WEBVTT - Kopi Time E104 - Wellington’s Santiago Millán, on China’s complexities 0:00:06.400 --> 0:00:10.039 Welcome to Kobe Time, a podcast series on Markets and 0:00:10.050 --> 0:00:14.329 Economies from Devis Group Research. I'm BA chief economist. Welcoming 0:00:14.340 --> 0:00:19.370 you to our 104th episode today. It's all about China. 0:00:20.030 --> 0:00:23.100 While in the US, you have this whole story of 0:00:23.110 --> 0:00:27.770 resilient economic growth and still sticky inflation, which has combined 0:00:27.780 --> 0:00:31.559 to create this narrative of interest rates going higher for longer. 0:00:31.680 --> 0:00:35.169 The opposite is the case in China. Uh post pandemic 0:00:35.180 --> 0:00:39.700 rebound has been underwhelming. Financial markets are listless and prove 0:00:39.709 --> 0:00:41.299 that inflation momentum is muted 0:00:41.869 --> 0:00:45.388 what to make of China's near and medium term outlook 0:00:45.400 --> 0:00:47.990 in the context of all that. Well, we have a 0:00:48.000 --> 0:00:50.810 seasoned expert with us to talk about all this. 0:00:51.098 --> 0:00:55.020 Santiago Milan is a member of Wellington Management's Global Macro 0:00:55.029 --> 0:00:58.409 strategy group. Wellington is one of the world's largest asset 0:00:58.419 --> 0:01:02.470 managers with over a trillion dollars of client assets under management. 0:01:02.520 --> 0:01:06.339 Santiago leads their efforts in thematic analysis and sector based 0:01:06.349 --> 0:01:10.639 macro research for China and other Asian countries. He's an 0:01:10.650 --> 0:01:14.559 active participant in investment strategy groups focusing on both debt 0:01:14.569 --> 0:01:17.979 and equity markets. Santiago Milan, welcome to COVID 0:01:17.989 --> 0:01:18.410 Time. 0:01:19.510 --> 0:01:22.199 Thank you. It's my pleasure to be here. Uh 0:01:22.209 --> 0:01:24.620 So good to talk to you, Santiago, you and I 0:01:24.629 --> 0:01:29.019 met almost 15 years ago and uh we have met 0:01:29.029 --> 0:01:31.500 in multiple places in Asia. I was just thinking, I 0:01:31.510 --> 0:01:33.540 think we were on a trip to the Philippines once 0:01:33.550 --> 0:01:35.639 I met you in Hong Kong many times. Great to 0:01:35.650 --> 0:01:36.660 have you on the podcast. 0:01:37.730 --> 0:01:40.160 Thank you. Yeah. No, it's great to see you. And 0:01:40.169 --> 0:01:42.190 it's been quite an adventure over the years. 0:01:42.620 --> 0:01:46.769 Indeed. You are talking to me from Boston, but that 0:01:46.779 --> 0:01:50.269 has not been your address the past decade and a half. 0:01:50.279 --> 0:01:53.720 So reflect on what you have been doing the past 0:01:53.730 --> 0:01:54.540 decade and a half. 0:01:55.900 --> 0:01:59.809 Sure, so well, it's been definitely an interesting decade. I 0:01:59.819 --> 0:02:04.769 would say that I've been observing uh from almost a 0:02:04.779 --> 0:02:08.820 front row seat, all of these changes and development that 0:02:08.830 --> 0:02:12.820 has been happening in China and in Asia more broadly. 0:02:13.279 --> 0:02:16.320 And China has changed a lot in 15 years when 0:02:16.330 --> 0:02:18.229 I arrived in Hong Kong, 0:02:18.529 --> 0:02:21.800 China was at the tail end of a spectacular boom 0:02:21.809 --> 0:02:25.779 in the economy that had begun with China's accession to 0:02:25.788 --> 0:02:29.448 the WTO and uh lots of reform and opening the 0:02:29.460 --> 0:02:33.149 economy was booming, asset prices were booming everything the stock 0:02:33.160 --> 0:02:36.059 market had more than tripled in three years. And the 0:02:36.070 --> 0:02:39.059 world's leaders all came to Beijing 0:02:39.320 --> 0:02:45.750 for the 2008 Olympics, that vibe was one of pervasive optimism. 