speaker 2: general answer to your question is uh yes. Uh I now, 522 00:33:28,369 --> 00:33:32,420 Speaker 2: 11 thing though uh about the near term and uh 523 00:33:32,430 --> 00:33:36,079 Speaker 2: uh you know, well, actually the present is that there 524 00:33:36,089 --> 00:33:38,510 Speaker 2: is a recognition that perhaps 525 00:33:39,339 --> 00:33:42,489 Speaker 2: perhaps given some of the factors that you are talking about, 526 00:33:42,500 --> 00:33:46,550 Speaker 2: which is a relatively stable environment that is uh facilitated 527 00:33:46,560 --> 00:33:51,680 Speaker 2: by financial repression uh that there could be steps taken 528 00:33:51,790 --> 00:33:57,869 Speaker 2: to uh tackle at least the local government. Uh and LGFB, local, 529 00:33:57,880 --> 00:34:02,369 Speaker 2: local government, financial vehicle and provincial debt uh situation. 530 00:34:02,800 --> 00:34:06,300 Speaker 2: Um That is a possibility in the near term. Uh 531 00:34:06,319 --> 00:34:10,529 Speaker 2: It will be complex and full of uncertainty because the 532 00:34:10,540 --> 00:34:16,870 Speaker 2: government needs to take action while reducing the risk of 533 00:34:16,879 --> 00:34:22,709 Speaker 2: moral hazard. It needs to restructure things and promise that 534 00:34:22,719 --> 00:34:26,510 Speaker 2: uh you know, they will never be restructured again. Um 535 00:34:26,860 --> 00:34:31,409 Speaker 2: uh This will not be a quick or simple process. 536 00:34:31,419 --> 00:34:35,969 Speaker 2: It probably begins with uh centralized audit of all of 537 00:34:35,979 --> 00:34:40,259 Speaker 2: the provinces and all of the debt. Uh and to 538 00:34:40,270 --> 00:34:43,370 Speaker 2: figure out how to match the liabilities with 539 00:34:43,449 --> 00:34:48,060 Speaker 2: assets to figure out what is the solvency of these provinces. 540 00:34:48,070 --> 00:34:51,540 Speaker 2: And they probably know that already. But the reason why 541 00:34:51,550 --> 00:34:54,479 Speaker 2: an audit would be necessary in the beginning is to 542 00:34:54,489 --> 00:34:58,379 Speaker 2: make it all common information so that everybody knows how 543 00:34:58,389 --> 00:34:59,959 Speaker 2: everybody else is doing 544 00:35:00,330 --> 00:35:05,419 Speaker 2: from there. Uh figure out what uh a portion of 545 00:35:05,429 --> 00:35:09,979 Speaker 2: the debt problem can be resolved by simply uh matching 546 00:35:09,989 --> 00:35:13,899 Speaker 2: assets with liabilities and selling assets to CRE to free 547 00:35:13,909 --> 00:35:17,120 Speaker 2: up um uh cash flows and so on. 548 00:35:17,550 --> 00:35:21,560 Speaker 2: And then, um uh you know, after that, uh having 549 00:35:21,570 --> 00:35:25,760 Speaker 2: the diff more difficult steps of actually restructuring some of 550 00:35:25,770 --> 00:35:29,699 Speaker 2: these debts and figuring out where the financing is going 551 00:35:29,709 --> 00:35:32,239 Speaker 2: to be, where the funding is going to be uh 552 00:35:32,250 --> 00:35:37,800 Speaker 2: to do this. Um Despite that, uh however, I would 553 00:35:37,810 --> 00:35:42,000 Speaker 2: say that the big picture remains that uh Chinese growth 554 00:35:42,010 --> 00:35:42,899 Speaker 2: and this is 555 00:35:43,580 --> 00:35:46,359 Speaker 2: somewhat unique to China. But there are a lot of 556 00:35:46,370 --> 00:35:50,169 Speaker 2: Asian countries that share this future is very much debt 557 00:35:50,179 --> 00:35:55,489 Speaker 2: driven and those issues that you mentioned are very real, 558 00:35:55,500 --> 00:36:00,399 Speaker 2: not just zombie companies uh that essentially live beyond their 559 00:36:00,409 --> 00:36:05,310 Speaker 2: useful purpose, but also from an equity investor perspective. It's 560 00:36:05,320 --> 00:36:09,589 Speaker 2: very important to remember that over the medium term, excessive 561 00:36:10,459 --> 00:36:14,279 Speaker 2: reliance on debt will eat into the cash flows to equity. 562 00:36:14,500 --> 00:36:19,649 Speaker 2: And that I think is one of the reasons for 563 00:36:19,659 --> 00:36:24,530 Speaker 2: this lackluster long term economic uh market performance that I 564 00:36:24,540 --> 00:36:25,870 Speaker 2: discussed earlier. 565 00:36:27,830 --> 00:36:29,659 Speaker 1: Very, very interesting. Um 566 00:36:30,330 --> 00:36:33,020 Speaker 1: Let's talk a little bit more in the context of 567 00:36:33,030 --> 00:36:37,379 Speaker 1: China's consolidated balance sheet if you will. So the country 568 00:36:37,389 --> 00:36:41,899 Speaker 1: has large debt domestically well known. And to your point, 569 00:36:41,909 --> 00:36:45,040 Speaker 1: there are ways to address it, nothing simple but can 570 00:36:45,050 --> 00:36:48,719 Speaker 1: be addressed um with some degree of sort of, you know, 571 00:36:48,729 --> 00:36:53,000 Speaker 1: brave policy making. Uh but we talk separately but we 572 00:36:53,010 --> 00:36:55,060 Speaker 1: don't combine it with the other issue which is that 573 00:36:55,070 --> 00:36:57,600 Speaker 1: China is a very large creditor internationally. 574 00:36:57,879 --> 00:37:01,530 Speaker 1: So net net, does it all work out to China's favor? 575 00:37:04,070 --> 00:37:08,409 Speaker 2: Yeah. Yeah, that's a, that's, that's another great question. Um 576 00:37:08,419 --> 00:37:13,580 Speaker 2: I would say net net, it's, it's uh it's very 577 00:37:13,590 --> 00:37:18,339 Speaker 2: difficult to, to really think about anybody's favor. Um The 578 00:37:18,350 --> 00:37:22,879 Speaker 2: fact that there are uh large uh foreign assets I 579 00:37:22,889 --> 00:37:27,129 Speaker 2: think is very important in the sense that uh as 580 00:37:27,139 --> 00:37:30,479 Speaker 2: well as you very well know from uh the, the 581 00:37:30,500 --> 00:37:31,120 Speaker 2: the 582 00:37:31,189 --> 00:37:35,399 Speaker 2: story of what drives financial instability and what drives financial crisis. 583 00:37:35,750 --> 00:37:41,699 Speaker 2: There is almost always a big, big link between international 584 00:37:41,709 --> 00:37:48,580 Speaker 2: pressure on the currency and assets and uh domestic financial instability. 585 00:37:48,729 --> 00:37:53,409 Speaker 2: And so China is actually similar to Japan in this sense, 586 00:37:53,419 --> 00:37:54,479 Speaker 2: in the sense that 587 00:37:54,879 --> 00:37:58,969 Speaker 2: uh uh investors might be looking at a huge, huge 588 00:37:58,979 --> 00:38:03,089 Speaker 2: stock of liabilities, but they also are looking at a huge, 589 00:38:03,100 --> 00:38:08,419 Speaker 2: huge stock of future foreign exchange to match those liabilities. 