0:02:45.758 --> 0:02:49.139 And this carried through even through some of the doubts 0:02:49.149 --> 0:02:53.478 of the global financial crisis. And indeed China did uh 0:02:53.490 --> 0:02:56.210 do a lot of the heavy lifting to get the 0:02:56.220 --> 0:02:58.380 world out of the GFC. 0:02:58.929 --> 0:03:02.478 The economy actually did deliver since then when I arrived 0:03:02.490 --> 0:03:07.258 in Hong Kong. Uh China's GDP was $3.5 trillion. It 0:03:07.270 --> 0:03:11.059 was the fourth or fifth largest economy in the world. 0:03:11.070 --> 0:03:16.579 Since then, China's GDP has grown fivefold. It's now $17 0:03:16.589 --> 0:03:18.720 trillion plus. Um 0:03:19.250 --> 0:03:21.630 and China was supposed to grow a lot, it did 0:03:21.639 --> 0:03:27.070 grow a lot, however, not everything was as expected. In particular, 0:03:27.080 --> 0:03:30.800 one would expect with this type of, of performance that 0:03:30.809 --> 0:03:33.978 I just described that. Well, asset prices would have done 0:03:33.990 --> 0:03:36.330 fantastic and guess what they didn't 0:03:36.830 --> 0:03:41.300 in part for, for uh structural reasons. But also because 0:03:41.309 --> 0:03:44.639 of uh this fact that I mentioned, which was that 0:03:44.649 --> 0:03:48.679 the asset prices were in a huge bubble in 2007, 0:03:48.690 --> 0:03:53.059 early 2008, the stock market in those 15 years has 0:03:53.070 --> 0:03:57.300 actually been flat or slightly up or down depending on 0:03:57.309 --> 0:03:58.639 how you measure it. 0:03:58.850 --> 0:04:03.360 Hs CE I which is the index of China mainland 0:04:03.369 --> 0:04:09.720 listed companies in Hong Kong is actually down almost 40%. 0:04:09.729 --> 0:04:13.339 From the day I arrived in Hong Kong to the 0:04:13.350 --> 0:04:17.719 day I left in Hong Kong. So economy grew by 0:04:17.730 --> 0:04:22.738 five times stock market did nothing qualitative changes, however, have 0:04:22.750 --> 0:04:26.230 been huge and I think they're even bigger than the 0:04:26.238 --> 0:04:27.238 uh quantity 0:04:27.335 --> 0:04:33.605 changes. What are these qualitative changes? Well, first, the infrastructure 0:04:33.615 --> 0:04:38.425 stock has uh flourished in an unbelievable way when I 0:04:38.436 --> 0:04:43.286 got to Hong Kong. Um The the first uh high 0:04:43.295 --> 0:04:47.805 speed rail line was just being inaugurated from Beijing to Tianjin. 0:04:47.815 --> 0:04:51.565 I remember I wrote it and it was really exciting now, 0:04:51.575 --> 0:04:54.864 uh the country has by far the largest high speed 0:04:54.876 --> 0:04:55.726 rail network 0:04:55.932 --> 0:05:00.411 in the world. Uh 50 or so, Chinese cities have 0:05:00.421 --> 0:05:05.291 subway systems and this connectivity infrastructure is massive and it 0:05:05.302 --> 0:05:09.592 has all been developed in the last 15 years. Education 0:05:09.601 --> 0:05:14.231 has also changed dramatically. When I uh got to Hong Kong, 0:05:14.242 --> 0:05:19.441 there were around 2 million um graduates uh from higher 0:05:19.451 --> 0:05:24.252 education every year. This year, it will be 11 million. 0:05:24.678 --> 0:05:28.619 And finally, I'll mention one thing among many others that 0:05:28.630 --> 0:05:33.109 have changed dramatically, the development of the service economy. And 0:05:33.119 --> 0:05:36.029 I remember when I got uh to to Hong Kong 0:05:36.040 --> 0:05:39.420 and and started uh having discussions about what was the 0:05:39.428 --> 0:05:41.469 future of the Chinese economy. 0:05:41.678 --> 0:05:45.600 There were many, many doubts about whether China would or 0:05:45.609 --> 0:05:51.390 could develop a uh really serious and successful service economy 0:05:51.399 --> 0:05:55.190 and indeed it has it's already there, there are challenges 0:05:55.200 --> 0:05:57.290 and we can talk about them. But those are my 0:05:57.299 --> 0:06:01.390 observations in the rear view mirror time to look forward. 