590 00:38:08,489 --> 00:38:13,469 Speaker 2: And that makes it much more difficult for a run 591 00:38:13,479 --> 00:38:17,549 Speaker 2: on the currency to become a trigger for massive financial 592 00:38:17,649 --> 00:38:22,819 Speaker 2: instability. And this is true both in terms of the stock. Therefore, 593 00:38:22,830 --> 00:38:26,070 Speaker 2: you know, the the the the assets themselves and also 594 00:38:26,080 --> 00:38:31,819 Speaker 2: the flow China continues to be a net saver with 595 00:38:31,830 --> 00:38:36,469 Speaker 2: a significant current account surplus in absolute terms, even if 596 00:38:36,479 --> 00:38:38,959 Speaker 2: it's not as big as it used to be relative 597 00:38:38,969 --> 00:38:40,239 Speaker 2: to GDP. 598 00:38:40,639 --> 00:38:44,270 Speaker 2: So I would say that this uh external credit or 599 00:38:44,280 --> 00:38:49,010 Speaker 2: status of China is something that is definitely significant and 600 00:38:49,020 --> 00:38:52,129 Speaker 2: important doesn't get us all the way out of the woods, 601 00:38:52,139 --> 00:38:56,899 Speaker 2: but it does signify a much more stable uh likely 602 00:38:56,909 --> 00:39:00,549 Speaker 2: dynamics uh than uh if it were the case that 603 00:39:00,560 --> 00:39:02,189 Speaker 2: China did not have this 604 00:39:02,530 --> 00:39:06,549 Speaker 1: right. So the country is a major creditor nation has 605 00:39:06,560 --> 00:39:10,800 Speaker 1: large stocks of reserves. And I've been reading certain threads 606 00:39:10,810 --> 00:39:14,179 Speaker 1: in and on Twitter lately about how there could be 607 00:39:14,899 --> 00:39:17,879 Speaker 1: almost equal amount of sort of missing reserves or unreported 608 00:39:17,889 --> 00:39:21,750 Speaker 1: reserves on the balance sheet of multilateral uh agencies uh 609 00:39:21,760 --> 00:39:25,370 Speaker 1: run by the Chinese authorities. Um But at the same time, 610 00:39:25,379 --> 00:39:26,270 Speaker 1: we do have 611 00:39:27,189 --> 00:39:30,529 Speaker 1: quite a few large Chinese corporations who have issued substantial 612 00:39:30,540 --> 00:39:33,300 Speaker 1: amount of foreign currency debt in recent years and decades. 613 00:39:33,469 --> 00:39:37,419 Speaker 1: And they have huge wall of financing coming up. And 614 00:39:37,429 --> 00:39:40,489 Speaker 1: this is happening at a time when international interest rates 615 00:39:40,500 --> 00:39:43,799 Speaker 1: have gone up a lot dollar liquidity, although 616 00:39:43,919 --> 00:39:46,149 Speaker 1: not as tight as we would have feared a year 617 00:39:46,159 --> 00:39:49,209 Speaker 1: ago because of QT and higher interest rates, but still 618 00:39:49,219 --> 00:39:51,299 Speaker 1: not as ample as they used to be and going 619 00:39:51,310 --> 00:39:55,870 Speaker 1: forward would get tighter. Um So us monetary policy tightening, 620 00:39:55,879 --> 00:39:59,350 Speaker 1: it will have an impact on Chinese companies who want 621 00:39:59,360 --> 00:40:00,589 Speaker 1: to refinance their debt. 622 00:40:02,129 --> 00:40:05,629 Speaker 2: Absolutely. And um you know what I would say is 623 00:40:05,639 --> 00:40:11,139 Speaker 2: that the offshore corporate or the dollar corporate uh market 624 00:40:11,149 --> 00:40:16,300 Speaker 2: for Chinese companies is very, very distorted. And so I 625 00:40:16,310 --> 00:40:20,459 Speaker 2: it definitely affects the overall macro, it definitely affects these 626 00:40:20,469 --> 00:40:22,979 Speaker 2: companies in a negative way. 627 00:40:23,409 --> 00:40:28,319 Speaker 2: But again, I wouldn't really be uh uh quick to 628 00:40:28,330 --> 00:40:31,310 Speaker 2: say that this will be a source of massive overall 629 00:40:31,320 --> 00:40:36,040 Speaker 2: macro instability. A few things are worth noting about that 630 00:40:36,050 --> 00:40:40,699 Speaker 2: offshore uh dollar denominated corporate market. The first one 631 00:40:41,000 --> 00:40:45,889 Speaker 2: is that it is almost entirely dominated by real estate firms. 632 00:40:45,899 --> 00:40:49,689 Speaker 2: And that is peculiar if we think about it because 633 00:40:49,699 --> 00:40:54,189 Speaker 2: real estate firms are not natural borrowers in international markets 634 00:40:54,199 --> 00:40:58,689 Speaker 2: because they don't have revenue in US dollars. So this 635 00:40:58,699 --> 00:41:01,929 Speaker 2: actually adds uh you know, to the, to, to, to 636 00:41:01,939 --> 00:41:03,469 Speaker 2: the concerns that you meant 637 00:41:03,550 --> 00:41:06,560 Speaker 2: that you mentioned uh in particular, if we think about 638 00:41:06,570 --> 00:41:10,649 Speaker 2: the fact that Renminbi is now depreciating as well as 639 00:41:10,659 --> 00:41:15,040 Speaker 2: uh having higher us interest rates. So why are the 640 00:41:15,050 --> 00:41:18,719 Speaker 2: these real estate developers out there in the uh dollar 641 00:41:18,729 --> 00:41:22,209 Speaker 2: corporate market? Well, the reason has to do with some 642 00:41:22,219 --> 00:41:26,000 Speaker 2: of the repression issues that you mentioned earlier, 643 00:41:26,300 --> 00:41:29,810 Speaker 2: uh the Chinese government as part of its policy uh 644 00:41:29,820 --> 00:41:34,719 Speaker 2: has been trying to uh move away from what it 645 00:41:34,729 --> 00:41:39,370 Speaker 2: sees as a dependence on real estate development for its 646 00:41:39,379 --> 00:41:43,979 Speaker 2: economic growth. And therefore, has made it very difficult historically 647 00:41:43,989 --> 00:41:48,659 Speaker 2: for these firms to borrow in the onshore market. And 648 00:41:48,729 --> 00:41:53,149 Speaker 2: their solution to that problem has in many cases been 649 00:41:53,179 --> 00:41:55,729 Speaker 2: to go uh abroad. 650 00:41:56,300 --> 00:42:00,310 Speaker 2: Um So the the there there is that issue there. 651 00:42:00,469 --> 00:42:03,830 Speaker 2: And then finally, I think to complete the picture, we 652 00:42:03,840 --> 00:42:07,169 Speaker 2: need an idea of whether this problem which is a 653 00:42:07,179 --> 00:42:11,770 Speaker 2: real problem. I I agree. Uh III I is is 654 00:42:11,780 --> 00:42:12,949 Speaker 2: big enough to, 655 00:42:13,034 --> 00:42:17,385 Speaker 2: to make us concerned about systemic instability. And there I 656 00:42:17,395 --> 00:42:20,544 Speaker 2: would say the answer is that it is unlikely because 657 00:42:20,554 --> 00:42:24,094 Speaker 2: even though it is big by global standards, because China 658 00:42:24,104 --> 00:42:27,324 Speaker 2: is huge, it's the second biggest economy in the world 659 00:42:27,334 --> 00:42:28,584 Speaker 2: in nominal terms. 660 00:42:28,889 --> 00:42:33,540 Speaker 2: Um it is very, very small relative to the stock 661 00:42:33,550 --> 00:42:37,560 Speaker 2: of liabilities or the stock of interest payments uh in 662 00:42:37,570 --> 00:42:42,300 Speaker 2: the overall system. And again, it is also very much segmented, 663 00:42:42,389 --> 00:42:46,629 Speaker 2: uh there are capital controls and uh that this point 664 00:42:46,639 --> 00:42:49,719 Speaker 2: that you mentioned earlier about China being a net creditor 665 00:42:49,729 --> 00:42:52,840 Speaker 2: and a net saver is also important when we think 666 00:42:52,850 --> 00:42:56,319 Speaker 2: about these factors. So I wouldn't be too concerned. 