0:06:03.019 --> 0:06:06.928 Indeed, uh Santiago, I do wanna talk about some of 0:06:06.940 --> 0:06:09.910 the structural challenges with you in the latter part of 0:06:09.920 --> 0:06:12.909 this podcast, but let's stay with the near term for 0:06:12.920 --> 0:06:15.420 the time being. So what's your sense of China and 0:06:15.428 --> 0:06:18.549 macro at this point? So economic momentum for the second 0:06:18.559 --> 0:06:22.829 half of this year uh underwhelming worrisome. Where, where do 0:06:22.839 --> 0:06:23.368 you stand? 0:06:24.790 --> 0:06:29.070 Yeah, absolutely. I think that um um it, it's, it's 0:06:29.079 --> 0:06:33.099 very difficult to really calibrate uh a, a message that 0:06:33.109 --> 0:06:37.420 uh targets an audience uh accurately. And the reason is 0:06:37.428 --> 0:06:42.339 that the spectrum of beliefs about the Chinese economy is very, 0:06:42.350 --> 0:06:45.859 very wide. But I agree with uh I think what 0:06:45.869 --> 0:06:49.420 you um suggested, which is that there is a lot 0:06:49.428 --> 0:06:51.140 of pervasive pessimism. 0:06:51.709 --> 0:06:56.320 Um I think that pessimism is uh has a, a 0:06:56.329 --> 0:07:01.760 grain of truth. Uh But I wouldn't really go overboard 0:07:01.769 --> 0:07:06.679 with uh a narrative that suggests that China will collapse 0:07:06.690 --> 0:07:08.578 or that China will face 0:07:09.470 --> 0:07:13.809 a Japan like scenario in the future. Most importantly, because 0:07:13.820 --> 0:07:19.470 China is still not a developed economy. Um But one 0:07:19.480 --> 0:07:22.290 thing to keep in mind is that the policy and 0:07:22.299 --> 0:07:27.970 institutional objectives of the Chinese government have changed significantly and 0:07:27.980 --> 0:07:32.640 this goes to a burning question and a frustration I 0:07:32.649 --> 0:07:34.329 would say for the analy 0:07:34.410 --> 0:07:37.750 community and the investment community and some of the business community, 0:07:37.760 --> 0:07:41.980 which is, you know, why aren't the policy makers as 0:07:41.989 --> 0:07:46.970 worried as we are? Uh We read headlines about a 0:07:46.980 --> 0:07:53.720 youth unemployment rate above 20%. Um We uh see the, 0:07:53.730 --> 0:07:58.940 the the economic activity indicators come in uh worse than 0:07:58.950 --> 0:08:03.049 expected uh month after month, what's going on? Why aren't 0:08:03.059 --> 0:08:03.880 they worried? 0:08:04.290 --> 0:08:07.500 And I think there are two answers there. The first 0:08:07.510 --> 0:08:14.160 one is that the uh authorities actually frankly uh don't 0:08:14.170 --> 0:08:19.299 see the type of negativity that the markets see they 0:08:19.385 --> 0:08:22.334 are very focused on the medium term and in the 0:08:22.345 --> 0:08:26.744 medium term, uh they feel that uh that, that, that 0:08:26.755 --> 0:08:30.355 there needs to be a lot of patience and uh they, 0:08:30.364 --> 0:08:35.195 they are uncomfortable with the type of breakneck uh uh 0:08:35.205 --> 0:08:40.674 infrastructure driven growth that was there in the past, the 0:08:40.684 --> 0:08:43.973 one that I mentioned, for example, that allowed China to 0:08:43.984 --> 0:08:46.135 do a lot of the heavy lifting for the world 0:08:46.145 --> 0:08:48.815 to get out of the global financial crisis. 0:08:49.349 --> 0:08:52.359 And uh you know, and I know that you wanted 0:08:52.369 --> 0:08:54.960 to stick to the short term, but I'll mention one 0:08:54.969 --> 0:08:57.840 long term issue because I think it is very relevant 0:08:57.849 --> 0:09:00.780 to the short term. And that is that I think 0:09:00.789 --> 0:09:01.479 China 0:09:01.780 --> 0:09:06.890 is right now in the process of uh shifting uh 0:09:06.900 --> 0:09:11.020 or making its third big shift or big change in 0:09:11.030 --> 0:09:16.869 the policy stance in the institutional priorities of uh the 0:09:16.880 --> 0:09:20.409 uh of uh of, of, of the government and of development. 