667 00:42:56,860 --> 00:43:00,819 Speaker 1: Right. Right. This is not a dollar deficient economy by 668 00:43:00,830 --> 00:43:05,439 Speaker 1: any stretch of imagination. Um, bit of a jump, not 669 00:43:05,449 --> 00:43:07,899 Speaker 1: necessarily related to what we've been talking about, but this 670 00:43:07,909 --> 00:43:10,020 Speaker 1: is something that you and I have spoken about in 671 00:43:10,030 --> 00:43:12,589 Speaker 1: the past and I would really want you to weigh in. Um, 672 00:43:12,600 --> 00:43:14,759 Speaker 1: we talk a lot about China sort of running out 673 00:43:14,770 --> 00:43:18,090 Speaker 1: of engines of growth. Uh But we also recognize 674 00:43:18,179 --> 00:43:21,239 Speaker 1: is that there is one area of structural shift where 675 00:43:21,250 --> 00:43:24,979 Speaker 1: China has massive scope for investment and growth and innovation 676 00:43:25,229 --> 00:43:28,189 Speaker 1: and they're added already, which is climate change. So give 677 00:43:28,199 --> 00:43:31,350 Speaker 1: me a little sense of your assessment on what is 678 00:43:31,360 --> 00:43:33,510 Speaker 1: China doing with respect to climate change? 679 00:43:35,010 --> 00:43:38,320 Speaker 2: That is a great question. Um And I think that 680 00:43:38,330 --> 00:43:41,840 Speaker 2: China is very much misunderstood for good reason, it's very 681 00:43:41,850 --> 00:43:46,139 Speaker 2: difficult to understand China in terms of climate change. On 682 00:43:46,149 --> 00:43:49,189 Speaker 2: the one hand, if you look at a snapshot of China, 683 00:43:49,199 --> 00:43:53,000 Speaker 2: what you see is by far, the world's biggest emitter 684 00:43:53,010 --> 00:43:57,359 Speaker 2: of carbon emitting almost as much more than at the, the, 685 00:43:57,370 --> 00:44:01,419 Speaker 2: the US and Europe put together and you see a 686 00:44:01,429 --> 00:44:04,280 Speaker 2: country where emissions have not yet peaked, 687 00:44:04,364 --> 00:44:08,134 Speaker 2: whereas in most of the developed world, they have already peaked. 688 00:44:08,274 --> 00:44:11,415 Speaker 2: And so there is room uh to ask for more 689 00:44:11,425 --> 00:44:15,125 Speaker 2: from China if you look at that snapshot. But if 690 00:44:15,135 --> 00:44:17,844 Speaker 2: you look underneath the surface again. Or if you look 691 00:44:17,854 --> 00:44:21,895 Speaker 2: at the other side, China is also the world's biggest 692 00:44:21,905 --> 00:44:22,975 Speaker 2: investor 693 00:44:23,370 --> 00:44:30,178 Speaker 2: uh in renewable technologies and in uh renewable capacity again, 694 00:44:30,189 --> 00:44:35,159 Speaker 2: more than the US and Europe put together uh A 695 00:44:35,169 --> 00:44:38,759 Speaker 2: a and if you look at what China is doing 696 00:44:39,280 --> 00:44:43,540 Speaker 2: in terms of the energy transition in general, I would 697 00:44:43,550 --> 00:44:47,820 Speaker 2: say that China is positioning itself and has already positioned 698 00:44:47,830 --> 00:44:52,479 Speaker 2: itself as what I call the Saudi Arabia of renewables. 699 00:44:52,780 --> 00:44:56,590 Speaker 2: Um China, I I uh uh if you look at 700 00:44:56,600 --> 00:45:02,639 Speaker 2: different renewable technology segments, uh accounts for anywhere between more 701 00:45:02,649 --> 00:45:09,310 Speaker 2: than half to sometimes 95% of the production or the capacity. 702 00:45:09,469 --> 00:45:13,709 Speaker 2: Uh it the 95% would be for things like poly silicon. 703 00:45:14,270 --> 00:45:14,830 Speaker 2: Um 704 00:45:15,129 --> 00:45:20,100 Speaker 2: and this uh puts China in a really important position 705 00:45:20,270 --> 00:45:25,040 Speaker 2: as the world itself engages in the energy transition. I 706 00:45:25,050 --> 00:45:28,239 Speaker 2: think the energy transition is the single biggest 707 00:45:28,550 --> 00:45:34,719 Speaker 2: uh macroeconomic structural change that is happening in the next 708 00:45:34,729 --> 00:45:39,879 Speaker 2: few decades. And China is there to be uh uh a, 709 00:45:39,889 --> 00:45:43,489 Speaker 2: a near monopoly or a provider of a lot of 710 00:45:43,500 --> 00:45:46,939 Speaker 2: those technologies. Now, of course, this uh 711 00:45:47,050 --> 00:45:51,290 Speaker 2: does not mix well with the geopolitical tension and friction 712 00:45:51,439 --> 00:45:55,310 Speaker 2: that we're seeing across the world. Uh But China is 713 00:45:55,320 --> 00:46:01,379 Speaker 2: definitely uh uh AAA very important player in climate and 714 00:46:01,389 --> 00:46:05,459 Speaker 2: global decarbonization and will remain so for a very long time. 715 00:46:06,790 --> 00:46:10,139 Speaker 1: Yeah. Um I think, you know, some of our mutual 716 00:46:10,149 --> 00:46:13,259 Speaker 1: acquaintances who have worked in Hong Kong financial sector and 717 00:46:13,270 --> 00:46:16,139 Speaker 1: have gone on to the government of China. I mean, 718 00:46:16,149 --> 00:46:18,540 Speaker 1: they sort of tell us that uh in terms of 719 00:46:18,550 --> 00:46:21,840 Speaker 1: driver of growth, whether it is investment or innovation in 720 00:46:21,850 --> 00:46:23,810 Speaker 1: the private sector and this is one area, the authorities 721 00:46:23,820 --> 00:46:27,279 Speaker 1: have absolutely no qualms about holding them back. They're sort 722 00:46:27,290 --> 00:46:30,310 Speaker 1: of unleashing all the talent that they can and it 723 00:46:30,320 --> 00:46:31,739 Speaker 1: is very, very encouraging. 724 00:46:32,620 --> 00:46:37,149 Speaker 1: Well, finally question on the role of Chinese capital. Uh 725 00:46:37,159 --> 00:46:40,090 Speaker 1: I mean, every time I travel around the world meet 726 00:46:40,100 --> 00:46:44,090 Speaker 1: clients counterparts, it's all about China plus one corporate strategy 727 00:46:44,100 --> 00:46:47,620 Speaker 1: and who's strategizing and reducing their presence in China and 728 00:46:47,629 --> 00:46:49,939 Speaker 1: building in ASEAN? And I, I think that's an interesting 729 00:46:49,949 --> 00:46:52,020 Speaker 1: narrative and there's a lot to talk about it, but 730 00:46:52,030 --> 00:46:54,129 Speaker 1: a lot of the times what is absent in that 731 00:46:54,139 --> 00:46:56,989 Speaker 1: conversation is what are the Chinese companies doing in the 732 00:46:57,000 --> 00:46:58,169 Speaker 1: middle of all these 733 00:46:58,560 --> 00:47:01,620 Speaker 1: uh shifts? Uh So talk to me a little bit 734 00:47:01,629 --> 00:47:04,159 Speaker 1: about the role of Chinese capital. I mean, are the 735 00:47:04,169 --> 00:47:06,969 Speaker 1: Chinese companies just sitting around and watching the whole world 736 00:47:06,979 --> 00:47:11,379 Speaker 1: reshape or they're actually part of this uh reshaping that 737 00:47:11,389 --> 00:47:12,129 Speaker 1: is going on? 738 00:47:13,909 --> 00:47:17,260 Speaker 2: Yeah, another great question. I'm uh and I think that 739 00:47:17,270 --> 00:47:20,080 Speaker 2: this is also very much underappreciated. I think it's a 740 00:47:20,090 --> 00:47:24,319 Speaker 2: huge development. Uh And, and uh the reality of what 741 00:47:24,330 --> 00:47:27,110 Speaker 2: the Chinese companies are doing is much more complex than 742 00:47:27,120 --> 00:47:28,459 Speaker 2: is commonly described. 