0:09:20.880 --> 0:09:24.228 And uh what, what is the third? Well, the first 0:09:24.239 --> 0:09:29.289 one was essentially the revolution itself, the establishment of communism 0:09:29.299 --> 0:09:33.510 from the revolution in 1949. All the way until reform 0:09:33.520 --> 0:09:38.809 and opening all of the economic activity in China was 0:09:38.820 --> 0:09:41.070 politically developed, determined 0:09:41.489 --> 0:09:45.460 that led China to a situation in the seventies where 0:09:45.469 --> 0:09:50.119 its GDP per capita was lower than sub-saharan Africa. Its 0:09:50.130 --> 0:09:53.829 um uh industrial share of the economy was lower than 0:09:53.840 --> 0:09:58.339 North Korea and it was very clear that the uh 0:09:58.349 --> 0:10:02.880 some of the development objectives of uh the the policymakers 0:10:02.890 --> 0:10:05.460 were not going to be met. And this led to 0:10:05.469 --> 0:10:10.359 the second big period of uh or institutional framework 0:10:10.455 --> 0:10:13.325 which was reform and opening. And we know what that 0:10:13.335 --> 0:10:17.445 was all about. It was about letting market forces enter 0:10:17.455 --> 0:10:22.325 the economy and unleash massive amounts of economic activity. It 0:10:22.335 --> 0:10:27.344 worked very well in achieving development itself and growth itself. 0:10:27.354 --> 0:10:31.525 But around 10 years ago, again, China found itself with 0:10:31.534 --> 0:10:36.104 a bunch of externalities to that model that its policymakers 0:10:36.114 --> 0:10:39.325 didn't particularly like. Um 0:10:39.619 --> 0:10:43.630 And what are those externalities? They are massive uh uh 0:10:43.640 --> 0:10:50.070 environmental damage. They are a big, big inequality by some measures. 0:10:50.080 --> 0:10:54.489 Uh Chinese income inequality and also wealth inequality are even 0:10:54.500 --> 0:10:59.559 bigger than the United States. Uh And also uh one 0:10:59.570 --> 0:11:04.250 other externality was uh that the uh open markets and 0:11:04.341 --> 0:11:09.111 uh access to uh uh uh these types of opportunities 0:11:09.122 --> 0:11:13.551 created pockets of wealth that combined with pockets of power 0:11:13.622 --> 0:11:19.711 that uh created a degree of political uh uncomfortableness that 0:11:19.721 --> 0:11:23.410 the the that the leadership was not happy with. And 0:11:23.421 --> 0:11:28.891 so now we are in the third big era of 0:11:28.921 --> 0:11:28.971 uh in 0:11:29.064 --> 0:11:34.693 institutions, policy making and governance. And let's call it the 0:11:34.703 --> 0:11:38.113 era of common prosperity for lack of a better word. 0:11:38.304 --> 0:11:42.733 And we don't really know what this era really means 0:11:42.744 --> 0:11:46.713 just like in the beginning of reform and opening, we 0:11:46.723 --> 0:11:49.882 didn't know what it would be like, right. Now we 0:11:49.893 --> 0:11:52.814 are crossing the river by feeling the stones if you 0:11:52.823 --> 0:11:53.443 will 0:11:53.785 --> 0:11:58.176 to determine what uh the new era of common prosperity means. 0:11:58.184 --> 0:12:02.815 But one thing we know for sure, the um emphasis 0:12:02.825 --> 0:12:06.916 on growth uh at any cost and the emphasis on 0:12:06.926 --> 0:12:11.895 material advancement is not there. And that answers a lot 0:12:11.905 --> 0:12:17.466 of this frustrating question. Why aren't the policymakers as worried 0:12:17.476 --> 0:12:18.415 as the market? 0:12:19.849 --> 0:12:25.270 Fascinating uh you know, characterization Santiago would I would assume 0:12:25.280 --> 0:12:29.780 that that lack of clarity runs beyond the analyst community 0:12:29.789 --> 0:12:33.900 and spills over into the day to day Chinese population. 0:12:34.190 --> 0:12:36.789 Uh And would you say that uh sort of, you know, 0:12:36.799 --> 0:12:39.659 frustration or lack of clarity as to where things are 0:12:39.669 --> 0:12:42.679 going is one of the reasons why we haven't seen 0:12:42.690 --> 0:12:46.900 a big post pandemic bump uh because that, that uncertainty 0:12:46.909 --> 0:12:51.489 clouds people's animals, ferrets and exuberance and therefore, yeah, I 0:12:51.500 --> 0:12:53.709 can go out now, but I don't think I'm going 0:12:53.719 --> 0:12:57.400 to spend a lot of money or plan for a major, 0:12:57.409 --> 0:12:59.099 you know, expansion of my company. 