743 00:47:28,909 --> 00:47:32,979 Speaker 2: The common narrative is that China has become expensive and 744 00:47:32,989 --> 00:47:37,030 Speaker 2: firms are choosing to manufacture elsewhere. And that the geopolitical 745 00:47:37,040 --> 00:47:40,659 Speaker 2: tension is driving investment away from China. And both of 746 00:47:40,669 --> 00:47:43,319 Speaker 2: those factors have a grain of truth, of course. But 747 00:47:43,330 --> 00:47:47,080 Speaker 2: the dynamics are much, much more complicated. Um 748 00:47:47,469 --> 00:47:51,299 Speaker 2: a little fact to set the the the landscape here 749 00:47:51,429 --> 00:47:56,000 Speaker 2: uh a few years ago, uh on a huge proportion 750 00:47:56,010 --> 00:48:01,919 Speaker 2: of China's outward foreign direct investment was directed towards securing 751 00:48:01,929 --> 00:48:05,859 Speaker 2: natural resources. It was basically in mining Chinese companies were 752 00:48:05,870 --> 00:48:10,110 Speaker 2: going out there to find oil resources, coal resources, lots 753 00:48:10,120 --> 00:48:11,979 Speaker 2: of other resources and some of 754 00:48:12,060 --> 00:48:15,089 Speaker 2: that is still going on. Of course, including with critical 755 00:48:15,100 --> 00:48:20,229 Speaker 2: minerals for the energy transition. But the largest area of 756 00:48:20,239 --> 00:48:26,549 Speaker 2: Chinese outward FD I now is in manufacturing. Chinese companies 757 00:48:26,560 --> 00:48:29,919 Speaker 2: have reached the point in the global development where they're 758 00:48:29,929 --> 00:48:34,448 Speaker 2: taking the the the outsourcing steps that developed world companies 759 00:48:34,459 --> 00:48:36,550 Speaker 2: took a few decades ago. 760 00:48:37,100 --> 00:48:41,449 Speaker 2: Importantly here and probably under recognized in many parts of 761 00:48:41,459 --> 00:48:45,830 Speaker 2: the world is that the global appeal of Chinese electronics, 762 00:48:45,840 --> 00:48:49,469 Speaker 2: certain kinds of industrial goods and especially as I mentioned earlier, 763 00:48:49,479 --> 00:48:56,370 Speaker 2: the energy transition technologies is huge. Last year, China became 764 00:48:56,479 --> 00:49:01,129 Speaker 2: the second largest exporter of automobiles in the world. It 765 00:49:01,139 --> 00:49:05,050 Speaker 2: overtook Germany this year. It is set to overtake Japan 766 00:49:05,060 --> 00:49:05,709 Speaker 2: and become 767 00:49:06,250 --> 00:49:09,899 Speaker 2: number one now just like in the developed country. Uh 768 00:49:09,909 --> 00:49:14,459 Speaker 2: companies and the the developed world, Chinese companies are starting 769 00:49:14,469 --> 00:49:18,959 Speaker 2: to follow their new customers and build facilities that cater 770 00:49:18,969 --> 00:49:22,489 Speaker 2: to local markets. So you see all of these Chinese 771 00:49:22,500 --> 00:49:27,719 Speaker 2: companies producing vehicles, industrial goods, uh energy transition technology 772 00:49:27,814 --> 00:49:32,024 Speaker 2: set up shop, not only in Southeast Asia, but also 773 00:49:32,034 --> 00:49:37,114 Speaker 2: in parts of Europe in the Americas. And even despite 774 00:49:37,125 --> 00:49:43,064 Speaker 2: the geopolitical headwinds, lots of Chinese companies are trying marginal 775 00:49:43,074 --> 00:49:47,945 Speaker 2: amounts successfully to actually invest in the United States uh itself. 