0:13:00.690 --> 0:13:04.859 Absolutely. I think that's a, that's, that's very much right. Obviously, the, 0:13:04.869 --> 0:13:07.919 the the whole picture is a mosaic that is complex 0:13:07.929 --> 0:13:10.780 and includes more than just this. But this ingredient I 0:13:10.789 --> 0:13:15.869 think is very, very important. Um You see that the 0:13:15.880 --> 0:13:18.880 uh on, on this uh area, the government is not 0:13:18.890 --> 0:13:20.859 exactly standing still. 0:13:21.179 --> 0:13:25.309 Uh Yes, there are changes and those changes create uncertainty, 0:13:25.330 --> 0:13:28.450 but you do see parts of the leadership, for example, 0:13:28.460 --> 0:13:34.669 the Premier Li Chang um frequently uh approaching the private 0:13:34.679 --> 0:13:41.840 sector and uh other uh constituents in the economy, trying 0:13:41.849 --> 0:13:43.809 to reassure them that the role of 0:13:43.880 --> 0:13:49.330 the private sector will still be uh well. Uh the 0:13:49.340 --> 0:13:53.450 the the almost the core of the Chinese uh development, 0:13:53.460 --> 0:13:58.348 producing the bulk of the employment, producing the bulk of 0:13:58.359 --> 0:14:02.809 the consumption and therefore the bulk of the momentum for 0:14:02.820 --> 0:14:06.450 the uh Chinese economy. With that said 0:14:06.900 --> 0:14:09.969 um II I, you know, back to your point on, 0:14:09.979 --> 0:14:14.549 on the issue of confidence, it's important to remember that 0:14:14.559 --> 0:14:20.549 the three years of COVID and GEOPOLITICAL conflict and also 0:14:20.559 --> 0:14:28.270 political transition were quite traumatic uh for the Chinese consumer 0:14:28.280 --> 0:14:32.369 and business environment much more. So I would say than 0:14:32.465 --> 0:14:35.455 for the rest of the world, this is not just 0:14:35.465 --> 0:14:39.315 about the lockdowns, this is also about some of these 0:14:39.325 --> 0:14:44.174 signals about changes in institutions. I would say one big 0:14:44.184 --> 0:14:47.575 one that the markets of course were very much affected 0:14:47.585 --> 0:14:51.825 by uh was the regulation uh of the uh uh 0:14:51.835 --> 0:14:55.815 uh uh I would say of uh certain areas of 0:14:55.825 --> 0:14:57.974 private services including 0:14:58.229 --> 0:15:03.640 uh platform uh internet companies. And of course, uh the 0:15:03.650 --> 0:15:09.320 uh private education sector and those two things among others 0:15:09.330 --> 0:15:14.719 uh got people very, very nervous about the overall direction 0:15:14.729 --> 0:15:18.880 of the Chinese economy. And now we are again, I 0:15:18.890 --> 0:15:21.580 would say in this process of discovery 0:15:21.666 --> 0:15:25.435 of what the true environment is like. My assessment of 0:15:25.445 --> 0:15:31.286 this is that the true environment is definitely not as 0:15:31.296 --> 0:15:34.645 it was in the era of reform and opening. So 0:15:34.656 --> 0:15:38.255 it certainly is different but it probably is not as 0:15:38.265 --> 0:15:41.666 negative as some of the more negative narratives that there 0:15:41.676 --> 0:15:44.995 are out there and probably not as negative or 0:15:45.101 --> 0:15:48.151 very likely not as negative as what some of the 0:15:48.161 --> 0:15:52.031 more depressed areas of the Chinese stock market are suggesting 0:15:52.041 --> 0:15:55.192 in particular, I would point to these Hong Kong listed 0:15:55.202 --> 0:16:00.901 Chinese stocks that are owned mostly by international investors which 0:16:00.911 --> 0:16:03.992 are trading at some of the lowest valuations depending on 0:16:04.002 --> 0:16:07.581 how you measure it in 20 years, sometimes more than 0:16:07.591 --> 0:16:08.452 20 years, 0:16:09.409 --> 0:16:13.440 right? So what does that mean for the financial markets 0:16:13.450 --> 0:16:17.210 in the near term do is is a valuation attractive 0:16:17.219 --> 0:16:20.359 because it's low or the valuation is not attractive because 0:16:20.369 --> 0:16:22.059 the low evaluation is telling us something 0:16:23.520 --> 0:16:27.000 you have to ask a difficult question, didn't you? Uh 0:16:28.909 --> 0:16:32.210 Yeah, I think, I think um uh well, you know, 0:16:32.219 --> 0:16:34.390 the first thing I would say is that if you 0:16:34.400 --> 0:16:37.940 look at equities, um uh there is a very, very 0:16:37.950 --> 0:16:42.619 big uh segmentation in the market offshore and onshore. Uh 0:16:42.630 --> 0:16:46.460 My view is that the offshore equities are simply too 0:16:46.469 --> 0:16:49.859 cheap even if we factor in uh uh the the 0:16:49.869 --> 0:16:55.940 the fact that the the the developments are actually concerning. 0:16:56.429 --> 0:17:02.739 Um I uh frequently describe uh the valuation for these 0:17:02.750 --> 0:17:06.540 stocks as the inverse of a bubble. Why is that 0:17:06.550 --> 0:17:11.099 a useful concept? Well, a bubble on the upside typically 0:17:11.109 --> 0:17:14.819 forms because the market recognizes a fundamental, 0:17:14.905 --> 0:17:20.574 mentally structurally positive aspect of a market or an industry. 0:17:20.795 --> 0:17:24.415 The internet today, what we're doing today actually, right now 0:17:24.425 --> 0:17:28.535 in this conversation is probably 20 times better than what 0:17:28.545 --> 0:17:31.675 anyone imagined in the year 2000. And yet it was 0:17:31.685 --> 0:17:33.295 time to sell stocks. 0:17:33.800 --> 0:17:37.050 Um back to the China example, I think the market 0:17:37.060 --> 0:17:41.069 did recognize that there are some reasons for concern. As 0:17:41.079 --> 0:17:44.069 I said there, this is a big change in institutions. 0:17:44.079 --> 0:17:47.020 This is a big change in the policy stance, lots 0:17:47.030 --> 0:17:51.160 of uncertainty is involved. But the way that these stocks 0:17:51.170 --> 0:17:52.050 are trading 0:17:52.790 --> 0:17:56.919 at uh you know, single digit uh trend pe s 0:17:56.930 --> 0:18:01.349 and valuations that are lower than they have been in 0:18:01.359 --> 0:18:05.890 a multiple decades suggests to me that this is overdone 0:18:06.069 --> 0:18:10.869 and that uh there is upside in uh the offshore stocks, 0:18:10.880 --> 0:18:14.930 the onshore stocks are much more complicated on the surface. 0:18:14.939 --> 0:18:18.890 They look in my view basically fairly valued. 0:18:19.270 --> 0:18:22.319 But the problem is that once you open up the 0:18:22.329 --> 0:18:26.149 hood and you see uh you, you have a look 0:18:26.160 --> 0:18:30.000 at the stocks that uh investors actually like that bottom 0:18:30.010 --> 0:18:34.380 up analysts uh find quality in, you find that lots 0:18:34.390 --> 0:18:38.339 of these stocks are actually again in a segmented market 0:18:38.349 --> 0:18:42.619 trading at very very high valuations. And so it is 0:18:42.630 --> 0:18:47.399 a very difficult job to be a China stock picker, 0:18:49.199 --> 0:18:51.400 right? I mean, like just this year, I mean, we've 0:18:51.410 --> 0:18:56.099 seen China bank stocks and telecom stocks rally uh something 0:18:56.109 --> 0:18:57.989 that they haven't done in a very long time. And 0:18:58.000 --> 0:19:00.790 the darlings of recent years, the tech stocks in particular 0:19:00.800 --> 0:19:06.810 have done absolutely nothing. Uh onshore or offshore. Um Santiago earlier, 0:19:06.819 --> 0:19:11.188 you were talking about authorities have begun to make overtures 0:19:11.199 --> 0:19:14.589 to market participants saying that, you know, the 0:19:15.349 --> 0:19:18.589 tumult of recent years, you know, it's behind us, things 0:19:18.599 --> 0:19:21.640 are gonna be constructive, private sector has an important role. 0:19:21.660 --> 0:19:25.780 So go out innovate, invest, we're, we're behind you. So 0:19:25.790 --> 0:19:30.000 let's talk about the whole regulatory backlash of the last 0:19:30.010 --> 0:19:33.198 couple of years. And is it indeed your sense that 