776 00:49:48,340 --> 00:49:53,810 Speaker 2: And so uh China is an active participant uh in 777 00:49:53,820 --> 00:50:00,020 Speaker 2: uh the global reshuffling of supply chains in the regionalization 778 00:50:00,030 --> 00:50:04,399 Speaker 2: of supply chains is also very important here. I think 779 00:50:04,409 --> 00:50:08,870 Speaker 2: that much more than decoupling. We should talk about regionalization 780 00:50:08,879 --> 00:50:09,770 Speaker 2: and the world 781 00:50:09,844 --> 00:50:14,125 Speaker 2: uh shifting to different blocks. And of course, the Asian 782 00:50:14,135 --> 00:50:19,475 Speaker 2: block of, of which China is the central participant is 783 00:50:19,485 --> 00:50:23,715 Speaker 2: uh already and likely to uh increase in importance as 784 00:50:23,725 --> 00:50:28,354 Speaker 2: the most important uh part of, of, of the, of the, 785 00:50:28,364 --> 00:50:32,324 Speaker 2: of the world's uh supply chains. So 786 00:50:32,770 --> 00:50:35,959 Speaker 2: um maybe I'll, I'll leave it there. I think that 787 00:50:35,969 --> 00:50:40,080 Speaker 2: uh these developments are, are very, very important, they will 788 00:50:40,090 --> 00:50:45,699 Speaker 2: determine what the global production landscape looks like in the future. 789 00:50:45,870 --> 00:50:50,100 Speaker 2: And it's important to understand that uh China is not 790 00:50:50,110 --> 00:50:53,590 Speaker 2: uh a, a uh a bystander there. They are an 791 00:50:53,600 --> 00:50:55,919 Speaker 2: active participant in this process. 792 00:50:56,790 --> 00:51:00,678 Speaker 1: Uh Santiago, the common refrain in this conversation that Jovan 793 00:51:00,689 --> 00:51:04,270 Speaker 1: and I have just had is the sort of the 794 00:51:04,280 --> 00:51:07,299 Speaker 1: urge to, for people to sort of appreciate the complexities 795 00:51:07,310 --> 00:51:09,489 Speaker 1: of a country that is as large as China, I 796 00:51:09,500 --> 00:51:13,600 Speaker 1: think uh brushing it with, you know, one broad stroke 797 00:51:13,610 --> 00:51:15,979 Speaker 1: is a, you know, is a mistake, but it's also 798 00:51:15,989 --> 00:51:18,969 Speaker 1: a dangerous mistake. So I hope that, you know, the 799 00:51:18,979 --> 00:51:22,500 Speaker 1: listeners who are, you know, fortunate enough to hear your 800 00:51:22,510 --> 00:51:23,459 Speaker 1: wisdom today 801 00:51:23,669 --> 00:51:26,759 Speaker 1: would at least take that key insight away. Uh I 802 00:51:26,770 --> 00:51:29,139 Speaker 1: thank you so much for your time and insights. This 803 00:51:29,149 --> 00:51:30,679 Speaker 1: has been a fascinating conversation. 804 00:51:32,340 --> 00:51:34,339 Speaker 2: Thank you timer. Thank you for having me. 805 00:51:34,590 --> 00:51:38,330 Speaker 1: It's been great to have you. Uh Thanks to our listeners. 806 00:51:38,340 --> 00:51:41,520 Speaker 1: Uh COVID time is for information only and it does 807 00:51:41,530 --> 00:51:45,799 Speaker 1: not represent any trade recommendations. All 104 episodes of the 808 00:51:45,810 --> 00:51:49,589 Speaker 1: podcast are available on youtube and on all major podcast 809 00:51:49,600 --> 00:51:54,790 Speaker 1: platforms including Apple Google and Spotify. As for our research publication, 810 00:51:54,800 --> 00:51:57,129 Speaker 1: webinars and live streams, you can find them all by 811 00:51:57,139 --> 00:51:59,928 Speaker 1: Googling devious research library. Have a great day.