0:19:33.209 --> 0:19:33.839 it is where 0:19:34.020 --> 0:19:36.229 reflection point that they are not gonna be as much 0:19:36.239 --> 0:19:41.329 backlash going forward? Um I sort of think you sort 0:19:41.339 --> 0:19:45.709 of touched upon the services sector, particularly education tach for me, gaming, 0:19:45.719 --> 0:19:48.410 crypto other things come to mind and of course, general 0:19:48.420 --> 0:19:51.688 data privacy issue a around which, you know, some tech 0:19:51.699 --> 0:19:56.670 companies have been uh really, really, you know, uh hurt by, 0:19:56.680 --> 0:20:01.270 by the uh regulatory uh out. Uh I was gonna 0:20:01.280 --> 0:20:03.650 say overreach, but rather regulatory action. 0:20:03.839 --> 0:20:08.010 So where are we with respect to the whole regulatory framework? 0:20:08.650 --> 0:20:09.199 Hm. 0:20:09.969 --> 0:20:13.560 Yeah. No, that's a great question. Um My view uh 0:20:13.569 --> 0:20:17.978 you know, as, as, as, as typical is that, you know, 0:20:17.989 --> 0:20:19.899 it's a, it's a, it's a mixed bag. I I 0:20:19.910 --> 0:20:24.339 would say that um the, the, the place I would 0:20:24.349 --> 0:20:29.719 start is that the regulation of these sectors was inevitable 0:20:29.729 --> 0:20:33.530 and it's not in just inevitable in China, it's inevitable 0:20:33.540 --> 0:20:35.679 pretty much everywhere else in the world. 0:20:35.969 --> 0:20:40.169 A lot of the regulatory steps that really got the 0:20:40.180 --> 0:20:46.030 market spooked were very similar types of data regulation and 0:20:46.160 --> 0:20:51.180 anti monopoly regulation. Uh That for example, Europe has now 0:20:51.189 --> 0:20:54.239 with that said, the elephant in the room is that 0:20:54.250 --> 0:20:58.619 Europe has no world class internet companies and it is 0:20:58.630 --> 0:21:02.050 probably no coincidence that they have strong regulation and no 0:21:02.060 --> 0:21:03.939 world class internet companies. 0:21:04.619 --> 0:21:08.989 The strong regulation in China, I think is unlikely to 0:21:09.000 --> 0:21:12.770 eliminate the internet companies altogether as it did in Europe 0:21:12.780 --> 0:21:17.050 or the big ones at least because uh China is 0:21:17.060 --> 0:21:20.689 essentially a protected market and it is very difficult for 0:21:20.699 --> 0:21:25.550 foreigners to compete in that market because of the obvious reasons. 0:21:25.839 --> 0:21:26.469 Um 0:21:26.910 --> 0:21:30.880 But uh nevertheless, uh you know, it's, it's, it's important 0:21:30.890 --> 0:21:34.099 to uh to realize that these regulations are there and 0:21:34.109 --> 0:21:36.979 it's not, they're not going to go away with that 0:21:36.989 --> 0:21:42.060 said um within the bird cage if, if you will 0:21:42.069 --> 0:21:43.400 of these regulations, 0:21:43.660 --> 0:21:48.109 uh there is uh no reason why these companies cannot 0:21:48.119 --> 0:21:51.020 continue to grow and to grow a lot. It's going 0:21:51.030 --> 0:21:54.329 to be a more competitive landscape than it is in 0:21:54.339 --> 0:21:59.390 other places. Valuations definitely need to adjust for these, for 0:21:59.400 --> 0:22:03.030 this new reality, but they have already a adjusted. 0:22:03.550 --> 0:22:07.000 And the last thing that I would say is that 0:22:07.010 --> 0:22:10.189 the government seems to be kind of of two minds 0:22:10.199 --> 0:22:15.599 about the service sector and service driven GDP growth. On 0:22:15.609 --> 0:22:20.839 the one hand, uh lots of the leadership recognizes that 0:22:20.849 --> 0:22:25.719 the service sector is essentially the engine of job creation 0:22:25.729 --> 0:22:30.069 in China. In fact, manufacturing employment in China peaked around 0:22:30.079 --> 0:22:33.060 a decade ago, has been coming down ever since. 0:22:33.380 --> 0:22:37.079 Uh manufacturing output continues to rise because of automation and 0:22:37.089 --> 0:22:42.119 other things. Um And uh you know, this role uh 0:22:42.130 --> 0:22:47.329 as an employment creator is very uh important and valued 0:22:47.339 --> 0:22:51.290 by the, the leadership. And they are uh are very unlikely, 0:22:51.300 --> 0:22:54.589 I would say to kill this goose that lays golden 0:22:54.599 --> 0:22:55.930 eggs in that sense. 0:22:56.349 --> 0:22:58.390 And the last thing that I would say is that 0:22:58.400 --> 0:23:03.239 there's also a recognition by the leadership that the service sector. 0:23:03.250 --> 0:23:10.520 And I would say this interconnected digital uh service uh sector, 0:23:10.530 --> 0:23:11.300 the world of platform, 0:23:11.380 --> 0:23:15.430 platform economies and so on virtual worlds. Um uh It 0:23:15.439 --> 0:23:21.089 is very, very important to essentially uh do something very 0:23:21.099 --> 0:23:25.439 basic but critical for economic development, which is to enlarge 0:23:25.449 --> 0:23:26.329 the market. 0:23:26.750 --> 0:23:30.959 The market is much, much bigger when uh there is 0:23:30.969 --> 0:23:36.280 so much connectivity when uh each individual supplier has access 0:23:36.290 --> 0:23:39.958 to not just a handful of customers around their neighborhood, 0:23:39.969 --> 0:23:45.359 but to a huge national market. And uh therefore, uh 0:23:45.454 --> 0:23:49.563 the the the the the service sector in general and 0:23:49.734 --> 0:23:55.444 digital interconnected services in particular are something that uh is 0:23:55.454 --> 0:24:00.864 unlikely to be crushed by the government. The heavy lifting 0:24:00.875 --> 0:24:04.064 of the regulation in my view is already done. 0:24:04.969 --> 0:24:09.180 So, speaking of digital services uh that this year is 0:24:09.189 --> 0:24:12.390 all about large language models. And A I and we 0:24:12.400 --> 0:24:15.160 have seen amazing run up in still a group of 0:24:15.170 --> 0:24:18.900 stocks in the US around that narrative seem to be 0:24:18.910 --> 0:24:21.979 missing that in the context of China. Although like if 0:24:21.989 --> 0:24:24.910 I follow South China Morning Post, there are 0:24:25.410 --> 0:24:28.300 stories that are coming out about how companies from Alibaba 0:24:28.310 --> 0:24:30.780 or Baidu are sort of bringing in various layers of 0:24:30.790 --> 0:24:34.239 A I capability. The authorities are engaging the private sector 0:24:34.250 --> 0:24:38.489 and setting up some degree of thinking and uniform standards 0:24:38.500 --> 0:24:41.650 about A I. Um but somehow or the other, it's 0:24:41.660 --> 0:24:44.959 not really catching the global investors interest. 0:24:46.739 --> 0:24:49.109 Yeah, I think that's uh that's interesting. I mean, to 0:24:49.119 --> 0:24:51.890 your point, uh uh there are places where it is 0:24:51.900 --> 0:24:56.319 catching in interest and in particular in the shares when 0:24:56.329 --> 0:25:00.250 you look at certain comp companies that are geared towards this, 0:25:00.260 --> 0:25:03.649 some of which you mentioned, um uh they, they have 0:25:03.660 --> 0:25:07.959 performed quite well. Uh But uh but I, I definitely 0:25:07.969 --> 0:25:11.349 agree that overall there isn't that sense of hype? 0:25:11.839 --> 0:25:16.290 Um I, I would say that uh that, that, that 0:25:16.300 --> 0:25:19.030 a lack of hype uh does not mean that there 0:25:19.040 --> 0:25:23.989 is an absence of uh the A I uh development 0:25:24.000 --> 0:25:28.560 in China. I think it's important to remember that the 0:25:28.569 --> 0:25:30.689 IP for A I 0:25:30.920 --> 0:25:35.930 uh is uh very much uh uh well, well, China is, 0:25:35.939 --> 0:25:40.290 is a, a very, very uh important player in generating 0:25:40.300 --> 0:25:44.260 the IP. If you look at, for example, the proportion 0:25:44.270 --> 0:25:50.699 of cited peer reviewed papers uh in the top 1%. 0:25:50.949 --> 0:25:55.640 Um China is uh I I think number one or 0:25:55.650 --> 0:25:57.510 close to number one. 0:25:57.949 --> 0:26:00.889 And if you look at, as you said, uh the 0:26:00.900 --> 0:26:04.938